Energy, monopolies and cartels

 The ambition of every business is to become a monopoly, if it cannot achieve that, its ambition will be to become part of a cartel. The ambition of every government should be to prevent monopolies and to outlaw cartels.  A business having a monopoly or being part of a cartel enables it to make profits without any market mechanism to restrain those profits. It can charge what it likes and its owners will live a life of great riches.The riches enjoyed by owners of monopolies and cartels are created because poorer people, often very poor people, must pay whatever prices the monopoly dictates. There are very few incredibly wealthy people in the world, but most of them have built up their fortune (or inherited it) upon a foundation of a monopoly. In doing so, they have exploited the millions of poor who have no choice but to purchase from the monopoly or pay the prices dictated by the cartel.

Despite all the lip service paid to the free market, over the centuries nusinesses have sought to shackle fre markets in chains.

There is a relatively new aspect of monopolies and cartels that has recently come into existence. These days they are not often owned by a few wealthy people – indeed they can be owned by the pension funds and insurance policies of the poor and those of average wealth.

However these new monopolies are run by people who rather like the Members of parliament in their expenses, live very fat and luxurious lives by working as executives that run these monopolies. It is a niche that some people can exploit without taking the entrepreneurial risks that people who establish their own businesses take.

Indeed, there seems no down side;  we see executives who have run very large banks waltz off into the sunset having caused losses that have wiped out the banks, being rewarded not with punishment but with large bonuses and golden parachutes. Failures like Mr Fred Goodwin will never have to work a day of their lives again as a result of being rewarded for incompetence.

In the United Kingdom successive governments have permitted the creation of a quasi cartel amongst the energy companies. I do not say that the energy companies collude in fixing prices, but when there are only six of them it hardly takes collusion to ensure, within the law, that the price of energy from each of them is more or less the same.

There is a regulator that is supposed to see that the energy companies treat the public fairly. That regulator is the Office of Gas and Electricity Markets – Ofgem.  Despite the efforts of Ofgem energy prices rise quickly when fuel prices rise, but when fuel prices fall, energy prices take much longer to fall and never seem to fall as much as they should.

In addition to the regulator that regulates energy markets (or is supposed to) there is another government created organisation “Consumer Focus” whose “duty is to provide more coherent consumer advocacy body – Consumer Focus – able to address consumer issues across different sectors, undertake cross-sectoral research, and provide a voice for consumers in dialogue with companies, regulators, Government and Europe” (no, I am not making this up) in matters such as energy.

There seems to be a flaw here. If Ofgem actually regulated the energy companies properly then what need is there for a consumer “advocate”? Ofgem is surely supposed to be an umpire, deciding whether the energy companies are justified in their prices, not an arbitrator or negotiator collecting opinions from all interested bodies and mediating between them. Perhaps I misunderstand what is supposed to be going on, but I do not misunderstand the fundamentals here.

It seems to me that these six energy companies must spend a vast amount of their resources negotiating rpices with their regulator, rather than with customers. It is profitable for them to do so.

With only six energy companies controlling the UK market it seems that you have the worst of all possible worlds. There is not enough competition to drive prices fairly; in energy you do not switch your supplier every week (as you might when you buy your groceries at the supermarket) – switching can be a long and painful process.

Far worse than that is the problem caused by the undeniable contribution of the energy companies to climate change; their pricing policies do not encourage less energy use, which means even more emissions and faster cliamte change. The well rewarded executives take thei wealth not only from our pockest, but, as in the case of the failed banks, from the pockets of our future generations.

I have argued for many years that energy is too important to be left to the private market; we do not leave policing or defence to the private market and we should not leave energy supply to it. The energy companies have a vested interest in selling as much energy as possible and encouraging its sale; that is hard conducive to expecting them, as we do, to be in cliamte conscious.

Certainly, nationalised industries tend to be more inefficient that privatised ones, but this efficiency is probably the same, in money terms, as the excessive profits that privately owned concerns make. Have the big six British energy suppliers made excessive profits? Consumer Focus claims that they have, and that consumers are not being given a fair deal. 

The big six energy companies deny this through the grandly titled Energy Retail Association (which comprises the big six). The Regulator insists that it is regulating properly I shall be looking at the arguments on all three sides and will write about them tomorrow.

One Response

  1. Thanks for the great post, I look forward to reading more from you soon!

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