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The heat is truly on UK energy sector regulators

February 11, 2014

'Extraordinary stuff" was the reported comment of one Whitehall insider about Energy Secretary Ed Davey's intervention in an ongoing review of power firms' profit margins.

Attention has centred on British Gas because of Mr Davey's pointed comments about that company's possible monopoly, the power the regulator Ofgem has to break the company up and whether it may choose to use it.

Mr Davey is encouraging the investigation, carried out by Ofgem, the Office of Fair Trading and the Competition and Markets Authority, to consider profit margins from gas supply and whether British Gas has a monopoly position, and whether it has abused that position. The inquiry was launched last November.

This is far from the first investigation of profit margins in the energy industry, yet consumers still feel the wool is being pulled over their eyes. Every attempt to provide the transparency and clarity customers want has seemed doomed to be frustrated as the big six companies ignore exhortations for restraint from politicians and announce growing profits hand-in-hand with inflation-busting price rises. The timing and relative uniformity of these rises has tended to make a mockery of claims the industry's structure does not operate like a cartel.

Few customers feel they benefit from any real competition in the sector. Recent figures show that British Gas dominates the supply market for gas, with rising profit margins, and a margin for gas that is in some cases five times the profit realised by companies for supplying household electricity. If gas profit margins were similar to those for electricity (given that it is easier to store gas, it is hard to see why they should not be) each household would save pound(s)40 a year on average.

British Gas chooses to explain this by pointing out that the relevant data has been in the public domain for several weeks. It is tempting to parse the response in these terms: "Don't complain. You've known for weeks that we were wielding monopoly power."

However, there is genuine concern that Ofgem has been so slow to react; hence Mr Davey's apparent interference in their inquiry.

Labour's spokesman on energy and climate change, Jonathan Reynolds, says companies are increasing their profits on the back of spiralling bills for consumers. Labour's pledge of a 20-month freeze on energy prices, should they win the next General Election, resonates with the electorate.

The Minister's intervention is not a sign of confidence from the Government. It betrays a lack of confidence that this is a truly competitive market. Ministers seem to lack faith in the regulator. More than anything, it shows that the Coalition Government is still concerned about Labour's price-freeze pledge, and the traction Mr Miliband is gaining with his cost-of-living appeal to voters.

But Mr Davey's move is welcome, for the effect it should have on regulators (surely they rather than suppliers are the real target) who must deliver a clear and decisive report, focused squarely on the best interests of customers.


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Source: Herald, The (Scotland)


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