Sunday, October 09, 2011

Business, TelCo's, and Power companies

When studying quality assurance it was pointed out that quality cannot be acheived by constantly changing suppliers. If suppliers don't have a stable market then there is no incentive to invest in productivity or quality improvements, for there is too much uncertainty in the environment and may not gain a return on the investment. Therefore suppliers need a certain amount of loyalty from their customers.  On the other hand the customer needs the supplier to invest in quality and productivity and not just invest profits in luxurious lifestyle. To achieve this large corporate buyers can impose discounts and penalties on their suppliers, that is the buyer can can control the terms of supply rather than the supplier. For example a 5 year contract, on condition of a 5% discount each year: this actually justified on the basis that the buyer helped the supplier improve quality and reduce waste: and the buyer wants to share the benefit they helped achieve.

So enter the government privatising and deregulating everything, like telecommunications companies and electrical power supply. On top of which we have a competition watchdog, which is there to prevent monopolies and protect competition. Though given the subtle difference between the common perception of competition and the economists definitions, it may be better to protect diversity rather than competition. The theory is that by deregulating and protecting competition efficiency is produced and this benefits the buyers by lower prices and higher quality. Its all rubbish. Competition produces chaos, and annoyance and inconvenience.

Every 3 to 6 months, some telecommunications company phones up and tries to get the receiver of the call to change service provider: and typically calling from overseas, like from India to Australia. The benefit of changing supplier is discounted service for some time frame. Changing does not make these interrupting phone calls go away, and the new contracts may lock in for 1 to 2 years and impose a penalty if drop out earlier. The service providers are mostly retailers, they do not own the telecommunications infrastructure, they do not build it, and they neither maintain nor operate it. They are basically paper shufflers who play around with money on paper.

Similar situation arises for electrical power retailers. They come around knock on door, asking to see last bill, and some number on the form: because they are discounting in the area, and if have right number on form win the lottery or something and get the discount. Once again the majority are just retailers, they don't own power stations, or fuel supplies, they don't build, operate or maintain any of the infrastructure: just paper shufflers.

Some how these companies can buy the resource direct from the actual producers and sell to the public at lower price than the public can buy themselves direct from producer. Probably end up similar situation to that of the farmers pressured by the supermarkets. The supermarkets for that matter tend to impose the same contracts and discounts on all suppliers. Depending on what is being supplied to the supermakets can simply increase fee to allow for discount so that get fee normally get: not like they provide enough work to deserve a discount and certainly not providing any services to assist improvement of productivity or quality. But that's another story.

The point here is that just because these retailers are offering lower fees at the moment doesn't mean that the customer will benefit in the long term: financially or otherwise. The "otherwise" is probably the more critical issue, because as pointed out above, the retailers are just measuring things in terms of money and shuffling numbers on paper: the result is that the actual infrastructure can be placed at risk. Due to such risks, some regulation is required to control the retailers: so not actually deregulated market just a different set of regulations.

Price is not an absolute measure of anything: it is always relative to a time and set of circumstances. One retailer offering lower fees is just a stimulus in the environment, it is not a guarantee that prices will drop across the board, nor an indicator that prices can be maintained at that level. All the retailers have to buy from the same producers, they have to pay all the people doing the paper shuflling, making phones calls and running door to door making the sales, and otherwise make a profit to keep shareholders happy. Put simply costs that were not present in the previous government/people owned system. Admittedly the previous system may have had public servants employed not doing much of anything: for example plans for power stations not built, or simply attending pointless meeting after meeting making out to be involved in productive administration. A privatised bureaucracy is no more efficient than a government bureaucracy: so no real benefit to privatisation: just a shift in ownership and control. Fundamentally the minimum cost of everything is zero: don't do it. If choose to do it, then it costs what it costs. The objective of business is not to minimise costs, but to maximise profits: and having locked the costs: the only way to maximise profits is increase sales and prices. The exercise is therefore to redistribute the associated costs, to achieve higher benefit or added-value.
Competition does not lower prices nor produce efficiency. Diversity of suppliers merely offers variety in the quality of service and prices. A given total profit can be achieved by low prices and high volume, or high pr ices and low volume. Business is a real world experiment and each enterprise aims to see what works for them. If other players can ask high prices, then so can everybody else. Business pushes prices up in an attempt to get similar income and lifestyle to those with the higher prices: don't generally or sensibly want to be the one with the lowest price. Only drop prices if expectations of higher sales volume, and thus greater nett profit.

In terms of telecomunications and power supply, the market has been deregulated and the retailers are all out to get some share of a market not previously available. So to get a share of that market they all offer lower prices: what else can they do? They don't have anything or do anything, so price structures is all that they can play around with. So the lower prices is actually questionable, because the price constructs are not altogether comparable: except maybe on a fixed period: say the 1 or 2 years of a contract lock in. To provide the lowest rate need to know what rates everybody else in the market is offering. If it is truly unregulated then can only guess what the lowest rate in the market is going to be before publishing figures. Once figures published, then know real position in the market, but still a guess for next release of new prices: because do not know what the other players are going to do: raise or lower their prices relative to which other player. So at any point in time its anybodies guess which player offers the lowest price rate.

So for many consumers, there is no value to them in switching from the original producer/retailer to one of the new retailer only companies: its just an inconvenience and interruption to their day. Its similar to discount vouchers and end of season sales. For busy people collecting the discount vouchers is more effort than the discount is worth, for other people they have the time to get the maximum possible value from the vouchers: its a matter of opportunity cost to the individual. Stores making discount vouchers available understand these opportunity costs, and some what hoping that not everyone takes advantage of all the vouchers released.

The sales people for the telecommunications and power companies however, don't appear to understand such opportunity costs: for that matter many appear to have just stepped off the ship and can only just speak English. They seem to think that everybody would appreciate having their day interrupted to get a discount. No! If we didn't call the supplier chances are we are not interested. Also if people are locked into 2 year contracts and cannot change without paying a penalty, then there is also reluctance to change. But it does seem like the retailers may know, which households have never changed from the original producers, and therefore, who is not currently locked into a 1 or 2 year contract.

Point is many are not interested in the lower prices for a variety of reasons, not the least of which is that the sales person interrupted and wouldn't quickly accept no: the harder they try the more locked the answer "no" becomes. Also of importance is the perception that the over all quality of service is declining due to poor maintenance of the infrastructure, and that it will get worst. Its not lower fees people want, its more reliable service, and the paper shufflers cannot provide. If these retailers can affect the quality of service they do not mention so or explain how: they only ever present the option of lower prices. They are not creative enough with their paper work, nor do they explain how they get the resource they sell in the first place. In other retail, aware that local stores gets discount for buying in bulk from wholesaler, and wholesaler gets discount for buying in bulk from manufacturer/producer. So assume that this is what the telecommunications and power retailers are able to do: buy in bulk from the producers. This however also infers a need to push consumption: not really good for the power industry. {NB: most modern phones require a power point, whilst traditional phones didn't: want to lower costs put the traditional phone back.}

That is the retailers have to sell what they buy: whether the product is considered perishable or not depends on the terms of their contract. Like internet service providers, buy so many gigabytes or hours of activity for a month: if don't use it then loose it, it doesn't roll over to the next month with most suppliers. So if power retailers buy so many kWhrs for a year, and cannot sell them to consumers, it becomes like perishable fruit if have to sell with in a given period of time. That perished then becomes a cost to be recovered in price of next batch of power sold, and so the price goes up. But what are they actually selling? Its like the mobile phone companies, $600 for $50: next time I'm short of money I will just go mobile phone shop and exchange a $1 for $2. The problem is the only measure they have for what ever it is they are selling is dollars: the monetary value only. But not really measured: the original price really pulled out of thin air. The power companies seem to be moving in similar direction.

The power companies can only buy potential kWhr's, whilst consumers typically buy KWhr's actually used: though may be averaged and bill based on estimated yearly usage and every so often brought into alignment with actual usage. So retailer has a problem if consumers use more power than the "potential" the retailers bought: for which the producer may impose a penalty on the retailer. So irrespective of whether consumers use more or less power the price can climb: it all depends on how well the retailers can balance their requirements.

Prices are not absolute and all depends on what the individual considers reasonable. The more of a resource a consumer uses, the lower the price they want, however reliability of supply is also important, and they will not opt for lower at the cost of loss of supply. For example no power and the refrigerators don't work, and the fruit perishes and so do medical supplies: this represents losses to businesses and also potential loss of life. Reliability of a resource supplier is therefore important. If lower prices appear to be resulting in reduction in reliability people are not going to switch to lower price and reinforce lack of supply.

Also in terms of power reduction, no benefit can arise unless an entire generator/turbine can be shutdown. So if local power station has 5 turbines, there can be no real reduction in cost of supply, until only need to operate 4 turbines. Also with urban sprawl, there is likely to be increasing energy losses getting power from station to the outer suburbs. An option is to build a power station closer to the outer suburbs, but then got problem of transportation of the fuel supplies, and also the minimum size of power station that is practical to build and operate. It is a problem concerning the economics of geography and location: power station where the coal is, the water is, or where the usage is? The answer is typically only valid at a single point in time: and thus invalid once the power station is built and operational: because prices are not absolutes. For example power generated using coal is becoming an increasing environmental issue: basically been an issue since first used. Original issue was visible particulate matter, now it is invisible gases: but no one said gases have to be exhausted to the atmosphere. The exhaust gases are a resource currently wasted. The carbon tax may be an increasing issue of concern, but in the main both business and individuals are extremely wasteful. Its not lower priced power retailers that need to be looking for, nor suppliers of ever so questionable green power: rather use less power, pay less.

The way to use less power is to increase the real benefit required from the power used: so not a cost cutting exercise, but a quality, productivity improving, waste reduction exercise. For example achieve light without electricity, heating and cooling without electricity, and cooking without electricity. And rechargeable batteries are they a problem or a means of buffering peak demands. We primarily use the electricity we do because it is convenient and there is a lack of diversity in alternative systems. Similarly people mostly use mobile phones because of convenience not necessity: lets many in business be relatively incompetent: instead of paying attention during a meeting they sort it out afterwards with a phone: so could have saved the fuel travelling to a meeting. Which is another issue, all the houses and buildings empty during the day, whilst people out at work in other buildings. All this travelling back and forth, stuck in traffic jambs, to sit at a desk using a computer all very wasteful. Further how much energy used in houses occupied by one person during the day? Also we have mulitstory buildings for carparks to feed offices: we could be using the cars as workstations and the carparks as the office blocks. Some of the buildings we have are highly questionable. Like supermarkets with oceans of carparks: could just have a market with goods sold direct from vehicles. Then there is all the street lighting and the comercial buildings lit up during the night: is it all really necessary? Similarly offices that require lights on during the day, more poor design. The need for hi-rise buildings themselves are questionable. Geographical economics may imply the formation of central business district (CBD): but the construction of hi-rises buildings more create the CBD rather than a consequence of. That is the CBD is developed at the expense of more localised centres of business: and so unnecessary travel is imposed. Urban sprawl is largely sprawl because of the CBD: build and develop more local centres and have less concentration of pollutants, more built in redundancy and improved security of supply.

We have moved from population mostly engaged in agricultural work, to manufacturing onto service sector. Telecommunications and power retailers are a sign of modern society. Our problems are not so much those of production: we can produce what we need with few people: our problem is acceptable means of distribution to those that need. A lot more paper shuffling is going to be taking place, selling ever stranger financial products, to bring about transformations in the infrastructure, the heritage, we already have. As long as people are content with what they have they are unlikely to change behaviour. Its like the frog: throw into hot water it will immediately jump out, place in warm water and slowly bring to the boil the frog won't move and will be boiled to death. People in industrial society basically have all the material comforts they could possibly want: they are not overly certain however that is what they really need or wanted. Service sector is keeping people occupied, and finding alternative ways to buy and sell stuff., and pump money round the economy: this is necessary because we have more people than is required to physically produce stuff: on top of which got a decreasing population actually interested in producing stuff.

So it all becomes about buying and selling abstract somethings, which may turn out to be nothing, and get the likes of the global financial crisis (GFC).