13 January 2008
Consumers lose out as giant firms stifle competition, write Jon Ungoed-Thomas and Steven Swinford.
On the fourth floor of a porticoed building a short stroll from Trafalgar Square, in central London, is a meeting room for one of the most exclusive clubs in the world. This is where the "big six" that dominate Britain's gas and electricity industry regularly convene to agree market strategy, billing and sales techniques.
Among the small elite who attend these "private and confidential" meetings are Ian Peters, chief operating officer of British Gas, David Threlfall, chief executive of Npower, and Eva Eisenschimmel, who launched the ice cream Haagen-Dazs in Europe and is now chief operating officer at EDF.
A laminated print-out reminds the six executives not to use language such as "stitch up the market", although this is a forum to which smaller rivals are never invited. The members of this exclusive club have prospered in recent years while one by one most of their less powerful competitors have gone bust.
The meetings are held under the auspices of the Energy Retail Association, which says the six executives never discuss or agree price rises -that would be illegal. Instead, the members of the association -who pay an annual subscription fee of about Pounds 100,000 each -are meant to work for the "common good" without trying to secure competitive advantage.
But with Npower -owned by the German utility group RWE -announcing hefty price rises this month and others expected to follow suit, the companies face questions over whether they have been engaged in "tacit collusion". Last week rivals accused the big six of jointly pursuing strategies to crush smaller competitors and bolster an anti-competitive market. The allegations are strongly denied.
Allan Asher, chief executive of Energywatch, which represents the interests of gas and electricity consumers, said: "British householders are a captive market. The energy companies should be fighting for market share, fighting for customers and fighting to offer the best value they can. But what they do is behave and price in almost exactly the same way."
The most recent profits figures for the six main companies, which also include Eon, Scottish Power, and Scottish and Southern, reveal they made more than Pounds 2billion in six months last year. Average household energy bills are expected to exceed Pounds 1,000 this year, compared with Pounds 572 in 2003.
According to well-placed industry insiders, the practices used by the big six to rack up profits include keeping domestic bills broadly "in line" with one another, restricting energy supplies to competitors and demanding laborious accreditation and credit requirements for new companies.
When deregulation was introduced in the late 1990s, it promised a new era of vigorous competition. There is still an array of deals on offer, but most smaller companies have gone bust and Energywatch says the big companies are reluctant to undercut each other by large margins. An analysis of price rises since September 2004 shows that on at least four occasions the big six announced increases within a few weeks of each other, even though they have very different costs on a monthly basis.
It is also claimed that the companies fail to pass on savings made when wholesale prices fall. Last year, when the cost of gas fell by 60%, household bills fell by only 13%. The companies say this is because they buy their energy in advance, insulating customers from the peaks and troughs of the market.
While those who switch get better deals, the profit margins are usually still considerable for the power companies. The consumers who remain loyal to their suppliers often face heftier bills than new customers. It has meant rising profits for the big six, who now control about 98% of the marketplace.
Keith Munday, commercial director of BizzEnergy, a Worcestershire company that provides business with electricity and wants to break into the residential market, said: "Consumers are paying inflated prices because of the control these companies exert over the market. They are getting a very poor deal compared with the true costs of generating power and servicing customers."
One of the biggest problems for rivals is that the big six have their own power stations, with direct access to gas and electricity. By restricting rival firms' supplies, it is claimed, they can keep the wholesale market price higher, which ultimately means bigger bills for consumers.
Smaller companies also complain that the big companies support operating protocols and accreditation processes that are often too cumbersome and costly for rivals.
Companies have complained to the regulator, but say little has been done.
The regulator Ofgem says the evidence of "churn", as about 100,000 customers switch accounts each month, indicates a competitive industry. It says it has also tried to remove unnecessary barriers to companies wanting to break into the market.
Alistair Darling, the chancellor, wrote to Sir John Mogg, chairman of Ofgem, this month, asking him to explain why fuel prices were rising so markedly. They are due to meet this week.
Duncan Sedgwick, chief executive of the Energy Retail Association, said the group discussed issues such as carbon emissions, smart meters, best standards in sales practices and billing processes, but discussion of specific price rises and profits was strictly prohibited. Pricing policy had been discussed in relation to the public debate on fuel poverty, but not in relation to any potentially competitive issues.
He said: "We want competition to work and it's a complete fallacy to say there isn't a difference in price. But we have to stop thinking so much about just the price, and more about how much we use."
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