British Gas is digging its own grave with its new price increase

The fundamental problem for the big six energy firms is essentially one of legitimacy

British Gas owner Centrica insists the price increase reflects rising distribution costs and various regulatory requirements (Getty)

As any couple knows, trust is the basis of a strong and stable relationship. If you don’t trust your partner there can be no peace of mind, even when they are behaving themselves.

It’s not so different from the public’s relationship with privatised utilities. British Gas is hiking electricity prices by 12.5 per cent at a time when inflation is just 2.6 per cent and wholesale energy prices are falling.

The parent company, Centrica, insists the increase reflects rising distribution costs and various regulatory requirements. Nevertheless, many suspect profit padding.

And that’s hardly surprising given what we know of the industry. The competition authorities themselves have confirmed that energy companies are exploiting the inertia of their less savvy customers to bolster their profits by some £1bn a year.

Some 17 million people, for various reasons, don’t switch suppliers, which means they get automatically dumped on the expensive standard variable tariffs of the big six suppliers. There’s nothing illegal about this. But most people nonetheless find it repellent.

And if private energy companies are prepared to gouge their customer base in this way, why wouldn’t they in other ways too? If you don’t trust someone, you tend not to give them the benefit of the doubt.

In the late 19th century, when electricity was first supplied to households, it was distributed by an eclectic mix of local enterprises. Some of these were owned by municipalities, others by local dignitaries, others by entrepreneurs. Profit was a motive for some, but the dominant driving force was civic pride and a desire to spread the fruits and synergies of the second industrial revolution.

After the Second World War provision was nationalised and consolidated into large regional boards. Retail distribution was only privatised in the late 1990s. Only then was the raw profit motive introduced into the domestic retail energy sector.

The remuneration of the bosses of electricity and gas companies took off. Consolidation and vertical integration became a justification for further salary hikes and bonus schemes to match those in the wider private corporate sector. The pay of the Centrica boss, Iain Conn, was £4.15m in 2016 – a sum local officials in charge of energy distribution before privatisation would have struggled to accumulate over their entire careers.

Retail energy privatisation was never popular. The suspicion was that corporations would simply exploit their natural monopolies and gouge the public. That suspicion has hardly been dispelled over the past 20 years.

The fundamental problem for the big six energy firms is essentially one of legitimacy. A similar crisis can be seen in public attitudes to the privatised train operating companies. It’s not that people think of the era of Public Electricity Suppliers and British Rail as a kind of golden age (at least not those who lived through it). But whatever the problems there were, people had a degree of confidence at that time that they were, at least, not being ripped off for the sake of higher dividends for shareholders or to hit targets for executives' bonus schemes.

Contrary to the mantra of the libertarian right, markets are not necessarily the magic solution to every problem. Markets are different. Buying gas or tap water is not like buying groceries or clothes. Commuting to work is not like booking a summer holiday flight. Private ownership and nominal competition do not automatically deliver beneficial results – especially if information is asymmetric, consumer purchases are only sporadic and effective competition is weak.

Unless we address the crisis of legitimacy in privatised utilities we are destined to continue spinning around the same spiral of distrust, where even when companies behave reasonably people suspect foul play.

Theresa May’s answer before the general election was to impose a modest cap on standard variable tariffs relative to the best offers of the energy companies. But that has now been abandoned. Instead an ineffectual regulator, Ofgem, has been told to solve the problem. The answer from Labour under Jeremy Corbyn and John McDonnell is to (gradually) renationalise – and not just in energy.

Given the way the political wind is blowing, this is primarily a challenge for those who genuinely believe the private supply of retail energy and several other formerly publicly provided services is worth preserving and can be made to work. It is when trust in a relationship breaks down irretrievably that radical solutions (and Labour’s manifesto fits that bill) really start to look attractive.