In some states the old world of electricity retailing, where consumers had no choice and retailers had little incentive to improve, has ended. Full retail competition is under way in Victoria and NSW, allowing consumers to move to the electricity retailer of their choice.
But the much-heralded introduction of FRC, promising lower prices and better service for all, has started very slowly. Most retailers are playing a wait-and-see game and few consumers are exercising choice. A 'cold war' has gripped electricity retailing with no signs of it ending soon.
With hundreds of millions of dollars spent introducing FRC, how did we get into this situation? There are four reasons.
Firstly, consumers are not that interested in switching. Consumer research undertaken by Roy Morgan Research reveals that only 11 per cent of consumers in Victoria and NSW said they were very likely or quite likely to change retailer (or switch). This is much lower than occurred when utility markets in the UK, New Zealand, the United States and Norway were deregulated.
And consumers say they are happy with their present retailers: 72 per cent of respondents said their retailers mostly met their expectations.
Secondly, price is likely to be the biggest single driver of switching. International experience shows that a 10 per cent price difference is needed for switching to take off. This demand for sharper prices is echoed in the Roy Morgan data. Despite high satisfaction levels with their retailers, only 8 per cent of consumers thought their retailer offered competitive prices.
So, while consumers are generally happy with their retailers, they suspect they could get a better price by shopping around. But can they?
While discounts of 3-5 per cent are available if consumers shop hard enough, that is not enough to ignite the market. Retailers are not responding to consumer need for seriously better prices, because they cannot.
Even before FRC, retail was a low-margin, high-risk business. Earnings before interest and tax ranged typically between 4 and 8 per cent of sales. So with risks as high as ever and pre-FRC margins already paper thin, offering discounts of 3 to 5 per cent leaves precious little room for error and not enough incentive for many customers to switch.
Thirdly, retailers are showing a lack of innovation. There should be plenty of scope here, as only 5 per cent of consumers thought their retailer was innovative.
But retailers have been so consumed with getting their systems ready for FRC, dealing with government and, in Victoria, working out the implications of the recent price determination, that new product development has not had the attention it deserves. There is not much to excite consumer interest.
Finally, some retailers' systems for transferring customers are not as ready as they would like them to be. Some even thought the market would not start on time because of the poor state of systems' readiness. Some retailers are nervous about pursuing market share blatantly in case they succeed and then struggle to cope with the influx of new customers.
So, the 'cold war'. Unless a retailer breaks out, does something different and triggers a competitive reaction, this is how it is likely to stay. If something were to happen though, it would probably be one of two broad scenarios: price war or value competition.
Retailers compete on price with a largely undifferentiated offer. The market remains a commodity market. A price war breaks out, giving consumers a short-term boon. And those retailers least able to reduce cost ultimately exit the market or are bought out by the most efficient retailers. The industry eventually consolidates and margins recover with a strong tendency to oligopolistic pricing. Large retailers alone win out.
Alternatively retailers' offers are sharply differentiated and competition is on the basis of value, not just price. Value is created by the introduction of new products and services and new business models. Consumer choice grows and the market is less commodity-oriented, as retailers charge for value adding differentiated offerings. Consumers and retailers win.
But do not hold your breath – the 'cold war' is not about to end soon. And if there is minimal price or value competition and not much switching (at least in the short term) most people will ask why we spent so much money on FRC.
