Submission to Australian Competition Tribunal on Application by AGL Energy Limited for merger authorisation ACT 1 of 2014

Transcription

1 Submission to Australian Competition Tribunal on Application by AGL Energy Limited for merger authorisation ACT 1 of April Carrington Road Marrickville NSW 2204 Phone Fax ausconsumer@choice.com.au The Australian Consumers Association is a not-for-profit company limited by guarantee. ABN ACN

2 About CHOICE Set up by consumers for consumers, CHOICE is the consumer advocate that provides Australians with information and advice, free from commercial bias. As vital today as when we were founded in 1959, CHOICE continues to fight for consumers and uncover the truth. By mobilising Australia s largest and loudest consumer movement, CHOICE fights to achieve real change on the issues that matter most to Australian consumers. To find out more about CHOICE s campaign work visit and subscribe to CHOICE Campaigns Update at: CHOICE Submission: 28 April 2014 Page 2

3 Introduction: 1. CHOICE provides this submission to the Australian Competition Tribunal because we believe that approval of the application by AGL limited for merger authorisation with Macquarie Generation would not be in the long-term interests of Australian energy consumers and would therefore not provide public benefits more broadly. 2. CHOICE has formed this view on the basis that further consolidation in Australia s energy sector would deny consumers the full benefits of competition. We believe this view is supported by an examination of: The current levels of concentration in Australia s energy sector and trends towards ongoing consolidation and vertical integration; The consumer detriment evident in other highly concentrated sectors, particularly markets for essential goods and services where consumers face non-price barriers to fully acting on their preferences; and Low levels of informed demand side engagement in the energy sector, which increases the potential for market participants to obtain economic rent. Market concentration in energy retailing: 3. As at 30 June 2013, three privately owned retail businesses AGL Energy, Origin Energy and Energy Australia controlled an estimated 77 per cent of the market for small electricity customers in southern and eastern Australia, and an estimated 85 per cent of the market for small gas customers The Australian Energy Regulator (AER) describes recent trends in Australian retail energy markets in its most recent State of the Energy Market report: Australia s retail energy markets tend to be highly concentrated. Three or fewer retailers account for more than 90 per cent of electricity market share in four of the six jurisdictions. Similar ratios apply in gas. In addition, substantial vertical integration exists between retailers and energy producers Overall AGL Energy gained some market share (mainly in New South Wales), but largely at the expense of Origin Energy and EnergyAustralia. Growth in the market share of smaller retailers in was mostly for relatively new entrants with less than 1 per cent share in any regional market. More established retailers such as Simply Energy and Lumo Energy did not have a significant change in their customer base. But in August 2013 AGL Energy acquired Australian Power & Gas, reversing most of the market share gains by the smaller retailers over the previous year. 2 1 Australian Energy Regulator, State of the Energy Market 2013, p Australian Energy Regulator, State of the Energy Market 2013, p. 120 CHOICE Submission: 28 April 2014 Page 3

4 Market concentration in other sectors: 5. In undertaking advocacy and policy work across markets, CHOICE has investigated the consumer detriment that arises from high levels of concentration, particularly in markets for essential goods and services. Over time, this has presented particular concerns in the supermarket sector, with the duopoly of Coles and Woolworths accounting for over 70 per cent of the market, 3 and in banking, where the big four banks control over 80 per cent of the market for home loans and household deposits In the supermarket sector, market concentration has been linked to reduced consumer choice and product innovation, including through the backward integration of retailers into their supply chains and the growth of generic products CHOICE also has growing concerns that access to consumer data will create new competition issues across key markets, for example through the capacity for supermarket businesses to combine data with their fuel retail businesses and use this to target offers in the insurance sector. This is likely to present similar challenges in the energy sector, where increasingly granular levels of customer data have the potential to help incumbent businesses shape and market products and services with levels of sophistication that new entrants could not match. 8. In the banking sector, CHOICE s recent nationally representative research has found that smaller institutions enjoy significantly higher customer satisfaction ratings than the major banks, who nevertheless sustain an overwhelming market share. 6 In this sector, it is particularly concerning that consumers face a number of non-price barriers to acting on their preferences, including information asymmetry and perceptions that switching providers is too much hassle or that there are no better products on the market. 9. CHOICE has observed that over time, these non-price barriers appear to have helped the big four banks maintain their market share even when consumers have expressed significant degrees of frustration over pricing decisions, such as around interest rates on home loan and deposit products. 7 CHOICE believes that this issue is exacerbated by the fact that banking is a relatively complex market for essential services, and that consumers have little choice but to participate even if their capacity to make fully informed and engaged decisions is sometimes limited. In this respect, there are similarities between the consumer experience of Australia s banking and energy sectors. 3 CHOICE, CHOICE supermarket special, accessible at 4 APRA Insight, Issue , accessible at 5 CHOICE, CHOICE supermarket special, accessible at products.aspx 6 CHOICE, Submission to the Financial System Inquiry, 31 March 2014, accessible at 7 CHOICE, CHOICE releases Better Banking report, 2 March 2011, accessible at CHOICE Submission: 28 April 2014 Page 4

5 Consumer engagement in energy retailing: 10. Australia s retail energy markets are undergoing a transition from full price regulation to varying degrees of deregulation. While full price deregulation has existed in Victoria since 2009, 8 the NSW Government has only recently announced that it will move in a similar direction CHOICE strongly supports genuine competition, and the benefits that it brings consumers in terms of increased choice, innovation and pricing. However, we have raised concerns around whether the preconditions for consumers to fully engage in energy retail markets and make informed decisions have been achieved. 12. CHOICE undertook a nationally survey of electricity consumers in 2012, 10 which found that: One third of respondents who recently joined their electricity retailer said they had tried to compare providers but had found it was too hard to work out the best choice; Only about half of those who recently joined their electricity retailer were confident they had made the best choice; and 29 per cent said they did not bother comparing providers as they are all about the same in terms of what they offer. 13. On the basis of this research, CHOICE observed in our 2013 submission to the Australian Energy Market Commission s Review of Competition in the Retail Electricity and Natural Gas Markets in NSW that it is an open question as to whether price deregulation, in the form it has so far been undertaken in Australia s retail electricity and gas markets, is achieving genuine competition with net benefits for consumers. For example, in the Victorian market, often held up as the model for pursuing deregulation in other jurisdictions, there is a lack of understanding regarding the net impact of retail price deregulation on consumers. While there has been considerable switching activity, there are concerns about marketing efforts and retail costs, and CHOICE believes there is a need for more information about the actual impacts on consumers Essential Services Commission, Progress of Electricity Competition in Victoria, Research Paper, May 2013, p. 2 9 For example, see Barry O Farrell MP, Delivering lower electricity prices for NSW households, 7 April 2014, accessible at data/assets/pdf_file/0019/512614/retail-pricederegulation pdf 10 CHOICE, Energy retailers marketing tactics, updated 23 April 2013, accessible at 11 CHOICE, Submission to AEMC Review of Competition in the Retail Electricity and Natural Gas Markets in NSW, 8 February 2013, accessible at ew%20of%20competition%20in%20nsw%20issues%20paper.ashx CHOICE Submission: 28 April 2014 Page 5

6 14. CHOICE would also note recent research indicating it is questionable whether full deregulation in Victoria has achieved price outcomes any different to other jurisdictions where varying degrees of regulatory control have remained in place In drawing the Tribunal s attention to this research, CHOICE is not arguing for the reregulation of retail energy markets, or suggesting that governments are best placed to set efficient prices in competitive markets. Rather we are making the point that contestability on the supply side of a market can be significantly undermined and in fact result in perverse outcomes if it is not coupled with active consumer engagement on the demand side, in particular the capacity of consumers to make informed decisions based on transparent information, and thereby reward those firms that best meet their preferences. 16. The UK s Office of Fair Trading provides a useful definition of competition in terms of the relationship between supply and demand: 13 Markets work well when there are efficient interactions on both the demand (consumer) side and the supply (firm) side. On the demand side, confident consumers activate competition by making well-informed and well-reasoned decisions which reward those firms which best satisfy their needs. On the supply side, vigorous competition provides firms with incentives to deliver what consumers want as efficiently and innovatively as possible. When both sides function well, a virtuous circle is created between consumers and competition. 17. CHOICE believes that when the demand-side preconditions for genuine competition are not met, particularly in a market for essential goods and services, this has the potential to cause significant consumer detriment. This potential is likely to be exacerbated in a market with high levels of concentration and substantial barriers to entry by allowing market participants to obtain economic rent. Vertical integration in Australia s energy sector: 18. Moves towards deregulation of energy prices have followed transitions from government ownership to private ownership of energy sector businesses, particularly in generation and retail. Again, the degree of private ownership varies across jurisdictions, although trends suggest the privatisation of remaining assets is gathering pace While there are some jurisdictions where AGL Energy, Origin Energy and Energy Australia have lower levels of concentration and vertical integration, this is generally because there is a higher degree of government ownership, rather than a diversity of private market 12 Gavin Dufty, St Vincent de Paul Society and May Mauseth Johnston, Alviss Consulting, The National Energy Market Is there a devil in the retail?, December 2013, p. 19, accessible at _Is_there_devil_in_the_retail.pdf 13 UK Office of Fair Trading, 2010, What does behavioral economics mean for competition policy?, accessible at 14 For example, see Queensland government considers selling CS Energy and Stanwell, accessible at za7h.html#ixzz309bQLWTM CHOICE Submission: 28 April 2014 Page 6

7 participants. 15 In this context, it is likely that those established businesses with the strongest position in markets will be best placed to purchase remaining government assets as they are privatised, therefore further increasing levels of concentration and vertical integration. 20. As the AER recently observed, vertical integration between energy generators retailers has emerged as a major trend in Australia s energy sector, providing obvious benefits to industry participants: 16 While governments structurally separated the energy supply industry in the 1990s, the subsequent vertical integration of retailers and generators to form gentailers has been significant. Vertical integration provides a means for retailers and generators to internally manage the risk of price volatility in the electricity spot market, reducing their need to participate in hedge (contract) markets. This reduced need for hedge contracts can reduce liquidity in contract markets, posing a potential barrier to entry and expansion by generators and retailers that are not vertically integrated. Across the National Electricity Market (NEM), three private businesses AGL Energy, Origin Energy and EnergyAustralia have significant market share in both generation and retail markets. 21. This trend underlines the emergence of the big three AGL Energy, Origin Energy and EnergyAustralia with their dominance in energy retailing underpinned by significant shares in generation, and as the AER suggests, posing a potential barrier to entry. 22. To the extent that vertical integration may result in efficiencies, it is not clear that the benefits of these efficiencies will be passed through to end users. This especially the case where there is a lack of demand-side competitive pressure, whereby firms have an incentive to compete based on merit. As discussed above, CHOICE believes genuine demand-side competition is at best a work in progress through many of Australia s retail energy markets. Conclusion: 23. CHOICE is concerned that there is a significant potential for the big three of AGL Energy, Origin Energy and EnergyAustralia to become entrenched as the energy sector equivalent of the supermarket duopoly or the banking big four, resulting in long-term consumer detriment. 24. This concern is borne from the fact that energy is a complex market for essential services, characterised by information asymmetry and low levels of demand-side engagement. Within this landscape, the capacity of businesses with already significant levels of market share to further consolidate and vertically integrate will present barriers to entry that over the long term have a clear potential to reduce price-based competition on the demand side, undermine consumer choice and product innovation. 25. In this context, CHOICE believes there is no apparent consumer benefit in the merger of AGL Energy with Macquarie Generation. If anything, we believe it has the potential to result in a disbenefit to the community by increasing vertical integration and consolidation within 15 Australian Energy Regulator, State of the Energy Market 2013, p Australian Energy Regulator, State of the Energy Market 2013, p. 123 CHOICE Submission: 28 April 2014 Page 7

8 entrenched participants, increasing their market power and working against the best interests of Australian energy consumers over the long term. CHOICE Submission: 28 April 2014 Page 8