James Allcock RIP, rogue [2]

Continued from last week

So what disturbed Allcock's stately scam ship as it sailed serenely through the market?  The first issue arose in the mid '80s when the laws of supply / demand / price caught up with him, as they always do eventually.  You can suspend the laws of nature, but only for as long as you are willing to throw money at it.  

What happened was this.  He'd secured vast quantities of gas at ultra low prices (the units don't matter, but it was single-digit pence per therm) in the late '60s and early '70s - see part 1.  This was amply sufficient, right through the 70's.  But by the '80s there had been two oil crises, 1973 and 1979; and the price of oil had risen tenfold (sic).  The prices BG was paying for its gas had jogged upwards a bit with inflation and other adjustments, but nothing on that scale.  So the big producers, who were always oil companies au fond,[1] stopped drilling for gas, concentrating on the still bounteous North Sea oil reserves.  There were whole years in the '80s where not a single gas well was drilled - not for exploration, nor even for extending already-producing gas fields.  A complete gas-investment strike by the producers.  BG did the sums, and correctly assessed they'd be facing a supply crisis in due course.  And new gasfields took an absolute minimum of 2 years to bring onstream[2], often much longer if outright new exploration was to be involved.

Still, BG had a monopoly to go with its monopsony, and they knew who was going to pay for the business of digging them out of that hole - its captive customers!  So Allcock did the rounds of the big producers, intimating that BG was now willing to pay prices above 20 p/th - a huge increase - for any new gas fields they could bring to the table in the next few years.  This, of course, set off a new round of stately and highly enjoyable negotiations I described last time, as the producers dug down into the archives for overlooked gas discoveries, and indeed started drilling again for new resources.  It worked: high prices have that effect.  (I've written before about another, hilarious aspect of this episode as the crazy, artificial boom-and-bust cycle ran its inevitable course.)  Thus did Allcock and his monopoly powers - a dismally blunt instrument indeed - avert the first storm that broke over his head.

The second, however, was to be terminal, albeit a protracted affair.  On purely ideological grounds, Nigel Lawson persuaded Thatcher to privatise BG, a task given to Peter Walker.  To make a long story short, in 1986 he succeeded in getting the public to buy the shares ("Tell Sid", for those with 40-year memories), and the legislation ended BG's de jure monopoly / monopsony.  But it did nothing to eliminate or even, in the short- to medium-term undermine, its de facto stranglehold, not least because in the initial legislation, no regulator was appointed!  

And it was Allcock who commanded BG's first and highly effective line of defence: making sure no other bugger could obtain gas with which to go into competition with the monopoly.  In the next part we'll tell the story of his long, ruthless but ultimately unsuccessful rearguard action.  And, no, I haven't forgotten the promised account of the colourful abuses of its monopoly that BG perpetrated over the years - some of which will feature in part 3 and others in a later episode.

ND

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[1] Gas was always seen as a more-or-less unwanted by-product - something that came up from most oil-wells anyway, or something you discovered, disappointingly, when you'd really been looking for oil.  In some places around the world, by-product gas was simply flared

[2] A lead time as short as 2 years would be for a geologically simple gas field in shallow waters, close to existing infrastructure, that had already been discovered but never developed because the price BG had been willing to pay was just too low - the producer had better uses for its development budget

Rogues I Have Known: James Allcock, part 1

Pic:  Daily Telegraph

There won't be many readers who have heard of James Allcock (died at the age of 90, obit here, which you should maybe read first). De mortuis nil nisi bonum, obviously; and I'll immediately say, he was a very nice guy who commanded tremendous loyalty, which (generally) speaks well for a man.  But he was also, how shall we say, a tough customer.  Being, as he was, the head buyer for the old British Gas when it was a monopoly.  I shall explain.  At length.

BG took on the form we most associate with it when North Sea gas hove into view in the late '60s.  The late (and not very lamented) Dennis Rooke was given responsibility for converting the nation rapidly from town gas to natural gas, in which he succeeded, using methods that left a lasting and very equivocal legacy - a story for another day.   It seems from the above-referenced obit, Allcock (I never knew this) had a hand in it, too.

However, it was in his prime as BG's head buyer of gas from upstream producers that I first met him.  Did I say 'buyer'?  BG enjoyed, not only a statutory monopoly, but also a monopsony, which it enforced zealously.  So if your company had discovered gas in the North Sea (and later, off the west coast, too), you had nowhere to go but to headmaster Allcock's study.  The only question was, how painful the experience was going to be.  He had only two forces providing a weak form of discipline on his rapacity:  (a) some customers (particularly industrials)[1] still had the ability to use alternative fuels, mostly oil of one grade or another; and (b) the Norwegians, at least, had alternative outlets for their gas.  Otherwise, he could generally have his wicked way with you; and he & his opposite numbers in equally monopsonistic European utilities used to swap notes gleefully on how roughly they'd rogered their victims.

That said, he was a perfect gentleman, and built a department consisting of three teams of negotiators to carry out his purchasing policy.  You need to know that these negotiations were for astonishing amounts of gas, since Allcock insisted on buying the entire quantity of gas in a given field, which might be producing the stuff for as many as 50 years[2].  So the amounts of money on the table were correspondingly stupendous; the sellers were very big companies themselves (basically, the '7 Sisters' of yore plus the Norwegians, and various hangers-on); and the negotiations were interminable.  Two years for the sale of a single large field's gas was par for the course. 

Each of his teams was led by another perfect gentleman[3] and some courteous juniors, whose conduct was extremely stylised in the oriental fashion.  There were three juniors to a team, and each had their allotted role.  #2 would occasionally get to speak out loud in the meetings; #3 might get to whisper something to #2; and #4 was silent, taking notes.  There would also always be one or more of BG's exceptionally proprietorial external lawyers, who did all the drafting.  Indeed, all the meetings were held at the offices of BG's lawyers, the then firm of Denton Hall Burgin & Warren.  This was to the advantage of all the participating negotiators, since lunch came in the form of a Fortnum's hamper, and the fridge was well stocked too.

Thus, it was possible to be thoroughly rogered by Allcock and his teams, and enjoy the whole process greatly.   One or two of the juniors might have been redbrick, but inevitably the main players on all sides (whichever oil company was selling its gas) were Oxbridge: even the US sellers, and in some cases the Norwegians, made sure to field the "right people" for this arcane negotiation ritual.  Literary references (which would sometimes find their way into the drafting) and Latin jokes were prized currency.

This stately and splendid abuse of BG's statutory powers lasted from the late '60s to the early 90's.  Allcock had to weather a couple of storms - which he did with panache - before eventually competition started developing for real, as I'll describe in part 2.  I'll also give some examples of the outrageous abuse of its monopoly BG perpetrated when this regime still had the power to do so.  

And, to cut to the chase for part 1, Allcock - in his urbane manner - fought the onset of competition all the way.  Given that BG retained a de facto monopoly/monopsony for years after it lost its statutory rights, and never lost its natural monopoly on the pipeline system until it relinquished it voluntarily by demerger, his powers to do so were baleful and very great.  But when, in the early 90's, it was manifestly almost over for his way of doing business, I had a drink with him one day and asked him this: why this stubborn rearguard defence, when the end-point was clear?  I drew the analogy with Germany's immense WW2 losses on the Eastern front: if they'd called it quits after Kursk, say, and fallen back in good order to the German border, Berlin may never have fallen to Russia[4].  As it was, fighting for every hectare they lost countless men for arguably a much worse result.  Likewise, BG was (at the time I posed the question) still mulishly refusing to concede market share, and using its enduring natural monopoly on the pipeline system to make life as difficult as possible for its new competitors, once they arrived on the scene, even knowing that there was every intention on the part of government to make sure the new entrants succeeded.  If BG had fallen back on its then-remaining de jure monopoly of the residential gas market (which it didn't lose until much later) - devilishly difficult for competitors to make inroads into, and not nearly as profitable as the infinitely more accessible industrial & commercial sectors - it could have held that till kingdom come.

He smiled, poured us another drink, and said: "Every day's delay is another monopoly pound in our pockets."

More to follow.  In the meantime: RIP, James, you old rogue. 

ND

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[1] For a sustained period until the late 1980s it was illegal in the UK, and in most of Europe and the USA, too, to use natural gas for power generation .  Bizarre, but true.

[2] The largest North Sea gas field, Leman, started production in 1969 and is still producing to this day

[3] In the early years, at least - things changed towards the end, but, no names, no packdrill 

[4] A counterfactual for the historians, obviously.  But it served my illustrative purpose.

To Hull in a handbasket: the perils of monopolies

A most unlikely anomaly persists in the area around Hull.  Uniquely in the UK, it evaded liberalisation of landline telecomms - a sop to John Prescott? - and its municipally-owned telephone network, Kingston Communications, persists as a local monopoly.  It's always claimed the locals are "proud" of KC and their crap cream-coloured kiosks - which, bizarrely, have now been granted Grade-II listed status.

I say 'claim' because in point of fact, the locals despise KC and its utterly useless landline services, telephone and broadband.  If it wasn't for the fact that everyone has mobile 'phones these days, somebody would have demanded it get fixed long since.  Such is the fate of local monopolies, or indeed any properly contestable service, that local authorities get involved with - see Bristol Energy, Robin Hood Energy (Notts), Together Energy (Warrington), not to mention Croydon's ridiculous essay into building and property speculation, and Thurrock's ruinous solar farm ventures.

It reminds me of a conversation I had, many years ago, with a bright junior member of my staff who was (is) of Indian heritage, and who would periodically return to the subcontinent to see relatives etc.  After one such trip she said to me: "You need to take an internal flight to see some of my family.  There's only one airline that flies there, and the tickets are very expensive.  It's odd, because with no competition and high prices, you'd think they would put on a really good service - but it's rubbish!"

I was able to enlighten her on, *ahem*, the Ways of the World.   She went on to become a well-known TV personality, and I imagine that by now she'll have amassed plenty of personal experience to ratify the truth of what I told her.

How many times do these simple lessons of practical capitalism need to be learned and re-learned the hard way?  

ND

UPDATE: Jim (BTL) gives additional detail: KC no longer owned by council

And These People Have Jobs ... BBC Jobs!

Idly tuning into BBC2 yesterday I encountered of programme on the history of lighting, in which our hero recounts (inter alia) the story of sperm-oil lamps.  This involves telling us about the United Company of Spermaceti Chandlers of Nantucket (1761) which attempted to establish what he describes as "one of the first ever monopolies".

First ever ?  Pardon me while I get up off the floor and reach for my sources.

The term "monopoly" first appears in Aristotle's Politics. Aristotle describes Thales of Miletus's cornering of the market in olive presses as a monopoly (μονοπωλίαν) ... Under mercantilist economic systems, European governments with colonial interests often granted large and extremely lucrative monopolies

An enactment published by Gratian, Valentinian and Theodosius was not content merely to proclaim the manufacture of purple an official monopoly but also made a monopoly of the sale of fabrics dyed with blatta, oxyblatta and hyacinthina

At the time of Edward VI the sovereign was accustomed to grant special privileges to his favourites, which constituted a practical monopoly  

Etc etc etc, through ancient Chinese salt monopolies, the East India Company ...  Sheesh.  Is there no such thing as an 'editor' at the Beeb these days?  Still, what would they be expected to know about monopolies, eh ..?

ND

Privatisation, Taxation and Monopoly

Returning to the Grauniad Privatisation piece and our discussion of a couple of weeks ago: one of our commenters, Andrew, picked up on the writer's summation, which revolved around a point about taxation.  Here's a key extract from the end of the essay. 

A tax is generally thought of as something that only a government can levy, but this is a semantic distortion that favours the free market belief system. If a payment to an authority, public or private, is compulsory, it's a tax. We can't do without electricity; the electricity bill is an electricity tax. We can't do without water; the water bill is a water tax. Some people can get by without railways, and some can't; they pay the rail tax. Students pay the university tax. The meta-privatisation is the privatisation of the tax system itself ...  The commodity that makes water and power cables and airports valuable to an investor, foreign or otherwise, is the people who have no choice but to use them. We have no choice but to pay the price the toll-keepers charge. We are a human revenue stream; we are being made tenants in our own land, defined by the string of private fees we pay to exist here. 

Well.  Firstly, his list is silly, mixing categories that should be kept separate. If can't do without it is to be a criterion, what about food then ?  From first-hand experience, the public bakeries in Russia were pretty awful: everyone tried to get their bread elsewhere.  The only tax involved in food provision is VAT (if any, generally not) and perhaps a payroll tax if it hits supermarkets particularly.  The margin extracted by Mr Tesco is subject to competitive pressure.  So can't do without it isn't right; and to include electricity in with the rest is only fair if you've proved or decided that competition is impossible in that sector.  I say it's entirely possible - though also entirely fair to debate (as we often do) the regulatory shortcomings we currently suffer from.  Is he proposing 'electricity-free-at-the-point-of-use', like health services ?  We know where that leads.  Airports shouldn't be included either: his list only makes sense if it sticks to genuine 'natural monopolies'.  

Secondly, we all agree that monopolies need toughing-up rigorously on all occasions (see earlier post).  Everyone knows that monopolies are what every evil rent-seeker desires above all else - they have changed hands for large sums of money or other consideration at every point in history. What's that got to do with privatisation?  Again, it's a debate about regulation (and perhaps social subsidies for impoverished energy users etc), not private ownership.  Any 'authority' in charge of a true monopoly service, however 'owned', is prone to charging too much - call it tax, rent or whatever you like.  Why does the writer assume publicly-owned monopolies will be the more likely to act 'progressively'?  It  might be true if they are state-subsidised, or have a 'progressive' pricing policy - but again, this has little to do with the main thrust.  More significantly, experience - see that earlier post again - is that they charge wildly too much in absolute terms because they are so staggeringly inefficient.

(Historical note: British Gas had its de jure monopoly taken away some years before it was privatised.  this altered precisely nothing.  It was then sold off with its de facto monopoly intact: again, this achieved nothing - at first.  It was only when the regulator took the gloves off that the glacier started to melt - with very striking and highly beneficial consequences for consumers.  By the way, the old BG did indeed have a 'progressive' pricing policy, entirely of its own devising and with no statutory mandate.  It decided that medium-sized industrial customers would subsidise both the very largest industrials, and the residential customers.  But it charged everyone more than was necessary, as eventually became evident.)

So - we will be 'taxed' by monopoly services however they are owned.  Minimising the tax is the name of the game.  If you want some examples of really outrageous 'taxes' on which no-one ever gave me any choice, how about:

• the extra amount on my home insurance to cover the activities of burglars
• the extra on my car insurance to finance the 'crash-for-cash' and 'imaginary whiplash' brigade
• the extra on my general tax bill to pay for treating pie-munchers on the NHS 
• [ ... your favourite example here ... ]

The taxation argument is entirely spurious.  The essential services will get paid for anyhow, and the primary issue is to find whatever keeps the costs lowest.  All empirical evidence points to nationalisation being a very poor approach.

ND

Privatisation Revisited

A wet Bank Holiday weekend encouraged a goodly take-up of the 'privatisation paper' challenge in the post below, yielding lots of important challenges to the Gruaniad writer's attack on private ownership of what he considers to be essentially public assets.  His provocation will stir me to write a few posts on his themes, and a good starting-point is this para from part-way through the piece. 

There's no doubt that since privatisation the old nationalised industries have sacked colossal numbers of workers and brought in new technology. If efficiency is doing the same job or better with fewer workers, many of the privatised firms are more efficient. But this simply suggests some or all of the nationalised industries should have been commercialised – that is, had their subsidies shrunk and been removed from direct government control, obliging them to borrow money at commercial rates and operate in a world of market prices without making a loss.

 The first operative word is colossal, acknowledging as it does that there was massive inefficiency in play, in some of the very largest industries of all.  This is no trivial matter and, given that many of them including the biggest were monopolies, his flippant 'solution' - should have been commercialised - is laughable.  No economy can be sanguine about monstrous systemic waste in vital sectors unless (as, say, the French sometimes claim) it is a conscious part of employment policy.  Even then, quantified justification in terms of a proper cost-benefit analysis would be a major challenge: and we capitalists already know what we reckon the outcome would be.

For this first riposte, and particularly for those too young to know these things from first-hand experience, harken to one of Old Drew's tales ...

Back in the early 1990s, the opening-up of the gas market had only just got properly started.  (The 1986 privatisation per se had been an empty gesture because ther old British Gas Corp was sold off as a de facto monopoly, a privilege it guarded and enforced with commercial brutality.)  But things were gradually changing for the better, and one day an experienced US gas company obtained regulatory approval to do something that had never been done before: an independent company was going to build an entry-point for gas going into the BG grid system.  (Previously, BG built them all.)  Obviously the new entry-point needed to be compatible with BG's existing infrastructure, so the newcomer was given BG's technical specifications, one of which was for provision of metering, a very necessary aspect.

The metering spec was for three densitometers be installed (for measuring gas density - one for use and two for back-up), and likewise three gas chromatographs.  For those who don't know, a GC analyses the molecular composition of the gas very accurately, and simple A-level chemistry allows things like calorific value - and density - to be calculated quite precisely from the results.  

Now both these pieces of equipment are standard, robust, and very reliable.  It is entirely reasonable to provide for a back-up (which will probably never be used) because continuous accurate metering is vital: but a single back-up meter is universally considered to be adequate - universally, that is, excepting for BG in 1990.  So the US interloper - a company well-recognised for its expertise in such matters - refused to install the third meter.

It gets funnier.  BG's operating procedure was for the GC density calculations to be compared with the densitometer readings at all times: and in the event of discrepancy, the GC calculation would always prevail.  In other words, no densitometers were required at all ! 

So the newcomer refused to install any.  BG resolutely insisted on 3 of each: the regulator was invoked, and wisely ruled in favour of just two GCs and of course no densitometers at all.

But here's the sting.  Obliged to accept that the newcomer needn't install a third GC, or any densitometers, BG itself installed the utterly redundant 4 pieces of kit ! - 'at its own cost', which needless to say meant at the cost of all gas users everywhere.  We may be 100% certain this accurately reflected gross inefficiency the length and breadth of BG's extensive systems.

And lest we forget, that ladies and gentlemen is why monopolies must be resisted everywhere: and, when they are found to be inevitable (as occasionally they are), they must be watched over night and day.  It is to the various attempts to resolve this problem that we will turn in later pieces.

ND