ACCC proposes default retail prices

In brief

A major recommendation in the ACCC's Retail Electricity Pricing Inquiry Final Report is to abolish standing offers and replace them with an obligation on retailers to supply at a price no higher than the level determined by the Australian Energy Regulator, to be known as the 'default offer'. The ACCC also recommends headline discount claims be calculated as a discount from the default offer price, so as to enable consumers to compare prices across retailers. We take a look at the evolution of standing offers and the ACCC's concerns and recommendations for reform.

What are standing offers?

Consumers may choose between two types of offers: market offers and standing offers. Each consumer has a designated electricity retailer that must offer to supply them a standing offer under the retailer's standard retail contract. Retailers are responsible for setting the price of both market offers and standing offers in Victoria, NSW, South Australia and southern Queensland.

Standing offers were originally created as a transition measure during the privatisation process, to allow consumers to adjust to the new competitive market. Governments chose to retain standing offers as a safety net for consumers who had not engaged in the market or who faced difficulty accessing a market offer due to credit or other issues.

Standing offers essentially guarantee consumers access to at least one offer on certain minimum terms (access to paper billing, minimum periods before bill payment is due, a set period for reminder notices, and no more than one price change every six months).

Retailers often set market offers by way of a substantial pay-on-time discount from their standing offer.

What are the ACCC's concerns about standing offers?

Standing offers have generally become the highest priced offer in the market, and the ACCC is concerned that they function as a 'loyalty tax' on inert consumers. Further, the gap between standing offers and market offers has significantly increased. In regions where consumers have a choice of retailers, the difference between the median standing offer and the best market offer can range from $273 (ACT) to $832 (South Australia) per year.

Around 20 per cent of consumers remain on standing offers, and this cohort represents 18-40 per cent of the 'big three' retailers' revenues. Consumers can end up on standing offers because they never seek out market offers, they do not choose an energy supplier when moving house, or they revert to a standing offer after the expiry of their market retail contract.

The ACCC considers that the high price of standing offers outweighs the benefits of consumers having access to a guaranteed offer with additional consumer protections. The ACCC also regards the model terms and conditions in the standard retail contract as inflexible and unnecessary.

The ACCC is also concerned with the discounting practices of retailers. Since standing offers vary between retailers, there is no easy way for consumers to compare different discount claims.

What is the ACCC proposing?

The ACCC is proposing to replace standing offers with a 'default offer' set by the AER. Designated retailers, as defined in the National Energy Retail Law, will be required to offer electricity at a price at or below the default offer. The default offer will be subject to certain consumer-protection measures (simple pricing, access to paper bills, minimum payment periods and access to bill smoothing).

The ACCC expects that the default offer will be higher than market offers; however, it should be significantly lower than current standing offers. The ACCC additionally believes the price differential between default and market offers will be beneficial, as it will incentivise retailers to innovate and consumers to engage with the market. Unlike standing offers, however, retailers will no longer control the price point. Instead, the Australian Energy Regulator (AER) will be charged with calculating the rate, based on the efficient costs of operating in each jurisdiction, including the costs of supplying an offer with the required consumer protections, plus a reasonable margin and an allowance for customer acquisition and retention costs (CARC). Importantly, the restriction on changing prices more than once every six months will be removed. The ACCC considers that certainty and stability in pricing will be maintained through the regulated price set by the AER.

The ACCC has also recommended that if a retailer chooses to advertise using a headline discount claim, it must calculate the discount from the reference bill amount published by the AER. The AER will publish a reference bill amount for each distribution zone using AER bill benchmarks for medium (2–3 persons) households and the price set by the AER for default offers.

The ACCC has rejected the alternative recommendation contained in the Independent Review into the Electricity and Gas Retail Market in Victoria (Thwaites Report) to replace standing offers with a 'basic service offer' (BSO). The Victorian Government is currently considering the Thwaites Report recommendation. Unlike the ACCC's proposal, the BSO would be determined by the regulator and would be based on the efficient cost to run a retail business but would not include an allowance for CARC or headroom.

The ACCC considers the BSO may lead to reduced innovation and act as a disincentive on retailers to adopt new technologies. Since the BSO does not allow for CARC, the ACCC also raises concerns that it may lead to market exit of smaller retailers and increased concentration. Further, the ACCC takes the view that increased price regulation tends toward further consumer disengagement.

Where to from here?

If these recommendations are adopted, the AER will play a critical role in energy pricing, and calculating the default offer will require important judgement calls on the appropriate level of costs and margin. It remains to be seen whether this form of re-regulation will bring prices down. The ACCC's proposal will not come as a surprise to retailers, and is likely to be greeted more positively than the more radical proposal in the Thwaites Report. In particular, retailers will welcome the proposal for the AER to allow for CARC and headroom. At the same time, retailers may be concerned about any form of re-regulation, and we may see further consultation from the government on alternative proposals, such as banning pay-on-time discounts and requiring retailers to set tariffs in a way that allows consumers to easily compare rates.