I WAS not pleased when I received my last electricity and gas bills, and even less so when I received notification of the latest price increases, which were 19% for gas and 12% for electricity.
I am sure that most other people felt the same but as a professional economist I believe strongly that the size of these price rises are unjustified and that there is a large element of profiteering by the energy companies involved. Inflation is currently averaging about 5% per year, so these are massive increases in real terms
When I was an academic I was not particularly interested in macroeconomics but had two first and second year tutorial groups so had to know enough about the subject that my students could benefit from the discussions we had.
One of my esteemed colleagues at Aberdeen University – now the Auditor General in Northern Ireland – gave excellent lectures on the advantages and disadvantages of monopolies.
I think that most Energy readers will understand the basic issues. There are many public sector monopolies which operate in the interests of the public they serve – in the UK and other countries. Private sector monopolies, on the other hand, were generally regarded as dangerous and required oversight or regulation.
The energy supply industry in Scotland, and elsewhere in the UK, is widely regarded as very competitive. In reality it is what economists call an oligopoly and it is currently demonstrating some of the worst features of a monopoly, including price fixing and profiteering – with the evidence being my latest bills.
An oligopoly is a market or industry dominated by a small number of sellers, known as oligopolists. The two obvious examples are Scottish and Southern Energy (SSE) and Scottish Power, who dominate the energy supply industry in our country.
The other dominant energy suppliers in the UK are British Gas, EDF Energy, EON Energy and Npower.
Oligopolies can be good for consumers like you and me if there is a high level of competition, which should result in lower prices, better service, more investment and innovation. The retail industry is an excellent example of that. But, sadly, the energy supply industry in Scotland is not.
I have a flat in Inverness. Within walking distance there are Tesco, Co-op, Marks and Spencer, Morrisons and Farmfoods stores, for example, and I am also a loyal customer of my local convenience store.
The supermarket chains in particular clearly demonstrate a very strong degree of competition, not only on prices but also on quality, types and ranges of goods. I usually feel that I am getting value for money and if not there is plenty of choice.
That is not the case with the electricity and gas supply industry.
I am sure that I am not alone in believing that there is price fixing or collusion going on. The latest round of price rises are surprisingly similar and yet the competitive positions of the suppliers such as SSE, Scottish Power and British Gas vary enormously.
Price fixing or collusion is illegal, of course, so I must choose my words carefully. An alternative explanation is that one member of the oligopoly or cartel is the price setter and the others generally follow suit.
Economic theory suggests that there are few or no benefits to the other members by setting prices significantly higher or lower. I believe that is in reality what is currently happening in the energy supply industry in Scotland.
The industry is regulated by Ofgem (Office of the Gas and Electricity Markets) which should ensure that the markets are as competitive as possible and that there are no restrictive practices such as price collusion.
In reality, Ofgem has taken a very light touch approach and largely let the suppliers do what they want to do. The Financial Services Authority and Bank of England adopted a similar approach to the banks, and we all know the consequences of that.
I have criticised Ofgem in the past for failing to ensure that the industry invested enough in new electricity generation and transmission capacity in Scotland. At least some progress is now being made with that, notably the Beauly-Denny Interconnector.
In March, Ofgem began an investigation into the pricing policies of the cartel (sorry, oligopolies) and in August enlisted the help of accountants BDO.
Let all of us gas and electricity consumers hope that this investigation leads to positive action and is not yet another whitewash.
Tony Mackay is the MD of energy economists Mackay Consultants
