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Will Re-regulation Of Energy Prices Stop Price Gouging?

The re-regulation of electricity prices might be the only option if retail power prices continue to rise.

A recent government appointed panel led by Professor John Thwaites found that deregulation of the market and increased competition did not achieve the promised outcome and was hurting Australian families and businesses.

The inquiry highlighted the fact that consumers are now paying more for the same service as a result of deregulation, and suggested serious measures be taken to rein in prices and protect Australian consumers.

It discovered that the top three energy suppliers - AGL Energy, Origin Energy and EnergyAustralia – are dominating the market and charging consumers maximum prices.

The review recommended that standing offers which allow retailers to set the price be scrapped. The proposal also suggested methods to help customers compare prices, and that contract periods be set for a minimum of 12 months.

Households in the National Electricity Market (NEM) states of Victoria, NSW and South Australia pay the highest retailer’s cut of households in any comparable nations, according to an August 18 article in the Australian Financial Review.

 Fig 1 – The retailers cut of typical household power bills is three to five times its European counterparts

The inquiry found that although Victoria is not the only state being charged excessive rates for energy usage, it is the hardest hit. The average retail charge for Victorians using 4000 kilowatt-hours a year is $423 before GST, about 30 per cent of the household bill.

This cost is higher than the $415 cost of transmission and distribution, and the combined cost of wholesale generation ($263) and federal and state renewable energy schemes ($73).

Since the report was released, AGL has announced steps to try and fix up this practice of price gouging, with EnergyAustralia following suit. However, it may be a case of too little, too late.

Australian Competition and Consumer Commission chairman Rod Sim and Australian Energy Market Operator chief Audrey Zibelman told the newspaper that Australians will not tolerate paying the highest electricity prices in the world.

RBC Capital Markets estimates that approximately $75 million could be cut from AGL Energy's gross earnings if Victoria follows through with the recommendations outlined in the Thwaites report.

The fact that AGL’s two main competitors have a similar market share means that the overall effect of re-regulation could be three times that, split between AGL Energy, Origin Energy and EnergyAustralia.

RBC analyst Paul Johnston told the Australian Financial Review that “given the strength of the recommendations and the political focus on energy prices, he expected the government to adopt most of the measures”. He believes that this could have a knock-on effect in other Labor states, with NSW’s Labor opposition already pledging electricity prices would be reregulated if it wins office.

The Victorian government is currently considering the panel's recommendations and is expected to respond by November. The ACCC is due to deliver its interim report on electricity retailing to the government by September 27, with a final report due next June.

Posted by: Nandita Reddy

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