Re-regulation: What do latest retail reports reveal?

At the end of November each year, the Australian Energy Regulator (AER) and Essential Services Commission (ESC) publish their assessments of the performance of the retail market for the previous financial year.[i] While each regulator provides their own high-level commentary on what the data shows, it is worth digging a little deeper – by trying to understand the possible cause for changes in customer outcomes and experiences.

These reports primarily include pre-pandemic data from July 2019 to June 2020. Clearly the April to June quarter can be read as significantly impacted by COVID-19, however the first three quarters are particularly important to analyse, given they represent the first period since the re-introduction of price regulation in all National Electricity Market (NEM) jurisdictions on 1 July 2019.

Market concentration

When full retail competition was introduced into the NEM, each network patch was allocated a local retailer. These local retailers gained access to all the customers within that patch, on standing offers. Since 2005, the percentage of customers held by local retailers has progressively declined. As tier 2 retailers entered the market, they won customers off the local retailers by offering cheaper market deals than incumbent standing prices.

While the local retailers in NSW, Victoria, South Australia and South East Queensland (SEQ) were also able to offer market contracts, they were unable to switch standing offer customers onto the cheaper deals without obtaining their explicit informed consent. This meant customers were often able to save significant amounts of money by switching and resulted in Australia quickly becoming one of the most competitive retail markets worldwide.

Interestingly, in 2020, the residential market share of large retailers in Victoria remained steady. In previous years, this has not been the case, as illustrated by the “big three” retailers[ii] market share declining from 63 per cent in 2014/15 to 54 per cent in 2018/19. In 2019/20, this market share remained at 54 per cent.

While a trend cannot be inferred from one year's data, that it has occurred coincident with the introduction of the Victorian Default Offer (VDO) warrants some further consideration. 

Prior to the introduction of the VDO in 2019, the Australian Energy Council (AEC) engaged Craig Emerson Economics to consider the economic consequences of the VDO. In his report, Dr Emerson noted that if the VDO was priced too low, and did not enable retailers to make a reasonable profit, then it would be likely that smaller retailers - or those with a higher cost base - would be less able to compete with larger players. Similarly, in the Australian Energy Market Commission’s (AEMC) advice to the Council of Australian Government (COAG) on the DMO, it noted analysis from KPMG that “[J]urisdictions that have re-introduced stronger controls on tariffs in response to concerns about the retail market, whether price controls or non-price tariff regulation, have typically experienced a fall in diversity of offers and activity”.[iii]

In the National Energy Customer Framework (NECF) jurisdictions[iv], where the higher priced DMO was implemented on 1 July 2019, the decline in market concentration slowed from previous years, but the market share of the big three did continue to fall. In 2018/19, the big three held market share of 65.5 per cent, falling to 65 per cent in 2019/20 - a decline of 0.5 per cent in the year. As a comparison, between 2017/18 and 2018/19, concentration fell by 2.9 per cent.

Switching

Switching rates were significantly lower in Victoria in 2019/20, even before the effects of COVID-19 in Q4, which saw switching rates fall dramatically. This was a similar experience in the NECF states, albeit the declines in Q1-Q3 were lower than that in Victoria.

Again, the cause of these reductions is not yet clear. However, this outcome was not unexpected. Both the AEMC and Craig Emerson Economics predicted engagement would decline with decreased price dispersion. While price regulation has undoubtedly reduced the prices paid by customers on standing offers, it has also narrowed the differential between a customer's current offer and the best available offers. Previous research has identified that each customer has an amount in their mind that they consider they need to save to warrant the effort of switching.[v] While the difference between the cheapest available offer and the VDO was at least $280 in 2020, this spread does not take into account the fact that more than 95 per cent of customers are currently on market offers, and likely to currently be paying less than the VDO.

Other regulatory reforms were introduced in 2020 that are likely to further reduce the incentives to switch. Retailers are no longer able to market headline conditional discounts in the NEM, with all discounts now required to be calculated off a reference price. While this has enhanced the ability of consumers to compare offers, it similarly has removed a key driver that customers previously used to engage. Customers currently receiving large discounts on legacy offers might be less willing to engage and seek out an offer where the advertised discount appears smaller. This is a messaging problem, and retailers and Governments collectively should seek to build greater understanding amongst customers to mitigate the negative consequences of the reform.

Customer service and complaints

Despite the challenges of 2020, positively, retailers have managed to significantly improve their performance when it comes to complaint management and customer service. Ombudsman complaints in particular represent an objective measure of performance between retailers. Customers are required to attempt to resolve their issue with their retailer before seeking assistance from their jurisdictional energy ombudsman. Retailers are required to report internal complaints to the regulators, but the measure differs greatly depending on how each call is characterised. Ombudsman complaints, on the other hand, represent a failure in the internal systems, with the customer feeling like they needed external assistance.

In Victoria, there was an 11 per cent reduction in calls to retailers, and a 17 per cent reduction in internal complaints. More importantly, this translated to a disproportionate 25 per cent reduction in ombudsman complaints, meaning that retailers were first avoiding issues becoming complaints, and when they did, they effectively resolved more of these internally without the need for mediation.

This improvement may have led to some of the reductions in the above metrics on switching and engagement. The AEC undertook some research in 2018 and identified that customers primarily switched as a consequence of one of a number of key events. These events included moving house, getting a high bill, or having a dispute with their provider. With fewer complaints, this may have meant fewer customers felt the need to switch.

Conclusion

It is early days since the retail markets were re-regulated in Victoria, NSW, SEQ, and SA. However, the 2019/20 data shows that, particularly in Victoria, competition and engagement have been muted slightly. 2020/21 data will likely be significantly affected by the COVID-19 pandemic and as such, may not provide much additional insight to these early indicators, but policy makers and industry should continue to monitor the impacts of price regulation and other market reforms on the overall customer outcomes in the coming years to ensure that engagement does not continue to decline. There remain good offers for customers to take up, and this money will be left on the table if customers become complacent.

[i] Essential Services Commission Victorian Energy Market Report 2019–20, 30 November 2020, Australian Energy Regulator, Annual retail markets report 2019-20, 30 November 2020.

[ii] AGL, Energy Australia, and Origin Energy

[iii] AEMC, Customer and competition impacts of a default offer, Final report, 20 December 2018, iii

[iv] NSW, ACT South Australia, Queensland and Tasmania

[v] For example, “Testing the impact of behaviourally informed energy bills and best offers”, The Behavioural Insights Team, 2017