In Centrica’s initial submission to the CMA’s energy sector investigation the company said that regulators have paid “little consideration” to the fact that supplying retail energy “requires the management of large and complex financial risks” which can lead to increased costs for the supplier.
One of the outcomes of the CMA’s investigation could be the breakup of energy suppliers into supply and generation arms, but Centrica said that its vertically integrated model allows the company to secure a strong credit rating which is required to mitigate some of these costs.
“A strong credit rating is also important for the efficient management of collateral costs, which arise from providing customers an on-demand supply at a price, set in advance, that varies infrequently,” the company’s submission said.
“These collateral requirements can be significant, however we believe they are a necessary cost of serving customers in the face of often volatile commodity markets,” Centrica added.
But the company said the “most serious” problem faced by the retail energy market today is “the low level of trust in energy suppliers, driven by a range of related factors, the most significant of which is price increases.”
Centrica said retail consumers are faced with “uncertainty” over the reason for tariff increases, with many believing them to be due to rising energy company profits.
“In fact, British Gas’ profit as a percentage of an average dual fuel bill has declined since 2009,” Centrica said.
“At the same time, underlying commodity costs have risen by four per cent a year, transportation and distribution costs have risen by seven per cent a year and the costs of environmental and social schemes have increased by 17 per cent a year,” it added.
Also since 2009, Centrica points out a decline in monthly switching between retail tariffs which it says may be an unintended consequence of increased regulation in the sector.
“We welcome the CMA’s intention to assess the impact of regulation on competition,” the company said.
“We firmly believe that competitive activity in, and consumer engagement with, the retail market (particularly the domestic market) has been shaped by the ever changing regulatory framework,” it added.
The calls to investigate the impact of Ofgem’s regulation follow criticism from five former energy regulators who have argued that regulatory interventions in the market may increase customer and supplier costs and led to weaker competition.
Their letter submitted to the CMA said: “The investigation should examine the effect of regulatory interventions on price levels and price dispersion, customer switching, customer choice and the products offered by suppliers, innovation, supplier profitability, new entry etc.”