October 14, 2011 / 7:01 AM / 8 years ago

Energy bills face overhaul in first wave of reform

LONDON (Reuters) - Energy companies will have to simplify their billing structures under plans announced by Ofgem, making it easier for consumers to compare prices and overhauling a system the regulator believes is stifling competition.

Gas burns from a ring on a domestic cooker in a home in Manchester, February 13, 2006. REUTERS/STR New

Ofgem, unveiling what it says will be the first of four waves of reform, also released data showing recent price hikes mean the profit electricity and gas suppliers can expect to make from each household had soared in recent months.

Publication of the proposed reforms coincided with comments by World Climate Service’s senior meteorologist Richard James who told Reuters Britain was set for a third successive winter of unusually cold and snowy weather.

The energy market regulator’s strongly worded statement also chimed with recent speeches by senior members of the government who are under pressure to ease the pain for consumers at a time of high energy costs, spending cuts, rising unemployment and sub-inflation pay rises.

Shares in British suppliers Centrica and SSE initially rose as investors focussed on near-term prospects of bumper profits in the second half of this year but then dipped into negative territory as analysts flagged the mounting political risk faced by the companies.

“We see good upside in SSE but are aware that investors in this company will need to have thick skin as the companies are operating in the political limelight,” analysts at Liberum Capital, who have a ‘buy’ rating on SSE and a 1,500p target on the stock, wrote in a research note.

Shares in SSE were down 0.2 percent at 1,341 pence by 11:40 a.m. while Centrica was 0.1 percent weaker, underperforming a 1 percent rise for London’s FTSE 100 blue-chip index.

Liberum said it believed utilities had little room to reduce overall costs while consumer group Which? said consumers should not expect to notice the impact of reforms in the short term.

“This will help remove some of the complexity and confusion in the energy market that infuriates consumers,” Which? executive director Richard Lloyd said in a statement. “These important steps will take time to make a difference for hard pressed consumers.”

Which? said it had recently asked 36 people, including a solicitor, an engineer and an accountant, to work out their domestic energy bill using nothing but information from the supplier’s website. Only the company director was able to.

Ofgem said on Friday it continued to believe radical change was needed to address poor supplier behaviour and a lack of transparency in a system where consumers are currently faced with more than 400 tariffs to choose from.

Electricity and gas firms will still be able to offer a mix of products but under the plans Ofgem will set a fixed standing charge on top of which the companies will be able to offer a variable price per unit, making bills clearer and price comparison easier. Extra layers of complexity such as discount structures will also be removed altogether.

“So the lower the (unit) price the smaller the bill, with no exceptions,” Ofgem said in a statement.

The regulator said the plan was the “first of four waves of reform” which would include plans due in November to help business users and in December decisions on proposals “to break the stranglehold of the Big Six in the wholesale electricity market.”

Britain’s energy minister Chris Huhne last month pledged “to get tough with the big six energy companies.”

Britain’s six largest utilities are German groups E.ON and RWE, British companies Centrica and Scottish and Southern Energy, French operator EDF and Spanish firm Iberdrola.

Ofgem said its latest report on prices showed the average dual fuel bill in Britain now stands at 1,345 pounds a year.

It estimates companies are making 125 pounds per customer in profit, compared with 15 pounds in June. Based on a graph provided by Ofgem that is the highest level since at least 2004 and is only expected to tail off gradually in the coming months.

Energy companies disputed Ofgem’s figures though.

Centrica’s British Gas arm said the regulator’s report was misleading and its methodology flawed but a figure provided by the company showing that its margin per dual household bill was 24 pounds in the first six months of this year was actually higher than the 15 pound June figure given by Ofgem.

SSE said it did not recognise Ofgem’s estimated margin increase to 125 pounds, describing its calculations as entirely theoretical.

Reporting by Paul Hoskins; editing by Keiron Henderson

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