The path to prosperity is paved with electoral intentions
George Osborne tells us that Britain is now “on the path to prosperity”, while Mark Carney seems to think that the time for remorse in the City is finally over and that the Bank of England is now “open for business” (although he also seems to think that our money needs to be wasted on McKinsey).
Yet nothing has changed.
We still have a banking system that cannot produce the wealth Osborne is depending upon: the only uncertainties over the next collapse are the timing and how much of the cost is to be borne by depositors. Conflicting and confusing resolution and preference rules are passing unchallenged through parliament. Carney’s own new policy of allowing banks to draw liquidity near collapse by pledging collateral of lower quality guarantees that if a bank then collapses there will be even less for unsecured depositors to share, thus increasing, not reducing, the probability of a bank run. But that probably won’t become apparent until after the election, and the public have now forgotten. Too big to fail is now too big to bovver.
The insanity of Help to Buy is now obvious to all. Combined with negative returns to savers, house price inflation will continue, eroding fairness at every level in society – but insidiously, so that voters think they have benefited.
Having seen what one privileged sector in the economy has managed to extort from society, the utilities have started to copy the banks. First, mis-selling: competitive pressures can always be defeated by the coup de Jarnac of tariff opacity, in which there is no better ingredient than embedded derivatives: what customer is not going to be seduced by British Gas’s “Fix and Fall” offer without investigating how it is to be paid for? After all even the prime minister doesn’t understand how to price derivatives – why else would he have given the Chinese and French a 30-year offtake agreement at double the spot rate? – unless you are cynical enough to think that he knew what he was doing, and calculated that the cost would emerge long after he had left office.
Giving customers an option they pay for indirectly is a great way to ensure they don’t shop around. So is the fact that all the other providers are charging the same prices. Switching just isn’t an answer. Nor is Sir John Major’s windfall tax: how will that lead to lower prices, when it will simply be grossed up into an even higher tariff? Removing green surcharges may make a small contribution: if they are there to deter waste, today’s energy costs alone do that. But something more radical will be required. Labour’s price cap on its own won’t do without a deeper approach to the problem. You can’t simply fix the price while leaving the industry in private ownership without repercussions (the most obvious of which will be the precautionary retaliation before the election). Nor will there be any public enthusiasm for renationalisation of these industries.
But rent-seeking and utilities are an explosive combination. How much would you pay to have running water in your home if the alternative were to fill a bucket at a well? A great deal more than you are currently charged. That is why there is rent to seek – and why, without some clearer thinking than any of the parties have so far shown, we are vulnerable to the very insidious appearance of efficiency among these companies.
What has protected us so far has been the cultural incompetence inherited from the days of public ownership. But now that utility bosses are paid as much as investment bankers it is unsurprising that some of the City’s culture will reappear, and since cheating customers produces quicker profits than improving infrastructure this trend is here to stay.
Regulators will struggle to control prices if they are the only protection for the public. Political support is too fickle for the long-term battle they now have to fight. What we need is a rethink of the structure of these utilities so that market forces are harnessed more directly to the public good. Don’t be fooled by the protestations of the companies that they are making only 5% profits, like other retailers: they are vertically integrated businesses in which profits can be far higher than those measured by comparison with apparently arm’s length pricing for the individual stages. This is the same trick that multinationals use to comply with transfer pricing rules on corporate tax – one which the politicians have failed to grasp.
In the short term the best approach would be to separate fully the distribution and production arms. Domestic contracts should be restricted to a single tariff without fixing options and other devices for making hidden profits. (If individuals want to buy the options let them do so independently under clear contracts that are separated from the product supply: they will be recognized for what they are – a form of speculation, and the take-up will be tiny.) The distribution companies should accept energy from producers at prices set by regular reverse auctions. Consumers wouldn’t even need to switch contracts to be assured of the best possible price. Only then have we any hope of having market forces work effectively to reduce prices.
Longer term, while renationalisation is impracticable, we should examine the possibility of launching a state-owned competitor to reverse some of the damage. And we should learn the lessons from the high future costs of privatising the wrong kind of business by ceasing to underpin private profits with unremunerated state guarantees of future liabilities.
Like the banks, these utilities are relying on your apathy to get away with this behaviour. Don’t let them; otherwise you’ll need blankets, buckets and candles sooner than you think.