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NewsletterTell Me Now Review, Issue 3, December 2002Welcome to the third issue of the Review from Tell Me Now. In this issue of the Tell Me Now Review, we provide an overview of the deregulated energy industry in Victoria. Which includes the reform process, major players, regulatory environment and effect on consumers. This information has come from a variety of sources including proprietary news services, government information, market research databases and the Internet. Tell Me Now is the leading online research and business information firm specialising in answering research questions and providing customised reports when you can’t – or simply don’t have time to do it yourself. We conduct primary research by phone or store visits, write reports on industries and companies to your specifications as well as continuing to provide intelligent answers to specific information requests. Happy reading and we hope you have a safe holiday period and a prosperous 2003. Cindy Tschernitz The Australian Energy Industry and Deregulation of the Retail Gas Industry in Victoria Contents
1 Energy Market Reform The days of ‘owning’ the customer are over, with the introduction of full retail contestability (FRC), first in the electricity market, and now in the gas sector. Energy retailers in the emerging era of energy deregulation are in the business of marketing energy and energy services which means getting more customers. The Parer review of the energy market, released in November 2002, recommends wide-ranging reforms designed to make the energy industry more efficient and competitive and provide standardised regulation across the country. A national energy market model is part of the ongoing process to reform Australia’s $100b energy market and includes the establishment of a national energy corporation to oversee network planning and market development. These reforms would deliver a framework for clear objectives, policy direction and eliminate the duplication of the state based regulatory environment. Reform of the natural gas industry is being driven by the Commonwealth Government's commitment to introduce competition into the industry to provide customers with greater choice as to their gas retailer. It is thought that nationally there will eventually be three or four energy providers since there is not enough critical mass in the Australian market to sustain more than this number of competitors. The retail market is described as being in a transitional phase, as suppliers consolidate paving the way for the emergence of ‘super suppliers’. The Australian scenario is unlikely to produce large retail only operations but there are a number of strong vertically integrated operators such as AGL, TXU and Origin Energy emerging. Natural Gas has been deregulated in Victoria since the 1st October 2002 and in NSW since January 2002 with South Australia and Queensland still to follow. Full retail contestability in electricity was introduced in January 2002 in all eastern states except Queensland. Full retail competition for gas in Victoria is now a reality. Since 1997, when the Gas and Fuel Corporation was desegregated and sold to private industry, large customers have had the choice of retailer made progressively available through the staged introduction of contestability for different levels of consumption. Full retail competition means that domestic and small business customers can choose the retailer they buy their gas from to obtain prices and services that best meet individual needs. Potential customers can shop around for retailers who provide packages such as a multi-fuel (electricity and gas) service. The options are; seeking a contract with any gas retailer; entering a contract with the existing retailer; or continuing to be supplied by the existing retailer under a "deemed" contract on published prices and terms. Will deregulation really lead to a more competitive market with lower prices and improved service for small customers (domestic and small business)? Customers are being promised competitive prices for their gas and electricity supply, while suppliers are being promised light handed regulation and the ability to compete for customers across state boundaries and regional jurisdictions. Competition is unlikely to be fully effective during the initial period of FRC. Prices should fall in the long term as the industry invests in the infrastructure necessary to meet future demand. Meanwhile, adjustments will be made by the regulators and submissions made by the energy companies to be able to charge tariffs which reflect the transmission and distribution costs which enable security of supply and service and the achievement of reasonable profit margins. The Essential Services Commission is of the view that for gas retail businesses in Victoria a profit margin of 2-3% is appropriate. This has been supported by the Energy Action Group but the retailers have argued for higher net margins. The Energy Action Group and the Energy Users Association of Australia have expressed the view that Australian regulators believe they have to provide much higher returns, higher operating costs and higher capital costs to energy networks than their counterparts in both the US and UK, adding up to higher prices. In its recent review of the electricity market for small customers, The Essential Services Commission found that competition has been effective in some parts of the market where sufficient margins are available and competition is likely to continue to become more effective over time as experience increases, but may be limited where regulated prices continue to restrict the margins available when competing for some customers. The major energy retailers in south eastern Australia, AGL, Origin Energy and TXU, operate in several states to achieve economies of scale and will benefit from standardised regulation. AGL & Origin have purchased retailers in Victoria – Citipower by Origin, and Pulse Energy by AGL for $880 million. Australian Gas Light (AGL) is now a player in both the gas and electricity markets. AGL focuses on the distribution of gas and electricity in NSW, Victoria and South Australia. Following the Pulse purchase, AGL became Australia's largest energy retailer, with 3.1 million customers. The purchase gave AGL an extra 557,000 electricity and 535,000 gas customers in Victoria. It now has 35% of the national market. Through its sales and marketing operation AGL is a retailer and wholesaler of energy and energy related services to about 30% of all energy customers in the south eastern part of the country. It has 380,000 Victorian customers who buy both gas and electricity from the one source. TXU has 12% of the national market but is strongly represented in Victoria with 900,000 customers. It offers its residential and small medium business customers the dual-fuel option – gas and electricity on the same bill. In Victoria, TXU Retail claims it does business with about one million gas and electricity homes and businesses. TXU Networks owns the electricity and gas distribution business, supplying gas to 460,000 customers in Victoria’s west and 510,000 electricity customers in Victoria’s east. TXU recently signed a contract with Woodside which will meet 30 per cent of TXU’s current Victorian and South Australian gas load annually. It will replace gas contracts that are expiring over the next few years. The contract will further support provision of gas to TXU’s 460,000 retail gas customers in Victoria and will provide fuel for TXU to generate electricity for South Australia and Victoria. The acquisition of Citipower’s $137 million electricity retail business has provided Origin with a large customer base in Victoria. Origin participates in most segments of the energy chain including natural gas exploration and production; power generation; energy retailing and trading; and asset services. It supplies energy to more than two million households and businesses. It is a major player in the developing solar energy market, being the largest retailer of grid-connected solar systems in the Victorian market, the largest market in Australia and is a major buyer of wind energy. Origin has an extensive network of retail gas appliance stores with its acquisition at the end of 2001 of Gasmart. Origin has a monopoly on the South Australian domestic market as systems are not in place for consumers to swap retailers. In early 2003 Origin will be offering electricity to domestic and small business customers. The Essential Services Commission, is the economic regulator established by the State Government of Victoria to regulate prescribed essential utility services supplied by the electricity, gas, water, ports, grain handling and rail freight industries. The Commission commenced operations on 1 January 2002, subsuming the Office of the Regulator-General Victoria. It is the Commission's role to regulate the distributors' prices and service standards and manage licencing arrangements for the distribution and sale of gas in Victoria. Other suppliers issued with a licence to retail natural gas in Victoria are BHP Billiton Petroleum, ENERGEX Retail, EnergyAustralia, Ergon Energy Gas, Esso Australia Resources, Gascor. 6 What has changed since deregulation of the gas market? Since the introduction of full retail competition in NSW and the ACT in January 2002, customers for both electricity and gas have entered into negotiated contracts with their existing or different suppliers. As of November, 230,000 small electricity customers had entered into negotiated contracts. The Ministry for Energy and Utilities, NSW, claims that the competition has created $1.6 billion in savings for customers. However, relatively few electricity customers in NSW and Victoria have switched supplier. According to NEMMCO, from January to the end of November, in NSW and the ACT 52,700 small customers have switched to different suppliers, while in Victoria around 77,700 have changed suppliers. By end of October, just over 2% or 20,000 customers in NSW and the ACT had switched gas retailers. This includes the large as well as the small customer segment from a total of one million customers. VENCorp’s Churn Report shows that in Victoria, since the 26th October, barely 2% or 25,700 small customers have switched suppliers or are in the process of transferring. A further 16,800 have lodged transfer requests. Only 7,500 customers have completed transfers. If this rate continues, Victoria would see a much higher rate of switching than in NSW, which is the same as Victoria after almost 12 months of full competition. Retailers said they expected the growth of ‘churn' in the energy sector to resemble more of a slow burn than an explosion. After almost 12 months, only 5% of electricity customers have changed energy companies. This is to be expected, based on the experience of the electricity retail markets in New Zealand and the UK in the first year of deregulation. The energy retailers are still getting their retail offerings in place. TXU claims to have poached 31,000 gas customers from AGL’s Pulse with its aggressive marketing campaign. AGL and TXU offer a single bill option, but in practice this can be unwieldy. None of the companies is offering true joint billing for gas and electricity. The billing periods are different and a combined bill for many customers would seem too large. Gas is bi-monthly and electricity is quarterly. TXU offers a dual-fuel option but it is a bill-smoothing service where a set amount is paid each month and adjustments made if the set amount is incorrect. AGL offers a 6% discount for customers who have gas and electricity accounts with AGL and Origin claims that it discounts electricity so offers no more discounts for gas. The emergence of a national market model should make comparisons of energy retailers a real possibility in the future. In the UK, the regulator's website allows consumers to easily compare energy retailers. The process of trying to compare what each company here is offering is confusing, making it easy to put it in the too hard basket. It is necessary to call each retailer and go through a series of questions. The energy component of a customer’s gas bill, about half the price normally paid, is the part that is being opened up to competition. The rest of the price covers costs such as market and network charges. Network charges for distribution of gas and electricity will continue to be regulated. The three gas companies are anticipating price rises of 6.5% from February 2003, though TXU is pushing for up to 21% and an average of 14.3%. Price rises in January 2002 were in line with the CPI, averaging 2.9%. The Victorian Government has referred TXU’s plans to increase it’s prices to the Essential Services Commission, a move that may result in a gas price cap similar to that implemented last year for electricity. There could be a price war unless the energy regulators put some controls on the price increases which are probable in the next year. Industry sources expect any price capping moves to happen from January. As part of the move to full retail contestability the responsibility of reading gas meters has been switched from retailers, who currently do the work, to distribution businesses. The advent of full retail contestability also means that the fee paid to Gascor under the Victorian Government’s tax levied under the monopoly system is now available. For AGL, this is a saving of $37 million per year. The Energy and Water ombudsman's report highlighted areas of concern with the implementation of competition among utility companies. Complaints were received about pressure door-to-door techniques, false claims by sellers, failure to inform customers of cooling-off rights, contracts not stating prices, salespeople failing to identify which retailer they work for, and transfer issues where customers receive bills from existing as well as previous suppliers.
Churn Report : Customer transfer report VENCorp 11th December 2002 Council of Australian Governments' (CoAG) energy market review chaired by former federal resources minister Warwick Parer. November 2002. Different Worlds: strategic drivers of Australia's new energy industry. PricewaterhouseCoopers, 2001. Essential Services Commission. The economic regulator for the state government of Victoria – formerly the Office of the Regulator-General The future of gas retailing Greg Martin, Managing Director AGL Company
Presentation to CEDA 30 September 2002. Retail Transfer Statistical Data NEMMCO Review of effectiveness of electricity full retail competition Essential Services Commission October 2002 UTILICON is an industry forum for senior executives in the electricity, natural gas, water and telecommunications industry It will host Victoria Power 2003 where the Hon Ian Macfarlane, Federal Industry Minister for Industry, Resources and Tourism, will outline the benefits the COAG review will deliver for energy suppliers, distributors, retailers and consumers in Victoria. Other sources The Australian Gas Association has information on market segment contestability Australian Gas Industry Directory 2002 Australian Gas Association The Australian Gas Journal quarterly The Australian Gas Association Electricity, Gas, Water and Sewerage Operations, Australia 2000-01 ABS 8226.0 September 2002 Energy and Water Ombudsman (Victoria) Gas Statistics Australia 2001 Australian Gas Association Ministry of Energy and Utilities NSW Government Review of the Victorian Gas Market, prepared by Allen Consulting May 2001 Victorian Gas Contestability Project Reports Department of Energy and Resources Victorian Gas Industry : application for re-authorisation of Market and System Operations Rules ACCC Issues Paper June 2002 (VENCorp application for re-authorisation of MSOR). 17p. The Victorian Energy Networks Corporation – VENCorp Special investigation : TXU’s proposed gas retail tariff amendments : Public report The Essential Services Commission 4 December 2002 54p.
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