There’s More Than Price To Retail Electricity Competition

One of the main themes of my work is that the value of customer retail choice in electricity is not just an increased likelihood of lower prices. Choice is good because it enables customers to go out and look for, and purchase, differentiated products. But, but, but, … the nattering nabob says, electricity is a homogeneous product. No it’s not, because of the wide variety and individuality of the uses to which we put it, across different uses, at different times of day, in different seasons. It is also heterogeneous in the fuels and technologies we use to generate it. The electrons are homogeneous, but the output, the outcome that they deliver to each consumer, is not.

So I think that we advocates for retail choice have done ourselves a big disservice over the past decade by selling “deregulation” as a way to lower retail rates. The logic is simple: if electricity is a homogeneous good, then deregulating (wholesale, as it has happened in the US) electricity markets will induce entry and investment in generation where it’s needed, retirement of old plants where they are not needed, and the resulting increase in efficiency from generating power where it’s cheap and selling it where it’s less cheap will lead to a reduction in retail rates, QED.

But that’s only part of the story, the cost part. By focusing solely on prices to the exclusion of other changes that choice brings and that customers may value, we are arguing for choice with one hand tied behind our back. That’s the hand of consumer utility, preferences, and value. What if customers want a service option for which they would actually pay a higher rate, but it would give them more satisfaction? Such is the case with green power, where you can pay more per kilowatthour to have your power generated entirely (or in shares, at lower prices, for those who can’t afford full assuaging of their consciences) by renewable sources.

I’m sufficiently radical that I consider consumer choice, as the philosophers would have it, an a priori good, because it is one manifestation of individual liberty. But for the consequentialists among you, consumer choice also generates superior outcomes when some potential competition exists. It doesn’t have to be a large number of competitors; what’s more important is the free entry and exit.

All of this is lead-in to an interesting little story I saw earlier this week from the UK. The headline reads “A fifth of UK energy buyers base their decisions on more than just price”, and the punchline is that when electricity customers switch providers, non-price considerations are very important in that decision:

In the electricity market, 21% of customers who switched chose their new supplier partly for non-price reasons, while in the gas sector the figure was 22%. Following price, the most common reason for choosing a supplier was its reputation for good overall customer service. This rebuts the traditional belief that all corporate energy buyers are penny-pinching scrooges who make purchasing decisions exclusively on a price basis. Some are influenced by word of mouth and do respond to the positive images a supplier projects.

Also significant in the decision-making process is the clarity and accuracy of a prospective supplier’s bills. This is understandable given that bill accuracy and bill clarity feature in the most important elements of customer service to both electricity and gas customers alike (in addition to tender response, contract negotiations, response to queries and account manger reliability). Another non-price reason for a particular supplier choice was its financial stability.

Customer service, billing clarity, and metering transparency and service.

3 thoughts on “There’s More Than Price To Retail Electricity Competition

  1. Some people in Houston Tx.choose to pay a higher price to have their trash picked up by companies that re-cycle the trash.

  2. Well, yes. “Green power” options represent an increase in consumer choice on paper. Their real-world impact on energy consumption (or generation for that matter) is de minimus — even assuming that utilities pursue genuinely “green” power sources with the extra money, something we can’t take for granted.

    The larger point, which you recognize, is that existing, monopoly utilties already provide reliable service for most of their customers in most cases. In still-regulated states where electricity prices are low (e.g. Georgia and Wisconsin) the incentives to encourage competition are therefore also low. In the UK things may be different.

  3. I’ve been an engineer at a very large electric power utility for 25years, watching the deregulation experiment at my utility and elsewhere.

    The CEO and Board used to have a planning horizon of 20 years, and took it very personnaly that the system reliability was always kept up -both generation capacity and transmission / distribution. Efficiency (i.e. business efficiency) wasn’t that good, partly because we had guaranteed returns, but the supply was stable and the prices were middle of the road. The only down side was that ALL press was negative and that no politician would ever get caught saying anything but slamming us.

    Now, the planning horizon is about 4-6 years at best(not enough time to even license a tower for lines), and prices are high. We’re hated more than ever, and worker morale is pathetic. Business efficiency is great because we’ve downsized 3 times. In the next 10 years, 70% of the people who know anything about how to run our plants will retire and there are no replacements.

    As I’ve watched it form here and elsewhere, my conclusions are that Electric Power can be and is best left as a regulated business. There’s no natural law that prevents the Regulation from being done correctly! Trust me though, the Utilities themselves don’t want the regulation and obligation.

    (The phone system analogies are N/A because we have to be hard wired, high investment central station power –they don’t)

Comments are closed.