UK’s big six utilities seen spared from breakup after review

Energy news
Energy news

The UK’s biggest energy suppliers probably will escape a recommendation to break up companies when the nation’s anti-trust regulator completes a review of how best to reduce costs and spur competition.

The provisional findings of the Competition and Markets Authority are “highly unlikely” to delve into the structure of the country’s energy industry or the wholesale markets, said Ann Robinson, director of consumer policy at uSwitch, a UK price comparison site. Instead, the regulator will focus on how to get consumers more engaged in managing their bills, she said.

The comments, echoed by industry officials who wished not to speak publicly before the decision is announced on July 7, suggest the utility industry’s basic structure probably will be retained by Prime Minister David Cameron’s government. The opposition Labour Party, which lost the last general election in May, had promised to split the industry into separate retail and power-generation businesses.

“The key issue is how to make this market work and how to get engagement up in the market,” Robinson said. “They’re not just talking about switching. They’re also talking about people getting a better deal with the suppliers they’re already with — beginning to feel they understand energy and their bills.”

The top suppliers are Centrica Plc, SSE Plc, Iberdrola SA’s Scottish Power, RWE AG’s nPower, Electricite de France SA and EON SE. None of the companies had a comment. EDF, which called for the inquiry in 2011, pointed to an article its chief executive officer wrote last week in the Daily Mail.

‘Treated Fairly’

“Customers want to know that they are being treated fairly and they also need the industry to meet the big energy challenges ahead,” Vincent de Rivaz said in the article that was published on June 21. “Energy companies need to innovate with digital technology to help customers save energy and enjoy simple bills and prices, so they feel in control.”

The CMA confirmed the report is due on July 7 and didn’t give more details about what it would contain. In February, the CMA said that 95 percent of gas and electricity customers with the so-called “Big Six” could have saved as much as 234 pounds a year by switching tariff or supplier in the years from 2012 to 2014.

The CMA’s review was prompted by a request by Ofgem, the energy regulator, which last year sought an investigation into whether the utilities used their market power to increase prices.

Political Feud

The review was meant to defuse political debate between Cameron’s Conservative Party and the Labour opposition on how to keep a lid on energy bills. Members of Parliament have expressed concern that utility charges have been rising faster than inflation. Ed Miliband, former Labour leader, pledged to freeze prices and break up the Big Six if he won the election.

The CMA in February said it found no evidence the utilities made excessive profits from power generation or that wholesale market prices were above a competitive level.

The watchdog’s report next week will be provisional, with final recommendations due by Dec. 25. It’s likely to suggest measures to boost engagement, help vulnerable customers and ensure regulation encourages innovation and competition.

The regulator will most likely recommend switching suppliers to become easier and ask the higher priced standard variable tariffs to be actively chosen by customers, said Deepa Venkateswaran, an analyst at Sanford C. Bernstein & Co.

Consumer Charges

Currently energy customers are placed in the variable tariffs automatically unless they chooses a lower priced fixed tariff, she said. About 70 percent to 90 percent of the customers of the largest power suppliers are on variable tariffs, she said in an interview in London.

“The final decision shouldn’t be stronger than its recommendations next month,” Venkateswaran said. “It may either soften its views along with the responses from the companies in the next six months or keep them unchanged.”

About 10 percent of customers currently compare and switch tariffs, Robinson said. If that were to double or triple to 30 percent it would be “transformational,” forcing suppliers to improve their service and increase efficiencies in order to retain customers.

The focus is expected to be on enabling “sticky” customers to benefit from the lower prices enjoyed by more mobile ones, said Tony Ward, head of power and utilities at Ernst & Young LLP. If so, the remedies may have a deeper impact on the larger energy retailers, he said.

“They should also enhance competition between suppliers, through further increasing switching levels, as well as encourage innovation in tariffs and services.”