Ofgem failing to improve transparency of the Big Six profits

29 July 2013

A lack of transparency about energy company profits is undermining trust in the energy market and Ofgem is not taking all the action necessary to tackle the issue and restore consumer confidence, MPs on the Energy and Climate Change Committee have warned in a new report. They want to see a competitive energy market with profitable companies able to invest in Britain’s future energy infrastructure.

On behalf of the Committee, 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.

Unfortunately, the complex vertically-integrated structure of these companies means that working out exactly how their profits are made requires forensic accountants.

Ofgem should shine a brighter light on the internal structure of these big companies."

The six largest energy companies are complex with several different arms – generating, trading and supplying energy – that occasionally sell energy and services to other parts of the same company. When reporting their overall profits they include all these different business arms making it difficult to determine the precise profits of the energy supply side of the business and how this impacts upon energy prices.  Greater transparency is urgently needed to reassure consumers that high energy prices are not fuelling excessive profits, according to the MPs.

Ofgem is failing consumers by not taking all possible steps to improve openness and increase competition in the energy market, the report concludes. The MPs criticise the regulator for its relatively light touch approach and for not fully implementing the recommendations of the accountants it commissioned to improve how energy companies report their profits. Considering consumers’ lack of confidence in energy companies, the MPs argue, Ofgem should reconsider whether the transparency to be gained by implementing more of BDO’s recommendations outweighs the costs involved.

Committee member John Robertson MP said:

“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 report also reprimands the Government for not doing enough to help the millions of low-income families living in poorly insulated homes,  struggling in ‘fuel poverty’. Spending on the problem has been cut in England and some of the Government’s fuel poverty programmes appear to be in hiatus.  The use of levies on bills to fund social and environmental programmes will add to the burden faced by energy bill payers.  The MPs argue that to help protect the most vulnerable more programmes should be funded through direct taxation rather than levies.

Sir Robert added:

“Fuel poverty is getting worse as energy prices rise making it all the more critical that the Government must respond to the Hills Review as a matter of urgency.”

“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.”

Further information

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