Jul 19 2018

ACCC condemns BSO

Last week’s release of the Australian Competition and Consumer Commission’s report into electricity prices is the latest in a series of in-depth analyses of the energy market and the challenges faced by the industry in delivering for consumers. 

Consideration of the implications of each of the 56 recommendations in the ACCC’s report is underway, but in the meantime there are immediate impacts for the Victorian Government, which is yet to land on a decision on Recommendations 1 and 2 of its earlier Thwaites Review into the Victorian electricity market.  These recommendations propose the abolition of the Standing Offer in Victoria and the introduction of a Basic Service Offer (BSO).

Background on ACCC Report

The 400-page ACCC Retail Electricity Pricing Inquiry is an exhaustive survey of more than 10,000 documents from across the sector, representing 10 years’ worth of data.  This data set is unique and valuable as we assess the best reforms for the retail sector.

The ACCC delivered its recommendations on how to “reset” the National Electricity Market (NEM).  The AEC does not accept all of the characterisations in the ACCC’s report, nor all of its recommendations, but it is a valuable outline of how we arrived where we are now. While many of its recommendations appear straightforward, others will take time to properly assess – this is highlighted by one of the report’s key points that there can be unintended consequences with significant repercussions from not getting it right.

We note that the report does echo the conclusions of the Australian Energy Market Commission’s (AEMC) annual review of retail energy competition, which revealed growing dissatisfaction from consumers resulting from rising energy bills and confusion over discounting and how energy is sold to consumers.

It is now well accepted by industry, government and regulators alike that reforms to improve transparency are necessary.

2017 Thwaites Review

The confusing nature of the energy market is an issue that has already been well-ventilated in Victoria, where Recommendations 3 – 11 of the 2017 Thwaites Review were quick to be supported by the industry as sensible measures to make it easier for consumers to access better deals.  Work on the implementation of those measures is ongoing with the Essential Services Commission (ESC).  Victorian consumers should also be assisted by the $50 Power Saving Bonus, which incentivises consumers to engage with the Victorian Energy Compare comparator website in order to find cheaper energy deals.

However, the most radical Recommendations - 1 and 2 - of the report remain outstanding. The Victorian Government noted in its Interim Response to the Thwaites Report in March that "further analysis is required regarding the scope and application of the BSO and its effect on Victoria’s energy sector".

The Victorian Government’s delayed decision on these recommendations reflects the fact that they would represent a fundamental restructure of the energy retail market in Victoria. We know that their implementation would have serious and material consequences for consumers (and industry) that cannot be avoided. 

This is because the BSO as proposed would be calculated by the ESC to take the place of a standing offer contract. The BSO would shrink the market and there would be little incentive to compete above it, and no incentive to compete below it (as it is a below cost offer, not allowing for acquisition, retention or headroom costs).

The implementation of these recommendations would effectively end energy retail competition in Victoria. Customers (including vulnerable and disadvantaged customers) will lose the price benefits they currently receive through very cheap market contracts. Reducing the energy retail environment to the three incumbent retailers (because all second tiers have left) will mean a loss of jobs and a chilling effect for the investment required to encourage the service innovation that will allow customer uptake of new technologies and demand response. It will also likely stifle private sector investment in generation.

It would also put the Victorian Government in charge of retail prices – a responsibility that most state governments have been keen to shed because they cannot control the key generation and network input costs recovered through retail prices. 

ACCC assessment of BSO

The ACCC has now used its report to endorse the industry position on the Victorian BSO. It confirms that there are ‘significant risks associated with implementing a BSO in Victoria, or across the NEM more broadly’ (pg 50 ACCC).  It identifies that implementing a BSO would lead to “reduced innovation and act as a disincentive to retailers to adopt new technology or service models”. It would also lead to “retailers exiting the market”. 

These sentiments are not new.  Prior to the release of the ACCC Report, stakeholders including ACCC Chairman Rod Sims and St Vincent de Paul’s Manager of Policy and Research, Gavin Dufty, publicly warned the Victorian Government of the risk of unintended and adverse consequences for households and businesses if a re-regulation of the Victorian retail market is pursued.  In its submission to the Thwaites Review St Vincent de Paul said it had “grave concerns” in relation to introduction of the BSO. Retail businesses have also indicated that their investment decisions in Victoria will be materially affected.

The industry reserves its position on the ACCC’s proposal that the AER be asked to develop a ‘default offer’.  Whilst the ACCC does indicate that a default offer would sit above competitive market offers and include an allowance for customer acquisition and retention costs, the devil is, as always, in the detail and we must ensure that any reforms that place regulated offers in the market do not suffer the same shortcomings of a BSO.

AEMC assessment

The recent AEMC 2018 Retail Competitiveness Review considered why the retail market is not operating as well as governments and consumers might expect:

“In considering how competition is developing, it is important to recognise that the retail energy market is still maturing. The mobiles sector, generally viewed as an effectively competitive market providing consumer-focused offerings, has had retail price deregulation in place for over two decades. In contrast, for retail electricity, Victoria, the most mature market has had price deregulation in place for less than a decade, New South Wales deregulated prices less than five years ago, and South East Queensland only two years ago. The retail energy market will continue to evolve in the coming years as consumers change preferences in how they manage their energy use, and technology improves”

In other words, we are still working in a market that is immature.  The ACCC agreed:

“The ACCC considers that electricity markets are still developing and mature retail competition has not yet been achieved in any NEM jurisdiction.”

The AEMC report went on to confirm that re-regulating energy prices will not fix the concerns of Australian households and businesses, and could actually make things worse by killing innovation and reducing the benefits of competition.

Conclusion

Both the AEMC and the ACCC reports make sobering reading and are a sharp reminder to the industry of the changes needed to re-gain the trust of consumers. Customers want greater transparency and simplicity in how energy is sold. And, fundamentally, they would like to see price relief as soon as possible.

This does not mean that re-regulating energy prices in Victoria is warranted, and certainly not in the form of the proposed BSO. The ACCC position that it is “concerned” about the impact of implementing a BSO needs to be taken seriously.

Whilst reforms are needed to make the market easier for consumers to engage with, governments and regulators should not be tempted to throw the baby out with the bathwater. Competitive retail markets are still the best vehicle to deliver innovation and pricing efficiencies for consumers.

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