Wednesday, April 7, 2010

It's fairly easy to see why consumers don't trust the electricity industry?

The electricity industry has a habit of getting very concerned about giving customers 'correct' price signals. Obviously you know when you are in monopoly when you have this discussion because in a competitive market you price to the market. All the economic 'correctness' in the world doesn't matter a jot if customers won't buy.

In my last post I suggested it is the absence of property rights for customers (which then flow back to suppliers by having to meet the contracts with customers) that is causing all the retail market problems. I can understand if this might seem like just another attempt to 'beat' the customer with economic 'correctness' but I think that property rights would actually improve things for customers. While property rights would limit the 'all you can eat' electricity tariffs that New Zealand has traditionally enjoyed, it would also allow customers to start negotiating for different service terms rather than just getting 'correct' economic signals. This would add a significant extra dimension to electricity retailing; and more dimensions means more differentiation between retailers.

The problem with how the industry operates currently is that power system engineers decide how demand will be met under an 'all you can eat world' and then customers have to pay. However, as engineers and economists are frightfully concerned that 'all you can eat' is wasteful and costly they then start designing (as only monopolies can do) 'correct' price signals. And let's be clear, in the absence of property rights to trade off, or trade up, and good information then 'correct' price signals are really only penalty fees. Which is why electricity consumers generally feel like they are being beaten upon because electricity pricing in New Zealand is, effectively, sunk cost recovery with penalties for 'bad behaviour', with no meaningful guidance on how to behave 'better'.

The belief that smart metering will help is slightly misguided as well. Smart meters will provide better information but smart meters don't actually create proerty rights. They could help enable property rights but this isn't the role that is being anticipated for them. All they will do is 'help' people to behave the way that some engineer and/or economist and/or politician thinks they should.

Introducing property rights into the current electricity industry is problematic I admit. However, until each customer can choose to elect for bulk power deals, volume limits, top up payments, prepayment, and even local reliability and voltage levels then the engineers, economists and the politicians will always have their favourite playpen. And, maybe, just maybe, this is why there has never been a proper review or study on New Zealand's retail market design - too many control freaks want control.