‘Opaque’ supplier finances damaging trust

Greater financial transparency is necessary if energy suppliers are to win consumer trust and head off radical intervention in the energy retail market, the chair of the Competition and Markets Authority investigation has said.

Accounting in the energy sector is both opaque and inconsistent meaning it is hard to gauge the profitability of suppliers, according to Roger Witcomb.

“The real problem is persuading customers they are not getting ripped off”, he said. “That is what causes the lack of trust. There is a feeling that we’re being overcharged and you can’t trust any of them and therefore what’s the point of engaging.”

Speaking to delegates at the Utility Week energy customer conference in Birmingham, he said many big six chief executives had expressed frustration that “nobody believes us” when they explained why prices had gone up.

“One of the reasons for this is that the financial accounts are incredibly opaque,” said Witcomb. “It is impossible to tell from their accounts how much money they are making. They’re all on different bases, they all use different measures of cost and they all use different measures of wholesale energy costs in particular.”

He noted that one of the CMA’s lesser known remedies was a recommendation to get suppliers to report financial information on a consistent basis. “It was a hell of a job for us to try to work out what was going on”, he continued. “It would be much easier for the companies to produce their numbers in a sensible way.”

Witcomb reiterated his claim that many suppliers are in fact making excessive profits, despite their protestations. He said an “awful lot” of a typical £1,000 bill is cost passthrough.

“Our best guess of what it costs an efficient energy supplier to supply a dual fuel customer on direct debit is around £120 per year.” He added that an average profit margin of £75 on such a cost base is therefore “too much”. 

Yesterday (19 January), Ofgem revealed its new Supplier Cost Index which is designed to improve transparency around energy costs and pricing. The index takes into account the wholesale cost of energy, network charges and govenrment environmental and social oblgations in order to project the relative cost of energy for 12 months ahead compared to historical levels.

However, on launching the new metric, Ofgem chief executive Dermot Nolan stressed that it is not designed to indicate the profitability of energy companies. He said this is recorded via annual Consolidated Segmental Statements.