ACCC Retail Electricity Pricing Inquiry: Preliminary Report

Monday 16 October 2017 @ 10.55 a.m. | Legal Research

On Monday, 16 October 2017, the Australian Competition & Consumer Commission (ACCC) released the preliminary report to the Retail Electricity Pricing Inquiry. This report is the first stage in “an inquiry into the retail supply of electricity and the competitiveness of retail electricity markets in the National Electricity Market” (the Inquiry); presented to the ACCC by the Treasurer of the Australian Government, the Hon Scott Morrison MP on 27 March 2017.

While this preliminary report presents the initial findings of the ACCC, there is still a substantial amount of analysis to be conducted, including the taking of submissions from the public, before the final report is presented to the Government in June 2018. Submissions to the preliminary report will be accepted until the 17th November 2017.

Terms of Reference

Presented to the ACCC pursuant to subsection 95H(1) of the Competition and Consumer Act 2010, the requested inquiry is an inquiry into the competitiveness of retail electricity markets within the National Electricity Market (NEM). Established in December 1998, the NEM consists of the wholesale electricity market covering all States and Territories of Australia except Western Australia and the Northern Territory. The NEM provides wholesale generation of electricity to large industrial energy users and to local electricity distributors within the participating States and Territory, and these in turn deliver the power to homes and businesses. Such examples of prominent electricity retailers which participate in this scheme are: AGL, Origin and EnergyAustralia.

In presenting the inquiry to the ACCC, Treasurer Scott Morrison provided for 9 terms of reference which should be included in the inquiry. These are:

  1. The key cost components of electricity retail pricing in the NEM and how they have changed over time;
  2. The existence and extent of any barriers to entry, expansion and/or exit in retail electricity markets;
  3. The extent and impact of vertical integration in the NEM;
  4. The existence of, or potential for, anti-competitive behaviour by market participants and the impact of such behaviour on electricity consumers;
  5. Any impediments to consumer choice, including transaction costs, a lack of transparent information, or other factors;
  6. The impact of diverse customer segments, and different levels of consumer behaviour, on electricity retailer behaviour and practices;
  7. Identifying any regulatory issues, or market participant behaviour or practices that may not be supporting the development of competitive retail markets;
  8. The profitability of electricity retailers through time, and the extent to which profits are, or are expected to be, commensurate with risk; and
  9. All wholesale market price, cost and conduct issues relevant to this inquiry.

Background and Findings

The initiating force behind the inquiry is the recent increases in electricity price, particularly over the past 10 years. In their findings, the ACCC found that, on average, a 2015-16 residential electricity bill was $1524 (excluding GST). This is an increase from 2007-08 of almost 50%, an increase which has not been matched by increases in other areas of the economy, nor in wage growth. As such, the increase in electricity prices has placed “Australian businesses and consumers under unacceptable pressure”.

In the preliminary inquiry, the ACCC found that in this time, the biggest driving factor for the increases in residential bills were primarily higher network costs, which itself constituted 48% of the total residential bill in 2015-16. Other factors driving increases were: increased retailer operating costs (16%), and increased environmental schemes (7%). What was also found was that while these prices drove the increase in residential bills, wholesale energy costs actually decreased in real terms, making up 22% of the residential bill.

“While most retail markets across the NEM have more than 19 retailers operating, the ‘big three’ vertically integrated gentailers, AGL, Origin and EnergyAustralia, hold large retail market shares in most regions and control in excess of 60 per cent of generation capacity in NSW, South Australia and Victoria. In the case of generation, this share has been relatively stable over recent years. This market dominance has led to non-vertically integrated retailers having limited access to risk management products, and outcomes for consumers and businesses are being driven by pricing practices that are not consistent with vigorous competition.

While natural monopoly electricity networks are highly regulated, electricity network operators have been able to over-invest in poles and wires as a result of the network regulation framework. To a significant extent, decisions of the past relating to network investment are ‘locked-in’ and will burden electricity users for decades to come. Attention should now turn to what can be done to mitigate these effects, recognising that there are already signs that network prices are moderating, due to changes in the network regulation framework since 2013. The issues arising from the network regulation framework have been compounded by network operators successfully challenging regulatory decisions of the Australian Energy Regulator (AER), resulting in higher network charges to households and consumers. The ACCC welcomes the Australian Government’s announcement that it will take steps to remove the limited merits review process, as this will help ensure network pricing is moderated in future.”

As far as the findings in the initial inquiry are concerned, the ACCC has summarised the primary concerns which were outlined in the first part of the inquiry. These are:

  1. There appears to be insufficient competition in both generation and retail markets, which both raises prices and increases barriers to entry. The lack of availability and high price of gas has also increased the price of electricity.
  2. There appears to have been over-investment in electricity network operators, inefficient cost recovery and higher than warranted rates of return, due to the network regulation framework which has led to increased costs for consumers. Some of these costs represent a continuing burden on consumers.
  3. Some measures to improve environmental sustainability have been overly generous and poorly targeted, with outcomes that appear inequitable.
  4. Retail deregulation has benefited some and hurt others. The market is exceptionally complex, and consumers have no ability to exit the market. We need to understand what is required for the market to work effectively, and to ensure that consumers have the tools to enable them to make informed decisions about their electricity services.

Recommendations

As this is only a preliminary report. The ACCC has not presented a full list of recommendations, rather waiting until the final submissions and analyses have come through. The ACCC have, however, provided a number of measures which may be implemented to ease pressures on electricity prices for businesses and consumers. These are:

  • Boosting competition in generation and retail markets
  • Lowering network costs
  • Ensuring cost effective and equitable environmental schemes
  • Improving outcomes for small customers

Other initial recommendations that were presented in the preliminary report are:

  • improvements should be made to the AER’s ability to effectively investigate possible breaches of existing regulation. The AER should be provided with the power to require individuals to appear before it and give evidence when investigating possible breaches. Governments should also consider whether the infringement notice penalties and civil pecuniary penalties for breaches of the NEL and NERL operate effectively and are sufficient to deter market participants from breaching existing regulations
  • the Australian Government should provide additional resourcing to improve and promote the AER’s Energy Made Easy price comparison website as a tool to assist consumers in comparing energy offers. Consideration should also be given to Retail Electricity Pricing Inquiry – preliminary report 156 improving and promoting the Victorian Government’s price comparison website, Victorian Energy Compare
  • state and territory governments should review concessions policy to ensure that consumers are aware of their entitlements to concessions, that concessions are well targeted and structured to benefit those

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