Tim Leunig writes: Why are utility companies hitting the poorest hardest?

Global gas prices are going up, and prices for UK consumers are going up too. Gas suppliers are raising prices by around 18-20%.

Consumer price rises are inevitable when the wholesale price goes up. But my supplier, E.ON, has structured its price rises to hit the poor more than the rich. They are doing this by raising the cost of gas much more for small users than large users.

They have raised the price of the first 2680 kWh by 46%, but the price of additional units by only 15%. This means that the poor – and the green – will see much bigger rises in their bills.

Annual current gas bill   Price rise
£140 or less 46%
£250 33%
£500 24%
£750 21%
£1000 19%

Notes: These figures relate to E.ON SaveOnline 4

Prices in pence /kWh are rising from 5.304/2.94 to 7.75/3.372 for the first and subsequent 2680 kWh.

The pattern is similar for electricity – those who use more than £1000 worth of electricity a year will see prices rises by only half as much as those who use small amounts.

Of course, people can swap suppliers. But E.ON’s behaviour makes it look as though they think poorer customers – who may be less well informed, and have worse access to the internet – are less likely to swap. E.ON appear to think that these people are trapped and have decided to exploit them. This is not acceptable.

The competition authorities need to see whether this approach is widespread, and clamp down on it if it is. And in the interim politicians should use the bully pulpit to shame companies who behave like this.

Tim Leunig is Chief Economist at CentreForum.

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27 Comments

  • Martyn Wilson 13th Aug '11 - 12:10pm

    Why do they do it? Because they can. A toothless regulator does not seem to able to control the companies. I don’t believe that public = good and private = bad or vice versa, but the privatisation of the utility and the rail network has not benefited the population of the UK. National assets are now now in the hands of foreign goverments and speculators. sadly it is unlikely to change. The gap between rich and poor lengthens as does the gap between the top and the middle and the gap between the middle and the bottom in wealth terms.

    The value of a business is determined by its ability to be bought and sold for profit, not by the business it conducts, hardly a way to provide long term wealth, employment and stability. Share price is all, and the customer/consumer is nowhere in the mix.

  • The electricity giants are just as bat.

    Scottish Power are raising the standard daily charge on one of their tarifs by [b]EIGHTY SIX PER CENT[/b] as well as increasing the marginal charge per unit by 19 per cent.

  • Tim, you make no mention of the influence of commodity speculators on oil and gas prices (as well as food) – regulation is government’s role, not the role of the citizen, and it is government which should be keeping a grip on the situation, with the option of instituting a cap on fuel price rises. How many families in dire financial straits are being pushed to the edge, if not over it into the squalid choice between eating and heating? Allowing speculators and utility providers to pillage the public like this borders on the sadistic, but then I would expect little else from a Tory-led government.

  • Andrew Suffield 13th Aug '11 - 1:42pm

    Either they genuinely think their customers would prefer this structure, or (more likely) they’re just treating it as a “fixed monthly charge for infrastructure” and then smoothing out the curve a bit. Have you asked them?

  • It seems that in 21st century Britain we accept that rich businesses will loot from the people but are somehow surprised and enraged when it happens the other way round.

  • Old Codger Chris 13th Aug '11 - 4:19pm

    Privatising gas, electricity and water was a con. None of these utilities is in a competitive situation in the manner of (for example) British Airways, which was rightly privatised.

    These industries should be publicly owned with democratic oversight but with the freedom to raise capital using financial instruments such as tradeable bonds as required.

  • We were told yesterday on these very pages that the markets would sort everything out.

    Well, before “the market” in power, I never ever had to choose between heating and food in the winter time. Now I do. I have felt constantly ripped off ever since we privatised the lot. So as far as I am concerned the markets can get stuffed and we should renationalise – running gas and electricity for the good of all, not the enrichment for a few shareholders and executives. But that is too social democratic, so it will never be considered in the UK.

  • Simon McGrath 13th Aug '11 - 5:17pm

    @Old Codger “Privatising gas, electricity and water was a con. None of these utilities is in a competitive situation in the manner of (for example) British Airways, which was rightly privatised”

    odd then that are so many price comparison website/chris huhne urging consumers to shop around. whats that if not competition?

  • @Martyn Wilson “privatisation of the utility and the rail network has not benefited the population of the UK”

    Rail travel has risen by a huge amount since privatiasation, far outstripping any rise in road traffic. Would they have been achieved if the system were still nationalised? I was opposed to privatisation at the time, but have changed my mind in the light of the evidence.

  • This isn’t, of course, the only means by which the rich benefit. Discounts for paying by direct debit and prompt payment, for example, have been in place for some time.

    Could you clarify, Tim, the correlation between income and size of bill? I can see some benefits for families with already very high bills, having a lower percentage price increase than those with smaller bills, other things being equal.

  • Old Codger Chris 13th Aug '11 - 6:28pm

    @Simon McGrath
    Since gas and electricity are delivered from the same source along the same pipes / cables regardless of the supplier chosen, they are natural monopolies. Publicly owned utilities paying (for example) fixed interest on bonds purchased by investors, would not have to factor dividends for their shareholders / foreign owners into their prices.

    @johng
    I’m unsure whether a properly managed privatisation of the railways (not the version we actually got, which almost everyone now agrees was bungled) would have been better or worse than the much maligned BR. I do know that the public subsidy is much GREATER than used to be paid to BR. The train operators are obviously in business to make money, and when things go wrong they walk away and the taxpayer picks up the tab – the argument that they are entrepreneurs taking a risk is simply false.

  • Thank you all for your comments. I should say that I am not opposing private ownership of gas or electricity – they have increased “back office” efficiency, as well as been quick to offer things like paperless billing, self-read meters etc. These are good things.

    But the sector is inherently less competitive than (say) tea bags. If PG put the price up, and Tetley don’t, people spot it immediately. Furthermore, PG don’t have a huge (and confusing) range of products, and you are not “stuck with” a default provider. Hence the need for government to monitor the effectiveness of a market such as this. They don’t always work well, and this is one such case.

    For households of any given size, there is a very clear gradient between income and energy use. People who are poor are simply too poor to use energy in the profligate manner of the affluent. Richer people live in bigger houses, and heat those houses more (remember too that social housing is comparatively well-insulated compared with all other sectors). Finally, terraced houses and flats have fewer external walls, and so are cheaper to heat. The data can be found in the ONS publication “Living costs and food survey”. It would be pretty odd if someone on £10k spent more in absolute terms on energy than someone on £100k.

  • The cost of utility regulators is trivial as a % of the bills, so yes, it will comfortably be outweighed by the increased rate of efficiency savings over time since privatisation.

  • Hmm! “Efficiency savings”.

    I used to know someone who was a maintenance engineer for one of the electricity companies; he and his colleagues were based at depots scattered around their region and when there was a fault or storm damage would go out, fix the problem and restore service.

    Following privatisation the “efficiency” of the maintenance department was increased dramatically by the simple expedient of cutting the number of maintenance engineers. I asked him how this worked; how it was that the very much smaller number remaining could do the same job.

    They couldn’t he explained. It simply meant that a fault that might previously have taken a few hours to fix would now take several days. Also because there were fewer depots they were often traveling to the other end of the region and spending many hours on the road in doing so.

    It may perhaps be the case that the nationalised industry was providing an unnecessarily gold-plated service – I don’t know. But whether it was or not makes no difference. What was sold as “efficiency savings” was, in reality, a cut in service levels.

  • Liberal Eye – the number of electricity and gas outages has fallen over time (see data on DNOs on the OfGEM website) so this looks like a good example of the private sector getting rid of overmanning. It isn’t a cut in service levels if the service doesn’t suffer!

  • I think that your assertion that the poor use less gas than the rich may well not be true. The poor in general terms live in homes with less insulation, and generally with older less efficient boilers. Add to that the fact that many of the poor, whether out of work or elderly spend all day at home and require heating all day and it would appear to me that in fact the poor might well be higher users of gas and or electricity.

    Where the poorer users are still being hit is in the higher charges imposed on those forced to pay for their gas and or electricity up front by means of a prepayment meter.

    What sense does it make to charge someone more for paying before use for every single unit used, rather than paying quarterly in arrears. Given the estimate my electricity supplier has just provided to me for my next 12 months supply of £1742 it must surely be good for their cash flow to have that money in the bank before I use the electricity?

    My electricity prices are rising from 13.9p to 17.1p and from 7.53p to 8.96p – given that my supplier has announced an average price rise of 11% for electricity I would suggest that they have increased my tariff disproportionately.

    Given that the tariff I am on “Total Heating Total Control” is only available from Scottish Hydro, and that to swap to any other supplier would cost money to have the meter changed, money which I and thousands of others cannot afford changing suppliers is out ofthe question.

    This is how the poor are being hit hardest, not by the differential charges based on usage.

  • Why? Because they always have. You only have to look at the price of utilities through a prepay meter as compared to a normal meter.

  • Old Codger Chris 14th Aug '11 - 1:48pm

    @Liberal Eye
    Following on from your post this morning, I’ve been told that whereas the old regional electricity boards would send out an engineer employed to cover their area (obviously) today’s companies send their engineers all over the country because, of course, they have customers all over the country.

    I doubt this improves efficiency.

  • Yes, on the face of it, Linda, this post makes some sense, but references to efficiency savings puts it back in the same old category, unfortunately. The most likely reason for numbers of power cuts etc (let’s retain a British phrase, shall we?) is technological advances. If you regard this as an issue of the private sector being more “efficient”, I would point out that most of that effect was down to nationalised industries being starved of proper investment cash. I accept there is a ceiling to what you can draw from people in taxes, but we are nowhere near that ceiling at present.

  • Why do so many people on this site talk about “the poor” as if we are a separate species? Why do you sit around guessing about how much energy the poor use, as on this thread, without asking some poor people?

    Can I ask if anyone here has had experience of poverty? The type of poverty where you can’t afford heating when you want or need it in the winter? Why don’t you ASK people like me what life is like and what we would want to be done? I am, however, afraid that if you did that, it would probably conflict with most modern LibDems’ love of privatisation and the almighty “markets” which are failing people on the lower-middle to bottom of our society.

  • The rate of efficiency gain has been more rapid since privatisation – see work by Foreman-Peck and Szymanski (sorry Stefan, if I have spelt your name wrongly!). Sorry for not being clearer.

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