Thursday, 4 August 2016

Energy costs (and more): trust, not competition, is what's wanted.

The powers that be have acknowledged that the privatised energy suppliers (gas and electricity) are ripping us off, and have proposed a series of measures designed to make we consumers  become more alert. Their solution is to persuade us to "switch" - either to another tariff or another company.

Indeed, the energy suppliers have been ordered to tell OFGEM, the government regulator for the gas and electricity markets, of anyone who has not changed supplier for three years, and then all the others , of which there are six major ones, will be able to write to us offering what may be a better deal. 

As recorded in my previous post, one of the reasons  the "Leave" campaigners  were successful in the EU was that they listened (and came up with the slogan "take back control" which resonated with the disaffected), but the Remain campaigners lived in their own little bubble and didn't listen.

I suspect the Competition and Markets authority, who have come up with the "switch"suggestion, are equally deaf to our real needs.

What I believe most people really want is not to be pestered with all sorts of alternative, and often incomprehensible, suggestions, but firms which we can trust to deal with us fairly.  This applies not only to energy suppliers, but house and car insurance, banks and possibly other areas as well.

I have come to dread the months of June and July, when my house and car insurance are due for renewal.  I am neither innumerate not completely computer illiterate, but I do not relish spending great chunks of sunny days messing about getting matching quotes and trying to bargain down my existing supplier.  Yet this is what the system imposes on me.  

For example Saga, a firm allegedly designed to look after the elderly, proposed to increase car insurance by 36%.  In the past I have spent time getting a matching quote and holding them to their promise to beat it (which they do by 1p.)  This year I couldn't be bothered but simply went to another company and obtained similar cover for about two thirds of their price.  Ditto for house insurance

What I really want is a bank, insurance company and energy supplier  who will treat me fairly, so  that I can spend my days doing what I enjoy doing, confident that I may not be getting the lowest price, highest rate of interest, or whatever, but that I am being given a fair

As it happens, as far as energy supplies are concerned, I buy both gas and electricity  from ECOTRICITY who aim to obtain as much of their supplies as possible form sustainable or renewable sources.  As afar as I know they are not over-charging me, but if they are then at least it's for a good cause.  

What the Competition and Markets Authority needs to do is find means of creating firms capable of balancing ethical values of service and fairness  with reasonable profit.


  1. The problem is that you have to define what you mean by 'fair price'.

    The best method anyone has ever developed for setting prices, indeed the only one which has ever worked, is to have a market. All other attempts to set prices have failed catastrophically (you can watch it happening right now in Venezuela, or read the excellent book Red Plenty by Francis Spufford).

    In the absence of a market, who is going to decide what price is 'fair', what process will they use, what data will they need, and how will they get it?

    1. When the product is an non-essential and there are plenty of consumers and alternative suppliers, all who know what they're doing, then markets work fine. But when the product is an essential and and the few alternative suppliers seem to go out of their way to make their pricing structures difficult to understand then markets fall down on the job.

      As to a fair price, how about unit cost plus a little bit of profit on top. Or, if you want to be more sophisticated about it, economists are rather keen on marginal cost pricing.

    2. As to a fair price, how about unit cost plus a little bit of profit on top

      Then consumers are guaranteed to get the worst possible deal, as there is no incentive for anyone ever to reduce costs if there's no market.

      Whereas if you have a market, there is always an incentive for providers to invest in ways to reduce costs, so that those savings can be passed on to the consumer in the form of more competitive prices, meaning they get a larger market share and more money.

      There's also no incentive to provide good customer service if there's no market, so customer service will be terrible (cf, BT pre- and post-privatisation; British Railways; etc).

      (Also, in things like power generation, I'm pretty sure that 'unit costs' are dwarfed many times over by capital costs of building power stations and fixed costs of network maintenance, so that doesn't even work as an idea.)

      And even after all that, it sounds suspiciously like Marx's theory of excess value, which I think everyone knows is rubbish because value is a demand-side function, not a supply-side one (what something is worth is entirely to do with how much someone needs it, it has nothing to do with how much materials or effort went into its construction).

    3. I think you'll find that quite a lot of people rather like the idea of going back to British Rail and the good old Yorkshire Electricity Board and North Eastern Gas Board (as they were in my area.)

      As to large capital costs, these can be factored in as a modest return on capital invested (doesn't take much to beat the Bank's current 0.25%.

      To repeat, markets work well when there are lots of buyers and lots of sellers, all who are well informed, and the product is a non-essential. When the number of suppliers is limited and the product an essential monopolistic and oligopolistic practices develop to limit competition and take the customer for a ride, as seems evident with both the banks and the energy suppliers.

  2. When the number of suppliers is limited and the product an essential monopolistic and oligopolistic practices develop to limit competition and take the customer for a ride, as seems evident with both the banks and the energy suppliers.

    In that case, I don't see why your solution is to reduce the number of suppliers to one, thus eliminating all competition and therefore all incentive to provide good service, and instead institution an absolute (legally-backed) monopoly which will inevitably do all it can to take customers for a ride (it's called producer capture, and is inevitable when there is no competition: the legal monopoly will inevitably be run for its own benefit and the benefit of its employees, not the benefit of customers).

    If the problem is too few suppliers leading to anti-competive practices, the solution has got to be more suppliers, not reducing the field to one.

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