MSE News: Guest Comment: The problem with energy firms

A._Badger

backfoot wrote: »

You said that all state monopolies had been inefficient and I challenged you to be specific in relation to the ESI to say where? You failed to come up with any comment other than repeating the oft heard generalisations.

Well the investment and energy analyst Nigel Hawkins certainly seems to agree that there were inefficiencies to be squeezed out of the system - an opinion widely shared by other analysts, including those at the IFS.

In his October 2010 report fr the Adam Smith Institute 'Privatization Revisited' Hawkins writes:

"In the years following the flotations of the regional water and
electricity distribution companies, some of the benefits of
privatization were delivered, notably through increased efficiencies.
Although water charges rose, there was a step-change upwards in
investment levels. In the electricity sector, efficiencies were far
more discernible. Indeed, prior to the surge in gas prices in 2003,
which pushed up fossil-fuel generation costs, there were major cuts
in electricity prices."

Other analysts have concluded much the same, though the failure of regulation, as most posters here seem to agree, has let consumers down badly since.

Ben84

magyar wrote: »

I think the point about nationalisation is far simpler than Ben presents it. I don't agree that nationalisation provides cheaper products, after all do you hear anyone calling for Tesco and Sainsbury's to be nationalised? Does anyone seriously think the government could run those stores better and provide cheaper/better food?

However what nationalisation is excellent for is planning and implementation. If you want to see pure deregulation in effect, look to the USA. The world's most technologically-advanced nation has the shonkiest power infrastructure you can imagine - whereas actually we have one of the finest in the world.

A nationalised industry can simply look at the map and say "right, we'll have a power station there, there and there, we'll upgrade the grid here, here and here, and it can all fit together". Trying to get dozens of private companies to do that will never work efficiently (and it doesn't).

So what I think would be sensible is to split out the generation part of these companies and put those into one nationalised company (including the grid). This would then sell wholesale electricity to private supply companies. I think this would give the true competition needed to get low prices whilst ensuring efficient control and growth of the backbone infrastructure.

Their potential to deliver the best prices is there, even if it may not have been fully realised. Without multiple private organisations delivering these services there's no need for customers to pay for advertising, or for dozens of highly paid directors and top of the business staff, plus the collective billions that go to shareholders in profit. There's also the scale of economy being greater in many cases with just one large organisation. We are now paying for a lot of costly extras that don't deliver us better products or services.

Competition was supposed to lower prices, but swapping national for private bought in huge financial penalties from the first day that would be challenging to outweigh. I feel that perceived value has been misleadingly produced by confusing pricing and hidden costs by the major companies, while overheads have been cut though reductions in service quality. A lot of it's hidden at first too. The Virgin Media new customer line certainly doesn't keep you on the telephone for more than an hour with lots of transferring between departments and no effective action being taken by the staff, but the help line for existing customers does. Things that are essential parts of a service are often lacking or missing now in the new private companies that have replaced the national industries.

The service problems are a major annoyance for me and seem to be a new problem introduced with privatisation. I find their tendency to operate customer services out of overseas offices with poorly paid staff sad really when I discover how little value their time seems to be worth when I realise they don't have the training or resources to do anything useful. It also annoys me that companies don't seem to have ever considered the value of my time and feel it's ok to use it up inefficiently in large amounts every time I try to contact them. To be able to spend over an hour on the phone to any company and hang it up having achieved nothing useful is appaling and shouldn't be happening as often as it does, and least of all should it be happening with large companies who deliver major services. There are some good companies out there too, but they don't have the market share the major ones do. I can tell long dire stories about many of the big companies and believe they mainly gain their market shares through heavily advertising, dubious pricing and cutting corners. Having done business with the two major telephone/internet providers, I can safely say the average product quality delivered in that market has degraded a lot.

It's hard for me to say conclusively that prices are now higher or lower than they would be without privatisation, answering that is beyond my abilities really and does not take in to account relative value for money anyway. What I can conclude however is that I'm sure with all the costly extras we're now paying for extra things that aren't of value to us and the service is often poor value for money.

A._Badger

Ben84 wrote: »

It's hard for me to say conclusively that prices are now higher or lower than they would be without privatisation, answering that is beyond my abilities really and does not take in to account relative value for money anyway. What I can conclude however is that I'm sure with all the costly extras we're now paying for extra things that aren't of value to us and the service is often poor value for money.

As I have posted above, the analysis has been done - by professionals - who have concluded that both the government and consumers have benefited: at least fiinancially.

The service issue isn't something you solve by reducing choice (as any former customer of Post Office Telephones will ruefully tell you). You solve it by the application of stringent anti-monopoly rules - forcing the lazy energy giants to compete in a genuinely open market.

Pincher

It's easy for all the efficiencies to come to nought,
if speculators like Enron horde energy contracts to drive the price up.

I would be interested in seeing what Goldman Sachs makes on trading energy futures.

Ben84

A._Badger wrote: »

As I have posted above, the analysis has been done - by professionals - who have concluded that both the government and consumers have benefited: at least fiinancially.

The service issue isn't something you solve by reducing choice (as any former customer of Post Office Telephones will ruefully tell you). You solve it by the application of stringent anti-monopoly rules - forcing the lazy energy giants to compete in a genuinely open market.

Choice is an interesting idea and comes with a lot of assumptions. We generally assume that the more choices we have the more freedom we have, and that of course is a good thing.

There's truth in this, but it's not a full picture as choice has negatives too that we often just don't realise. When you have too many choices to make yourself it becomes hard to choose, there is a time and effort penalty. With the modern obsession with having more choices we're increasingly overwhelmed with options, many of which are meaningless choices (e.g. coloured loo paper), as well as the aspect that while we feel we should always have loads of options there's sometimes good reasons why our lives would be better and we'd save time and be happier if there were less choices.

Electric and gas are perfect examples. With very rare exception, every house and workplace in the UK has standardised three pin 240V sockets and if there is mains gas it's methane delivered at approximately the same pressure everywhere. That choice was taken away from us by the electric and gas boards decades ago, which surely goes against the idea that choice is always good, but I have to ask why shouldn't they have made this choice for us? They consulted experts who considered how we use energy at home and at work, as well as safety, cost efficiency and compatibility, and this is the system they created. Now under the premise more choice is better companies could start delivering different electric at different voltages and frequencies, AC or DC, with special sockets and every system would have its own specific appliances, as well as different types of gas at different pressures and we could choose for ourselves, which if choice is good would make our lives better. You could choose the electric and gas that is perfect for you and works with the appliances you want. Does anyone find this situation with so many choices appealing?

The opposite would happen though. We're mostly not energy expects, engineers or product designers, we'd be confused and with every supplier bamboozling us with why theirs is the best option and using various tactics like contracting manufacturers of desirable appliances to only make devices for their system, we'd fast become even more confused. A massive illusion of meaningless choice would have been developed and it would be time consuming and make daily life needlessly complicated.

Similar illusions of choice that burden us with difficult (often meaningless too) decisions that actually could be better made by experts are everywhere now and so too are the time and effort penalties from making us choose. Companies try to make it look like there's more options than there are. Identical products in different boxes with different claims are more common than many realise, with medicines being a regular example.

The current system with energy suppliers is also largely meaningless choice based around marketing and different prices for the same things. Thankfully at least all the electric and gas is the same, in fact regardless of who your supplier is it will come from the same local power plants and gas pipes, all that changes is who collects your bill money and buys the energy on the wholesale market for you. However, the companies go to long lengths to create choices. Who is the greenest energy supplier? Who is cheapest in your usage range? Who is most ethical? Who has the longest price fix?

How can you compared so many disparate bits of data, and is it all meaningful anyway? Most importantly however, why is there such a range in prices, is any one company cheaper or is it just that some are more expensive than they should be? If the latter is correct, the choices we have are just an illusion. Why are say EDF (just to pick a big company) actually selling the exact same gas, electric and customer services at different prices under the concept of different tariffs? The choice is an illusion. Ultimately, I think we may just be confusing their now being a range or prices with their actually being cheaper prices than before. The idea of getting the cheapest supplier is now true, but what evidence is there that the nationalised industries has they remained would actually cost more than the average today, and what about the value of the time and effort we now spend on all this?

magyar

Ben, I totally understand your point. Of course it's the same electricity and gas. As I think I said earlier, what we need is the 'Ryanair' of electricity. At the moment we don't have that. We have electricity companies who think we care about things we don't. We just want our cookers and irons to work.

But this is a failing of the industry to spot that. It's not a failure of privatisation per se.

backfoot

A._Badger wrote: »

Well the investment and energy analyst Nigel Hawkins certainly seems to agree that there were inefficiencies to be squeezed out of the system - an opinion widely shared by other analysts, including those at the IFS.

In his October 2010 report fr the Adam Smith Institute 'Privatization Revisited' Hawkins writes:

"In the years following the flotations of the regional water and
electricity distribution companies, some of the benefits of
privatization were delivered, notably through increased efficiencies.
Although water charges rose, there was a step-change upwards in
investment levels. In the electricity sector, efficiencies were far
more discernible. Indeed, prior to the surge in gas prices in 2003,
which pushed up fossil-fuel generation costs, there were major cuts
in electricity prices."

Other analysts have concluded much the same, though the failure of regulation, as most posters here seem to agree, has let consumers down badly since.

Oh very well googled. :T

Of course other googling finds just as many experts who hold a different view.

Another expert says '

Electricity prices in the UK have performed no better than in other countries, such as France, which did not adopt the same reforms. The only significant price benefits have been for the largest industrial consumers (O’Mahoney and Vecci 2001, Perebois and Wright 2001, Thomas 2004).

Although there was a reduction in costs after privatisation (about 5%) this was more than offset by the increase in profits. The distribution of benefits has been unequal, with shareholders gaining most: companies have been able to make excessive returns, despite regulation (de Oliveira and Tolmasquin 2004, Buckland and Fraser 2002). Studies estimating what would have happened without privatisation concluded that electricity prices in the UK are between 10% and 20% higher than they would have been without privatisation (Branston 2000; Newbery and Pollitt 1997).'

Or Mr. Hawkins himself doesn't seem quite so convinced here:
http://www.utilityweek.co.uk/news/news_story.asp?id=143748&title=Can+the+current+privatised+electricity+industry+deliver+the+generation+we+need%3F

Anyway, I agree that the Regulator has been pathetic.:D

Ben84

magyar wrote: »

Ben, I totally understand your point. Of course it's the same electricity and gas.

And yet we are encouraged to worry about where our electric comes from and all kinds of extra stuff when the electrons that turn up at our houses will never be changed by changing who is billing us.

magyar wrote: »

As I think I said earlier, what we need is the 'Ryanair' of electricity. At the moment we don't have that. We have electricity companies who think we care about things we don't. We just want our cookers and irons to work.

Exactly my thoughts, I really do just buy electric and gas because I want to heat and light my house. It's not that I'm disinterested in environmental issues, I just feel their representation through energy suppliers is something of an illusion of choice. Changing the relative amounts of pollution from our energy sources is not for home users to worry about, their important job in all this is to use energy efficiently as possible, while it's the job of the government to do something about the energy sources. We're being asked by marketing departments no less to worry about issues the majority of us lack background knowledge and time to deal with. I do have to reject the idea we're benefiting from having these illusions of choice. We do collectively though the government pay experts to worry about these things, so lets let them get on with it and let us get back to questions we can answer.

magyar wrote: »

But this is a failing of the industry to spot that. It's not a failure of privatisation per se.

It's perhaps not that the industry haven't seen it, I think it's more that when there's a competitive market place where the products are similar, or worse identical as they are in the electric/gas market, companies have to come up with something to make them look better or different to each other. Hence the large number of largely meaningless choices we now appear to have. Once I strip out all the choices I see as being irrelevant or illusionary at best, and I know that electric and gas getting to your house and their quality is outside the scope of your energy suppliers, there isn't as much to worry about as it looked before.

The major meaningful choices they offer are customer services, it's either good or bad and I would guess nobody really needs the choice on this matter, we all want good customer services that can be contacted reliably by telephone, email or letter and that's all we ever needed in that area. Then there's billing choices, which can be largely divided in to pay by direct debit, standing order, cheque and over the phone with a card or at the post office. I could (if I wrote small) write everything a good energy company needs to do on the back of a postcard. As for unit costs, I honestly think there should be a standing charge for being hooked up to the wires and gas pipes each day then a unit cost, and considering it's all the same electric and gas it should cost the same. Ok, getting a unit of energy to someone in London probably costs less than a unit of energy to someone in a village somewhere, so cities/regions may justifiably vary, but the discovery I'm buying my electric for a 3rd less than the next door neighbours shows how illogical things currently are. We might like to say my electric is cheaper because I'm using the free market to shop around, or we might say energy suppliers are simply over billing some of their customers. You can probably guess my suspicion on this one

Complex billing systems that have multiple rates and strange discounts are all too common, when really it's quite rational that we can solve the equations (that have been entirely artificially added in most cases) to present the cost in a simple manner, and there's absolutely no reason why it should be different for houses in the same street.

I do still believe that privatisation in the energy sector by the creation of multiple companies who have to compete with identical products has generated by design all of these unhelpful (often costly in time and money) things the public now have to deal with.

magyar

Ben, you make some very good points above. I have long said that there is one very, very simple thing that Ofgem could do which would do away with a lot of this at a stroke: define the tariff structures that the companies have to use.

Most of us would need nothing more than 'low', 'medium' and 'high'. For each one Ofgem requires the first [x] kWh to be charged at a one rate and then [y] kWh to be charged at a different rate. That way, people can compare 'medium' tariffs, for example, and know it's a like for like comparison.

This is similar to what was done on trains and - whilst I agree with you it's still far from simple - it's a lot more straightforward now that we have just 'advance', 'off-peak' and 'peak' tickets.

I would also scrap 'green' tariffs (they're at best misleading and at worst downright disingenuous).

What is interesting though is that the mobile phone market is no less confusing than the electricity market, but somehow people don't seem to mind so much. I think it must be because even though we nearly all have a mobile phone, we still think of them as luxury items.

backfoot

Of course, pre privatisation the energy industry carried additional costs. Name me any business that doesn't review or find ways to streamline or react to the development of technology? It didn't need a structural change of the scale that was used to flush these out.

Privatisation was a political move and indiscriminate on where it was applied. The comments about poor regulation are unaminously agreed because it has been pitiful. Such a situation was not required because none of us needed or have benefited from the split up and segmentation of the different parts of the Energy Industry.

End user customers, don't give a monkeys, like we don't for services of health,police,fire etc.

All we want for energy is a simple bill, of units and price.

Why french,german or spanish companies are involved in trying to confuse me with marketing, contracts, exit fees,capped,fixed,green and other such rubbish is astonishing.:eek:

EDF (bless), switched me and thousand others onto a online tariff after a big sales pitch,then started to bill us all on their standard tariff :rotfl:.They even had the temerity to include this in their terms and conditions. I had to personally campaign to get them to concede the point. Where was a Regulator? Who could possibly have dreamt it up in the first place? They didn't even have a billing system to cope as it's still being built.

Even today,when customers phone up to say their bill is wrong, they concede the point only as a gesture of goodwill.

Jokers!

I think it needs to be radically changed.It wasn't broken before....it is now.