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MPs slam Ofgem over energy company reporting

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30th Jul 2013
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MPs have criticised consumer watchdog Ofgem for lacking transparency on the big six energy companies’ profits.

Parliament’s energy and climate change select committee said in a report that the UK’s major energy generators had been making regular, substantial profit announcements while raising energy prices at the same time.

“This fuels the perception that there is something going on in the industry,” said Richard Lloyd, chief executive of Which?, a consumer campaigning charity, who was also in attendance.

It also slammed Ofgem for rejecting or modifying recommendations from BDO to increase transparency within energy companies’ accounts, and asked that the regulator reconsider implementing the recommendations and to assess transfer pricing policies within the firms.

The big six firms, British Gas, EDF, E.ON, npower, Scottish Power and SSE control 90% of the UK energy market. In recent years, they have been subject to criticism for pushing up consumer costs.

Due to the complex, vertically-integrated structure of the companies however, the committee’s vice chairman Sir Robert Smith said it was down to forensic accountants to determine whether or not their profits are excessive and how they’re made.

According to the report, the big six companies have different arms, including “generating, trading and supplying energy, that sometimes sells energy and services to other parts of the same company.”

Profits from the retail side of the companies are around 2-5%, but the wholesale profits are often more than 20%, the report said.

The perception that profits are excessive is damaging to the trust of consumers, the committee said, and discussed how to make reporting more transparent in the House of Commons.

Since 2009, Ofgem has required the big six to publish annual consolidated segmental statements, intended to provide greater transparency about the profitability of the different parts of vertically integrated companies.

According to the committee, there were limitations to the effectiveness of the statements in increasing the transparency and comparibility of the big six’s profits, which Ofgem blamed on the companies themselves.

The regulator commissioned BDO to provide a detailed review of statements and the accountancy firm found a “number of inconsistencies” in the business models used, which they said limited cross-comparability.

BDO made recommendations to improve the statements, some of which Ofgem took on board as of 2012, but most of which were rejected as they would put unnecessary burdens on the big six.

Head of advisory services at the firm said that if the recommendations has been implemented, over time it would have led to greater transparency.

Publishing statements to the same year-end, having an independent auditor opinion on statements and reporting trade function results, all recommendations BDO made that were in part or wholly rejected, should be implemented, the committee said.

“We believe that taken as a whole, the benefits of BDO’s recommendations significantly outweigh any burdens on the six largest vertically integrated energy companies,” it said.

The session also focused on transfer pricing, which the committee said was “impossible” to see whether it had been done in the best interests of consumers and that more transparency was needed.

“There is an example for energy companies to make reputational gains by setting an example of best practice. In the context of low consumer confidence, we hope that energy companies will see the benefits of increased transparency,” it concluded.

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