Having developed as a series of vertically integrated, government-owned and state-based monopolies, commerciality and transparency are relatively new concepts in energy. The National Competition Policy (NCP) Agreements of 1995, and the industry disaggregation and privatisations which followed, were the catalyst for making them industry buzzwords.
The NCP agreements separated out the natural monopoly elements of the energy supply chain, distribution and transmission, and subjected them to transparent asset-based regulation. The potentially competitive parts, generation and retail, were subject to market discipline through an interconnected National Electricity Market (NEM) and the introduction of choice of supplier, or Full Retail Competition (FRC), for all end-use customers.
Generally speaking those reforms have been successful, with the NEM delivering greater reliability of supply and efficient investment signals in generation, and FRC encouraging customer switching and the lowest possible prices at the retail end.
Global benchmarking studies of retail energy markets conducted by First Data Utilities and energy think tank, VaasaETT, have found that states such as Victoria and South Australia are amongst the most competitive retail markets in the world. More recently the new national rule making body, the Australian Energy Markets Commission (AEMC), found that competition was effective in Victoria and retail price regulation could be phased out.
In a market with multiple suppliers without any great ability to differentiate their product, other than by price cutting, it should hardly be surprising that a review would find that price regulation was unnecessary. Nevertheless, it has been great cause for concern amongst some consumer groups who continue to advocate regulation in the name of a small subset of “˜vulnerable customers’. While well meaning, an argument for regulation based on an undefined minority, will always lead to lower quality outcomes for the majority.
Rather than accepting that government itself has created a competitive market in energy retailing, these stakeholders continue to cling to a belief that someone other than the market should set prices. Some also believe that commercial suppliers have an obligation to serve customers at below market prices, when in fact that belongs to the realms of government community service obligations (CSOs).
In the old days of a government-owned energy utility, cross subsidisation and deliberate under-pricing to achieve political objectives may have been possible, but not in the commercial and competitive world in which the industry exists today. It might be tempting to use regulation to achieve similar objectives, but any attempt to do so will be short-lived as no business can continue to exist in such circumstances. It is market failure, rather than market history, which must drive future approaches to price regulation of the energy sector.
Yet price regulation is only one area where such a mentality needs to apply. As retailers have shifted to being fully national businesses, they have run into a barrage of non-price, industry specific regulations that apply in each state. All add to the cost and complexity of doing business.
The Ministerial Council on Energy has attempted to respond to these developments by moving to a national retail framework. The concept may be sound, but in practice having states voluntarily agree to harmonise their regulatory frameworks is proving problematic. It runs the risk of every state’s specific clause being imposed at the national level.
Again, the state-based history of the industry, coupled with its characteristic as an “˜essential service’, leads policy makers to believe that every piece of regulation that has been developed is “˜essential’. Never mind that lots of these regulations are already covered by generic legislation such as the Trade Practices Act, Fair Trading Acts and Privacy laws.
What we need here is a little less history, and a little more contemporary thinking about an industry that is vastly different to that which existed just two decades ago. A modern, more efficient and consumer friendly national retail framework is what our competitive energy retail industry needs to see come out of the MCE process.
In a dynamic and competitive market like that which applies in energy retailing, regulation can either encourage change or hold it back. Australian governments now face critical decisions on which direction they want to head.