IMAGE CREDIT: Chris Guy / Croydon Gasometer 1997
We’re in an unusual situation today, where the two main parties have a very similar manifesto pledge, of instituting a ‘price cap’ on domestic energy bills. We don’t know exactly what this will look like, so there’s not very much we can say about it. Further, being a civil servant who works with this area, and being under purdah, it wouldn’t be responsible for me to speculate or talk about party politics in this way. I can, however, look back at the British experience of price regulation in the past and share some thoughts about how I think the policy landscape shifted back to price regulation in spite of the deregulation we’ve experienced over the last twenty years or so.
Regulated prices were complementary to the nationalisation of energy companies that was initiated following the second world war, and retail gas and electricity prices set by the government went through phases of being well below, or above, the levels asked for by the nationalised corporation boards. Apparently, Harold Wilson’s government set prices well below what the boards asked for, and Thatcher did the opposite. As so much of this activity went on behind the scenes, the exact details are not clear.
By the late 1980s, the consensus on centralised economic planning faded. Many of the nationalised corporations were privatised and independent regulators were created; direct government interference in pricing was essentially blocked. However, regulated prices still persisted for a number of years following the privatisation of these companies. In the British electricity sector (similar to other British utility privatisations) this essentially took the form of a price cap set by the regulator, and was much more benign than previous attempts by central government – the regulators having a duty to promote competition. These price caps, set by the regulators, were justified as being 1) needed temporarily in ‘pre-competitive markets’, and 2) necessary in naturally monopolistic areas such as networks. Throughout the 1990s and early 2000s, Ofgem and its predecessors were successful in separating the ‘naturally monopolistic’ areas from the competitive sectors. At the same time, many of the stronger barriers to entry were removed. With increasing competition and more suppliers available to choose from, the original justification for regulated pricing no longer held up. From 2002, GB no longer had price regulation for gas and electricity supply.
What caused the shift back to price regulation?
I don’t think we can attribute a single event to why the policy landscape shifted so much. Rather, we can point out that it wasn’t a sudden event. The change of Ofgem’s objectives, to better act in the interests of consumers (alongside promoting competition), the simplification of tariffs (i.e. removing choice/number of products in the retail market), and the politicisation of energy tariffs that started with Miliband’s price freeze … These all extrapolate to some level of interference by the government or the regulator.