Intervenciones y tratamientos

In the UK during World War II, the price mechanism was sup-pressed in many markets and administrative rationing was sub-stituted to deal with the associated shortages. It was well into the 1950s before these controls were eased. Subsequently, given the then consensus about macroeconomic policy and the high rates of inflation that developed, governments of both major political parties tried, with little success, to intervene in markets to hold down prices and incomes. Prices and incomes policies, which attempted to persuade unions to rein back wage demands and employers to minimise price increases, were particularly popu-lar with governments in the 1960s and 1970s.

In the case of energy prices, governments had a degree of con-trol since the gas, electricity and coal industries were national-ised just after the end of World War II. Conflicts between nation-alised corporation boards and government about objectives and actions to achieve those objectives (including price setting) were common (Heald 1980) and governments frequently intervened by backdoor means to influence or even fix prices in the energy and other state-owned industries. Since so much of this activity went on behind the scenes, its scale is not entirely clear. Nevertheless, at times, it came out into the open. For example, in the 1970s,

2 A further damaging effect of price caps in energy markets could occur if a number of countries capped prices at the same time. In those circumstances, the effects could feed into markets for depletable primary energy products where producers might well assume that they should hold back supplies until prices rose in the future. The relevant theory of depletable resources is explained in Krautkraemer (1998). The rest of this chapter assumes that the UK is alone in capping prices.

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Harold Wilson’s government discussed and determined gas and electricity prices in Cabinet, holding them below the levels the nationalised corporations wished to charge because of concern about the impact of increasing gas and electricity prices on the retail prices index. It was not only Labour governments that in-terfered with nationalised industry prices. Before privatisation of the major utilities began in 1984,³ Margaret Thatcher’s gov-ernment intervened, but on that occasion it was (indirectly) to raise prices higher than the industries concerned wanted rather than to cap them. When government borrowing was soaring in the early 1980s, the 1983 Autumn Statement increased repay-ments by the nationalised gas and electricity industries to the government, making them raise the prices they charged their consumers (Marshall and Robinson 1984).

By the later 1980s, however, as the old consensus about cen-tralised direction of the economy faded and monetary policy was recognised as the main instrument in controlling inflation, prices and incomes policies disappeared from the policy agenda.

Furthermore, once many of the nationalised corporations were privatised and independent regulators were established, direct government interference in their pricing decisions became more difficult so that one favoured conduit for government price inter-ference was blocked.

Post privatisation

However, price controls of a different sort then became popular.

Along with privatisation of the utilities came a new form of regu-lation, including price controls, which was fortunately relatively benign because it was operated by regulators with duties to pro-mote competition (Robinson and Marshall 2006). As far as prices were concerned, the regulators of the newly privatised utilities

3 The first was the sale of 50 per cent of British Telecommunications in 1984.

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used a price cap based on general movements in retail prices but with a specific element for each industry. The RPI-X formula tied prices in an industry to the change in the general retail prices index (RPI) but minus a specific deduction for efficiency improve-ments (X) (Beesley and Littlechild 1983).⁴

The underlying idea of these controls, which were advocated by those who wished to liberalise markets, was that an RPI-X price cap was justified in either one of two sets of circumstances.

one was that the regulators, in pursuit of their duties to promote competition, needed to cap prices temporarily in ‘pre-tive markets’: that is, markets which were potentially competi-tive but which were not yet actually so. These controls were to be transitional, aimed at curbing temporary market power, and would be dropped as soon as effective competition had been achieved. In Beesley and Littlechild’s phrase, RPI-X was intended to ‘hold the fort’ until competition arrived.

Another justification for controls was in ‘naturally monopolis-tic’ sectors of the industries – in the case of energy, the networks of pipes and wires that carry energy from where it is produced to where it is consumed – where it was thought unlikely, short of some unexpected technological change, that competition would be feasible and efficient. These price caps on natural monopoly areas were conceived as permanent and necessary to prevent beneficiaries of a natural monopoly from exploiting their market power to the detriment of others. RPI-X was expected to provide better efficiency incentives than the main alternative which was US-style cost-plus regulation, which had a tendency to inflate costs and promote investment-intensity.⁵

4 In the case of water, prices were allowed to rise faster than RPI.

5 Under the US system, regulated companies were permitted to earn a percentage rate of return on their allowable costs (the ‘rate base’). Thus they had an incentive to inflate the rate base to increase their money return (Averch and Johnson 1963).

The UK regime has problems of its own, as does any regulatory intervention (see, for example, Crew and Kleindorfer 2006).

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In the late 1990s and early 2000s, the energy regulators⁶ pursued a successful policy of separating the natural monopoly networks from the potentially competitive sectors (a separation which had not been done at the time of privatisation in gas and not fully done in the case of electricity), as a precondition for the introduction of effective competition in all potentially compet-itive sectors. At the same time, barriers to entry to potentially competitive markets were removed and, as competition began to flourish, price controls were removed. All had gone by 2002, leav-ing RPI-X as a cap on prices in the natural monopoly networks.

In some other utility markets, the energy regulator’s policy of opening markets to competition where feasible and removing price controls was unfortunately not followed. In the water in-dustry in England and Wales, for instance, where prices in the regional monopoly companies were permitted to rise faster than RPI, there was no separation of potentially competitive sectors from the network. In water, privatised in 1989, far from price caps ‘holding the fort’ until competition arrived (Beesley and Littlechild 1983), prices are still largely set by the regulator. Com-petition has still not arrived despite some efforts in recent years to introduce it.

Under the benign approach in the energy market, in which the utility regulator promoted competition wherever feasible and only resorted to price controls in other markets where monopoly seemed inevitable, there were considerable benefits for energy consumers, large and small, especially after 1998 when all con-sumers were given choice of supplier. Providing concon-sumers with the power of exit from suppliers they did not like was a massive step forward, which no other country had taken. There was suf-ficient rivalry to induce suppliers to reduce and then keep down costs and prices. Domestic consumers who switched supplier

6 The original energy regulators (offer for electricity and ofgas for gas) were com-bined in ofgem in 2000.

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typically obtained price reductions of about 20 per cent for gas and 10 per cent for electricity.⁷