Energy firms face Ofgem pricing probe
UK energy suppliers are to be investigated by the industry watchdog after the regulator said profit margins had risen 38 per cent. Campaigners tell Channel 4 News the probe is long overdue.
Ofgem said a comprehensive inquiry of the industry was necessary to ensure providers are not boosting profits at the expense of consumers.
The industry watchdog said the average margin on a standard dual-tariff had risen from £65 to £90 since September.
The move comes after a number of major companies including British Gas, Scottish & Southern Energy and Scottish Power announced a hike in energy bills.
From next month around eight million British Gas customers will see a rise in household gas and electricity bills as tariffs increase by an average of 7 per cent.
Providers have said they are currently selling gas at a loss in the face of rising prices on the wholesale market.
Energy firms have claimed wholesale gas prices have risen more than 25 per cent since the spring.
Consumer confidence
Alistair Buchanan, Ofgem’s chief executive, said he wanted to make sure firms were “playing it straight” with customers, adding that the watchdog would look at the “facts behind the numbers”.
We have long been concerned that the market is not as competitive as it should be and this review needs to get to the bottom of whether prices are fair or whether consumers are being taken for a ride. Audrey Gallacher, Consumer Focus
“The energy retail market can only be fully effective if consumers have confidence that the market is transparent and easy to take part in,” he said.
Mr Buchanan told Channel 4 News the investigation was part of ongoing improvements, but stressed it was important not to judge the industry before the findings are properly assessed.
“What we are clearly looking at here is whether the retail supply of gas to you or me is working as it should be,” Mr Buchanan told Krishnan Guru-Murthy.
“The important thing here is not to judge the industry. It could be that we come back in a couple of months time with a thumbs up.”
After the review
Mr Buchanan said if the inquiry found bad practice Ofgem could take findings to the government or Competition Commission.
“It depends on whether we find frankly evidence of lazy management or bad behaviour and maybe structural problems.
“We can go to the government and say that we think we need some additional legislative powers to help us regulate and police this sector.
“We could go to the competition commission of within our own suits of powers currently we could put through new licence conditions to stop any kind of behavioural inadequacies that we find.
“If the issue is about overcharging through anti-competitive behaviour we have a very strong card to play which is to send them to the competition commission.
“At this stage, like any lawyer preparing a case, we know that there’s a case to answer we just have to ensure in a very sober way that we get the correct data, we analyse that and then we give the consumers what the answer is.”
Review ‘overdue’
Lobby group Consumer Focus told Channel 4 News the investigation into energy prices was “very overdue”.
Audrey Gallacher, Head of Energy at Consumer Focus said: “We all have to pay for gas and electricity and the main protection we have against being overcharged is competition in the market.
“We have long been concerned that the market is not as competitive as it should be and this review needs to get to the bottom of whether prices are fair or whether consumers are being taken for a ride.”
The group said it believes utility companies are quick to protect their profits when wholesale prices rise and slow to benefit consumers when wholesale prices fall.
Where do energy companies buy their gas?
The major problem with trying to establish how much we could or should be charged fairly for our gas is that energy companies will not disclose how much they pay for their supplies wholesale. Added to this is the complication that some retailers (such as British Gas) also wholesale the commodity.
What we do know is that energy companies buy their gas from a variety of markets for example, the 'spot market' (the energy market equivalent of buying foreign currency at a bureau de change) or futures markets. What we do not know is the proportion of their energy that companies buy from each of these sources.
A further issue is that the US has become an exporter of gas extracted from shale rock using new drilling techniques and this has meant an increase in the global supply of gas. However, since for the most part UK energy companies get their gas from Europe, they claim that the increase in global supply has at the moment had little impact on the prices they pay. This may well soon change.
The Ofgem announcement was welcomed by Downing Street.
“Energy bills are a significant expense for many families in this country and that’s why it is important that we see these markets working effectively,” the prime minister’s spokesman said.
“[Ofgem] are doing exactly the right thing in looking into the effectiveness of this market and whether it is working from a consumer perspective.”
Energy bills
Mr Buchanan said that as Britain was facing a bill of £200bn to invest in updating the energy network over the next 10 years, consumers had the right to expect the energy retail market to provide value for money.
Ofgem warned in a recent report that rising wholesale prices, boosted by increased demand and the impact of soaring crude oil costs, could be passed on to the consumer.
British Gas – owned by Centrica – saw profits nearly double in the first six months of 2010 to £585m after the coldest winter for 30 years saw customers reach for the thermostat.
Scottish & Southern Energy announced a 6 per cent fall in half-year profits earlier this month after selling gas at a loss.
Ofgem said it aims to finish its investigation by March next year.