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Tuesday, 2 May 2017

Retail Electricity Prices: Defenders of the Indefensible

The TIMES on May Day carried a letter from a group of self-defining luminaries of the privatisation era, arguing against the current government's tentative proposal to impose a price-cap on electricity prices for households. They appear to endorse the point made in a recent report by the Competition and Markets Authority on electricity supply that even a temporary cap on prices 'would run excessive risks of undermining the competitive process'; with the implication [from both the Competition and Markets Authority and the signatories to the letter] that the competitive process is an unequivocally good thing.

Everyone who questions their electricity bill learns that the issue is one of exceeding complexity. The actual bill comes from a retailing company, which maintains the customer's connection to the national grid and processes the bill and any complaints from the customer. These companies compete with each other only in the management of the final connection and the customer relations: the supply is delivered to the street cables by the grid, which buys the power from generating companies [and, in small measure, from storage facilities].

Depending how efficient the retailing companies are in buying the power, they might be able to get contracts with the wholesale suppliers that enable them to make a little more profit than some of their rivals while the current contracts last. So if a retailing company guesses correctly what will be the market conditions and the wholesale providers' pricing parameters they might be able to offer some [or even all] of their customers a lower price than their competitors'. But no company can make perfect predictions and forward provisions all the time; and no company can escape from a general rise in wholesale prices due to inflation and other macroeconomic constraints. Each company has periodically to adjust its own employees' pay, its marketing budgets and other cost centres. So a trend upward in prices in unavoidable, and this will affect the different competitors at different times [as their wholesale contracts expire] so that the retail companies have to demand higher prices from their customers at different times.

Hence comes the notion that customers must continually be willing to 'switch' from one retailer to another, in order always to get the lowest available price where they need their supply. Since it is endemic to the market that companies are always becoming relatively more expensive and relatively less expensive, the marginal gain from switching is vitiated within a short period: most unlikely to be as long as two years. Thus it is a perfectly reasonable consumer choice to stay with one supplier, in the hope that over a decade the times when it is relatively cheap will balance out the periods when it is dearer than its competitors. If one company should always be more expensive than its competitors, that would become notorious and customers would then switch from it in sufficiently massive numbers to make it change policy.; but then they would be likely to stay for a long time with their new choice of supplier.

The idea that millions of household consumers will spend many hours each year comparing the complex pricing structures of all the suppliers, and making 'rational' choices that might be vitiated at the next adjustment of suppliers' prices, is plainly potty. The entire concept of 'rational' market behaviour, leading people to constantly monitor the market and 'switch' frequently, is dotty. It is in line with Economists' dogma, which has no relativity to real-world human behaviour: or to common sense.

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