Re-introducing the wheel: Getting a grip on the energy market

Malcolm Sayers, Director of Cambium, reflects on some of the recent debate about how to deal with ever increasing fuel prices and argues that the solutions may lie in the not too distant past.

On listening to the current debates about energy prices and the horror which met the Labour Party’s suggestions of price freezes my mind wandered back to a time when we had a regulated price cap.  Not in some long-gone monochrome past where all was publicly owned, but surprisingly recently. Energy prices were regulated by Ofgem, which in its wisdom abolished gas price caps in 2001, the next year electricity price caps followed.

Working for the consumer body energywatch at the time I met with Ofgem’s representatives who sought to explain the mysterious processes which would see prices plummet as soon as the distortion of price caps were lifted. Despite their valiant efforts, and my MA in Economic History, I could not grasp their rationale – terms like the invisible hand were bandied around liberally and the only explanation for my inability to see the market clearly, through their eyes, was political ideology. Time would show how wrong I was.

I was not alone though in my lack of faith, Brian Wilson MP, the then UK Energy Minister, publicly called for Ofgem to think again. Shelter, Age Concern, Help the Aged and others in the voluntary sector railed against the idea, and the letters pages, at least in Scotland, were heavy with debate. But to no avail, the third sector and the Labour Party were clearly also driven by blinkered ideology. Only Ofgem, independent from any political pressure, objective to the last, and focussed solely on scientific methods, could read the runes and determine what was best for us.  To leave us some comfort for our misguided concerns they publicly stated, they would be watching the companies for signs of abuse! April 2001 saw gas price caps lifted, this was followed by the immediate price rise of 5% by British Gas. So while Ofgem were watching they decided it was such an effective policy that they would lift the remaining electricity price caps as planned in April 2002. The rest is a history that has witnessed our real terms expenditure on fuel bills more than double.

In this newly liberated era we were given various reasons why the predictions had not come true:

a) Ofgem blamed us for not switching suppliers fast enough or often enough to create the competition needed to drive down prices. But as switching rates held up and increased so did prices and the flaws in that logic were exposed.

b) On the other hand suppliers told us that profit margins were so small it was probably best to view them as philanthropists delivering a vital service at great costs to themselves. However, the consistent posting of healthy profit levels from the big six eventually wore that story thin.

c) Since then we have heard for many years that wholesale costs were driving up prices as suppliers wrung their hands worrying about how to safeguard the poor punter from such costs. However, the prices we paid failed to go down with wholesale costs and that ratchet effect has now begun to undermine this story too.

So we have moved now to the latest distraction – the levies on our bills to pay for social and environmental policies.  The companies must guffaw at this wheeze as the public school educated millionaires of the UK Cabinet and the ideologically driven, neo-liberal economists of Ofgem happily focus on the few pounds per year that go to increasing energy efficiency and saving on fuel bills, while the big, grasping, and not very invisible hand continues to drive the interests of shareholders. This is exactly what the energy market was design to do and those at the helm therefore will see no need to change it.  And the prices continue to rise….

The real reason Ofgem’s prediction did not materialise is that very process which sees private companies seeking to deliver maximum profits for shareholders and directors’ bonuses.  If there is anything inevitable in economics it is this process, unless of course you are Ofgem for which it is mystical, opaque and apparently unforeseeable.

Tackling it however is not rocket science, it is merely about reversing the policy decision. It is as simple as re-introducing our earlier price controls so that rises must be justified, evidenced and related to costs and inflation.  This is preferable to the price freeze proposed by Labour as it can be sustained in the longer term.

Is this just ideologically driven social policy? Yes! But show me the socio-economic policy which is not and I will eat my unfeasibly large fuel bill.

The question is who’s interest do we want our energy market to serve, just the shareholders’ and directors’ or our wider citizenship? You make your choice then design your policy, the deregulation of the market has clearly failed to delivery any equity and instead drives millions in to fuel poverty. If policy makers think that is unfair then the solution of price control is technically feasible and relatively straightforward. If they think fuel poverty is a reasonable cost to pay for making some people rich then they need do nothing but tinker and pretend they are sorting things out.

Finally, I should also note that while the policy of paying for social and environmental policies through general taxation, proposed first by SNP, makes great sense, this is an aside to the real issue at hand which is the need to regulate the energy market and prices.

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