Saturday 17 May 2008

Exposed: How scheming power firms rig prices to con families out of £400 every year

By SEAN POULTER - 17th May 2008

a man working out a bill

Bills could spiral for families if power companies do not stop 'fixing bills'

Households are being overcharged by more than £400 a year for gas and electricity because power companies are fixing prices, it is claimed.

The official consumer body Energywatch says the power supply industry in Britain and Europe is rigged against consumers.

It also accuses the Government of being docile and complacent while millions struggle to pay their bills.

Householders have already been hit with a 15 per cent increase this year, and the industry is suggesting another 25 per cent rise.

The giant power suppliers claim they are simply passing on increases in the wholesale cost of gas, which has been driven up by a record leap in the price of oil to more than 120 dollars a barrel.

However, Energywatch says this link between the gas price and oil is unjustified, artificial and outdated. The watchdog says the link amounts to a form of price-fixing.

MPs on the House of Commons Business and Enterprise committee have begun an inquiry into the prices.

Energywatch chief executive Alan Asher will tell them that bills could be slashed if the price of gas and electricity was linked to the normal market pattern of supply and demand.

He said: "There is no shortage of gas, yet consumers are being bombarded with dire predictions of huge price rises.

"The prices being charged for gas and electricity bear no proper market relation to the cost of production or the availability of supplies.

"The commodity cost for gas would be about 25p-30p per therm, however the winter price is currently 85p."

Mr Asher, who is due to give evidence to the MPs' inquiry, complained: "There is no logic for the link to the price of oil.

"It is a form of price-fixing, although probably not illegal. The way it works is to give the gas producers an external reference point to keep their prices high.

"If the link was broken, consumers could realistically expect that gas prices would fall by half and electricity by about one-third."

Consumers are paying an average of just over £1,000 a year for gas and electricity. It appears the figure could come down by as much as £400 if the link to oil was broken.

Energywatch believes the Government, the industry regulator Ofgem and the EU have done too little to challenge the price-setting systems used by European energy suppliers such as RWE and E.on of Germany, EDF of France and Iberola, of Spain.

There are also concerns that some of them are using their control over Europe's pipelines to block exports of cheap gas to the UK from Russia.

Mr Asher said: "The Government should be pushing this as a key issue in the European parliament.

"They should have the competition authorities in Europe jumping up and down about it. Instead they are being docile and complacent."

Any price-rigging on gas feeds through to higher charges for electricity. This is because around 40 per cent of the UK's electricity comes from gas-fired power stations.

Energywatch believes that a Competition Commission inquiry is necessary.

Mr Asher believes the commission would take the view that long-term contracts that tie the price of gas to oil are uncompetitive and against the consumer interest.

It would also investigate the fact that supplies in the UK are in the hands of only six major players - British Gas, E.on, nPower, EDF, Scottish & Southern Energy, and Scottish Power.

The companies insist a succession of inquiries have given their industry a clean bill of health.

How Europe fuelled our dearer gas

When Britain was self-sufficient in gas from the North Sea, the price was directly linked to the cost of getting it out of the ground and rules of supply and demand.

This meant the UK enjoyed relatively cheap gas and electricity for decades.

But three years ago Britain became increasingly reliant on gas from Europe, where monopoly companies have been charging high prices for years.

The major European power companies such as RWE and E.on of Germany have historically bought and sold gas on the basis of very long-term contracts linked to the price of oil.

Unlike in the UK, there has been no meaningful competition among them. Consequently-these monopoly companies had no reason to cut prices or scrap the price link to oil.

Now that the UK is reliant on imports from Europe to cover 20 per cent of our need for gas, the high prices on the Continent are being imported to this country.

The European Commission has told member states that they need to break up the monopolies and introduce competition into the system. However, progress has been painfully slow.

As a result, British families and business are being held to ransom by European gas companies who can, for example, use their control of the pipelines to block access to cheap gas from Russia.

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