Australian Retail Market Report Recommends Instituting Regulator-Set Default Service Price Cap
The Australian Competition and Consumer Commission has released a final report on retail electric market reforms that includes a recommendation for abolishing the standing offer and replacing it with a lower-priced ‘default offer’ which can be priced no higher than a level determined by the AER (Australian Energy Regulator)
Standing offers are default or backstop offers, with pricing set by retail suppliers (unique to each supplier), designed for consumers who have either not been able to access a market offer due to credit reasons, not chosen a competitive offer, fallen off a fixed contract or did not choose their retailer when they moved to a new residence. According to an ACCC consultant's report, the standing offers are generally higher than the market retail offers and retailers are not allowed to change the default offer more than once every six months.
The AEMC (Australian Energy Market Commission) has found that in NEM (National Electricity Market) regions where consumers have a choice of retailer, the difference between the median standing offer and the best market offer for a representative consumer was between $273 (in the ACT) and $832 (in South Australia)
The ACCC report said that, "It has also been suggested that consumers on standing offers make up the bulk of retailer margins. The ACCC has analysed the source of retailer margins and found that, while average revenue for standing offer consumers is significantly higher than average revenue for market offer consumers, the majority of retailers’ revenue is from market offer consumers. Figure 12.3 shows retailers’ standing offer revenue and market offer revenue. Approximately 18–40 per cent of the big three retailers’ revenue comes from standing offer consumers. A much smaller proportion (2–17 per cent) of smaller retailers’ total revenue is from standing offer consumers."
The recommendation to abolish the standing offer provides that, in non-price regulated jurisdictions, the standing offer and standard retail contract should be abolished and replaced with a default market offer at or below the price set by the AER. Features of this default market offer mechanism would include:
• Designated retailers, as defined in the NERL (National Energy Retail Law), should be required to supply electricity to consumers under a default offer on request, or in circumstances where the consumer otherwise does not take up a market offer.
• The default offer should contain simple pricing, minimum payment periods, and access to bill smoothing and paper bills.
• The AER should be given the power to set the maximum price for the default offer in each jurisdiction. This price should be the efficient cost of operating in the region, including a reasonable margin as well as customer acquisition and retention costs.
• The default offer should be used by retailers in all circumstances where a standing offer is currently used. This includes circumstances where a consumer has moved into a premises but has not contacted the retailer, where a consumer has not selected a market offer before the expiry of a market contract, and where a consumer is switched through a retailer of last resort event.
The recommendation applies to jurisdictions without ongoing price regulation, namely south east Queensland, NSW, Victoria, and South Australia
The report says that the standard retail contract will continue to be relevant for jurisdictions with ongoing price regulation (Tasmania, regional Queensland, and the ACT), as in these NEM regions, the standard retail contract is the contract attached to the regulated price.
The report includes various of consumer protection recommendations