The price is complex

Few things in energy have been more certain in recent times than the federal government sooling the Australian Competition & Consumer Commission on to the vexed issue of retail electricity prices. It was only a question of when – and the answer, for a government under siege in the opinion polls and hampered by its lack of numbers in the Senate, is now.

What the ACCC review won’t resolve for Turnbull’s government is the fact that power bills for trade-exposed industries are painfully high and, when taken with gas bills and other relatively high operating costs in this country, are threatening the viability of manufacturing, one of the biggest of all policy issues for this country today.

Nonetheless, unlike so much else in the public power game, this inquiry is a good idea. There is so much disputation about retail power bills, and so many vested interests at play, that scrutiny by the “consumer watchdog” should pop the festering pimple of populism and posturing.

The ineluctable fact of this issue is that prices for the majority of east coast mass market electricity account holders – located in Greater Sydney, Greater Melbourne, south-east Queensland and Adelaide – increased by about 80 per cent between 2006 and 2014, driven upwards not least by a large increase in network charges and by the controversial Gillard carbon tax. They declined when the tax was removed but the view of the “mob” (as Paul Keating used to describe the community) is that they are still too high.

The most recent Essential Report opinion poll posed the question “Over the last few years have your gas and/or electricity costs increased, decreased or stayed much the same?” Seventy-seven per cent of respondents said they had risen, 13 per cent said they had stayed about the same, two per cent said they had decreased and good old “Don’t know” amounted to seven per cent.

It’s worth pointing out that 32 per cent of the poll’s respondents ticked “increased a lot” and this is quite a large reduction from the 45 per cent when this question was posed by the pollsters in 2012.

In asking those they polled what could solve the problem, Essential Report offered four boxes for ticking. “More government control of power companies” got 29 per cent support as did “more government ownership of energy production” while “more private power companies to increase competition” got 17 per cent – and “Don’t know” recorded 25 per cent.

The problem for energy retailers is that consumer angst and self-interested flag waving is relatively easy to communicate but the explanations of how the market works are not.

The Grattan Institute, whose recent report (titled “Price shock: is the retail electricity market failing consumers?”) is being cited by the government as influencing the inquiry, acknowledges that similar problems are being experienced in Ontario, a number of American states and the UK among others that have tried a competitive market system.

The institute also acknowledges that “numerous” studies have assessed Australian electricity prices “but we still lack consensus on whether there is a problem.”

It asserts that one of the issues is the lack of information about retailers’ cost structures.

Part of the institute’s conclusions that I do not see Turnbull and Treasurer Scott Morrison citing today is this: “There do not appear to be grounds for referring retailers to the ACCC; (they) do not appear to be involved in what would be termed uncompetitive behavior.” However, it adds, prices increases are a cause for public concern and this justification was used to launch the ACCC’s 2015 inquiry in to the east coast gas market (which, after following a long and winding path, seems by general agreement to be leading to a better place).

There is a salutary story to be found in Britain, as Grattan Institute explains in its commentary.

An inquiry by the UK Competition & Markets Authority (their version of the ACCC), recently completed, has wound back regulatory intervention in the retail market and focused on the same problem that bedevils the Australian scene: the disengagement of so many householders from opportunities to pursue better deals with retailers.

The Grattan case, in short, is that energy retailers should be doing far more to shepherd consumers in to better deals – and that they don’t do so because there is a profit to be made out of householders’ apathy or sheer inability to work through the complexities of pursuing a better deal.

The Australian Energy Council, the retailers’ mouthpiece, comments in reply that “competition cannot guarantee the lowest possible price for every customer at any point in time, nor can it guarantee that prices will not rise.”

It adds: “Governments should similarly be aware that it is not possible to regulate for such an outcome, and (regulatory) efforts to do so may have the perverse effect of enabling more generous (retailer) profit margins, as shown by the UK’s recent experience.”

The full AEC response to the Grattan paper is in a commentary titled “The retail electricity market: misunderstood or genuinely failing?” Both are to be found on their authors’ websites.

Included in the association paper is this thought: “Just as market offers are complex, so are customers. There is no universal customer. As with their phone bills and plane tickets, customers have a broad spectrum of engagement preferences. Some are not price sensitive and value no engagement with their retailer as preferable to shopping around for the best deal. Others are highly engaged, because of financial concerns or an interest in extracting the best value deal available.”

Boiled down, the central thrust of the retailers’ case is that “government policy should be directed to ensuring that there are no barriers to customer engagement with the market and that the most vulnerable customers are given specific support to ensure that they receive the most competitive deal appropriate to their circumstances.”

Whatever, as our young ones say, the ball is now in the court of Rod Sims and his “watchdog.” A report is unlikely until mid-2018 – which leaves lots of time for politicking and populist posturing by the many players on this stage.

And nagging away at the retailers’ minds all the while will be this point made by the Grattan Institute: “If competition fails to deliver the promised benefits, then government will have no choice but to return to price regulation.”

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