Bosses from eight energy suppliers and the interim chief executive of the regulator, Ofgem, are appearing before the House of Commons energy select committee amid public and political anger at recent inflation-busting price rises.
By John Aglionby, Emily Cadman and Guy Chazan
Welcome to this live blog. The action is due to start at 2.30pm, with the first session featuring Tony Cocker, Chief Executive Officer, E.ON, William Morris, Managing Director, SSE, Guy Johnson, External Affairs Director, RWEnpower and
Stephen Fitzpatrick, Managing Director, Ovo Energy
In the second session, expected to begin at 3.30pm, are Neil Clitheroe, Chief Executive Officer – Retail and Generation, ScottishPower,
Ian Peters, Managing Director – Energy, British Gas, Martin Lawrence, Managing Director – Energy Sourcing and Customer Supply, EDF Energy, and Ramsay Dunning, Group General Manager, Co-operative Energy.
Finally, MPs will question Andrew Wright, Interim Chief Executive Officer, Ofgem – the regulator
The big six energy suppliers – and two others – are to be grilled by MPs over recent price rises that have stoked a huge row about the cost of living – a theme that is likely to dominate the political debate in the run-up to the 2015 general election.
Consumer groups accuse them of piling misery on hard-pressed households by pushing through increases that are way above inflation. Energy companies say they have been forced to act because of the increasing cost of buying energy on the wholesale market, as well as the growing burden of government green schemes and network charges.
The issue has risen to the top of the political agenda, with Prime Minister David Cameron now promising to roll back green levies in order to ease the burden on consumers – putting him on a collision course with his Lib Dem coalition partners, and Labour leader Ed Miliband promising to freeze prices for 20 months if Labour win the election.
For a background primer on the issues at stake read this piece from FT energy writer Sylvia Pfeifer Burning up cash: are UK energy suppliers ripping us off?
Kiran Stacey, FT political correspondent, who will be in the committee room for the hearing, says there is almost as much at stake for the MPs as the energy companies:
MPs on the energy select committee will all be keen to make sure theirs is the question that gets highlighted on the news bulletins this evening. The parties are falling over themselves to show they are in tune with the public’s anger over rising energy prices, and MPs always love it when they are not the least popular people in a room.
There are some questions every MP will want to know. Why have retail prices gone up on average 9 per cent, when wholesale pries have barely risen? How is it that the companies have all announced such similar rises within the space of a few days? Is this evidence of cartel activity? That was certainly the suggestion of many MPs who spoke to the FT about the hearing yesterday.
But MPs will also be keen to use the hearing for party political reasons. Expect Labour to ask the larger companies whether their party’s idea of a price cap is likely to put them out of business. The Tories will ask the same of the smaller companies – who are more likely to say yes. Conservative MPs will also be keen to ask about the impact of green levies – they are campaigning hard within the coalition to reduce such levies, or to pay for them through taxes rather than bills.
This may prove one moment of harmony between company bosses and politicians – the executives themselves will be more than happy to talk about the impact of government-imposed levies rather than their own purchasing and billing arrangements.
The first session is just about to get underway, with the participants taking their seats. If you want to watch the hearing live, you can do do so here http://www.parliam…px?meetingId=14057
Here are some charts for background which showcase the likely key points:
Guy Johnson of RWEnpower takes the first question, to explain RWEnpower’s recent price rise.
He says the Ofgem assumptions on costs are backward looking, whereas the companies’ are forward looking
William Morris of SSE says it’s regrettable that prices had to go up but says that because of the way SSE buys in the forward market, it factored in a wholesale price rise for gas of 4%
William Morris of SSE is now asked about unit costs. He said they’ve gone up by a total of 8 per cent so the price rise reflects both what costs have risen by over the last six months and what they’re projected to rise by over the next six months. The wholesale energy cost proportion of the bill is about half, he adds
William Morris says government levies are expected to rise “significant’y” in the near future and says these should be taken off customers’ bills.
The committee is focusing on the regulated cost and transmission parts of the electricity bill – and whether these costs are being driven by the costs of connecting to renewable energy schemes
Guy Johnson, External Affairs Director, RWEnpower says he would support Labour plans to separate generation and retail business – saying that is what they do already
Kiran Stacey, FT correspondent tweets about the Energy Company Obligation – the levy companies have to pay the government
Stephen Fitzpatrick of Ovo Energy – not one of the big six – says the most expensive price they’ve paid for wholesale gas was in 2011 – when it was 74p a thermal unit. It is now down to 69p, he says.
“We don’t see nearly the same impact [as the big six] on wholesale energy prices,” he said.
Kiran Stacey, FT political correspondent, also noticed that Fitzpatrick is not singing the same tune as the other company bosses.
Stephen Fitzpatrick twists the knife further:
“It looks to me they’re charging the maximum price they can get away with and maintain an illusion of competitive pricing with [lower] prices for a small proportion of well-engaged customers”.
The committee is focusing sharply on whether companies are buying energy from themselves on an-above-market rate basis
William Morris: “We have to have a level of transparency. If we don’t have transparency and trust we can’t run a competitive business.”
Denials from all of the big companies, with Guy Johnson saying “we do not buy at an inflated price”
Guy Johnson of npower responds to Stephen Fitzpatrick by saying they have two products but insists one is not “some undercutting product”.
William Morris says SSE does not have a trading business but that its trading is part of its generating and retail arms.
Tony Cocker, of E.ON says its trading arm is based in Germany and insists it’s “very transparent”.
Guy Johnson of npower says the company’s trading business is similar to SSE’s.
“There’s no old-fashioned transfer pricing going on”.
Guy Johnson of RWE npower giving evidence
Guy Johnson: “There’s clearly an element of concern and suspicion that there are excess profits. At least as far as npower is concerned… we invest 1.8 times in the UK more than our operating profit. One hears about windfall taxes but it’s a little bit inconguous because we’re net investors in the UK.”
Stephen Fitzpatrick takes another dig at the big six, offering to sell gas to the big six – if he could
Stephen Fitzpatrick, managing director, Ovo Energy
Tony Cocker says E.ON’s gas and power generation business has made a profit in the past – now it’s struggling. He insists investment has not stalled in the past year or so. He said the company has invested 100 per cent of what it’s earned from generation
The thoughts of Kiran Stacey, FT political correspondent, on the hearing so far:
“The committee’s decision to bring in executives from the smaller players alongside the Big 6 is paying off. The toughest questions the bigger companies have faced so far have come from Stephen Fitzpatrick of Ovo Energy, who has accused his competitors of paying their own generating arms over the wholesale price, and of saddling passive customers with the bulk of the burden from green levies.”
William Morris: “85 per cent of the ingredients behind that bill are out of the energy companies’ control. The critical thing is how we can get the bills down”
Guy Johnson, npower: “Things are changing. We have invested in very efficient gas fired power stations. We made a loss of £21m in our generation business in the first half of 2013.”
Here is a breakdown from the FT graphics team of how those energy bills break down
BBC correspondent points out that even though Stephen Fitzpatrick is putting the boot into the big six, Ovo Energy is also against Labour’s price freeze proposal:
FT political correspondent Kiran Stacey is wondering if he’s smelling a rat:
William Morris: ECO is about £60, half the cost of the government schemes.
“It shouldn’t be spread across everyone’s bills, whether you earn what I do or if you’re just above fuel poverty.”
As the focus now turns to the impact of climate change policies on fuel bills, take a look at John Burn-Murdoch’s breakdown of the DEEC assumptions
William Morris says it is because ECO is a new and complicated scheme that it is hard to explain how much it costs the companies.
William Morris: “However much we articulate how much bills are going up, customers look at us for an explanation.”
William Morris keeps going back to fuel poverty, saying no one should be in a position to have to choose between heating their home or eating.
An ECO, for those not up on the jargon is the Energy Companies Obligation introduced this year designed to insulate the homes of low-income families (details on gov.uk )
William Morris says “unquestionably yes” when asked if he would pass on the savings if the green levies are lifted.
Tony Cocker. “Fundamentally yes” – answer to the same question. “Yes” from Guy Johnson too.
William Morris: “Pound for pound, penny for penny, it should come straight off the customer’s bill.”
Tony Cocker on the carbon floor price: “It’s a tax, it has no benefit on supporting investment. It should be taken away. It would be a pretty immediate reduction in the bill.”
William Morris says there are significant contradictions in current energy policy:
“We wish to decarbonise at pace, we wish to have security of supply and we want to have bills lower. We can’t have all those three things”.
Tony Cocker, CEO of E.ON
William Morris on the question of trust:
“I’ve got to tell you that the quality of the people I’ve encountered in this company and the passion for doing the right thing is second to none. However, we have a profound problem on our hands because we’re not getting that across.”
FT Energy Editor Guy Chazan’s views so far:
“MPs are failing to land a blow on energy chiefs. They bat off accusations that they are cross-subsidising their retail businesses through power generation.
All the energy chiefs promise to pass on savings from rolling back environmental levies back to customer bills. They also all back the idea of taking these charges off household bills and moving it to general taxation. “
Tony Cocker on trust:
“We have worked very hard at E.ON to improve our business and to simplify our business.”
The MPs are not impressed
Tony Cocker: We don’t put generation and retail together when calculating bills and they each have to survive on their own two feet.
Tony Cocker: In my case, there are no economies of vertical integration.
(c) PA From left to right: Tony Cocker, CEO of E.ON, William Morris, managing director of SSE, Guy Johnson, external affairs director of RWE npower and Stephen Fitzpatrick, managing director of Ovo Energy
Cocker, Johnson and Morris all say they won’t cut anyone off in the winter if they can’t pay their bills. By that they mean from November 1 and the end of February
More from Kiran Stacey, FT political correspondent:
“The strategy of executives from the big six companies is clear: blame the levies. So far, E.ON’s Tony Cocker has called the Energy Companies Obligation a “stealth poll tax”, while William Morris of SSE has argued it should be delayed. Mr Cocker followed that up by arguing against the carbon floor price, saying it should be scrapped altogether and does not help investment. This has so far helped them avoid awkward questions about their purchasing arrangements.”
Stephen Fitzpatrick says the big six, and British Gas in particular, has been the most active in forming a “win-back” team to give people who threaten to switch to another company a big discount.
Tony Cocker and William Morris say they do not engage in “win-back”.
“We need to have a very thorough competition commission investigation – supported by Ofgem. We need to depoliticise this debate so we can sort it out once and for all.”
Questioning moves on to profits:
William Morris: “If I don’t make a 5% profit I can’t afford to keep employing my 20,000 employees. The question is what I do with these profits. We’re investing $4m a day back in Britain.”
It looks like it is going to be a long session…. the second panel of witnesses was due to appear at 15:30
FT political correspondent Kiran Stacey has a question for the energy company bosses:
Tony Cocker insists the companies are not an oligopoly
Guy Johnson rejects claim that the industry is not competitive: There are more supply companies in the UK than in any of the other EU 15 [states].
Philip Lee MP keeps pushing on the competition theme.
William Morris replies saying that the product range is “pretty limited”. “The reality is there is competition there. We try extremely hard to hold on to our customers.”
Stephen Fitzpatrick claims there would be a £3.7bn saving on bills if the big six ran their companies in the way Ovo Energy is run. “There is a real argument for more competition”. He says Ofgem has “almost entirely failed” to ensure competition.
He’s probably the only one of the witnesses enjoying himself this afternoon.
Now on to some of the financials, here is a breakdown for some of the key companies:
Tony Cocker says the return on capital on upstream generation business has been comparable to other EU countries in the last 10 years or so. But at a stroke the Labour party price freeze proposal has, increased the cost of capital.
Stephen Fitzpatrick is doing very well on Twitter. This from former Sunday Times editor Andrew Neil is typical:
William Morris:” It’s evident from all of our conversation that we need to go even further, in an accounting sense, to be more transparent. We’re happy to participate in anything that would do that.”
Tony Cocker comes to SSE’s rescue, saying that while levies like ECO are government driven, there is tremendous risk for the companies in delivering them. He doesn’t explain why though. And he isn’t asked why, either.
Kiran Stacey, FT political correspondent:
Guy Johnson is asked about the 16% difference between the different tariffs. He says the prices are different based on how long the prices are fixed for.
Guy Johnson says in 2009, 2010 and 2011, npower made a loss on its retail domestic business.
We are now running 40 minutes over time on this first session. Panel two – which was due at 3.30pm – is set to feature:
Neil Clitheroe, Chief Executive Officer – Retail and Generation, ScottishPower
Ian Peters, Managing Director – Energy, British Gas
Martin Lawrence, Managing Director – Energy Sourcing and Customer Supply, EDF Energy
Ramsay Dunning, Group General Manager, Co-operative Energy
Stephen Fitzpatrick: “If we want to become trusted energy companies, people shouldn’t be able to save 16% by changing plans.”
The first session has just finished.
If you are still in the market for more, the second session is coming up shortly.
Tomorrow then sees the Environmental Audit Committee holds its final evidence hearing 215pm on ‘Energy subsidies’, with energy minister Michael Fallon and officials from the Treasury, DfID and UK Export Finance on how the govt defines energy subsidies in the context of new nuclear and other energy sectors, and the role of energy subsidies in supporting action on ‘fuel poverty’
The second session has started
Ian Peters of British Gas says there’s a very difficult trade-off between delivering good services to customers, securing a fair profit and ensuring security of the company.
Ian Peters says there are 700,000 small shareholders in the company. He says executive bonuses are determined by an independent committee.
Ian Peters is asked whether it’s right that the chief executive of Centrica’s salary has gone up by 36% since 2008 while bills have gone up by 38%. He gives a long answer that doesn’t really say yes or no.
Neil Clitheroe of Scottish Power says the company has been very clear that its profitability will be 4-5%. He says he’s paid on a simple scorecard and that his bonus has remained “relatively flat” in the last few years.
Neil Clitheroe: “If we don’t deliver to our customers we don’t get our businesses.”
Ramsay Dunning has an easy answer on the bonus question, saying his customers are also his owners
Martin Lawrence said his salary increase has been below inflation and that his bonus has gone down in the last two years.
The hearing is being suspended while members go and vote – probably for about 10 minutes – that was the division bell those watching live could hear in the background
Kiran Stacey, our correspondent in the hearing picked this up:
The session has restarted now that the MPs have returned from voting
Ramsay Dunning says the fact that the Co-op doesn’t have full ECO costs yet, they save about 4%, but quickly adds that if his company was as big as the big six there would be economies of scale. He also says that because of their ownership structure they can rely on lower profit margins.
(c)PA Neil Clitheroe, CEO Retail and Generation, Scottish Power
The questioning is now going into detail about costs.Neil Clitheroe is breaking down the make-up of Scottish Power’s costs. Overall they have gone up by about 10 per cent. For an average dual-fuel customer, “costs” have gone up from £1,177 to £1,275, Clitheroe says.
Questioning moves on to green levies. Neil Clitheroe says by 2020 these won’t rise to £270 per year per customer because much of the burden will be taken up industrial customers. But he doesn’t say what it would be.
Neil Clitheroe adds that the companies are seeing a conspicuous reduction in consumption by customers – taking off about £120 per average bill.
Neil Clitheroe says he doesn’t know how much of the reduction is because people cannot afford to heat their houses. He says 1m houses have been insulated this year and boilers have become much more energy efficient.
Ian Peters adds to this by saying gas consumption is dropping by about 4.5% per year. 3.5% of this can be explained by insulation and boilers. “The other 1% is harder to explain”
(c) Ian Peters, managing director of Energy, British Gas
Martin Lawrence answers why the ECO costs are different: “We all discharge our obligations in different ways,” he says.
A long discussion on Eco costs – which doesn’t really reach any conclusion
Peters agrees with Lawrence, going into detail over which bits of the obligation British Gas is implementing this year and next. To be honest, it’s all getting into the minutiae of the minutiae
This is the latest from earlier this week on the government’s stance on green energy initiatives
And the Labour response
Clitheroe says: “The UK is one of a few countries in Europe that doesn’t identify green levies on the bill. It rolls them into the unit rate and standing charges.”
Lawrence calls for government programmes that are fixed for a lengthy period of time. “Some degree of stability and clarity would help drive the costs down”.
Ian Peters is asked about separation between the wholesale and retail businesses. He relies that the return on capital, after the £4bn in investment is included is 4%, which he describes as “very thin”
Peters adds that if the two businesses were completely separated then it would add additional hedging pressures – and costs – on the retail business.
“Making sure we have sufficient supply is our greatest concern.”
Ramsay Dunning: “To the people on the outside, it looks like an oligopoly, it looks like a cartel. I don’t think it is but it looks like that. That deters competition. It also deters others coming in as potential suppliers.
“I’m not asking for the break-up of the big six but we need to do something”.
He suggests greater clarity between generation and retail as a first major step.
“That’s already happening but it’s not the perception.”
Clitheroe on retail and wholesale: “We have separate books.” Scottish Power also put its trading on a separate account, he adds
Lawrence says the businesses are conducted completely separately.
Executives are now asked about charges of letters and visits to people who are in debt. Peters says these prices are mandated by Ofgem
Peters says he hasn’t cut anyone off in nearly four years. When asked about people who are put on pre-payment meters, Peters says people at risk of “self-disconnection” are contacted. Clitheroe says customers who haven’t charged their prepayment key after 30 days are contacted.
Clitheroe: “Any customer in difficulty – we work extremely hard to help that customer… whatever it is. Can the identification of those people be improved, can we ensure that no one falls through the net? Yes.”
Lawrence says people in difficultypaying their bills need to contact their energy suppliers.
One thing from earlier: Lawrence says EDF hasn’t made its mind up yet on whether to increase its bills.
That’s the end of the second session. Now it’s the turn of Andrew Wright, interim chief executive of Ofgem. The hearing is running about 80 minutes behind schedule.
Wright is asked about the lack of competition in the market. He says the annual review will be published “in the spring of next year”.
Wright: “Prices are set by companies competing in the market.”
“It’s absolutely right there should be a public debate on that.”
“Our job is to make the market work as effectively as we can.”
Wright says proposed reforms will make it easier for consumers to choose suppliers and compare companies’ programmes.
Wright is asked what Ofgem could do if green levies are cut and companies don’t cut bills : “We don’t have powers to regulate end prices directly,” but adds steps could be taken, although he does not say what these would be.
Wright is asked if he would examine foreign models to see which competition models work best. He replies that it’s an “interesting point”.
When asked about suppliers’ tactics in trying to prevent people switching, Wright says: “All tariffs need to be available to all customers. On top of that [the suppliers] have to tell customers about the cheapest tariffs they have.”
Wright says that if a company is trading in two parts of the market and hedging that internally then it would be hard to act over that.
Wright calls for the introduction of smart metres. And then the division bell goes for more Commons votes. And that’s the end.
To be fair to Andrew Wright, the session had hardly got going – he only had 15 minutes. But he didn’t get into specifics when he might have done – he just promised vague wide-ranging reforms. So people watching would not be much wiser now than they were before he started giving evidence.
But he has promised to return.
So, what have we learnt today:
- The big six energy companies agree there’s a need for greater transparency and are willing to do whatever is necessary to help ensure that,
- They insist there is no cartel.
- The small providers say, or intimated, that they cannot understand why the big six are putting up bills as much as they are.
- The big six insist say their wholesale (or power generation) and retail businesses are run separately and have to survive on their own. But, somewhat at odds with that, some added that it would increase hedging risks if the companies were broken up.
- MPs did not land any knock-out blows but got close when questioning focused on the separation of wholesale and retail units when it came to setting bills but their combination when it came to setting dividends.
- Tony Cocker of E.On called for a major Competition Commission investigation, supported by Ofgem. None of the others openly supported this.
- There was lengthy discussion about green levies imposed by the government on customers. The energy companies repeatedly stated these should be removed from bills.
-MPs wanted reassurance, and got it, that people would not be cut off this winter.
So Andrew Wright will be back at a later date, to be confirmed, to continue his evidence. And the energy company bosses will probably be summoned again sooner rather than later. Thanks for the comments and following the blog.