Price Fixing Energy Prices

[Dorkins]

Justin Webb Interviews Ed on TODAY

Ed's view on Energy

Starts 02.20

Gets good at 05.00

And you get your laughs beginning 05.30

Ed is incredible.

"The market isn't functioning properly, and somebody's got to reset the market... We're going to make this market work."

...by using price controls?

[Goat]

"The market isn't functioning properly, and somebody's got to reset the market... We're going to make this market work."

...by using price controls?

F***ing clueless.

[LiveinHope]

"The market isn't functioning properly, and somebody's got to reset the market... We're going to make this market work."

...by using price controls?

there is so much in that interview - it just keeps giving

[alexw]

A friend of mine, who REALLY cares for their family - they took ultra early retirement when their wife developed MS - bought some of Neil Woodford's high income shares recently (can't recall whether it was Aberdeen or Invesco Perpetual). I pointed out that they were much in demand and perhaps, therefore, caution might be advised. But as he put it, where else to go for icnome?

I note this morning, against a rising market, SSE and Centrica are both down, probab;y off the back of Red Ed's big plan to steal other people's money (what else are socialists for eh?). Both are part of Mr Woodford's high income portfollio, so my friends capital will have taken a hit. Allegedly the energy companies are making huge profits. Apparently ~5% return on a equities is way too much, at least according to these market interveners, so investors, including pension funds, must be clobbered. So what to do with savings? Apparently BTL is on course to deliver total returns of ~13% this year. Whilst 5% on equities is unreasonable, 13% seems to be too little, as both parties seem intend on boosting the capital gains on that asset class. Moreover, Labour want unfettered funding of rent rises via the tax payer.

Still, it's all about caring for families. Free school meals, so parents don't have to cook for children. All day free care, so parenst don't have to spend any time with their children. Higher property prices so parents have to both work and work more hours - again away from their children.Censoring the internet so parents don't have to spend time with their children on the internet. It's all family friendly stuff. Well, in the same sense that shock and awe was all about bringing "peace" to Iraq and the Middle East.

If these policies really do appeal to parents it can only mean one of two things:

A ) they like stuff more than they like their children;

B ) they just don't like their children.

Meanwhile, lower stock prices for energy companies means it is less affordable for those companies to raise money via the equity markets. Higher share prices could have allowed a rights issue which could have helped pay for infrastructure and green investments. Now the companies will be forced to look to the debt matkets. They will be competing for funds with everyone else: that means offering an attractive rate, say via retail bonds. This not only creates a cost, which must be born by the consumer (who else is there?) . It could well mean a shortgage of mortage finance (through increased competition and hence higher offered interest rates), meaning higher mortgage rates. Or perhaps higher gilt yields, as government competes against the energy firms for funds. The equity markets are supposed to allow firms access to cheap capital by raising that as a risk asset. Labour just don't seem to understand this.

Of course, the government doesn't really need to compete with anyone for funds : they just get the BoE to print it up ... which weakens stirling and forces up the wholesale stirling price for gas.

Maggie understood you could not buck the market. Bet she never imagined just how much extending and pretending could be dreamt up tho.

I do agree that price fixing is not the way to go but I do disagree with a lot of what you have said.

1) Utilities are a guaranteed return with zero risk outside of gov intervention. If you have zero risk then returns should be extremely low. 5% sounds much too higher for zero risk investment.

2) All returns to investors come from productive society - that is the more that is taken as returns to investors the less that goes to workers as wages. If we have an increasing number wanting investment returns (as has been happening due to an aging of society) then the return per investor should fall. But instead of investors taking the hit the economic share going to workers has fallen, and those monies have been redirected to investors. So again 5% is way too much from this perspective also. Like it or not returns to investors should be gradually falling. We talk a lot about inter-generational inequities here. This is part and parcel of that.

3)The utilities have been underinvesting in infrastructure for decades. What other industry can do that, then instead of reducing returns to investors to pay for necessary capital spending, can instead hugely up prices? This shows how broken the idea of free-market forces operating for privatized utilities is.

4)The free school meals is a very good idea. The places where it's been tried it hugely improves pupil performance. There is less pupil disruption as hungry pupils don't focus well and act out. It builds up school moral and cohesion. Eating together (both pupils and teachers) in a "break bread together" scenario allows everyone to meet, greet, and socialize on an equal footing. As if in a way they were a large extended family. This also reduces pupil disruption as students are less likely to act out if they've been sitting and eating with that teacher. Moreover because everyone gets the same food it reduces social boundaries, there's no "poor people food", or social stigma for children from poorer families having to rely on free school meals while others don't. So in multiple ways its a very good thing for reducing future negative social costs, and improving the quality of our future workforce. It will save much more than it costs in the long term.

5)There are many things that he could promise that would have the necessary effect. Price fixing isn't one of them. For example he mandate the break up of the sellers of energy from those that produce it. Since currently they are both there is no reason for them to find the lowest cost sources, and they can mask politically sensitive selling profits as producer profits. He could force the energy co's to provide full accounts disclosure to OFGEM. Currently they don't. How can regulators properly regulate when they don't have access to all the info? Moreover this allows them to *hide* profits offshore. If he wanted to he could use the buying power of the gov to force proper competition between the energy producers. For example a state company that acts as the final seller of all gas/electricity to consumers. It would buy gas/electricity from the producers and sell it. The buying power of such a company would be high and thus it would force proper competition between producers. If no producer wanted to sell to the state company then the price that that state company was offering would be too low, and would need to be raised. It would function very much as the NHS does in buying drugs from Pfizer, GSK, etc.

Edited September 25, 2013 by alexw

[MrPin]

Look, these are now "private" companies!

If you don't like their shit, don't buy it!

It is a "free" market!!

[Goat]

1) Utilities are a guaranteed return with zero risk outside of gov intervention. If you have zero risk then returns should be extremely low. 5% sounds much too higher for zero risk investment.

EDF's corporate bonds are yielding 5.17%. Hargreaves Lansdown.

The market appears to disagree with you.

[Sour Mash]

Unfortunately for the policitians, the measures used to push up the price of houses also push up the price of essential stuff like food and energy. Strangely, the public don't seem to share the same enthusiasm for soaraway gas and electricity prices as they do for soaraway house prices.

If Ed wants lower energy prices, all he has to do is tell the BoE to stop printing money and allow interest rates to rise. Not likely to happen though - money printing is the new miracle economic cure-all.

[Dorkins]

there is so much in that interview - it just keeps giving

I guess it's hard to come up with a coherent and marketable plan for government when you're doing your absolute best to avoid mentioning any hard truths about the UK's economic situation i.e. house prices, debt levels, interest rates, inflation, fiat currency, government debt, bank balance sheets, deposit insurance etc etc

I'm no Miliband fanboy but I don't think it's entirely his fault, I expect they've done the focus groups and found that the electorate either don't want to hear it or wouldn't understand it even if they did. Uninformed and irrational electorate + vote-hungry politicians = bad policy.

We need a leader who is willing to put being right ahead of being popular. I think when we hear a senior politician utter the immortal words "house prices are too high" we will know we are finally getting somewhere.

Edited September 25, 2013 by Dorkins

[Venger]

Unfortunately for the policitians, the measures used to push up the price of houses also push up the price of essential stuff like food and energy. Strangely, the public don't seem to share the same enthusiasm for soaraway gas and electricity prices as they do for soaraway house prices.

If Ed wants lower energy prices, all he has to do is tell the BoE to stop printing money and allow interest rates to rise. Not likely to happen though - money printing is the new miracle economic cure-all.

Exactly.

Just like Labour. This price-fixing will probably help keep prices higher. Where we might otherwise have had a big price drop, when global market conditions that affect energy prices come into play, such as possible when the US taper happens, or more people find QE had no affect at all, except to make economic conditions worse, Milliband's intervention may keep prices high.

Half way though listening to him on iPlayer. Makes me cringe out. He's looked back a couple of decades and only seen energy prices rise, therefore, prices can only keep rising into the future? Hooray for the QE/stimulus at no cost to anyone, making us rich through higher house prices and energy prices.

[LiveinHope]

Exactly.

Just like Labour. This price-fixing will probably help keep prices higher. Where we might otherwise have had a big price drop, when global market conditions that affect energy prices come into play, such as possible when the US taper happens, or more people find QE had no affect at all, except to make economic conditions worse, Milliband's intervention may keep prices high.

Half way though listening to him on iPlayer. Makes me cringe out. He's looked back a couple of decades and only seen energy prices rise, therefore, prices can only keep rising into the future? Hooray for the QE/stimulus at no cost to anyone, making us rich through higher house prices and energy prices.

i wouldn't let him run for a bus

[porca misèria]

Always thought there was a danger in investing in public utilities and transport because they are too heavily regulated to be a safe long term bet.

Their price in the market is kept permanently (relatively) low by the risk of government messing.

Like insurance companies bearing the risk of a massive disaster generating big losses.

[porca misèria]

Temporary measures have a tendency to become permanent.

What happens on 1 January 2017? Does red ed really let the energy companies raise prices by 30%?

What happens in the run up to the 2019/20 general election? What chance of red ed capping them again? What do you think?

There's a regulator whose job includes making sure the prices charged are fair. I wonder what'll happen to them if a politician's whim usurps their role?

[ingermany]

There's a regulator whose job includes making sure the prices charged are fair. I wonder what'll happen to them if a politician's whim usurps their role?

Same as the BoE when Cameron changed monetary policy because he decided that houses needed to be made more expensive. Nothing.

[stormymonday_2011]

EDF's corporate bonds are yielding 5.17%. Hargreaves Lansdown.

The market appears to disagree with you.

That would not be the same EDF that is 84% owned by the French government

http://shareholders-and-investors.edf.com/edf-share/shareholding-structure-42691.html

So much for privatised utilities

It seems anyone can own our energy infrastructure apart from the British people who paid to have much of it built in the first place

Basically a lot of the energy profits are simply taxes we are paying to foreign governments to whom we have handed over our resources

Edited September 25, 2013 by stormymonday_2011

[Si1]

That would not be the same EDF that is 84% owned by the French government

http://shareholders-and-investors.edf.com/edf-share/shareholding-structure-42691.html

So much for privatised utilities

It seems anyone can own our energy infrastructure apart from the British people who paid to have much of it built in the first place

Basically a lot of the energy profits are simply taxes we are paying to foreign governments to whom we have handed over our resources

So what?

If they're good at it then its fair payment for a fair service.

Look up David Ricardo

[mfp123]

the UK has some of the lowest energy prices in europe, the lowest gas prices and lowish electricity prices.

the average profit on an annual household bill of £1315 bill is £65.

if people think it is a license to print money they should be snapping up shares in these companies.

if margins are approximately 5% and £65 per household per year, at exactly what prices does labour think it can freeze them at?

£1250???

[mfp123]

if politicians want to bring down energy prices they should be looking at ways to increase supply.

the starting point would be shale gas, which you can see the effects with the US.

freezing prices for 20 months doesnt change anything.

[alexw]

So what?

If they're good at it then its fair payment for a fair service.

Look up David Ricardo

So hang on, government owned utilities is bad, but if its the french gov owning our utilities its then ok?

[The Knimbies who say No]

the UK has some of the lowest energy prices in europe, the lowest gas prices and lowish electricity prices.

the average profit on an annual household bill of £1315 bill is £65.

if people think it is a license to print money they should be snapping up shares in these companies.

if margins are approximately 5% and £65 per household per year, at exactly what prices does labour think it can freeze them at?

£1250???

£65 per household per year profit? 27million households means £1.7Bn profit across the whole sector. Is this correct, or just some opaque accoutancy to mask the real figures. I very much doubt profits of £1.20 per week are typical but happy to be corrected.

[mfp123]

£65 per household per year profit? 27million households means £1.7Bn profit across the whole sector. Is this correct, or just some opaque accoutancy to mask the real figures. I very much doubt profits of £1.20 per week are typical but happy to be corrected.

that figure is for household bills. £65 per year from £1315 is 4.9% profit which looks about right - close to the 5% for the industry.

the key issue is that people want bills to be £600 or £700 per year like the US. increasing supply is what policy should be about. that would make a genuine difference to bills.

Edited September 25, 2013 by mfp123

[wonderpup]

So hang on, government owned utilities is bad, but if its the french gov owning our utilities its then ok?

It's the free market- apparently.

And there's this;

EDF has seen its prices capped at five per cent in France, leading to fears it will hit its 5.5 million UK customers with more ­double-digit prices to compensate.

http://www.mirror.co.uk/news/uk-news/energy-bills-uk-families-face-143538

So to clarify- the French government owns 84% of EDF, and they cap it's prices in France- so the only place they can make it pay is in the UK because our politicians are gullible enough to believe that a six member cartel is a free market and so cannot be questioned.

From the other side of the channel we must look like utter twats.

[The Knimbies who say No]

that figure is for household bills. £65 per year from £1315 is 4.9% profit which looks about right - close to the 5% for the industry.

Yeah but what about the accountancy issues?

http://www.business7.co.uk/business-news/company-results-and-forecasts/2013/05/22/sse-reports-6-rise-in-annual-profits-to-1-41bn-106408-23978759/

SSE have about 10 million customers(dunno if that's just households though). Their retails profits are quoted as £400 million, but they made £500 million on their wholesale operations and £1.4Bn overall. If the wholesale or other areas sell energy to the retail division, profits in the retail division can be whatever they want them to be. ie a quid a week or so.

Edited September 25, 2013 by The B.L.T.

[Si1]

So hang on, government owned utilities is bad, but if its the french gov owning our utilities its then ok?

Nope

Just opposed to monopolies

Not really bothered who owns them providing competition is fair

[South Lorne]

Yeah but what about the accountancy issues?

http://www.business7.co.uk/business-news/company-results-and-forecasts/2013/05/22/sse-reports-6-rise-in-annual-profits-to-1-41bn-106408-23978759/

SSE have about 10 million customers(dunno if that's just households though). Their retails profits are quoted as £400 million, but they made £500 million on their wholesale operations and £1.4Bn overall. If the wholesale or other areas sell energy to the retail division, profits in the retail division can be whatever they want them to be. ie a quid a week or so.

..the simple answer is to ban all wholesalers from owning retail outlets ...in a free market this is a conflict of interest....governments are thick and do not understand poor and possibly unethical business practice...if they understood business , lets face it, the full time politicians would not be politicians..............

[alexw]

the UK has some of the lowest energy prices in europe, the lowest gas prices and lowish electricity prices.

the average profit on an annual household bill of £1315 bill is £65.

if people think it is a license to print money they should be snapping up shares in these companies.

if margins are approximately 5% and £65 per household per year, at exactly what prices does labour think it can freeze them at?

£1250???

It certainly is....

"Critics of gas companies argue that they may make relatively modest profits from their residential businesses, but the companies are all vertically integrated and the profit margins in their “upstream” business tend to be much higher. Take Centrica, for instance. It made £1.09 billion profits from British Gas last year, a profit margin of 7.8 per cent, but its Centrica Energy business made £1.23 billion, a profit margin of 25 per cent. Labour believes these companies are big enough to absorb temporary losses."

http://www.telegraph.co.uk/news/politics/ed-miliband/10333495/Energy-price-freeze-a-flash-of-genius-or-a-crackpot-idea.html