ACCC Cleaning Up the Market

ACCC Cleaning Up the Market

In late 2015, Mark Yates asked me if I would be interested in doing some work for Yates Electrical Services. I remember him telling me he had about 2 weeks of work available for me, that was 145 weeks ago, and according to my workflow tracker, I still have at least a couple more weeks left before I’ll be finished.

Today, my role at Yates Electrical Services largely involves overseeing the marketing and communications for the business, which – among other things – generally means I spend a large portion of my day trying to translate information supplied to me by technicians, electricians and engineers into something which the average human (like me) can actually understand.

As the Australian Competition and Consumer Commission (ACCC) last week released a report which calls for the adoption of new powers provided to the Australian Energy Regulator (AER) to target “market manipulation”, and facilitate a reset of the National Energy Market to reduce unnecessary costs on consumers, we feel it’s a good time to start looking at your electricity supply, who you’re paying, and what you’re paying for.

Let’s start with what and who’s involved, and how they fit into the system: First, there’s the energy market, the price of which is determined by supply and demand and is operated by the Australian Energy Market Operator (AEMO). AEMO provide the essential link between various market participants, who can be either generators – businesses who generate energy and export it into the National Electricity Market - or retailers, businesses who purchase electricity from the National Electricity Market and on-sell that electricity to the consumer. In some cases, a business may operate as both a generator and a retailer (often referred to as ‘Gentailers’), this allows a retailer to hedge their generation against fluctuations in market prices, as any energy which they are paying for from the market during a trading interval is offset by the energy they are selling – essentially meaning the price of that energy becomes irrelevant. BUT, and this is one very big but; this configuration also enables these businesses to shift costs from one part of the business to another (known as ‘transfer pricing’), which is something the ACCC is including in their investigations.

According to the report, at least one vertically integrated retailer made significant adjustments to its transfer price in February 2017 in order to reallocate costs between its retail and wholesale businesses. This followed significant increases in the wholesale price. The ACCC is concerned about the impact that vertical integration may have on a standalone retailers’ (the small guys) ability to offer competitive rates in the market. In a nutshell, a company which has too much vertical integration can have too much influence on wholesale market prices, either by enabling them to bid more capacity at higher prices, or simply choosing to make plant capacity unavailable to the market, driving prices up as supply drops and demand increases. This is definitely in their own interests, but it is not in yours.

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Second, you have the Network Operators, businesses who own, build and maintain the physical poles and wires which ultimately transport the electricity you purchase directly to your toaster and kettle first thing in the morning, and for this service, their charges make up nearly 50% of an average residential bill. In previous years the Australian Energy Market Commission revealed that the majority of price rises in consumer bills were driven by increasing network costs. Apparently the cost of installing new infrastructure and maintaining the existing network increases disproportionately to inflation, so much so in fact, that the Australian Energy Regulator concluded the network operators were exploiting their positions – one which is essentially a natural monopoly, as you only require one set of wires to deliver electricity – by over-investing in their network, upgrading their own infrastructure and generating works which aren’t necessarily required (a practice known as ‘Gold Plating’) then passing these costs on to the electricity consumer (AKA: you). In 2015, the AER ruled that these companies were no longer allowed to pass these costs on to the consumer, but the decision was appealed and eventually overturned. The system remains heavily biased towards these monopoly network businesses.

As much as the network operators play their part in the price rises though, they are definitely not solely to blame. Retailer costs have also been increasing, with retailer behavior almost geared to deliberately confuse customers; You may have experienced this yourself while shopping for electricity – one company offers a 15% discount, another offers a 20% discount, you may think the latter is the better deal, but that isn’t necessarily true, as the price of the product they are selling is so varied (even though it’s literally the exact same thing). This is something the ACCC report also suggests will be targeted, by having the AER set the price for those who don’t engage in the market, essentially creating a base from which a retailer can then provide discounts, ensuring the end user is confident that the higher discount is indeed exactly what they’re signing up for.

Ultimately, the report is looking for transparency in a market which is increasingly clouded by uncertainty and harmful practices which are damaging the industries reputation, at least beyond what it is already. The ACCC believe that making bills easier to understand, debts easier to pay and deals easier to comprehend while reducing the ability for market gaming and unnecessary price gouging from both retailers and network operators is a good start.

Another key component of the report suggests the scrapping of subsidy schemes for solar installations, with the report finding the average solar customer is paying over $500 less than non-solar customers. The ACCC has no issue with the scheme itself, merely that if the government would like to keep the scheme in place it should be included in their budgets, rather than charging other energy consumers more so that those with solar can pay less. Households with solar energy have benefited from generous feed-in tariffs, and also received subsidies for the installation of the systems through the Small-Scale Renewable Energy Scheme (SRES), which the ACCC has recommended be finalised by 2021. Many, including the Smart Energy Council believe this is the wrong approach however, as rooftop solar provides home owners the ability to regain some control over their own power affairs, while abolishing these subsidies will simply make it harder for everyone else looking to become a part of the rooftop solar revolution.

One thing is for certain, the next few years are definitely set to produce some interesting developments in the Australian Energy Market – we can only hope they are changes which are geared towards a consumer driven market that offers greater choice and transparency for the end-user.