A Disappointing Response From Ofgem

Good morning all,

Ahead of my meeting with Ofgem Director of Retail on tomorrow, I've actually received a full written response to one of the emails I sent to Jonathan Brearley (Ofgem CEO), although the response wasn't actually from him but from one of Ofgem's engagement analysts. 

My personal opinion is that the below response is a disappointing approach to take, it took me half hour to find enough evidence to counter most of what they've said in their response. I'll write this into an article and have it uploaded to the website later today, right after I've responded to their letter with my counter-points. I assume these will also come into use during my meeting on Thursday. 

Effectively, the response below doesn't answer all of the questions asked and it attempts to use old data to answer a question about today, which is either a mistake on their part or deliberately misleading. I don't know which, but either way it doesn't fill me with confidence. Anyway, enjoy the response below, if any of you have received responses from Ofgem please do forward them on to me at Richard@over50smoney.com.

Ofgem's Response (the bits in bold were my questions):

Dear Richard Winstone,
Complaint Response (CMPT12022/02717)

Thank you for taking the time to contact us on 14 October 2022 with your concerns, which we have recognised as a complaint and logged in line with our complaints process. I understand that you are unhappy with the price cap methodology in relation to the EBIT and Headroom allowances. We welcome all feedback and ensure it is shared with the relevant teams within the organisation.

To address the concerns you have listed, I would like to provide you with the following information and have adopted the same numbering system as outlined in your email.

Supplier profit
I’d like to begin by clarifying one of the underlying assumptions of your complaint around supplier profits. Ofgem, on behalf of customers, carefully monitors the financial health of their suppliers, and most are not currently turning a profit at all1, which puts them at risk of failure, disrupting supply and increasing costs for consumers, particularly the most vulnerable, which is our ultimate concern.

The price cap applies to companies’ domestic retail business. The profits you may be referring to from some companies were not from their retail businesses, but from oil and gas extraction, which is not an area regulated by Ofgem.

1. Do you think the price cap formula is fit for purpose in a market where the overwhelming majority of homes are on Standard Variable Tariffs?
The default cap sets a limit on the amount a supplier can charge a default customer. The cap level reflects costs of an efficient supplier at the time. Therefore, changes in the cap level reflect changes in efficient costs faced by suppliers. This ensures the level of the price cap protects energy customers from paying too much for their energy, and at the same time it ensures suppliers can cover the costs of supplying energy to their customers.

The price cap continues to protect millions of consumers and Ofgem has published its independent ‘Conditions for Effective Competition’ report2, with a recommendation that the cap stays in place for the coming year during this volatile period, to further protect consumers. With global costs so high, now would be the wrong time to expose consumers to the rapid fluctuations of a volatile energy market.

For the longer term, we would like to look at broader price cap reform options to better meet customer needs in a world where prices may continue to be highly volatile. But ultimately it is a decision for UK Government whether the price cap remains in place for the long term. We are working closely with the Department for Business, Energy and Industrial Strategy on the options for the cap from November 2023.

2. Will you change the EBIT calculation from 1.9% of other costs to a fixed £10 per household?
We are currently reviewing the EBIT allowance. We published a policy consultation3 on the 26 August, which is now closed. In our consultation, we considered alternative approaches to the current scaling, such as a fixed absolute term.

We noted the range of factors to be taken into account in the consultation document, which could have varying impacts, and therefore the need to assess whether the current EBIT allowance level delivers an appropriate rate of return for efficient suppliers. We intend to continue this consultation process going forward. We welcome further responses to consultations in the normal course.

You can sign up for any consultation and receive an email update when it passes from one stage to the next. All consultations are available to view on our website.

3. Will you change the Headroom Allowance calculation from 1.46% of other costs to a fixed £10 per household?
The headroom allowance is one of the ways we recognise the net cost pressure of uncertainties that are not already included in our efficient benchmark. In our 2018 decision, we decided that it is appropriate for headroom to scale in line with all cost components except network costs. We think this approach is reasonable because it avoids an allowance either over-scaling and undermining protection for consumers, or under-scaling and exposing suppliers to potential risks.

We currently do not intend to review the headroom allowance. However, as with all cost components, where there is evidence of material and systematic changes in costs, we will consider cost reviews.

4. How do you plan to reintroduce competition to the market and force domestic energy suppliers to once again offer cheaper fixed rate tariffs?
We regulate the energy suppliers in the way we deem best to protect the interests of consumers including by promoting competition. The Domestic Gas and Electricity (Tariff Cap) Act 20185 (the Act) sets us the objective of protecting existing and future customers who pay standard and default rates. There are currently non-SVT tariffs on the market for consumers to access that do not fall under the objective of the Act, such as fixed tariffs. Apart from limiting what suppliers can charge on standard variable and default tariffs, we have no power to dictate the prices suppliers charge. These are commercial decisions for energy companies to make based on their assessments of the wholesale and retail markets.

However, due to global market conditions, exacerbated by Russia’s actions, we continue to see much higher wholesale energy prices than normal. As a result, average fixed rate tariffs continue to exceed the cap level. We expect that once wholesale energy prices return to normal levels, suppliers will begin to offer a wider variety of non-SVT tariffs once more.

5. Finally, British Gas announced plans to cap their own profits and Octopus Energy are setting their SVT prices lower than the price cap figure, both are examples of energy suppliers regulating themselves. Do you think it's fair to say Ofgem has failed as a regulator if the market they are regulating are being forced to regulate themselves?
The default cap sets a limit on the amount a supplier can charge a default customer, reflecting costs of an efficient supplier at the time. Within that cap, how suppliers choose to set the standing charge and unit rate is a commercial decision which Ofgem does not have a role in, so long as the overall tariff structure does not lead to default customers paying above the relevant cap level for any level of consumption.

I hope that the above information has helped clarify the specific points you have raised. The rise in global energy prices is unprecedented and Ofgem is deeply conscious of the worrying impact high energy bills are having, and will continue to have, on consumers across Great Britain. Ofgem is completely focused on doing all we can to support consumers through this crisis.

If you are not satisfied with how Ofgem have handled your complaint, you can ask for it to be reviewed. The purpose of the complaint review is to ensure your complaint was investigated thoroughly in the first instance, and that all relevant information was supplied. Please visit our website for details of complaint review process.

Yours sincerely,

 

I know it's a long read, if you've gotten this far down, I'll be back tomorrow with my response to this letter. 

Thanks everyone, 

Richard Winstone