Are the UK’s Big Six utilities playing out 0-0 draws?

Competition policy expert Professor Catherine Waddams says the UK energy market is not a cartel, but a tacit collusion

During BBC Radio Four’s excellent File on Four documentary about energy prices broadcast this week Professor Catherine Waddams, director of the University of East Anglia’s Centre for Competition Policy, likened the UK energy market to a sports event which no-one tries to win because each team has already won merely by turning up.

The programme looked into the sticky energy policy situation that the UK has found itself – that it needs the energy companies more than they need it – and whether, like the banks, the Big Six were “too big to fail”. Ultimately, the documentary ducked this question, but it raised some interesting issues along the way.

Energy prices in the UK’s liberalized market are rising fast. Some 12 million people are estimated to be in fuel poverty, which is defined as spending more than 10 per cent of income on energy bills.

Rising energy prices are also having a worrying effect on industry. One chemicals company said its gas and power bills had risen 45 per cent and 12 per cent respectively in the first six months of 2011, equivalent to one month’s annual profit.

Cement manufacturer Cemex UK, owner of the largest kiln on Britain, said it was considering relocating production in Egypt due to its rising energy bill, while ceramics firm Steelite could move to China for the same reason.

The programme asked numerous parties including energy secretary Chris Huhne MP, Ofgem overseer of markets Ian Marlee and well-known energy policy professor Dieter Helm why prices were rising so quickly. The listener was offered the crystal clear conclusion that energy prices were high due to the vertically-integrated nature of the energy companies, which Helm neatly likened to breweries who own pubs in which they sold only their own beer.

Perhaps the most interesting segment was when BBC reporter Gerry Northam asked Professor Waddams if the UK energy utilities industry was a cartel. Waddams replied: “There is not an explicit cartel. There are no hidden emails or phone calls to uncover an explicit arrangement either in pricing or market sharing. But the conditions in the market are such that we do have tacit collusion, which means they are not competing very hard. It’s a bit like a sporting event in which it is difficult to make the two sides actually compete against each other if they can get along without doing so.”

The public likes sporting analogies and the idea of the Big Six companies playing out 0-0 draws in order to progress to the knock-out phase of the football/rugby/cricket World Cup could be a useful one with which to bash them.

Being an objective documentary, the industry had a right to reply. And who else should make it but perennial industry apologist David Porter, CEO of the Association of Electricity Producers?

In fairness to Mr. Porter he did a sterling job as usual. He said: “If companies end up charging roughly the same prices then there are good reasons. Although the Big Six may have generating businesses which look rather different – some may have more coal fired production, or gas, or nuclear – in the end there is a spread of fuels and technologies which impose unavoidable costs on the industry. When coal and gas prices rise it will have an impact on prices.  There is no misbehaviour.”

The results of forensic accountants BDO’s investigation into the Big Six’s profits will be very interesting indeed.

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