The Australian Competition and Consumer Commission (ACCC) recently released “Restoring Electricity Affordability & Australia’s Competitive Advantage,” a comprehensive report that analyzes the reasons for very high prices and “sets out 56 recommendations to reset the National Electricity Market, boosting competition, reducing costs and improving consumer and business outcomes.” (Click here to find the full report.) I generally agree with its recommendations and want to focus here on two issues: retail price structure and inherited customers.
First, the problem of confusing retail price structures. There are several features that complicate the comparison of retail tariffs from the various retailers in the Australian market, including the interpretation of discounts. The ACCC has recommended the establishment of requirements to make it easier to compare one retail offering to another and has recommended restrictions on third-party intermediaries. It advocates for the establishment of a “default offer rate” to which all discounted offers would be compared.
The default offer rate is likely a workable solution, but I would like to suggest a much more prominent role for government- or regulator-sponsored websites such as energymadeeasy.gov.au in Australia and powertochoose.org, in the Electric Reliability Council of Texas (ERCOT). Part of the success of the powertochoose.org website was due to heavy promotion from the very start of retail competition, and I believe that better promotion of government-sponsored sites in Australia would also facilitate retail competition, even going beyond the ACCC’s recommendation in chapter 14.
In the case of powertochoose.org, retailers provide information to the website, and consumers wanting to compare rates can simply enter their zip code (post code) to see available offers and evaluate their prospective bill, according to their level of typical monthly energy consumption. It is important to understand that this website is not organized by a third-party intermediary, the likes of which have been criticized by the ACCC. This type of official comparison website, set up by the regulator in order to provide unbiased, consistently formatted, apples-to-apples consumer information, could provide the “reference bill amount” advocated by ACCC in recommendation 32.
Second, the problem of incumbents inheriting customers. That is, the successor company of a previous retailer tends to maintain a large fraction of its pre-competition customers, who may not explore cheaper retail options from the competition, thus disadvantaging new retailers – even when they offer a cheaper product. In its retail restructuring, Texas devised a pricing strategy aimed to give a short-term advantage to new retailers by establishing a temporary, artificially high price that the incumbent had to charge. In effect, this became an easy “price-to-beat” for new retailers. Once a certain number of customers switched to the new retailers, or once a sunset date had passed, the price-to-beat was eliminated.
The price-to-beat was set above expected market-based prices for retail offerings, which may seem like a giveaway to incumbents, but it actually provided an opportunity for new retailers to make an initial entry into the market and undercut the incumbents, thus weakening the significant advantage of the incumbents.
As the powertochoose.org website shows, there are now plentiful retail offerings in ERCOT competing for customers on a level playing field. It is probably fair to say that the temporary price-to-beat strategy helped produce a vibrant retail market.
How does the price-to-beat relate to Australian restructuring? Australian retail restructuring is arguably past any initial transition period, so how could something analogous now be implemented? Here’s a possibility: Note that the ACCC report recommends that state governments take over some of the “excessive” network costs in order to allow for a bill reduction. This price reduction could be used to create Australia’s own price-to-beat. One possibility would be to allow the discount to flow first to customers of non-incumbent retailers, who would then be able to offer lower prices than the incumbents. While this might be criticized as being akin to an “introductory” credit card rate, the key issue here is to establish a more advantageous position for non-incumbent retailers using an instrument with a well-defined sunset clause. Greater competition keeps prices lower, and the regulator-sponsored website makes it easier for consumers to find those prices. A possible recipe for a vibrant retail market in Australia.