Britain’s competition watchdog, the Competition and Markets Authority (CMA), has cleared the country’s Big Six energy retailers of market abuse and colluding on pricing for gas and electricity and said it sees no reason why these vertically integrated companies which both generate electricity and gas and market should be broken up.
The long-awaited initial findings of the CMA report into the country’s power markets claim, however, that millions of energy customers have been paying too much for their energy bills.
Between 2009 and 2013, British Gas, E.ON, EDF Energy, Scottish Power SSE and RWE Npower collectively charged around 5% above the competitive level in the domestic sector and this resulted in domestic customers paying around £1.2bn more on an annual basis. Combined with the estimated £500mln of extra charges on small and medium-sized businesses, the amount over the five-year period becomes £8.5bn, the CMA said.
One of the surprises in the raft of remedies to the situation suggested by the CMA is a transitional cap on bills. Equally surprising is that the prime minster has indicated he would accept a cap since he has always been set against a cross-the- board cap.
A spokeswoman for David Cameron initially said: “The Prime Minister does not think that price regulation is the right approach.” But the operative word here is word here is “transitional”.
Downing Street later indicated the PM is prepared to consider a temporary cap on the more expensive bills.
The controversy over power prices was re-ignited back in September 2013 by Ed Miliband, who said if the Labour Party should regain power in the May 2015 General Election he would freeze electricity and gas prices for a period of 20 months. He also indicated said he would consider breaking up the Big Six companies who hold 90% of Britain’s market.
Shortly after he said this Ed Davey, the then Liberal Democrat minister at the Department of Energy and Climate Change (DECC), stuck his oar into the debate when he said the six big power big utilities should not treat consumers like cash cows.
This refers to the practice of getting consumers to pay by direct debit and then setting the payments at an estimated level which is higher than the cost of energy actually consumed. Figures of between £200mln and £300mln have been suggested as the sums the utilities have on deposit at their banks.
The disquiet caused by the disclosure of this racket came as no surprise to me. For years I have been phoning my suppliers demanding my money back. They usually said we will put it towards your next bill. I always replied, no you won’t you will send me a cheque or do a bank transfer. When we sold our flat in London recently I got £460 back from SSE.
But this practice is really a side issue to the main debate which is that the Big Six companies, despite the CMA saying there is no market abuse, do operate like the high street banks and effectively work as a cartel matching each other’s price rises. The question is what can be done about it.
For me a defining moment in the discussion came in the first half of 2014 at the Energy Select Committee meeting in Parliament. At the interrogation the heads, or rather the spokesmen for the utilities, said the price rises were largely out of their control because wholesale prices had been rising because they had to buy power on global markets and they had to pay for transmission costs and for “green” subsidies.
They might have got away with these claims save that there was an interloper in the room. Stephen Fitzgerald is the boss of Ovo Energy, which is a small energy supplier. Fitzgerald brilliantly used the occasion as a marketing opportunity. He said the price of gas had fallen to below 72p a therm since hitting a high of 74p a therm in May 2011 and Ovo was now buying power for next winter at a price of 69p a therm.
It may be different for Ovo because it is so small it might not buy at global prices, but the damage was done. As Fitzgerald put it he could not explain the latest price rises, and accused his larger rivals of “charging the maximum price they feel they can get away with to the customers that they feel will not switch under any circumstances”.
The round of inflation-busting price rises Fitzgerald referred to (and all six groups announced price increase of 6% or more) led to a political furore which, in turn, led to the setting up of the CMA investigation in June 2014.
Apart from a transitional price cap to get consumers off the expensive standard, or variable rates, the CMA suggested a number of reforms. It recommended that Ofgem, the energy watchdog should set up a price comparison website. The CMA took a swipe at Ofgem for limiting companies to offering only four different tariffs.
It said this limited competition and there should be a broader range of tariffs on offer. Another remedy suggested was a greater roll-out of smart meters so that consumers know how much power they are using at any given time. Far too many bills were based on estimates, which a lot of consumers, for one reason or another can’t be bothered to update and this leads to overcharging.
But the key remedy lay in the hands of the consumers themselves the CMA said. Roger Whitcomb, the chair of the investigation, said: “Many people have been overcharged but they do not have to be. Money can be saved if people shop around for deals that suit their individual circumstances.”
I can personally advocate switching. Before the election I did my own little experiment in shopping around. In my new house I inherited a mandate from British Gas, which with a 29% market share is the largest of Big Six. My dual bill was over £1,600 a year. Okay it is a four bedroom house, but it is not enormous and it is well insulated. I tried others of the Big Six. But there was little change to be had there.
I went for the smaller suppliers and finally lighted on Good Energy which tries to get all its supplies from renewable sources. They offered me a deal which came to £1,200 a year. But British Gas did not make it easy to switch. They phoned me up saying there has been some mistake. They could offer me different tariffs etc, etc, they then threatened me saying I would have to pay for a whole quarter if I quit. Too late, too late said I. I have switched and saved myself over £400 a year.