Energy Price Freeze

Damian Hinds Excerpts

Wednesday 2nd April 2014 Commons Chamber

[Damian Hinds (East Hampshire) (Con)]

This is an extremely serious issue that goes to the heart of the competitiveness of British businesses, large and small, and the costs borne by hard-pressed households, especially the most vulnerable in our society. It therefore deserves proper, sober treatment, not naked populism. The Opposition try to frame the debate as one in which the big six’s defenders and apologists are against the public interest. In fact, we must all be on the side of the consumer against whatever stands in the way. The motion pits supporters of a rational, transparent competition policy framework against those who advocate arbitrary intervention that is politically motivated.

In this country we do not, or should not, mix competition policy and politics. That is a dangerous road that leads inexorably to political preferment for other sectors, with all the inequity and inefficiency that would bring, and indeed the explosion of lobbying we would all look forward to. Our competition policy system mixes rules-based and discretionary approaches, but with a bias correctly towards the rules-based approach. We set up a system and then set experts on the problem to work out what needs to be done. To say that a referral proves that the system is broken, as the right hon. Member for Don Valley (Caroline Flint) has done, is to fly directly in the face of the principles that underpin the system and give investors confidence. For politicians to decide to impose a price freeze without a transparent investigation would undermine much of the British economy, and the effects would be felt far beyond the energy sector.

There are big concerns about competition in the sector, and they are legitimate. We know from the annual assessment of competition, which shows the situation in sharp relief, that there is a largely settled geographical pattern, low shares of new entrants, relatively low consumer engagement, in part because of the complexity of the market, and increased profits that appear not to be directly reflected in increases in efficiency. There is the question of entry barriers and the extent to which vertical integration makes that situation worse. It has been suggested that there might be some tacit co-ordination in the market. In this country, running a cartel is somewhere between extremely difficult and impossible. However, as Galbraith once said, there are a number of habitable halfway houses in which oligopoly situations can pertain, and it is very important to guard against those.

The market appears to be somewhat mired, and it certainly lacks public confidence, so it is right that the CMA should investigate, but it would be wrong to accompany that investigation with a Government-imposed price freeze. Why? First, there is of course the theoretical possibility that costs will come down. It is wishful thinking for the Opposition to say that a freeze will stop prices going up but whenever costs come down there will be more players in the market. Of course there will not be. What incentive would they have? Secondly, in the event of cost pressures, a freeze would hurt small firms most, partly because they have the smallest reserves for absorbing cost increases, less ability to forward-buy and higher percentage marketing costs as they try to attract more customers.

Thirdly, firms inevitably find ways around price freezes. We do not know what they will be, but companies are smart and usually find a way to do it. They can nip in with a price increase before a freeze is imposed, they can cut investment, as has been mentioned a number of times, and—this has not yet been discussed—they can discriminate against less profitable customers. If a ceiling is put on the price, there will still be plenty of customers who are profitable at that price, but there will be others who are not, and companies might decide to reject those customers.

[Albert Owen]

I am sure that the hon. Gentleman is very genuine, but his Government introduced legislation—the Energy Act 2013—to hold back prices and interfere in the price mechanism. If what he describes would happen under a freeze, why would it not happen under the legislation that was introduced to hold prices down?

[Damian Hinds]

The key thing that underpins British competition policy, and indeed the approach in this market, is encouraging competition without setting prices. It is a system that tends to work, and when it does not we have competition policy authorities to investigate and determine how the system needs to be put right. That is the correct way to do it.

Of course, there is another side to the story. The margin enjoyed by the big six on domestic energy in 2012 was 4.3%. The big question is whether supernormal profit is being generated elsewhere in those companies, particularly on the generation side. My hon. Friend the Member for Warrington South (David Mowat) mentioned the international comparisons, which I think are worth bearing in mind. It is also worth remembering that high prices have not just happened in this country. Prices did not just start rising after May 2010. According to the Office for National Statistics, in 2002, 2003 and 2004 the average household energy bill was £70 a month, but by 2009 it had risen to £108 a month, a rise of more than 50%. They then went down slightly after 2009-10. The biggest factor in those price increases, including when the Labour party was in government, was wholesale energy prices, including the world oil price and declining domestic gas supplies.

Does that mean all is well and we should not worry? Of course it does not. We want markets to operate well and competitively, and there are signs that this market might not be doing so. It is perfectly possible to have markets with high levels of concentration that still operate competitively, so long as they are contestable. Confectionery, detergents and grocery retail are all markets with very high C5 ratios, but the market can still work if it is contestable, if products are clearly comparable and if switching between them is easy. It is when those last two points do not pertain, as with banks and the energy sector, that worries arise.

It is right to try to bring in more competitors, and I think that what the Government have done in that regard has been encouraging. I encourage them to do more. We also need more trusted brand names to enter the market, rather than just companies that nobody has heard of. We need to learn from companies such as Sainsbury’s and Marks & Spencer what they believe has held them back. We can go further on tariff simplification, as we are only part of the way through that process. The complexity had become comic. It will now be under much greater control, but we could go further. We need to ensure that annual energy statements are clear, consistent and prominent and that they are machine readable so that comparison sites can read them.

Overall, we know that there are problems with the market. Given the low levels of public confidence, it is right that the CMA will have a full-blown investigation. That is the way we do things in this country to get to the bottom of it. It would be quite wrong to second-guess the outcome of that with a populist price freeze.