Got a call this week from a salesperson from a traditional electricity retailer.  It confirmed to me what is rotten in the electricity industry, the lies being told about the causes of high prices and what we need to do about it.The Proposition

I rarely take cold sales calls over the phone, but I was interested in this one and it was a personal pitch (‘Hi Graham’).  She had a nice, pleasant voice and didn’t sound like a salesperson.  She knew I had switched away from her company a year ago.  She knew I’d switched to Powershop (recommended by GetUp as the most credible, honest company for green power and lower prices).  She knew I’d been a customer for many years (‘you’ve been a very loyal customer’).  She offered me a 40% saving on my electricity (‘can they offer you this much?’).  She could do all the work to switch and it would be very easy.  It was very compelling.

I asked if her 40% discount on electricity was on the whole bill.  No, it was on usage (she had not declared that…).  She could offer 28% whole of account discount.  Was a heavy user?  No.  Then whole of account discount might be better for me.

Would I like her to make the changes now?  No thanks.  She offered her direct line any time I wanted to call back.  I’m inclined to include it here so you can call…but it’s not her I’m concerned about – she did an excellent job really by being able to keep me on the line – but the business case behind her proposition.

The Business Case behind the Proposition

Now a 28-40% cost reduction is pretty compelling for a customer.  What kind of business can offer that?  A company with high fixed costs and low variable costs.  In goods retailing sales, the business has incurred all the costs already (fixed), so any revenue it received for an item sale goes straight to the bottom line profit (no variable costs).  In electrcity, generation capacity, transmission lines and most of the people costs are fixed.  Only the raw materials, maintenance and some sales costs are variable.

But you can’t sell to just cover your variable costs – you can’t have sale prices all the time.  You must cover your fixed costs across all the sales you make.  This means that my old utility company – to whom I have been ‘very loyal’ – has been charging me around 28-40% more than they should have …for many years…and it’s only since a year after I left them that they bother to contact me and offer me a ‘deal’.  They should have apologised a year ago for overcharging me all this time…and perhaps offerred to compensate me for their behaviour.

So What is the Cause of High Electricity Prices?

The first cause is clearly the traditional companies.  Current costs to lazy customers are 28-40% greter than you should be paying.  Their willingness to offer high discounts reflects their loss of market share (of customers who were overpaying) to new wholesalers.  They need to get customers back to cover their fixed costs.

The second cause – not covered by this situation – is that spare generation capacity exists nationally (mostly in NSW and Qld) but, due to government regulations of the deregulated national system and smart gaming of the system by the utilities, it is not in their to send excess power to places that need it.  Better to shut down marginal generators till high spot prices make it worthwhile starting up.

What Should You Do?

You should at least phone your electricity company and get their best offer.  You are likely to reduce your bill by 10-30% just by doing this!

You should phone Powershop or other competitors and get an alternative quote.  If you phone Powershop and mention me and take up their offer, both you and I get $75! (But that’s not my purpose here – make your own decision.) Traditional companies will have complicated quotes (not Powershop).  Get them to quote on your last or most expensive bill and just look at the totals to see what the real saving is.  You will want to consider their conditions too.  Powershop can be cancelled monthly but that’s not the case for traditional utilities (another trap they put in).

You should then switch, to demonstrate to your old company that they have not been loyal to you (that’s why you left your phone supplierTelstra many years ago).

Why Should You Do This?

Utilities have been ripping us off through complicated billing, customer inertia, poor government regulation of the industry (unexpected consequences of the deregulation that occurred in southern states 10-20 years ago) and smart ability to game the generation system.  It’s payback time!  There are a lot of new low-cost wholesalers out there, demonstrating how much the industry has been overcharging.

Lower utility prices for you are only a phone call or two away (your new supplier will do all the paperwork).

Just do it.  Now I better go and explore the gas alternatives…