Citizenship and Government - Projects

Market segmentation and domestic electricity supply in Victoria

Andrea Sharam

If the observations of other unregulated and recently deregulated essential services were to hold for electricity reform, we could expect to see market segmentation of household customers. Market segmentation is a corporate strategy that aims to acquire attractive customers and avoid unattractive customers. Segmentation is a function of marketisation and commodification. Some markets already segment and assign unattractive customers to "residual" markets, "sub-prime" markets or "markets of last resort". Unattractive customers are referred to by industry as BOZOs, meaning "bringing only zero outcomes". Bozos are often discussed in terms of requiring "termination". Residual markets tend to involve market abuse by suppliers because these customers lack market power. It is possible therefore to suggest that segmented markets are characterised by simultaneous competition and monopoly. The implications for the supply of essential services, like electricity, therefore are profound. Residual markets can be observed in credit, insurance, education, housing, health and telecommunications. This research has attempted to identify whether there is evidence of emerging segmentation of the domestic electricity market in Victoria.

In practice governments have been shy about simply deregulating electricity without some kind of social protection. In Victoria the government established a "provider of last resort scheme" (POLR) to ensure all customers have guaranteed access to supply. Access to the scheme, however, effectively penalises these customers for their lack of market power. Victoria's POLR can be criticised for being a state-sponsored residual market. However, Victoria's POLR does not yet typify a residual market. This is because the vast majority of customers still remain on the two tariffs that compose the POLR and customer inertia currently inhibits market segmentation.  The Victorian government is nevertheless considering winding back access to these tariffs in order to stimulate the market. In other words, the government may abandon universal service.