Power Transformed Update 2
Meeting Topic: Effective decision making for good consumer outcomes
The Demand-side Energy Reference Group held its fourth meeting on 11 November 2015.
The meeting focused on:
- the role of behavioural economics in regulation and policy development, and its use as a tool to support more effective consumer decision-making and unlock better consumer outcomes; and
- what we can do in the transforming electricity sector to minimise unnecessary consumer detriment and enable good consumer outcomes, as a necessary element of effective competition.
The outputs from this meeting will inform the development of a list of principles and strategies that can be adopted across the energy market to: support better consumer decision making; provide a consistent safety-net in an increasingly complex market; and ensure that all consumers can access new products and services and better deals. These principles and strategies will be published in a discussion paper in early 2016.
- Tools to Support Effective Decision-Making
An informative presentation was given by Peter Kell, Deputy Chair of ASIC, on the use of behavioural economics in regulation in the financial services sector. The presentation highlighted the limitations of reliance on disclosure to underpin informed decision making in complex markets for essential services. Consumers make decisions that are less likely to be in their own interests when presented with high levels of information, or overly complex information, because we all rely on predictable shortcuts and rules of thumb in decision-making.
ASIC believes that effective regulation in complex markets requires regulators to factor in real consumer decision-making and have therefore begun to adopt some behavioural economics approaches in its approach to regulation of the financial services market. It was noted that behavioural economics is not new and has been used to create effective policy for the long-term interest of consumers in the past, notably in establishing mandatory superannuation (recognising that consumers will always discount the value of saving for later versus spending now) and the more recent prohibition on unsolicited credit limit increases (recognising that consumers will usually overestimate their ability to pay back credit in future).
ASIC recognises that behavioural economics does not provide an easier or more direct approach to assisting consumers to engage and make good decisions. However it does underpin a robust approach of looking for the root cause of problems and what will effectively address them, rather than jumping straight to solutions. It was also noted that in determining the success of policy or regulatory measures, it is important to focus on consumer and market outcomes. Rather than assuming outcomes are driven by consumers acting in their interests, ask is the market delivering outcomes that benefit consumers?
Behavioural insights are relevant to the transforming energy market because, like financial services, it is a very complex market. Existing regulatory frameworks commonly rely on disclosure, so it may be reasonably asked whether these contribute to effective and informed decision-making.
Peter Kell’s presentation will be made available via the ASIC website.
- Minimising Consumer Detriment
In the July meeting, the Reference Group workshopped types of detriment that consumers could experience in the transforming energy market, which may create barriers to achieving good consumer outcomes and undermine trust in the energy market. A shortlist of representative examples of detriment that consumers may experience in the energy market was used as a basis to workshop principles and strategies that may mitigate unnecessary consumer detriment in the current meeting.
The workshop considered whether there was a pre-existing treatment that could address the potential detriment (ie. the problem may be addressed by the Australian Consumer Law) and, if so, how effective that treatment may be in enabling a good consumer outcome. The Reference Group also considered principles that could underpin effective strategies to mitigate consumer detriments. Where specific treatments or strategies to address particular potential detriments could be identified, there were also listed.
Examples of the outputs from the workshop include:
Potential Consumer Detriment: Buck-passing and blame shifting when disputes arise in an off-grid system with an add-on home energy management system.
Possible Principles to Address Detriment: Consumers need to have a reasonable chance of understanding the risks involved with going off-grid; Consistency of energy consumer protections regardless across all providers of energy, regardless of whether they’re licensed.
Possible Strategies to Address Detriment: Fit-for-purpose licensing, including an ‘off-grid’ category; All energy providers to be members of energy Ombudsman schemes.
Potential Consumer Detriment: Mis-selling energy products in the face of complexity, including through high-pressure sales tactics.
Possible Principles to Address Detriment: Consumers should be able to make informed and considered decisions, free from pressure; Consumers should be given more effective information, rather than just more information, to underpin decisions.
Possible Strategies to Address Detriment: Provisions of the Australian Consumer Law will prevent deceptive and misleading conduct; Ban on door-to-door sales in the energy market; Finance products should not be unnecessarily complex and regulation of them should be consistent.
Other potential detriments considered during the workshop include the inability to access new products and services due to cost or other systemic barrier (eg. renting), an inability to effectively compare new products and services and get a competitive price in a market where individualised offers are more likely based on installed technology, and reduced retail choice in off-grid communities.
The principles and strategies developed following this workshop will be presented in a discussion paper to be released in early 2016. The next meeting of the Reference Group will be held in February 2016 and will focus on how far a fair safety-net of protections for consumers should extend in an innovative and rapidly evolving energy market.