Site menu:

Site search

Get Updates

Enter your email address to hear about new posts. (You can view my privacy policy here.)


RSS Recent Posts

Archives (month)


Marx out of ten for the attack on price caps?

When the Thatcher government privatised British Telecom in the 1980s, they created a regulator to cap prices. They did the same with the privatisation of water, electricity and gas. No one suggested then that Thatcher’s policy was Marxist or State intervention. So is there any justification for such accusations now that Theresa May is proposing that the energy regulator should reintroduce a cap?

Imagine a world in which supermarkets could tell if customers had looked around for a better deal … and charged higher prices to those who hadn’t

When the utility companies were first privatised, they each had a monopoly in their own market (or a near-monopoly in the case of BT). Until competition emerged, prices were capped at a level which the independent regulators determined was sufficient to allow the companies to recover their costs, including the “cost of capital”. That latter term is the label economists use to describe the level of profit which is sufficient – but no more than sufficient – to encourage investors to put up the capital required to finance the companies’ functions.

In those areas where competition has emerged, the price caps have been withdrawn. Where competition does not exist, or is insufficient to have an effect, price caps remain. The supply of water is still subject to a price cap.

In the case of energy, numerous companies entered the retail market with a range of price offerings and it was thought that competition was having the desired effect. For those customers who shop around, there are, indeed, competitive options. Very effective ones. But for customers who don’t shop around – or who select a fixed-term deal and then don’t look again when the deal expires – the energy supply is automatically put onto the company’s default tariff. It is those default tariffs where doubts have been raised as to whether they are responding to the full force of competition.

At first sight, that may seem odd. When shopping for goods and services, we don’t spend time in advance of every purchase searching for the best price. We know, for example, that supermarkets compete with each other on price and we don’t have to do the research each time we head for the shopping aisle. Sometimes we look around. Sometimes we rely on the fact that others have been looking. So long as enough people are keeping an eye on prices at any given time, providers will be driven to compete. The rest of us can buy the product at the resulting price.

See also:  Game, Stress & Match

But imagine a world in which supermarkets could somehow tell which customers had scoured the market for the best deals and they offered those customers a lower price, with higher prices charged to the shoppers who didn’t know what was available elsewhere. In some markets, that is almost exactly what happens. In a car show room, vehicles are marked with a sticker price which is often an invitation to negotiate, not the final price at which a deal might be done. Customers don’t, of course, have to do research before they are allowed to negotiate; they can just bluff in order to see if a reduction can be obtained. But those who know what prices are available elsewhere can walk away from the showroom if the offer can be bettered.

In the case of energy, it’s a whole lot simpler for the sellers. Customers who don’t ask about the options are placed onto the default tariff. Those who do ask, or who look up online, are shown a range of options. It is the very absence of an enquiry which signals to the energy company that a particular customer doesn’t know about the market level, or they don’t care (enough) about it to act on the information. These customers are charged a higher price – not so much higher that it triggers the  desire to look around after all – but sufficiently high that the Competition and Markets Authority concluded last year that customers were, in aggregate, paying £1.4 billion a year more than they would have done in a fully competitive market.

In its report, the CMA advocated a range of measures to revitalise competition and reduce the prices paid by customers. One member of the five-person panel went so far as to suggest a price cap, although the others thought competition could be achieved without that step.

The proposal isn’t Marxist. It’s not a return to the 1970s when successive UK governments controlled prices and wages in an unsuccessful attempt to conquer inflation. It’s simply the application of an economic mechanism, first introduced to the UK by Margaret Thatcher, in which the price of essential utilities is capped at an economically rational level unless and until competition takes over and renders the cap redundant.

See also:  Who's optimistic now?

Sign up for updates by Email, Twitter or RSS Feed.

Related articles on this website
Regular readers of this blog must be sick to death by now of me repeating how much damage accounting standards are doing to pension schemes (here, here, here and, even ...
Read the complete article
It seems that, when it comes to Brexit, we can’t trust anyone to get their facts right. Not even lawyers. At least, not Lawyers for a People’s Vote (LfaPV). I don’t ...
Read the complete article
Tax avoidance has become a hot topic. The Times newspaper has recently unmasked a scheme in which income tax is avoided by the ludicrously simple means of saying the salary ...
Read the complete article
Until a few days ago, I had never heard the expression: "When you hear hoofbeats, think of horses not zebras". A visiting US professor used it in conversation with me. ...
Read the complete article
I keep hearing that last Friday's agreement between the UK and the EU 27 means that a hard Brexit is off the table. Well, I'm looking at the table and ...
Read the complete article
Lindsay Tomlinson is calling for a summit to change the way pension costs are calculated in company accounts. As chairman of the National Association of Pension Funds, Tomlinson would say ...
Read the complete article
I see the Treasury has been consulting on its new approach to financial regulation. Some of the main ideas – reforming the tri-partite model – have been discussed at length ...
Read the complete article
I had always thought that employee contributions into a pension scheme were a mistaken idea. Should I be re-thinking that in the light of Hutton’s report out today? Or should ...
Read the complete article
Accountants in a tangle with Webb
Lawyers for Alternative Facts?
You mean we’re NOT supposed to avoid tax?
A horse. A zebra. Or maybe it’s a fish?
Hard Brexit is dead. Long live … hard Brexit
Time to start thinking again, I think
Probably the best regulator in the world?
The Hutton Contribution