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Monday, 21 October 2013

Unplug the politicians


Beware the Law of Unintended Consequences. As the General Election looms ever nearer, politicians are making increasingly bellicose threats to energy companies and other infrastructure owners over price rises and regulators and even the Archbishop of Canterbury are joining the chorus. While it might get a few more crosses on voting slips (or even bums on pews), their interventions may already be leading to price rises and may delay or cancel construction of major infrastructure projects.
Labour leader Ed Milliband promised at his party’s conference last month to freeze electricity prices for 20 months and woe betide any of the despicable providers trying to pre-empt a Labour win by edging up its prices in advance. Two days later energy firm SSE hiked its by 7 - 9.7% for 4.4 million electricity customers and 2.9 million gas customers. It blamed the increase not only on wholesale prices but also green levies introduced by the previous Labour government. Could this be a double unintended consequence of Labour policy: one for the cost of subsidising wind and the other to buffer themselves against the possibility of a Milliband-led government from 2015?

Not to be outdone, Scottish First Minister Alex Salmond, promised at his conference that an independent Scotland would cut tariffs, by 5%, thanks to the fledgling state taking on the green commitments itself.
 
British Gas and Npower have since joined in what critics might tag the “dash-to-stash”, when it hiked prices by 9% and 10.4% respectively. Number 10 clumsily suggested customers should invest in woolly jumpers ... then generated much heat while backtracking.
 
It’s not only energy companies that are encountering this dabbling. Many a London resident will have raised a glass of seven-times recycled tap water this month to celebrate industry regulator Ofwat’s rejection of Thames Water’s proposed 8% price rise. I’m as happy as any of them to stop paying any more to the utility, largely owned by Australian, Chinese and Abu Dhabi investors. But I’m also miffed that every time I walk along Cannon Street it smells worse than when Romans were queuing to spend a sestertius at the local facilities.
 
London’s groaning drainage network is to be upgraded with the construction of the £4.1bn “super sewer”, but Thames claims it needs the increase in charges to pay for this and widespread repairs to the 25,000 miles of private sewers. No doubt there will be a degree of brinkmanship before the regulator makes a final decision next month, but the increasingly hawkish stance of politicians or regulators towards price setting threats either delays to huge infrastructure projects or even cancellations.
 
Unpopular as rising utility bills are, someone has to pay for the many billions needed in keeping the lights on, the taps running and the trains running. Foreign investors now fund the majority of many of the infrastructure groups. The more capricious politicians and regulators become, the greater a perceived risk investment will become for the largest projects, with the longest lead times. That could mean higher required rates of return ... and higher bills.
 
Political wrangling also invariably leads to delays. Witness today’s go-ahead for the French and Chinese-funded £16bn Hinkley C nuclear reactor, which is now running at least a year late, thanks in part to two years of bickering over the “strike price” for power generated by the first new nuclear reactor in 20 years. Observe too the interminable political fights and rival economic impact “studies” miring the HS2 project.
 
Or they can just be cancelled. Heathrow Airport shareholders are now threatening not to build a multi-billion pound third runway (should it get the parliamentary go-ahead in any case - far from a given) because the Civil Aviation Authority will not allow it to raise landing fees over and above inflation.
 
There is already a spectacular case study in London, the collapse in 2009 of the Metronet Public Private Partnership consortium, which was undertaking two-thirds of the upgrade of the Underground network. Metronet effectively “threw away the keys” after many months of disputes with the “PPP arbitrator” over £2bn of work it said it had been required to carry out by London Underground but had not paid. Given the vitriolic opposition among many London Assembly members to the “privatisation of the Tube”, it would come as little surprise if LU or other parties were egged on. If so, there was a lot of egg on faces, with major disruptions to work and taxpayers picking up the £400m tab for the collapse.
 
However, the UK government’s “new best friends”, the Chinese, and other foreign sovereign wealth funds behind the biggest projects may start flexing their muscles if they see their investments mired by political delays. If not, construction companies risk making hefty investments just to see designs gathering dust.

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