How to save Labour: cut our bills

8:58 am - June 16th 2008

by Lee Griffin    

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The real problem with Labour is right, more than anything, is the perception that we’re being bled dry by various different outlets of our hard earned cash.

If Gordon Brown is to have any hope of a fightback, the best place to start is with our energy prices, a subject that the government clearly feel is a priority given the announcements made on the 30th of May. Don’t be fooled though, if you’re hoping for a cure to the ever booming gas and electricity prices then you’ll be sorely disappointed by this latest official announcement.

All in all the plans seem to do as much as the idea of the big six energy companies investing a further £225million over 3 years in to social tariffs, a scheme that if you take British Gas’s profits (which is from my perspective a good average of the other companies) would mean merely 2-3% of their annual profits being “reinvested” in to helping the poorest customers afford their rising energy bills.

That is to say it does bugger all in the grand scheme of things, with the government effort likely to bring no more than 100,000 households out of fuel poverty while at least 4 million currently reside in that rather worrying bracket, even ignoring rising costs of living that mean those just outside the bracket are becoming more and more affected. Equally these schemes are likely to positively benefit only a handful of the needy rather than the group as a whole.

There is a myth that there is vigorous price competition between them [the suppliers]. For the main product they most actively sell – direct debit for dual fuel, gas and electricity – the price difference between the cheapest and most expensive is £30 a year; it’s just a few pence a week – Allan Asher, EnergyWatch

What needs to be asked, by the government to the energy companies, is just how private companies can be expected to be treated like such when disrespecting the level of influence and importance that they play in every day lives. After all these aren’t ice cream manufacturers where people can actively choose to just not do business with them and to not buy ice cream.

We all need heating, we all need some level of electricity, and some of us more than others. We now can accept there is an oligopoly situation and thus the government and Gordon Brown should be starting to show some traditional Labour strength in not letting those with such a stranglehold on our lives to profit so greatly from it.

The government needs to demand reform of the pricing structure of Gas and Electricity in this country, and needs to do so for three reasons. First, let me explain what the reform would have to be…

At the moment we pay by usage, a fair and just way of delivering a commodity like gas an electricity, but we for some reason pay (with or without a standing charge) an extended rate for our first allotment of energy with the price then falling afterwards.

This needs to be reversed, we should be paying much less for the first allocation of our energy and the government would have all the necessary weight and evidence to show just how much energy is “enough” for the average person. Once the level of basic usage per person is ascertained energy companies should not legally be able to charge above a government set rate. This first stage of the plan would give some respect back to Labour and to make our lives in this country fairer economically.

Plus, the rate would have to be further linked to household sizes. You cannot simply say that 5 people should have 5 times the amount of basic entitlement, heating a house heats a house regardless of how many people live in it, lighting a room with a light bulb lights the room even if no-one is in it, and using an oven cooks food for variable amounts of people. They should firstly be charged based on what council tax band you’re in. Ideal? Perhaps not, and perhaps there would be an even more fair way of ascertaining your house size without allowing you the opportunity to commit fraud.

And the reasons why…
And here is where the three reasons I talk about become apparent. The first is obvious, economics. People pay for what they use fairly. Heating a house during the year and ensuring that you have light and provision to cook food is accessible and affordable to all (in conjunction with warm front initiatives and winter fuel payments if needed), while running a computer all night and leaving your TV on becomes more of the luxury it should be.

Second, the environment. If a scaling rate was introduced then it would be a true disincentive to use both more energy than is sustainable to use, and more energy that releases pollutants in to the atmosphere. Haggle as needed over tariffs from green energy later, the benefits of up scaling the rate you pay rather than downscaling it is obvious and sends the right message.

Third, housing sustainability. I said above that there needs to be balance on the amount of energy deemed necessary per household based on it’s size. The shift in how we charge for energy could quite easily make living in smaller homes truly beneficial to people, with people paying proportionately less for energy by living below their means than they do even now, but also getting charged more for living above their means.

If there is a god, then perhaps Gordon will wake up and see that this is one area where he could fight and really make a case for a social-democratic party staying in power after the next election as opposed to a conservative government that would never in their lifetime think of seeking to curb the profiteering of those with their hands around our wallets and our throats.

A longer version of this article appears on Griffindor.

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About the author
Lee is a 20 something web developer from Cornwall now residing in Bristol since completing his degree at the lesser university. He has strange dreams, a big appetite, a small flat, and when not forcing his views on the world he is probably eating a cookie. Lee blogs independently from party colours at Program your own mind.
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Story Filed Under: Blog ,Economy ,Environment ,Labour party ,Westminster

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Reader comments

Or, we could charge market prices for energy, and pay cash benefits large enough that people on very low incomes can afford to light their houses, heat their water, cook their food and heat their houses in winter, while not rigging prices for everyone else.

Just like we could abolish tax credits and raise the personal allowance.

But because people prefer a solution that sounds more perfect in theory, without giving thought to the enormous complexity and expense it’d involve (not to mention the disincentives provided to investment in energy when compulsory price controls are in place), the simple, almost-as-effective-and-much-less-wasteful measures get ignored.

(also re home sustainability – the most effective way to achieve this would be through doubling council tax and removing all council tax benefits. I imagine this isn’t on your agenda…)

john b, this is just one point of a whole raft of issues that need to be address. I didn’t go in to council tax because it would a) make this article way to long and b) I’d prefer it if other people got in on the debate about the various other facets of inequality in the economy as they see it.

But I fail to see how this, what I’ve written about, is “rigging” prices. Far from it the system I believe would work is it about making sure people are paying fairly for energy within the climate of environmental responsibility balanced with definite need. I also don’t believe it would cost much to implement nor that it would be too complex, not in terms of money available with the big 6 for certain, let alone government funding. Using simple information such as council tax banding isn’t a “perfect” solution in theory, it is what I feel would be a realistic solution much closer to the ideal situation.

I think you completely miss my point about keeping energy companies competative, and that is to find the right point of balance between not charging those that are truly needy too much for their basic energy (or indeed *anyone* for their basic energy) while making more money off of those that choose to use more. I don’t think the government needs to interfere any more than to set this control. In reality I believe the government under a correctly balanced system should rarely need to give benefits specifically on the issue of fuel poverty and that a free market solution is possible…it was that idea that I wished to explore here, especially given Labour’s propensity for moving away from their core values.

I’d also like to say that this was written before the 42 days decision, I’m much less inclined to believe anything is possible with Labour now 😉

But I fail to see how this, what I’ve written about, is “rigging” prices.

Because the government would be telling companies how much they’re allowed to charge to whom and for what. That isn’t a free market solution – at best, it’s a corporatist compromise, characteristic of the current lot’s approach.

I guess it comes down to whether or not you think the retail electricity/gas market as currently constituted is competitive. If it is, then your plans are clearly government meddling; if it isn’t, then they might be seen as a reasonable solution to market failure.

But I suspect it is competitive: the very limited price variance you describe is typical not just of cartels, but also of commodity markets with very limited product differentiation. Like, err, electricity and gas.

btw, I wasn’t suggesting that we pay benefits *specifically to counter* fuel poverty – rather, that all benefits should be set to guarantee an income large enough to pay rent, rates and bills on an appropriately-sized home at the actual, market price.

No, the government would be telling companies how much they’re allowed to charge as a rate for an objectively determined initial energy usage level. After that it’s fair game. And as I’ve said in the article it’s clear that the situation ISN’T competitive and hence why the government needs to step in.

Why should we be happy with a benefits system pumping money by bigger and bigger proportions in to energy companies, some of the biggest not even being UK owned? I’d much rather see that people paid a fair amount than the government pumping money in to a problem through benefits. As far as I’m concerned all that would do is alleviate a certain level of restraint that energy companies do currently have for not pricing the poor completely out of the market, as well as still failing to solve the issue of energy becoming proportionally cheaper the more you use despite supposed commitments by the government and energy firms to cut emissions.

“And as I’ve said in the article it’s clear that the situation ISN’T competitive and hence why the government needs to step in.”

No, you’ve said you believe that the situation isn’t competitive. It’s far from clear to me that that’s the case.

I don’t know enough about electricity and gas retailing to say for certain that it /is/ a competitive market, but I do know something about oil retailing – which is a market where nobody makes any money and margins are tight, because the producers capture nearly all of the market value.

Hence, I’m generally sceptical of claims in energy markets that retail suppliers are profiteering – when frequently what they’re actually doing is passing on cost increases without which they’d be unable to make an acceptable return on capital, and being blamed for it because the consumer gets their electricity bill from Centrica and not from Gazprom or Saudi Aramco.

If the market were not competitive presumably the companies would be making abnormally high returns on capital. Is there any evidence that this is the case?

Uh… 500% increase in profits for British Gas in two years. I guess it’s a matter of perspective as to whether you think that is an abnormal return or not in two of the worst years for energy pricing globally.

Where do you get 500% from?

(clicking subscribe)

Andrew: It’s called maths. 😉 £95mil to £571mil profits in two years. This is all in the public domain, check it for yourself. As our own casting the net has pointed to today as well, British gas aren’t the only ones profiting so vastly off of us, NPower seem to have gained 41% profits off of 17% rise in prices.

I accept not all profit comes from bills and that extra services, streamlining and such can also create greater profit margins…but my point is that the ethical implications of an energy company in the position they are with the sheer power they have means that I don’t believe governments can sit by and let these sky rocketing profits happen without much better assurance and business regulation to protect the poor, keep pricing fair (this doesn’t necessarily mean cheaper for everyone or even the majority), and to aid environmental efforts.

Easy there Lee. Your link in the article went to the Centrica Group accounts, not to the page that specifically dealt with British Gas Residential. Looks like the relatively low profits in 2006 are mainly accounted for by higher commodity prices than in 2007. Arguably some element of getting fat on the higher margins then in 2007, although they claim to have reduced prices in response during that period. But doesn’t this invalidate your argument? When commodity costs are high (as in 2006, and right now), British Gas seems to make less money than when costs are lower, as they can’t pass on price changes very quickly in response to changes in wholesale markets. Do you think they should be penalised further when their business is struggling?

I’d hardly call £571mil in profits struggling, Andrew. Also, if you read my article you’d understand there is no penalising that I’m suggesting, just restructuring of tariffs to redress equality issues.

I’ve posted a follow up to this article here which is in response to john’s piece on the Sharpener.

I think you’re missing the point. If you think that the pricing structure is unfair, you’re talking about revenues, not profits. Profits are affected, as John has amply demonstrated over at the sharpener, by other factors. British Gas Residential’s revenues dropped by nearly 10% between 2006-2007, in the same period when profits went up by 500%. That doesn’t suggest that people were being gouged in 2007 to me.

Using a large percentage increase over a small base, and cherry-picking your time period to maximise that value is just sensationalism.

You might be right, and energy companies might be evilly exploiting the poor, but I don’t think that pointing at a big profit figure makes your case.

Andrew: You (and john) are confusing the issue of pricing relative to previous years and versus wholesale gas prices with what I’m talking about. I’ll repeat as I have on my blog to john’s asinine comments, I’m not claiming that the companies are evil only that they are not operating an environmentally sustainable method of charging or an equitable structure of rates to benefit basic essential use while trying to curb extraneous use.

I’ve repeatedly said I don’t mind the companies profit situation, but that they have roughly increased charges on customers in line with wholesale gas price rises (you talk about us cherry-picking a time period, yet both you and John use the very short period of this singular year to show how energy companies are absorbing cost, ironic that) and as such there is no argument for them being required to keep the pricing structure they have because “times are tight”, in fact with the reserves they have to hand right now it’s the most opportune time do something revolutionary.

Consequently I was never pointing at the big profit to make my case for pricing reform, only for why announcing big subsidy figures needs to be compared to how much money it is in relative terms., you guys have just jumped on that through lack of forethought to tackle the real debate at hand (and given it is the lengthiest aspect of my article it’s not like you can miss it without having simply ignored it), to fight a point I never made.

Let me just break it down for you, in some simple small paragraphs that even you and john won’t fail to understand…

Energy companies are *not* in a precarious position and *haven’t* over the long term been absorbing the costs of wholesale gas prices until possibly only a couple of months ago. They do currently charge for the first (and therefore most essential) energy use disproportionately to how much they charge for more extravegant or needless energy use.

The time has come to say it is fairer on everyone, specifically the poor and the old, to reverse that scale so the more necessary energy use is cheaper, enforcing this would give Labour some headway back in to quelling the anger in their core vote. It is also a perfect solution to actually attempting to tackle climate change as it punishes disproportionate energy use through additional charging, rather than just saying “we’re reinvesting the money”. All of this doesn’t mean the companies should be making less or even more profit…the profit levels don’t come in to it, only the amount being charged for a proportionate level of “necessary” use.

I eagerly await more ignoring of these points so that you can roll about moaning about how people keep picking on the energy distribution industry.

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