23rd Feb 2015 12:20
LONDON (Alliance News) - UK electricity and gas regulator Ofgem came under fire on Monday after a group of UK lawmakers said the regulator has not yet delivered value for energy customers and raised concerns that network companies are making greater-than-expected profits.
The Energy and Climate Change Select Committee Committee is appointed by the House of Commons to examine the expenditure, administration and policy of the Department of Energy and Climate Change.
"Ofgem has not yet delivered value for energy consumers in its regulation of transmission and distribution networks ... The Energy and Climate Change Select Committee raises concerns about the profits of network companies, that have been greater than expected after the first year of a new regulatory framework introduced by Ofgem to keep costs down," said the Committee Monday.
Network costs currently make up around 23% of a customers dual fuel bill according to the Committee. These costs are passed on to consumers by gas and electricity suppliers who are charged by the network companies for using their transmission and distribution infrastructure.
"The costs charged by the companies that have a near monopoly over the UK?s gas and electricity networks are often overlooked when energy bills are discussed. But network costs are one of the main reasons dual fuel bills have risen in recent years," said Tim Yeo, chair of the Energy and Climate Change Committee Monday.
The companies who run the distribution network are SSE Power Distribution, owned by SSE PLC, Electricity Northwest, owned by funds controlled by the Commonwealth Bank of Australia and a fund controlled by US bank JP Morgan, Northern Powergrid, a subsidiary of Berkshire Hathaway Energy, UK Power Networks, owned by Cheung Kong Group, SP Energy Networks, which is owned by Spain's Iberdrola, and Western Power Distribution, owned by US utility PPL Corp.
In January, Ofgem said it had launched an investigation into whether SSE put its competitors at a disadvantage in the electricity connections market, as it announced reforms to try to increase competition within the sector. It had been reviewing the GBP500 million a year electricity connections market for six months to identify how competitive it is and to spot any barriers to entry for new competition.
"While we have seen more progress over the last five years to increase competition, the network company remains the sole provider for a number of key parts of the connections process," said the regulator in January. "Ofgem's reforms tackle this by requiring network companies to commit to an enforceable code of practice that will ensure a high standard performance in all aspects of the connections market."
However, on Monday the Committee said "Ofgem has created a new regulatory framework designed to ensure that network costs are competitive and that profits aren't excessive, but there is clear evidence that the companies are making higher profits than expected."
"Ofgem?s chief executive told us that we would have to wait eight years to see whether value for money was being delivered for bill payers. This is too long for hard pressed consumers to wait," added Yeo.
The Committee said although the new regulations implemented by Ofgem "are an improvement," it said the regulator has been "too generous" with price caps and set performance targets "too low."
The Committee also said it wanted Ofgem to provide greater incentives to connect new and smaller energy generators to the grid to increase market competition.
"The current system of network costs is too complex, the inquiry heard, with a combination of codes and regional charges across the country making it difficult to compare price and performance across different network companies," said the Committee Monday.
"The report calls for an in-depth study on the pros and cons of replacing the regional variations for network charges with a standard national tariff," it added.
Tim Yeo summarised the report by stating that "Ofgem must get its act together and scrutinise these near monopolies more effectively," adding that "barriers preventing smaller players from entering the market must be removed to drive down costs for consumers."
The concerns follow on from Ofgem's orders to energy suppliers to pass on a fall in wholesale gas prices on to customers, which led to all 'Big Six' energy firms cutting their prices in February, March and April.
In January, Ofgem urged consumers to switch to a fixed price energy tariff, despite major suppliers committing to introducing price cuts to their variable tariffs, and said independent suppliers, rather than the so-called 'Big Six', are offering the cheapest deals as it shunned big firms.
The Big Six energy suppliers comprise EDF Energy, E.On, nPower, SSE, Scottish Power Ltd, which is part of Spain's Iberdola Group, and Centrica's British Gas.
In January, Ofgem said large energy providers are set to experience a small increase in profits during 2015, because future wholesale gas prices have fallen by more than the cuts made by the companies to household bills, said the regulator in January.
The rise in profits was set to be partially caused by network costs falling by around GBP8 per year, per household bill for large energy firms, as a result of price control measures Ofgem introduced for electricity distributors in 2014.
In January, Scottish Power said for every GBP100 spent by a typical gas customer, GBP51 is made up of wholesale energy costs, GBP24 goes towards the delivery to the customer's door, whilst GBP12 is put toward customer service. The remaining balance is put toward environmental obligations and VAT, and GBP3 is profit for the company.
On Friday, Ofgem piled more pressure onto electricity and gas suppliers to assist customers in getting the best deal possible, by ordering suppliers to be more transparent with their branding and deals and said suppliers using white labels - when a product is produced by one company and sold by another - must inform customers of their cheapest tariff regardless what brand it is sold under.
SSE shares were up 0.7% to 1,538.00 pence per share on Monday afternoon while Centrica shares fell by 0.8% to 250.00 pence.
By Joshua Warner; [email protected]; @JoshAlliance
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