The Toaster Principle

Peter Wilby writes:

Nobody should be allowed to lead the Labour party, it has been said, unless they grasp the "conservatory principle": the aspiration among large sections of the electorate to own a home with a glass room on the back. Perhaps there should be another test, called the "toaster principle", for energy ministers. Nobody should run the energy department unless they understand why people spend so much time shopping around for a £25 toaster when they could be saving hundreds of pounds comparing tariffs and switching power suppliers.

Chris Huhne, the energy secretary, was widely mocked – as politicians usually are when they instruct voters on how to organise their domestic affairs – for making this comparison in a recent interview in the Times. As usual, he has denied saying any such thing and assured the Lib Dem conference this week that he intended not to denigrate consumers but to "get tough" on the energy companies. So that's all right then. Except it isn't. No matter how hard Huhne tries to create transparent pricing structures and simple procedures for switching suppliers, the energy companies find new ways of confusing and cheating their customers. As Huhne knows perfectly well, that is how a competitive market in energy works. Suppliers compete on which can most effectively outsmart their customers.

To some degree this applies to all markets, including that for toasters. One familiar example is the "50% off" label that looks like a bargain until you think it was probably never worth the "full" price. Another is the "buy one, get one free" supermarket offer that persuades shoppers to splash out on products in quantities they don't need. Even for goods unaffected by fashion or seasonal supply variations, retailers increasingly move prices up and down in an arbitrary way, hoping to confuse customers as to what constitutes fair value.

But when you're buying toasters, trousers, cabbage or baked beans, price isn't the only factor. Quality, design, convenience and personal preference also matter. There are several hundred toasters on the market and, for those who want to start the day without a burning smell, it's worth taking trouble to find the right one. Price isn't much of an issue as long as the bread comes out warm and evenly brown.

For energy, that isn't so. Whatever your supplier, you get the same power. There's no such thing as luxury electricity, and neither EDF nor British Gas can improve your toast. The only competition is on price. If the lowest price were easy to find and the supplier could be changed in a 30-second phone call, all but one energy supplier would go out of business, and you wouldn't have a competitive market any more.

So the companies devise complex and impenetrable tariff structures, and without a degree in astrophysics you can't be sure what you'll pay, particularly given the extreme volatility of energy prices that yo-yo more than stock markets. Most important, they offer the lowest prices to new customers, as numerous businesses (including newspapers and magazines) do. Invariably, the prices rise sharply after a year – or as soon as the fixed-rate tariff runs out – and the companies hope you won't notice or, if you do, can't be bothered to switch.

Many other industries – insurance, phones, credit cards, banking – operate in similar ways. Though they may involve more significant issues of service and quality than energy, they compete mainly on price (or, in the case of savings, interest rates) to sell what are essentially standard, undifferentiated services. Savvy consumers switch, or threaten to switch, annually. For example, it is now impossible to get more than minimal interest on an "easy access" savings account without opening one that includes a whopping "introductory bonus", usually lasting a year. Again, the banks and building societies hope you won't make a note of when the bonus runs out or you'll be in the throes of a love affair and forget to switch. As with insurance, you must read the small print: an "easy access" account may allow only three or four withdrawals a year.

If I say that the only deal that doesn't try to con you comes from index-linked certificates issued by the publicly owned National Savings and Investments – which the Treasury keeps withdrawing because otherwise we'd all take our money out of the banks – you may think I'm making a political point. But I'm not; it is just a statement of fact.

Whether it's energy, insurance, phones or savings (including, sadly, the NS&I certificates), those who lack access to the internet, mostly poorer or older people, pay higher prices or receive less interest. That's how it is with competition. It isn't a one-way street, where suppliers compete to offer customers the best deal. Politicians are disingenuous when they suggest otherwise. Consumers have to work as hard as the suppliers, devoting time and energy to sniffing out what's best for them and outwitting the wicked capitalists who just want their money.

It is part of what has been called "the financialisation of daily life" which requires every household to turn itself into something like a hedge fund. A generation ago, nearly all the industries I have mentioned were either nationalised monopolies or so heavily regulated that they might as well have been nationalised. Competition was non-existent. Building societies, for example, met monthly to agree their interest rates. In those days, we were all, no doubt, ripped off. Now about half of us get a decent deal while the other half – who have probably got rotten toasters, too – are more ripped off than ever. Some middle-class folk, it should be admitted, are too affluent or too cool to bother with the chores required to get into the first half. But no prizes for guessing in which half you'll find most poor people.

Ever since the Thatcher governments – which insisted that regulation, rather than being a device to protect the public, was in fact a conspiracy against them– politicians have been deluged with complaints about poor service, mis-selling and excess profit among privatised or deregulated industries. They always promise to get tough and, indeed, sometimes move towards re-regulation. But companies always find new tricks, keeping one step ahead of both consumer and government. So it will continue, for better or worse, until someone dares to utter again the dread words: public ownership.