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Power retailers under pressure as ACCC takes aim at 'loyalty tax'

Power retailers under pressure as ACCC takes aim at 'loyalty tax'

Investors in AGL Energy and Origin Energy are right to be worried about the prospects for their electricity retailing businesses, according to competition tsar Rod Sims, who is leading the regulator's crackdown on the way the big three players treat their most loyal – and profitable – customers.

"Our recommendations are unashamedly to help consumers get better deals and that will mean lower returns for the major retailers," Mr Sims said in an interview after announcing another instance of penalties for misleading discounting.

"I have no hesitation in favouring consumers over the shareholders I'm afraid."

Mr Sims said the Australian Competition and Consumer Commission's push for a "default" tariff, which will set a base to measure offers of discounts, will, if implemented, address the "ridiculously high" standing offers by the major players. The big three in the sector also include unlisted EnergyAustralia.

Despite some analysts saying the move would reduce competition in electricity supply, Mr Sims said it would provide smaller retailers with a level playing field.

Of the ACCC's 56 proposals to rein in electricity prices, the suggestion to create a default tariff is seen as among those most likely to be implemented.

The release of the proposals on July 11 caused some $1.7 billion to be initially wiped off the combined market value of AGL and Origin.

Several analysts and investors described the hit to the stock prices as an overreaction, but Mr Sims' comments underline the regulator's determination to take action.

The proposal would bring a government-imposed price for retail electricity that would be set lower than existing "standard offers" from retailers and act as a base against which consumers can more effectively measure discounts.

The concept is understood to have been suggested by Western Australia retailer Alinta Energy, which is on a drive to win customers on the east coast from its bigger rivals.

Changes 'manageable'

Morgan Stanley analyst Rob Koh compares the ACCC's recommendation to "a cut to the loyalty tax rate", referring to the penalty paid by the 1.7 million customers pay who have never shopped around for a competitive offer and remain with their existing retailer on higher tariffs.

"Retail profitability is ... driven by large numbers of customers paying above-average prices and never engaging with their supplier," Mr Koh said in a note. "Disengaged customers pay a 'loyalty tax' vs. customers who shop around."

AGL, Origin and EnergyAustralia will feel most of the impact because they are the only "incumbent" retailers that have bought out state-owned retailers and have "sticky" customers that have never switched.

Mr Koh described the changes as "manageable" for AGL and Origin, estimating they would need to reduce discounts to other customers by less than 300 basis points across the board to recoup the impact.

"We anticipate that the current incumbents will recoup the loyalty tax cut over time, absent market disruption," Mr Koh said.

'Invented' benchmark

But Mr Sims signalled that the majors had more to lose and noted they generally oppose the recommendations, while the smaller retailers are in favour.

"The difference is it's the larger retailers who have got these ridiculously high standing offers but also it means that consumers lose faith in the system," he said.

"The large retailers make a lot of their money out of people being disengaged and not switching and so then they pay a loyalty tax: the longer you stay with your retailer they more you pay."

Mr Sims said the ACCC's recommendations would give confidence to consumers that "when they see a 25 per cent discount they know it's better than a 15 per cent discount".

"At the moment they do not know that because you are advertising a discount against a base that you invent yourself," he said.

Energy Minister Josh Frydenberg said the government "will carefully consider these recommendations and respond before the end of the year".

The latest action by the ACCC has led to Revtech Media, the company behind power discount website One Big Switch, paying penalties of $25,200 for alleged "false and misleading" representations on energy prices.

The watchdog already has taken legal action against the retailer involved in One Big Switch, Click Energy, over a separate but more serious matter, with the case to be argued in the Federal Court.

Mr Sims said that in the Revtech Media case, customers that switched could have been better off but with smaller savings than advertised. But in the Click Energy case, customers that switched "had a reasonable chance of being worse off".

Meanwhile, Alinta released a Deloitte report it commissioned that found customers in south-east Queensland could save up to $365 a year on their power bills by signing up with Alinta's plan that includes a 25 per cent pay-on-time discount. It found that since Alinta entered the Queensland market in August 2017, other retailers had responded by almost doubling their discounts to an average of more than 15 per cent.

Alinta announced a further reduction in average tariffs in Queensland of 1.6 per cent from August 2, with chief executive Jeff Dimery saying the cut "should lighten the load even more for our customers".

Financial Review

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