In January 2007, the Commission appointed NERA Economic Consulting (NERA) to undertake a Review of the Effectiveness of Energy Retail Market Competition for small customers in SA (incorporating both electricity and gas).
The purpose of the review was two-fold: to inform the Commission's approach to the setting of electricity and gas retail standing contract prices across 2007/08; and to build on the extensive work undertaken by the Commission over several years in monitoring and reporting publicly on the SA energy retail market.
NERA has now completed this review and has concluded that competition appears to be generally effective in the electricity retail market for most small customers in SA and is well on the way to being effective in the gas retail market.
The Australian Energy Market Commission (AEMC) recently commenced a review of the effectiveness of competition in the Victorian energy retail market following a formal request from the Ministerial Council on Energy. The AEMC will conduct a similar review in SA during 2008. The Commission has maintained close contact with the AEMC during its current review of the SA energy retail market.
In 2007 the Commission will review the retailer component of electricity standing contract prices in SA, to apply for a period of at least 3 years from 1 January 2008. AGL can charge such prices to residential and small business customers receiving electricity under the standing contract established by the Commission.
The Commission will also review gas standing contract prices charged by Origin Energy to apply for a period of at least 3 years from 1 July 2008.
In addition, it may suggest means by which the Commission can enhance its efforts to further promote energy retail market competition in SA, and indicate areas in which better data will need to be gathered to enable future competition reviews to be conducted.
The Commission has appointed NERA Economic Consulting to assist it in the conduct of the review, which will build on the extensive work undertaken by the Commission over several years in monitoring and reporting publicly on the SA energy retail market. The competition review will commence this month and is required to be completed by April 2007, i.e. in the early stages of the AGL price path review.
The Review has been based around three distinct phases of work:
- Phase 1: Development of an appropriate set of criteria for use in the assessment of competition effectiveness;
- Phase 2: Assessment of and conclusions on the status of the SA retail energy market in relation to each of the individual criteria recommended in Phase 1. Based on these conclusions, an overall assessment of the effectiveness of retail market competition in SA was made; and
- Phase 3: Identification, based on the outcomes of Phase 2 and the scope and impact of the current retail market development activities, of areas where changes to the Commission's current retail market development activities might enhance the effectiveness of retail competition in SA.
The Commission had discussions with the Australian Energy Market Commission (AEMC) regarding the conduct of a competition review by the Commission and the possible interaction of such a review with any future review undertaken by the AEMC. The AEMC may commence retail market competition reviews in the 2nd half of 2007, following a direction from the Ministerial Council on Energy.
NERA has now completed Phase 1 of its review. NERA was required to recommend an appropriate set of criteria that could be used to assess the effectiveness of competition in the electricity and gas markets in South Australia.
As part of this process, NERA noted that it was important to first give consideration to how the term ‘effective competition’ should be interpreted in the context of this review and the framework to be applied in conducting this analysis. NERA recommended that the Commission adopt the following criteria for the purpose of its current review:
Market Structure:
- Number of customers and retailers;
- History of entry, exit, retailer consolidation and vertical integration;
- Market share and market concentration;
- Barriers to entry and expansion;
Market Conduct:
- Extent of market offers made by retailers;
- Extent and type of marketing activity undertaken by retailers;
- Evidence of anti-competitive, misleading or deceptive behaviour by retailers;
- Customer awareness of ability to choose retailer and the existence of other retailers;
- Customer views on the ease of obtaining and comparing information provided by retailers in relation to market contracts;
Market Performance:
- Availability of market offers at a discount to the standing contract;
- Availability of differentiated market contracts with alternative price and non-price features, terms and conditions;
- Retailer performance and customer satisfaction with performance; Impact of competition on low-income groups.
Phase 2 of this review will provide NERA’s assessment of the effectiveness of competition on the basis of the above criteria.
Publications
NERA has now completed Phase 2 of its review. NERA concluded that competition appears to be generally effective in the electricity retail market for most small customers in SA and is well on the way to being effective in the gas retail market.
NERA noted that nine competitors have entered the electricity retail market since the introduction of FRC in January 2003 and in that time have managed to capture 36 percent of all residential and 25 percent of all small business customers in the state. An additional 23 percent of residential and 9 percent of small business electricity customers have also switched to market contracts with the incumbent retailer, AGL.
While there have been fewer entrants in the gas retail market, due largely to capacity constraints along the two pipelines that serve the SA market, this has not limited the rate of customer switching to gas market contracts. Despite the fact that competition for small gas customers was opened 18 months after electricity, around the same percentage of residential gas customers have switched to market contracts with new retailers and an additional 12 percent have moved to market contracts with Origin Energy. NERA noted that whilst a much smaller percentage (around 10 percent) of small business customers have moved to market contracts it did not appear to be due to any structural impediments to competition.
Importantly, NERA's assessment of the electricity and gas retail markets is based largely on data up to and including December 2006, and has therefore not taken specific account of the impact of the current high wholesale electricity prices. Further, NERA has also advised that it is too soon to assess the longer-term market impacts of current moves to greater vertical integration in the energy industry. NERA's report should, therefore, be read in light of those provisos.
Publications
NERA has now completed all three phases of work. In Phase 2, NERA concluded that competition appears to be generally effective in the electricity retail market for most small customers in SA and is well on the way to being effective in the gas retail market.
Nevertheless, NERA has recommended that the Commission continue to monitor the state of competition in these markets, particularly for those customers for whom competition is less effective due to the existence of barriers to entry or expansion.
In Phase 3, NERA has made a number of recommendations for changes to the Commission's current retail market development activities to enhance the effectiveness of retail competition in SA. The recommendations cover four main areas:
- Enhancements to Performance Monitoring Framework;
- Compliance with the Energy Price Disclosure Code;
- Enhancements to the Estimator Service;
- Approach to Retail Price Regulation.
The Commission has not formed a view at this stage on the conclusions arising from the work of NERA, and believes it is appropriate that the Phase 2 and 3 reports be released for public comment before any such conclusions are formed.
On 15 May 2007, the Commission released for comment an Issues Paper concerning its review of electricity standing contract prices able to be charged by AGL SA from January 2008. The AGL SA submission was also released at that time. Parties preparing submissions in response to the Issues Paper and AGL SA submission (due 22 June) may wish to give consideration to the NERA reports in finalizing their submissions.
Publications
NERA has now completed all three phases of work. In Phase 2, NERA concluded that competition appears to be generally effective in the electricity retail market for small customers in SA and is well on the way to being effective in the gas retail market.
Nevertheless, NERA has recommended that the Commission continue to monitor the state of competition in these markets, particularly for those customers for whom competition is less effective due to the existence of barriers to entry or expansion.
Importantly, NERA's assessment of the electricity and gas retail markets is based largely on data up to and including December 2006, and has therefore not taken specific account of the impact of the current high wholesale electricity prices. Further, NERA has also advised that it is too soon to assess the longer-term market impacts of current moves to greater vertical integration in the energy industry. NERA's report should, therefore, be read in light of those provisos.
In Phase 3, NERA made a number of recommendations for changes to the Commission's current retail market development activities to enhance the effectiveness of retail competition in SA. The recommendations cover four main areas:
- Enhancements to Performance Monitoring Framework;
- Compliance with the Energy Price Disclosure Code;
- Enhancements to the Estimator Service;
- Approach to Retail Price Regulation.
The Commission has not formed a view at this stage on the conclusions arising from the work of NERA, and believes it is appropriate that the Phase 2 and 3 reports be released for public comment before any such conclusions are formed.
