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Are UK utility companies being judged unfairly?

The UK’s energy corporations are being closely scrutinised, but is some of the criticism that is thrown their way unjustified?

The UK’s major energy corporations have come under increased scrutiny in the past few weeks, as Ofgem instructed the Competition and Markets Authority to launch an investigation into a supposed lack of competition throughout the industry.

According to the regulator, the fact that electricity and gas suppliers have announced rising profits at the same time as price increases has left consumers feeling disillusioned and resentful. Ofgem believes there are too many barriers preventing smaller organisations from breaking the monopoly of the ‘Big Six’ and greater transparency is required to restore the public’s faith in the energy sector.

But this begs the question; should a private corporation – regardless of whether it is an energy supplier or not – be forced to make the minute details of its operations and pricing structures available to the public?

Private companies are entitled to turn a profit and businesses in other sectors are not put under as much pressure as energy firms to publicise the finer points of their business models. Of course, the energy industry is a special case as people cannot live in the modern world without gas or electricity, but it can still be argued that power suppliers are being treated in a way that other private companies would not.

An industry review “should be welcomed” by companies

On the face of it, the only people who appear to benefit from an in-depth review of the energy sector is consumers. However, Nick Butler – who spent 29 years with BP and was also senior policy advisor to the British government – thinks corporations should welcome the investigation.

He writes a regular blog for the Financial Times that assesses the relationship between energy and power and in a recent post he suggested that a full-scale review could give the industry an opportunity to “clear its name” by dispelling some of the myths that surround pricing policies.

Mr Butler also wrote that the inquiry would prompt businesses to review their strategic positioning within the market, which will be vital as the industry continues to evolve. He stated that the landscape of the sector will be very different in just two to three years’ time and the industry will change at a pace that has not been seen since privatisation in the 1980s.

In his opinion, there are three possible conclusions of the review:

  1. It highlights examples of “unacceptable behaviour” by energy corporations
  2. The structure of the industry is fundamentally flawed and requires reform
  3. The public’s negative perception of the industry has been based on a lack of knowledge on how the sector works or because of “political gamesmanship”

It goes without saying that energy corporations will be expecting the latter outcome and this might finally make people realise that these businesses are not the ethicless, villainous money-making machines that they are perceived to be in the media.

Mr Butler’s thoughts were echoed by E.ON UK chief executive Tony Cocker, who said: “A full investigation will once and for all get to the heart of any structural issues that exist or are perceived to exist and help us to all deal with many of the myths and misinformation that surround the energy market.”

Why consumers should play devil’s advocate

The energy sector is often used as a political football and sensationalist media organisations are also quick to make a big deal out of price hikes. A good example of how energy firms are often portrayed as public enemy number one was seen in April 2014, when the Times reported that British Gas was guilty of “predatory pricing”. In response, the firm’s managing director of residential energy Ian Peters strongly rejected such claims and insisted the company’s tariffs were in line with the restrictions laid out by the industry regulator.

This is just one instance of how media reports and opportunistic adverts from price comparison websites can sometimes sway public opinion. By comparison, a disproportionate amount of coverage is given to the rising costs that energy companies are incurring and there is also a lack of awareness about just how burdensome government levies can be.

With the government setting an ambitious target of reducing the UK’s carbon emissions by 80 per cent – based on levels from 1990 – by 2050, companies are under a great deal of pressure to generate more sustainable energy. Prime Minister David Cameron confirmed towards the end of 2013 that green levies would be scaled back and this prompted a number of major energy suppliers to lower their customers’ bills.

Just by looking at the latest business results published by RWE npower – another member of the Big Six – it is clear to see that 2013 was a very challenging year for energy providers. The company’s energy generation business lost money and domestic gas and electricity profits were also down on the previous year.

Chief executive officer at the organisation Paul Massara said that £790 million was invested by the company into Britain’s energy infrastructure, which was way above the amount of profit the firm made in the UK.

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