Pain on the Train

One might suppose that the market fundamentalists who have been running successive UK governments since Thatcher would know a thing or two about markets.  Specifically one would think that they could ensure that a given market was reasonably efficient and competitive.

Unfortunately this is clearly not so in relation to the railways as a small piece in yesterday’s FT reports:

The Competition Commission has found that conditions imposed by the government on companies that lease carriages to the train operators are stifling competition…  [This] will come as a blow to the government’s management of the private rail network.

The Dept of Transport has apparently complained that overcharging costs as much as £177 million pa out of rolling stock leasing costs of circa £1 billion much of which is funded by taxpayer subsidies.

This really isn’t good enough

Gas – Unfair at any Price

British Gas owner Centrica’s announcement of £992 million profit for the first half of 2008 only a day after putting up gas prices by an eye-watering 35% has caused predictable howls of outrage and calls for a windfall tax from left and left-leaning politicians.

This would be a mistake.  In fact only 17% of the profit is due to retailing residential gas with the vast majority coming from ‘upstream’ – i.e. producing gas from fields in Morecambe Bay and the North Sea – even though this is a relatively small part of the business.  British Gas is not allowed by law to subsidise its residential sales from upstream profits even if it wanted to for fear this would give them an unfair advantage in the market.  In the medium and long run it is far more important that they and others like them have the incentive to invest in additional energy supplies (especially renewables) that will eventually bring prices down again.

As has been observed often before, the cure for high prices is high prices.

But there is also a political issue.  The implication of a windfall tax is that the Government can redistribute it to those in fuel poverty.  This sounds perfectly fine but unfortunately it doesn’t work.  Energywatch recently said that social tariffs reach only 1 in 15 of the most vulnerable households.  And that’s before factoring in the huge bureaucratic cost involved which the country can ill-afford. 

Socialist solutions sound great but unravel when you look more closely.

However, I am very uncomfortable with the whopping £144 per annum extra paid by those on pre-payment meters compared with the relatively affluent on direct debit.  This is the result of a paradigm that says each of us should have maximum choice in each and every area of our lives.  But why?  As it happens I have just fixed our own household energy prices well ahead at the old price so I am able to be perfectly relaxed about the coming winter, but for every winner there will be several losers.  Moreover, the multiplicity of deals on offer from the energy companies makes the market quite remarkably opaque.  A good system would be one accessible to all in society and not just those with more money and/or education.

It is no surprise that society is getting more unequal under Labour.

As an alternative, why not require the energy companies to have just a single transparent tariff for all residential and small business customers (except perhaps insofar as they could demonstrate a genuine difference in the cost of supplying that customer – i.e. a set amount for the additional cost of a pre-payment meter).  ‘Choice’ would be reduced but transparency and fairness would increase dramatically, the energy companies would save a bundle on sales and marketing (and I for one would be delighted to see no more of their salesmen!!) and there would also be multi-million pound savings from not having to pay off comparison websites (I understand that each switch nets them circa £40 so their interest in promoting ‘churn’ is understandable) which would find its way back to the customer in lower prices.

And finally, with ministers and senior civil servants in the same boat as ordinary people it might just concentrate minds that need to be concentrated on, for example, why energy prices are now so much higher here than in Europe even though we have more domestic supply than almost any other EU member.

Small Earthquake in the Energy Market

Liberal Eye is feeling ever so slightly smug today.   The House of Commons Business and Enterprise Committee has been grilling the bosses of the big energy companies about rising prices and concluded as I blogged last week that the energy market is simply not working properly.  Its Chairman, Peter Luff, was all over the media yesterday with their conclusions – click here or here (audio) for details.

The MPs agree that there is no evidence of price collusion among the big six energy suppliers but note that it’s easy for each to predict what the other five are going to do on price and conclude that:

It is clear that there are very real problems in the energy markets at all levels … which need to be addressed.

In particular they are concerned that the established players are preventing new competition emerging, that UK consumers are paying more than those on the Continent and that there is a massive disparity between prices charged to those in fuel poverty (most of whom are apparently on quarterly credit tariffs and NOT on pre-payment metres) and an affluent minority who can afford to pay by direct debit.  Both Ofgem and the Government come in for sharp criticism.

In short, the MPs could hardly be more damming.

Liberal Eye notes that if you plan to take over British Energy for £12 billion you must have a pretty clear idea of how much you think its future earnings are worth and this in turn depends on future prices.  So if  two energy companies are jointly negotiating to take over a third there must have been a great deal of sharing of thoughts on prices.  This is sailing perilously close to the wind.  (The definition of a cartel is what precisely …?) 

At first glance this is the sort of story that a headline writer might summarise as “Small earthquake in Westminster – no-one Injured” .  However, this would be to wholly miss the real significance of this story.   The headline should read “Small earthquake fatally undermines dam foundations – creates crisis“.  The reason?  The Labour Government, like the Conservatives before them, have put their faith in creating competitive markets in the industries they privatised.  The market would, they promised, keep prices competitive and through its ‘dead hand’ protect the public interest with just the lightest of light-touch regulation to keep things on the straight and narrow.

This plan has now palpably failed and the market fundamentalists’ delusion stands exposed as a fallacy nearly 30 years after it became the dominant economic meme in the Thatcher/Reagan era.  That is why I regard the emergence of these problems in the energy market as fundamental.  It undermines the very foundations of the ‘market fundamentalist’ cognitive policy that has shaped politics over the last 30 years.  (In passing it’s worth noting that similar issues exist in other sectors - banking, retail, public transport etc.  The public are again the losers paying greatly over the odds for most of what they buy).  The Government will, of course, soldier on trying to patch and mend as they go but it will be to no avail.  It is effectively impossible for a Government to change cognitive policy mid-term so we must wait for a new one.

So here’s a prediction: whichever Party first manages to articulate a convincing alternative to market fundamentalism will sweep all before it.  But will this be the Conservatives who like to think they understand economics (but got us into this mess in the first place) or the Lib Dems who tend not to like to think about economics at all (thus securing their record as easily the most unsuccessful Party of the twentieth century)?

Not such Good Value

We all know that British supermarkets are highly competitive and give outstanding value for money.  And how do we know?  We know because they told us so.

 

If you smell a rat you are right.

 

What we actually have are 4 near-identikit firms who maintain an illusion of competition but actually have no real interest in duffing each other up and every interest in maintaining a system that suits them just fine.  What they actually do is to use their size and power to roll over and squelch any upstart competition that emerges so ensuring that real competition is minimised and that they are left with free reign to beat up their suppliers and achieve ever greater margins.

 

As Cheshire dairy farmer Ray Brown told the BBC:

 

“If you [the farmer] are lucky you get 26-27 pence per litre, it’s the same price as we were getting 11 years ago.

 

“Supermarkets have a big score to settle there. The consumer then was paying 40 pence per litre, currently they are paying 57-58 pence.”

 

He’s absolutely right.  This means that consumers are being overcharged by a minimum 45% by the supposedly ‘competitive’ supermarkets (and that’s only using the reference point of 11 years ago).  Could there be any clearer evidence of market failure?  Could there be any clearer justification for a strong anti-monopoly response from Govt?

 

I think hard-pressed families (and farmers!) deserve some answers and some action.

 

In this context the publication yesterday of the latest investigation by the Competition Commission is yet another depressing example of the utter uselessness of the established system of regulation (see also Northern Rock etc).   Predictably, and in line with established form, the results will not worry the supermarkets.  Not that they actually wrote it as such but they do seem (as David Boyle suggested recently in this excellent piece on monopoly) to have successfully framed the issues in ways that play right into their hands.  It’s appears that in the rose-tinted World of the Competition Commission the supermarkets are basically virtuous and hence deserving of all possible support—which they are naturally pleased to give with just the lightest possible rap on the knuckles.

 

For instance a principle plank of the CC’s proposals is that planning applications for new stores or store extensions should be made subject to a ‘competition test’.  At first this seems reasonable until you stop to think that using Planning to address a Competition issue is basically barmy.  Moreover, it does nothing to address established local abuses—for instance Tescopoly reports that Tesco is the dominant retailer in 67% of postcode areas and has a greater than 50% market share in 5 areas.  (In contrast note that the CC had earlier concluded that over market shares of over 8% lead to abuse).

 

Another main plank of the CC’s proposals is that a supermarket ombudsman be appointed to oversee and where necessary enforce a stronger code of practice for dealing with suppliers.  Predictably the supermarkets are engaging in heavy breathing and talking ominously of costs of “hundreds of millions … which could be passed on to the consumer”.  To say this is a bit rich in view of their soaring margins on for instance milk is an understatement.

 

Actually, I too am opposed to the idea of a revised code of practice but for a very different reason.  It’s an administrative solution for a problem that requires a market solution and as such it simply won’t work for its intended purpose—although it might well provide lots of new civil service jobs!

 

David Boyle is absolutely right—Lib Dems should make this issue their own.

French Lessons

If you’re apartment-hunting in Paris “contre services” is what you hope not to see in an advert – especially if you’re an attractive female student.  It can be perfectly innocent, but all too often it’s a not-so-subtle code meaning that the rent will include sexual favours.

This is the iniquitous result of a housing crisis that the French Government admits is the worst since WW2 with money rents (never mind the ‘extras’) rising far beyond the reach of most ordinary people.  The BBC has more here.

No doubt many lessons can and should be drawn from this but what strikes me is what it tells us about markets.  All too often we forget that the undoubted beneficial power of markets is subject to some rather restrictive but crucial conditions like, for example, that there are ‘many willing buyers and sellers’.  When this is not so, when the one of the parties is not so much willing as desperate, then the balance of power becomes too unequal and the market becomes dangerously perverse.

In other words, a market can malfunction just as dangerously as the brakes on your car if they are not properly maintained.  Such maintenance is a core responsibility of government in a complex modern economy and it neglects it at the extreme peril of the more vulnerable members of society – the old, the young, the poor, the sick.  Labour is, of course, neglecting it which is why they are finding inequality, child poverty etc. so intractable.