When is Competition just an Alice in Wonderland world of make-believe?

When is Competition just an Alice in Wonderland world of make-believe?

There is no doubt that the world is a lot simpler when, no matter what the problem is, a prayer provides the answer. There have been long periods of history where everyone could enjoy such simple lives. The alternative is quite hard – first of trying to really understand complex issues and then trying even harder to find the best solution in the circumstances. So it has been in economics and regulation. For the past 30 years politicians, regulators and officials have led simple lives. No matter what the problem is privatisation, competition and free markets are the answer. When Northern Rock tottered on the edge of the abyss there was nobody in positions of power where a light bulb immediately came on to ask if “nationalisation” might be the answer. It was not the sort of question that true believers in the faith would ever think to ask.

We find a similar situation with competition. It is an act of faith that more competition has always to a good thing. It is forced into every nook and cranny – however in appropriate or ineffective. There appears no light bulbs anywhere in Whitehall or Westminster that ever comes on and questions whether direct regulation by the government or its agent might actually do a better job. Instead we are bamboozled with how wonderful all our competition is and any ill effects are down to the laziness of the consumer not switching suppliers. The classic example of this is the UK electricity market.

At the heart of the UK electricity market is gas. More UK electricty is produced from gas than any other means. The international price of gas is linked (for mysterious reasons) to the price of oil. This gets the “competitive” UK electricity market off to a very bad start…a vital raw material prices set by an untouchable international cartel. The raw material price colluders sit quite out of reach of Ofgem, the EU Commission competition authorities or anybody else.

From a cartel setting a floor on the raw material prices we move onto the international trading of gas. This is driven by totally unpredictable events…like revolutions in the Middle East and a cold snap across the US. This leaves the average electricity production price from gas as a matter of pure chance of when gas contracts happened to have got placed…which are quite unpredictable.

It is true that from time to time that one supplier may buy a quantity of gas at a cheaper price than another. This has nothing to do with competition but when they happened to strike the deal. So the switching of suppliers by large numbers of consumers to the supplier with the cheaper gas works only until they run out of the gas bought at that price. Everyone has then to turn to the supplier sitting there with the higher cost gas contract. It is a zero sum game.

We then come to the generating stations. Not much scope for competitive differentiation here. The technology of gas fired generations becomes set on stone at the point the plants were built.

Things get a whole lot worse with the national and local electricity distribution of the electricity. The National Grid is a monopoly. The local distribution wires are another monopoly.

It is not too much of an exaggeration to suggest that the much vaunted UK competitive electricity market structure boils down to little more than competition between retail billing systems and calling centres…both peripheral activities.

With so little control over the cost of production and distribution – no wonder the suppliers have applied their creativity to dress up their offerings into a byzantine array of tariffs so complex that another small unproductive industry has grown up on the Internet to make any sense of price comparisons.

To add insult to injury the consumer gets periodic hectoring from Ministers and Ofgem that rising electricity prices are somehow their fault for not being more willing to switch suppliers.

An real Alice in Wonderland world of make-believe competition.

It is not the purpose of this article to take cheap a pop shot at the electricity market (nothing I have said will be new to most people) but to show just how competition has so embedded itself more as a new age faith than a useful tool in the right circumstances. The question of whether price regulation (that takes into account what new investment is required) might not deliver a better outcome is not the sort of question that true believers in the faith would ever think to ask.

Many years ago there was a very passionate campaign by some beer drinkers who adopted the slogan “Bring back real Ale”. My slogan is “Bring back real thought” on whether competition is the best sole solution – for example with a number of our national infrastructures.

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