Seemingly inadvertently yesterday, David Cameron made a commitment to legislation that would force utilities to ensure their customers were always on the cheapest tariff for their energy supplies.
The proposal has been met with some derision and now seems to be unravelling, but it’s problematic principally because it does not go nearly far enough.
In this, as in many markets, the odds are stacked against the consumer. Tariffs have proliferated, becoming increasingly difficult to compare, making informed decisions almost impossible. Few people really understand what they’re buying.
This is not simply a problem for the ill-educated. As I pointed out in a paper for the Long Finance initiative, MBA students prove incapable of determining which mortgage offers them a better deal, even when dealing with fewer parameters than are offered to British borrowers.
A massive information asymmetry is at work. Companies understand their customers’ cognitive biases. They crunch the likely impact of millions of buying decisions. And they frame choices in ways that turn what should be plain-vanilla commodities into much more profitable branded products.
There is only one answer to this: redesign markets from the consumers’ point of view. There are two main tasks.
First: enable the creation of technologies that level the playing field for consumers.
If you venture into a complex market without representation, you are asking to be fleeced. Traditional agents (people), however, are expensive, and their role as honest brokers has often been eroded when they are paid by the seller, not the buyer.
Technology can solve this problem. It is now a very simple task to design an intelligent agent that scours the market on behalf of a consumer, inviting bids and accepting them, based on criteria that its master has specified.
Here’s how it might work in the utility market.
Imagine every home has a smart meter. The meter communicates usage patterns to the intelligent agent (basically just an app programmed to make buying decisions). The agent receives bids to supply electricity and gas from utility companies on a regular basis (every week, day, or even hour). It selects the most advantageous bid and the energy is supplied through a grid that is supplier-neutral. Finally, it handles billing.
End result: the market clears at whatever price fairly reflects the cost of energy in wholesale markets.
Smart meters are allegedly on their way, but are currently promoted mostly as a way of making life easier for suppliers (e.g. by smoothing demand peaks). My scheme would see them primarily serve the consumer, not the producer.
But we don’t need to wait for them arrive. Intelligent agents could be in the field tomorrow, fed on a regular basis by information on usage from the previous month’s bill.
We could also apply the same principal to any utility market. Mobile phones, for example, could be cut free from onerous, long-term contracts that serve consumers very poorly, with SIMs roaming seamlessly to whichever network provider was able to offer them the best price for a call, text, or – most importantly – a chunk of data.
A modern phone is a powerful computer, easily able to handle this task. Roaming is already possible. It only happens abroad though, not at home.
So how would we make this happen?
That’s where the second requirement – and the government – comes in. We need a revolution in the way utility markets are regulated.
The starting point is open data. Regulation would be needed to force utilities (providers of energy, telephony, banking services etc.) to provide information to the market in a regular and structured way (and with suitable privacy safeguards).
That makes it possible for intelligent agents to prosper.
Next, a legal framework is needed to create a niche in the market in which intelligent agents could operate, while strict ground rules would ensure they behaved themselves properly.
The nearest thing we have to agents at the moment are price comparison sites such as confused.com – and very useful they are too for making occasional purchases of simple products such as car insurance.
At present, however, they don’t get all the information they need in the right format (see open data, above). They’re not empowered to automate the buying process – and leave too much of the routine work up to the consumer. And we cannot be sure they are acting purely in our interest.
Regulation would sort that out, forcing utilities to work with agents, empowering agents to negotiate contracts on our behalf, making the agents accountable for their decisions, and preventing any cross-ownership or commercial relationship between the utility and the agent.
We’d also need regulation to reduce instability in the market (e.g. forcing others to step in on an emergency basis if a supplier was temporarily unable to meet its contractual obligations). Similar vigilance would be needed against market abuse. Utilities would almost inevitably try to form covert cartels to fix prices. That would need to be stamped out.
Finally, we’d have to debate where it made sense to restrict consumer choice in order to ensure a better consumer outcome. Requiring every consumer to engage an agent, for example, would stop an unrepresented group of suckers from being exploited.
So there you have it.
Intelligent agents + smart regulation = a substantial shift in power from producers to consumers.
You’d think this sort of transformation would be under way. After all, the technology to do this has been around for some time, and has already melted the glue in markets where participants compete on a more equal basis. I played around with an early version of this idea back in the dot.com boom (it was called mykitchendrawer.com and was intended to be an intelligent version of the place where we thrust all our bills).
Now surely, it is time to act. The financial crisis has underlined how badly consumers are screwed by current market arrangements. We know we still need markets. But we also need markets that behave in very different ways from the ones we have now.
David Cameron has dipped a very cautious toe in the water, and probably wishes he hadn’t. But his timid proposal doesn’t go nearly far enough.
It’s time to look at markets from the point of view of consumers, and redesign them from the ground up. And to start using technology to advance the public interest, not bamboozle the long suffering, but increasingly irritated, consumer.