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 was a lot simpler in times gone by when, no matter what the problem, a prayer would provide the answer.  Faith based solutions are alive and well today with many of our sector regulators. For them, no matter what the problem, more  competition will provide the answer.  Competition has been  forced into every nook and cranny of many of our public service. Nobody even dreams of  questioning whether direct regulation over some functions 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.

A 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 as almost a new age faith, in the regulation of our national infrastructures. It is not just a question of competition failing to deliver but regulators shielding themselves from their real job in framing regulations that will lead to high performing dominant players or monopolies.

 

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