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Let There Be Light: Evaluating Legal Reform of Energy Companies

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About The Author

Anirudh Mandagere (Former Law and Social Policy Editor)

Anirudh is the judicial assistant to Lord Justice Jackson. Previously he studied History at St. Catherine’s College, University of Oxford and undertook the Graduate Diploma in Law and the Bar Professional Training Course at City University. Outside of the law, Anirudh enjoys running, badminton and watching the cult Netflix series, ‘Bojack Horseman’.

The rising cost of energy occupies a prominent position in political discourse. At the 2013 Labour Party Conference, Ed Miliband announced a freeze of energy prices and new powers for regulators to cut high energy costs. The new Labour Party leader Jeremy Corbyn has gone even further arguing that nationalisation of the leading energy companies is the best method to significantly reduce energy costs. While Corbyn’s scheme is clearly more radical than anything Miliband proposed, both figures derive their solutions from the same political philosophy. This is the belief that Britain is in the midst of a ‘cost of living crisis’, in which people on an average wage struggle to afford basic essentials such as food, rent and travel.

It is unlikely that the debate about energy costs will simmer down anytime soon. Reform of the major companies so that they work in the interest of the consumer will continue to be on political agenda for a long time. This article will examine the current structure of the energy companies, critically evaluate the proposals for nationalisation and discuss the potential for legal reform.

Current Structure of the Energy Companies

The government of Margaret Thatcher was particularly concerned with privatising state monopolies. It perceived public ownership as inefficient, wasteful and responsible for long-term economic decline. Energy was no exception to the rule: gas was privatised in 1986 and electricity followed suit in 1990. These two industries were further transformed in 1998, as existing barriers to entry were broken and a myriad of suppliers came to compete with the privatised companies. In the same year consumers were given the freedom to choose energy suppliers; we take this for granted now – but this basic option was not available in any other major economy at the time.

In 2015, problems are emerging with privatised energy companies. In the first decade of the twenty-first century, some suppliers failed, whilst others merged with larger entities. Now, there are six large suppliers – colloquially termed as the ‘Big Six’, who occupy a market share of 99% of energy supply. While a choice of six suppliers is wider than in other leading economies such as Sweden or Germany, the fact that in recent years there have been few market entrants to challenge the ‘Big Six’ is undoubtedly concerning. Moreover, the freedom to choose suppliers has come under heavy strain over the last few years. An investigation by the Guardian has shown the extent of obfuscation that comes with trying to switch providers.

The most pressing problem with the status quo however is the steep rise in energy prices. Since 2010, gas and electricity bills have risen by three times the level of inflation. Taking a more long-term view, the average bill for a UK household for gas and electricity has increased by 170% and 64% respectively in the past decade. This has tremendous social consequences, particularly for the poorest in the society. There are over two million people living in ‘fuel poverty’, a measure in which a household’s fuel cost leaves the household below the official poor line. Jack Monroe has written movingly about the effects of high energy costs, and in particular the choice that some have to face between ‘heating and eating’.

The current situation has substantially increased the popularity of nationalisation. Indeed, in a recent survey the British public overwhelmingly support nationalisation, by 68% to 21%. But is re-nationalisation a realistic endeavour? And would it solve the problems caused by the current status quo?

Examining Nationalisation

Under a Corbyn government, nationalisation of the energy companies would be pursued by purchasing shares in the utility companies so that the state has a controlling interest. However, others have questioned this approach, arguing that it would contravene EU law. Specifically, this would mean contravening Article 101 of the Treaty on the Functioning of the European Union (TFEU), which prohibits anything which ‘has the object or effect of preventing, restricting or distorting competition’. Indeed, the European Commission has been particularly interested in promoting energy liberalisation; it has issued directives in 1996, 1998 and 2003 encouraging private ownership and liberalisation of the energy companies. This is designed to ensure that there is healthy competition within the energy sector, and that consumers can choose which provider they want. Indeed, 15% of shares in the Romanian gas company ‘Transgaz’ were sold to private investors so that Romania could be eligible for EU membership. Even in countries with state energy companies there is a degree of liberalisation to make sure that consumers are not beholden to one bureaucratic model. For example, the energy company EDF is majority-owned by the French state, and supplied electricity to 93% of French households in 2012 alone. However, in response to the growing liberalisation of the European energy market, in 2005 the French government part-privatised EDF and floated shares on the Paris stock exchange. Given this trend for liberalisation, Corbyn’s plans seem to run directly counter to the fundamental policy behind the EU competition law. The question we arrive at is therefore whether the EU membership and energy nationalisation are mutually exclusive or not?

In short, not necessarily; Hungary provides an example of nationalisation within the remit of the European Commission. In 2013, the Hungarian state-owned company MVM bought the Hungarian national gas operations of E.ON, which supply energy to the majority of Hungarian households. Two years later, it set up the ‘First National Utilities Company’, which aimed to make the state the sole player in Hungary’s natural gas, heating, energy and distance heating sector. The European Commission accepted this re-nationalisation, noting that under Article 345 TFEU treaties do not prejudice the ‘system of ownership’ within its member states.

Setting up a publicly-owned company would be admissible, providing that the company acts in all respects as a private one would normally do. Under Article 107 TFEU, this would forbid any ‘state aid’ such as tax exemption, interest rate relief or state grants to the nationalised energy company. This policy is in accordance with the Commission’s role in promoting competition, and one that it has been stringent in enforcing. Most importantly for a Corbyn government, this would mean that the state would not receive any potential discount for purchasing all the shares. In practice, the state would have to abide by stock market rules and purchase all the equity required if it wished to gain a controlling interest. In all likelihood, this would mean an expensive purchase price, especially when considering that the state would also have to compensate private investors. Under the prospective Transatlantic Trade and Investment Partnership (TTIP), it may well be the ‘Investor-State Dispute System’, an independent arbitration system, rather than government who would decide how much to compensate investors. Indeed, analysts at Jeffries stockbrokers have suggested that the total cost would be a staggering £124bn. To put this in context, £119.5bn is the projected target for the entire welfare budget.

There needs to be careful thought about this endeavour. Nationalisation is a hugely complex, bureaucratic and expensive solution – so there needs to be at least some guarantee that the process would reduce costs and ensure the security of energy supply. However, there is little evidence that this would be the case. On a purely theoretical level, the major problem with nationalisation is its role in crowding out the market, placing the state in such a dominant position that consumers face a lack of basic choice of supply. Now it is true that privatisation has come under fire for its perceived role in replacing state monopolies with equally unaccountable private monopolies. However, when privatised companies have come under fire, it is usually the nationalised aspect of the privatised industry that is actually under fire. For example, when consumers complain about delays on a privatised train company; in effect it is the ownership of nationalised infrastructure that usually causes the delay.

On a practical level, the French model has been held up as one to follow. As mentioned before, the majority of French households are supplied by the state energy supplier EDF, which some have argued has been a major success story. Indeed, in 2011 the then energy secretary Chris Huhne noted that while electricity prices in France rose only by 3%, in Britain they rose by almost 9%. However, it does not follow that a French-style nationalised energy company would provide a better deal for consumers. A household in London has cheaper gas costs than its Parisian equivalent, and has the second-cheapest gas costs overall in the EU. Cheap electricity costs in France are a result of forty years of French investment in nuclear reactors, which are currently experiencing a whole host of problems, including projects being delayed, cancelled or running over-budget. This is rooted in the structure of the state-backed nuclear company Areva, which is essentially run by ‘a collection of civil servants representing the different ministries in Paris’. In an age when Areva must compete with a range of cheaper energy options worldwide, a nationalised approach has empowered a resistant bureaucracy.

A clear example of how such a system does not provide a good deal for the consumer can be found in Hinkley, Somerset. While Britain does not have an equivalent of EDF, the government has decided to directly fund nuclear-power stations. In 2013, the British government negotiated with EDF a contract for a nuclear power station, and the result has been described as a ‘major national scandal’. EDF has been given enormous taxpayer subsidies, so much so that it will be paid twice the current price of electricity it generates for about three decades. Despite enormous subsidies of over £24.5bn, the generator is now predicted to provide only 3.2 gigawatts of electricity. To put this in perspective, a gas-fired power station in Pembroke can already provide 2 gigawatts of unsubsidised power at half the price. The Hinkley power station is running vastly behind schedule and has caused significant embarrassment for the government. This example demonstrates who benefits when the state gets directly involved in energy matters. Power is not within the hands of the voter, but in the hands of lobbyists who seek taxpayers’ money for corporate welfare. This is not a desirable model for the UK to follow.

Some argue that privatised industries place the interests of shareholders above the interests of consumers. Yet in reality, it is also the regulators who have impeded competition and given the consumer a worse deal. It is noted that 34% of households in Britain had ‘never considered switching supplier’, which has enabled energy companies to become so unaccountable. This is primarily because since 2008 the energy regulator Ofgem has actively reduced competition by limiting the number of tariffs an energy company can offer. Consumers have been short-changed since this move; indeed E.ON has withdrawn its ‘Staywarm’ tariff which was geared to the over-60s market who wanted a fixed charge per month. Since Ofgem reduced the number of tariffs, the average price cut offered by the ‘Big Six’ has halved.

A nationalised approach is a zero-sum game. Rather, it is time to take a closer look at privatisation, for the data reveals an astonishing fact. Fourteen years after the industries were privatised, energy bills became cheaper. For example, gas prices fell by 16% and the annual electricity bill fell by 25%. Admittedly, this was due to falling world energy prices, but only the privatised energy industries could take advantage of it. In the 1970s, a similar situation occurred in which natural gas was cheaper than coal. However, the Central Electricity Generation Board (CEGB) was ordered by the government to buy expensive British coal rather than natural gas to prop up the state-owned coal mines. Privatisation released energy companies from following political special interests; it gave them the freedom to buy cheap natural gas and to offer better deals to consumers.

An Inconvenient Truth

EU law does not prohibit nationalisation. However, it would be costly, and require time and effort to nationalise the energy sector while simultaneously avoiding breaching the EU state aid rules. In addition, it also remains unlikely that the end product of nationalisation would necessarily involve lower energy prices.

So if nationalisation does not work, what will? The answer lies in the remarkable change that has occurred in the law governing energy companies. Ever since the turn of the millennium, governments in the UK have returned to increasing state control over energy companies. olicy in the energy sector is driven by a series of Energy Acts, which have been amended six times since 2008. Over the past decade, a variety of energy legislation has expanded environmental subsidies, which have increased household electricity bills by 15% and gas bills by 5%. By subsidising renewables and hiding insulation schemes within energy bills, environmental legislation has increased energy prices and hurt the poorest in society. As the Institute of Fiscal Studies has noted, ‘environmental policies drive up energy prices…significantly through the impact on generation and network investment costs’. There is a directly proportional relationship between energy costs and government intervention in support of renewable energy. The most striking example of this is in Germany, where investment in renewable energy network has led to prices doubling that of Britain.

Moreover, encouraging competition and challenging the ‘Big Six’ does not require new legislation to be effective. A reverse auction held by ‘Which?’, allowed energy suppliers to offer group discounts. In this scenario, the seller (an energy supplier) competed to obtain business by undercutting other rivals. This led to 38,000 customers switching suppliers and saving on average £223 on their energy bills. If such reverse auctions were recognised and promoted by the government, in a similar manner to the ‘Tell Sid’ campaign, then the role of the ‘Big Six’ could be challenged without the need for excess regulation. This approach has been embraced by the EU for its role in stimulating competition; the 2006 EU Procurement Directives include Article 54 of the Public Sector Directive and Article 56 of the Utilities Directive, which both offer a regulatory framework for reverse auctions.

This is not to say that the government should play no role in safeguarding the environment. Rather than enshrining subsidies in law, it would be more efficient to replace such legislation with a carbon tax. It would encourage businesses and consumers to reduce emissions in a way that is most convenient to them, rather than by raising costs through a complex mass of subsidies.

Nationalisation may not be contrary to EU Law, as long as the state aid rules are followed and there is adequate compensation given to private investors. Indeed, the case of Hungary shows that re-nationalising an energy company is not prohibited by EU Law and can be carried out. While it may be legal, it is not a desirable option for the UK Energy Sector. It would stifle what little competition there is left in the energy sector and would require an extraordinary level of investment in nuclear power stations. Rather, energy reform should tackle the heart of the problems facing the industry: environmental subsidies and legislation which artificially inflate prices and distort the market.

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Tagged: Commercial Law, Competition, International Law

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