An electricity and gas price cartel? Why Ofgem can't tell

Robert Lea
17 Sep 2009

cartel *. an agreement or association between two or more companies or businesses for regulating output or fixing prices. Some countries including the UK and the US have legislation forbidding cartels on the grounds that they are monopolies that function against the public interest

Cartel. It is the "C" word the UK household energy industry dare not even whisper.

Ofgem, the industry's regulator, says there isn't one. It's held an inquiry which tells us so - though that hasn't stopped the regulator threatening the industry with referral to the cartels police at the Competition Commission if, like last winter, the industry did not pass on the benefits of falling wholesale gas prices in the form of lower household bills.

We are here again. The price of wholesale gas, which was last year trading at more than 60p a therm, has fallen sharply recently and been priced below 20p a therm this week.

Yet there are no signs of a cut in retail prices, which currently mean an average annual household bill of £1250, double where they were at the start of the decade and contributing to the billions of pounds of profits made by British Gas, E.On, EDF, npower, Southern Electric and Scottish Power.

But with no further cuts apparently in prospect, independent evidence indicates that households are routinely being overcharged.

Consumer Focus, the publicly funded watchdog, says its investigations indicate gas prices should be cut by 15% and electricity charges lopped by 7%, adding up to annual saving of more than £150 a year for the consumer.

Philip Cullum of Consumer Focus fumed: "Consumers have feared for months that the big six suppliers might not have passed on the full cuts in wholesale prices, but the companies claimed to have acted fairly.

"Our research for the first time shows the energy companies are pocketing £1.6 billion extra while millions of households struggle to make ends meet. Energy firms should take immediate action to put things right."

The watchdog however declined to use the "C" word. And, of course, asking the energy companies to cut prices in the interest of the public is as laughable as Lord Mandelson's demand that the Phoenix Four, the miscreants in the MG Rover fiasco, hand themselves over to Companies House so they can be banned as directors.

That the companies, seemingly acting as one, refuse to cut prices poses the not unreasonable question: are these six suppliers acting as a cartel?

Just because Ofgem says it has found no evidence does not mean a cartel does not exist. Similarly, just because the Big Six operate in an utterly deregulated market does not mean competition is working properly. The energy companies of course deny any such cartel claims and say the issue on prices is because the public does not understand that they the suppliers cannot afford to cut prices.

Any or all of their excuses (see panel below) might even be true.

The problem is that we the consumer have no idea. Once you have even begun to understand the small print of your gas and electricity bills we have no reference as to how good or bad a value the pence/kilowatt hour charge is.

We have no idea of how rapacious the energy supplier is being. We have no idea of what their profit margin is. (The industry and the regulator claim it is about 2%. Billions of pounds of profits over the years suggests that is a nonsense).

In short, more than a decade after Ofgem's predecessor relaxed the final price controls, the household energy industry is as opaque as it has ever been.

What consumers ought to know at a basic minimum is what wholesale price is being taken as the reference for the setting of the retail price they are paying. If a company is charging a higher price because it has fouled up in the timing or the source of its forward buying or hedging, then that is the sort of information an informed consumer should have. If the retail price is unfairly out of line with the wholesale price then Ofgem should produce the evidence that says so. If our bills are going up because of spending on wind farms, then we should be told by how much.

With total deregulation should have come the minimum quid pro quo: maximum transparency. Ofgem has backed itself into a corner by declaring it does not believe the domestic energy market is fixed.

Periodic threats to send the industry to the Competition Commission only further undermine its stance: either the companies are price-fixing or they are not.

The least Ofgem can do to repair the fractured reputation of itself and the industry it regulates is by demanding detailed and, yes, perhaps commercially sensitive information be made available. Especially as the operations of four of these six companies are hidden by the cloak of foreign ownership.

The duty of Ofgem is, first, to the consumer. Rather than tell the consumer they are not being ripped off, the regulator could execute that first duty by ensuring the inquisitive consumer is properly informed.

Four reasons why, say your suppliers, your energy bills aren't coming down

* Wholesale gas prices are very volatile and the prospect of a another cold winter or of disputes cutting off Russian gas supplies could see prices rise as fast as they have recently fallen; the glut of liquefied natural gas being imported into the UK, a major cause of the recent price fall, could easily dry up when Far Eastern demand returns.

* Swings in the wholesale price have to be averaged out to determine a less volatile retail price, or as one company said: “Your bills do not slavishly follow the wholesale price for if they did many of us would have been out of house and home when the wholesale price soared last year.”

* Retail prices lag wholesale prices by around nine months because supplies have to be forward-bought: the gas we are using now was bought at last winter's much higher prices.

* The actual wholesale cost of gas or generated electricity makes up less than half the retail price: other costs, like renewing ageing current infrastructure and subsidising investment in costly renewable energy like wind farms, have risen.