Posted by Jake on Sunday, July 17, 2011 with 5 comments | Labels: Article, Bonus, energy, OFGEM, politicians
Continuing from last week's post on energy bill rip-offs, according to the International Energy Agency, Britain is 68.7% self-sufficient in Natural Gas. And yet hikes in our gas and electricity bills over the last few years outstrip those in countries with virtually no reserves. Why is that?
In its Retail Market Review of March 2011, OFGEM observed that the suppliers’ behaviour continued to deteriorate when it came to pricing:
Ofgem, like a disappointed but indulgent primary school teacher, gently reproves the utilities with words such as
“It has come to our attention that suppliers may not be conducting due diligence while executing some of the new provisions of SLC**. Therefore, we have decided to issue this guidance to help clarify certain issues.”
Given the history of the marketing licence condition and the extensive consultation exercises previously carried out (e.g. during the Probe), Ofgem firmly takes the view that suppliers should already be fully aware of, and fully capable of understanding, the spirit and letter of the obligations contained in SLC **.
In the absence of exceptional circumstances or compelling evidence of genuine uncertainty, Ofgem is unlikely to consider it appropriate to provide any additional clarification on SLC **.
It remains the responsibility of suppliers to ensure compliance with all licence conditions and relevant provisions of consumer protection law.”
In summary, this says:
a) We know you are doing the wrong thing.
b) We’ve already told you what the right thing is.
c) We know you know what the right thing is.
d) We’re not going to tell you again.
e) You should be doing the right thing.
f) Erm… that’s it. Yours Sincerely etc.
If you want to know whether companies are profiteering, don’t look at the statements they make to the regulators and the public – which will all be hand-wringing stuff about how their own costs are so high - but look at what they say to their investors. Centrica, in its 2010 Annual Report, stated that since the previous year its operating profits had jumped by 29%, from £1.9 billion to £2.4 billion. British Gas, part of Centrica, contributed a 24% jump in profits to £742 million.
Having learned long ago that the government watchdogs like OFGEM are not just toothless but are dog-less, the utility companies are merciless in their rip-offs. Department of Energy and Climate Change (DECC) figures show how the actual cost to UK energy companies of purchasing gas has only a tenuous link to the price the companies charge domestic consumers:
Centrica, owner of British Gas and one of the largest suppliers of gas and electricity in the UK, provided the following information in its 2010 Annual Results:
The contribution of the Downstream business, which sells the energy to households and businesses, breaks down like this:
Between 2009 and 2010, Centrica reported the following increases in its retail business
· Customers - up 2% (from 25.2 million to 25.7 million)
· Gas supplied - up 3% (from 14.1 billion therms to 14.6 billion therms
· Electricity supplied - up 1% (from 44.5 thousand gigawatt hours to 45 thousand gigawatt hours)
And yet these small increases of between 1% and 3% in volumes resulted in a bumper 20% increase in profit. Which could only be achieved by bumper price rises.
Another look at the 2010 Annual Report, in the section about remuneration and bonuses for its top executives, you will find a graph showing that one of the bonus criteria is the Earnings Per Share (EPS).
For the full bonus to be paid, EPS needs to grow 30% faster than inflation. For the executives to get their money, Centrica’s negligible increase in market share seen in the annual report needs to be compensated for by an increase in profit margin.
All the companies, the Big Six and the small middle-men, rely on customer confusion to maintain their market shares. Statements made by three energy companies in response to a BBC Watchdog program in October 2009 titled “Why haven’t energy prices come down?” all manage to claim they are the cheapest, one way or another:
· British Gas –
o “I would point out that we were the first of the "big 6" to cut prices this year and also had the biggest cuts”
· EDF Energy –
o “EDF Energy is currently the cheapest supplier among the big 6 both for a typical dual fuel standard credit customer and dual fuel prepayment customer based on a national average across all regions”
· Scottish Power –
o “Our Economy 7 rates are the cheapest in the market for prepayment, direct debit and prompt Cash Quarterly.”
A really paranoid person might think these companies share out the accolades: I'll have the biggest cut in price, you can do the lowest Economy7, and he can have the top-spot for duel-fuel.
Everyone has something to boast about, and can still keep up the ripping.
One of the important services the energy companies provide is supplying power to keep us warm in the winter, and cool in the summer. They can also achieve this without delivering a single kilowatt of power. Simply take a look at Centrica’s 2010 Interim Results presentation, and any Ripped-Off Britons worthy of the name would get hot (under the collar) and chilled (to the bones): “Aim to double operating profit over the next 3-5 years”! Help!
Ordinary Britons are on the whole painfully reasonable people. If we possibly can, we tend to give the benefit of the doubt when we are ripped-off and take the pain ourselves. Scammers rely on this – where there is uncertainty and confusion there is resigned tolerance. Without a forensic examination we can’t be sure whether that choking gas bill was because we left the thermostat too high a month ago. Or maybe we can do something about the shocking electricity charges by running the washing machine at night during off-peak hours. If at all possible, we put the blame on ourselves. Why do we do this? Because in the synchronised pricing of the Big 6, and the indolence of OFGEM, what alternative do we have?