Consumers Win in Energy War

The Victorian retail electricity and gas market has become one of the most competitive in the world.

Retailers, including several from interstate, are busily invading each other's territories.  We are seeing a variety of standard incentives including cash bribes and footy club oriented concessions.  In addition, the most valuable household customers are being bombarded by door-knock and telephone sales offers.  The upshot to date is that over 20 per cent of Victoria's household electricity customers and 16 per cent of gas customers have moved off their host retailer's regulated tariffs.

The share of customers who have switched supplier is a bellweather of competition.  According to data assembled by the US Center for the Advancement of Energy Markets, Victoria (and South Australia) has seen more customer switching than any of the 60 states and provinces in North America.  Only the UK has more customers shifting to a new retailer.

Vigorous competition is important in ensuring both that the consumer gets great deals and that suppliers are well informed about the demand for gas and electricity.  The feedback of consumer demand is vital to ensure that new supplies of the right sort come on stream at the right time.

But Victoria cannot simply sit back and bask in its good performance.

Competition can only flourish if government required regulated fall-back prices more than covers suppliers' expenses.  To this end, the Bracks government is allowing host retailers gradually to bring prices for each customer class into line with costs.  The Essential Services Commission is also examining ways that allow retailers to enforce payment of debts and penalise late payers.

Following fifty years of politically set prices, such measures are essential.  This is all the more so since the host retailers are now vulnerable to having their most lucrative customers cherry picked.  Last month the Herald Sun reported how energyAustralia, the giant NSW government owned retailer, was successfully signing up big spending household customers in this State.  Such deals are great for consumers but also sound the death-knell for cross subsidies that have long prevailed.  Where retailers have profitable customers captive to themselves they can also be required to subsidise other, unprofitable customers.  But when the highly profitable customers are poachable by rivals, all suppliers have to start offering them better deals and this undermines the scope for cross subsidies.

Among other potentially helpful developments would be a roll out of so-called interval metres that measure consumption by the half-hour.  These would allow households who consume when electricity is cheap to negotiate better deals.  They also mean that those who consume during high price periods, for example on hot days when air-conditioners are going full pelt, would pay the real costs.  This also encourages behaviour that flattens out the costly peaks.  Ironically, the lack of smart meters presently means affluent families who have domestic air conditioners tend to be subsidised.  However, rolling out smart metres is far from a done deal.  Even though technology is making the process more affordable it remains expensive.

Victorian gas and electricity consumers are benefiting from lighter regulation.  These benefits will increase as the wind-down of government controls offers enhanced scope for competition to do its job.

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