US Government Shows How Much UK Consumers Are Ripped Off

  • Date: 29/01/11

Back in early November there were two conflicting stories from different parts of the dominant UK gas company, Centrica plc, owner of the British Gas brand.

Centrica put up domestic gas and power prices at the start of the winter based on future forward prices. According to the old Centrica spin, swallowed in it’s entirety by UK regulator Ofgem, UK gas prices were set one to three years in advance. That is they bought gas for winter 2011 in 2008 at the highest prices ever (£1 per therm in summer 2008), and they couldn’t unfix them. For anyone who ever heard of a commodity market, that is patently ridiculous. I noted at the time that Centrica would be failing their shareholders by not taking advantage of Ofgem’s gullibility. A debate then developed as to how exactly suppliers set their prices, because unlike with petrol prices, they don’t seem to move up or down with the underlying commodity. A lot of that comes from Ofgem’s view that prices are actually set not by commodity, but by competition. I’ve always suggested that Ofgem simply go out for a drive and study the effect of competiton on petrol prices – i.e. there isn’t one.

The back story of Centrica’s price hikes, swallowed by Ofgem and the press, enabled by vested interest switching sites (or as I call them stitching up sites) was the old saw: the North Sea is in decline, gas is insecure and the UK depends on volatile world gas prices via LNG imports.

The other story at the time was that as Centrica retail hiked prices, Centrica Trading imported the first LNG cargo to the UK from the US. So much for security of supply fears.

Neither Ofgem or DECC think consumers should actually be given any information on gas commodity prices, and certainly Ofgem is completely clueless about what they mean anyway. Ofgem seems completely unaware of the cost structure of the gas industry and gives only random guesses that commodity prices are somewhere between 45 and 70% of retail prices. From my business experience I know that the commodity cost ranges from between 65% for domestics to 85% for large industrials.  The rest is cost to serve in National Grid delivery charges, which again are impossible for private parties to discover.

Ofgem and DECC bend over to protect “commercial confidentiality”. They seem to have no interest in providing transparency for consumers. Luckily, there is a governmental organisation that thinks that markets work best in the open, but it is the US Energy Information Administration, not any UK body.

Thanks to the EIA stressing transparency over confidentiality,  we can now discover the price that Centrica paid for the cargo of the Maersk Meridian on page 15 of the EIA November Gas Report.

British Gas Retail charges a standard rate direct debit price of 7.093 for the first 670 kWh per quarter followed by 3.293 ppkWh for the rest. The higher price should mean that this is where they recoup most of the cost to serve fixed charges they pay to National Grid for network access. This should also mean that the 3.293 rate is basically commodity plus their margin.

And what a nice margin it is. Based on figures the US regulator are happy to provide,as the UK regulator is desperate to hide,  Centrica paid a price of 1.47 pence per kWh for the Maersk Meridian cargo, which means 55% of the Centrica Tier 2 rate, at least in the case of that cargo which is not a million miles away from any average gas commodity prices, is profit.

Let’s not forget: We get shafted twice here. Higher energy prices translate to higher prices throughout the economy, which lead to higher inflation.Which leads to call for higher interest rates. Which leads to stitching up sites now salivating at the thought of the fee income they’ll get by providing fixed price mortgages.

No Hot Air, 29 January 2011

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