Why the ‘big six’ energy suppliers are “ripping off” consumers

David Cameron has recently claimed to know a thing or two about economics. So why is he surprised the privately owned ‘big six’ energy providers appear, as Ed Milliband put it, to be “ripping off” consumers? It’s not that they are particularly evil, unethical or exploitative, but that they are dominated by the same economic ideology which led the Thatcher government to privatise gas and electricity in the first place and which Cameron claims to understand. And that same ideology dictates that it is the legal duty of those private companies to maximise shareholder wealth. Such maximisation necessarily involves them in taking decisions which result in the disadvantage of parties other than shareholders, including, as far as they feel is judicious, their customers. So why is Cameron ‘disappointed’?

It is the ideology of Milton Friedman, simplistic populariser of the neoliberal belief. A cornerstone of the ideology is Friedman’s “empirical generalisation that it costs the state twice as much to do anything as it costs private enterprise, whatever it is.” The message was often stated. That particular quote is from a lecture Friedman gave to the Institute of Economic Affairs, free market think tank lobbyists, much loved by Margaret Thatcher, some 18 months after she had become leader of the Conservatives. The only supporting evidence offered by Friedman was that his son had pointed it out to him. If it turned out not to be true the basic justification for privatisation would be shown as quite spurious.

It is tempting to believe Friedman. There is no other target for denigration and abuse so obvious and seductive as the full-blown public bureaucrat. And yet, the evidence is elusive.

The record of privatisations is far from convincing. Keynes argued there was no reason why the state should ever get involved in running a railway, yet their privatisation was a shambles and their performance since has been shameful. Privatising natural monopolies would be problematic even if private industry were substantially more efficient than public. Not only do the private firms have that added cost of repaying shareholders, but all sorts of additional mechanisms and regulators are set up to create a pseudo-competitive market. And such competition – energy is a good example – invariably fails.

It is the supply of gas and electricity that gives providers their real power. Under public ownership, the control of supply was managed, however inefficiently, in the interests of the whole nation. Under private ownership, driven by the Friedmanite free market, open access dogma, control of supply is both weakened and used as a means of discharging what the private firms (or their top management) believe to be their legal duty to maximise shareholder wealth. Control of supply has been weakened by increasing reliance on imported energy (eg Russian gas) and foreign investment (four of the big six are foreign owned). Control of supply no longer has the UK’s best interests as its main concern.

The remaining control of supply has been tightened by restricting investment, so that UK is now threatened with the lights going out within the next couple of years. This enormously strengthens the hand of suppliers in the discharge of what they believe is their legal duty. George Osborne begging the Chinese to invest in UK nuclear generation is a desperate attempt to reduce the increasingly tight stranglehold of the big six.

But it bears repeating: the big six are not demonstrably evil, unethical or exploitative. They are merely acting in accord with the Friedmanite ideology which dominates the political and financial worlds as well as top corporate management. But Friedman was wrong as has been repeatedly highlighted on this site, most recently http://www.gordonpearson.co.uk/09/saving-the-friedman-legacy/ The ideology is based on a mixture of careless assumptions and deliberate falsehood for which academic neoclassical economists bear considerable responsibility.

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