Deregulation did not fail to deliver competition to the NSW electricity retail market: debunking bullshit from the Australia Institute.
On Thursday the 7th Of September the Guardian Australia published an odd opinion piece by the chief economist of the Australia Institute, Richard Denniss. The piece is a strange, self-contradictory rant about how marketing costs are to blame for the high cost of electricity to Australian consumers.
Deniss argues that the deregulation of the retail electricity market is directly responsible for higher prices and that competition has failed. What follows from here are some very, very strange conclusions that the growth in marketing staff and marketing material sent to consumers represents a failure of competition.
Richard’s premise can be boiled down to three core premises:
a) deregulation has failed to deliver competition
b) consumers are bearing the “unfair” cost of marketing reflected in higher prices
c) neoliberalism is bad, because a) and b).
Not only will I demonstrate that these premises are false, but I will point out that Richard practically does so himself.
For those of you unfamilar with NSW energy market deregulation, prior to 2013, electricty prices were set by the Independent Pricing and Regulatory Tribunal, or IPART. After deregulation, retailers were free to set their own prices. The logic behind this was that by allowing retailers the freedom to set their prices would permit them to compete on price, lowering costs for the consumer.
Richard disputes this in a very strange way. The lede states:
Electricity companies pay millions for ‘customer retention’. The cost of this marketing nonsense is passed on to you and me
This is an odd claim to make. Any one who has worked in a call centre knows exactly how customer retention consultants operate. If you’ve wanted to cancel a service with a provider, be it your ISP or your bank, you’ll have noticed that the customer service consultant must transfer you to another consultant to complete this for you.
They might refer to them as “cancellations” or some such. This consultant is a customer retention specialist and they have the authority to offer you special deals and sort out issues that an ordinary consultant cannot. Ultimately, if they cannot change your mind they process the cancellation.
Their entire function is to change your mind about leaving the company. It might seem nefarious or bureaucratic but as a consumer you can get some really good deals here. The business is offering you whatever incentives it can for you to stay with them.
So when Richard talks about consumers paying for “customer retention” it immediately makes no sense from this perspective. Consumers either get convinced to stay on the strength of a better deal, or they churn because they felt they were going to get a better deal somewhere else. It is of course a generalisation but that’s generally how the process works.
Richard doesn’t seem to understand this at all. He may as well argue that consumers as a whole are paying for “Cheaper Tuesdays” pizza coupons. Actually, that is pretty much exactly what he is arguing:
These days, customers have access to a baffling range of electricity products and plans. We get to open junk mail, receive marketing calls, chat to friendly people at our door, watch TV ads and — if we are really keen — go to websites to compare the prices we can pay for our identical electrons. And, thanks to the efficiency of the market, we the consumers have to pick up the tab for all of this marketing nonsense.
So Richard’s thesis is that the marketing activity of business is not only inconvenient, but is the sole driver of rising electricity prices. His argument so far is “marketing is annoying”. I remind you this is the chief economist of a leading Australian think-tank.
Let’s look at how Mr Deniss believes marketing is driving prices highers.
“Since we started privatising and chopping up our electricity industry, the number of people employed in sales and marketing in the industry has grown by 400% to almost 5,000 in 2016.”
One wonders, so what? Certainly when the mathematically discinclined are inclined to think “that’s a lot” when somebody uses “grew by [big]percentage of [small number]”. The truth is, this isn’t a great way to communicate figures and is often done to mislead.
What the numbers really are is that the number of sales and marketing staff rose from 1000 at some unspecified time (probably 2013–2014) to 5000 in 2016. We’re not given a time-frame, and this lack of details should prove concerning to anyone with a critical mindset.
What Richard neglects to put in context over the same time period, is the number of energy retailers went from 15 to 36, although IPART ‘s 2017 report puts this at 26— nearly doubling or more than doubling. It’s a bit concerning that such an obvious error went past the author and the editorial staff at the Guardian through to publication.
It’s hard to see what Richard’s complaint is here. These are retailers that emerged in the past 5 years — so obviously growth is going to be important to the success of their businesses. One is left wondering why Mr Deniss finds this so remarkable; or how he believes businesses get sales.
“Today there are 36 different electricity retailers selling to NSW households, with a family in central Sydney required to choose between over 250 plans — all in order to receive the exact same electrons. What could go wrong?”
Is the author honestly arguing that a variety of choice is a bad thing for consumers? Yes Richard, please elucidate on what actually can go wrong here?
Consumers are not required to evaluate every single offer — they can choose the first one that comes their way — or they can shop around for the best deal. I am puzzled why Richard thinks this is a bad thing.
Even when he previously lambasted the retailers for :
“In order to help customers “choose” between the bewildering array of plans, the electricity retailers employ an army of salespeople to knock and ring and email us with ideas, suggestions and friendly advice about how to simplify our billing.”
Oh you poor dear. Not only are there are too many retailers and plans to choose from but there are actually people employed to actively contact you and spell out the benefits of their particular plan! We do have it rough, don’t we Richard?
Just to be clear, Richard thinks retailers actively pursuing consumers to compete on price is a bad thing because it’s “bewildering” ?
What exactly does Richard think competition looks like? In one breath he complains about the failure of deregulation and in the next, he complains there’s too many options! Jesus, that’s a failure of competition right there! I think he just implied Australian householders are too stupid to shop for electricity plans. Those normie peons.
“Never mind the fact that electricity prices rose rapidly for years before the carbon price came in because of the profits of the electricity retailers and distributors. “
Whoa, what in the actual f**k? Did he just blame deregulation for the record growth in network costs that happened *before* deregulation? With a straight face? And nobody in the comments even blinked an eye?
But the entire thrust of his argument is that :
“But rather than admit that “competition policy” in Australia has failed to deliver the benefits, or even the competition that was promised, the Abbott, Turnbull and now Morrison governments are trying to blame renewable energy for the cost of electricity, rather than the failed reform agenda of privatisation and deregulation.”
So let’s see if I got this right — the number of retailers in the market either slightly less or significantly more than doubled; consumers have a “bewildering array of plans” to choose from; over 4000 jobs have been created; and these jobs have been created for the sole purpose of drawing customers away from the market incumbents — and this is, in the mind of the author constitutes a failure to deliver competition to the market?
Richard’s either a complete dunce, or he’s lying. Given the significant resources that the Australia Institute attracts, I cannot believe for a second that he managed to get it so completely wrong completely by accident.
Let’s see what the regulator has to say and how Richard’s claims stack up:
Richard has made the claim that deregulation has failed to deliver competition. We discussed this earlier,
“Since 2013–14, competition in the retail market has continued to develop. The number of brands competing in the market has risen from 15 to 26; the market share of smaller retailers has increased from 7% to 13% and the number of small customers on market offers has risen from 63% to 77%. More than 30% of customers switched either retailer or offer in the last year.”
So since deregulation, the number of different retailers went up (a lot), the market share of smaller retailers nearly doubled, and nearly a third of customers have churned in the year prior to the report alone.
So it would seem that customers are more than capable of navigating what Richard describes as a “ bewildering array of plans”. How can anyone contradict themselves so blatantly with a straight face?
Now, in regards to the second point:
“Needless to say the costs of all this marketing are passed on to you and me in the form of higher electricity bills. That’s how efficient markets work.”
But according to IPART:
“We found that electricity prices for residential customers increased by an average of 14% in July this year, which was driven by rapidly increasing wholesale costs.”
Wholesale costs. Retailers have nothing to do with it. But Richard claimed that :
“It’s not renewable power that is hurting Australian consumers. It’s market power. Like the big banks, the big electricity retailers are making big profits off the back of charging high prices.”
But in fact, there is a cost.
“However, these rising costs have been largely offset by decreases in network charges over the previous two years. The net result is that on average, residential customers are paying 2% more for electricity since 2013–14 when prices were deregulated. This is a real decrease in prices of 5% (once CPI is accounted for).”
Wait, but doesn’t this contradict Richard’s entire thesis that marketing and sales costs are being passed on to the consumer? But since deregulation, retail prices are lower?
But wasn’t the whole point that retailers and those big marketing fatcats responsible for gouging the customer? But wholesale prices are the ones driving the increases. The data, which I’m fairly certain he’s drawing on the same sources as I am, draws the exact opposite conclusion.
It’s important to consider the question here isn’t whether renewables are worth the extra cost; Richard’s denying there’s a cost at all. He’s arguing that “No these have nothing do with renewables, it’s marketing and the neoliberals fault”. That’s blatantly untrue. He knows it is.
But nevertheless, Richard persists with this untruth:
“But the electricity sector is not the only one where privatisation is pushing up prices.”
But as previously stated:
“This period of relative price stability contrasts with the large price increases in the 5 years leading up to 2013–14, which were driven by increases in network charges.”
And I mean shit, Richard himself admits this:
“Never mind the fact that electricity prices rose rapidly for years before the carbon price came in because of the profits of the electricity retailers and distributors.”
So, according to the regulator AND Richard himself, the period before deregulation saw rapid price rises. No one’s disputing that. I’m sure he’d like us to “never mind” that — since it’s one of the most bloody pertinent facts in the whole piece.
And hey look Richard gave us a graph! Graphs mean data, and data means it must be right!
Electricity as percentage of total spending 2009–10 at 2% and then 2015–16 as 2.1%. So, as the regulator points, the prices rose slower than headline rate of inflation. And as Richard helpfully pointed out to us, wages have largely remained flat over that time period.
So according to the data presented (and it’s older data to be sure), electricity as percentage of total spend has decreased in real terms. Of course this likely doesn’t take into account the price shocks over the past year — but hey fun fact — those are as a result of supply-side issues, not the staffing decisions of retailers.
Do we have more recent data on retail prices — well it’s not presented in the article and I assume the next IPART report will come out in October/November like last year.
What is absolutely 100% clear is that the data presented by Mr Deniss when complemented by that of the regulator doesn’t support his conclusions, and often directly contradicts it.
What’s truly concerning is that Richard often completely contradicts himself. But if you throw in some references to “neoliberals”, the Liberal Party, and those bourgeois fatcat managers and bankers, the Guardian readership doesn’t blink an eye. Reading through the comment section is a depressing portent for the intellectual future of humankind.
The only conclusion I can reach, assuming the author is arguing in good faith, is that he is grossly incompetent.
That such a obviously sloppy, incompetent work has been accepted uncritically by the Guardian readership serves to validate the stereotypes of the Left as the inherent contradictions and falsehoods are so blatantly obvious.
To conclude, Richard argument that deregulation has failed to deliver competition to the market is demonstrably false by virtue of the fact that he is complaining about the noise such competition makes. Richard yearns for the days when the electricity market was nationalised, despite the fact there wasn’t any incentive for competition. One would’ve expected that an economist would understand how actors respond to market incentives.
Advocating for the closure of coal-fired power plants, the introduction of renewables and increasing the cost of power through a carbon tax whilst shifting the blame is dishonest.
The truth is, I don’t think those the article is aimed at particularly care. As long as Richard keeps banging on about the Liberal Party, neoliberalism and evil managers, no matter how obviously self contradictory his position is, it will continue to be treated as gospel. Hating on the Right is both the breadth and the depth of these
It’s the ugly flipside of climate change denialism. Denialists will argue against all evidence to the contrary of the evidence of climate change. Greens such as Mr Denniss will argue that their policies have no costs whatsoever.
Richard leaves us with this non-sequitur:
But if the last 10 years have taught us anything it’s that the purpose of energy policy isn’t to fix problems in the energy market, it’s to cause problems for your political opponents.
It would seem to me that the last ten years haven’t taught Mr Denniss anything at all.