Yves here. This post is important not just in and of itself but also as an example of the methods and costs of rent-seeking.

By Raúl Ilargi Meijer, editor-in-chief of The Automatic Earth, Cross posted from Automatic Earth

My personal view of how communities should manage the production and distribution of their basic necessities is very different from what has become the accepted model in the western world. The running mantra says that private industries are better at anything and everything than governments are, and hence, than communities are.

What I think is that even if that were true, and from what I see it’s much more of an ideology than a proven fact, even if it were true it wouldn’t make any difference. Because as far as I can see, it’s essential and crucial to the well-being, and indeed the survival of a community, to control production and distribution of its basic needs. It may not be evident at all times, but, like with so many things, when shortages or other problems set in, so does reality. And a community will realize too late that it’s fine to pay a small prize for its independence.

And here, after Energy Is A Power Game – 1 and Energy Is A Power Game – 2 (Britain Is Losing), I return one more time to Britain and its energy politics. After Thatcher was done, the British people were left with very little ownership of both their energy sources and the relevant distribution systems. It may have taken 25 years or so, about an entire generation, but today the bills are due for what was decided under her leadership and her alleged free market beliefs. And now the people are stuck. Exactly how stuck they are is what they will find out from here on in, and they’re not going to like it one bit.

But there’s little left to do, the die have been cast. There are voices now clamoring for a “full-scale” reform, but they had one of those 25 years ago, and it created, instead of the promised increase in competition and decrease in prices, an – often foreign-owned – energy cartel that now has an iron grip on Britain.

Today, October 29, the Commons Energy and Climate Change Select Committee will start doing a lot of posturing when they get to “grill” the heads of their big six energy corporations. But other than a ton of questions, mucho posturing and a few superficial changes, plus lots and lots of promises made to allow everyone to save face at least to some degree, the MPs are powerless and toothless. They can ask any question they want, but control over power generation and distribution in Britain has already been squandered away.

They could hypothetically elect to re-nationalize the entire industry, but while it may be the only possible way to go down the line (as industry insider Euan Mearns also suggested), that’s not going to happen any time soon.

UK household gas prices have risen faster than in any other major European country

Household gas prices in Britain have risen faster than in any other major European country, the Sunday People can reveal. Research shows they rocketed by nearly 200% in 10 years, compared with less than 40% in Denmark. And the whopping increases show no sign of being curbed after ScottishPower became the latest Big Six energy company to put up its prices. The firm announced a rise of 8.5%, joining Npower’s 11.1%, SSE’s 8.2% and British Gas on 8.4%.

The rises will hit five million British families already choosing between heating and eating and push them even further into fuel poverty. And it makes the UK second only to Estonia for customers struggling to pay their energy bills. Shadow energy secretary Caroline Flint told the Sunday People: “These figures lay bare the full scale of the cost of living crisis facing Britain.”

Energy prices in Britain are double those of the US, although lower than in Germany, France, Ireland and Spain. But France and Spain cap rises by making prices fit an index-linked formula. Labour leader Ed Miliband is planning something similar by freezing energy prices for 20 months if he becomes PM in 2015. That is predicted to save 27 million homes an average of £120 a year.

I have no idea if the people in Britain were aware of this, but it seems obvious that once they do, it’s not going to make them happy. A 200% rise in a decade looks pretty insane, especially when that decade contains a full-blown financial crisis. And the questionable behavior continues:

Energy firms raised prices despite drop in wholesale costs

Some of Britain’s big six energy companies have seen their wholesale electricity costs fall over the last three years while still putting up prices for millions of households. The figures will put yet more pressure on the firms to explain why bills and UK profits have been going up, as they appear before a influential House of Commons committee of MPs.

According to Ofgem, Npower paid an average of £59.61 per megawatt-hour for electricity in 2010. The average wholesale price fell by 4% to £57.32 in 2011 and rose by less than 2% to £58.39 in 2012. The company increased retail prices by 5.1%, 7.2% and 9.1% respectively in those years.

Similarly, EDF paid wholesale prices for electricity supplied to households of £58.16MWh in 2010, falling by 0.6% to £57.82 in 2011 and rising less than 5% to £60.68 in 2012. In those years EDF’s electricity prices to customers went up by 7.5%, 4.5% and 10.8% respectively.

Meanwhile E.ON paid £57.64MWh for its electricity in 2010, rising by 7% to £61.82 in 2011 and falling by 4% to £59.44 in 2012. It raised its power prices twice by a cumulative 20% in 2011, before cutting them by 6% in 2012.

Asked why wholesale prices appeared to be out of kilter with increases in bills, companies said network and environmental costs had been the biggest factor in higher electricity bills, which are now around £600 a year on average. However, figures from Ofgem indicate electricity network costs have only risen by £10 in each of the last four years, while green costs are rising by a similar amount. Green and social levies make up £112, or less than 9%, of the average household energy bill.

Perhaps an even bigger problem, however, from an ethics point of view, is what the energy companies have been pulling behind the curtain:

British Gas rakes in £20 million profit from overestimated bills, says whistleblower

Energy giant British Gas is siphoning off millions of pounds of extra profits annually by keeping hold of money owed to former customers who have built up credit on their accounts. A whistleblower has told the Observer that £20m-worth of “credit balances” was put into the annual accounts of British Gas in one recent financial year. The shadow energy secretary, Caroline Flint, said she was “shocked” by revelations about the credit windfall, which she said was “unacceptable”.

Under the current system, energy companies estimate customers’ future usage and charge accordingly. If less energy is used, credit is built up which can be reclaimed or used to offset higher-than-expected subsequent bills. The profits from “credit” were taken by British Gas in cases where private or business customers had been overcharged on the basis of estimated bills, and then changed to another supplier, or ceased using British Gas for other reasons, with the outstanding sum owed to them still on their accounts.

British Gas – which argues that it is unable to track down all customers who have left them, changed addresses, or gone bankrupt – used to wait six years before taking the cash. But the whistleblower claims a special team was set up – partly based at a Leicester call centre – to fast forward this process so that investigations to locate people would be launched, and the money then taken into company accounts over a much shorter timescale.

Under this new arrangement, British Gas then took years of accumulated credit owed on accounts to augment its income. While there is nothing illegal about this, the source said British Gas was apparently nervous about how the move would be viewed if it became public. “We were briefed about how sensitive this was and there was endless talk about how this would look if it ended up on the front page of a newspaper,” said the whistleblower. He believes that all the other power companies also take this kind of money back into their accounts as profit but only after six years.

These guys are pretty shameless. And why shouldn’t they be? Who’s going to touch them? Who do we think controls what here?

Record numbers fight to claim back £1.2 billion overpayments which make energy companies £12 million interest a year

Sunday Mirror research shows that energy firms are sitting on direct debit customers’ credit – and raking in £12m a year interest. Record numbers of customers are battling power giants to claw back the £1.2 billion they have overpaid. The independent energy ombudsman is being flooded with billing complaints after the Sunday Mirror last week revealed the massive scale of the scandal. Our research found energy firms were sitting on the fortune that belongs to direct debit customers in credit – and raking in more than £12 million a year interest.

Nine out of 10 complaints to the ombudsman are about bills. The most common problems are mistakes on charges and inaccurate meter readings. In the past two months alone the ombudsman has agreed to investigate 3,304 complaints – up from 1,533 in the same period last year. A spokesman said: “These are cases we have accepted for investigation. “We have dealt with thousands of complaints from people who say they have been overcharged.”

Not that they’re ready to give a single inch, and again: why should they?

Energy giants: Our profits aren’t large… as direct debit interest helps them rake in £3.7billion

The head of Energy UK has claimed the Big Six energy firms do not make large profits – despite the £3.7 billion they raked in last year. Angela Knight, chief executive of the body that represents the energy giants, made the claim as details emerged of the widespread tax avoidance employed legally by energy firms. It was also revealed that companies are making an estimated £36 million a year in interest on the credit built up by customers paying via direct debit.

Miss Knight, a former Tory MP, said: ‘They might be politically popular, but price freezes have never worked and never will work,’ she said. ‘Windfall taxes have taken place in the past where there have been windfall profits. The profits here of four or five pence in the pound aren’t particularly big.’ [..]

While the Big Six – British Gas, SSE, nPower, E.On, EDF and Scottish Power – make profits of around 4 or 5% from supplying energy to households and businesses, they make an average of 22% from generating electricity, sourcing and storing gas, and transporting energy. [..]

More than three million older people are worried about staying warm indoors this winter – with six million anxious about rising fuel bills, says Age UK. But the charity said many are unaware of the potentially fatal consequences of living in poorly heated housing.

A 22% profit ratio. That’s quite something for an industry that should serve a society’s basic needs. Still, this next bit is at least as tasty:

The other energy scandal – power giants use loophole to cut their own tax bills

As Britons buckle under the pressure of soaring energy bills, The Independent on Sunday can reveal the energy companies that are saving millions by exploiting a legal tax loophole.

Scotia Gas, 50% of which is owned by SSE, the energy giant which is about to put its prices up by more than 8%, has avoided an estimated £72.5m in tax. UK Power Networks and Electricity North West, responsible for running large sections of Britain’s electricity network, have both saved more than £30m.

UK Power Networks, which owns and maintains power cables and lines for eight million people in London, the South-east and East of England, has avoided an estimated £38m since 2010 from paying £164.4m via the Cayman Islands to firms controlled by Li Ka-shing, a Hong Kong tycoon and Asia’s richest man. His Cheung Kong group also owns Northumbrian Water, among several water firms that use the quoted Eurobond exemption.

Electricity North West owns and operates the region’s electricity distribution network, connecting 2.4 million properties to the National Grid. It has avoided an estimated £30m in tax after sending £107.2m to its owners, JP Morgan Infrastructure Investments Fund and Colonial First State, since they bought it in 2007.

More than 30 UK companies have cut taxable profits by racking up interest on debt from their owners. In doing so, this minimises – in some cases wipes out – their UK corporation tax bill. As most of the owners are based abroad, 20% of the interest payments would usually have to be sent straight to HMRC, minimising the overall saving. But as the money is lent via offshore stock exchanges that qualify for a regulatory loophole called the “quoted Eurobond exemption”, no tax is withheld.

Scotia Gas is the second-largest gas distribution firm in the UK, serving 5.8 million people in Scotland and in the South and South-east of England. While half of it is owned by SSE, the rest is owned by the Ontario Municipal Employees Retirement System and the Ontario Teachers’ Pension Plan. After they bought the networks from National Grid Plc in 2005, the new owners lent the majority of their money – about £530 million at a 12.5% interest rate – through the Channel Islands Stock Exchange rather than investing it in shares in the company. Scotia has since paid interest of £537.3 million on these loans.

The Ontario Teachers’ Pension Plan also owns National Lottery operator Camelot and Bristol Airport, both revealed to be using the tax-avoidance scheme last week. It is among several foreign pension funds investing through this legal loophole. [..]

The Eurobond exemption was introduced in 1984 to encourage third-party investment into UK companies. But analysis of listings on the Channel Islands Stock Exchange and UK company accounts shows firms across the economy are using it to minimise tax bills by borrowing from their owners. More than £2bn a year has left the UK as interest payments to owners, avoiding an estimated £500m, compared with if loan amounts had been invested in companies’ shares. Given that other stock exchanges such as the Cayman Islands and Luxembourg qualify for the exemption, the total tax avoided is likely to be even higher.

UK Power Networks owner, Hong Kong tycoon Li Ka-shing’s Cheung Kong group, which also owns Northumbrian Water and several other water firms, avoids taxes through the Caymans. Scotia Gas, co-owned by energy giant SSE and the Ontario Municipal Employees Retirement System and Ontario Teachers’ Pension Plan, does it through the Channel Islands. The MO: they buy a company and lend it money at very high rates. On the case of Scotia Gas, since 2005, the new owners already made more in interest than the principal they put in in the first place. And counting.

This Eurobond exemption Thatcher set up may be a great profit machine for investors with deep pockets, but it’s mayhem for both the British nation as a whole, which loses £100s of millions in tax revenue, and for the taxpayer, who also doubles as client of one of the Big Six energy corporations. AND has already seen her/his energy bill rise 200% in 10 years, AND gets another 10% slapped on just in the next year. AND may want to check to water bill too, because that’s at least partly foreign owned as well.

Which makes me wonder how Thatcher followers, like Cameron, would today defend the decision to sell off all the public utilities she could get her hands on. Would they want to claim that it would have been worse if she hadn’t done it? Is that even possible? You deliberately set up an instrument to allow foreign investors to not pay taxes that a domestic investor would have had to pay?

Five questions that the big six energy firms must answer

The bosses of the big six energy companies will appear before the energy and climate change select committee on 29 October. The powerful group of MPs, chaired by Tim Yeo, will grill them on green levies, profit levels – and why consumers face such big increases in their bills. These are the questions they should ask: [..]

The companies will argue that their costs have risen hugely because of wholesale power price increases and “green” levies. Don’t take this at face value: companies buy a portfolio of future contracts lasting many years to ensure that their wholesale supplies will meet future retail demand. If they have underestimated their needs, that is their responsibility – and they could choose to absorb that cost. No one knows how much the power companies have bought in advance – and at what price – so independent experts have to take their arguments on trust. Green levies make up only 9% of the overall bill currently, a figure that will rise to 14% by 2020.[..]

Why is it that 30 years since the market began to be liberalised, a group of enormous firms still have a stranglehold over the sector? And why do they all put their prices up pretty much at exactly the same time, if they are not acting in concert in some way?[..]

Days ago, the last of the big six, Scottish Power, paid an £8.5m fine after Ofgem found inadequate training and monitoring of staff had led to inaccurate information on annual charges, consumption calculations and tariffs being given out. E.ON, which was fined £1.7m in 2012 for overcharging, had to pay an additional £2.5m this summer to help its poorest customers meet their fuel bills this winter after it was found to be selling low-energy light bulbs it should have given away. SSE was fined £10.5m for “prolonged and extensive” mis-selling, while British Gas was fined £1m two years ago for misreporting how much energy it had supplied.

Here’s a certain Dr. Phillip Lee, not coincidentally, I’m sure, a Conservative MP, calling for that full-scale reform which Thatcher already pushed through. He starts off with “Britain’s energy market is broken.”, and I’m thinking yeah, well, it was your guys and gals that broke it. And if you get to shape the next “reform” as well, what are the chances that this time around you’ll get it right, that you will actually put your voters’ interests first? If so, please explain what has happened to change your position. If you think the first round was badly bungled by your own party, then undo it. Retrace your steps. Engage the people, ask what they think needs to be done.

But that’s not Dr. Lee’s agenda. Quite the contrary, really. He’s a reconnaissance trooper, a first line combatant, ordered to promote the notion that what is wrong in the UK’s world of energy, is that pesky and very unfortunate 2008 Climate Change Act, which legally binds the government to all sorts of emissions standards.

After all, let’s be honest, how can domestic and foreign deep pockets maximize their profits selling power to British homes if they have to take all these CO2 related issues into account that they don’t even “believe” in? It’s just not fair …

Only full-scale reform of our energy market will prevent endless price rises

Britain’s energy market is broken. The most recent hike in prices is just the latest sign. There are more to come, and the unedifying thinking aloud from the political establishment is not going to fix it. We need full-scale energy market reform.

There is nothing we can do with today’s UK energy market to stop consumers from being hit by even more unfair price increases. Just as worryingly, it is impossible to guarantee that the UK’s current market and our energy policies will make it possible to meet the demand for affordable energy, which is mushrooming as our economy grows, our population rises. It does not work like that.

In fact, it is not clear that a true market in energy exists. Fears about an energy oligopoly – a market dominated by a few huge companies – are being replaced by ones of a monopoly as price rises are announced almost simultaneously by the “Big 6” companies. [..]

Britain needs to take a much longer-term view of how it uses energy. Over the last four decades California’s economy has grown eight times without its energy usage increasing. We can do the same here. Our focus needs to be on energy efficiency, not on subsidising intermittent, renewable energy generation. In our increasingly populated and energy-demanding world, wholesale energy prices will not go down any time soon. We must be honest about that and introduce policies which will mitigate the impact of that reality on our lifestyles and our children’s future.

In this context, we need to revisit the decarbonisation targets set under the previous government. Not because I believe we should abrogate our climate change responsibilities, but because they are destroying important parts of our economy. If this continues unchecked, there will be one less powerful, democratic nation around to effect beneficial change to the environment. A low-carbon Britain with no jobs and no money will not help save the planet. Real progress on decarbonisation must not undermine our global economic position.

The present UK government is legally obliged to reduce greenhouse gas emissions by at least 80% by 2050, but they’re thinking: why should we care about the law when we are the ones making the law?! And if the government so obviously flaunts the law, how can it force companies to uphold it? How can it? It doesn’t even want to. It’ll just change the law. That’s what Dr. Lee’s letter to the editor is announcing in veiled terms. Accompanied, of course, by the scare tactic that if people don’t comply, their electricity and gas bills will rise even further. It’s like a 21st century scorched earth strategy.

And they really don’t give a rat’s derriere about the law. Any law. Not if it stands in the way of increasing profits. These people just use the billions they ostensibly spend on reducing emissions as a further profit vehicle for their friends, paid for by the taxpayer. Who will invariably be left with less money and more emissions.

Statistics suggest UK is not on track to reduce emissions by 2020

The government has announced it is on track to reduce emissions by 34% by 2020, yet key statistics suggest that carbon dioxide emissions are actually on the rise. Government figures from the Digest of UK energy statistics (DUKES), published in July, state that UK emissions of greenhouse gases between 2011 and 2012 increased by 4.5%.

Under the 2008 Climate Change Act, the UK government is legally obliged to reduce the UK’s greenhouse gas emissions by at least 80% (from the 1990 baseline) by 2050. The UK was the first country in the world to establish a legally binding climate change target. But despite mass green-energy schemes, the figures suggest that the UK is relying heavily on coal, as opposed to renewable energy. [..]

So far, £35 billion has been invested in low-carbon initiatives since 2010, but according to the government this will have to increase by 310% in order for them to hit their targets.

The government’s “lavish” subsidies on renewable energy programmes have faced growing criticism, with the TaxPayers Alliance arguing that the schemes are simply being funded by consumers through higher household energy bills.

But Davey said: “We’ve already had record amounts of planned investment in the energy sector and today we have given further confidence to the industry of the support available from government for new energy infrastructure out to 2021. [..] Our latest projections show that we are on track to meet our first three carbon budgets, but we recognise the scale of the challenge that we face in delivering further emissions reductions and meeting the target of the fourth carbon budget”.

The government claims emissions are down, and they’ll make their 34% 2020 reduction target, but in reality those same emissions rise 4.5% per year. What do the people know? And who cares anyway? What does it take to scare them enough? If you claim prices will rise by 20% per year, will they agree to let you soften the emissions rules? How about 50%? Everybody has a price, right?

And Cameron is in “good” company. The Canadian government thinks the same way, no matter what anybody says, as of course does just about any other government on the planet: done with the niceties once the bottom line gets in sight.

Canada says falling short of emissions reduction target

Canada acknowledged on Thursday that it will miss its target for greenhouse gas emissions by a wider margin than expected unless it takes further action to offset emissions in the oil industry.

The admission in a report by the environment ministry comes as the Conservative Prime Minister Stephen Harper is actively pushing development of the Keystone XL pipeline, which critics say will encourage production in the Alberta oil sands, a top emitter.

Canada signed the Copenhagen Accord in December 2009 and committed to reduce its greenhouse gas emissions to 17 percent below 2005 levels by 2020. It estimates the country will produce 734 megatonnes (MT) of greenhouse gases in 2020, or 122 MT (20%!) higher than its promised target.

Of course, one way to make sure complaints about emissions targets go away is to get rid of those whose job it is to keep track of them:

Massive job cuts at the Environment Agency

The Environment Agency is to shed 1,700 of its staff as it faces larger than expected government-led budget cuts. The 15% cut was reported in “The Ends Report” magazine on Friday [..] 11,400 members of staff make up the non-departmental agency, which is a body of the Department for Environment, Food and Rural Affairs (DEFRA). The cut will come into force by next October.

The organisation monitors the implementation of environmental regulations and delivers the government’s green commitments. DEFRA itself is facing budget cuts of 10% as part of Westminster’s austerity measures, meaning the Environment Agency’s cuts are deeper than expected.

The energy companies cheat and lie, and so does the government. Not a great thing to realize, certainly when you face huge future problems because of a fast shrinking domestic energy supply. One source we’ve not looked at yet is imported (shale) gas, an option the Cameron team has its eyes on. Unfortunately for them, even Royal Shell’s own CEO says this bubble will burst before it goes anywhere. Nor does Shell want anything to do with British shale. Another major blow to the government.

Shell CEO Peter Voser: cheap shale gas is a myth

It is a “myth” that exports of cheap shale gas from America will cut gas prices in Europe and Asia, Peter Voser, chief executive of Royal Dutch Shell has warned. America is sitting on a glut of shale gas that has seen prices plummet to as little as a third of UK prices. It is now in the process of developing export terminals where the gas will be cooled for shipping abroad as liquefied natural gas (LNG).

UK politicians have hailed the prospect of Britain importing cheap gas from the US as one solution to help consumers struggling with rising energy bills as domestic gas production dwindles. But Mr Voser said that the idea of “cheap US gas going into the rest of the world and therefore changing the pricing structures across the world” was a “myth”. The price impact of US exports would be “not that significant” because the additional costs of liquefying, transporting and then re-gasifying the gas would mean its eventual cost was comparable to existing market prices, he said.

Earlier this year British Gas owner Centrica struck a £10bn deal to export LNG from the US, welcomed by David Cameron, the Prime Minister, who claimed that “future gas supplies from the US” would help provide British consumers with a new “affordable” source of fuel. Former energy secretary Chris Huhne last month urged the UK government to pressure the US to allow more exports, which he claimed would “gradually equalise the gas price in the US with the rest of the world” and help reduce UK prices.

Shell has repeatedly played down the prospects for shale gas development in Europe and the UK. It has shunned involvement in the embryonic UK shale industry – which the Prime Minister has also suggested will cut energy bills. It is involved in shale gas exploration in other areas like China but Mr Voser said that Chinese shale gas would be consumed by the country’s domestic gas market and would not “alter the pricing mix and the volume in Asia-Pacific”.

So is there anything left to keep the lights on in Albion? Let’s see. Wind and solar can and will be expanded, but as intermittent sources will ever only have a limited impact keeping the electricity grid alive.

Domestic oil and gas – including North Sea are falling of the proverbial cliff. Total discovered gas reserves peaked at 1,985.0 billion cubic metres in 1997, and declined 64.3% to 709.0 billion cubic metres in 2011.

Still, while declining oil production has a negative effect on revenues, it’s not a major factor in electricity generation.

But as you can see, coal is. And coal is the one thing Britian still has substantial reserves of:

It becomes a matter of simply ticking off the boxes then. Wind and solar have limited impact, domestic oil and gas numbers are plunging, imported gas is prohibitively expensive.

That leaves nuclear, which nobody really wants because of the risks involved, and coal, which nobody wants either, because of CO2 emissions.

Add to that a political and corporate system that is only interested in maximizing profits for investors, and more than willing to use both the people’s money, and their fear, to achieve it.

Put together, it seems to make it inevitable that in the future the British grid will either be run on domestic coal and nuclear plants owned by Chinese, or not run at all.

And again, my personal view of how communities should manage the production and distribution of their basic necessities is that they should keep control of them in their own hands, and close to their chest. The UK has signed away control of their power to the likes of an Ontario pension fund with offices in the Channel Islands, and a Hong Kong tycoon who does business via the Caymans. And controls substantial parts of the UK water supply as well.

There are no good reasons to sign away such controls to anyone outside your own society, and there are very good reasons not to sign them away. The first step for the British should be to regain control of their energy and water. And then take it from there. It’s going to be far from easy, but at least you won’t have anyone but yourselves deciding your fate. And that’s not just something that should be a priority for Britain of course, it is a universal truth. After all, why on earth would you want someone 5000 or 10,000 miles away decide if you can heat your home or switch on your lights?