ACCC's recommendations for encouraging consumer engagement

In brief

The ACCC has identified consumer disengagement as a key issue of concern in the retail electricity market, and formulated a number of proposals designed to encourage consumer engagement and switching as a way to drive competition. We look at the key recommendations.

What are the current issues in the retail electricity market?

The ACCC considers that a major reason consumers are disengaging with the market is that there is insufficient information about the options available. Even where the information is available, consumers can feel overwhelmed and confused by its complexity.

The Retail Electricity Pricing Inquiry Final Report concludes that market opaqueness increases search costs and incentivises stasis.

What are the ACCC's proposed solutions?

Problems with consumer engagement are not unique to Australia or the energy market. Regulators around the world are looking at regulatory techniques to engage 'sleepy' consumers. In 2010, the UK consumer and competition law regulator, the Office of Fair Trading (OFT) (now the Competition and Markets Authority (CMA)), devised a framework, based on behavioural economics, setting out the conditions that must hold for consumers to be able to drive competition between firms. According to this framework, consumers must be able to:

• access information;
• assess information; and
• act on information.

The ACCC's recommendations can be summarised using this 'triple A' framework.

Accessing information

The ACCC advocates for the application of the Consumer Data Right (CDR) to the electricity sector. The CDR will give consumers access to, and control of, their data with the aim of reducing information asymmetry between consumers and retailers. The ACCC has recommended that, when applied to the electricity sector, the CDR should cover:

• historical consumption data;
• product data;
• meter data; and
• customer data.

The ACCC considers that access to data will have two key benefits for consumers.

Firstly, it will allow them to better understand their own consumption patterns, which will help them to evaluate which offers best suit their needs and may prompt behavioural changes to reduce energy bills. It will also facilitate a better understanding of bills, by indicating to consumers which time periods or usage patterns are the largest contributors to their bills.

Secondly, it will facilitate informed decisions by enabling accurate price comparisons based on current consumption data (rather than inexact average customer surveys). This should reduce search costs associated with finding the best deal, thereby encouraging consumers to engage in the market and ultimately switch suppliers.

Assessing information

The ACCC has also made recommendations aimed at reducing confusion about retailer offerings. Currently, competition among retailers is primarily based on discounts applied to retailer standing offers, which vary between retailers. As each retailer discounts from a different base, the ACCC has found that consumers find it difficult to compare offers. The ACCC recommends that any advertised discount rate be calculated from the reference bill published by the AER (based upon the 'default offers'. Requiring retailers to discount off a consistent benchmark will allow consumers to better compare offers from different retailers.

The ACCC also raises concerns about excessive pay-on-time discounts, which it considers effectively penalise those that do not pay on time. Accordingly, it further recommends limiting conditional discounts to the reasonable savings expected from the retailer.

Acting on information

Finally, the ACCC has recommended establishing a mandatory code of conduct for third party intermediaries, such as price comparison websites, to replace the current voluntary code. The ACCC has raised concerns about third party intermediaries contributing to consumer confusion by not adequately disclosing the fees and commissions they receive when recommending offers to consumers.

If the recommendations are accepted, the code will require that offers are recommended based on the benefits to the consumer, as opposed to the commissions that the intermediaries receive. The code will also allow for consumers to provide their explicit, informed consent to third party intermediaries to pass their details onto retailers to obtain their customer data. This would operate in conjunction with the CDR to decrease the friction surrounding consumer switching.

What are the implications?

The CDR has the potential to shake up the electricity market. In addition to the benefits to consumers described above, energy retailers and other companies may use the increased availability of data to create new products and innovate existing products (such as smart appliances that adapt energy usage in response to real-time prices).

The recommendations relating to discounting will allow consumers to better assess different offers in the market. However, it may take some time for consumers to start engaging in the market and some may simply choose to remain disengaged. There is always a risk that intervention in relation to how retailers market and price goods and services could reduce incentives to innovate. For instance, the recommendation that all discounts be referenced to the 'default offer' could limit innovation in billing methods, such as opt-in critical peak tariffs, which allow consumers to declare days of peak demand, or upfront/prepaid tariffs, which can reduce bill shock.