14 May 2018
Regulators should operate free of political interference. Ideally, they should be independent, honest and robust and people should both depend upon and fear them. They should be part of the judiciary rather than the executive. Above all, they should not court popularity nor try to placate the mob when it is demanding blood.
OFGEM: MORE OF A MEDDLER THAN A REGULATOR
Ofgem (Office of Gas and Electricity Markets) is a UK regulator set up to ensure that competition in the energy market is fair to consumers. Its statutory duties and powers have been established by at least eight parliamentary acts and of course some EU rules too. It has a budget of £90 million and more than 750 staff. Consumers can switch freely and seamlessly between suppliers, of whom there are many. I have counted thirty seven ‘alternative’ suppliers in addition to the infamous Big Six for a total choice of 43 competitors.
Ofgem’s most important responsibility concerns the electricity generators. It needs to ensure that enough capacity, of whatever kind, is built to satisfy our future energy needs. Our future consumption will not be directed mainly by economic and population growth but overwhelmingly by the plan to ban the sale of petrol and diesel cars by 2040. The UK’s electricity grid needs to be enlarged substantially and, given the lead times for new power stations, quite urgently.
I don’t know if this was the right way to set things up but it seems reasonable to say “GO OFGEM!” and let it get on with what it has been empowered to do. I mean, how hard can it be?
The answer is that if Ofgem is treated as a policy tool by the government of the day its work can be both difficult and ineffectual.
For major capacity investments, Ofgem encourages competitive tendering, reasoning that the leanest transmission owner will produce the lowest prices for consumers. To this end, Ofgem sets guidelines for financial risks and cost of capital and acceptable returns. If these guidelines are too lenient, consumers might end up paying too much. If too harsh, the investments in new capacity might not happen.
It is perhaps unfortunate that today’s political mantra is that consumers are overpaying for energy. Politicians are competing to be seen to interfere. Unintended consequences are everywhere.
The generators are being put off from committing to major new investments.
In January 2018 National Grid plc responded to Ofgem’s proposals for its Hinkley-Seabank project as follows:
“These parameters do not, in our view, offer the level of returns that would allow sustainable investment in the UK energy sector needed to deliver good outcomes for both customers and investors.
National Grid intends to work constructively with Ofgem in the coming weeks and submit our detailed views to progress towards achieving a fair and timely outcome for customers and investors. However, we will also consider all other options available to us if we are not able to progress this satisfactorily.”
Back in 2015, George Osborne removed exemptions for a Climate Change Levy from renewable electricity generators. The whole point of the exemption was to incentivize renewable energy and to penalise traditional carbon-based energy. This is what Drax plc had to say:
“We are surprised and disappointed at this retrospective change to a support regime which has been in place since 2001 specifically to encourage green energy and support renewable investment.”
In both these cases, regulation appears to be falling over itself to discourage and penalise long-term investment in capacity. What on earth is going on?
Something similar is happening in the supplier market. 43 competitors are not enough for our meddling politicians. They want to introduce price caps too. When I say 43 competitors, I mean 42. This is what Flow Group had to say in April when it announced that it was being sold to a competitor and that its shares would be worthless:
“The headwinds facing challenger suppliers, in particular the impact of the Government’s price cap and the significant number of new entrants to the market pursuing aggressive pricing strategies, have continued to strengthen.
The response of the “big six” energy suppliers to Government policy developments is considered likely by the Company’s management to be, in many instances, to lower their standard variable tariffs. This would lead to an erosion of the differential between the prices challenger suppliers are able to offer and the tariffs being offered by the big six. The Board believes this would be likely to have a significant adverse impact on consumers’ propensity to switch suppliers.”
The government has meddled in a highly competitive market, in order to generate a news headline about price capping, and has started to wreck it.
POLITICAL REGULATORS ARE EVERYWHERE
Everywhere you look in the UK, statutory regulation is subject to meddling by politicians for one reason or another. Ofcom regulates communications including telecoms, television, radio and the mail. It covers the ownership of broadcasters as well as the content they transmit, both highly political issues. Even Royal Mail is political, given that the next Labour government intends to nationalise it.
The FCA (Financial Conduct Authority) is notoriously toothless, according to many. In the US, the SEC terrifies those suspected of wrongdoing. In the UK, the tradition of light-touch regulation, one of the signature policies of the Blairite years, appears to be in robust health. The FCA, like Ofgem, takes it upon itself to call for fair treatment of consumers and issues surveys about the pros and cons of high cost credit for people with cash flow problems. This is all slightly interesting but it seems to me that the best way to protect consumers is to nail crooks and fraudsters and take them out of circulation.
One might say something similar about the Charity Commission. It employs 350 people to oversee 184,000 registered charities. Want to know how many regulatory decisions it took in 2017? Two. It was a quiet year because there were four in 2016. It appears that checking up on charities is not much of a priority, despite surveys suggesting widespread public scepticism about them. Calling charities to account is tough and probably lonely work until a real scandal (like Haiti) breaks and then blame can flow freely.
GRENFELL TOWER – BLAME BEFORE RESPONSIBILTY
I want to see active and independent human regulators who apply regulations that have been authorised by Parliament. Regulations without regulators are great news for lawyers but not necessarily for e.g. people who live in high rise towers, covered in cladding that may or may not be legal. The Grenfell Tower disaster killed 71 people and released a storm of blame which was directed in any and every direction. Shadow Chancellor John McDonnell said that the victims were “murdered by political decisions” – as an admirer of Karl Marx this is possibly his specialist subject though it gets us no closer to understanding whether the cladding conformed to industry standards.
It may have been partly a political decision to house people in high rise blocks in the first place. High rise residential towers started to be built in the UK after WWII and had a bad reputation by the end of the 1960s, a few years before the construction of Grenfell Tower. There is a Monty Python sketch about architects first broadcast in 1970. It is a satire on the propensity of planners to pretend not to know that high rise residential buildings are potential death traps.
It features two architects presenting their proposals. The first, played by John Cleese, suggests something that is essentially an abattoir. “I mainly design slaughterhouses” he says in apologetic explanation in response to the horror at his plans. The second architect (Eric Idle) presents a scale model that catches fire there and then. This problem is brushed aside by the officials who are attracted to its reasonable cost.
Forty seven years later, what new wisdom do we have to add? Perhaps that an independent building regulator with teeth might be a good idea. At present building regulators are approved inspectors who can be chosen by the builder himself from a list monitored by the Construction Industry Council which is essentially an organisation consisting of 500,000 industry professionals. If it’s not self-regulation it looks very like it.
BRENÉ BROWN – BLAME BEFORE ACCOUNTABILITY
When something bad happens do you want to know whose fault it is? The answer to that question, which is not mine but belongs to Brené Brown, a professor of social work in the US, appears to be an emphatic “Yes!” from most people in the UK. We are nearly paralysed by a national culture of blame and a terror of accepting responsibility. And the most direct way to evade responsibility is to blame someone else. So when bad things happen, the result is a circle of finger pointing.
But Brené Brown makes a point that is so good that it staggers me, as if she had unexpectedly thrown water in my face.
“People who blame a lot seldom have the grit and tenacity to actually hold people accountable”.
I suggest that you read that again and ponder its implications for a moment.
She says that there is an inverse relationship between blame and accountability. “Blame is simply a way that we discharge anger”. It is a cheap way of feeling better and it avoids the hard work and confrontation involved in explaining why something happened and whether anyone didn’t do their job or fulfil their obligations.
Blame is quick and destructive. It is not the first step in a process that leads to a constructive conclusion. Regulators hold people properly accountable. Blame encourages meddling and is the enemy of true responsibility.
MEDDLING HURTS INVESTMENT
As an investor, I am faced with the potential threat of Labour’s promise to seize private assets, such as my shares in Royal Mail, at a price to be determined but likely to be below where they are valued in the open market. This is an unpleasant thought but at least I have the chance to see it coming.
But the fallout from meddling could be worse. The current government is becoming more interventionist and more short-term, a poisonous combination for serious long-term investors. Politicians want to dip their wicks in anything that looks like a public utility – energy, water, transport, communication and, in their dreams, social media platforms. Their attention is seized by whatever goes wrong next and their mission is to avoid the blame and to pacify the accusers.
In each case the providers of these services need to make substantial long term capital investments. This capital can be provided by private investors but will not be if there is a material risk that the next transient secretary of state can change all the rules because a focus group has detected a twitch of public disapproval.
Proper regulators would understand this. Meddling politicians don’t or don’t care and deserve to be sacked.