Readers' Champion: Regulator needs to adopt more energetic attitude

Aug 7 2008 Lesley Campbell, Daily Record

IT HARDLY seems necessary for me to add my voice to those already complaining about energy prices and the profits made by the firms producing gas and electricity.

But I decided to do something very simple this week - find out how much utility companies are paying for gas and electricity, then work out how much they are selling them for.

If rising prices are the result of unavoidable increases in a global market, they are easier to swallow then prices that are driven up with the sole aim of making bigger profits.

So which is it with energy companies? Are they simply passing on higher costs, or are they charging us more than the market rate and pocketing the extra?

I spoke to a number of experts, including one former gas trader.

"Tracking gas and electricity prices in the wholesale market might not a problem but it won't tell you much.

Some companies have long-term contracts at a fixed prices and don't suffer when prices go up. Some buy almost daily and whatever the price is, that's what they have to pay. Some of the companies have so many divisions it's hard to discover what price they are paying. After a while, it all becomes a blur."

I made my own enquiries and within minutes found companies using different ways to measure power in the wholesale market - and calorific values and voltages are different in each.

Even normal bills from a power company make it almost impossible to see the underlying pricing structure and I suspect this is not accidental.

I delved into the wholesale market to try to work out who makes this market price. The answer is that in an increasing number of cases, the companies that produce gas and electricity, and set the prices, are the same ones that sell us gas and electricity.

So while the retail arm tries to explain away price hikes by saying "it's not our fault, the market's gone up", another division of the company is congratulating itself on making higher profits from these prices.

Take a look at British Gas. The division that sells to the public saw its profits collapse by 69 per cent last year. Their excuse? A 89 per cent increase in wholesale gas price.

Reading these figures, you might think we'd all done quite well to have seen increases of just 35 per cent.

But then I looked for the companies responsible for making the wholesale gas price go up - and British Gas is one of them.

The division that extracts gas from the sea saw its profits rise from £123million to £638million, and the parent company of both, Centrica, was wealthy enough to pay its shareholders a dividend of £144.6million - up 16 per cent from last year.

The entire group handed in spectacular results, so the excuse "we're just passing on the higher market price" simply doesn't wash.

Other companies may not be in the fortunate position of being able to produce and sell their own power. But some of the companies are passing on price hikes on supplies they bought at last year's lower prices and when they charge us more for this gas and electricity today, they are their own pockets.

The idea of a windfall tax is the logical response. Companies might be incentivised to be less predatory in their pricing if they knew they could not reap the benefits.

But there's no guarantee that they would end up offering cheaper deals to their customers if they knew their profits were going to be capped - there are plenty of ways for clever companies to shuffle money off their balance sheets to avoid windfall taxes if they want to. In addition, the Exchequer would earn less corporation tax.

All this would be unnecessary if the industry were effectively regulated.

Overseeing our energy industry is Ofgem. Regulators often describe their roles as delicate and complex, and Ofgem tell us they promote competition, make sure there is adequate investment in the networks and contribute to the drive to curb climate change.

Perhaps Ofgem have tried to untangle the world of gas and electricity, to work out who owns whom and how much each unit generates in profit.

But they seem to have orgotten their mandate: "Protecting consumers is Ofgem's first priority.

We do this by promoting competition and regulating the monopoly firms which run gas and electricity networks."

With our utility bills in one hand, and reports of Centrica's profits in the other, how well do we think Ofgem has done?

I TRY to help everyone who writes in, but sometimes the volume of letters makes this impossible. Please put your full name and phone number on your letter or email. Don't send any original documents or include your account details. You can email me at readerschampion@aol.com or write to me, Lesley Campbell, at Daily Record, One Central Quay, Glasgow G3 8DA