March 27, 2014
Britain ordered a full anti-trust investigation into its biggest energy suppliers on Thursday after finding signs of tacit price coordination, launching a process that could result in the break-up of companies including Centrica and SSE.
In a move that may usher in the biggest shake-up of Britain’s retail energy market since it was opened up 15 years ago, three regulators said competition was so weak and public trust so low that an investigation was needed.
“Profit increases and recent price rises have intensified public distrust of suppliers and highlight the need for a market investigation to clear the air,” energy regulator Ofgem said.
Centrica (CNA.L), the country’s biggest supplier which owns former monopoly British Gas, rejected any suggestion of tacit coordination on prices with other suppliers and warned the threat of a break-up would likely result in lower investment.
The country’s big six energy suppliers – SSE (SSE.L), Scottish Power (IBE.MC), Centrica (CNA.L), RWE npower (RWEG.DE), E.ON (EONGn.DE) and EDF Energy (EDF.PA) – are under intense political scrutiny ahead of a national election next year because of soaring utility bills.
The six companies, which control around 95 percent of Britain’s energy supply market, have denied accusations by the opposition Labour party that they are ripping-off customers and say they have been unfairly cast as the villains in a debate over rising prices ahead of the election.
Energy bosses and investors have warned that a lengthy inquiry could sow uncertainty that will deter the 200 billion pounds of investment they say is needed to avoid potential power shortages in future decades.
“We will act on that uncertainty and that’s something the company and the country will have to deal with,” Nick Luff, Centrica’s finance director, told journalists.
The regulators said they had found some signs of tacit coordination by the companies on pricing strategies, though they said it was too early to conclude whether such coordination did exist.
“We found a number of aspects … that would appear to be consistent with tacit coordination between them,” the regulators said.
POLITICAL ENERGY
Retail profits within the sector rose to 1.1 billion pounds from 233 million pounds between 2009 and 2012, a rise of almost five times, the regulators said.
Prime Minister David Cameron, who ordered the initial review following mounting public anger over high energy bills, welcomed the full investigation.
The soaring cost of everything from gas to train tickets has shot up the political agenda since the return of economic growth forced the opposition Labour party to shift its line of attack to the decline in real incomes that has squeezed voters.
Opposition Labour leader Ed Miliband pledged last September to freeze bills for 20 months if he won the 2015 election, putting Cameron on the back foot over the cost of living in Britain.
Miliband’s policy wiped 2.7 billion pounds off the market value of the two London-listed energy suppliers, Centrica and SSE in a day, which have failed to fully recover since.
With the issue top of the political agenda, hundreds of thousands of customers have started switching to smaller providers in search of better deals. One of those to benefit is Ovo Energy.
“It is likely we will see a much more dramatic shakeup of the sector now and that can only be good news for energy customers and the industry as a whole,” said Stephen Fitzpatrick, chief executive of the small supplier.
Ofgem said a public consultation would run for eight weeks until the end of May before the regulators will make their final decision to refer the sector for investigation.
The competition watchdog has 18 months to carry out the probe and can request a six-month extension if needed, pushing the outcome of the investigation well beyond next year’s May election.
Ofgem also said it would start increasing fines against energy firms breaching its rules. The regulator has the power to charge a fine amounting to up to 10 percent of turnover, but has never imposed fines this high. It is now saying that from June 1 it could enforce eight-figure penalties.
(By Karolin Schaps and Kate Holton)