U.K. Watchdog Seeks Explanation on Lack of Power Bill Cuts

The U.K. energy regulator has written to the largest energy suppliers, asking them why household bills haven’t been cut to reflect lower prices for gas and electricity in wholesale markets.

Wholesale prices for the coming winter are 16 percent lower for gas and 9 percent lower for electricity than a year ago, yet the six biggest utilities have yet to reduce their prices, Ofgem said in a letter sent yesterday. A failure to explain the mismatch risks undermining public confidence in the energy market, it said.

The regulator has proposed that the U.K.’s retail energy industry be referred for investigation by the Competition and Markets Authority after a report found the market isn’t working as well as it should.

“If suppliers are going to start rebuilding that relationship, they need to take the initiative and explain clearly what impact falling wholesale energy costs will have on their pricing policies,” Ofgem’s Chief Executive Officer Dermot Nolan said in a statement.

Energy costs have been at the forefront of the political debate since September when opposition leader Ed Miliband promised to freeze prices, which were rising faster than inflation, if he won the general election next year. Ofgem’s proposals may lead to a breakup of the six biggest suppliers.

‘Wholesale Prices’

“Over the last two years wholesale gas and electricity prices for the coming winter have averaged 19 percent and 14 percent higher than the current forward prices Ofgem referred to,” UBS AG analyst Stephen Hunt said in an e-mail. “With energy retailers typically forward contracting over a 24-month period, Ofgem’s exclusion of the hedging impact will likely be misleading for many observers when assessing the actual reduction in wholesale energy costs to retailers from recent price falls.”

The largest U.K. supplier Centrica Plc said it buys energy in advance, meaning that changes in wholesale prices take time to feed through to the retail market.

“The details of our hedging strategy are commercially sensitive,” Ian Peters, Centrica’s managing director of residential energy, said in a statement. “To disclose our hedging would risk tacit coordination, which is not appropriate in a competitive market. So we will not comment on how we have reacted to specific events.”

The opposition Labour Party said yesterday it would set up a new energy board, giving authorities the power to force utilities to cut their bills when wholesale costs decline.

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