Will the U.K. Repeat California's Energy Disaster?

Marc Champion writes editorials on international affairs. He was previously Istanbul bureau chief for the Wall Street Journal. He was also an editor at the Financial Times, the editor-in-chief of the Moscow Times and a correspondent for the Independent in Washington, the Balkans and Moscow. He is based in London.
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The U.K. is in the middle of its annual party conference season and today was the turn of Labour leader Ed Miliband to light up his bid to win elections in 2015. The result: It looks like Britons will be choosing between two brands of populism when it comes time to vote.

Miliband's headline-grabbing news was apledge that if Labour returns to government, it will impose a roughly 20-month freeze on natural gas and electricity prices; break-up the six dominant utility companies; and "reset" the industry under a powerful regulator that would ensure retail energy prices fall when wholesale ones do.

Energy has been a big issue in the U.K., where prices have continued to rise, squeezing consumers whose salaries are falling in real terms. At the same time, the big utility companies have reported healthy profits.

According to Labour Party data, the U.K.'s energy companies have skimmed 3.9 billion pounds from consumers since 2010, mainly by not passing on declines in wholesale prices. It has proposed clawing back 4.5 billion pounds from the companies. Miliband's idea would be to freeze prices and then put a new system in place -- details to come -- that would marry low prices with investment in the country's crumbling infrastructure.

And yet the U.K. is already struggling to persuade global energy companies to invest in new nuclear and other aging energy systems (the government's own plans call for 110 billion pound investment in energy infrastructure during the next decade). So it's hard to understand how the prospect of price controls and threat of corporate breakups will encourage companies to jump in and commit money.

The U.K.'s Committee on Climate Change says that while the average household energy bill rose by 60 percent from 2004 to 2011 (compared with 17 percent in general inflation), almost a third of this increase was due to government polices to fund investment in low-carbon energy and making homes more energy efficient, policies that Labour supports.

Miliband's proposal produced a snarky comment from RWE Npower Plc, one of the big six energy providers: "It's very easy for politicians to come up with simple-sounding solutions to difficult problems," the company said. After listing all the things required for the companies to be able to freeze prices, including a halt in investment, NPower added: "But will this make things better for Britain?"

That's not as lame a punch line as it sounds, serving as a rejoinder to Miliband's catch phrase, repeated numerous times during his party conference speech: "Britain can be better than this!"

Maybe a temporary prize freeze and restructuring of the industry could work, but it's a huge enterprise that would have to be the result of intense planning. A BBC interview with Labour's shadow energy minister, Caroline Flint, suggests not: Asked if she had studied California's effort to control energy prices and the ensuing crisis in 2000-2001, it was evident she had no idea what the interviewer was referring to.

The energy pledge came with several others: repealing an unpopular tax on spare rooms in state-funded housing, reversing a proposed cut in the corporate tax rate and increasing taxes for the wealthy. All of which makes a coherent political argument for Miliband, distinguishes him from the ruling Conservatives and taps into underlying fury at the economic pain that ordinary people are feeling as a result of the financial crisis.

Miliband even addressed his biggest problem head-on -- the perception that he doesn't have what it takes lead the nation. If Prime Minister David Cameron wants a debate on leadership, "be my guest," said Miliband, 43, in a kind of Armani-suit version of Dirty Harry's "make my day." It was good political theater, but the populism is worrying.

Cameron has been trying to distract attention from the economic pain by staking out anti-immigration positions and promising a referendum on whether to pull out of the European Union so that the U.K. (or more likely in that case just England and Wales, after Scotland secedes), can live on in splendid isolation.

For the U.K. to shutter itself to immigrants, and turn away even more foreign students, Chinese tourists and smart entrepreneurs than it already does, will be suicidal if continued long enough. In the meantime, it will be popular. Similarly, it can be years before falling investment and the market distortions caused by price caps cause blackouts, as California discovered. But again, until then price controls -- hard to lift quickly once imposed -- will be popular.

You have to hope that Cameron and Miliband will both rein in their more populist policies before too much damage is done. Still, it's enough to make you yearn for the modest earnestness and surprise-free campaign style of German Chancellor Angela Merkel. Nobody seems to question her leadership skills.

(Marc Champion is a Bloomberg View editorial board member. Follow him on Twitter.)

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Marc Champion at mchampion7@bloomberg.net