Following on from two polar opposite announcements last week, the butting rams of business energy square up this week.
Alistair Phillips-Davies of SSE, the UK’s second biggest supplier and Sam Laidlaw of Centrica, locked horns over the latter’s “scaremongering” over the Competition and Markets Authority (CMA) investigation into the energy market.
In calling for the investigation, Ofgem had said last Thursday, that they believed energy companies may be making “excess profits” and “ripping off” customers, warning that any conclusion could include the break up of the Big 6.
Reactions have been varied; some energy suppliers have welcomed the move, notably SSE and E.ON whilst others have painted apocalyptic scenarios for UK energy, notably Centrica, BGBs parent.
Commentators have even suggested this is a ruse to move energy off the frontline agenda in time for the expected 2015 election. Citing the apparent traction Ed Miliband gained in his commitment to pseudo renationalization of the industry (at least for a few years).
Headline grabbing numbers such as a 5-fold increase in profit between 2009 and 2012 to a collective £1.1bn have been held in stark contrast to increased customer bills, poor service claims and general discontent with the energy market.
One of the most telling features of the domestic energy market, something happily not shared with the business energy market, is the evidence of
“possible tacit coordination reflected in the timing and size of price announcements”, a state of affairs that “reduces competition and worsens outcomes for consumers”.
Ofgem explained that the Big 6 suppliers “may be able to anticipate each other’s future actions” and change their prices at around the same time, in the same direction and of the same magnitude, albeit without direct communication between them. Whilst this in itself is technically not a breach in competition law, Ofgem warned that
“it may result in competition being less effective”.
Dermot Nolan, Ofgem’s new chief executive, said:
“Ofgem believes a referral (to the CMA) offers the opportunity to once and for all clear the air and decide if there are any further barriers which are preventing competition from bearing down as hard as possible on prices.”
Whilst the CMA investigation is yet to start, and with it likely to take at least 18 months or even 2 years, the outcome and implication has already been hotly debated.
Ofgem themselves hardly dampened the flames when Nolan said:
“Anything is possible”
…including a break-up of the Big 6.
Ofgem also questioned the fairness of the 5 per cent profit margin the suppliers aim for, a statement dangerously close to government intervention in private businesses.
But it was Laidlaw of Centrica who really ramped up the hyperbole with his claim
“prolonged period(s) of uncertainty could damage investment at a time when Britain’s energy security is being seriously challenged.”
This was the outburst that Phillips-Davies took particular exception to writing in the Daily Telegraph:
“Throughout any inquiry it is time for this industry to listen and change, not be defensive or scaremonger.
“The choice facing energy companies is simple: attempt to carry on regardless without the trust of customers or stand up and be counted.”
Indeed Phillips-Davies called for a deeper and broader remit for the investigation writing:
“This investigation needs to look at the bigger picture in the extremely complex and interconnected business of producing and supplying energy if it is to have any chance of establishing confidence in the market among consumers.
“What about interconnectors, gas storage, the role of switching sites, smart metering and perhaps the biggest issue of all, in terms of affordability, the cost of investment decisions?
“Everything not already economically price-regulated should be examined. A meaningful inquiry cannot dodge these issues because they are difficult. If the investigation is to “clear the air” then these big issues must also be in scope.”
Laidlaw was not available to comment but one of his PR team piped up with:
“Sam (Laidlaw) was not scaremongering. He was raising genuine concerns about the reserve margin in power generation and the need for investment in new capacity, which have been echoed by respected commentators.”
In contrast Ed Davey, secretary of state for energy and climate change, welcomed Ofgem’s move.
“This is just too important to rely on guesses about how to fix the energy markets, if we get it wrong, consumers will pay the price.”
Richard Lloyd, executive director of Which? said:
“It is make or break time for the energy suppliers, who should not wait to be forced into action but instead start now to put customers first, keep costs as low as possible and trade transparently”.
How Mr Lloyd feels about Phillips Davies call for a broader investigation into ‘switching sites’ like Which? is unclear.
Missing the point as usual came Labour. Following on from Miliband’s misreading of the separate announcement of the new SSE fixed price energy deal it was Caroline Flint turn, with the Labour’s shadow energy and climate change secretary claiming that SSE had shown that a price freeze is possible and that all customers need it.
Flint added the customary:
“That’s why the next Labour Government will freeze gas and electricity prices until 2017 and reform the market to break up the big energy companies and make tariffs simpler and fairer”.
Again conveniently forgetting that fixed price energy deals have been a feature of both the domestic and business energy market for years, regardless of what her party may think. And that SSE have already committed to restructuring their business to provide greater transparency and openness.
With Laidlaw resisting change, Miliband and Flint missing the point and Phillip-Davies unsatisfied with the current remit, it has been an inauspicious start to the CMA investigation.
Let’s hope that by the time June rolls around and the real work starts that the CMA take a more balanced and rational position and err on the side of SSE and not the political point scorers. Energy is too important to allow this opportunity to be missed.