Why utility reform won't be an issue for Labour

'In waltzed Kim Howells, Labour's competition spokesman, to tell them that the windfall profit tax was an act of spite that he heartily agreed with'
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The Independent Online
News reaches me of an extraordinary fracas, or rather a series of them, that took place this week under the umbrella of that usually restrained and well-meaning organisation, the Fabian Society. For obvious reasons, it is fashionable these days, possibly to the point of necessity, for businessmen to attend any event where Labour big wigs are going to be speaking. This particular one was organised by Neil Stewart, a New Labour groupie who now works for that master of commercial PR, Sir Tim Bell.

The conference was held under Chatham House rules, which means that nothing can be reported without permission, but since I was not there, I'm free to recount whatever I like.

Mr Stewart's theme was the well-trodden one of utilities, regulation and windfall profit taxes. The main disappointment came when Mike O'Brien, Labour's shadow financial secretary, billed as there to give a keynote address on Labour's plans for a windfall profit tax, refused to say anything about it at all. Much too sensitive, problematic and contentious for your ears seemed, to his audience of utility types, to be his general demeanour. It was already money-back time, but there was worse.

In waltzed Kim Howells, Labour's competition spokesman, to tell them that the windfall profit tax was an act of spite that he heartily agreed with. It was Labour's political duty to be nasty to the utilities whether it was justified or not, he said. It was therefore completely pointless trying to argue against it. He really couldn't give a damn whether it was right or wrong, it was going to happen anyway. Was he drunk or merely taking the piss? Whichever it was, there followed a heated exchange of views.

I recite this episode not just for its amusement value, but also because it tells a story. Everyone knows there is something wrong about our privatised utilities and the way they are regulated, but it is hard to articulate precisely what those things are or what to do about them. In many respects, Labour is worse at it even than the present Government, whose position, at least, has the merit of being unambiguous.

Broadly, ministers believe reform unnecessary. Warts and all, the system works reasonably well and much as it was supposed to, they say. Instead they vainly try to drive home the message that utility privatisation, far from being something to be ashamed of, is one of the great triumphs and achievements of 17 years of Tory rule, having led to enormous improvements in efficiency and standards of service across a great range of industries.

The trouble for New Labour is that though they might rail against fat cat salaries, "excessive" profits, bumper dividends and questionable standards of service, in their hearts, most of them know this to be true.

The question becomes, therefore, not one of how to put all these initiatives into reverse, but merely that of how to tweak and reform the system so as to answer the electorate's concerns. In this department, solutions are hard to find. For all the noise, heat and political point-scoring generated by fat cat salaries, the utilities are actually only part of a much wider pattern of corporate excess in Britain today. There were some particularly indefensible cases of it in the early years of water and electricity privatisation, but nowadays it is no worse among the utilities than anywhere else.

There doesn't seem a lot of point, therefore, in attacking fat cattery in the utilities if you are not going to confront it elsewhere as well, for the effect would be only to drive the best managers out of the industry. As for the more general problem of corporate excess, there are no easy answers here either, as the impotence of Greenbury has demonstrated. The only guaranteed method, penal rates of taxation for very high earners, has been all but ruled out by Tony Blair.

So Labour is stuck with its windfall profits tax as its only way of getting back at the fat cats. It would be naive of the utilities to believe they are going to change Labour's mind on this. Apart from anything else, this is for the time being Labour's only substantive tax proposal, the only way it has yet come up with of adding to Government revenues. In other respects, however, Labour has yet to define a credible policy for the utilities. There are ideas aplenty but none of them, when examined closely, really seems to fit the bill. Profit sharing between customers and shareholders has a superficial appeal, but when you think about it, this is actually just a complicated version of the present system of price cap regulation, whereby customers gain the benefits of efficiency gains at each periodic price review. Moreover, because it reduces the incentive for efficiency, customers might end up worse off.

A rather better approach might be sliding scale regulation, which matches any increase in dividends with an equal reduction in charges. Again, however, the incentive to efficiency that the present system gives is removed and, in any case, the degree of legislative, regulatory and organisational reform required probably makes it not worth the candle.

The upshot is that Labour is left creeping slowly but surely back to the Tory position - that the present regulatory setup is basically all right. This is the more so because with each successive price review it becomes progressively harder to sustain the charge of profiteering. With British Gas, we have now gone full circle; here the allegation is not that regulation is too lax but that it has become unacceptably harsh. The same will eventually happen with water and electricity. The utilities may have been privatised with too lax a regulatory regime, but by the time Labour gets into power, the system may largely have corrected itself. As a consequence the utilities may no longer be much of an issue. Their frenzy of unrestrained greed will have helped Labour get into government, but they will no longer be a problem that needs to be dealt with.

That last great bastion of retail price maintenance, over-the-counter medicines, has fallen, or it will do if John Bridgeman, director-general of fair trading, has his way. Normally I would stand full square behind Mr Bridgeman on an issue like this, but in this instance I don't. Retail price maintenance in OTC medicines supports a vital network of small local pharmacies throughout Britain. Mr Bridgeman's insistence that it will have little effect on them is fatuous and dangerous nonsense. By allowing himself to fall prey to Archie Norman's charm offensive, Mr Bridgeman threatens the future of hundreds of these enterprises. He might find it more convenient to satisfy his pharmacy needs at the nearest Asda, but he seems to forget that some people don't even have a car, let alone a chauffeur. What does he care? It won't be Mr Bridgeman who has to answer for this act of vandalism and recklessness. Someone else will be doing his job by then.