Watchdog admits energy 'distrust'
Ofgem has acknowledged a "deep distrust" of energy companies among consumers and said it "completely understands" frustration and anger about rising bills.
The energy regulator's chief executive, Andrew Wright, told the Commons Energy and Climate Change Committee that consumers were not convinced that price increases were either fair or justified.
He said: "I completely understand why people feel frustrated and angry about rising energy bills. Prices have more than doubled over the last 10 years at a time when incomes have been squeezed, and consumers are not convinced that price increases that they see are either fair or justified.
"There is a deep distrust of anything the energy companies do or say. Partly that reflects the history - in that respect to some extent that's their own fault - there's a legacy of years of aggressive doorstep selling for example, we see poor customer service, confusing tariffs, all of these things have compounded that mistrust of energy suppliers and when anyone tries to take action by changing supplier then they experience a market that is both confusing and difficult to navigate.
"Consumers have a perception that the market isn't working well and that is something that we agree with. We think that the retail market is not working as well as it should and that's why we've put in place the retail market reforms to try to make the market simpler clearer and fairer.
"So, given all that, it's not surprising that consumers jump to conclusions that price rises are being driven by profiteering, and that is the basic problem that we have and the question is what do we do about it."
Mr Wright's comments follow Ofgem's disclosure that the earnings of Britain's Big Six suppliers have multiplied five-fold to more than £1 billion since 2009.
Figures released yesterday by the regulator show that together British Gas, E.ON, EDF, npower, ScottishPower and SSE recorded underlying earnings - before interest payments and tax - of £1.19 billion in 2012, up from £221 million in 2009.
It meant they pocketed an average of £53 profit per home last year, representing a margin of 4.3% - up from £30, or 2.8%, in 2011 - fuelling anger over rising gas and electricity bills following recent steep tariff rises.
Suppliers have blamed rising wholesale energy prices, higher distribution costs and Government green levies for the increases.
Labour has pledged a freeze on tariffs if it gains power. The Coalition is widely expected to announce changes to the way it levies charges on bills to pay for energy efficiency measures.
Energy UK, which represents the energy industry, said the figures did not take into account the costs of "huge investment" being made by energy companies and used profits calculated before interest payments and tax were deducted.
It claimed that Ofgem's figures about the reasons for tariff rises supported what energy companies had been saying.
Ofgem's figures showed the rise in profits in 2012 from the year before was partly explained by higher gas consumption during a period which was colder than average, compared with 2011, which was warmer than average.
It said bill increases in 2012 were caused by higher prices for gas and electricity on the wholesale market, up 14%, plus rising costs of transmission and distribution, and Government levies, up a combined 20%.
The report showed that from 2009, a number of loss-making domestic suppliers had moved from loss to profitability, as prices had "increased significantly".
It said there was "some evidence of rising profit margins" - attributed to higher prices and volumes rather than lower costs.
The report added: "It is not yet possible to assess whether this is a sustained trend or the result of unusual weather over the past three years."
Mr Wright defended suggestions from the committee that Ofgem is a "toothless tiger" and "not fit for purpose".
He said it has "never been easier" to choose a new energy supplier and switch to them than it is now, which is down to Ofgem's actions.
Mr Wright said Ofgem has powers to make the market more competitive but it cannot "stray outside" of its remit by stepping in to control prices directly.
He told the committee: "First of all, I have not said that this level of profit is right or acceptable, nor have I approved it.
"If the companies ever imply that we think that 5% or any other level of margin is right, then we've never said that.
"We think that companies need to earn the profits that they make by providing good, efficient service, reducing costs, improving performance and winning customers.
"In a competitive market, they should have no entitlement to any level of profit."
Pressed on what action Ofgem is taking to challenge energy companies, Mr Wright said the regulator does this by making the market to ensure "competitive pressure bears down on these companies" due to new entrants and consumers engaging more effectively in the market.
He said: "If you think that we should go further, and we should be looking at regulating these companies directly, then that's certainly a legitimate debate for politicians to have.
"We will do what we can within the public policy framework that's set out for us. We are not elected politicians. We work under a statutory framework, set by Parliament, by Government.
"If you want to change that statutory framework, to something that leads to us being able to control prices directly, then that's certainly something that's appropriate for Government and politicians to debate.
"It's not right for us, as unelected regulators, to change that public policy framework without that mandate of being elected."
Mr Wright said companies are giving a "pretty good" account of what is happening with their wholesale costs and are "providing us with more transparency than we've ever seen".
Asked if he thought firms have exaggerated the impact of wholesale prices on their costs, he said there is no reason to suspect this and "we would not expect them all to have identical costs".
Mr Wright faced repeated questions about Ofgem's scrutiny of National Grid, and whether extra capacity, for which consumers would have to pay, was needed.
He said: "National Grid does not have an incentive to bring investment forward. If they can actually invest later, then they will benefit from that. So it is not in their interest to invest ahead of need, it is in their interest to invest just in time.
"The incentives are there to ensure that National Grid delivers its outputs as efficiently as possible, invests as close to need as possible. Obviously, there are risks on the other side of investing late and those risks are quite significant.
"You would expect National Grid to be looking early at these long-leadtime projects. These are large, important, complex, appropriately well-scrutinised investment decisions that National Grid needs to look at early."
He added: "It's a difficult balance to make between, on the one hand, being accused of standing in the way of investments needed to connect renewables and nuclear power stations and, on the other hand, making sure you've got a flexible enough system to allow National Grid to respond to these large and difficult investments."
Asked for his response to Labour's price-freezing suggestion, Mr Wright said: "We will work with whatever government to make sure that the policies they have operate in the interests of customers and we have obviously yet to see any detail of what the Labour Party proposes.
"We will be happy to work through that to make sure it's practical and the sort of things we would consider is: Does it have an adverse impact on consumers? And that includes: Does it have an adverse impact on the investment that's needed?"
Pressed further on his opinion, given his 25 years of experience in the market, Mr Wright added: "Price regulation clearly is an option, but it is obviously necessary to allow companies to recover the revenues that they need to be able to run their businesses effectively.
"They should have no guarantee of profits... but an efficient business serving customers well should be able to recover the costs that they incur.
"Any arrangement that doesn't allow them to do that potentially puts at risk investment in the industry, puts at risk the proper functioning of the industry and potentially becomes a windfall tax rather than necessarily a price regulation mechanism.
"And once again, if that is the route a government wants to go down, then that's for governments to decide, but we clearly think it's important that there is a stable regulatory framework under which consumers and investors can make effective decisions in the marketplace."
Last month, former prime minister Sir John Major suggested that e nergy companies should be hit with a windfall tax to cover the cost of Government help for people struggling with ''unjustified'' hikes in their bills .
Mr Wright said that debates over whether Ofgem should be able to regulate the end price for customers and whether windfall profits need to be clawed back are for politicians to consider "and not ones for us".
Responding to Mr Wright's comments, Consumer Futures chief executive Mike O'Connor said: " We need energy companies to make a profit in order to invest in society's future needs, but that profit must be in a market which is competitive, transparent, open and fair. We still have some way to go."