Do you remember those evening phone calls inviting you to switch your phone carrier? Well, within the next few months you find a new horde of callers waiting to entice you away from an existing service provider.
This time the phone marketers will be pushing electricity. From January there will be full retail contestability. Households will then be able to shift to a new electricity retailer. As in the case of changing phone service provider, people switching electricity retailer will still use the same wires.
Most businesses are already able to change supplier. This has been a great cost saver. Average price reductions are over 25 per cent.
The enormous cost savings made by the privatised electricity industry has underpinned the price reductions. However, the better deals were activated by competition, which forces suppliers to find ways of saving costs and offering improved value. With competition, retailers have to research customer needs, find sources of generation that fit those needs, and package all this together in ways that are attractive -- that is at a cheap price or with great service.
The electricity investment cycle is such that household consumers will not see an early repetition of the price reductions that benefited businesses over recent years. In fact, a rise in wholesale prices of electricity over the past year is currently placing upward pressure on all customers' prices.
This prospect is spooking the government, which is presently examining whether it should impose caps on the prices to households and other small consumers.
There will be no shortage of consumerist busybodies urging the government to hold prices down, but price caps, while superficially attractive, are dangerous measures. Prices set too low will thwart competition. Rival firms won't bother entering the market if they can't make a dollar.
Moreover, prices set close to the bone will automatically make the service to some customers unprofitable. Unprofitable customers will inevitably see a degradation in their service. In addition, low prices will make retailers reluctant to negotiate contracts with generators. This can cause a reversal of the current upward trend in the investment cycle, bringing severe, perhaps catastrophic shortages of electricity within a year or so.
Providing government regulation allows retail competition to do its job, the effects will be highly beneficial. Although many of us will find the electricity marketers' calls annoying, there will be some excellent deals offered, and many households will switch to the new retailers offering them. In England fully opening the market to competition saw 27 per cent of household customers changing their electricity supplier.
The beauty of full retail contestability is that it is likely to benefit everyone. Even those of us who are too lazy or cautious to switch or just don't see enough value in doing so are likely to gain. This is because the existing suppliers will need to ensure all their prices are competitive simply because their once-captive customers are now free to move.
Armed with previous retailer commitments, the Government prevented electricity price rises to households during 2001. If, however, it controls prices into the future, it will unravel the electricity reforms returning us to the bad old days of persistently high prices and poor service.
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