Quote:Energy firms 'overcharge by £3.7bn a year'

MPs told that some suppliers cannot justify increases in household bills

• Rowena Mason, political correspondent
  
• The Guardian, Tuesday 29 October 2013 21.14 GMT
  
• Jump to comments (243)
  

Stephen Fitzpatrick: 'It looks to me like a lot of energy companies are charging the maximum price they feel they can get away with.' Photograph: Andy Rain/EPA

Some of Britain's biggest energy companies have been accused of raising households bills for no reason and systematically overcharging customers by £3.7bn a year as they were grilled by MPs over their soaring prices and profits.
They were taken to task by Stephen Fitzpatrick, the chief executive of small supplier Ovo Energy, who launched a stinging attack on his larger rivals for being "the best filibusters in the business" when it comes to revealing how they make their money.
After British Gas, npower, SSE and Scottish Power announced inflation-busting increases in household bills, Fitzpatrick said he "cannot explain any of these price rises" as his company is buying gas for 7% less than it was two years ago.
The four companies that have raised bills in recent weeks are under increasing pressure to justify their higher prices after figures from the regulator Ofgem showed that network costs have risen by just £15 since last year, wholesale costs by £10 and green costs by £10.
During the hearing MPs criticised the companies' executives for accepting large bonuses while putting up prices year after year and failing in their duties to protect poor households who have to choose between heating and eating.
John Robertson, a Labour MP, warned that thousands of people were dying of hypothermia because they could not afford to pay their bills. He dismissed the companies' claims that they do not disconnect customers by pointing out that those who fall into debt are moved on to prepayment meters which in effect force them to "self-disconnect". "The big reason is they die of hypothermia and they can't afford to keep the heating on. By the time you have gone to look for them [after 30 days of no energy] it's too late," he said.
The four major companies that have raised prices blamed a combination of rising wholesale prices, green levies and network costs for their latest round of £100-plus increases, taking the average bill to £1,315 a year.
They said they could cut prices per household by £40 to £60 instantly if the government removed a charge for the ECO Energy Companies Obligation scheme to help poorer households cut their energy usage, with E.ON calling it a "stealth poll tax" and SSE saying putting it on bills was "morally wrong".
Tony Cocker, chief executive of E.ON, even called for a competition inquiry into the market to clear the energy firms of any allegations of profiteering once and for all. Cocker also said Labour's promise of a price freeze "at a stroke has increased the long-term cost of electricity and gas supply in this country".
However, Ed Miliband, the Labour leader, dismissed the claims of the Big Six energy companies as excuses and said he would take action against those that are "overcharging people and taking advantage of a broken market" by freezing prices and breaking up the firms if he wins power in 2015.
Fitzpatrick said he was "somewhat confused by looking at the explanations for the price rises over the past three or four weeks because we do not see really the same impact, especially in wholesale commodity prices.
"We buy all of our power and gas on the wholesale market and … the most expensive price we have paid for wholesale gas in the last four years was in May 2011, for the following winter that was 74p a therm.
"Since then it has been below 72p a therm for this winter, last winter and next winter. We are buying gas for next winter at a current price of 69p a therm."
He laid into RWE npower for being the "worst offender" in terms of offering some of the most expensive tariffs, and British Gas for its tactic of swiftly offering people much cheaper prices when they say they are about to switch supplier. He said the big companies could easily get round MPs' questions with "very complex, very clever, very confusing answers", adding: "You'll never get to the bottom of it."
He added: "We are all trying to track were the money has gone, and you will never find it."
Some of the big companies offer cheaper fixed-rate deals than Ovo and other small suppliers, but these are only taken up by a minority of savvy customers. Millions of British households are on the most expensive tariffs, which cost up to £150 more or £3.7bn in total than the prices that Ovo claims accurately reflect the costs of supplying energy with a 5% profit margin.
Sitting next to representatives of E.ON, npower and SSE, Fitzpatrick said it was also "common practice among several of our competitors that they load the environmental and social obligation costs on to those customers that are less likely to leave. It looks to me like a lot of energy companies, a significant number of the Big Six, are charging the maximum price they feel they can get away with to the customers that they feel will not switch under any circumstances and then maintaining the illusion of competitive pricing with tariffs targeted towards a very small number of relatively well-engaged customers.
"In the case of npower, which is the worst offender, historically and today the price differential is about 16%, which is about £200. That's more than the increase we have seen."
Turning to his rivals' sales practices, Fitzpatrick complained that "one in five customers joining today are immediately leaving to go back to the previous supplier because of a win-back inducement that can be up to 15% off the bill".
He said: "When a customer calls their supplier and says I'm going to leave, they say hold on a moment, we've just found out we can save you £160. British Gas seems to be the most active, with a dedicated win-back team whose sole job it is to call people up and there's a terrible mistake, we've been overcharging you all this time and now we can cut your bill. When this kind of behaviour is allowed to go unchallenged, this ex-monopoly advantage by the Big Six goes unchallenged by Ofgem, we'll never get effective competition."
Andrew Wright, interim chief executive officer of Ofgem, said it was "absolutely right" that there should be a debate about its powers to regulate the industry and promised an annual competition review, but his evidence to MPs was cut short by a parliamentary vote in the Commons.