Natural Monopoly, Essential Goods and Regulation

If the public have a problem with the energy companies, they are first directed to Ombudsman Services, which suggests itself to provide ‘independent dispute resolution for the communications, energy, property and copyright licensing sectors’.

Ombudsman Services is funded by the companies it handles complaints about, which raises questions about conflicts of interest and influence.  According to WhatDoTheyKnow.Com, a website which covers Freedom of Information requests to 15440 authorities,  Ombudsman Services is not subject to the Freedom of Information Act 2000.

Mr. Monopoly

The second level of query is with Ofgem, who review Ombudsman Services. Ofgem, industry regulators, have put forward recommendations for the companies to simplify their bills. Criticisms of Ofgem are that they have taken a long time to respond to public feeling that the energy companies are colluding.
The cross party Energy and Climate Change select committee is currently investigating whether there is industry monopoly and regulatory capture: the process by which regulatory agencies eventually come to be dominated by the very industries they were charged with regulating (George Stigler is a famous commentator).  This seems an obvious and logical investigation, as the energy infrastructures fit into an economic category known as ‘natural monopoly’.  There have been calls for transparency of cost of the generation of energy as well as an audit of the movement of finances between different arms of the same companies. Ofgem are being urged to move from talk into action as a regulating body.

Rebecca Willis representing Cooperatives UK was a witness at a session of the local energy—community energy—inquiry given before the cross party Energy and Climate Change Select Committee raising the issue of regulatory capture:

“You have to be amazingly determined and the reason for that is that the system is really stacked against them, in Scotland and in the UK more widely. We should not lose sight of the sense to which this is a point about regulatory capture because what we have is a system that is set up for the big players and that large-scale commercial system is the one that the companies and DECC understand, everyone in and out of DECC’s doors understand their systems and speak the same language. When I say regulatory capture, it is not malicious intent, it is just that everyone working in the system has the same background and shares the same ethos”.
Third party charges in the domestic energy bill also have to be drawn into question. Price comparison websites are earning commission and we need to understand all of the costs which go into the bill. John Moylen, energy correspondant for the BBC describes how there is a low level of switching companies going on:

“A depressingly small number of people who have switched suppliers. It is a sign of a market which is not working as it should.  We need to shake up the structure of the market to make it easier for new competitors to come into the market and shake things up with innovative offers and better prices – as happens with healthy competition. More efficient service and more efficient cost bases. This is difficult to do when the first and biggest barrier you face is how do you get hold of the electricity/energy in a market which is not operating openly and transparently and liquidly as it should.”

So how do we deal with the lack of transparency in the energy market, and a lack of regulation from Ofgem ? These issues have been raised over a number of years. There is a very complex structure involved in these firms; they generate power, they also trade that power, and then they also sell that power to domestic and business customers.
The MPs of the cross party Energy and Climate Change select committee have said that because of the complex company structures, it obfuscates where the profits and losses are being made. They conclude that, without the assistance of the companies themselves, it was not possible for them to tell with any certainty the level of energy company profit margins.
Energy prices have been going up at the moment (July 2013) and they will go up again later this year, and this fuels distrust because of energy poverty and the number of people struggling with their bills. If the ‘marketplace’ is suffering from the problems which Joseph Stiglitz and Amartya Sen are suggesting, and the fact that the prices are a rip off due to alignment within the sector – the regulation of it is being held up precisely because of the obfuscation knowledge necessary to apply the law.
Criticism has been levied at the regulator because Ofgem is failing consumers, that they are not taking all possible steps to improve openness and competition in the market place, and that there is a distinct problem with the Ofgem’s ‘light touch’ approach which has previously involved a code of voluntary self regulation (a strategy which failed to work previously when the Financial Services Authority asked the insurance industry to self regulate in light of the adjustments brought about by the Silverstein case that muddied contract certainty).

Energy costs

Ofgem commissioned some accountants to look at the firms profits and recommend how it could be made easier to understand and to make it clear where profits and losses were being made. When the independent accountants BDO (BDO International is the fifth largest accountancy network in the world) came back with a list of recommendations, Ofgem failed to implement all of them.
Out of 8 recommendations, there were at least two which were not implemented. A specific issue was around the trading of energy and it was recommended that companies give more details on this. Ofgem said that it was too complex and that ultimately it would not be for the benefit of consumers. Ofgem said they will look again at this under pressure from MPs, and that they make the firms publish segmented accounts.
From the mid 1990s we enjoyed a decade of falling energy prices. Since 2005, both the price of gas and electricity has been rising and rising. There is gross concern from both public and MPs that the energy market is not working and is stuck in monopoly and regulatory capture. In a report of July 2011, Chris Huhne MP, at the time Secretary of State and part of Department of Energy and Climate Change wrote: “Independent regulation of the gas and electricity markets has been a cornerstone of energy policy ever since privatisation was initiated in the 1980s. By promoting competition in the gas and electricity supply and retail sectors, and replicating competition for the monopoly networks”. Two years later, there is decreasing competition. []
On the 29th July 2013, the Energy and Climate Change Select Committee published their findings. It reported:

  • Bills that no-one can understand
  • Company accounts that are opaque
  • Profit margins on different lines of business that are hard to disentangle
  • Problems of competition at the wholesale and retail level
  • A regulator which is not regulating the market


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