Independent review into the electricity and gas retail markets in Victoria: final report
When competition was introduced into Victoria’s retail energy market in 2002, it was anticipated to generate consumer benefits through lower costs of supply and innovative product development. It was expected that low barriers to entry would attract new competitors and reduce the commercial advantage of the incumbent retailers market participants. Competition would be the most effective means for ‘regulating’ the retail energy market and delivering the best outcomes for energy consumers.
During the early years of competition, the Victorian Government played a role in price regulation by requiring retailers to have a Standing Offer with an agreed price path each year. This agreed price path then determined actual prices, which were published in the Government Gazette. From 1 January 2009, all retail price regulation was removed. Retailers were free to set the prices of both their standing offers and market offers.
Since then, the residential market has expanded to include 25 energy retailers selling electricity and 13 retailers selling gas to residential and small business customers in Victoria servicing 2.4 million households and 274,000 small businesses. Retailers increasingly used discounts to promote their offers, starting at around a low 5 per cent and rising to over 40 per cent for some retailers in the current market. Customers transferred off standing offers and switching rates increased, which gave the appearance that the market was functioning well.
However, since 2000, prior to competition, electricity and gas prices for Victorian households have increased almost 200 per cent.
Traditional reviews into retail energy prices have focused on using either standing offers, current market offers, or a combination of the two in reaching conclusions, and not what consumers are actually paying. This gap in real data was made clear to the review panel by consumer advocacy groups at the start of the review. The review panel was unable to compel retailers to provide details of their operating costs or margins. To address this gap, the review panel commissioned new research to collect and analyse data on what Victorian energy consumers are paying, sourced from their actual energy bills. This provided critical research on actual prices being paid and benefits that could be achieved by switching.
The research results found that Victorian households are paying much higher prices than official estimates; on average around 21 per cent per year more for their electricity than the cheapest offer available in the market. Nearly one quarter of the customers whose bills were analysed for the review were paying at least $500 more than the cheapest available offer. While wholesale electricity and gas costs have moved up and down since 2000, network prices have increased moderately and environmental costs have contributed marginally, there is no constant trend that can explain the significant increase in retail prices.