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Big power companies face probe into customer-saving tactics

Tuesday 3rd December 2013

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Fears the big power companies will stifle small competitors is prompting the Electricity Authority to mount an investigation into the practice of customer "saves" and "win-backs" to prevent customers switching provider.

The regulator issued figures showing that some small retailers, particularly Pulse Utilities (Just Energy) and Hunet Energy, which targets Asian customers on Auckland's North Shore, have been particularly hard hit by competitors offering big discounts to "save" customers who start the switching process.

The same practice is banned in the telecommunications sector. Customers seeking to switch telecommunications provider only deal with the company's switching staff, whereas power company customers who initiate a switch are routinely referred for "save" offers, as long as they show up as a valuable customer.

A "win-back" is similar to a save, but the discount or other marketing lure is offered after the switch is completed.

"Saves and win-backs could be seen as part of a healthy competitive market where firms fight for consumers," the EA says in its preliminary note on its investigation. "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."

With nine potential new, independent retailers in discussions with the EA about entering the electricity market, the regulator's chief executive Carl Hansen told BusinessDesk he was intent on ensuring the playing field was not tipped in large retailers' favour.

Having established a hedge market for wholesale electricity trading that was "working really well", the EA wanted to ensure that would-be competing retailers weren't disadvantaged by activities of the traditional generator-retailers - Contact Energy, Meridian, MightyRiverPower/Mercury, Meridian and TrustPower.

"We don't want to find out in 18 months that new entrants find it difficult and then it's too late."

Established in 2010, the EA has pursued an aggressive policy of encouraging competition in electricity retailing, which was moribund in the first decade after deregulation in the late 1990s. Its 'What's My Number' campaign helped push rates of switching as high as 30 percent of all customers in any one year, although the rate has slackened recently. It is now building a new tool to allow customers to get customised information about the best deal for them, depending on their consumption profile.

The growth of save activity was leading to under-reporting of switching intentions, since customers "saved" before switching to a new retailer do not enter the figures, said Hansen..

He also questioned whether the use of targeted discounts not visible to other customers was obscuring transparency in retail electricity competition.

"If the main incumbent can adopt a strategy of announcing increases in posted tariffs then wait to see who's switching and offer discounts, my main concern is that the system is putting the customers in a place where they (the incumbent retailer) hope to catch the customers who are switching," Hansen said.

"In the worst case scenario, these activities could force new entrants out of the market. Although consumers would benefit in the short term, in the long term they may suffer through less entry and a less competitive retail market," the EA analysis says.

The inquiry is expected to take six to nine months.

Figures released with the analysis show 29 percent of customers intending to switch to Pulse Energy brands were being "saved", and 17 percent of Hunet customers.

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