Energy czar's rule spells good news and bad
March 28, 2000
by Irwin Stelzer
SUNDAY TIMES (London)
March 17, 2000
Britain's pickpocket-in-chief, Gordon Brown, has cost consumers money every time they drive, light a cigarette, buy a home or do just about anything except breathe. So it is good news that Stephen Byers, the Trade and Industry Secretary, is trying to put a few quid back into consumers' pockets by making sense of the rules under which the regulated gas and electricity utilities operate.
This legislation, wending its way through Parliament, has attracted nothing but criticism and bad press. Little wonder. It has been amended what must be a record 900 times, and, at the last minute, the telecoms and water industries were dropped from the Bill.
However, it is important not to confuse procedure with policy. The DTI may have botched the procedure, but it is in the process of getting policy right. Dropping the telecoms and water industries was the right thing to do, and it took courage for Byers to admit his original error and correct it.
Everyone knows that the telecoms industry, and all of the media and computer industries with which it is rapidly converging, are in the throes of unprecedented technological change, and that a regulatory regime appropriate to the more stable electricity and gas industries simply cannot work for telecoms. As for the water industry, its heavy involvement in the environmental upgrading required by the European Commission and its responsibilities for waste treatment make it unique.
So Byers was right to focus on gas and electricity. Better a U-turn than continuing on a path that leads over a cliff.
And he got it right, too, when he stuck to the Tory policy of maximising competition wherever possible. As a result, British consumers now have a choice of suppliers of their lighting, heating and cooling needs. Just as economics textbooks would lead us to expect, this competition is putting money in consumers' pockets by driving down prices.
However, not all parts of these important industries are, or can soon be, truly competitive. The wires that move the electricity from the power stations to the customer remain monopolies, as do the pipes that move the gas. So regulation is necessary - and, up to now, not as effective as it might have been.
This is not to criticise past regulators. They were dealt a bad hand when the Tories decided to couple privatisation - the right idea - with so-called "light-handed regulation'' - an idea that, in practice, left the regulators at a serious disadvantage relative to the companies whose prices they were supposed to control. The companies knew what their costs were; the regulators didn't. The companies knew just how much they would have to spend in the future to provide a good service; the regulators didn't. It was an open secret in the industry that, in the game of regulation, the companies were winning handsomely, creating wealth for executives who suddenly saw themselves as hot properties in the international job market, although few had ever been recruited by an overseas company.
The new utility Bill aims to redress the balance by giving the Director General of Ofgem, the energy industries regulator, broad powers to gather information, prevent price manipulation, and levy unlimited fines if he thinks that companies are playing fast and loose with consumers' interests. Indeed, the power to fine is so great, and the nature of the offences that might trigger those fines is so vaguely defined, that Callum McCarthy, the Director-General, is a bit awed by the powers that he will have, and is likely to issue guidelines limiting them to the extent that the law permits.
That has not made gas and electricity companies any keener on the Bill. American investors, particularly, are upset that the billions that they have invested in the UK, a country that they thought would continue to have a regulatory environment more benign than their own, are now subject to tougher regulation than they had expected. The irony is that Britain's regulated companies are now snapping up utilities in America because they see the US as the easier country in which to satisfy regulators and make some money.
However, those US companies that have been wanting to build new gas-fired power plants in the UK see one advantage in this Bill. Byers has promised that once the new regulatory regime is in place, he will heed McCarthy's advice and lift the ban on construction - a ban that has saved a few thousand miners' jobs at the expense of better ones in the construction industry, restricted competition in electricity, and added to Britain's emissions of allegedly globe-warming CO gases.
Anyone familiar with regulation knows that whether it proves in practice to be fair to both shareholders and consumers is only in part a function of the governing legislation. Equally important is the way that the law is applied. Which brings us back to Callum McCarthy, a shrewd former investment banker who has forced the distributors of electricity - the so-called wires companies - to tighten their operations, and lower their costs and charges.
Indeed, he has squeezed the electric lemon so hard that the pips have squeaked, and it is not certain that the companies will be able to make a reasonable return on investments while maintaining the quality of service to which customers feel entitled. McCarthy thinks that they will; some in the electricity industry see a future of more blackouts and of profits so low as to discourage investment in maintaining and upgrading electricity systems.
When the new utility Bill finally emerges from its tortuous path through Parliament, Britain's key energy industries will find themselves operating in a completely new environment, under the eye of a regulator so mighty that new Labour could properly designate him the latest of the many "czars'' it is so fond of creating.
If McCarthy runs true to form, he will push to extend the scope of competition, which will mean letting prices run up in periods in which demand exceeds supply, as he did in the gas industry last winter. That's good news for electricity companies. The bad news for them is that he will come down hard on companies that he thinks are abusing consumers. And he will have the power to make them wish that they hadn't.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.