Why new rules should switch to a default price cap on gas and electricity

A safeguard tariff is a better idea than anything offered by Ofgem, and while the CMA’s report is unremarkable, finding that households overpay by £1.2bn a year calls for regulator action

It is possible there a few people who haven’t heard that it is possible to change one’s supplier of gas and electricity, but there can’t be many. The Competition and Markets Authority would like more – a lot more – to do the deed.

Ofgem, the industry regulator, has been saying the same thing for a couple of decades, only to find its cries received with utter indifference in many quarters. By contrast, the CMA has an idea to improve the lot of those who are too lazy, or too baffled by complexity, to save themselves £160 a year or thereabouts.

It suggests a default tariff that would act as a safeguard against unfair pricing. The price would apply only to the most expensive tariffs and would be set at a sort of Goldilocks level – low enough to prevent gouging of non-switchers, but not so low that it kills competition. One glorious day in the future, when competition is deemed to be effective, the safeguard would be removed.

The CMA’s vision of a competitive market rests heavily on the supposed wonders of smart meters, which is alarming. As the Institute of Directors has argued persuasively, this £12bn programme smells like a vastly expensive way to install technology that may be out-of-date by the time it arrives. But a default price cap – a limited and soft form of price regulation – is a much better idea. It has several advantages.

First, it avoids a breakup of the big six suppliers, which would probably cause more confusion that it solves. Second, it’s more intelligent than Ed Miliband’s blunt “price freeze” proposal because it recognises the reality that wholesale energy prices move. Third, a default price sets a semi-official benchmark against which suppliers’ other tariffs can be compared.

Do non-switchers deserve a nanny regulator to hold their hand to such a degree? Some government ministers may hate a proposal with even the slightest whiff of price regulation. They should reconsider.

The CMA’s report is sober and unremarkable in most respects – it gives a clean bill of health to the wholesale energy market, for example, and says integration between generators and suppliers is fine. But the key finding is that households have been paying £1.2bn a year too much for their energy, and small businesses are losing £500m. If those statistics are robust, a regulatory response is required.

A safeguard tariff is a cleverer idea than anything that has emerged from Ofgem over the years. The energy companies, who keep telling us they want to restore “trust” in their industry, should get behind it. This report could have been a lot worse for them.

China crisis?

There’s one way to stop investors selling shares – just suspend trading in a large part of the market. Yes, it’s the latest chapter in China’s cack-handed attempt to prevent its over-valued stock market falling further. About a quarter of the firms listed on the Shanghai and Shenzhen exchanges have asked for trading in their shares to be halted.

Most of these companies have offered an excuse of some sort – a restructuring or share issue in the offing. But it defies belief that all these explanations are genuine. Rather, the rash of suspensions look to be part of the state-sponsored share-support operation that has already seen the government funds step in as big buyers of shares.

It’s not working. The Shanghai Composite is down 28% from its mid-June highs and the Shenzhen version is about 38% lower. As described here recently, Beijing looks both desperate and naive. If the authorities wanted to prevent a bubble, they should have acted by the market recorded a 150% year-on-year gain. Even after the falls of recent weeks, valuations still look too high.

On Tuesday, it was suggested here that Beijing might succeed in pushing water uphill just this once, only to create bigger problems next time. Now one can’t be confident even in that prediction. Bloomberg calculates that about a fifth of China’s stock market value – $1.4tn of equity – is frozen. Who knows what the real prices would be?

Shopping the bosses

If the CMA report (see above) gets the energy bosses out of the firing-line as corporate bogeyman, who’s next? Supermarket bosses and captains of retailing.

“Of the staggering £76bn now being paid in in-work benefits, £11bn is going to those who work in retail. Think of that,” implores Boris Johnson, mayor of London, in the Telegraph. “These are companies whose chief executives now earn vast multiples of the wages of the majority of their staff.”

Famous shopkeepers should expect this theme to develop. If they can afford to pay themselves £1m-plus a year, why can’t they pay their staff properly? It will be fun to hear the answers.


Nils Pratley

The GuardianTramp

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