A long overdue reset to the tariff reform agenda promises better outcomes for energy consumers. Plus a new report finds that retailers really do charge residential customers more than business.
The ACTU Price Gouging Inquiry holds a blowtorch to the energy industry, highlighting the predatory pricing tactics used across the industry and how it is impacting the Cost of Living in Australia.
Allan Fels' recent Price Gouging Report commissioned by the ACTU exposes the predatory pricing practices that are rife across many Australian industry sectors, and especially in energy.
He goes on to say a hell of a lot more in the full Report about the bad behaviour and predatory pricing practices that are rife across the energy industry.
This is a wide-ranging inquiry into a fundamental 'policy gap' in Australia where firms are free to charge whatever they like to their customers, providing that there is no unlawful collusion between them. Free market economists would argue that it's perfectly OK for firms to charge what they like - if a customer doesn't like the prices, they can buy from a competitor or not buy at all.
Unfortunately, in Australia, there is limited competition and concentrated pricing power across many markets, including for essential services like energy, where there is no option to 'not buy at all'. In these conditions, there is no real barrier to price gouging.
Firms are free to charge as much as they like. They can price gouge lawfully as long as there is no unlawful collusion. This has given rise to a policy gap – there is no set of government policies about excessive prices.
In the absence of real competition, argues Fels, we need policy intervention to address price gouging and the cost of living crisis.
There is currently a gap in government policy. It does not pay sufficient attention to high prices. It needs to. It needs to investigate and expose their causes and, as far as possible, remedy the problems: ineffective competition, vulnerable consumers, and exploitative business pricing practices.
Energy gets special attention in this report:
Of great concern is price gouging in the electricity sector, a very concentrated industry at all levels. ... there has been routine price gouging at the generator wholesale level ... There are also practices in the energy derivatives market which require deeper probing by ASIC. ... At the tranmission level there has been a history of setting prices too high ... At the retail level there is very substantial price discrimination between business and consumers which is hard to explain on the basis of cost differences.
Energy is a uniquely influential commodity because it's a core input cost for virtually all goods and services, so rising energy prices have a direct inflationary effect across the entire economy.
On top of all these systemic issues that lead to higher energy prices, there is a further problem where most consumers are still unable to easily identify the best available prices in the market:
There are also major problems for consumers in determining what are the best prices in the retail market and much more activity is required to get competition and good prices in retail.
Bill Hero subscribers will know this is exactly the problem that Bill Hero solves. Sign up now, and we'll solve this problem for you, too.
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Price Gouging and Unfair Pricing Practices in Energy
Feature Article
Wholesale prices are low, but bills are still high
The Australian Energy Regulator’s (AER) latest Wholesale Markets Quarterly Report has revealed that in 2023, average annual wholesale electricity spot prices fell by up to 64%, and average annual east coast gas market spot prices fell by 43%.
Both electricity and gas prices during the quarter remained well below the record prices of 2022 and were now closer to longer-term annual averages.
Volume-weighted average quarterly wholesale spot prices. Prices weighted against ‘native’ demand - excludes demand met by rooftop solar PV. Source: AER Wholesale Market Report Q4 2023
In this report, the AER blithely comments that:
Once retailers’ wholesale costs adjust to the lower prices going forward, prices faced by consumers should reflect these lower costs.
Pardon me while I snort into my coffee cup.
Economics 101 teaches us that in a perfect market, retail prices should fall after a reduction in wholesale costs. Clearly, the Australian energy market is far from perfect because, at Bill Hero, we've observed that energy retailers will pass through wholesale price increases immediately, but strangely, they are always much slower to pass on wholesale price declines 🤔.
Allan Fels' Price Gouging report calls out this particular issue as 'Rockets and Feathers', where wholesale price rises lead to an immediate 'rocket-like' retail price increase, but wholesale price declines translate much more slowly into a 'feather-like' descent in retail prices. The report also digs into other kinds of predatory pricing practices that exist in energy and other industries.
ACTU Price Gouging Report
The ACTU Inquiry into Price Gouging and Unfair Pricing Practices, released on 7 February 2024, brings a refreshingly direct analysis of the exploitative pricing practices that are routinely applied across many industries in Australia:
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Taxonomy of Exploitative Pricing Practices
Loyalty taxes set initial prices low and then sharply increase them over time when consumers cannot easily detect, question, or renegotiate them and where the ‘transaction costs’ of changing to other competitors are high.
Loyalty schemes are often low-cost means of retaining and exploiting consumers by providing them with low-value rewards of dubious benefit.
Drip pricing where firms only advertise part of a product’s price and reveal other prices later as the customer goes through the buying process is spreading including in airlines, accommodation, entertainment, pre-paid phone charges, credit cards and others.
Excuse-flation where general inflation provides camouflage for businesses to raise prices without justification is also more prevalent in the current environment. As inflation starts to fall excessive inflationary expectations and future cost increases can be built into prices.
Confusion pricing involves confusing consumers with a myriad of complex price structures and plans making price comparisons difficult and dulling price competition.
Asymmetric or ‘Rockets and Feathers’ pricing is of much concern in the current environment, especially as inflation is starting to come down. When costs increase, prices go up quickly ‘like a rocket’ but when costs decline, prices fall slowly ‘like a feather’. This practice of delaying price falls when costs have fallen can be very profitable for businesses.
Algorithmic pricing is the practice of using algorithms to set prices automatically (but taking account of competitor responses) raises issues about whether this reduces price competition and is analogous to cartel pricing.
Price discrimination which in its simplest form involves charging different consumers different prices for the same product enables businesses to set prices according to how much each consumer is willing and able to pay. It takes many forms. It is enabled by a lack of competition. In electricity, retailers offer better prices for business customers than for consumers even allowing for lower costs of supply.
At Bill Hero, we have consistently pointed out how many of these practices apply in the retail energy market. Our particular favourites are the 'four horsemen' of the retail energy price apocalypse:
Loyalty Tax
Confusion Pricing (although we prefer our own term, 'Confusopoly'TM)
Asymmetric (Rocket & Feather) Pricing
Price Discrimination.
Let's see what the Price Gouging report has to say on these issues as they relate to the energy markets.
Loyalty Tax
It's good to see our old friend, the Loyalty Tax, appear in yet another official investigation. Readers of Savings as a Service will be very familiar with this one, since we bang on about it all the time.
It's telling that the Price Gouging Report chose the energy industry for its case study on Loyalty Tax, since energy is one of the industries that most overtly relies on overcharging existing customers.
The report quotes the earlier ACCC Electricity market monitoring inquiry that we also discussed in last month's newsletter, which found that energy retailers have managed to apply Loyalty Tax so effectively they have completely undermined the so-called 'safety net' of default offer pricing:
The December report of the ACCC Inquiry into the National Electricity Market (Electricity market monitoring inquiry December 2023) found that existing customers pay a loyalty penalty leaving them hundreds of dollars worse off every year. ... customers on old plans are paying higher average prices than those on newer plans. ... retailers recoup their costs over a customer’s lifetime, by setting attractively low acquisition offers and making subsequent unilateral price increases for their existing customer base over time’ (Bill Hero emphasis)
Confusopoly
On the Confusopoly front, the report has this to say:
While electricity is a homogenous product that defies differentiation, the terms on which it is made available for sale are a case study in obfuscation. Part of the retail strategy seems to be making understanding as hard as possible so as to discourage genuine comparisons.
The electricity oligopoly has long engaged in this activity. Retailers deliberately and manipulatively seek to confuse consumers with complex price structures and plans, making it very difficult to compare between options or to judge the fairness of any specific plan or offer.
Asymmetric pricing
The timing of price rises and price falls is very often asymmetric. That is, when input costs rise, retail prices will rise immediately, but when input costs fall, retail prices are much slower to respond.
The Price Gouging report calls this the ‘rockets and feathers phenomenon’. Price increases are like rockets that ascend with great speed, and price falls are like feathers that float slowly back down.
We're witnessing this play out in the retail energy market right now. Wholesale costs are back to about the level they were before the price shocks of 2022, but retail prices remain dizzyingly high.
Price discrimination
Price discrimination is when different customers are charged different prices for the same product by the same firm. Under the competition law, it is generally not illegal to charge different prices to different customers, except in the narrow case of ‘predatory pricing’.
The report highlights a discrepancy where AGL, based on data in its own annual report, is seemingly charging residential customers more than business customers for the same energy:
AGL needs to explain why consumers are paying $60.10/MWh more than seems to be justified by cost differentials. That is, for every consumer bill of $1,000, there is an apparent excess to be explained of $205.61 relative to prices charged to large business customers and not accounted for by genuine cost differences.
Recommendations
The Report includes a series of recommendations, including industry-specific recommendations, to prevent and alleviate the many issues identified.
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Price Gouging Report Recommendations - Energy
Recommendation 4.7: There should be a review of the design and operation of the wholesale market as to whether it requires refinements or a fundamental change in the form of a ‘capacity market’ as in North America and in Western Australia. This review should be chaired by an independent expert with input and resources from the AER, AEMO, and ASIC. The level of electricity generation concentration should be kept under review, and there should be close scrutiny of the impact on competition, positive or negative, that could occur in the transition to a re-designed energy market.
Recommendation 4.8: ASIC should be provided with a Ministerial Direction to investigate the energy derivatives market to ensure that participants in both the National Electricity Market and the markets for derivatives are not misusing their position in either to gain an unfair advantage or influence the price of energy to meet derivatives conditions.
Recommendation 4.9: Network prices should continue to require close regulatory scrutiny with the long-term interests of consumers put first.
Recommendation 4.10: There should be a regulatory review of the high degree of price discrimination in the retail electricity and gas markets.
Recommendation 4.11: State Governments and regulators should continue to introduce initiatives to improve retail outcomes brought about by current market imperfections.
Bill Hero addresses Recommendation 4.11 directly – by providing energy consumers with tools and services that improve consumer outcomes despite the manifest market imperfections.
AGL's latest results
On 8 February, the very day after the release of the Price Gouging Report, AGL, one of the biggest players in the Australian energy oligopoly, announced its first-half 2023/24 results and revealed that it had quadrupled profits through higher wholesale pricing and increasing retail margins.
Higher wholesale pricing ... contributed $293 million of [profit] improvement ... while increased margins on supplying customers added $124 million.
AGL's CEO Damien Nicks said the recouping from customers of the higher costs of wholesale power over the last two years was “just the way that market works”.
A new deal between the federal government and the gas giants Woodside and Esso will see 260 petajoules supplied to gas-fired power stations in Australia’s southeast coast until 2033 under an enforceable supply commitment as part of the gas code.
It follows a commitment announced in November by the energy minister, Chris Bowen, and the resources minister, Madeleine King, that APLNG and Senex will deliver up to 300 petajoules by 2030, with 140 petajoules due by the end of 2027.
Under the Albanese government’s gas code, energy companies are exempt from the price cap on gas of $12 a gigajoule for the domestic market if they agree to supply commitments to the east-coast market.
The Federal and NSW Governments have announced a $206 million package for energy-saving upgrades to 30,000 social housing properties, including access to solar for low-income renters and apartment residents.
QLD Premier Steven Miles has announced the government had committed $179 million to expand the local network-connected batteries program. The scheme, first announced in 2021, works by harvesting solar energy collected by rooftop panels during the day and storing it in communal, grid-sized batteries.
With the ambition of killing two birds with one stone, the Tasmanian Government has announced a $50 million expansion of its Energy Saver Loan Scheme.
It’s hoped this will incentivise more households and businesses to use these no-interest loans to purchase energy efficient products, now including EV charging infrastructure.
Increasing uptake of electric vehicles and home batteries – or at least an increase in the number of households planning to buy an EV or invest in home battery storage – has helped to deliver Australia’s second-biggest year for rooftop solar growth yet, new data confirms.
EnergyAustralia has suffered a $1.1 billion write-down mostly due to skinnier margins on retailing electricity and gas, increased competition and a higher cost of capital.
NSW government has expanded its offer for low-income households in the state to swap their energy rebate for a free, fully installed 3kW rooftop solar system.
The Rebate Swap For Solar offer, announced on Monday, invites eligible households across the state to exchange a payment of $285 a year for long-term savings on their electricity bills of up to $600 a year, generated by rooftop panels.
Allan Fels takes particular aim at the energy industry in his Price Gouging Report for the ACTU. "The electricity industry is riddled with questionable prices," Professor Fels said.
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A long overdue reset to the tariff reform agenda promises better outcomes for energy consumers. Plus a new report finds that retailers really do charge residential customers more than business.
2023 has been an 'annus horribilus' for retail energy consumers. Wholesale rates are finally down, so in principle, retail rates should follow. But when? Bill Hero will help you get the best of those rate reductions as quickly as possible.
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business editor Ian Verrender
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