… but the free market is failing energy and water consumers, says Murray Rowlands
NO DOUBT in common with many others, I have recently devoted much time to working out how to escape the money-devouring monster of the privatised gas industry. A direct debit account once well in surplus has rapidly turned into deficit. Unfortunately, I am now certain the beast will get me in the end, so I tried ringing Sid, the famed privatisation enthusiast who a was feature of the promotional advertising when the Tories sold off our gas all those years ago, to ask if he could help. Sadly, his number has long been discontinued.
Two years ago, at a Fabian Society conference, it was as if the proudly displayed images of Sidney and Beatrice Webb and George Bernard Shaw were staring in disbelief at the podium where Yvette Cooper, then an environment minister, addressed the audience. No one in the packed hall asked what had happened to the public gas and water ownership for which the Fabians had successfully campaigned at start of the 20th century. Despite the fact that London’s foreign-owned water supply had run so low in the summer of 2005 that standpipes were again about to appear on the streets of the capital, the Fabians remained silent on this issue.
Before the success of their famous Fabian forebears more than a century ago, great profits were made by selling water from carts brought in from the provinces to a parched London. Now, in the world where the market rules, we may be on the brink of something similar,
Centrica, the company which owns British Gas, has just announced the largest single price increase for an energy utility in modern British history. By way of explanation, those who believe in the all-purpose efficacy of market forces point to the 35 per cent increase as evidence of a lack of competition in British and European gas markets. They accuse gas regulator Ofgem of not doing its job properly. Here, at least, they have a point. From the Financial Services Authority to Oftel, the so-called regulators have failed to make the market system work. This is because a system based on market demand for an essential service will inevitably fail the community it purports to serve.
You might think supplying a large part of the British population with gas and electricity should be enough for any company. However, in 1998, Centrica launched a credit card; bought the AA and sacked many of its full-time staff, replacing them with temporary workers; purchased One Tel, the residential telephone operator; and acquired Dyno-Rod, the drain unblocking service. More attention should have been paid to the diminishing supply of North Sea gas and identifying alternative sources. Profits have diminished because European governments previously eager to share in our gas stocks have been less willing to make up the shortfall on demand, now that our gas is running out.
Only in 2005 did Centrica, trading as British Gas, realise it had get to grips with the fact that markets can be volatile. The company set aside £400 million to import more gas and invested an estimated
£600 million in new power and energy projects. So confident was Centrica that it had stabilised the energy market that, in 2007, it offered its customers a price reduction. However, the competition supposed to keep the cost of energy down was illusory. In France, Germany, Italy and Belgium, the prices charged had more to do with profitability than providing affordable energy. In contrast with the rest of Europe, Britain’s faith in an open market for energy means British Gas must compete with the likes of Powergen and npower in the mistaken assumption that gas available from limited sources might somehow lower costs as a result of competition.
British production of gas has declined from 73 per cent of our needs in 2007 to 60 per cent this year. British Gas has been forced onto the world market where the demand for gas is soaring. Gas prices are linked to oil prices. Imported gas has become very expensive, reflecting an increase of $50 a barrel for oil. In addition, 40 per cent of our gas has to be used for the generation of electricity, which is extremely costly. By 2015, we will have to import 75 per cent of the gas we need.
In the 1990s, the preoccupation with so-called diversification in order to increase profits meant the storage facilities necessary for a consistent supply of gas were never built. Britain currently has the lowest storage capacity of any European country. It is ironic that British Gas now complains about the rising cost of coal imports, since other energy sources were supposed to have superseded coal. The Tories under Margaret Thatcher virtually closed down the coal industry because they claimed it could no longer compete in the energy market. TUC general secretary Brendan Barber is right to demand that coal play a more significant role in supplying our energy. And we need to look at how the use of clean coal might actually benefit the environment.
Meanwhile, gas prices are likely to rise again next year. Reading the material put out by Ofgem, with its fixation on operating to keep an artificial market for essential energy, there is likely to be very bad news for the millions facing fuel poverty. How can so-called social tariffs be grafted on to a market-based system of energy production and management? It is not clear how British Gas proposes to spend the £225 million on social programmes between 2008 and 2011 allocated to alleviate fuel poverty. Ofgem’s misplaced faith in market forces is shown in the way it suggests we should shop around for cheaper suppliers when all sources reflect the actual wholesale price.
Where is the evidence that the free market for essential services benefits consumers? There is plenty of evidence to the contrary. But not everyone is doing badly. Thames Water chief executive David Owens receives an annual bonus of £662,000, while two other directors get £192,000 and £130,000 respectively. Thames is now owned by a German utility company backed by an Australian bank. How can we be sure of their dedication to keep the water turned on during our next summer drought?
When public utilities were sold off, opinion polls at the time indicated that a majority of the British people wanted these essential services to remain in public hands. They were right then and they are right now, since it is clear that market systems for energy and water do not work. They are not a reliable alternative to state investment, whether for repairing leaks or building storage facilities. Companies such as Centrica and Thames Water will always put their shareholders’ dividends before the needs of their customers.
