The dubious activities of big companies revealed in recent days show why effective regulation is vital in a market-led economy
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Getting heated: claims that traders manipulated wholesale prices of the gas market have raised questions about how well the sector is being regulated. Photograph: Nigel Roddis/Reuters
Have you noticed that, despite all the current uproar over the BBC, the Guardian and the Observer have both found time this week to shine the spotlight on national utilities that are, I think, rather more important to our daily lives even than the telly? I refer to gas and water, the means by which we stay warm, fed and watered enough to stay alive (and watch TV).
Terry Macalister's old-fashioned Guardian scoop this morning about a whistleblower's concerns for gas-price rigging is a belter of a tale that has already forced the government to promise a Commons statement today. But the Observer's exposé on Sunday of systemic corporate greed and tax avoidance by some of Britain's privatised water companies is also an impressive bit of digging into dubious financial engineering, every bit as labyrinthine as the supersewer the rascals are currently building under London.
The gas price story is a bit like the rigging of Libor, the London-based inter-bank lending rate, explains Macalister. The big six energy suppliers all deny involvement in any wrongdoing in the shape of manipulating the wholesale price of gas to maximise their own profits – as they would. But the financial services watchdog, the Financial Services Authority, and Ofgem, the energy regulator, are both investigating the allegations over the £300bn-a-year market, so we'll just have to wait and see what they turn up.
But in a week in which three major global corporations have been exposed for large-scale UK tax avoidance – mostly legal I expect, but deeply shocking and immoral – we're entitled to be sceptical. Here's the Guardian's report on Amazon, Google and, especially offensive, Starbucks (its claims to sell coffee have always been disputed in our house) – and here's Simon Hoggart's take. If you missed it, read it. It stinks.
But gas and water matter more than coffee, which couldn't do without either. What the Observer investigation showed is that Margaret Thatcher's privatisation in the late 80s – Michael Howard was her eager water minister, if I recall – has allowed big firms such as Thames Water to fall into the clutches of private equity groups, which concentrate on looking after shareholders and senior executives more than they do in investing in less leaky, more efficient pipes and plant for the customers.
All credit to Simon Hughes, the Lib Dem MP and deputy party leader, for digging into the £4bn supersewer's finances – here's his article – which will burden Londoners with bills that could have been avoided, and have kept profits safe from the UK tax authorities – a double injury. Anglian Water and Yorkshire Water are also in the frame.
I don't know about the other water barons, but let's hope they're in the clear as, for example, Costa Coffee is. Unlike Starbucks, which manipulates its income to avoid liability, Costa made £50m in Britain last year and paid £15m in tax. It is possible to be honest and prosper – many rich firms and individuals do. Costa also sells much better coffee, doesn't it? And let's hear it again for David Harding, founder of Winton Capital, who paid £34m in tax on income and dividends of £84m last year – the correct amount – without complaint.
In an interview with the Sunday Times, Harding said: "I think that if you want to be accepted by society, you have to be seen to be paying your share. I think the resentment and anger is felt among the middle class – the civil servants, the teachers, the soldiers, the public-sector workers, the professional classes, the backbone of the British nation."
So what do we do about it ? "Don't mourn, organise" as the Wobblies used to say. The Observer's Will Hutton makes a good start with four recommendations for water in his weekend column. Even the theoreticians of privatisation knew water would be a real challenge for their competition model because the stuff is much the same and has to travel through a single pipe. You could say it's a natural monopoly – as many did at the time.
Hutton's four ideas are: that the regulator (Ofwat) should have greater powers over balance-sheet strategies and approve borrowing plans because the rascals have – like the Glazer family at Manchester United – loaded the utility with debt; that such companies be required to pay corporation tax after appropriate deductions based on turnover; that non-exec directors be legally obliged to ensure the utilities do their job, which is to provide water, not profits; finally that ministers take a golden share in any firm that accepts the guarantee which the taxpayer provides for its undertakings.
As I never tired of saying during the height of the banking crisis – where under-regulated abuses were also insufficiently appreciated until too late – banks are like sewers. We may not like them but they are necessary to the orderly functioning of society, above all the provision of credit. We can't have shit running down the high street but we should try not to have shits running the banks or utilities on the high street either.
So what's gone wrong with the regulators? We've had trouble with rail regulation – a botched job from its mid-90s start – with water, banks, now the energy sector – where pricing between fuels and renewables is a recurring nightmare. Then there's the BBC, which is regulated by a mixture of the BBC Trust and Ofcom. As marketisation of the NHS gets into its stride, I anticipate grief for the NHS regulator (alas it's called Monitor, not OffSick as I'd hoped).
Regulation is a complex subject, has been for a century or more since President Teddy Roosevelt challenged the great oil and steel monopolists of America at their most predatory – his anti-trust regulation was pioneer work. Yet even a cursory glance at the UK model developed when Thatcher first privatised British Telecom in 1982 shows that its price cap model, known as RPI-X and devised by Stephen Littlechild, has been widely admired and adapted abroad in preference to the US model, based on a rate of return on capital. US utilities are hated – as Hurricane Sandy again reminded Americans the other day.
As recently as 2007 – just before the financial crash – a House of Lords select committee on regulation came up with what reads like a rather complacent report, proposing some changes but also concluding that "on the whole, the legislation is thought to be working well" for both regulators and regulated.
Well, up to a point, Lord Copper. My layman's impression is that regulatory regimes vary and they change as key personnel change and the economic balance of power between the various industries and the government of the day changes. Thus the National Institute for Health and Clinical Excellence (Nice) – the pharmaceutical regulator that decides what drugs have enough benefit to be worth the cost to the NHS – is famously efficient (and cautious), so it's always under attack from big pharma, now facing tough times as its most lucrative patents end and no magic replacements emerge from the research labs.
But patients and their tabloids complain too. It's never easy. But the danger with regulation must surely be "producer capture", the idea that those in charge of overseeing an industry get bullied or seduced into seeing their job as the water company or the power generator does. After all, the private-sector operative is generally slicker, better paid and backed by an army of lawyers. Some tax officials who turn out to be very good at it can easily be lured into changing sides, can't they?
So there is an inherent asymmetry of power and information in the relationship that puts the public authorities at a disadvantage. Does it mean that privatisation of what we used to call "natural monopolies" was a mistake? Not necessarily. The phone business changed out of all proportion and recognisable shape in previously unimaginable ways after privatisation.
And you wouldn't want to wait six months for your new mobile (as we used to do for fixed voice-only land lines when they were still rationed by queues in the 70s), would you?
But water may be a natural monopoly (Scottish Water remains owned by the state) and claims that privatisation would improve innovation, efficiency, access to capital markets and competition have – as the Observer showed on Sunday – been proved to be only partly true at best.
Rail? Plenty of sensible people think it might be better in state ownership and seems to be drifting back that way by virtue of successive failures by private franchise holders. I'm not so sure: the trains are much better now.
As for the banks, well, there again, we've all ended up owning several of them and most – not all – of the rest are in disgrace for greed, incompetence and dishonesty. Those the taxpayer owns don't seem very responsive to public policy – which requires them to lend more. But there again, the government and the EU are busy piling costly new stable door regulations on them, notably to rebuild safer levels of reserve capital, which contradict the lending imperative.
After three decades in which market wisdom was allowed its head, inadequately checked, we are seeing its limits very clearly. In a market-led economy, effective regulation is central and vital – like having an effective police force (are police commissioners the answer?) – so parliament and Whitehall should both take a more aggressive interest.
There are signs of this happening, not least in George Osborne's recasting of bank regulation in the hope of doing better than Gordon Brown in 1997. Touch wood. And if you want to know more there's a seminar upcoming at Oxford. Five whole days and yours for just £3,100. Plus VAT of course.
Alternatively, the authorities could summon up the will to send a few of the rascals to prison. That would concentrate minds wonderfully. Tax swoops on Mayfair and the City. If they can do it in New York, we can do it here. Who knows, if voters get really angry, they may be safer in the slammer.
