Ofgem, the energy regulator, is to investigate the justification for the latest swingeing price increases in gas and electricity, inflicted on defenceless consumers by Britain’s “big six” utilities.
The above sentence could have been written at just about any time in the past five years. And Ofgem’s conclusion has always been the same – the market is working, price increases are justified and there are no abuses.
This time, Ofgem – to whom the adjective “supine” is now routinely attached – have been moved to action by evidence of a 38% increase in the utilities’ profits over the past quarter alone. At the same time, these companies are again hiking prices by anything up to 10%.
Even the most obliging regulator might find it difficult to avoid the question of precisely how the poor utilities managed to chalk up 38% profit increases during a period of recession when they were supposedly running to keep up with increases in the wholesale price of gas.
That still doesn’t mean that they will do anything about it. These companies are long-practiced in the art of obfuscation and Ofgem freely admits, for example, that it finds their accounts of when and at what price they buy their gas impenetrable.
The deeper one goes into the complexities, the more difficult it becomes to prove anything. Ofgem needs to stick to the bottom lines. If profits rise beyond the rate of inflation, it is a reasonable conclusion that the price increases applied were excessive and the savings passed on to consumers when wholesale prices came down were inadequate.
Utilities should be told to prove otherwise – or else take the consequences. This is not a cat and mouse game without significant consequences, which can be left to two sets of accountants to argue over. It is, quite literally, a matter of life and death to a significant number of consumers, and a major contributor to hardship for millions more.
Whether a different answer emerges next March will depend largely on how Ofgem poses the question. If the search is for a formal cartel, it seems unlikely that there will be the kind of paper trail that proves any such thing.
Neither, I suspect, do our energy moguls meet any longer in a London hotel, as used to be the case, to decide who should go first and by how much. Why should they take that risk when the process is now so firmly established?
The most fundamental question as far as Ofgem is concerned is how much it actually wants to know. In the past, the answer was “as little as possible” because the whole edifice which it presides over depends on the presumption of genuine competition. If that does not exist, then what exactly is it regulating?
In theory, there are half a dozen major companies competing hell for leather against each other, to determine how the market is divided up. If that were really the case, one would assume that the companies with the smartest trading floors would be able to gain significant advantages over their rivals. In any such market, the effect of competition should be to drive prices down, not upwards at an accelerating rate.
The reality is that competition only takes place at the margins. They all have their different packages and gimmicks but even the most savvy consumers get tired of switching when it becomes apparent that the benefits from doing so will always be short-term, as the cycle of price increases by each of the companies comes round again.
Scotland’s two big players in this market, Scottish Power and SSE, are in particularly strong positions because at the time of privatisation they retained their territorial bases as vertically integrated companies. For the great majority of Scottish consumers, competition is virtually irrelevant – they have simply stuck with the devil they know.
The Scottish companies are also adept at playing the investment card because they retain the role of infrastructure providers which has passed to National Grid elsewhere. Limit our profits, they say, and we won’t have the cash to invest in grid renewal or expansion – or at least those parts of it that do not suit their own corporate interests.
It would be interesting to know if Ofgem’s more proactive interest in all of this has been politically driven. If it isn’t, then it should be since the Tory/LibDem coalition government might sensibly see a popular cause on the horizon – protecting consumers from profiteering by the private utilities. For politicians as well as regulators, that 38% figure surely demands explanation.
As life-sustaining commodities, gas and electricity are too important to be left to the market or worse, to the pretence that the market is working. Privatisation is not going to be reversed but there is a strong case for other measures that limit the ability of companies to exploit their position within what is in most countries still treated as a natural monopoly.
I have long argued that the powers given to “independent” regulators represent an abrogation of responsibility on the part of government. Ultimately, the question of whether poor people should be ripped off for heating their homes is a political one, not an abstract academic exercise.
That is what has been happening for years. The question is whether there is any prospect, in our new age of austerity, of anyone stepping in to stop it happening.
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