The big reveal: Victoria responds to Thwaites Review

Retailers were pleased that the Victorian Government’s seven month silence on its Independent Review of the Electricity & Gas Retail Markets was broken over the weekend.  Now the real work of formal consultation with the Government begins, in a compressed timeframe given its stated intention to announce a final response by the middle of the year. 

The opportunity to consult formally and in detail with the Government on the nine recommendations from the Thwaites Review it has accepted is welcome. 

This paper summarises the Government’s interim response and consultation paper and outlines some areas of concern for Victorian retailers.

Victorian Government Interim Response

The key features of the Government’s response are:

• The proposed price re-regulation of the market via the introduction of a new offer type called a Basic Service Offer (BSO), and the abolition of the current Standing Offer have been put on hold, pending consultation (Recs 1 and 2)

• Marketing information on prices will be made more easily comparable, and retailers will be required to communicate to customers their ‘best deals’ in dollar terms on household bills (Rec 3)

• Retailers must commit to greater clarity in relation to market contract periods, practices and variations. Prices in a market contract must be fixed for a minimum of 12 months (Rec 4)
• The new Payment Difficulties Framework, as settled with the Essential Services Commission (ESC) at the end of last year, will be implemented and the Utility Relief Grants Scheme will be reviewed (Rec 6)

• The ESC will report on the competitiveness and efficiency of the market by 31 December 2019, and it will be provided with additional information gathering powers. In the meantime the ESC will work on a ‘reference BSO price’ that could be published from 1 July 2018 (Rec 8)

Recommendations 1 and 2

The deferral of the Review’s proposal to re-regulate prices in the energy market is welcome.  Implementing a BSO and removing the standing offer as proposed would have had serious and material consequences for consumers that cannot be avoided.

The AEC will be participating in the Government’s consultation on Recommendations 1 and 2 over the coming weeks.  The risks these recommendations present remain live and include:

1. Some households (including some low-income and vulnerable households) would pay more for energy. This is because price re-regulation would kill competition in the Victorian market, wipe out most (if not all) of the smaller retailers from the market and remove the incentive for the remaining retailers to put very cheap deals into the market.  Consumers would rush to the BSO price which would, despite intentions to the contrary, be effectively a market ‘floor’.  

2. It places huge pressure on the regulator to accurately analyse and assess market movements and the cost inputs for retailers, in circumstances where most of a retail bill’s cost drivers (such as wholesale and network costs) are under neither the Government’s control, nor the retailers. Small changes in the input data or the assumptions would change results materially.  Errors made by the regulator would have consumer or industry impacts, and potentially both. Regulators that have done this in the past have often supported price deregulation given the challenges of setting a reasonable price.

3. A BSO or equivalent would also be a deeply retrograde step for an energy market which policymakers are keen to see transition to a low emissions and more customer-centric future. The retail market must retain the flexibility to respond to different demand response capabilities of consumers, which will be critical to enabling the increased penetration of variable supply generation technologies (ie renewables) in Victoria.  A ‘one-size-fits-all’ BSO would be completely at odds with this energy market of the future, and would also act as a disincentive to potential investment in Victoria’s wholesale market.

4. The proposal to abolish Standing Offers does not account for the necessary consumer protection role they play for those customers who are yet to engage with the market. This occurs when, for example, a customer has just moved in to a property and is yet to decide on a retailer, or market offer; or in the case of a retailer default. Retailers are likely to operate at a loss in servicing these customers with the ‘no frills’ BSO (plus the full suite of customer entitlements) as described by the Government.  The Government’s acknowledgement of the challenges the removal of the Standing Offer represents, is welcome, but there is no proposal to deal with this issue at the present time.

Price re-regulation of this market would be a backwards step.  If the Government is committed to price re-regulation, Recommendations 1 and 2 must be subjected to a rigorous assessment of costs and benefits to enable an avoidance of the issues outlined above.  Only a proper cost-benefit analysis would provide the confidence that this proposal represents the best option for Victorian consumers.  Absent the consideration of alternatives as part of that analysis, no such confidence is available.

Recommendations 3-11

The AEC has indicated publicly that it supports Recommendations 3 – 11 in principle.  It is imperative that retailers continue to respond meaningfully to criticisms of the market, and its perceived lack of transparency.  Some of the work proposed in these recommendations is already underway in other jurisdictions under the auspices of the Australian Energy Regulator (AER).  Where possible national consistency should be a goal, as this also places downward pressure on retailers’ costs to the benefit of consumers.  

The work that has been done with the AER in relation to comparator rate tools and marketing in dollar terms, for example, may be instructive in the Victorian context. It also means quick wins for Victorian consumers.

The devil will be in the detail.  Whilst the principles of transparency and simplicity are laudable, detailed work is ahead to ensure that each recommendation is workable in practice. 

Reference BSO price

A new element to the Government’s response is a ‘reference BSO price’, which the ESC has been asked to develop by the Government.  This reference price has not been consulted upon previously, nor was it contemplated by the Thwaites report. 

The AEC understands that it will be a replication of an ‘efficient’ retailer’s cost stack, and must be developed by the ESC for submission to the Government in the middle of the year.  This is a complex area with many commercial sensitivities and the identification of a ‘one-size-fits-all’ cost stack, in order to identify a reasonable price for energy at any given point in time, may have its challenges.

Conclusion

Some of the Review’s criticisms of the market and of retailers’ practices are warranted, and retailers agree these should be addressed through regulatory change supported by the industry.  Retailers are looking forward to the opportunity of consulting in detail on the Thwaites’ Report recommendations – the nine supported by the Government include valuable reforms to the benefit of consumers. 

However, proposals to re-regulate the market remain ill-conceived and the AEC will continue to explain the unintended and adverse consequences for households and businesses if a price re-regulation of this type is pursued.

Whilst this work is underway, Victorian consumers should be encouraged by both industry and Government to access the Government’s own Energy Compare website.  We know that 70 per cent of consumers who use the site, find a better deal and switch.  It is a simple and effective way to help consumers reduce their energy costs.