Have we got the same problems?

Earlier this week the LEANZ programme of Auckland seminars got a more than usually eminent speaker: Professor Sir Martin Cave, who among many other achievements is now chair-elect of the UK's energy regulator the Office of Gas and Electricity Markets (Ofgem).

Picture from http://www.martincave.org.uk/

He was on his way to Wellington to assist MBIE's Electricity Price Review, given his background as one of the members of the UK's extensive two-year review of the British electricity markets (for regulation uberwonks, all the source material you'll ever want can be sourced here, and for the rest of us the summary report is here). If I've got it right I think the invitation to New Zealand came from Vector, but in any event Vector certainly hosted the Auckland event, emceed as usual by Richard Meade. Well done, folks, LEANZ activities in Auckland and Wellington depend on business support.

The gist of what Martin said was that the review found the wholesale market was working tolerably well: there was room for some improvements but it generally got the green tick. The distribution (lines) businesses were already closely regulated. But the retail market - that was quite a different story. There appeared to be a large lump of captive customers, or if not captive, at least not interested in escape. As the summary says (p22), "72% said they had never switched tariff with an existing supplier, did not know it was possible, or did not know if they had done so". It will be no surprise that the incumbent retailers had them on expensive tariffs. The summary says (pp45-6) that

we estimated the detriment from excessive prices to the domestic customers of the Six Large Energy Firms to be about £1.4 billion [NZ$2.7 billion] a year on average over 2012 to 2015, the entire period for which we had data, with an upwards trend, reaching almost £2 billion [NZ$3.9 billion] in 2015. We consider this our headline estimate of the annual detriment arising from high domestic retail market prices.

In our discussion in Auckland, we had some difficulty getting our heads around this. In particular, why aren't the excessive returns from these passive victims competed away? To which the answer was, you can wave attractive offers in front of them till you're blue in the face, but They. Won't. Move.

Which leads to the next obvious question, why not? Many theories. Part of it appears to be down to the characteristics of the customers who have "disengaged". The review ran a big survey which found (p33) that "those who have low incomes, have low qualifications, are living in rented accommodation or who are above 65 are less likely to be engaged in the domestic retail energy markets against a variety of indicators of engagement". The already disadvantaged, as usual, fare worst.

There are also process explanations (p35): "there is some evidence indicating that the process of searching for an alternative supplier and successfully switching has been problematic for some customers. Significantly, the perception of the complexity and burden of the process appears to be worse than the reality, which may further dissuade domestic customers from shopping around and/or switching".

And if you accept all this - and for balance maybe you should read this piece which UK consultancy Oxera did for one of the Big Six, and which disputed the excess profits and argued that there might be perfectly rational  reasons for customers not to bother switching - the final questions we knocked about for a while were, what do you do about it? And have we in New Zealand got the same issues?

In the UK, they are pressing a number of buttons at once, trying to work on both the lumpen demand (eg by setting up an accessible database of non-switchers that will be easier to market to) and the excess profits from too-high prices. Legislation was passed in the UK last month to impose price caps, which will kick in this coming northern hemisphere winter.

That will help people with their bills, but price caps are a clunky bit of economic regulation that is generally not nearly as good as getting to the root of impediments to effective pro-consumer competition (though that's easy to say 11,000 miles away from the problems). You'd wonder - and we kicked this about a bit with Martin - whether you wouldn't be better off with transfer payments directly to the disadvantaged who have big power bills. A better-targeted version of our recent winter energy package would deal to the immediate affordability problems while leaving room for more market-oriented solutions to competition impediments.

Have we got the same issues? While we're not clones of our neighbours, it's interesting that the Aussies have something similar to the UK. The final report from the ACCC's Retail Electricity Pricing Inquiry, released last month, found (from the media release) that "It is clear that most households are paying far too much for electricity. In addition, some of the most vulnerable in our community are forced to struggle through freezing winters and scorching summers, with many others also having difficulty paying their bills".

The Aussies have also gone for price controls: the ACCC recommends "Abolishing the current retail ‘standing’ offers (which are not the same between retailers), and replacing them with a new ‘default’ offer consistent across all retailers, set at a price determined by the Australian Energy Regulator".

And while we haven't seen anything definitive yet from our own inquiry, its latest process update to stakeholders says that "we have already identified common positions on some key areas. A notable example is that some consumers are genuinely unable to afford such basics as heating their homes, and that something must be done to help them".

That's suggestive that we're broadly in the same area, too, though I'll wait to see the evidence, and I also think there's a good chance that we may have made a better go of publicising and facilitating switching than either the UK or Australia with initiatives like the Electricity Authority's WhatsMyNumber. If we have a problem, though, I hope we don't default to price caps as the easy to reach for answer. Make the market work better is the first best option: go elsewhere only if you have to.