Watchdog launches inquiry into energy firms' profits

ENERGY firms are to be investigated by the industry watchdog after it emerged that the companies' profit margins had soared by 38 per cent despite a major price hike for consumers.

• Review: Alistair Buchanan

Ofgem said it would probe the accounts of the major firms after discovering average margins on a standard dual-fuel yearly bill had risen to 90, compared with 65 in September.

Three of the "big six" - Scottish Gas owner British Gas, Scottish & Southern Energy (SSE) and ScottishPower - have all announced price rises in recent weeks.

Scottish Gas increased its tariffs for gas an electricity users by 7 per cent, SSE hiked gas bills by 9.4 per cent and ScottishPower lifted gas bills by 2 per cent and electricity costs by 8.9 per cent.

"The energy retail market can only be fully effective if consumers have confidence that the market is transparent and easy to take part in," said Ofgem chief executive Alistair Buchanan.

"So we will go beyond our usual quarterly reports on prices and do a comprehensive review of the retail market and our recent reforms from the consumers' perspective.

"We will also carry out a detailed investigation of the newly available retail accounts and the facts behind these numbers."

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British Gas managing director Phil Bentley recently claimed his company had been selling gas at a loss, which was not sustainable.

But consumer groups have questioned energy suppliers' figures, claiming wholesale prices are still around half their peak in 2008, while in the same period customers' prices have fallen by less than 10 per cent.

The company, which is owned by Centrica and operates as Scottish Gas north of the Border, saw profits nearly double in the first six months of 2010 to 585 million following the coldest winter for 30 years last year.

But SSE announced a 6 per cent fall in half-year profits earlier this month after selling gas at a loss and ScottishPower saw a 7 per cent drop to 646.8m.

Trisha McAuley, deputy director of Consumer Focus Scotland, said: "This review is timely coming hard on the heels of yesterday's worrying news that fuel poverty levels in Scotland have reached an all time high. Consumers have little trust in their energy suppliers or the prices they pay for energy. This review needs to get to the bottom of whether margins and prices are fair or whether consumers are being taken for a ride."

The individual energy companies last night defended their pricing structure, insisting that they would cooperate with Ofgem in their investigation.

SSE said: "We've always accepted that the competitive energy supply market is subject to a lot of scrutiny, and that's part of Ofgem's job. We agree with Ofgem that customers have the right to expect that the market is giving them value for money."We will, therefore, work with Ofgem in a constructive way during this latest review, showing how - for example - our gas supply business has been losing money for several years. This in itself shows how important it is that any analysis of the market is as complete as possible, and reflects - amongst other things - the very significant upwards cost pressures which are now a feature of the energy market."

A spokeswoman for Scottish Gas added: "We pride ourselves on being the most transparent of the suppliers and Scottish Gas and its parent Centrica, have provided full disclosure of profits and costs in its audited accounts since privatisation."

But she questioned Ofgem's figures, claiming that analysts had forecast that Scottish Gas margins in the second half of 2010 would be around 3-4 per cent on residential energy sales - substantially less than the margin predicted by Ofgem for 2011.