ASSESSMENT OF THE EFFECTS OF TARIFF REGULATION ON THE DUTCH RESIDENTIAL RETAIL MARKETS FOR ENERGY
JUNE 2009
Boaz Moselle
Contents
1 Introduction and Executive Summary... 1
2 Lessons from international experience ... 6
3 Great Britain ... 12
4 Texas... 26
5 Sweden and Norway ... 31
6 Australia... 33
7 Views of regulated companies ... 38
8 Direct effects of retail tariff regulation ... 41
9 Predicted overall effects on pricing ... 43
10 Empirical evidence of overall effects ... 56
11 Conclusions... 60
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Introduction and Executive Summary
This report assesses the main effects of retail price regulation for the supply of energy (gas and electricity) to residential consumers in the Netherlands, using evidence from international experience, on economic modelling and empirical data, and on interviews with Dutch retailers. In this section we give an overview of the issues addressed, and summarise the main conclusions.
1.1 Retail price regulation by the Energiekamer
With the introduction of liberalisation in the Dutch retail energy market in July 2004 a form of tariff regulation was introduced. The Electricity Act (article 95b) and Gas Act (article 44) provide the legal basis for tariff regulation in the Netherlands, which might more accurately be described as “tariff surveillance”: energy retailers are bound by law to submit all prices to the Energiekamer (EK) in order for EK to check whether these prices are reasonable. EK checks the reasonableness of tariffs based on an undisclosed model which contains wholesale prices, operational and capital expenses and a certain reasonable margin. Based on its assessment of a specific tariff of a retailer as being unreasonably high, EK has the authority to force that retailer to lower its proposed end user tariffs.
When a tariff is “too high” based on the general model, this does not directly lead to the conclusion that that tariff is unreasonable. The finding is regarded as a preliminary conclusion, that is always followed by a discussion with the retailer about the specific circumstances in which the tariff has been set. These discussions in combination with the “backstop” of formal intervention by EK have so far led to either acceptance of the tariff by EK or an altered tariff by the retailer. The EK has not yet formally used its authority to force suppliers to change their tariffs.
It is worth noting that this system differs somewhat from the more common form of retail price regulation, where the regulator would publish a maximum allowed tariff. Under the EK approach there is no published price ceiling. The model used by the EK to assess costs is confidential.
1.2 Overview of issues
It is useful to begin with an overview of the main issues (costs and benefits) around the effects of tariff regulation for residential consumers. Here we provide a list of potential issues— our analysis will show that some of these are of little relevance to the NL, while others appear to be quite significant.
Potential costs of tariff regulation for residential consumers
Burden of regulation
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directly, but in the long run are likely to be borne partly or wholly by consumers, since market mechanisms mean that costs common to all market participants tend to be passed through into prices.
Informational incentives
Consumers may not devote “enough” effort to becoming well-informed and making good choices, because they believe they are protected from making poor choices by the existence of regulation. As a result, price regulation may even lead to higher rather than lower prices.1
“Regulatory failure”
In assessing the effects of regulation, it is important not to assume that regulation will be designed or implemented without any errors or distortions. A proper assessment of regulation involves weighing up the risks of ‘market failure’ against the risks of ‘regulatory failure’. In the case of tariff regulation there are at least two natural concerns.
First, the price cap could be set too low, either accidentally or (hypothetically) in the future because of political pressure. In that case the market would be undermined: firms would under-invest or withdraw from the market, or suffer financially. As an extreme example, in the California crisis the combination of unregulated wholesale and regulated retail prices bankrupted two utilities. Moreover, the mere existence of regulation may deter entry, since potential entrants may perceive a political risk that in the future if wholesale prices rise dramatically then regulation may be used to prevent commensurate retail price rises.
Second, it is also possible that maximum prices will be set too high. In that case tariff regulation has no material effect in restraining pricing, and is therefore ineffective or even counter-productive (since it could still have some of the negative effects described here). This could arise either from some form of “regulatory capture”, or simply as a result of errors in estimating costs and appropriate margins.
Encouraging collusion
Regulated prices may act as a “focal point” for tacit collusion. A “focal point” is something that helps people coordinate without having to talk to each other: a famous example is that if two people are told to meet in New York City, without being able to agree where, they are quite likely to succeed because there is a small number of places that are “focal points”: the Statue of Liberty, Times Square etc. Retailers can not talk to agree a price, since that is illegal, but it might be a natural outcome for them all to choose the regulated tariff.
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Potential benefits of tariff regulation for residential consumers
Preventing abuse of market power
A key benefit of price regulation is of course to prevent possible market power abuse by retailers, in the form of excessive pricing. This may be an issue in particular if concentration is too high and there are barriers to entry, and/or if there is some form of collusion (either tacit or explicit).
Mitigating the effects of high switching costs/’customer inertia’
If a significant set of customers is “sticky”, i.e., is unwilling to switch supplier even in the face of large price differences, then even in an apparently competitive market retailers may be able to charge high prices to those customers, earning profit margins that would usually only be obtainable in markets with inadequate levels of competition.
As a matter of terminology we do not refer to such behaviour as “abuse of market power”, because it can occur even if the firm has a small market share and faces vigorous competition from other firms. An alternative perspective would be that each firm has market power over the subset of its customers with high resistance to switching (so-called “sleepers”). However from an economic point of view this is essentially a question of labels, not of substance.
1.3 Conclusions
The main conclusions of our analysis are that:
1. The direct costs and the direct effects of retail price regulation are both very small. A rough estimate is that the direct cost of price regulation is of the order of no more than €650k per year, less than €0,10 per consumer protected. In the first four years following market opening, direct interventions by the EK to lower tariffs have affected less than 5% of Dutch households, and the reduction in bills caused by EK interventions was about €30 per directly affected household.
2. In the absence of effective retail price regulation, the market outcome would be a system of “two tier” pricing. This refers to a situation where consumers who are willing to switch supplier (i.e., consumers with “low switching costs”) end up on contracts that provide no more than a reasonable margin to the supplier, while consumers who are resistant to switching supplier (those with “high switching costs”) pay tariffs that are significantly higher. It reflects the ability of suppliers to charge higher prices to customers who are unwilling to switch, even in a situation where there are many potential competitors that the customer could switch to.
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treated with some care. Nonetheless, they probably provide a good sense of the order of magnitude effects.
4. Price regulation will prevent or at least limit two tier pricing, provided the price cap is set at a level that limits any “excessive” margins. Conversely, as discussed above (see “regulatory failure”), if the price cap is set sufficiently high then it will have no effect on actual pricing, nor on consumer welfare. Lack of data makes it hard to estimate just how effective Dutch price regulation is in preventing a two tier pricing outcome. The available data is compatible with a broad spectrum of possible conclusions. These range between at one extreme an “optimistic” scenario, where price regulation has largely prevented the development of two-tier pricing, and at the other extreme a “pessimistic” scenario where price regulation makes very little difference to outcomes. Combining the different sources of evidence used in this paper, the most likely conclusion is that the current market situation lies towards the middle of this spectrum. However, more research is required to provide a solid evidence basis for this conclusion.
5. We therefore conclude that the net consumer benefit of retail price regulation has probably been positive. In an optimistic scenario it is of the order of some hundreds of millions of euros per year, but in a “pessimistic” scenario it may be negligible.2
Both scenarios are consistent with the available evidence, and the true outcome is most likely somewhere in the middle of the range.
For the avoidance of doubt, these conclusions do not automatically imply that the Netherlands should continue with retail tariff regulation. That question falls outside the scope of this report. However, it is worth noting that our analysis implies there is a trade-off between the social benefit of preventing two-tier pricing through effective regulation, and the potential costs of “regulatory failure”, now or in the future. Policy-makers considering the future of tariff regulation would need to form a judgment concerning that trade-off.
1.4 Recommendations
1. The EK should continue to monitor retail prices actively, and in particular develop over time a more detailed understanding of how much different groups of consumers are actually paying for their energy. This data would allow the EK to assess more accurately the level of price dispersion, and therefore the extent of two tier pricing, seen in the Dutch retail energy market.
2. The EK should consider supporting or promoting research into switching along similar lines to that conducted in the UK, to see whether consumers who switch are actually switching to the best deals available on the market. Evidence from
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similar research undertaken by academics in the UK suggests that many consumers who switch may not switch to the best deal available, and a high proportion may actually switch to worse deals than the one they leave.
3. The EK should continue to promote effective and reliable switching, combining this with consumer education and effective and proportionate enforcement of consumer protection rules. One important observation is that the market would be more effective, lessening the need for price regulation, if consumers could be persuaded to switch more easily. Policy-makers must however bear in mind that some actions intended to protect consumers, such as restrictions on direct marketing, could also significantly reduce switching rates and lower the incentive for some retailers to offer attractive prices.3
4. This report has analysed experience to date with tariff regulation. Policy makers should also consider carefully the long-term trade-off between the potential benefits of tariff regulation (in particular, limiting excessive margins on high switching cost consumers), and the potential long-term costs (in particular, the risk that at some point in the future regulators might distort market outcomes by setting a price cap that is either too low or too high).
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Lessons from international experience
We have reviewed international experience in liberalised gas and electricity markets that have abolished price controls for domestic consumers, or never had controls in place.4 Our detailed findings are in chapters 3 to 6 of this report. This chapter gives a summary.
There are rather few markets that have gone down this route to date. We focus on:
• Great Britain (GB), which has a relatively mature domestic retail market and some years of experience with full price de-regulation;
• Texas, which has the most successful competitive retail market for domestic customers in North America, and is the only part of the United States with significant experience with price deregulation;
• Norway and Sweden, which like GB have many years’ experience with deregulated domestic retail markets;
• Australia, which has set up a process for deciding on the de-regulation of prices to domestic consumers (on a state-by-state basis), and is in the process of implementing it. Of these countries, only GB and Texas have gone through the successive phases of liberalisation followed by price deregulation. The Nordic countries never regulated prices, and Australia has not yet deregulated them. Moreover, Texas deregulated prices less than two years ago, while in GB deregulation was completed in 2002. GB therefore provides the most complete case study, and receives the most attention in this report.
In reviewing experience with deregulation, policy makers should bear in mind that the relevant comparison is not between real-world deregulated markets and idealised regulated markets. It is a well-known observation in economic theory that a “theoretically perfect regulator” can always do at least as well as a deregulated market: it can simply regulate for the market outcome, if that is the best possible, or for a better outcome if there is one. For policy-makers however the choice is between imperfect markets and imperfect regulation.
2.1 Great Britain
The decision to remove retail price regulation followed on from analysis suggesting that competitive retail markets were developing well, with high switching rates and a range of alternative suppliers making competitive offers.
Although there is some ambiguity in the data, in the first one to two years following domestic retail price deregulation (2002), the margin earned by retailers appeared to rise, particularly in electricity, suggesting that there was a short run cost to consumers of price deregulation. This cost was much greater for consumers who took electricity only.
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In more recent years, retail competition has on average developed reasonably well by many metrics. It is hard to assess how much the absence of price controls has contributed to this development. There has been a significant level of innovation, mainly in the form of capped and fixed price tariffs. Some commentators link this innovation to the removal of price controls, but the evidence is hard to read. Consumers in the Netherlands have available to them a range of contract types similar to those seen in GB.
Recent price rises have led to significant political pressure on the regulator: if price controls were still in place then in our judgement there would have been considerable pressure to use them to mitigate the effects of price rises. It is conceivable that this pressure might have led to prices being set below competitive levels, but inevitably this involves some speculation.
Recent analysis by Ofgem suggests that specific social sub-groups do not enjoy the full benefits of competition. These sub-groups include:
• Electricity-only consumers (about 20% of GB households), and also consumers who consume gas but do not buy on “dual fuel” contracts (i.e., they have separate contracts for electricity and gas). Ofgem found that these customers pay more than dual fuel customers, and that the premium does not reflect any additional costs;
• Consumers who use pre-payment meters (PPMs).5
Ofgem found that these customers also pay more than others, and that in some cases the premium is larger than would be implied by the additional costs of PPMs; and
• Certain “vulnerable” customer groups: elderly customers and customers on low incomes. Ofgem found that older people are likely to have worse than average deals because a higher proportion of old people are non-switchers, do not pay by direct debit, and/or do not have access to the internet. Low income customers are far more likely to have switched as a result of direct sales activity (e.g., telemarketing or door-to-door sales) and therefore far less likely to compare a range of competing offers before switching. They also have lower rates of access to the internet and are less likely to pay by direct debit. It is possible that at least some of these consumers would be better off if prices were still regulated.
There is also considerable evidence, both from Ofgem and from academic studies of the GB market, that a significant proportion of consumers (outside of these specific social sub-groups) make poor choices in purchasing retail energy. One recent study found that among consumers that switched suppliers exclusively for price reasons, only 8-19% switched to the firm offering the best deal for that consumer, and in aggregate switching consumers appropriated only between 28% and 51% of the maximum gains available to them. Moreover, between 20% and 32% of switchers
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actually switched to contracts that made them worse off. Ofgem’s recent investigation similarly found that as many as one third of all switchers do not switch to better priced deals.
As with the specific sub-groups discussed above, it is possible that these consumers would have been better off if price regulation had remained in place.
Following on from these findings, Ofgem proposes to reintroduce some form of “relative price controls”, i.e., controls on the difference between prices charged to different types of consumers. At a minimum this will involve a requirement that the premium charged to PPM customers should be cost-reflective.
2.2 Texas
While evidence from Texas is scarcer, some preliminary conclusions are that:
• As in the UK, competition works well for a large part of the population. Over 80% of residential customers have switched contract or supplier.
• However, sticky customers pay quite a lot more than those who have switched.
• Policy-makers made sure there was “headroom” in the period around price deregulation. • Price dispersion, as measured by the difference between average and lowest offers to new
customers, is large and has increased significantly since price deregulation.
• From the beginning of deregulation, Texas has adopted aggressive policies to promote consumer engagement in retail competition. This is in contrast to GB, where in early years there was a belief that the market should ensure consumer engagement. Ofgem’s recent proposals to improve the retail market functioning (described earlier in this report) suggest that it is moving more towards the Texan approach in this area.
• Texas provides some help for low-income consumers via the regulatory system (although the programme itself is mandated by the state government). However this help is not in the form of regulation, but is essentially fiscal, albeit funded via charges on the electricity system.
2.3 Sweden and Norway
These are markets that function well, and do not have any form of retail price regulation. Competition appears to be effective, with many small retailers, a wide range of contract types available, and high switching rates. However, before concluding that competition makes price deregulation unnecessary, one should note that these markets also functioned without explicit price controls prior to liberalisation. This is probably explained by a combination of widespread public ownership, and the potential for implicit regulation.
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generation has been a response to the relatively high costs of managing wholesale market risk due to insufficient wholesale market liquidity. If so then one possible precondition for removing retail price regulation might be to ensure that the wholesale markets are sufficiently liquid and “entrant-friendly”.
2.4 Australia
In Australia retail markets were fully opened to competition in 2002. At the same time, a framework was agreed for reviewing the effectiveness of competition in order to decide whether residual price control arrangements should be lifted. The process for the reviews (State-by-State) was specified in advance in some detail, and consulted upon. The reviews focus on: the nature and extent of rivalrous behaviour between energy retailers; consumer behaviour, attitudes and information requirements in relation to the purchase of energy products and services; and the ease of entry into energy retailing. The reviews are taking place about five years after the market was fully opened (in the case of Victoria Sate, the first jurisdiction to be reviewed). No price controls have yet been lifted, so we can only learn from the review process itself, not from experience after lifting the controls.
The purpose of the Australian review was to determine whether or not to lift residual price controls (which, by the time of the review, applied to the prices paid by about 40% of customers). It was not intended to (re-) open the question of whether retail competition is a good idea. Furthermore, the process and framework for the reviews had been set out as part of a wider energy market reform programme, which clearly envisaged from the start that lifting of price controls was the intended eventual outcome.
The first review took place in the state of Victoria. It concluded that competition was effective and therefore that price controls should be lifted. A number of issues were raised during the review which suggested that competition might not be equally effective for all customer groups. However, the conclusion was that these issues could not effectively be addressed through maintaining price controls. For example, the regulator suggested that intervention to improve the quality of information available to customers, rather than maintaining price controls, would be an appropriate response to the finding that some switchers end up worse off.
2.5 Overall conclusions
Overall conclusions from this survey are that:
1. Retail competition in energy can work well enough that it provides most consumers with reasonable prices. In those cases it works as well as many other markets that are generally left without price regulation in the Netherlands and comparable societies.
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3. Since the success of retail competition is not guaranteed, it may be desirable to undertake an explicit assessment, as in Australia, as a precondition for removing price regulation.
4. The success of retail competition in the Nordic countries may suggest that such an assessment should look carefully at the functioning of wholesale as well as retail markets.
5. Even where competition is generally active, there are likely to be subgroups of consumers who do not engage effectively with the market. Either they do not switch despite potential savings, or they switch but fail to make savings (or could make significantly larger savings by switching more intelligently).
6. Ending price regulation is therefore likely to lead to more price dispersion, with companies charging higher prices to existing customers while competing more aggressively in more price sensitive segments of the market.
7. This “two tier pricing” will create winners and losers. The losers may be concentrated more in specific social groups (as is the case in GB).
2.6 Related work
Two other recent reports are relevant to this survey. A 2008 report by Professor George Yarrow of the Regulatory Policy Institute examines international experience with energy price deregulation.6 Professor Yarrow examines more or less the same examples as we do, not surprisingly since these are the main available sources of evidence. Another 2008 report, by the UK National Audit Office, examines the experience with price de-regulation decisions by UK regulators in energy, telecoms and post.7 We recommend that policy makers interested in the effects of price deregulation read both these reports alongside this one.
2.7 Implications for study of the situation in the Netherlands
The main lesson we draw from the experience described above is that this study should focus on the potential for price deregulation to create winners and losers, in particular if it leads to a
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Report on the impact of maintaining price regulation, Jan 2008, prepared for the Australian Energy Market Commission. Available at:
www.aemc.gov.au/pdfs/reviews/Review%20of%20the%20Effectiveness%20of%20Competition%20in%20 the%20Electricity%20and%20Gas%20Retail%20Markets%20in%20Victoria/second%20draft%20report/consult antsreports/001Report%20on%20the%20Impact%20of%20Maintaining%20Price%20Regulation%20-%20Prepared%20for%20the%20AEMC%20by%20Professor%20George%20Yarrow,%20Regulatory%20Polic y%20Institute.pdf 7
The process for removing price controls in retail energy supply, telecoms, and parts of the postal market is reviewed in Protecting consumers? Removing retail price controls, National Audit Office (March 2008). Available at:
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Great Britain
3.1 Background
Gas and electricity markets in Great Britain are fully liberalised and there are no controls on retail prices. The liberalisation process began in 1986 with the privatisation of British Gas as a fully-integrated monopoly. The electricity sector was privatised in 1986, with distribution and supply activities carried out jointly by fourteen regional companies, each with a local monopoly. Retail prices were subject to price controls.
Between 1997 and 2000 the industry was restructured so that the gas pipeline network and the supply activity were under separate ownership, and so that the electricity network and supply activity were legally separated and regulated under separate licences.
Competition was introduced gradually, starting with the largest industrial consumers. When competition was introduced for domestic consumers, price controls were retained initially. Competition was extended to domestic gas consumers on a region-by-region basis between 1996 and 1998, and to domestic electricity consumers between 1998 and 1999.
The main entrants in each market were the former monopoly suppliers in other markets. Thus, in each of the fourteen electricity regions, the electricity incumbent started to supply gas and started to supply customers outside its home region, and the national gas incumbent started to supply electricity. Customers that did not switch remained subject to price controls until 2000, when controls were lifted from customers paying by direct debit.8 Price controls on the retail prices of the gas incumbent (Centrica) were removed in April 2001.9All remaining price controls, including those on the retail prices of the former monopoly retailers in their distribution areas, were lifted in 2002.10
The process of introducing competition was led by the industry regulator, Ofgem. Ofgem acts within a remit set out in primary legislation, which, although it has evolved over time, has always included a duty to promote competition.11 Ofgem’s efforts to introduce competition to retail supply was supported by central government (new legislation was required to support some of
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“Direct debit” is a payment method whereby the customer authorises their bank to settle bills in full whenever the merchant requests. The bill is sent to the customer but the customer needs to take no action to pay the bill. It is therefore a more reliable payment method from the supplier’s perspective, and is less costly to administer.
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Except for a relative price control on pre-payment meters (see explanation later in this report).
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The process for removing price controls in retail energy supply, telecoms, and parts of the postal market is reviewed in Protecting consumers? Removing retail price controls, National Audit Office (March 2008).
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Ofgem’s initiatives). The decision to lift price controls was Ofgem’s and did not require new legislation.
Decision to lift price controls
Ofgem’s decision to lift price controls was based on its analysis of the extent to which competition had developed and might be expected to continue to operate effectively in the absence of a price control. Ofgem analysed information covering: customers’ experiences; customer switching behaviour; market shares; price and non-price offers; entry and exit of suppliers; and barriers to entry.
The evidence on which Ofgem relied in deciding to lift price controls is summarised in the relevant decision document,12 and included the following points:
• customer surveys revealed that customers generally understood that they could switch and were happy with the process;
• over a third of customers had switched supplier at least once, and around 170,000 customers were switching each week;13
• all customer groups seemed to be benefiting equally—in particular, “pre-payment” customers seemed to switch as often as credit customers;
• market shares of the ex incumbents were falling rapidly (4% per year in gas, and 10% per year in electricity); and
• customers had a range of competing suppliers to choose from, with prices between 5% and 14% lower than the incumbents’, and suppliers were beginning to offer new tariffs (eg, “green” tariffs, or bundled tariffs including telecoms).
A further factor that may have been important in the timing of Ofgem’s decision was that reforms to competition law enacted through the Competition Act 2000 both modernised the framework for assessing anti-competitive behaviour, and also gave Ofgem strong enforcement powers. This is important because, having lifted price controls, customers’ interests are protected through the operation of effective competition, so it was important that Ofgem had the necessary powers both to require companies to provide information if Ofgem suspected that competition rules had been infringed, and to punish any actual infringements.
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See Chapter 11 of Review of domestic gas and electricity supply competition and supply price
regulation—Evidence and initial proposals, Ofgem November 2001.
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14 3.2 Price trends following removal of price caps
At the time price caps were removed,14 wholesale power prices had fallen quite dramatically. As Figure 1 shows, retail prices did not reflect this reduction in cost, remaining fairly flat over 2000-03. This led to considerable public criticism at the time.
Figure 1: Monthly wholesale and retail electricity prices15
The trend in natural gas was somewhat different. As Figure 2 shows, retail gas prices were somewhat more responsive to underlying wholesale prices, although there appears to be some asymmetry (i.e., retail prices reflected wholesale price increases more than wholesale price decreases).16 It may be noteworthy that retail prices rose sharply (by around 10%) in April 2001, i.e., when price controls were lifted.
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As noted above, controls on retail prices charged by former incumbents to domestic customers in their distribution areas were lifted in April 2002.
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Source: p. 87, Ofgem, Domestic Competitive Market Review 2004. Nominal prices. Retail prices are for direct debit, and exclude transmission and distribution use of system charges.
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Figure 2: Monthly wholesale and retail gas prices17
We note however that these conclusions are based upon Ofgem data. The recent report by Professor Yarrow cited earlier comes to rather different conclusions, based upon a different data source (data published by the relevant government ministry). Professor Yarrow concludes that retail gas prices fell significantly, so that a household consuming gas and electricity did see a price reduction that reflected changes in wholesale markets. He argues that it was mainly or only “electricity-only” households that may have suffered from excessive retail margins, reflecting the much lower level of competition (since in GB the main form of competition for households at the time was between the former gas incumbent retailer and the former regional electricity incumbent retailer).
3.3 Headroom in the transition to full de-regulation
One point of potential interest to policy-makers considering price de-regulation is the design of the transitional arrangements. In GB, Ofgem wanted to be sure that the regulated tariff was high enough that a potential entrant would find it attractive to enter the market and undercut the incumbent. It was therefore important not to set the regulated tariff too high: in the jargon employed at the time, there needed to be “headroom” for entrants.
Two factors other than Ofgem’s setting of regulated tariffs contributed to ensuring headroom. First, as noted above wholesale electricity prices were falling around 2001–2002. This factor may have been helpful in allowing companies to offer attractive prices to new customers, and/or to fund the costs of customer acquisition, although as the discussion of Professor Yarrow’s report above indicates, the evidence on this point is mixed.
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Second, it is important to understand that an “entrant” in this context could be the gas incumbent Centrica entering the electricity market, any of the electricity incumbents entering the gas market, and any of the electricity incumbents competing for customers outside their distribution areas. All meaningful retail competition in GB has come from these sources, there has been no successful entrant who has built a significant energy retail business “from nothing”. In the fourteen regional electricity markets incumbents therefore faced competition from the national gas incumbent as well as from the other regional electricity incumbents. The gas incumbent had the advantage of an existing national brand, and in many cases it was already supplying gas to the customers it wanted to attract on the electricity side. When companies supply both gas and electricity to the same customer the total administrative costs are significantly reduced, and, as a result, so-called “dual fuel” offers were priced at a good discount to the stand-alone price of gas and electricity supply. The electricity incumbents were at a similar cost advantage when offering dual-fuel supply to customers within their own region.
The evidence is that this factor was significant: dual-fuel offers were significantly cheaper, and in all cases the “other incumbent” was the most successful entrant. When Ofgem proposed to lift price controls in 2001 80% of customers that had switched were taking both fuels from the same supplier.18 The fact that the “other incumbent” was the most successful entrant can be seen even now: after ten years of competition, the former incumbents have an average market share of almost 50% on a regional basis;19 the second largest supplier in each case is the former gas incumbent (selling electricity) and the former electricity incumbent (selling gas). In both cases the regional market share of the “second former incumbent” is just over 20%.20
3.4 Retail competition is in general reasonably effective, but with significant defects Since lifting price controls Ofgem has continued to monitor the effectiveness of competition retail (as well as wholesale) markets. It has published regular updates on switching rates and market shares.21 These assessments were highly positive: the last such review concluded that “all segments of the market remain highly competitive.”22
More recently however, in response to public concern about rising prices, Ofgem undertook a more detailed investigation of whether the retail market was working effectively. Its conclusions were less positive in tone: “the fundamental structures of a competitive market are in place, and
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Review of domestic gas and electricity competition and supply price regulation—Evidence and Initial
Proposals,, para 3.31, Ofgem (2001).
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British Gas average regional market share is 48%, and the average “in-area” market share for the former electricity incumbents is also 48%.
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Energy Supply Price Probe, initial findings report, Para 3.12 and Figure 3.4., Ofgem (2008).
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See, for example, Domestic retail market report July 2007, Ofgem (2007).
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the transition to effective competitive markets is well advanced and continuing. We have, however, found a number of important areas where this transition should now be accelerated.”
The findings of this investigation are the single best source of evidence concerning the functioning of a deregulated domestic retail market similar in many respects to the Netherlands. We therefore describe its findings in some detail.
Positive Findings
Ofgem’s main positive findings were that:23
• The GB retail energy supply markets have six substantial companies competing for the business of domestic consumers. This compares favourably with many other UK consumer services sectors).
• The market shares of these Big 6 suppliers in their former monopoly markets continue to fall year-on-year.
Figure 3 below illustrates the decline in incumbent market share.
Figure 3: incumbent market share loss over time24
• The level of consumer participation in GB energy supply markets is amongst the highest of any retail energy market throughout the world. The annual switching rate of 18 per cent also compares well with other retail services in the UK.
• Since market opening, energy suppliers have also widened considerably the range of tariffs available to domestic consumers. They offer fixed or variable prices, green energy deals and social tariffs, energy service packages and a wide range of incentive
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Text in italics in the following bullets comprises direct quotes from Ofgem, Energy Supply Probe - Initial
Findings Report, October 2008. Text not in quotes summarises other findings in the same report.
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and reward deals. Suppliers have also responded in recent years to consumer demand for greater certainty by offering a range of fixed or capped price tariffs.
• Some 17 per cent of domestic consumers are particularly significant for the functioning of GB competitive energy markets. These “active” consumers regularly seek out competing price offers and switch suppliers on the basis of a good understanding of the range of offers available. They typically make accurate switching decisions and secure the most attractive deals.
• Suppliers compete actively for those consumers who seek out the best deal in the market by offering keenly priced products. Dual fuel, direct debit tariffs offer the lowest prices and are the prime focus of competition among suppliers. We estimate that 8.5 million consumers benefit from these deals - equivalent to 38 per cent of all consumers with both gas and electricity supplies.
• There is no collusion between retailers.
• Changes in wholesale costs are passed through in changes in retail prices. Figure 4 below shows the evolution of wholesale and retail prices since 2004.
Figure 4: link between wholesale and retail prices25
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Negative Findings
• [T]he national gas market and each of the former regional electricity markets are still highly concentrated.
• We have evidence of barriers to entry and expansion, in particular the difficulty that entrants have in securing adequate access to wholesale energy supplies.
• [A]ctive consumers [the 17% of domestic consumers referenced above] are significantly in a minority…Some [consumers] still find it difficult or time consuming to assess competing offers; some are not confident that they can make a sound choice; some are sceptical about the scale of potential benefits and whether they will be sustained; some still worry about administrative or billing errors, service problems or moving inadvertently to a worse deal; some are unable to get the best deals because they do not have internet access, a current bank account or both. • Around half of the less active group of consumers do in fact engage with the market if
approached directly by a sales person and supply companies put in significant direct sales effort in order to persuade these customers to switch. Such sales effort is to be welcomed - it is a sign of a vibrant market. Yet we have evidence that most consumers who change supplier in response to such an approach do not investigate alternative deals in the market, and may not therefore be making well informed switching decisions.
• Almost all consumers tell us that they switch supplier in order to save money. Our analysis suggests, however, that price differences explain only a proportion of switching decisions and other factors may be important - including the impact of sales activity, brand and customer service. Consumers may also be switching on the basis of poor or partial information. As a result, the high levels of customer switching may not yet be exerting as much constraint on suppliers' prices as it could.
• As many as one third of switchers may not achieve a price reduction. This proportion is higher for Pre-Payment Meter (PPM) customers (45 per cent) and consumers who switch as a result of a direct sales approach (48 per cent for gas, 42 per cent electricity).
• [T]here are instances of differential pricing that are of concern to us:
o Until very recently, the five former incumbent electricity suppliers charged electricity customers in their former monopoly areas an average of over 10 per cent higher prices than comparable “out-of-area” customers. The most recent price changes…narrowed this differential to around 6 per cent on average…[W]e can find no cost basis for this premium, nor are similar premiums found in gas.
20
consumers, 4.3 million are not connected to the gas main and so are unable to move to a more competitively priced dual fuel deal. Again, we can find no cost basis for this practice.
o A number of the price differentials between payment types do not appear to have a cost justification - particularly for those customers who pay by standard credit. Recent price changes (after the Probe was announced) have reduced the average tariff differential for pre-payment meter (PPM) customers. These now, on average, reflect cost differences. However some PPM customers still pay a larger premium than is justified by the costs incurred (see Chapter 8).
o Suppliers compete vigorously in the online market with heavily discounted offers, the cheapest of which may be, initially at least, below cost. This enables the companies to secure the leading places in price comparison tables. The relevant suppliers told us that customers acquired online are profitable over a number of years as prices are subsequently increased. We are concerned that the temporary nature of these offers is not transparent to consumers.
• Overall, these price differentials mean that companies charge more to existing (“sticky”) customers whilst maintaining competitiveness in more price sensitive segments of the market. The ability to price differentially in this way means that pressure on prices in the most competitive segments of the market does not always constrain prices for all other consumers. There is evidence in the companies’ business plans and from interviews with the Big 6 that they are aware of these dynamics and take them into account in their pricing decisions.
Ofgem also made additional negative findings concerning specific social groups, which we describe in the section below.
3.5 Specific social sub-groups of consumers do not enjoy the full benefits of competition
Evidence from GB identifies a number of sub-groups of the population who do not enjoy the full benefits of retail competition, and might therefore have been better off if price regulation had remained in place (although that conclusion is by no means automatic and requires careful investigation). These groups include:
• Electricity-only consumers (about 20% of GB households), and also consumers who consume gas but do not buy on “dual fuel” contracts (i.e., they have separate contracts for electricity and gas)
• Consumers who use pre-payment meters
21
The five former incumbent electricity suppliers have consistently earned significantly higher margins on electricity supply than on gas. Higher prices are charged to customers taking only electricity under a single fuel arrangement (around a third of their electricity customers). Of these consumers, 4.3 million are not connected to the gas main and so are unable to move to a more competitively priced dual fuel deal…[W]e can find no cost basis for this practice.
Pre-Payment Meter (PPM) consumers
With regard to PPM consumers, Ofgem concluded that:
There has been a great deal of public and political interest in whether the higher prices paid by consumers using pre-payment meters can be justified by the additional costs of metering and providing service to these consumers. The price premium charged to PPM customers differs significantly between suppliers, between geographic regions and over the range of energy consumption. PPM price premiums at the lower end of the consumption range appear to us to have a sound cost justification, while those at the upper end of the range do not. We believe that action is necessary to ensure that the premium charged to all PPM customers is placed on a sound cost basis. Moreover, we are concerned that competitive pressure on suppliers in this sector may not be sufficient and, as a result, the additional costs incurred in serving PPM customers may not be efficiently incurred.
It also noted that PPM customers “have recently become the most active in switching their supplier”, but that they “rarely consider a wide range of alternative suppliers when switching and often switch to more expensive deals”.
Vulnerable consumers
Ofgem identified “a number of concerns that may particularly impact vulnerable groups”, such as:
• Older people are among the least active consumer groups, are most likely to be with their original supplier and most likely to pay by standard credit. As a result, they will suffer more from higher in-area pricing by former incumbent electricity suppliers and the premium charged to standard credit customers, and benefit least from dual fuel discounts. Moreover, only a third of elderly consumers have access to the internet, and so are least able to compare offers or access the cheapest online deals.
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• Many rural customers are not on the gas grid and thus are impacted by the higher margins earned on electricity consumers, but cannot benefit from lower margins on gas or the discounts available to dual fuel customers. This is compounded by higher heating costs (from their use of oil, electricity or liquefied petroleum gas), which drives a higher proportion of these consumers towards fuel poverty.
3.6 A significant proportion of consumers make bad choices
As noted above, Ofgem’s recent investigation found that “as many as one third of switchers may not achieve a price reduction. This proportion is higher for Pre-Payment Meter (PPM) customers (45 per cent) and consumers who switch as a result of a direct sales approach (48 per cent for gas, 42 per cent electricity).”
UK academics have undertaken important research in this area (contributing to a wider body of research that covers a variety of countries and markets). Their conclusions reinforce those of Ofgem, providing evidence that a surprisingly high proportion of consumers who switch
1. Do not switch to the lowest priced deal available on the market; and 2. In many cases switch to higher-priced deals.
While Ofgem’s findings imply that these consumers come disproportionately from specific social sub-groups, academic research suggests that this kind of bad decision-making is generally spread among all parts of society. 26 As with the specific sub-groups identified above, it is possible that these consumers would have been better off if price regulation had remained in place.
Academic findings
The academic literature provides empirical evidence from various markets concerning the switching behaviour of consumers, showing in particular that switching consumers do not necessarily switch to the best supplier: some groups of consumers make poor choices. For instance, Economides et al. (2006),27 in their investigation of the effects of entry in the New York State telephone market covering the period September 1999 to March 2003, suggest that 42% of consumers switched to a more expensive supplier.
With regard to retail energy markets, Giulietti et al. (2005)28 suggest there may be similar effects in the UK gas market.29 They show that consumers’ switching decisions appear unrelated
26
“[Our] estimations also indicate, in line with the findings of Economides et al (2006) and Miravete (2003), that very few demographic variables are useful predictors of the ability of consumers to make accurate decisions”, Wilson C. M. and C. Waddams Price, “Do Consumers Switch to the Best Supplier?”, CCP Working
Paper 07-6, July 2007.
27
Economides N., Seim K. and V.B. Viard, “Quantifying the Benefits of Entry into Local Phone Service”,
NET Institute Working Paper, August 2006.
28
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to the monetary gains available from doing so. They show this by modelling the choice to change gas supplier as a consumer investment decision. They find that the potential bill savings30 that could be attained by switching supplier have no significant positive impact on the probability of switching. They identify as the most important barriers to change gas supplier the search costs, which they find are higher for those consumers with little previous switching experience in other markets, and to a lesser extent perceptions of switching costs31
In the UK electricity market, Wilson and Waddams (2007)32 suggest that the ability of consumers to choose accurately between alternative suppliers is substantially limited. They found that among consumers that switched suppliers exclusively for price reasons, only 8-19% switched to the firm offering the highest surplus (i.e., the best deal for that consumer) and, in aggregate, switching consumers appropriated only between 28% and 51% of the maximum gains available to them.
One possible explanation for findings of this nature involves search costs: consumers might not pick the best supplier because the cost of researching different offers precludes them from looking at the offers of all suppliers. However, Wilson and Waddams argue that their findings cannot be explained by search costs, because they observe that at least 20% (and perhaps as high as 32%) of switchers actually reduced their surplus (i.e. switched to contracts that made them worse off) as a result of switching. They calculate that these consumers lost an average 14-35 per year in increased bills.
Wilson and Waddams consider a number of other possible explanations such as the impact of “mis-selling”, i.e. misleading (and potentially illegal) sales practices, but conclude that “consumers’ poor choices seem more consistent with an explanation of pure decision error”.
3.7 Ofgem proposes a number of reforms, including some re-regulation of prices Ofgem proposed a number of measures to address the concerns identified in its recent investigation, including:
29
The authors explain their focus on the gas market: “we view it as significantly the more interesting of the domestic energy markets for the present research question for three reasons. First, at the time of the survey, all gas consumers were in fact able to switch, whereas this was not true for electricity. Second, as a result, only a very small proportion of electricity consumers had in fact switched by the time our sample was taken. Third, the gas incumbent was at a competitive disadvantage as a result of “take or pay” contracts struck above the then spot price, so all entrants were able to undercut its prices, on average by 11%. Thus gas provides the clearest indication of the extent to which competition may be expected to provide benefits.”
30
Defined as the difference between current monthly bill and alternative bill that would have to be paid if supplied by cheapest supplier, based on range (low, medium, high) of consumption levels, and current payment method.
31
Defined as time required to switch and importance of ease of switching.
32
Wilson C. M. and C. Waddams Price, “Do Consumers Switch to the Best Supplier?”, CCP Working
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• Suppliers will be required to implement a number of improvements to the quantity and quality of information they provide to consumers. This could include
o a requirement for clearer information on customer bills (for example, detailing the customer’s existing tariff and consumption level) to make it easier to compare current arrangements with alternative offers;
o an annual statement to each customer showing, for example, the customer’s current tariff, the size of any premium they are paying (for example, relative to an average tariff or other payment method), their annual consumption level and alternative price packages available from that supplier;
o an annual prompt to all customers of how to switch supplier, the advantages and disadvantages of each payment method and the potential savings from changing payment method;
• A programme to promote confidence in price comparison and switching sites and to extend their scope, in particular to enable prepayment switching and switching among low income and vulnerable groups who do not have internet access;
• A sustained customer awareness programme will be launched to explain the switching process, promote the benefits of switching and, in particular, give vulnerable customers targeted information on the options open to them.
• We will work with consumer groups and suppliers to explore the development of an easy-to-understand price metric to enable consumers to compare prices quickly and easily. This metric could be made available to all customers on their bills and proposed annual statements, and would be used by all suppliers in all price quotations;
• Rules governing suppliers' sales and marketing activities will be strengthened, especially focussed on enabling consumers to make well-informed decisions in response to a direct sales approach, and to prevent any misleading marketing or sales activity. This could, for example, include an obligation to provide consumers with a written quotation and comparison with the consumer’s current price;
Re-regulation
In a recent follow-up to the investigation described above, Ofgem has announced that it intends to re-introduce certain elements of price regulation, including:33
1. A requirement that “price differentials associated with different payment methods must reflect costs”. This responds to the concerns described above concerning the higher charges for customers who do not pay by direct debit.
2. A prohibition on undue price discrimination between customer groups, requiring price differentials to reflect differences in costs. This would be a direct reversal of the
33
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decision (noted above) to remove a relative price control for PPM customers in 2002. Most notably, it will prevent retailers from charging higher prices to their “legacy” customers (located in the region where they used to have the monopoly) than to potential new customers (located elsewhere). Ofgem notes explicitly that “[t]he ruling will ensure that price discrimination must be objectively justifiable on cost or other grounds. Such discrimination includes differences between charges to customers in areas where the supplier was once the local incumbent and out-of-area charges.” In effect, Ofgem is therefore trying to end two-tier pricing.
3.8 Conclusions
Removing price regulation in GB has probably imposed some costs. First, it seems likely that cost-reflective regulated tariffs would have been somewhat lower than the tariffs actually charged in the years immediately following deregulation, when retail prices did not respond to falling wholesale costs. Second, some social subgroups appear to pay prices that are somewhat above cost (e.g., PPMs, non-direct debit customers). Third, a surprisingly large group of customers switch to tariffs that are bad deals, often in response to direct marketing—the incentive on companies to promote through direct marketing would probably be lesser if there were cost-reflective regulated tariffs in place.
Removing price regulation in GB has probably also provided some benefits, although as with any counter-factual this involves a degree of speculation. First, there has been a significant amount of innovation, with companies offering fixed price deals, capped deals etc, as well as green and online tariffs. Some commentators argue that this innovation would have been less likely in the presence of continued price regulation.34 We find this plausible, but difficult to substantiate, especially since Ofgem policy until around 2005 effectively prevented retailers from offering long-term prices. We note also that the Netherlands has a not dissimilar range of tariffs on offer. Second, there has not been a publicly known ceiling that might have provided a focal point for collusion (assuming that the counterfactual involved continued publication of regulated tariffs, rather than a system like that adopted in the Netherlands where the price ceiling is unknown to retailers). Third, recent price rises have led to significant political pressure on the regulator: if price controls were still in place then in our judgement there would have been considerable pressure to use them to mitigate the effects of price rises, which might have led to prices being set below cost, but inevitably this involves some speculation.
A final conclusion, important although unhelpful, is that it is very difficult to judge the effectiveness of price deregulation or indeed of retail competition itself. For example, the findings concerning poor choices made by consumers may appear negative, but equally they may be typical of real world markets. If so, then one conclusion might be that introducing competition, and potentially strengthening it through lifting price controls, involves an inherent trade-off: consumers on average may benefit, but there will be winners and losers. If so then the decision is in part an inherently political one.
34
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4
Texas
4.1 Background
Of all the US states, Texas provides the most useful empirical and policy developmental evidence for this study. Of the 20 or so states that implemented the policy of retail competition in electric markets, only Texas actually moved to the final stage of eliminating retail tariff regulation (or equivalent measures). Therefore Texas has the most complete and arguably the most successful adoption of deregulated retail competition. For example, as of September 2006, more than one third of residential customers had switched away from the incumbent supplier, very high in the US.
Texas introduced retail competition in 2002. Until January 1, 2007, it kept in place regulated rates, the so-called Price to Beat (“PTB”). Compared to the UK experience, Texas’s span of time under the abolition of tariff regulation is therefore considerably shorter. During this period, natural gas prices and competitive electric rates have been high and rising, so the Texas regulator, the Public Utility Commission of Texas (PUCT), has faced considerable political pressures to defend and to improve its implementation of a competitive retail energy policy. The PUCT has pursued activist policies, some of which are described in its 2007 report to the Texas legislature.35
The Scope of Competition report discusses several important policy issues and how the PUCT is handling them. The PUCT pursues the policy of providing entering suppliers with accessible data bases on retail customer characteristics that are essential for marketing activities. In Texas, the fully regulated T&D companies, which own and provide the metering and data collection, are not involved in the running the data base and cannot limit access to information to help its affiliate retailer. In early 2008 the number of Retail Electric Providers (REPs) had grown by about 50% to 28, offering nearly 100 different retail options.36
Texas has adopted aggressive policies to promote consumer engagement in retail competition, including requirements to provide consumer information to competitive retailers, publication of price comparisons by the PUCT, and other elements of consumer education. The PUCT runs the Texas Electric Choice Education Program and has a sophisticated website
www.powertochoose.org and a programme “Power to Choose” that are aimed at consumer
education on pricing, available suppliers and efficiency. By lowering the transactions and information costs to both consumers and REPs, the goal is to facilitate customer switching to the lowest cost offers.
35
Texas PUC, Report to the 80th Session of the Texas Legislature: Scope of Competition in Electric
Markets in Texas, Jan. 2007. Note that the Texas legislature only meets in odd-numbered years, so there is no 2008 report.
36
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4.2 Price trends following removal of the price cap
Assessing retail price trends is difficult given the relatively short time period since price deregulation, and the dramatic changes in wholesale energy prices that have occurred in that time. Data from a recent presentation by the Association of Electric Companies of Texas (AECT) does however provide some insights.
Figure 5: Residential electric and wholesale gas price trends in Texas37
We note from Figure 5 that retail prices for new customers appear to have tracked wholesale gas prices reasonably closely (gas-fired generation is the main price-setting technology in Texas). There is no dramatic increase in the price of average offers for new customers at the point of deregulation (i.e., at the beginning of 2007).
The same AECT presentation shows that over 70% of eligible residential customers had already switched contracts by the end of 2006, and that by the end of 3Q2008 that figure was up to 83%, suggesting that there was a limited pool of “sleepers” who might be bearing higher prices post-deregulation.38
However, we also note in Figure 5 that the average offer for new customers as of Nov 2008 was at approx the same level as in Jan 2006, while the lowest offer for new customers had fallen significantly, with the initial fall apparently occurring around the point of deregulation. Reading
37
Source: Overview of the Texas Competitive Retail Electricity Market, AECT Presentation to the Senate Committee on Business & Commerce: Overview of the Texas Competitive Retail Electricity Market, November 18, 2008. Available at http://aect.net/marketinfo/index.htm.
38
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off the graph, the difference between the average and lowest offers was about 2.3c/kWh in Jan 2006, increased to about 4.0c/kWh in Jan 2007, and stood at about 3.8c/KWh in Nov 2008. A tentative conclusion would be that price deregulation has led to greater price dispersion, even among offers to new customers. The large size of the difference is also noteworthy.
4.3 Headroom in the transition to full de-regulation
Between the introduction of competition and the abolition of the PTB, wholesale power prices rose considerably. A fixed PTB rate would therefore have become a block on competition, since it would have fallen below the cost of service, stifling any attempt at entry. This is what happened in some other US states (and also in some EU member states, e.g., Spain).39
However the PTB regime was designed to ensure that there remained sufficient “headroom” to foster entry and the development of competition. As in the UK, Texas policy-makers recognised that they needed to ensure the development of competition so that the abolition of the PTB did not leave customers vulnerable to excessive pricing.
They did so by a system that allowed but did not require utilities to apply for the rate to change to reflect changes in fuel prices. The effect was that the PTB went up when gas prices rose (Texas generation is heavily dependent on gas-fired generation), but did not fall when gas prices went down. This pattern is clearly visible in Figure 6 below.
Figure 6: Average Residential Price to Beat vs Competitive Offers40
39
See ERGEG report Status review on end-user price regulation (Ref: E07-CPR-08-04), June 2007.
40
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4.4 Retail competition is in general reasonably effective, but not all customers benefit
The PUCT notes that retail competition is generally working well. As of its last report (cited above), it noted that:41
• [T]here is an abundance of service offers from which customers may choose; some of them offered significant savings compared to the PTB.
• [M]any customers have exercised their ability to choose. As of September 2006, over one-third of residential customers were receiving service from a non-affiliated REP, and a number of residential customers still served by affiliated REPs had selected a plan other than the price to beat.
• By June 2006, 75 REPs were providing service to customers, with other REPs in the process of beginning operation. There are 32 REPs serving at least 500 residential customers, and residential customers throughout the competitive market have multiple providers from which to choose.
• As of September 15, 2006, customers visiting the Commission’s website promoting the competitive market would find 17 REPs offering products throughout the state. These REPs were offering between 35 and 41 different products in various territories, including four REPs which were offering, between them, five different renewable energy options.
Figure 7: Residential Customer Price Distribution42
However, as in the UK, not all customers in Texas benefit from competition. In its covering letter to the report, the Commission noted that “competitive forces are working to provide competitive prices to customers, but there remain a large number of residential and small commercial customers who have not chosen a competitive supplier and are paying electric rates
41
All text in italics in the bullets below is taken from PUCT, op cit.
42
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that are higher than the rates paid by customers who have shopped for another supplier.” The report itself noted that “[t]he bad news is that as many as 50% of all residential customers continue to pay high PTB rates.”
4.5 Protection for low income consumers
PUCT has a low income programme, the “LITE-UP Texas” electric discount programme, which provides discounts and other benefits (e.g., freedom to pay their deposits over time) to low income consumers. Under the 2008 version of this programme, eligible customers receive an approximate 20 percent during the months of May through September (peak months in the Texas system). Funding for LITE-UP Texas was made available by the Texas legislature, which authorized the PUC to use money collected by the System Benefit Fund (SBF). The SBF is a non-bypassable charge set by the PUC at a current rate of 65¢/MWh, or about $10 annually for a typical Texas residential electric customer. Its primary purpose is to fund discounts to low-income consumers.43
4.6 Conclusions
While evidence from Texas is scarcer, some preliminary conclusions are that:
• As in the UK, competition works well for a large part of the population. Over 80% of residential customers have switched contract or supplier.
• However, sticky customers pay quite a lot more than those who have switched.
• Policy-makers made sure there was “headroom” in the period around price deregulation. • Price dispersion, as measured by the difference between average and lowest offers to new
customers, is large and has increased significantly since price deregulation.
• From the beginning of deregulation, Texas has adopted aggressive policies to promote consumer engagement in retail competition. This is in contrast to GB, where in early years there was a belief that the market should ensure consume engagement. Ofgem’s recent proposals to improve the retail market functioning (described earlier in this report) suggest that it is moving more towards the Texan approach in this area.
• Texas provides some help for low-income consumers via the regulatory system (although the programme itself is mandated by the state government). However this help is not in the form of regulation, but is essentially fiscal, albeit funded via charges on the electricity system.
43
