Friday, February 08, 2013

The companies who bring us electricity should belong to us

Many people have not heard of district network operators. They operate behind the scenes, separate from the National Grid and the transmission companies, and most people would not even suspect their existence.

These 14 companies manage the switchgear, transformers, cables and everything else that plays such a vital part in keeping the lights on and the machines running around the country.

The electricity suppliers, the people to whom you pay the bills, lease the use of these regional networks, in much the same way that other telephone companies lease the telephone network from BT.

As I exposed this week in this news story, the suppliers are forced to pay whatever charge is made to them by the DNOs, and this charge ends up as part of your electricity bill, which varies from region to region, but is on average 16%.

This is effectively a natural monopoly, which allows the companies owning the networks to set their prices at whatever level they see fit.

Moreover, we have found out that 85% of these companies are foreign owned, just as is the case with many of the UK's water and sewage utility companies. This is considered to be a way of bringing investment into the country.

This may be so, but no one will invest without wishing to make a profit, and it seems that most of the profit leaves the country.

This profit totalled over £1.2bn in 2011/12. The biggest profit by far in terms of dividend as a percentage of profit was made by Western Power Distribution, serving the South West, South Wales and the Midlands, whose owners, PPL, are in America. They made a pre-tax profit of £190m.

As Richard Hall from Consumer Focus comments: "The absence of competitors, and the certainty that there will always be demand for electricity, removes many of the incentives to keep performance up, and prices down, that most ordinary businesses face".

I am not necessarily criticising Ofgem, which seems to be doing its best to get a grip on the problem, but it is only two years into a price control programme, having failed to do anything of significance for many years previously.

What this topic needs is more exposure and public discussion.

Even more worrying than the fact that it is a monopoly, is that this business sector does not seem to have escaped the tendency found elsewhere in the economy, of large, especially foreign-owned companies, using tax avoidance schemes.

The company reports, which are all available on the Ofgem website, show that while some of them pay a reasonable amount of tax, others are paying nothing like the 26% rate of corporation tax that they should be paying.

For example, Electricity North West, owned in Australia and the USA, was actually given a rebate of £15m in 2011/12, and the previous year paid just 13% tax.

Eastern Power Networks, owned in Hong Kong, last year received a rebate of £10m, and the previous year rebate of £12m, or minus 57% of pre-tax profit. Its two sister companies, London Power Networks and South Eastern Power Networks, (the three make up UK Power Networks), paid 7% and 1% respectively.

Ofgem can do nothing about this, of course, it's up to HMRC.

But ultimately it's up to the government. I've written several times before about the scandals of poor investment and big profits being made by some water companies, and argued that the best model for utilities is a social enterprise one, as practised by Welsh Water.

This "not for profit" business structure sees not only Welsh Water making record-breaking investment in infrastructure, but taking on more workers and paying each customer, who is a shareholder, a bonus of £22 each, which amounted to £150m over seven years.

Mutual companies, like the Co-operative Banking Group and John Lewis, are sustainable social enterprises, owned by members, doing better than their counterparts in the fully private sector and, what's more, continuing to recycle their profits back into other UK businesses, as well as providing better value for customers.

As I keep saying, imagine all water companies and energy companies run this way. Even banks. It wouldn’t be a case of ‘us’ and ‘them’, but just ‘us’. It gives people themselves a level of responsibility for, and involvement in, the essential services that we need.

This feeling of co-ownership would help to put an end to the criticisms that are continually levelled against most banks, water and energy companies.

It's a myth that we need foreign owned companies to run our utilities in order to provide investment. What we need is good and responsible management. An effective way of achieving this is for them to be forced to become not-for-profit social enterprises, since their primary purpose is to provide a social service.

In the case of the DNOs, Ofgem has been wise to include on its independent panel that looks at customer relations Teresa Perchard, the director of policy and advocacy at Citizens Advice, and Malcolm Rigg, director of the Policy Studies Institute. They will hopefully bring some sensible pressure to bear, but it's a bit like using a spade to shift a mountain.

What's needed is a radical shakeup. But despite the clamour, the banking industry is largely carrying on as before the 2007 crisis. Government has proved itself ineffective in forcing them to become more responsible.

In the absence of any other regulation, we must look to Ofgem to force responsibility in this sector. Ofgem must be held to public account.

No comments: