Price gouging in Victoria’s electricity retail market

The release of the Victorian Independent Review into the Electricity and Gas Markets is damning of retail margins in the electricity market. Most of the focus of the report is on price gouging but I think the bigger issue is the effect of economic reforms on the productivity of our energy systems.

The break-up of the Victorian electricity industry into separate functional units, and privatisation, was predicated on the economic benefits of market reform. With a few exceptions, such as John Quiggin’s critiques, the assumption of the economic efficiency of disaggregation and privatisation became a stylised fact.

It is difficult to estimate what the cost of ‘retailing’ within the formerly vertically integrated SECV was. But as a starting point in 1986, the SECV employed 22,045 personnel. The organisational units most closely related to what we now understand as ‘retail’ included the following (pg. 112 from the 1986 Annual Report) –

a) computer services 223
b) accounting 196
c) customer services 145

–  which together comprised 2.7% of the workforce. And bear in mind that the SECV was famous for being a bloated organisation. This would have included billing, accounting, and customer services. Tariffs were regulated by government and customers were posted quarterly bills. It was pretty simple. This was in a period prior to much of the significant productivity gains of IT. The Independent Review found that retail now comprises around 30% of residential bills.

Vic_bill_1
Figure 9 of the Review

Billing and customer service used to be relatively small departments within the SECV but now comprise an industry in itself. There are now 25 energy retailers selling electricity. The average retail charge for a typical customer using around 4,000 kWh per year is now $423 (+ GST). But what value does the retail industry add?

 

 

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