Energy firms: SSE’s price rise explainer shows how Labour has it rattled

The interesting subplot to recent revelations is what SSE et al would do if a Labour victory seems likely in May 2015

Ed Milband’s plan to freeze energy prices for 20 months still looks unworkable as he hasn’t answered the question of how investment in new infrastructure is meant to be funded. But he has clearly succeeded in putting the wind up the energy firms. SSE’s price rises on Thursday were accompanied by an extended explanation and how and where costs have risen.

As a modest contribution to greater transparency, SSE did okay. Of the £93 increase on a typical annual bill, about £70 comes from the combination of higher wholesale prices, higher network charges, what it calls “government-imposed levies”, plus VAT – in other words, stuff it cannot avoid.

The other £23 is essentially profit. And, as SSE says it will record a loss in supplying energy in the first half of this year, it was bound to put up prices sooner or later because its declared aim is to try to achieve a 5% profit margin. All that seems reasonably clear, even if a proper inquiry is needed to establish once and for all if integrated suppliers shuffle profits between their generation and supply divisions.

The interesting sub-plot, though,is what SSE et al would do if a Labour victory seems likely in May 2015. Ahead of a price freeze, would they seek to buy energy further forward? If so, they would probably incur extra costs since there is usually a price to be paid for certainty. Would those costs then be put on bills and labelled “price freeze expenses”? It would be a provocative move, but the industry seems to be in a mood for a fight.

Royal Mail sell-off: flexibility should have been key to share pricing

Well, it’s a simple formula: retail applicants will get £750-worth of Royal Mail shares. But if they applied for more than £10,000-worth, they’ll get none. So tough luck if you’re too rich or too greedy. It’s an elegant solution of sorts, and follows the practice set in the popular privatisations of the 1980s. But the reality is that the government should not have locked itself into a position where it had semi-promised the City that the big investing institutions would be allocated 70% of the shares on offer.

In the event, the slice for retail investors has been bumped up from 30% to 33%. But the tweak is still unsatisfactory. The sensible policy would have been to reserve the right to flip the proportions, which would have allowed regular punters to get more of what they wanted. A cut-off would still have been necessary given the size of demand, but the level would have been substantially higher – more like £2,000-worth of shares.

Presumably the government never thought shares in Royal Mail would be so popular. That’s no excuse. A 6% dividend yield was being waved around, so there was always a chance of a stampede. Flexibility to prefer retail applications should have been baked in.

The more serious mistake was to put a price cap on the shares of 330p. Yes, yes, we all know that level was regarded as optimistic only a few weeks ago. But the institutional book-build process is supposed to establish real demand when fund managers are obliged to commit money, as opposed to having a chat with the brokers about “fair” pricing.

The institutional tranche was more than 20 times subscribed, implying that about £28bn was chasing about £1.4bn-worth of shares. It requires no genius to see that Royal Mail could have been priced more keenly to the benefit of the Treasury while also ensuring the “right” sort of long-term investors, meaning pension funds, were represented on the register.

The scale of the underpricing will become clear in the next few days, and weeks, of trading. Royal Mail’s share price may be volatile initially. But if it settles around 400p, the public purse has been seriously short-changed. © 2013 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds

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