Do small businesses overpay for utilities? Evidence from the CMA and the real world

The recent provisional findings from the Competition and Markets Authority (CMA) investigation into energy markets includes the less than shocking revelation that SMEs overpay for their utilities. It found that most micro-businesses overpay for their energy usage and that 45% are on default tariffs that they had never negotiated with their suppliers. Consequently, suppliers are free to set high prices and enjoy profit margins of 8%, which are exorbitant compared to the 3% in domestic markets. Why does this appear to be the case? In this post I’ll be exploring some of the arguments made in the provisional CMA report as well as reflecting on my own experience running a small business and switching our electricity provider.

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“The CMA report says small businesses are being deterred, impeded and discouraged from gaining better deals within the energy market. This is leading to disengagement, which in turn reduces competitive pressures in the market giving unilateral power to energy companies to charge what they like.”
– John Allan, National Chairman for the Federation of Small Businesses

Switching for businesses sucks

The first point to mention is that switching utilities for businesses really sucks. Compared to switching as a business, domestic markets are wonderful. For businesses the switching time is at least 21 days, and in between the business will most likely be charged exorbitant ‘deemed rates’ of up to three times standard prices. For small businesses with a large electricity usage, particularly in winter in premises without gas heating, this time spent on a deemed rate while switching may represent a significant cost.

The CMA report points to ‘low usage of PCWs [price comparison websites’. In my experiences of switching there were no price comparison websites that operate in the same way as for domestic utilities. Each form I filled in online generated a phone call from a pushy agent instead of a simple quote. Often I was told that I couldn’t be helped by a broker until I had signed paperwork and returned it to them, something that I suspect most business owners wouldn’t be willing to do without understanding what powers exactly it would give the agent. When brokers do finally give quotes they were always significantly higher than the quotes given by the electricity retailers themselves. I did ask the agents I spoke to on the phone why this was, but they always denied it could be true. The majority of companies don’t even post their electricity prices online (Good Energy does).

Businesses pay more for everything anyway

I haven’t done a degree in business and I’m not an expert in procurement, but most small businesses seem to overpay for most things. Running a own small business, we always compare the prices available to consumers and the prices available to businesses, and almost always the consumer prices are lower. This is especially true for boring goods such as stationary and office supplies, and I expect utilities are lumped in the same category. I suspect this may be one general factor why business energy prices are higher, just that businesses attach higher values to convenience and security of supply than consumers do.

Auto-Rollover Contracts are evil

Most electricity contracts for businesses automatically roll over for another year if the consumer doesn’t contact the supplier within a certain narrow window. This roll over tariff will usually be significantly higher than the previously agreed price and, if no request is made to renegotiate or switch, the business will be locked into that new tariff.

So, what should be done about this?

At heart, this problem has two root causes. The first is in terms of the process of switching, not only the information when making a decision but also the technical process of switching. The second cause is engagement with businesses as a result of generally low interest in energy supplies and perhaps a willingness to let the company continue overpaying rather than open the can of worms that switching suppliers can be. Ideally if the first of these causes is improved, engagement by businesses might increase as well. Smart meters may also be one way to solve the engagement problem, but then again they are often touted as the panacea for all energy market related problems.

On the process of switching, there needs to be a transformation of the market. Retailers should be obliged to display their prices online and make the information available to price comparison websites. This should replace the system of individual quotes by pushy agents. It is unlikely that the measures suggested by the CMA, of merely requiring brokers to be more transparent, would have a large impact on business customers.

The process of switching also needs to be improved, with the length of time it takes to switch suppliers dramatically reduced. This should reduce the monetary costs associated with switching. More broadly, the market for micro businesses should be brought in line with the market for domestic customers. Downright stupid practices, such as auto rollovers with a narrow window in which to change supplier, should be prohibited.

Generally, the CMA’s analysis of this is spot on. Electricity markets do suck for businesses and something really needs to be done about it. However, in the report it does feel somewhat stuck-on and out of place. Given the size of the problem and the differences between domestic and business electricity regulation, it really should warrant a separate report. This is particularly noticeable in the proposed remedies which, apart from the prohibition on auto-rollover, fail to address the majority of the specific issues relevant to businesses.

For a nice summary of the proposed remedies in the CMA report, check out the handy guide prepared by the PWC Energy Spotlight blog.

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Do small businesses overpay for utilities? Evidence from the CMA and the real world

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