13 November 2012

Cameron Rules

The government's energy bill is due to be published in the next few days. Despite not yet knowing what it might contain, this is a good opportunity to talk about what consumers pay for gas and electricity.

The prime minister drew attention to the issue when he announced that the energy firms should be compelled to give the lowest tariff to their customers. we are waiting to see how that will appear in the bill.

In my view, Labour should support the "Cameron rule", and be prepared to amend the bill if the government tries to walk away from its proposal. To me the Cameron rule sounds a bit like the WTO principle of "most favoured nation", which means that if trade barriers are lowered for one country then the same treatment should be available to all WTO members. As with customs tariffs so with energy tariffs; all residential customers should receive the most favourable tariff on offer to any customer.

Reading the press reaction which followed the PM's announcement led to a moment of revelation. Some commentators assumed that privatisation had created a free market in energy. Really, they think consumers benefit from competition in energy supply! At best they acknowledge the information gap when it comes to pricing; at worst they blame customers for not switching suppliers often enough.

The first clue that there is not a free market in energy is the existence of of Ofgem. A competitive market wouldn't need its own regulator. To explain further we need a bit of economics.

Here comes the economics bit
The key idea is the law of one price; in a free market identical goods have the same price. One kWh should not cost more from one supplier than from another. So the fact that customers are charged different prices is a sign that the market is not free or competitive or efficient.

Privatisation swapped a state monopoly for a private oligopoly. Energy supply is now in the hands of six large companies. This kind of market does not operate like the competitive markets of the textbooks. The firms do compete but rarely on price. More usually they compete through marketing and indeed the complex pricing arrangements offered by the companies is a form of marketing.

The problem lies in a market structure that leaves the big six with considerable market power. Hence the need for Ofgem and also support for the idea that gas and electricity utilities belong in the public sector. Unfortunately that option will not be in the coalition's bill. However, a Cameron rule imposing  the law of one price on each supplier would lead to one price for consumers. When they complain that the rule will end the free market in energy, we can say, "there never was a free market  in energy."

The US has a Volcker rule for banks and a Buffett rule for tax, can't we have a Cameron rule for energy prices?

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