Government gives in to energy suppliers

CLAPTON

TruckerT wrote: »

I tried very hard in my earlier post to make it impossible to be interpreted as meaning that I thought that monopolies are a good idea. No such luck!


Mobile phone companies are like car manufacturers - they offer a wide range of products, and you can go and look at them before buying. It is entirely possible that you would take out an unnecessarily expensive contract in order to get some particular phone.


The Big6 seem to be operating like a monopoly - they all offer the same two products, and they compete only in the level of confusion or apathy which they can generate in their customer base.


I was under the impression that 'OfTwat', and her sister organisations, were supposed to be some kind of answer to the monopolistic nature of an undifferentiated market (thanks to Clapton for the word 'undifferentiated')


TruckerT

competition works very well in undifferentiated markets.

lets take an example of wheat.

lets say there are thousands of farmers producing wheat.

to make it simple lets say they all grow the same variety and to similar quality


then one would expect the price to be the same for all farmers irrespective of their own costs

and we would expect a lower price than if there was only one monopoly farmer or a small cartel.

so the same for electricity / gas
the key to lowest prices is genuine competition and the lack of government green taxes

grizzly1911

TruckerT wrote: »

The Big6 seem to be operating like a monopoly - they all offer the same two products, and they compete only in the level of confusion or apathy which they can generate in their customer base.


I was under the impression that 'OfTwat', and her sister organisations, were supposed to be some kind of answer to the monopolistic nature of an undifferentiated market (thanks to Clapton for the word 'undifferentiated')


TruckerT

Through their (suppliers )own complacency the model has failed to live up to expectations and has "failed". Their superior knowledge of the model has created the problem.

.

grizzly1911

CLAPTON wrote: »

There is, in truth, always philosophical uncertainty.

In such a mode I can't be absolutely sure that the earth will turn or the sun is still there.


But on an ordinary forum, it isn't really feasible to qualify all our statements with such philosophical musings or even to define what I mean by 'cheaper' or 'more expensive'.

It is a belief rather than certainty.

Some people believe in ghosts.

You could also add efficiency to the list.

TruckerT

CLAPTON wrote: »

competition works very well in undifferentiated markets.

lets take an example of wheat.

lets say there are thousands of farmers producing wheat.

to make it simple lets say they all grow the same variety and to similar quality


then one would expect the price to be the same for all farmers irrespective of their own costs

and we would expect a lower price than if there was only one monopoly farmer or a small cartel.

so the same for electricity / gas
the key to lowest prices is genuine competition and the lack of government green taxes

I think there are both similarities and differences between wheat production and energy production.

For one thing, farmers do not generally regard themselves as being in competition with other farmers. Most farmers will help out a neighbouring farmer in the event of any kind of difficulty (check out last week's stories about the South Dakota cattle ranchers).

Wheat, like oil and gas, is a raw material which is of little use in its raw state.

Wheat is converted into a wide range of edible products, just as oil and gas is converted into a variety of energy sources.

Petrol, like bread, might be described as an undifferentiated market item, but we have the option to shop around on a daily basis and, if necessary, we can find an alternative.

Domestic gas and electricity, like water, operates in a different environment. There are no real choices.

The fact is that the Big6 have no incentive to compete - the environment in which they operate allows them to drive each others' prices upwards rather than downwards.

TruckerT

michaels

TruckerT wrote: »

I think there are both similarities and differences between wheat production and energy production.

For one thing, farmers do not generally regard themselves as being in competition with other farmers. Most farmers will help out a neighbouring farmer in the event of any kind of difficulty (check out last week's stories about the South Dakota cattle ranchers).

Wheat, like oil and gas, is a raw material which is of little use in its raw state.

Wheat is converted into a wide range of edible products, just as oil and gas is converted into a variety of energy sources.

Petrol, like bread, might be described as an undifferentiated market item, but we have the option to shop around on a daily basis and, if necessary, we can find an alternative.

Domestic gas and electricity, like water, operates in a different environment. There are no real choices.

The fact is that the Big6 have no incentive to compete - the environment in which they operate allows them to drive each others' prices upwards rather than downwards.

TruckerT

Isn't it time to turn to the textbooks on oligolopies? Classical theory was that they are inherently unstable without specific (illegal) collusion however game theory with repeated interactions may result in different conclusions being drawn (See for example BA and VS fuel surcharges, initial explicit collusion was followed by gains from cooperation).

In general economic rent should only be maintained if there are effective barriers to entry - the reduced costs for new entrants (not being included in the Green levy with fewer than a certain number of customers) should have made incumbents at a disadvantage although it would probably also encourage new entrants to adjust their behaviour to only get a small number of very profitable customers rather than pursuing a larger customer base at a lower profit per customer.


Another not mentioned issue is that there are other 'green' charges that are still increasing our bills - the levies for wind, solar etc are part of the price per unit paid by the suppliers and so are totally opaque to the end user.

CLAPTON

Of course there is no actual evidence that the utility companies make 'excessive ' profits or indeed are inefficient.

grizzly1911

michaels wrote: »

In general economic rent should only be maintained if there are effective barriers to entry - the reduced costs for new entrants (not being included in the Green levy with fewer than a certain number of customers) should have made incumbents at a disadvantage although it would probably also encourage new entrants to adjust their behaviour to only get a small number of very profitable customers rather than pursuing a larger customer base at a lower profit per customer.

Where do the smaller retailers get their electric from?

Do the big suppliers "share" capacity?

What volumes can they order? What economies of scale and forward purchasing power do they achieve with a lower capital base?

What distribution tariff do they achieve against the bigger players?

Are overhead costs per account lower or higher?

TruckerT

michaels wrote: »

Isn't it time to turn to the textbooks on oligolopies? Classical theory was that they are inherently unstable without specific (illegal) collusion however game theory with repeated interactions may result in different conclusions being drawn (See for example BA and VS fuel surcharges, initial explicit collusion was followed by gains from cooperation).


To an outsider like me, the textbooks don't seem to offer any solutions. Economics is simple - there are winners and there are losers. Quite a lot of the argument about energy prices seems to revolve around the highly artificial manipulation of natural market forces (gambling on future prices etc). The labyrinth of rules and regulations which the players have to negotiate does not change the basic principle. It just keeps moving the goalposts. And economic theory is always one step behind - it explains nothing, it simply describes.



In general economic rent should only be maintained if there are effective barriers to entry - the reduced costs for new entrants (not being included in the Green levy with fewer than a certain number of customers) should have made incumbents at a disadvantage although it would probably also encourage new entrants to adjust their behaviour to only get a small number of very profitable customers rather than pursuing a larger customer base at a lower profit per customer.


These smaller companies seem to operate in an even shadier world than the Big6. Why are they so invisible?

Another not mentioned issue is that there are other 'green' charges that are still increasing our bills - the levies for wind, solar etc are part of the price per unit paid by the suppliers and so are totally opaque to the end user.


It's only opaque because nobody will make it clear.

CLAPTON wrote: »

Of course there is no actual evidence that the utility companies make 'excessive ' profits or indeed are inefficient.

As I have been asking all along - why does nobody simply go through the energy suppliers calculations in order to assess the validity of their claims?


TruckerT

CLAPTON

ofgem have considered whether the market i s rigged (i.e. a cartel is operating)

broad conclusions here:-

Background - Energy Supply Probe

In 2008 we launched the Energy Supply Probe. This was an investigation into the electricity and gas supply markets for households and small businesses.

The Probe found that although the market was working well in important respects - there was no evidence of a cartel, and retail price rises could be justified by wholesale costs - there were a range of features in the market that weakened competition. The result was that the market was not working in the best interests of consumers.

These included structural features, reinforced by the behaviour of suppliers and the lack of engagement and poor decision making by consumers.

Following an extensive consultation process, we developed a package of measures to improve the functioning of the market.

The first part of this package addressed concerns over unjustified price differentials through two new licence conditions for domestic suppliers, which came into effect on 1 September, 2009. These conditions:

required any difference in the terms and conditions offered by suppliers in respect of different payment methods to be cost reflective
prohibited undue discrimination in any terms and conditions offered to consumers.
The second part of the package promoted competition and consumer engagement and included obligations on suppliers to:

improve the information they provide to customers on bills and in an annual statement
help vulnerable and indebted customers who are currently blocked from changing suppliers due to outstanding debts
improve the conduct of their sales and marketing activities
help small business customers by providing them with better information regarding the terms and conditions of their contracts
improve the transparency of their supply and generation activities.
These measures became part of suppliers’ licences in October 2009, and were implemented between October 2009 and July 2010.

https://www.ofgem.gov.uk/retail-market-review/background-energy-supply-probe

kabayiri

CLAPTON wrote: »

Of course there is no actual evidence that the utility companies make 'excessive ' profits or indeed are inefficient.

There is plenty of evidence to suggest that a lot of the public "believe" excessive profits are being made.

I have relatives who work for one of the big 6. There have been advisory notes issued recently advising to work from home on specific occasions recently because of potential threats !

For me, some of the blame must lie with government. They have been loading these companies with green costs, whilst at the same time telling Joe Public that everything is fine - competition and switching will keep costs in check.