While debate rages as to whether households might save a cent per kilowatt-hour, or 3.5% of their bill, from slashing support for renewable energy, electricity retailers, at least in fully deregulated Victoria, are offering discounts of 20% and even 30% off their standard rates for new customers (no luck if you’re an existing customer).
It kind of makes you wonder if these guys can offer a discount of 20-30%, how much must they be gouging the customers who are on the standard rates?
And isn’t it funny how none of them seem to talk about the actual price they charge, only the discount?
Last month the Australian Competition and Consumer Commission picked up on this rather odd practice of retailers talking in discounts but not mentioning actual prices per kilowatt-hour and per day. It instituted proceedings in the Federal Court against Origin Energy for making false or misleading representations and engaging in misleading or deceptive conduct.
The ACCC found that Origin was offering a discount of up to 16% off the electricity usage charges they would otherwise pay Origin when, in fact, the rates charged to consumers under this ‘discounted’ plan were approximately 4% higher than under Origin’s standard retail contract.
The ACCC has actually said it will make it a priority to focus attention in the energy sector on what it terms a problem of ‘discounts off what?’ pricing.
Now, from looking within at my very own laziness I think I know the answer for why the energy retailers like talking in discounts and don’t like talking about cents per kilowatt-hour and cents per day.
Until recently I was an electricity customer of Origin Energy.
This was the case even though, thanks to my own criticism of that company’s stance on climate change policy, people were telling me I had inspired them to abandon the company.
And it was the case even though I knew Origin was underpaying for my solar electricity exports and was overcharging for the power I consumed. I even had friends at other energy retailers (far nicer than door-to-door salesmen) offering me vastly better rates if I switched to them.
Yet I stuck with Origin.
Now, if I’m reluctant to switch out of a bad deal in spite of spending my professional life writing about the market and obsessing about cents per kilowatt-hour figures, imagine what it’s like for the rest of the population?
The thing is that we know that the default rates (also referred to as regulated or standing offers) that the three big east coast energy retailers offer customers in most states are a complete ripoff (this doesn’t apply to Western Australia where electricity is subsidised, nor ACT).
According to research by Gavin Dufty at St Vincent De Paul, in Victoria households could save more than $400 per annum by moving from the default tariff to the best market offer. In NSW it’s around $350, South Australia is $280 and Queensland is $250. In addition, research by the Victorian Essential Services Commission has found that retailers have substantially hiked their margins in recent years for these default tariffs.
Yet a substantial proportion of households pay these inflated prices, or quite close to them. This inefficiency in the market well exceeds the impact of the carbon tax or the renewable energy target, yet is completely missing from the heated political debate about electricity prices.
We know for sure that at least about a fifth of households in South Australia and a quarter in Victoria pay these kinds of prices, while in South East Queensland it’s around a third and in NSW it’s 40%. These are the proportion of households that are on regulated or default standing offers.
The rest of the market is said to be on what are known as ‘market offers’. But this doesn’t necessarily mean these customers have shopped around for the best deal on offer. The big three retailers commonly offer their existing customers to sign up for a small pay on time discount. The moment customers switch to this, they are defined as being on a ‘market offer’ even though they aren’t paying much less than the default rate. And if they don’t pay on time they’ll still be paying the same inflated prices they always have.
Also retailers, in offering plans with big juicy discounts for paying on time, will often have these lapse after the first year on a two-year contract. After that you’re back on the same inflated default rate.
At present the big three power retailers – Origin Energy, AGL Energy and Energy Australia – completely dominate the markets which are open to competition (regulations inhibit competition in Tasmania, WA, ACT and regional Queensland). Across the eastern states they hold 77% of the market. Because they have inherited a large proportion of their customers through buying up state government power companies, they happen to hold almost of all of the lazy customers who pay ridiculously inflated prices. As you can imagine, the last thing they want is to let their lazy customers know just how bad the prices are that they are paying. Far better to talk in percentages.
Retail price regulation is not the answer to solving this problem. I’ve dedicated inordinate words to describing how the NSW regulator, IPART, has been exceedingly generous to retailers in setting regulated prices well above retailers' costs (meanwhile accusing the Renewable Energy Target of being incredibly costly based on costings that actually gave a windfall to retailers).
In addition, governments have already set up websites to help aid customers in comparing retailers offers yet these haven’t to date made much of a difference.
There is a better way, but it requires government to aid the market to work more efficiently given people’s inherent laziness, not fix the ultimate price outcome. If politicians really cared about consumers this is what they’d all be arguing about.