Power retailers have failed and they can’t complain

by David Blowers

An edited version of this piece was published by Herald Sun, Monday 21 August

Finally, someone has had enough. For five years or more, numerous reports have argued that there is something seriously wrong with Victoria’s retail electricity market – and that customers are paying the price for that in higher electricity bills. On Sunday, former deputy premier John Thwaites declared that enough was enough.

Back in March, I wrote in these pages that electricity retailers were earning far more from Victoria’s households and businesses than they should be. Our solutions here at the Grattan Institute were to make electricity pricing less complex, make sure those in hardship are on the best deals and make it harder for retailers to quietly move customers onto more expensive offers. And then wait to see whether these changes would result in lower bills for customers.

Well, Thwaites, as the head of Victoria’s independent review into retail energy markets, has decided that the public can’t wait. In a report released on Sunday, Thwaites and co. declared that customers paying on average 21 per cent more for their electricity than they need to, is completely unacceptable. And instead of giving the market a chance to fix itself as we advocated, Thwaites has moved straight to the recommendation we described as the last resort: re-regulation of prices.

The Victorian government stopped having any control over how much we pay for electricity in 2009. The argument was that, with government out of the way, the market would drive downs costs and prices. And the market would create new, exciting products that we electricity customers really wanted.

As all Victorians know, the reality has been different. Prices have skyrocketed over the past few years, and many of us use and pay for electricity in exactly the same way as we always have. So where’s the benefit from deregulation?

Thwaites has concluded that the market has failed consumers. And as a result, he recommends that the Victorian Government introduce a new, regulated product: a Basic Service Offer. The Victorian energy regulator would determine the maximum price for the Basic Service Offer, which all retailers would have to provide to any customer that wants it.

There will be no frills. No discounts, no freebies and no complicated pricing structures. Just a fair price for electricity. And that price should be low. Retailers will not be able to pass all their costs to these customers. They will not be allowed to recover via the Basic Service Offer most of the money they spend on advertising and marketing. The bottom line is: if enough Victorians end up on this offer, the retailers will earn far less.

There will be consequences. Some of the very good deals currently available in the market will disappear. Anyone currently on those deals would pay more for their electricity.

Small retailers are likely to struggle, and there will be far less to encourage start-up retailers to try their luck in Victoria. Fewer competitors will mean less innovation.

No one wants to be stuck with VHS or Betamax for the rest of their lives. But Thwaites doesn’t believe there is the equivalent of the DVD or downloading on the horizon in the electricity industry. And even if there is, he doesn’t believe it will be discovered or introduced by the traditional electricity retailers.

In declaring enough is enough, Thwaites has decided that most Victorians just want to pay a fair price for their electricity. They don’t particularly care whether they can choose from a big array of retailers, or select from a big range of ‘innovative products’ – even if they can figure out what those are.

Retailers will argue against this view and the rest of Thwaites’ recommendations. They will argue that there is already a nationwide review of retail electricity competition going on, and it’s too early to judge how effective the market has been. And only last week, retailers agreed at a meeting with Prime Minister Malcolm Turnbull to work with the Federal Government to help consumers find better deals.

But maybe it is too little too late. The warnings have been there for years, but retailers have not really acted.
When electricity prices were lower, maybe governments could ignore what was happening in the retail market, or at least give it more time to deliver to customers. But in the past year the cost of generating electricity has ballooned. Victorian consumers have already experienced some of that pain through higher charges. And they can expect more in January when retail electricity prices are reset again.

For many of us, the retailers have failed to deliver what we want and expect: a decent price for our electricity. They can hardly blame the government for wanting to do so.