First it was Ed Milliband wanting to impose an energy price freeze, now John Major has gone even further banging on about a windfall tax. What are these guys on?
Major seems to think the energy suppliers are profiteering - taking exceptional rents. Now, hang on a minute, John. These companies are operating in a market for a couple of undifferentiated products (electricity and gas). The former essentially has its price set by world-traded raw materials and conversion costs and the latter is itself a world traded commodity. So we should not be shocked to see that their offers are very similar. These firms are not going to compete like mad on price - loosing customers hurts the bottom line because they would have to spread their fixed costs over a smaller customer base; and winning customers is expensive. Sure, there's a little jockeying around the edges but they ain't going to rock the boat too hard.
It's true that the barriers to entry into the market are high so, surprise, surprise, we have just 6 major companies operating in this country. This is about the norm for this sort of market. Could they be colluding and taking super-rents? Well, just possibly - price signals are easy to make in this market - but sooner or later someone would break ranks and I think we'd settle back to their returns hitting their cost of capital. And if there is mischief it's not for someone to impose a windfall tax without assembling the evidence. What are the competition authorities for? (And eventually the courts?).
The real shame of all this posturing is the potential for investors to run a mile. Britain is in dire need of new plant and other infrastructure. The sight of governmental meddling is just what shareholders do not want.
This issue is too important for populist grandstanding - our politicians should be big enough to get off their soap boxes and provide the right environment for sustained investment.
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