The Review of the Effectiveness of Competition in Electricity and Gas Retail Markets in Victoria first draft report ultimately found that competition in gas and electricity retailing in Victoria is effective and that the market does not require regulation.
This review of the Victorian gas retail market, and whether or not it requires regulation, is the first review to be carried out by the AEMC on behalf of the Ministerial Council on Energy.
Reviews of the effectiveness of retail competition South Australia, New South Wales and the ACT by the AEMC will follow. The Economic Regulation Authority of Western Australian is responsible for undertaking a similar review in Western Australia.
The finding from this first review, that competition in gas and electricity retailing in Victoria is effective in ensuring competition, is an important step in the journey towards an integrated and competitive national energy market.
The reviews being conducted on the effectiveness of retail competition in gas supply are central to the policy strategy to improve energy market competition and efficiency.
The outcomes will directly decision-making on the future regulatory frameworks that will be applied to energy retailing in each jurisdiction, and particularly on the decisions regarding the need for retail price regulation in the future.
The Victorian review
In 2002, full retail competition (FRC) for Victorian electricity and gas domestic and small business customers commenced.
Since the commencement of FRC, rivalry between retailers and the exercise of choice by customers has ensured there is competitive pressure on retailers to manage their costs effectively, offer more cost reflective prices, and improve and diversify the retail services they offer, in order to better meet the preferences of customers.
Together with competitive wholesale energy markets and efficient incentive regulation of energy network services, effective energy retail competition contributes to the efficient, reliable and secure energy supply needed by households and businesses.
Gas and electricity are essential services for modern day living. However, they are relatively low involvement commodities and consumers generally do not put a great deal of research into their purchase. This consumer reality has an important influence on the development of the competitive environment for electricity and gas, for both customers and retailers.
Nonetheless, the AEMC found that the majority of energy customers participate actively in the competitive market by exercising choice among available retailers and their price and service offerings. There is strong rivalry between energy retailers, facilitated by the current market structures and entry conditions.
Furthermore, customers are demonstrating a clear willingness to participate in the competitive retail market if approached directly by a retailer. While customers may undertake only limited search activity on their own behalf, they respond well to direct marketing and exhibit a high willingness to switch retailers, particularly in response to lower prices. Neither brand loyalty nor perceived switching costs seem to be significant deterrents.
The percentage of all domestic and small business customers in Victoria who have entered into a market contract for gas supply is 59 per cent. The AEMC expects these levels to increase further as competition continues to develop.
The AEMC’s finding is also supported by evidence of strong rivalry between retailers. The relative lack of engagement consumers have with basic energy products means that retailers have a strong incentive to be pro-active in seeking and retaining customers in competition with their rivals.
There is evidence of vigorous marketing rivalry between retailers who are contacting customers directly, primarily through door-to-door sales and telemarketing. Retailers are also offering customers discounted tariffs together with a range of non-price incentives, such as accredited “˜green’ power, in an effort to differentiate their energy services from those of their rivals.
The current conditions for entry into and expansion within the retail energy sector are also positive. There has been substantial new entry into energy retailing in Victoria since the commencement of FRC, from both established interstate retailers and new players. The current market conditions encourage efficient entry, thereby creating a credible threat of competition from actual or potential new retailers and constraining the pricing and output decisions of existing retailers.
Finally, margins appear to be sufficient to allow efficient entry and to allow for price and non-price incentives for retailers actively seeking customers.
The AEMC has acknowledged that there are legitimate concerns about customers who, by virtue of their personal circumstances or the perception that they are unprofitable to serve, may not currently be able to access the full benefits of retail competition.
The Victorian Government, in consultation with retailers and consumer groups, has developed and implemented a range of strategies to safeguard the interests of these customers.
The Commission has the opportunity to provide targeted and practical advice to the Government regarding measures that would enable all classes of customers to experience the benefits of a superior competitive environment.
While the AEMC considers competition to be relatively more effective for electricity than for gas, it believes that gas retailing is nonetheless effectively competitive as:
– retailers are pursuing opportunities to secure gas customers while marketing electricity;
– the number of gas products available is continuing to grow; and,
– access to wholesale gas products is improving.
The Commission has commenced consultation on the First Draft Report and review of submissions will take place from November.