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Australian Energy Market Commission Review of the Effectiveness of Competition in Electricity and Gas Retail Markets in Victoria

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Australian Energy Market Commission Review of the Effectiveness of Competition in Electricity and Gas Retail Markets in Victoria Australian Energy Market Commission Review of the Effectiveness of Competition in Electricity and Gas Retail Markets in Victoria First Final Report 19 December 2007 Commissioners Tamblyn Carver Woodward Inquiries Australian Energy Market Commission PO Box A2449 Sydney South NSW 1235 E: [email protected] T: (02) 8296 7800 F: (02) 8296 7899 Citation AEMC 2007, Review of the Effectiveness of Competition in Electricity and Gas Retail Markets in Victoria, First Final Report, 19 December 2007, Sydney About the AEMC The Council of Australian Governments, through its Ministerial Council on Energy, established the Australian Energy Market Commission (AEMC) in July 2005 to be the Rule maker for national energy markets. The AEMC is currently responsible for Rules and policy advice covering the National Electricity Market. It is a statutory authority. The AEMC’s key responsibilities are to consider Rule change proposals, conduct energy market reviews and provide policy advice to the Ministerial Council on Energy as requested, or on AEMC initiative. This work is copyright. The Copyright Act 1968 permits fair dealing for study, research, news reporting, criticism and review. Selected passages, tables or diagrams may be reproduced for such purposes provided acknowledgement of the source is included. Foreword The energy industry has been the subject of widespread reforms. At the start of the last decade, the industry was characterised by isolated state-based integrated monopoly businesses that were predominantly government-owned. The performance inefficiencies attributable to the monopoly structures and the absence of interconnection and effective competition prompted a joint government initiative to establish a dynamic, interconnected national energy market. The removal of barriers to interstate trade, efforts to harness competition and the introduction of incentive regulation were part of a wider goal to establish a single national energy market operating under a consistent regulatory framework. A second wave of energy-specific reforms commenced in 2003. The Council of Australian Governments committed to the national governance, laws, rules and institutions to create an integrated national energy market framework. The reforms that stem from this commitment are focused on facilitating infrastructure investment, network interconnection and effective energy market competition. The reviews being conducted by the Australian Energy Market Commission (Commission) of the effectiveness of retail competition in electricity and natural gas (gas) supply are a central plank of the policy strategy to improve energy market competition and efficiency. The outcomes of these reviews will directly influence policy 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 first review, which focuses on energy retailing in Victoria (Victorian Review), has now reached an important milestone with the publication of this report. The Commission’s finding that competition in electricity and gas retailing in Victoria is effective is an important step in the journey towards an integrated and competitive national energy market. The Commission wishes to express its appreciation to the stakeholders who participated in the information gathering and consultation processes undertaken by the Commission leading to the publication of this report. By participating in these processes and providing written submissions, stakeholders have enabled the Commission to make findings and recommendations that are informed by stakeholder views and experience, relevant factual market information and rigorous, evidence-based analysis. John Tamblyn Chairman for and on behalf of the Australian Energy Market Commission Foreword iii Contents Foreword....................................................................................................................... iii Contents .......................................................................................................................iv Abbreviations and Glossary..........................................................................................vi Executive Summary.................................................................................................... viii 1 Introduction ........................................................................................................1 1.1 Purpose of the First Final Report...........................................................1 1.2 Input from stakeholders .........................................................................1 1.3 Structure of the First Final Report..........................................................2 2 Findings .............................................................................................................5 2.1 Nature of demand for energy services...................................................5 2.2 Retailer rivalry ........................................................................................6 2.3 Customer participation ...........................................................................7 2.4 Conditions for entry, expansion and exit................................................8 2.5 Profit margins.........................................................................................9 2.6 Equitable access to the benefits of competition...................................10 2.7 Second Draft Report ............................................................................11 3 Commission's Framework for Analysis............................................................13 3.1 Policy and legislative framework..........................................................13 3.2 Commission’s framework for assessment ...........................................15 4 Retailing Energy in Victoria..............................................................................27 4.1 History of full retail competition............................................................27 4.2 Participants in energy retailing in Victoria............................................30 4.3 Regulation of energy retailing in Victoria .............................................40 5 Retailer Rivalry ................................................................................................51 5.1 Price rivalry ..........................................................................................52 5.2 Non-price rivalry...................................................................................60 5.3 Marketing practices..............................................................................64 5.4 Provision of information .......................................................................73 5.5 Prevalence of mis-selling practices......................................................77 5.6 Commission’s findings .........................................................................84 6 Customer Participation and Experience ..........................................................87 6.1 Switching behaviour.............................................................................88 6.2 Access to and understanding of contract information........................101 6.3 Satisfaction with FRC.........................................................................108 6.4 Commission’s findings .......................................................................108 7 Conditions for Entry, Expansion and Exit ......................................................111 7.1 Non-regulatory conditions for entry, expansion and exit ...................112 7.2 Legislative and regulatory obligations................................................125 7.3 Commission’s findings .......................................................................133 8 Measured Profit Margins................................................................................135 8.1 Measuring average retail costs, revenues and margins ....................138 8.2 Commission’s findings .......................................................................146 9 Equitable Access to the Benefits of Competition...........................................147 9.1 Introduction ........................................................................................147 9.2 Customers experiencing financial hardship .......................................148 9.3 Other circumstances influencing access to the benefits of a competitive market ............................................................................150 9.4 Customers who may be less attractive to retailers ............................152 9.5 Commission’s conclusions.................................................................154 iv Review of the Effectiveness of Retail Competition in Victoria - First Final Report 10 Moving Forward .............................................................................................157 10.1 Second Draft Report ..........................................................................157 A Victorian Energy Retailers .............................................................................159 A.1 AGL Energy........................................................................................160 A.2 Australian Power & Gas.....................................................................160 A.3 Click Energy.......................................................................................160
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