The Magazine

The Limits of Consumer Choice

Some things aren’t worth shopping for.

Mar 10, 2014, Vol. 19, No. 25 • By ELI LEHRER
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Most conservatives, and even some liberals of the dwindling “New Democrat” variety, put near-religious faith in the maxim that greater consumer choice would improve nearly every heavily regulated service. They’re usually right. But examining a case where the benefits of consumer choice haven’t materialized as envisioned—in the consumer market for natural gas—may offer lessons to conservatives and liberals alike as they consider further reforms to the far more consequential health care market.

Part of the unglamourous  billion

Part of the unglamourous billion

Newscom

For many products and services, the benefits of choice are obvious. Within living memory, both landline telephone service and cable television were considered “natural monopolies” that couldn’t support more than one provider in any area. When technology and deregulation changed the equation, competing services proliferated and prices dropped steeply. Deregulation of trucking, freight railroads, and air travel served to lower prices and increase competition a great deal, while generally squeezing profits for incumbent players.

In the market for home delivery of natural gas, 15 states (including 6 of the 10 largest) now allow consumers to choose their providers and shop for lower prices. But except in Ohio—where one major delivery utility has exited the gas-purchasing business altogether and another actively encourages its customers to buy from other suppliers—more than 85 percent of natural gas customers don’t bother to shop around. And when they do, the choices aren’t impressive. When I looked to switch my provider in Northern Virginia, several companies advertised as offering competitive service didn’t even answer my inquiries. Of those that did, the “best choice” offered me a savings that would amount to less than $5 per month.

This is a pity, because vigorous efforts to get more people to use gas at home would yield significant economic and environmental benefits. Gas heat usually costs less and is almost always more reliable than electric heat. It’s also cleaner by almost every measure than any other fossil fuel. But the percentage of houses in urban areas with natural gas service is actually lower than when it was used for lighting 100 years ago.

Given these facts, one would expect gas providers to be doing blanket advertising on television, sending out mailers, and competing with each other to benefit consumers. But outside of the Northeast, the only region of the country where home heating oil is still common and the industry has for years been making a major “convert to gas” push, one doesn’t see this sort of marketing. No single reason can explain why. Indeed, gas industry trade associations I contacted were reluctant to give detailed explanations on the record. Four factors, however, stand out: lack of genuine choice, opaque pricing, generally high satisfaction with current service, and the direction of capital investment.

The lack of genuine choice may be the most obvious barrier. Natural gas is a commodity, with prices largely determined in the global markets. Since the companies that sell gas in competition with existing utilities don’t provide duplicate distribution infrastructure, there are few if any “features” they could compete on. Since gas is all the same, they can’t even compete (the way some electric power marketers do in some states) on the environmental benefits of their service.

Pricing is also opaque. Like medical bills, but unlike bills for telephone and credit card services, natural gas bills are subject to few national standards. The electronic bill I get from Washington Gas simply contains an “amount due” with no explanation of how much I am paying for gas service. (I had to call for this information.) Natural gas “deregulation” has, like many other forms of deregulation, affected only part of the equation. While the price of natural gas itself floats up and down, the pipes that distribute the gas are so expensive to build that few property owners can actually choose which company provides them. The infrastructure demands create “natural monopolies.” As such, government bodies set regulations determining how much the companies who own them can charge to carry gas.

Consumer satisfaction with natural gas service is also very high. The system is so reliable that the Federal Energy Regulatory Commission, which monitors electric and gas grid reliability, doesn’t even keep statistics on gas outages. Most Americans probably can’t even name their local natural gas distribution company or they will name their electric utility (often a different entity) when asked.

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