The Shadow of the Safety Net: Who Pays for Fairness?

Australians love talking about fairness just as much as we love talking about the weather. It is wired into our national identity. Whether it is who gets the last Tim Tam or who gets priority in the supermarket carpark, we care deeply about the fair go.

That instinct is exactly what sits underneath Victoria’s Getting to Fair: Advancing Equity strategy. The goal, promoting “just outcomes and equitable access”, is one the Australian Energy Council (AEC) supports wholeheartedly. Supporting people in vulnerable circumstances is not up for debate. The real debate is about how we fund that support in a way that is fair, transparent and economically sustainable.

Because fairness only works when the system that delivers it is fair as well.

Victoria’s Essential Services Commission is in a difficult operating environment. It faces rising household costs, a rapid energy transition, economic inequality and constrained state budgets. It may be  understandable that the Commission would look to consumer energy bills as a delivery mechanism for bill relief: it is fast, consistent and does not rely on the annual budget cycle.

Yet, as the AEC and our member retailers have highlighted, a bill-funded model for social equity creates a structural problem. One of our members recently put it plainly in a public submission, that well-intentioned “just outcomes” can end up shifting costs onto households who are already struggling with affordability, but fall outside concession categories (such as young families renting without solar panels, or people living in older apartments, who cannot shift their load to cheaper daytime periods).

The AEC’s recent submission to the Commission on the refreshed Getting to Fair strategy reinforced this point, by emphasising that fairness must sit alongside economic efficiency. It is important for affordability that any unintended cross-subsidies are avoided, as these risk raising costs for everyone, as well as distorting long-term investment signals in the energy market.

The present case is not a question of caring. Rather, it is a question of funding architecture.

The key point we wish to emphasise is that when equity programs are added to energy bills, there is potential for them to become hidden, regressive and difficult for the public to scrutinise. Whereas, when they are funded through the tax system, they become visible, progressive and accountable to members of the public via elected officials.

How Bill-Funded Fairness Can Create New Vulnerability

One of the most important, but least understood issues, in this debate is the way bill-funded support can potentially create the very hardship it is trying to solve. While it may sound counterintuitive on the face of it, it is important to recognise how policies like this can sometimes operate in a feedback loop.

To illustrate the point: when equity measures are built into energy bills, the cost is spread across all customers. Then, middle-income households who do not qualify for targeted support potentially end up with higher bills. Over time, these rising costs contribute to further financial squeeze upon that cohort, which could be a contributing factor to them to falling into financial difficulty themselves in future.  There is a real risk that socialising the cost of support for vulnerable consumers across the entire customer base could actually lead to the pool of people needing help growing.

This is why the AEC’s position is so clear: existing social agencies have an important role to play in energy equity. However, the most transformative measures should be funded transparently through the tax base, rather than quietly through the bill base. The latter carries the risk of cross-subsidisation, which as explained below, can add to the burden of expenses faced by households squeezed in the middle.

Seeing the Hidden Shadow: An Example of Cross-Subsidisation

To explain how a cross subsidy can work in practice, below is a simple hypothetical example.

Imagine two neighbours in the same building:

• One is a concession holder facing financial hardship.
• The other is a young family renting, without solar, juggling childcare fees and rising rent.

If a new equity measure is introduced and funded through retail bills, both households contribute to it financially when they pay their energy bills. However, only one receives the benefit. The relief provided to the vulnerable household is important and necessary. Yet the hidden problem here is that the cost of providing that relief is quietly added to the other family’s bill. They get no financial support, but pay more in bills in order to finance it.

Over time, as these bill-funded programs grow, the second household begins to feel the pressure and they may even fall behind and potentially become eligible for support themselves. An increase in bills could result in both households eventually needing help (that is still funded by the same limited group of ratepayers).

The above hypothetical scenario provides an example of how unintentional cross subsidies can operate as a feedback loop, which does not address the root cause. It is why, in our view the safety net for consumers should predominantly be funded by governments through the broader taxation base with its larger and more equitable spread, not through an essential service bill with its narrower and more regressive spread.

Retailers as Delivery Partners

The most constructive part of this story is what is already happening in the sector. Retailers have not waited for instruction. They have been busy working behind the scenes on building sophisticated, human-centred support systems for years. Further work is currently underway in adding additional supports for vulnerable consumers and in adding additional industry led oversight to ensure best practice is consistently applied.

Consider by way of example the “Knock to Stay Connected” program, a national initiative under the Energy Charter to help avoid disconnections. Instead of relying on letters or automated messages, signatory retailers work with networks to physically knock on doors to reconnect with customers who have disengaged. Trials have shown this avoids the overwhelming majority of disconnections, because people re-engage when the approach is human, personal and safe.

Or take the predictive analytics work that many retailers are now rolling out: rather than waiting for customers to fall behind, an emerging trend in the retail spaces lies in using technology to recognise early signs of difficulty and proactively reach out before bills become overwhelming. These initiatives are preventative, not reactive, and they are already beginning to support a large cohort of customers.

Another example of retailer led support includes the specialist family violence teams being established by leading industry players. There is increasing recognition by organisations of the need for teams to be trained in trauma-informed practice and to ensure that perpetrators cannot use energy accounts as tools for control. This type of support that goes beyond the traditional boundaries of energy retail and demonstrates leadership in consumer protection.

Examples such as those discussed above represent ways in which the energy retail industry is leading with innovation. It is positive proof that retailers excel when they are positioned as delivery partners with flexibility to tailor support, rather than as inadvertent funders of social policy programs.

Why the AEC shares the Commission’s Goal

We understand why the Commission might choose to target energy bills as a tool for equity and redistributive justice on behalf of Victorian consumers. They represent a fast, reliable and politically feasible way to counter the issue of energy affordability - in the short term. They face the very same bind that every regulator faces when budgets are tight and community need is growing.

We cannot ignore this reality and certainly the AEC (and our members) share the Commission’s desire to ensure no Victorian is left behind. Our position on the Getting to Fair strategy (and other equity-based strategies being rolled out across Australia) is not about rejecting the goal. Rather, it is about improving the source of the safety net, so that fairness can be delivered sustainably and transparently.

This alignment in purpose is important. The AEC and the Commission both want Victoria to get to fair. The AEC simply wishes to underscore the point that the path to fairness must rest on solid economic ground.

A Fairness Model That Works for Victoria

We are grateful for the Commission’s work in advancing the conversation on the topic of energy equity and fairness. For one, it presents to us an opportunity to think in bold terms about what a sustainable fairness framework could look like. The AEC posits that the following could represent a path forward towards a sustainable framework:

• Government funds energy equity programs through transparent budget allocations.
• Retailers act as partners in delivering programs, with the human-centred innovation they have already demonstrated.
• Regulation moves towards a principles-based model, so that new ideas can be implemented quickly and efficiently.
• Support remains targeted, evidence-based and proportionate to customer need.
• And finally, the safety net does not push people into the very vulnerability it is designed to prevent.

 That, in our view, is the kind of fairness Victoria deserves.