Lessons from Victoria: Has deregulation delivered?

Transcription

1 DEREGULATING ENERGY PRICES: FINDING COMMON GROUND QCOSS PIAC CUAC SACOSS DATE: THURSDAY, 24 OCTOBER 2013 VENUE: THE PAVILLION, ALLAN BORDER FIELD, 1 BOGAN STREET ALBION, BRISBANE JO BENVENUTI, EXECUTIVE OFFICER CUAC: LESSONS FROM VICTORIA: HAS DEREGULATION DELIVERED? Lessons from Victoria: Has deregulation delivered? Jo Benvenuti Executive Officer Consumer Utilities Advocacy Centre Opening comments It is with great pleasure that I join your forum today, as it provides an opportunity to share with you our experience about energy market reform in Victoria and to discuss with you potential pitfalls and strategies in the context of similar reform processes in Queensland and ultimately to benefit consumers in this state. The energy reform process in Victoria Victorian energy reform timeline 1980s (COAG) National Competition Policy and National Energy Market reform agenda 1990s Privatisation of distribution network providers, followed by generators, transmission network providers & retailers First Electricity Supply and Sale Code 1996 Electricity Industry Ombudsman Victoria 2002 Full Retail Competition CUAC established 2009 Retail price de-regulation 2009 Start of smart meter roll-out 2013 Introduction of time-of-use (flexible) pricing 1

2 The progressive deregulation and privatisation of Victoria s energy supply system occurred as part of the major microeconomic reform agenda that began in Australia in the 1980s as part of the Council of Australian Government (COAG) National Competition Policy and National Energy Market reform agendas. The Kennett coalition government privatised and restructured the energy supply in Victoria and oversaw the introduction of energy retail competition. Privatisation of the energy industry occurred progressively during the late 1990s. Distribution network providers were the first to be privatised. These were followed by the generators and transmission network providers and finally by the retailers. Along with the reforms, however, we also saw the establishment of consumer protections. The Electricity Industry Ombudsman Victoria opened in 1996 and later incorporated gas, water and LPG to ensure individual consumers were protected. And the first Electricity Supply and Sale Code was introduced, having been the subject of an 18 month consultation process involving industry and consumers it set a strong protection framework later to be rolled out to gas. Subsequent Governments continued the program of deregulation with the introduction of full retail contestability in About CUAC Established in 2002 to: Represent all Victorian energy and water consumers in policy and regulatory processes Facilitate and undertake research on consumer utilities issues Monitor grassroots consumer utilities issues with particular regard for low-income, disadvantaged and rural consumers This is also when CUAC was established, to represent the interests of Victorian consumers in policy and regulatory processes. This was very much at the behest of consumer advocates who were concerned that consumers needed a voice at the policy table in light of future energy and water reforms and in addition to individual complaint resolution. Price deregulation was introduced for all consumers in

3 Recent energy reform in Victoria Since price deregulation, however, Victoria introduced a number of further reform processes which have strongly influenced the design of the Victorian market. A mandatory rollout of smart meters to all Victorian homes and businesses is due for completion at the end of Smart meters can facilitate the introduction of a range of innovations to retail electricity including: Remote meter reading based on 30 minute interval reads and the abolition of physical meter reads Interactive consumer interfaces providing data about power consumption and cost directly to consumers in real time; and The possibility of improved network management through techniques such as load control Smart meters also facilitate time-of-use or flexible pricing which was introduced in September this year, with the intended benefit of reducing peak load and ultimately reducing pressure on future network investment. The design of the Victorian market is grounded in the principles of neoclassical microeconomics that emphasise rational behaviour, full information and minimal search costs. But there is some debate even among neoclassical economists as to whether such a market model works for small residential energy consumers. As you have heard from Gill Owen earlier today, in the UK for example they are in a responsive phase in relation to perceived market failures and their regulator Ofgem is in fact moving to re-regulate a number of areas. CUAC s research approach aims to examine whether the market is benefitting consumers and to provoke thinking and debate about improving design where market failures are identified. Ay CUAC, have been particularly interested in examining in more detail those issues around consumer behaviour, information and search costs and I will return in a moment to our research, but first I will look at the state of competition and what this has delivered for consumers. I will also draw on a number of recent reports issued by the Essential Services Commission, aimed at shedding light on how competition is progressing. 3

4 So what has the reform delivered for consumers? In Victoria we have had amongst the highest churn rates in the world meaning those consumers who have entered into market contracts and switched between retailers. We are really amuck with choice, with the current number of energy retailers at 17 and trend data showing that consumer participation has increased steadily over the past ten years. The proportion of all households on market offers is estimated (in the Wallis report, commissioned by the ESC) to have increased from 60% in 2007 to 77% by My colleague Gavin Dufty will take you through the pricing trends and experiences in Victoria but suffice to say that some savings can be made on market offers in comparison with standing offers. Of the people remaining on standing offers, the Wallis report indicates that the proportion is comparatively higher for those over 70 and lower income households. Of the lower income households surveyed (and in this survey this represents those earning less than $50,000 per annum), 38% had never entered into a market contract. And I think this bears further examination as the people for whom energy bills are a higher proportion of their income are the ones with most incentive to switch and for whom savings would have the most benefit. We need to know more about the barriers to their participation. Understanding the consumer experience: the CUAC research CUAC undertook research into the operation and functioning of competitive retail markets and the Victorian retail market specifically in 2011, two years after retail price deregulation. The aim of the research was to examine retail market function from a consumer perspective. The analysis and research was conducted with regard to a body of literature on consumer behaviour and decision-making and included a survey of 307 residential consumers and discussions with frontline workers in community agencies. Limited consumer understanding 4

5 Percent of respondents Consumer engagement with Victorian retail energy market 45% 40% 35% Switchers' level of ease in finding, understanding and comparing offer information 30% 25% 20% 15% 10% Easy or very easy Neither easy nor difficult Difficult or very difficult Don't know/unsure 5% 0% Find Understand Compare Offer information As you can see from this graph, our survey results showed that after a number of years of price deregulation, over 30% of consumers still found it difficult to compare energy and market offers. Underpinning this, the overwhelming majority of consumers were aware of choice, but knowledge about the basis of prices was much lower with just under half correctly stating that energy prices are not decided by government. These results are consistent with the Wallis report which found that there has been a deterioration over time in consumer understanding of the offers made to them. In their study, on a scale of 1 to 10, the average score of the ability to understand the pricing offer made was 6.0 in 2004 and 4.7 in 2013.They found that householder ratings of market offers have diminished steadily over the series of surveys and are now extremely low....not only do the offers fail to meet consumer expectations...they are difficult to compare and understand as well. Moreover it is getting more difficult for consumers to understand what they are being offered. Wallis 2013, p14 More needs to be known about the actual transaction outcomes of consumers and the extent to which they have benefited from their choices. The CUAC research found that the most important factor impacting on consumer participation is limited capacity, as individuals, unlike businesses, cannot bring specialised resources to bear on their decision making in a particular market. This is reflected in behavioural studies (included in our literature review) which showed that consumers are more likely to engage with and process information where there are limited rather than abundant options and where the products/services are comparable. 5

6 Sales channels and the quality of information Reported incidence of common misleading sales tactics at the door 35% 30% 25% 20% 15% 10% 5% 0% The salesperson told me they were from the government The salesperson told me that the whole area was changing to a different company The salesperson told me that I had to change energy company At the beginning the salesperson told me they had knocked on my door for a reason other than to sell me energy Door-to-door sales So how do consumers inform themselves about market offers? Our research found a range of problems with the quality of information in the Victorian market upon which consumers often base their decisions. This chart shows the misleading door sales tactics used by door to door energy sellers as detailed by consumers in our consumer survey. This may in part explain why consumers relying on this type of information to make market choices and select the right offer for them are not necessarily achieving their expected outcomes. CUAC and consumer advocates have been drawing attention to systemic examples of misleading door-to-door marketing for some years and this behaviour came within the sights of the ACCC in the last few years. On 27 September 2013 the ACCC launched its fifth prosecution action in relation to energy door-to-door sales and this may have influenced, in part, the announcements of the big three big retailers of their intention to withdraw from door-to-door marketing. At the time of the release of the Wallis report in October 2013, however, door-to-door selling remained the preferred marketing method and it will be important to be vigilant in continuing to monitor this sales channel. Switching sites 6

7 Similarly our mystery shopper analysis of privately operated price comparison or switching services showed problems with information quality, transparency and the presence of inaccurate information bringing to the fore the inherent difficulty for consumers in being able to effectively engage in the market based on easily accessible, reliable information. Choice complexity and search costs: an interesting case study In a presentation from our jurisdictional regulator in March of this year, entitled Pursuing competitive accountability in retail markets, the Chair of the Essential Services Commission (ESC) Dr Ron Ben-David, recounted his experiences in actively searching for a better electricity contract using online switching sites. In an exercise that incorporated a search for historical billing information, setting up a comparison spreadsheet, visiting commercial switching sites and comparing offers he declared I was soon overwhelmed by a plethora of electricity plans, discounts and special offers, bill estimates and claimed savings with none of the sites seeming to agree on which retailer and which offer was best, or even cheapest for my household. He concluded that, The inconsistent and labyrinthine way in which information is provided within, and across, these sites means that anyone seeking to extract genuine, meaningful and verifiable information from these sources is subjected to what must surely be a modern day trial by ordeal. Despite discovering inconsistencies and errors; errors that, typically only extensive cross-checking will reveal he completed his search and comparison with a search cost time estimated at24 hours and this for an electricity market offer only. Indeed, CUAC, having worked on these matters over a number of years has formed the view that the complexity of the market is such that a truly informed choice is only possible by using an independent switching site which uses your billing history information and then does the calculations for you to provide you with a small number of suitable options. The potential for random offer selection - UK UK experience comparable to Victoria [Actual consumer energy market] choices only marginally improved upon the gains that would have been made had the consumer randomly selected an alternative supplier % of switching consumers appear to have lost surplus through their choice of supplier. Source: Do consumers switch to the best supplier?, Chris Wilson and Catherin Waddams Price 7

8 Our report also highlighted the work of researchers Chris Wilson and Catherine Waddams Price, who examined the effectiveness of switching decisions by consumers in the UK energy market. They found that given the complexity of choice options and the information available to consumers that the quality of consumer decision making in that market yielded similar outcomes to what would occur if consumers were to randomly select energy offers. Given the information asymmetry evident in our research, CUAC was concerned to examine other indicators to test whether the market was delivering the expected price benefits for consumers. Other indicators of an effective market: level of concentration Another important indicator of an effective choice market is the level of concentration. In 2012, CUAC undertook research on market concentration calculated on market shares based on customer numbers and examining both the electricity and gas retail sectors for residential and business consumers. This research area has since been revisited by the ESC in its October 2013 report. The ESC research shows that electricity market concentration declined between 2003 and , with the big three retailers, AGL, Origin Energy and Energy Australia now accounting for 69% of the residential electricity market. CUAC believes that this important indicator needs to be monitored by the AEMC across jurisdictions and segments as an ongoing indicator of effective competition and that the ACCC should pay very close regulatory attention to future acquisitions of second tier retailers by large incumbents. Other indicators of an effective market: are consumer choices driving down retail margins? CUAC s next research intent was to look at retail margins, so we were pleased when the ESC commissioned a report by external consultant SKM_MMA on this issue. 8

9 Their study concluded that while gross retailer margins have increased by between 20 per cent (market offers) and 60 per cent (standing offers) in the five years to , this increase accounts for between 20 and 30 per cent of the higher prices observed in market and standing offers in Victoria. The rest of the increase is explained by higher wholesale, network and 'green scheme' costs. If consumers were making informed choices CUAC would like to think they would be having a greater impact on driving down prices as would be evidenced by some pressure on retail margins. Again, CUAC believes that this research and analysis should be conducted annually across all jurisdictions by the AEMC in both the electricity and gas markets as an important indicator of the state of the market.. Other indicators of an effective market: customer service and complaints EWOV: cases received pre and post retail price deregulation 16,831 electricity cases ,790 electricity cases 2012 (+183%); 6270 gas cases ,485 gas cases in 2012 (+114.7%) Another important indicator of the health of the competitive market is customer satisfaction and complaints. The Energy and Water Ombudsman (Victoria) complaints data shows very high actual case numbers and increases since price deregulation. CUAC believes that these kinds of increases in complaint numbers show a disturbing trend and one that should be given far greater weight by the rule makers and regulators in assessing the need for monitoring and compliance audits, enforcement activity and potential adjustment to the market rules. How are low income and vulnerable consumers faring in the reform process? In addition to how average customers are faring in energy reform processes, it is incumbent on us to monitor the impact on low income and vulnerable consumers. Key indicators in examining equity issues are access to supply, imminent disconnection and actual disconnection. Additional indicators include the monitoring of the number of payment plans and access to and the experience of consumers on hardship assistance plans. 9

10 In Victoria, the trends are not good. The ESC s report in 2012 showed an increase of 33% in electricity disconnections over the previous year to 1 in 100 customers. In gas the increase was 50%, with 1.1 in 100 gas customers being disconnected. These figures are historically high and high in comparison with interstate. Worryingly, the numbers of people on payment plans and on hardship plans had not increased. CUAC has also undertaken specific research on the experiences of Aboriginal consumers of the energy market and I note the importance of understanding the experiences of other vulnerable groups such as CALD communities and those with a disability. Lessons and common ground In CUAC s experience, energy reform is not about set and forget and the market will take care of everything. The setting of fair rules and a consumer protection framework is of course a key component. Having individual consumer protection and effective system protection mechanisms, in the form of ombudsman and regulators is another. In a deregulated market, however, more thought needs to be given to understanding the market, in monitoring and reporting on key indicators of market health in a systematic and transparent way. The kinds of research undertaken by our jurisdictional regulator needs to be undertaken nationally and the AEMC and AER should work with consumers and regulators to determine a research and reporting regime which builds a national comparative information base to assist further rule development and refinement. Further, research and analysis needs to be undertaken to understand consumer experience, not just of the average consumer but in how various classes of consumers are coping in their interactions with the market. Stronger relationships should be built between ombudsman schemes and regulators particularly in regard to systemic issues and enforcement. A key lesson from the rollout of smart meters in Victoria has been the importance of consumer engagement in the energy reform process. To that end, however, the initial failure of consumers to embrace smart meters has ultimately led, in our view, to a number of improvements for Victorian consumers. There has been a considerable amount of rethinking about the place of information and education in energy reform processes and the importance of building consumer knowledge about how the energy market works and what it means for them. As an example, the government recently implemented a communications campaign, Switch On through a website and a variety of media, which allowed Victorian consumers to catch up with the reforms: understanding how the energy market works, smart meter technology and its potential benefits, retailer choice and the introduction of flexible pricing. 10

11 My power planner: Independent price comparator The government also committed to the introduction of an independent price comparator site My Power Planner which provides consumers with offer options based on their estimated or real data. Based on the Australian Energy Regulator s Energy Made Easy switching site this site provides capacity for flexible pricing offers and hopefully the sites will be merged in the future to the benefit of consumers nationally. Energyinfohub: Programs for low income and vulnerable consumers To accompany the introduction of flexible pricing the Victorian Government has also established an Energy Information Fund. This fund will provide grants for community organisations to develop and deliver information about energy and flexible pricing for vulnerable and disadvantaged consumers. CUAC has been funded by the government to undertake a project that supports the Fund. We are doing four things as part of the project: helping to engage the community sector building a coordinating website that is a community sector hub for information about energy and EIF funding the site is called 11

12 and is now live Developing energy information materials that other community organisations can use and adapt Helping the government with advice, promotion and assistance to applicants We see this as an important development and one we hope emerges in other states or even nationally Research cited Consumer Utilities Advocacy Centre (2011) Improving Energy Market Competition Through Consumer Participation: A CUAC Research Report, CUAC: Melbourne =224&Itemid=30 Market Power in the Victorian Energy Retail Market, An analysis of market share and concentration, CUAC Policy Issues Paper-December id=274&itemid=30 Pursuing competitive accountability in retail markets presentation, May 2013, the Chair of the Essential Services Commission, Dr Ron Ben-David Essential Services Commission 2013, Progress of Electricity Retail Competition in Victoria: Research Paper May d8f7bb0e190a/electricity-retail-progress-competition-research-p.pdf Essential Services Commission 2013, Electricity Retail Margins Discussion Paper, Analysis of Electricity Retail Margins Essential Services Commission 2013, Energy retailers comparative performance report pricing , October 2013 Wallis Consulting Group, 2013 Final Report, Victorians Experience of the Electricity Market Essential Services Commission 2013, Victorian Residential Electricity Retail Market Research SKM MMA Retail Margins for Residential Supply Report, Analysis of Electricity Retail Margins (Essential Services Commission publications 12

13 13