Friday, 19 October 2012

"Charge The Least" - How to put David Cameron's idea into action

A wish by the UK Government that energy companies should be forced to charge customers the lowest price has been in the news lately.

However, HMG seems to be rowing back, possibly motivated by the fear that energy companies will simply raise prices, as some have apparently threatened.

So things are going all blurry.

The latest I've heard is that energy price plans will get labelled with some kind of 'APR' style tag. This sounds complicated, and indeed silly. The problem is that competition isn't working - so the answer is either to accept that energy competition is lackluster and patch up an answer, or to provoke competition.

I have two simple suggestions.

1. Just do it! Bill the lowest price plan.

By comparison with your mobile phone operator, energy suppliers have a very easy job billing you. In go meter readings (real or estimated, manual or automatic). They go through the logic of your price plan (for instance, this fixed fee and that price per unit). And there's your bill. Hey presto!

Speaking from direct and personal experience, I can tell you categorically (i) that every leading billing system out there has the ability to run billing data through as many plans as you like, for comparison or to apply 'best price' logic; (ii) every legacy system I've met can have this feature added quickly and cheaply, with the only appreciable long-term cost being the additional microseconds it will take to calculate each bill.

So the simple aspiration, "Charge the least," can be achieved technically, cheaply and quickly.

But there are two objections.

a) "But we'll just have to raise our prices."

It's trivially the case that if energy suppliers had to charge the lowest price, and that most of us are on the wrong price plan, then their revenues will be hit. 

But neither the government nor consumers need to care about this. There's no suggestion that new, lower prices should be introduced, only that the existing plans should be applied to the benefit of consumers. In other words, the complexity of pricing, lacklustre competition between increasingly vertically integrated energy companies, and consumer inertia have produced surplus profits.

An energy company can raise its prices to make good this shortfall. If the market is competitive, other players can choose not to follow suit - and gain a competitive advantage. And if all industry players act in the same way, the regulator and, if necessary, the Competition Commission can take action against such apparent oligopilistic behaviour.

b) You can't compare apples and oranges.

It is true that, while the basics of energy billing are simple, there are potentially important differences. The two main differences are: how do you pay (e.g. with or without a direct debit); and how long do you commit (e.g. the contract is for a minimum one month, one year or two years - the kind of thing we have to decide for instance when we sign up for broadband services or pay TV).

Yes, this means that it's not 100% achievable for every consumer to pay the least every time. But no, this doesn't kill the idea.

In this and other industries, direct debit is viewed as a benefit to the supplier, that can be rewarded by (say) a £5 reduction. So it's perfectly easy (a) to calculate the best deal with and without DD and display both, (b) to apply the relevant offer based on the customer's choice to pay by DD or not.

Contract periods are similar, but the reward is often a little more complicated - a price plan with a monthly commitment may be quite different from an annual one. And in regulated industries, there's always a concern that powerful players will artificially inflate the difference, which creates huge barriers to entry for a competitor (think what it's like trying to change your mobile phone operator six months in to an 18 month contract - you're locked in, and competitors are locked out).

So an answer in this case seems to me to be:
  1. Make the 'best price' logic apply within the customer's chosen contract period rather than to all price plans
  2. Display the best prices under different contract terms
  3. Require that any customer changing contract term with their supplier has a 30 day right to cancel and sign up with another supplier
  4. Give customers a similar 30 day right to terminate a contract early and without penalty following any price increase by a supplier

2. "Green Button" Innovation

In the USA, President Obama introduced a voluntary (for the industry) scheme, motivated by the desire to help customers reduce their energy consumption. 

The idea is that your supplier gives you access to your customer information (present and past energy usage) in a simple, standard way online.  Which doesn't sound so revolutionary. The magic is the next step.

It's not just your right to access your data, but your right to let an app do the job for you. So instead of relying on the energy companies, for instance, to display the information to you in graphical form, to help you compare your energy usage to statistics for other similar households and so on - third parties can do that, at no cost to the utility.

We could do that too. 

Now, guess what? A mandatory green button scheme in the UK would also allow people to create apps to compare prices - what you could have paid with any and every alternative supplier now and back through previous bills - and into the future, based on projected use.

So if the UK Government decides to back away from relying on energy suppliers to optimise pricing for consumers, the Green Button option might be even more powerful - because it would give consumers ownership of their own data, which we could then all use both for green reasons (cutting down usage) and to help us access a competitive market, with a simplicity and confidence that would overcome the confusion and inertia that leaves most of us out of pocket.

A Call to Action

These aren't the only options. There's a host of possible regulatory changes, some of which may be more potent in the long term.

But I do like simplicity. So how to choose between these two? Don't choose! Leave the choice to the suppliers!

Why not challenge every supplier to implement either automatic bill optimisation, or Green Button data access, or both by (say) April 2013? And require all operators to indicate in a standard way whether they have signed up to one, both or neither scheme in all advertising and on every customer bill. 

Do you know what? I think this cunning plan might just work!

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It's great to get comments - a good way to encourage, challenge and help me! Thank you. Jeremy