MMC’s change of heart turns privatisation policy on its head

A leaked MMC report reveals that privatised utilities may have been too harshly treated over the years. This has huge implications, says George Pitcher. George Pitcher is joint managing director of media consultancy Luther Pendragon.

One can understand the embarrassment felt by Trade & Industry Secretary Ian Lang at the leaking of the Monopolies & Mergers Commission’s report into the takeover bids by major electricity generators for the regional electricity companies. Whether one can sympathise with him is another matter.

It certainly seems somewhat heavy-handed to threaten The Economist, the recipient of the leak, with restrictive injunctions. It smacks of the nervousness with which any information – be it the effects of BSE in the food chain or the competitive structure of our utilities industries – is now treated by the Government. With a majority of one and its current standing in the polls, one can hardly blame such hesitancy. But the Government’s reaction is not an edifying sight and has done nothing for confidence among businesses.

The MMC’s report into the electricity industry’s proposed mergers is important because so much of British industry heavily depends on the ways in which it is supplied with electrical power. Were I charged – heaven forbid – with the task of lighting a national retail chain or powering freezer cabinets for the meat trade, my budgeting for the next five years or so could be significantly influenced by whether I could purchase my electricity direct from a national generator, a competitive local generator, a monopolistic regional distributor or a number of competitive distributors.

According to The Economist leak, the MMC would appear minded to ensure that my electricity is delivered in some regions by a distributor that is owned by a generator, while in others I take my chance with independent regional distributors. This is odd only in so far as it appears to imply that the Government will be recommended to endorse vertical integration in the electricity industry.

This, of course, is the system that the Government sought to break in the first place when it privatised the electricity industry. From the great cosmic grid in the sky, the late Lord Marshall, former chairman of the Central Electricity Generating Board and a fierce opponent of the separation of generation from the means of distribution, must allow himself a benign smile.

But that’s the topsy-turvy world of politics and industrial policy. What strikes me as being of great significance is the possible effects on other industries if vertical integration is to enjoy something of a renaissance.

For nearly two decades, vertical integration has been widely perceived as a force of darkness but there have been some notable exceptions. The marketing services industries appreciated the value of critical mass during the boom years by absorbing downstream functions such as printing and media-buying. Some consumer goods ranges, too, have long been held to benefit from vertical integration – Clarks, in the footwear industry, springs to mind.

But generally, in instances where a manufacturing industry has control of the means of distribution, we have collectively shied away from the implications for competition and the consequent price implications for the customer base.

Let me provide a few examples. The oil industry has over the years attracted at least as much MMC interest as any other, the implicit suspicion being that oil companies have used price manipulation at the petrol pumps because they own all means, from production to distribution.

The ferocity of competition among the oil giants has always ensured that no regulatory separation of ownership between upstream exploration and development, and downstream retail, has been forced. But one has always felt that the thought, if not the threat, has been there.

Are we now to assume, if the lofty MMC reckons vertical integration in the electricity industry is respectable, that the oil industry’s own vertical structure will not be bothered again? Furthermore, take the MMC’s insistence that the British electricity industry can be vertically structured to allow it to compete more effectively on an international scale. Does this not throw into disarray the entire MMC case for breaking the vertical structure of British Gas, which led to the company’s demerger?

These implications and anomalies spread far wider than the energy industries. Consider the disastrous regulatory intercession in the major brewers’ ownership of tied houses. Was this not driven by the view that vertical integration restricted competition?

And weren’t these principles the same ones behind the legislation that restricted insurance companies from operating tied sales- forces? In the case of the brewers, prohibitive tenancy arrangements emerged as result, and in the insurance companies’ case, the independent financial advisor was threatened with extinction.

We could, in the MMC’s leaked views on the electricity industry, be seeing a change of heart over the way in which vertically integrated industries are treated. That may or may not be good news for the markets in which such industries operate. But, it has to be said, such a policy shift will have come too late for some of the vertically integrated industries to which I refer. These, it appears, have been treated with unnecessary harshness over the years.

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