Price discrimination in Australia's retail electricity markets: An analysis of Victoria & Southeast Queensland

When capital-intensive monopoly industries are restructured and deregulated, consumer prices commence a natural drift from regulated uniform 'average cost' tariffs to competitive differential prices, and this can raise problems for policymakers. Deep discounts are welcomed, high Standing Offers are not. But price discrimination is unremarkable in economics. Indeed, in industries where fixed & sunk costs represent a significant portion of total cost, discriminatory pricing is usually welfare enhancing. Conversely, theory predicts and empirical evidence confirms that regulatory efforts to cherry-pick differential prices in asymmetric markets will damage consumer welfare. In this article, we analyse differential retail electricity offer prices in the Australian States of Victoria and Queensland and contrast these with industry average total cost and the marginal cost of retail supply. We find deregulated Victoria displays high price dispersion with Standing Offer tariffs 10% above industry average total cost and marginal offers at break-even prices (i.e. 20% below average total cost). In the semi-regulated Southeast Queensland market where a regulated price-cap exists, there is lower dispersion but marginal offers include a 6.7% retail mark-up. Efficient pricing requires the marginal unit produced to be priced at marginal cost and Victoria meets this criteria- but we identify an episode of inter-consumer misallocation due to high Standing Offers. We conclude policy initiatives designed to help firms shift vulnerable households from Standing Offer tariffs is desirable. (C) 2016 Elsevier B.V. All rights reserved.