CHOICE power switching survey

CHOICE investigates why consumers switch electricity retailers.
 
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01 .CHOICE power switching

Switching

With the increased cost of power generation, household bills are set to rise nationally over the next few years and consumers will be on the look-out for cheaper energy prices. In states where the utilities market has been fully deregulated, allowing numerous energy retailers to fiercely compete for customers, marketing has been particularly intense.

In brief

  • Highly competitive electricity markets in some states have prompted unprecedented levels of consumer switching.
  • Our survey reveals that discounts, offers and cheaper prices are the key drivers for switching, yet customer satisfaction often remains largely the same

Please note: this information was current as of February 2009 but is still a useful guide to today's market. 


Our survey

A recent CHOICE survey of 3300 subscribers in Victoria, SA, NSW and Queensland (markets with full retail competition) asked consumers:

  • If they were satisfied with the pricing and customer service of their current electricity retailer.
  • Whether they had switched to another retailer, and if so, why and how.
  • Whether switching had resulted in more or less satisfaction.

States where competition is not significant were not included in the survey (see Different states, different markets.) Our survey results revealed that discounts and freebies have been remarkably effective in enticing consumers to switch electricity retailers, and aggressive selling techniques have had a large role to play. In fact, Australians who have an opportunity to switch have done so more than five million times since full retail competition was introduced in 2002.

CHOICE verdict

Competition between energy retailers is intensifying, providing greater options for switching, but it pays to look closely at exactly what is on offer to ensure you get the best deal in the long term. Liberalisation of the energy market, which gives consumers strong incentives to shop around, also creates incentives for retailers to use aggressive marketing.

Consumers can sign up to bad deals, and in some cases they’re “signed up” to deals without their knowledge by overenthusiastic salespeople. While removal of the price cap on standard contracts in Victoria may stimulate competition, it will certainly leave some customers paying more than they should.

 
 

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Biggest is not always best

More than half of our 3300 survey respondents obtain electricity from the three major retailers, Origin Energy, AGL Energy and EnergyAustralia, yet these ranked in the bottom half of all energy companies for satisfaction (see the table). Origin and AGL are privately owned and active in all four states, while NSW government-owned EnergyAustralia does not operate in SA. Of the three, AGL had the lowest satisfaction rating (52%), with price being the biggest issue.

Overall, price dissatisfaction – specifically, high and/or disputed bills – was consumers’ biggest gripe, which is consistent with complaints recorded by the various state energy and water ombudsman offices.

In the six months to June 2008, billing made up 50% of all cases brought to the Victorian office, more than doubling from 5041 to 10,440 cases. In the NSW office, billing comprised 29% of complaints lodged, and in SA it was 40%.

Our survey showed that close to 60% of the 1267 respondents who switched retailers at least once changed from the three biggest retailers. Discounts, offers and promotions were the key motivators.

Victoria most competitive

Victoria is the most competitive market for electricity in Australia. Since 2002, about 2.8 million Victorians have switched retailers. The state has 14 active electricity retailers – the highest of all states – vying for new customers.

Our survey showed Victorians are much more likely to be approached by door-to-door salespeople and telemarketers than those living in NSW, SA or Queensland. In the last 12 months:

  • Seven out of 10 Victorian respondents were door-knocked at least once, and 26% at least four times.
  • Close to 20% who switched did so through a door-to-door salesperson.
  • About 11% received more than five calls from telemarketers in 12 months.

This aggressive marketing seems to work: 47% of Victorian respondents who switched felt some degree of pressure to do so. Close to half switched because they were offered discounts and freebies (see Free footy membership sways customer) – and the competition is likely to intensify. The Consumer Action Law Centre is concerned that aggressive, sometimes unlawful, marketing is driving the market, instead of consumers making informed choices.

Price monitoring abolished in Vic

To stimulate competitive pricing, government monitoring of electricity and gas prices – found in standard contracts – was abolished in Victoria for the first time earlier this year. This removed protection for consumers who were on such contracts, as power rates can now be set by retailers without government regulation, similar to market contracts.

So now, customers who elect to stay on standard contracts with their retailer may be paying more than if they shopped around. This makes the option of switching retailers for a better deal more attractive than ever, especially given up to 40% of Victorian energy consumers are still on standard contracts.
You’re on a standard contract if you’ve never negotiated a deal with your energy retailer. A market contract is a specific deal – usually with discounts and early payment rebates – sold to you by a telemarketer or door-to-door salesperson. To offset these changes and make the new pricing transparent, all retailers are now obliged to publish a range of offers on their website and in newspapers so that consumers can compare and make informed choices. Consumers who do not have web access can also call retailers and ask for their price plans.

Fiona McLeod, Energy and Water Ombudsman (Victoria), told CHOICE she expected to see complaints about high bills where customers are not aware of price rises in standard contracts. “Pricing is not within our jurisdiction, but we can investigate whether enough pricing information was provided to the consumer,” she says.

How the change affects the pushy sales drive, however, remains to be seen. “Cases relating to marketing and transfer are often systemic in nature, and an unknown factor is how many people were unhappy about the marketing directed at them but who did not complain,” says McLeod.

Does switching equal greater satisfaction?

When asked to compare their satisfaction with the new electricity company with their previous one, 66% of all respondents who switched said they were neither better nor worse off. Overall, about one-quarter said they were better off and only 9% said they were worse off. In Victoria and SA one-third of the switchers surveyed said they felt better off compared with 6% and 7% respectively, who felt worse off after switching.

Power switching survey results table

How we surveyed

In December 2008, we emailed 30,000 of our subscribers in Victoria, SA, NSW and Queensland, inviting them to take part in an online electricity survey. We excluded gas, as the electricity market was the more competitive of the two. More than 3300 subscribers responded to questions that asked them:

  • To rate their satisfaction with their current electricity retailer in terms of pricing and customer service
  • Whether they had switched to another retailer, as well as why and how they did so
  • Whether the ability to switch to another retailer had resulted in more or less satisfaction.

GraphNational electricity bills rose sharply in 2007 – in Victoria up to 17% – as the drought across eastern Australia reduced the output from hydro-electricity plants. More expensive gas- fired generators were used to produce electricity instead.

But there is more to high prices than the drought, says Roman Domanski, executive director of the Energy Users Association of Australia (EUAA). The EUAA commissioned an independent investigation in 2007, which found that a lack of rational water policy and planning, as well as opportunistic bidding by electricity wholesalers, contributed significantly to high prices. Opportunistic bidding occurs when generators withdraw supply and then re-offer power to the market at increased prices.

Domanski told CHOICE that wholesale prices, high network costs and steep costs associated with renewable energy will force prices up. He estimated wholesale power prices – 40% of what makes up your electricity bills – will rise by 10% in 2010 and a further 16% in 2011, even before carbon and renewable energy prices are factored in. In January, Queensland Electricity raised prices by up to 24%, while the Australian Energy Regulator has given the green light for prices in NSW to increase by as much as 10%. The federal government’s Carbon Pollution Reduction Scheme will increase electricity costs by 1.1% in 2010-11.

“It is very difficult to forecast precisely the overall percentage increase in prices for consumers in each state, as power costs are comprised of several components and they vary from state to state,” says Domanski. “Competition can help to moderate the price, but my concern is that there’s still limited price competition, even in Victoria. Generators who are also retailers have too much market power and limit the extent of competition in the market. There is no doubt prices are going one way – up.”

Generators sell power at wholesale prices in the National Energy Market. Retailers then buy electricity and package it for sale to consumers. AGL Energy, for example, is both a power generator and retailer and has a big share of the market in Victoria.

Different states, different markets

Different levels of price capping, state government involvement and industry competition have created very different market forces across the four deregulated states. NSW and Victoria, for example, were both deregulated in 2002, but spirited competition in Victoria has spurred a much higher switch rate than in NSW, where the state government owns the main generation plants and retail companies EnergyAustralia, Country Energy and Integral Energy.

The seven new entrants in NSW have only acquired about 14% of the small customer market from the government incumbents. Despite this, it’s not yet clear whether competition truly benefits consumers in the electricity market. In the 2007 World Energy Market Retail Rankings, SA came a close second to Victoria in having the highest switching rate in the world, followed by NSW in fifth place and Queensland in seventh. All four states ranked higher than the UK, Sweden, Germany and New York among the 22 markets ranked.

The rankings were part of the Utility Customer Switching Research Project, an international group monitoring switch rates and trends in fully deregulated global energy retail markets. Our survey results are consistent with these findings, with about 50% of respondents in Victoria and SA having switched at least once in the past five years, compared with 30% in NSW and 37% in Queensland. States where competition is not significant were not included in the survey. The ACT government operates a joint venture with the private sector to provide retail services, while WA, Tasmania and the NT retain government control in the retail sector.

Free footy membership sways customer

Donald McKinnonCompetition in the electricity market has spurred a flood of discounts, promotions and offers to entice consumers to switch retailers. DVD players, discounts of up to 10% for paying on time and/or free electricity for one month comprise the usual bait. Loyalty retainers, such as movie tickets and vouchers, may also be mailed to you towards the end of your contract with your retailer.

Any deal you get will depend on how aggressive you are when negotiating with a retailer. Former AGL customer and CHOICE subscriber Donald McKinnon, from Adelaide, received an offer from Origin Energy to pay $100 of his football club membership – about 40% of the overall fee – if he signed up with them. “I called AGL and told them I was prepared to stay with them if they could match the offer, but they were simply not interested,” he says. “So I signed up with Origin and have stayed with them since. It is good marketing because I’m passionate about my footy.”

In 2005, SA took top spot in the world for switching, with close to 40% of its consumers switching retailers. There are currently 11 electricity retailers in SA, including active retailer AGL Energy, vying for a market of 800,000 customers, about one-third the size of Victoria.

 

$300 in hidden fees

Ken HarveyKen Harvey bought into a dual fuel (power and gas) deal offered by a door-to-door AGL Energy salesman in July 2008. The offer details signed by Harvey includes a 7% discount off his bills and a $50 voucher that could only be used with a $400 purchase of electrical appliances from AGL Energy shops. He was also given a 35-page booklet of terms and conditions.


One month after the switch, Harvey was slapped with a $300 “cash deposit request” in his first bill for changing electricity and gas suppliers. The fee was neither mentioned by the salesman, nor stated in the offer details. Harvey refused to pay and called AGL. “Both customer representatives I spoke to agreed the charge was inappropriate. One said he would take action to deal with it and would also pass on my complaint,” says Harvey.

However, the matter wasn’t settled. In January 2009 he received a reminder to pay the $300, with a warning that access to his utilities would be restricted if he didn’t. Calling AGL again, a customer service supervisor said the charge should have been declared upfront and stated in the offer details, but still insisted he pay. She also told him he had a 10-day cooling-off period (even though the fee arrived in his bill a month after he had switched) and pointed him to a condition in the terms and conditions booklet for this fee. Upon checking he only found terms pertaining to a “debt collection fee”.

Harvey escalated the matter to the Energy and Water Ombudsman Victoria (EWOV). After EWOV contacted AGL Energy, it waived the $300 fee. Harvey said AGL’s marketing was “misleading and deceptive” under the Trade Practices Act. The Essential Services Commission’s Code of Conduct for Marketing Retail Energy in Victoria states that retailers must clearly declare all charges to customers when offering contracts. When contacted, AGL declined to comment on this case until EWOV has concluded its investigation.

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