Energy companies, transparency and market reform

Energy companies and Ofgem are blasted by MPs today over transparency of profits. Costs can be moved around between divisions making the apparently low retail profit margin figure meaningless.

Sir Robert Smith MP said, “At a time when many people are struggling with the rising costs of energy, consumers need reassurance that the profits being made by the ‘big six’ are not excessive.”

Their main concern was with companies dividing their businesses into divisions, it was unclear from the accounts if companies were simply moving costs and profits around. Companies have refused to provide details of their generating profits, claiming commercial confidentiality.

As a result MPs were again critical of Ofgem for having a, “relatively light touch approach and for not fully implementing the recommendations of the accountants it commissioned to improve how energy companies report their profits. Ofgem needs to use its teeth a bit more and force the energy companies to do everything they can to prove that they are squeaky clean when it comes to making and reporting their profits.”

The cross party committee also supported tackling fuel poverty through taxation rather than consumer levies; “Tax-funded public spending is a less regressive mechanism than levies on energy bills, which can hit some of the poorest hardest. Shifting the emphasis from levies to taxation would help protect vulnerable households.”

At the Scottish end of the Big 6, SSE was busy drawing a line under the mis-selling scandal at their annual meeting. Lord Smith trumpeted the company’s ‘six core values’ and the service guarantee that he hoped would build trust in SSE. Although he had to admit that these values were in place during the scandal. 9000 customers had been refunded an average £75, and the exercise was 98% complete. It only goes to show that it’s easier to write value statements than deliver them!

The old chestnut of a takeover of SSE was also raised at the AGM in the context of the new CEO. Lord Smith said, “We have no intention of accepting offers from people overseas, we haven’t had any yet, but we intend to rebuff them”. He wasn’t quite so robust when asked about offers from UK firms, effectively confirming that offers had been made.

While SSE reported a small fall in customer numbers, ScottishPower revealed that it added 400,000 new customers to its 5.6 million base in the first half of 2013. However, profits fell by 17.7% to £64.7m due to higher energy-efficiency levies imposed by Ofgem. Production at Scottish Power was up by 4.9% and the company said electricity demand in the UK had jumped by 0.2%, while gas demand grew by 5.9%.

Both companies are engaged in a lobby campaign over market reform and transmission charges and used the annual meetings to press their case. SSE’s capacity cut at Peterhead was questioned in a piece by Steven Vass in yesterday’s Sunday Herald. My quote in the piece expresses some scepticism over the cock-up theory. A big investment to cut capacity doesn’t sound like much of a strategy either.

While the UK Government has recently outlined their master plan for market reform it still isn’t enough for investment plans to be built on. Energy UK chief executive Angela Knight said, “We by no means have got the whole story. We all went cantering into this saying: that’s it, we have got the information. Uh oh, no we haven’t”. Further details are expected in August and then the package needs state aid approval from Europe. So still some way to go.

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