Vertically Integrated U.K. Energy Giants Want to Have Their Cake and Eat It

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Claims by the major UK gas and electricity suppliers that they have been forced to increase their prices because of rises in wholesale prices would appear to the reasonable. However, this is not entirely accurate, according to Electricity 4 Business Ltd.

Claims by the major UK gas and electricity suppliers that they have been forced to increase their prices in order to claw back the huge deficit created by the unprecedented rises in wholesale prices would, on the face of it, appear to be a reasonable explanation for their action, according to Electricity 4 Business Ltd.

However, if this were an entirely accurate picture they would be expected to take a hit on their profit especially since they have passed on to their customers '... far less than the full extent of the increase in wholesale energy prices experienced...'

But profits are rising and rising big time and the explanation given is that these profits come from a different source -- from upstream activities such as generation and exploration.

Now this might appear plausible except that it was they who persuaded the UK government against wide ranging protests at the time that they should be allowed to integrate both generation and supply businesses as they operated much more efficiently in tandem.

They can't therefore have it both ways -- either the vertically integrated companies should report as single entities and come clean about the overall level of profits they are making from activities that are ultimately paid for by the final customer or if they wish to divorce the business activities then the government must revisit the rationale for allowing such integrated giants in the first place.

If the former approach is the preferred one then the decision to raise tariffs to such unprecedented levels was completely unjustified and consumers have a right to new fair rates along with compensation for overcharging.

Furthermore, the original argument given for raising tariffs to these levels is itself now redundant.

Wholesale prices have seen a sustained retreat since the summer but this has failed to halt the drive towards even greater profitability.

Scottish and Southern Energy will be raising prices on 1st January 2007 despite an advance in pre-tax profits for the first half of the year to a staggering £484.5 million. Energy supply director, Alistair Phillips-Davies is recently quoted as saying 'If, as everyone hopes, falls in wholesale energy prices continue and are sustained, we will move as quickly as we can to reverse the price rises of recent years.'

But shouldn't they be applying these price reductions now, or at the very least forego any further increase?

After all, the profits that have been reported have been generated from the unprecedented rise in wholesale prices -- yes, those same wholesale price rises that necessitated the retail price increases in the first place.

Yet they, like all the other major suppliers, seem determined to have their cake and eat it by once again claiming that the retail business is a separate entity from upstream generation.

Graham Paul, Sales and Marketing Director of Electricity 4 Business Ltd, a company determined to redress this imbalance in the business electricity sector, points out a further negative impact of the government's decision to allow companies to operate both in generation and supply.

'Those energy giants who operate in both generation and supply gain a massive advantage by not having to go to the wholesale market for their supplies. Their supplies are simply transferred from their generating activities.

Those of us whose only option is to purchase from the wholesale market discover that prices are distorted by virtue of the energy giants' absence.' says Paul. 'The market is too small to operate properly and is therefore illiquid. The end result is a barrier to the very competition that de-regulation was supposed to create. Like Energywatch we believe there should be a competition commission investigation into whether the market really is working. If prices fail to come down, it will only add weight to the call for market structure change.'

The only feasible solution to redress this imbalance would be to force all parties to source their supplies from the one wholesale market which would be likely to drive down prices and lead to a far better deal for the energy consumer.

The European Competition Commission is currently investigating the barriers to competition in gas and electricity markets throughout Europe and is expected to enforce the break up of supply companies who also own the distribution networks. However, if the Commission is serious about creating truly competitive markets it must eventually aim to remove the advantages clearly evident to those suppliers with generating activities.


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Notes for Editors

Electricity4business is Britain's independent business electricity retail company specialising in the supply of electricity to the small and medium sized sector. E4B's aim is to cut the cost for British business by offering lower prices.

Business Electricity Retail Supply Market

96% of UK business is supplied by 6 players:

EON UK -- Powergen. EON Germany

RWE -- Npower. RWE Group. Germany

EDF Energy -- Electricite de France. France

British Gas Business. Centrica Plc

Scottish Power Plc

Scottish and Southern Energy Plc

Business Electricity Prices

Many businesses are experiencing price increases of up to 140% which has the potential to seriously impact UK business growth.

Escalating prices threaten business closure.

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