18 December 2008

A Simplistic Response to Energy Prices

Harriet Harman, filling in during prime minister's questions, said that the law would be changed to force energy companies to pass on lower costs to consumers if they didn't do it voluntarily. It might make for a nice sound-bite, but as a policy it's dangerous and probably counter-productive.

The clear implication is that the costs in question are oil and gas prices, but that ignores the fact there are numerous other costs involved which the government will never be able to adequately monitor or assess. The government could find itself forcing suppliers to cut prices at a time when increasing costs in other areas (such as staffing) are reducing their scope to do it. Even the cost of oil and gas is not as simple as the government likes to imply; many suppliers will undoubtedly enter into forward dated contracts to buy their supplies, which will give them greater security of price, but less scope to benefit from price reductions.

I don't accept the claims UK utility market (with the possible exception of water) is uncompetitive and therefore in need of heavy intervention. The number of salespeople knocking on doors and standing in shopping centres trying to convince people to switch seems to indicate that suppliers are actively competing.

By forcing the suppliers to drop their prices to reflect movements in the price of raw materials, I can see two perverse effects which could occur:

1. Suppliers may increase their prices more severely when prices are increasing, based on the expectation that they will be forced to cut prices later and need to ensure they have the scope to do it.

2. The requirement to cut prices upon government demand could force smaller players out of the market, especially those which focus on more speciality products, such as green tariffs, where price may not be the customer's over-riding concern. By reducing the number of players in the market, it would reduce the one thing which has been shown to improve the way the industry serves its customers - competition.


Martin said...

The first point especially is a good example of why regulation leads to bad consequences. Whenever a government regulates an industry, that industry suddenly stops seeing their customers as the other half of the equation, and suddenly see the regulators as the people to please, as pointed out here.

Paul Lockett said...

And, as the article you linked to says, the customers also stop seeing the industry as the other side of the equation and put excessive faith in the regulator to do their thinking for them.