While competition promises many benefits in utility markets, in practice consumers have to be knowledgeable to do well in deregulated markets. The report evaluates the level of consumer sovereignty that exists in Canadian deregulated utility markets by examining the results of a national survey on consumer knowledge and attitudes towards the long distance, natural gas, and future electricity markets. The report concludes with five key recommendations about making utility deregulation more friendly for consumers.

78 pages $15.00

Executive Summary

The introduction of competition into formerly regulated utility markets is a double-edged sword for residential consumers. While competition promises important benefits, it often fails to live up to its promises, and delivers mixed results instead. Lower prices may be accessible to only part of the market; questionable marketing strategies may be used; confusing pricing structures may make informed choice difficult. Consumers must be aware and knowledgeable to manage in this environment. Yet, as this study shows, not all consumers are actually knowledgeable enough to function well, even in well-established utility markets.

Deregulation has taken place in Canadian utilities such as transportation, telecommunications, and natural gas, and is imminent in electricity. Generally, utility deregulation means the relaxation of government oversight of prices and performance, and the entry of one or more competitors into the market. Once the market is functioning, consumers can switch from the former monopolist to another company. But are residential consumers actually ready for the utility shopping that is brought about by deregulation of utility services?

This report provide an overview of the deregulation debate, which shows that residential consumers have reason to be wary of deregulation. Residential consumers do not automatically benefit from deregulation of a utility market. In some cases, consumer choice is slow to emerge, and when it does emerge choice is limited. Deregulation can lead to price increases and quality decreases in practice, even though competition theory stipulates that the opposite should be true. Some or all of these factors can compromise social values, such as affordability and accessibility.

This report also contains a discussion of “workable” competition, the type of competition that residential consumers usually encounter in real deregulated markets. The examples of airline and long distance telephone deregulation show that workable competition may offer some benefits for consumers, but market flaws, such as market segmentation and inadequate consumer knowledge levels, may also impose disadvantages. Typically, market flaws arise when there is single firm dominance, which is often the case in deregulated markets.

The report then evaluates the level of consumer sovereignty that actually exists in Canadian deregulated markets, by examining the results of a national survey on consumer knowledge and attitudes towards the long distance, natural gas, and future electricity markets. Key findings include:

• 91% of respondents correctly believe that they have a choice between competing companies for long distance service, while only 50% of respondents in Ontario and Alberta correctly believe that they have a choice in natural gas suppliers;
• 20% of respondents do not find it easy to compare long distance prices (while 79% find it easy), and 50% of Ontarians and Albertans do not find it easy to compare natural gas prices (while 50% find it easy);
• Canadian consumers clearly favour receiving marketplace information from the competing companies, supplemented by information from consumer organizations, and, to a lesser extent, from regulatory agencies (46% wanted to receive information from companies, 23% wanted to receive information from consumer organizations, and 15% wanted to receive information from regulatory agencies).

In the long distance market, the survey shows that consumer knowledge and confidence has developed over the seven years since competition was introduced. There is still a significant inert segment of the residential long distance market, but it is quite a bit smaller than it was three years ago. From a consumer perspective, it is not acceptable that there be such a long lag in the development of consumers’ ability to participate in a deregulated market. Utility services are essential, and it is important that consumers be able to make informed decisions about new options as soon as the regulatory protections are removed.

Local telephone competition is beginning to emerge. There could be the same lag in consumer knowledge and confidence in dealing with the new local market, unless public education is taken more seriously. As with residential long distance, this consumer inertia will limit competition, and mean that the market is less responsive to consumers than it should be.

Consumer knowledge and confidence is still low in the residential natural gas markets of Ontario and Alberta. In fact, consumers’ ability to understand and make choices about natural gas is so low that real competition is not possible in a large segment of the market. In addition, ancedotal evidence suggests that abusive marketing practices have been widespread in Ontario, further discouraging consumers from participating in this market.

The report concludes with recommendations for decision-makers in implementing future deregulation of utility markets, aimed at ensuring that real consumer sovereignty in these markets materializes, and is established early on.

Summary of Recommendations

• “Workable” competition should work for residential consumers: Problems with market structure, such as single firm dominance, need to be carefully considered by regulators, and addressed in deregulation strategies. If necessary, deregulation needs to be slowed down in the residential portion of the market, to lay the groundwork for robust competition in the future. A standard offer should be seriously considered in any utility deregulation where there is apt to be significant consumer inertia in the residential market.
• Advertising needs to be more than just celebrity spots: Regulators should develop strategies to increase the information content of advertising as competition is getting underway in deregulated markets.
• There should be sources of independent information: When there are low levels of consumer knowledge about a new utility market, regulators should take steps to actively promote consumer education. Since the public would like consumer organizations to be involved in information dissemination, consumer organizations should be involved in public education strategies. For on-going information needs, regulators should consider developing, or foster the development of tools by consumer organizations for consumers to compare prices and quality of services in deregulated environments. Also, Canadian regulators should collect more information about service quality, and share this information more openly with consumers.
• Basic consumer protections are still needed in a deregulated environment: Codes of conduct for companies in newly competitive markets should be developed before competition starts; consumers should not have to experience widespread deceptive and borderline marketing practices before such codes are introduced. Rules on disclosure need to be in place before competition begins, particularly with respect to price. The way price will be disclosed should be tested with focus groups to ensure that most consumers readily understand it.
• Just because it is deregulated doesn’t mean it never needs to be monitored: Canadian decision-makers should ensure that monitoring of deregulated utility markets is undertaken while the market is in transition from monopoly to competition, to ensure that the deregulation strategy is meeting its original goals. Also, any self-regulatory initiative should include monitoring and full public reporting before government endorses it.

Utility Shopping Resources

As a result of our findings in this study, PIAC decided to launch a Utility Shopping Webpage, which is available on the PIAC site at www.piac.ca The page contains charts comparing long distance telephone prices by province, an update on local telephone competition, and links to resources on comparing Internet service providers, natural gas companies, and financial services.

This information is also available on paper for free from PIAC; send us a stamped self-addressed envelope or fax number with your request. If you do not have access to the Internet, and would like to, call 1-800-268-6608 to see if there is an Internet public access point in a library, community centre or school near you.