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Ed Davey calls on Ofgem to investigate energy firms' gas profits Ed Davey calls on Ofgem to investigate energy firms' gas profits
(about 11 hours later)
The energy secretary, Ed Davey, has urged the energy regulator to investigate the profits made by the Big Six energy companies from supplying gas and to consider breaking them up if they have ripped off customers. British Gas has hit back at claims that it makes excess profits after the energy secretary, Ed Davey, warned the company could be broken up if it was found to have ripped off customers.
The Liberal Democrat asked Ofgem to examine whether the companies' profit margins – in some cases five times higher for gas than for supplying household electricity – should be the subject of a market investigation.  Shares in British Gas's parent company Centrica were the biggest faller on the FTSE 100 index on Monday, after Davey named British Gas in a letter to the energy regulator Ofgem in which he called for an investigation into the profits the Big Six energy companies make by supplying gas. The Liberal Democrat urged Ofgem to "think radically", and consider breaking up companies if they were found to have abused their market power.
Davey said the debate about energy prices had focused on the cost of electricity but the evidence suggested that the worst overcharging was for gas. The energy secretary wants Ofgem to examine whether energy companies' profit margins – in some cases five times higher for gas than for supplying household electricity – should be the subject of a market investigation.
He said Ofgem's "full-scale market investigation" should consider splitting up companies – including British Gas – if they had abused their position. Shares in British Gas owner Centrica were the biggest fallers in the FTSE 100 on Monday, falling 3% to 305p. SSE shares were also off 1.6%. But Chris Weston, managing director of British Gas, said that the UK had "one of the most competitive energy markets in the world, with gas and electricity prices among the lowest in western Europe". Noting that British Gas' profit margins were on average 5% after tax, he said: "About two-thirds of British Gas customers are dual-fuel customers, taking both gas and electricity, and the price of the gas is the same for all customers whether they are a gas-only customer or on a dual-fuel tariff."
"I want them [Ofgem] to think radically," he told the BBC's Today programme. "There could be a number of remedies, including the breakup of some of these companies if they have abused their market power." Davey's intervention is the latest episode in the political storm over energy prices following Ed Miliband's pledge in September to freeze prices and reform the market if Labour wins the next election.
Davey said gas made up two-thirds of the energy bills of households connected to the grid and that if profit margins for gas fell to a similar level to those in the electricity market every household could save £40 a year. His intervention is the latest episode in the political storm over energy prices following Ed Miliband's pledge in September to freeze prices and reform the market if Labour wins the next election. The Federation of Small Businesses welcomed the move, saying that the business energy market was in desperate need of reform. "Over 40% of all small businesses are with British Gas and it simply cannot be right that one company has such a dominant share especially given the price of gas now accounts for between five to 10 per cent of total business costs for nearly one in ten of the UK's smallest businesses," said the FSB's chairman John Allan.
He called for the review in a letter to the Ofgem chief executive, Andrew Wright, in which he singled out British Gas. He said there was evidence the company, which has the biggest share of the domestic gas market, had tended "to charge one of the highest prices over the past three years, and has been on average the most profitable".  Davey has suggested the worst overcharging was for gas, rather than electricity. His view was echoed by Tim Yeo, the Conservative MP who chairs the energy and climate change select committee. Yeo told the Guardian: "We are now seeing a few more independents coming into the electricity market. In gas you have got 41% dominated by British Gas, that is a very big share for one company to hold."
Davey wrote: "Clearly you will wish to consider whether this is prima facie evidence of an issue in the market and so whether it merits a market investigation reference with the whole gamut of potential remedies that could follow including a breakup of any companies found to have monopoly power to the detriment of the consumer.  Yeo welcomed Davey's intervention, but said the timing was surprising. "This is not new information; it does raise the issue, what has Ofgem been doing in the meantime."
"Alternatively you may of course conclude that no action is needed or potentially some intermediate measure which can be taken by the sector regulator."  The Conservative MP said he did not agree with calls to abolish Ofgem – proposed by Labour's shadow energy minister Caroline Flint – but said the regulator's remit needed to be strengthened.
Davey's letter suggests looking at whether the Big Six should adopt a different business model and how well British energy markets are linked to those in mainland Europe. He also called for clearer accounting because opaque reporting made it difficult for the government and regulator to check how much money the companies made. The executive director of Which?, Richard Lloyd, said Davey's "hugely significant intervention" increased expectations on the regulator. "The pressure is now on the regulators to announce next month that they are taking the first steps towards a more radical reform of the energy market, and to give consumers confidence that they are paying a fair price." 
The executive director of Which?, Richard Lloyd, said: "This is a hugely significant intervention by the secretary of state for energy and implies that Ed Davey agrees with Which? that the structure of the biggest energy companies is partly to blame for the price hikes that millions of squeezed customers have been struggling with in recent years.  British Gas said it was complying with an independent market assessment being conducted by the Office of Fair Trading (OFT), Ofgem and the Competition and Markets Authority (CMA).
"The pressure is now on the regulators to announce next month that they are taking the first steps towards a more radical reform of the energy market, and to give consumers confidence that they are paying a fair price."  Weston said: "The current assessment of the energy market will be essential to rebuilding trust in the sector. We strongly support a proper, thorough and independent examination of the issues during this process."
British Gas said it was complying with an independent market assessment being conducted by the Office of Fair Trading (OFT), Ofgem and the Competition and Markets Authority (CMA).  But Yeo said MPs on his committee were not entirely convinced by energy bosses' arguments on competition and profits.
"Further discussions have been arranged over the coming weeks in which we will fully participate," a spokeswoman said.  "We have continued to feel that greater transparency is desirable even now, we haven't got as much information about some of their operations that we would like," he said. "Where you have got vertically integrated companies selling energy to consumers, we need to make sure there aren't other parts of their businesses where they are making larger profits than would be the case if it was an open and competitive market."
"The data referred to in the secretary of state's letter has already been fully disclosed and in the public domain for a number of months."
Labour's spokesman on energy and climate change, Jonathan Reynolds, accused Davey of spending months defending energy firms despite evidence of overcharging. 
"Actions speak louder than words and this government has let the energy companies get away with increasing their profits on the back of spiralling bills for hard-pressed consumers," he said.
"If the government wants to be taken seriously on energy bills, nothing less than a price freeze and action to stop these firms from overcharging in the future, as Labour has proposed, will do."
Ofgem said it would look at all evidence while compiling its report with the CMA and OFT. It declined to comment further.