Ah, there it is, economic casuistry again

Even, what could be described as an attempt to mislead people:

Ed Miliband has been urged to cut household energy bills by £200 with a cap on “pylon levy” charges imposed by electricity distribution companies.

The Energy Secretary is being encouraged to launch a review of the profits made by power distribution networks, which manage the cables that connect homes to the grid. In contrast to heavily regulated suppliers, their operating profit margins can be as high as 42pc.

Dale Vince, the Labour donor and founder of energy business Ecotricity, suggested that trimming the companies’ profits to a lower level could cut £6bn from standing charges – saving customers an average £200.

The trick in there is that word “operating”.

As we’ve noted before - spitting with rage as we did so - this has been tried on the margins of children’s homes operators. The trick is to look at the gross margin before all the capital costs of the infrastructure necessary. The higher the capital costs of the activity - like, say, having a home to put children in - then the higher that gross margin that can be shrieked about. Exactly the same trick is being used here. For the regional electricity distribution companies absolutely none of the costs of having a regional electricity distribution network are included when calculating that 42pc. But, you know, having the wires and the pylons and there substations and all that is a pretty important part of being a ‘leccie distributor.

Once we do account for all that properly:

He argued that because the industry was highly capital-intensive, a better measure would be return on capital – which averaged around 5pc.

Imagine that - no, go on, just imagine - the government ran these. Borrowed at those famously low rates that government can borrow at. Base rate is 5.25% at present, so the cost of the borrowing would be about, -ish, 5%. That’s now much net margin government would have to make to pay the capital costs of having the network. That is, a good guess would be that these companies are making their cost of capital, there are no economic profits, economic rents here at all.

But that claim of up to 42% - that’s simple casuistry, no? That insistence upon measuring profits by operating profits, by the closely akin EBITDA, rather than actually including the capital costs of the existence of the business at all.

Why are they trying to so mislead, gaslight, us all?

Tim Worstall