Opinion & Analysis
OPINION: Someone rings at tea-time, or some kid wearing a colourful corporate logo comes to your door and tries to sell you cheaper electricity. You sign up.
A few days later, your existing power company rings and asks if you'd consider staying with it. Inducements range from a magazine subscription through to as much as $350 off your next power bill.
The size of the offer will depend on three factors: are you a valuable customer? Does the power company need to gain or lose customers for reasons unrelated to the price you pay for power? How deep are the power company's pockets?
A valuable customer could even be a later payer, as long as they pay before the cost of issuing a second bill is incurred. Such customers are very valuable, since they forfeit the so-called "prompt payment discounts" that apply if bills are paid by a due date. If they chew through the juice, you might just about pay $350 to get that customer back, although bribes at that level make even the biggest power companies wince.
Given that about one customer in five is changing power companies annually, the likelihood of losing this new customer before they've paid for themselves is high.
On the question of deep pockets: if you're one of the big five - Contact Energy, Meridian, Genesis, Mercury (owned by Mighty River Power), or TrustPower - your pockets are deep compared to the scrappy little competitors who increasingly are finding toe-holds in New Zealand's newly competitive retail electricity market.
In fact, the mismatch of scale is such that the sector's regulator, the Electricity Authority, has proposed banning the use of customer "save" tactics, because they could be used to kill off small competitors.
"Saves and win-backs could be seen as part of a healthy competitive market where firms fight for consumers," the EA says.
"But these practices could reduce competition in the long term by adversely affecting the structure of the market. In turn this may lead to consumers getting less competitive offers in the future because of weaker competition."
In other words, the EA wants to promote competition by preventing people from being offered lower electricity prices.
That may sound exactly the nutty logic you get when regulators are let loose to create competitive markets. However, such a ban already applies in the telecommunications sector.
Under the telco industry's code of practice for customer transfers, "information provided in the Transfer Process must not be used for any other purpose (including win-back and marketing purposes)." This is part of the code's privacy provisions.
In the electricity sector, however, it's open slather and high-value customers who seek to switch are the big winners.
The EA's chief executive, Carl Hansen, worries that means only switchers will benefit, while small electricity retailers smart enough to work out who the best customers are will be stifled and everyone else could end up paying more.
Even today, there are some people who don't or won't seek out a bargain. What if power companies push their tariffs up aggressively, knowing they'll make margin on those customers, safe in the knowledge they can fling some loot at anyone they want to keep who shows signs of moving on?
The number of customers affected might be as little as 15 per cent of the original pool of switchers, one senior industry player estimates. But competition is far more fierce in retail electricity today than it was five years ago. They play these odds all the time in selling a product that engenders little loyalty from customers.
With as many as nine new entrant retailers, the EA is determined to try and create a level playing field.
Meanwhile, the share prices of all the big listed power companies, with the exception of TrustPower, have been trending down this week.
Talk among institutional investors points to "the Chorus effect" sinking Mighty River Power shares below $2 for the first time since listing at $2.50 in March and pushing Meridian instalment receipts closer to 90 cents than their listing price on October 29 of $1. Contact's share price has been plumbing two year low points at $4.66, having lost 15 per cent of its value in the past two months alone.
That reflects the ills facing the sector. The current wholesale electricity market would almost certainly not survive a change of government next year, demand for electricity is flat to falling as the economy becomes less industrial, and the potential for the Tiwai Point aluminium smelter to close after 2017 is ever-present.
There's a glut of electricity shares on the NZX, which a Genesis partial float next year would worsen.
To that extent, the latest regulatory threat is just another to add to the pile.
- © Fairfax NZ News