Gas retail deregulation – Victoria leads the way

Replacing retail price regulation for gas and electricity in Victoria, a comprehensive program of price monitoring by the Essential Services Commission of Victoria has been established to supplement the significant array of non-price consumer protections that already exist for Victorian consumers.

The State Government has retained a reserve power to re-impose price regulation where competition is found to no longer be effective, however in practice the reversal process would be quite detailed, involving a full market review by the Australian Energy Markets Commission. Because of this, the industry remains confident that the Victorian deregulation is for the long term. The Victorian Government can certainly rest assured that in gas and electricity retailing the very decision to remove price regulation, which had been the major regulatory risk for industry participants, will presage even more fierce competition in the Victorian market.

The increase in competition became evident when the first round of retailer “˜default tariffs’ for 2009 were revealed in January, which showed increases of around half those of the year before, when regulation was in place. While retail tariffs are determined mostly by wholesale gas and electricity costs, as well as network charges, the first round of pricing by the newly deregulated retail sector ended the argument that this would lead to profiteering by the industry. In a competitive retail market for homogenised products like gas and electricity, there is no such thing as market power.

International evidence has shown that Victoria is as competitive as it gets when it comes to gas and electricity retailing. World Retail Energy Market rankings released last year by Finnish utility think tank, Vaasaett, showed that in retail markets open to full retail competition Victoria led the world in customer switching. One of the main drivers of that switching is the high level of gas reticulation in Victoria, which in turn has led to higher household and commercial gas consumption. So-called “˜dual fuel’ contracts offered by retailers have proven to be a major attraction to Victorian consumers and have helped to drive their participation in the competitive retail market.

The other major factor has been the success of the Victorian Government, over a number of years, in getting their energy market structures right and in setting cost reflective tariffs. Those tariffs have been set with sufficient margin to attract new entrant retailers to the market, who then ensure that competition for customers keeps prices at efficient levels. Added to this is the more customer-focused approach brought about by competition.

The fact that Victoria no longer requires retail price regulation has even greater relevance as the challenges of climate change are dealt with. In other states where price regulation is in place, and where, in many cases, tariffs already do not reflect costs, state governments and their regulators will find themselves trying to deal with the “˜pass through’ challenges of the Federal Government’s Carbon Pollution Reduction Scheme (CPRS). Failure to ensure “˜pass through’ of the CPRS will subsequently delay or even stymie the development of the low emissions generation technology that all governments say they are committed to. This is not just a risk for the states abd territories but for the Federal Government’s entire emissions reduction strategy.

By removing retail price regulation, investors in Victoria will be in a stronger position to help the state adjust over time from its dependence on emissions intensive brown coal. To a large degree, more gas-fired generation will be part of this adjustment process. So too will be renewables such as wind power, which will be advantaged by the Federal Government’s National Renewable Energy Target. Because of its intermittent nature, wind is also likely to require more gas-fired “˜back-up’ plants.

The greater role gas will play in electricity generation will itself present challenges to the retail sector as it could provoke more volatility in gas markets. For this reason governments have attempted to provide more transparency to gas markets through establishing a bulletin board, designing a short term trading market and creating a national gas and energy market operator.

All of these steps are supported by retailers but none are more significant in ensuring that competition and investment continue in Victoria than the State Government’s decision to remove retail price caps. In this respect, the Brumby Government deserves credit for showing leadership in preparing its state for a climate-challenged future in which gas will have a critical role to play.

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