Friday, February 08, 2013

Exposed: The hidden monopoly that ramps up UK electricity bills

electricity pylons

UK electricity network operators are being accused of unfairly charging customers for the privilege of using the network to send electricity to consumers, and exploiting their monopoly status in order to make excessive profits.

Dale Vince, CEO of independent renewable electricity supplier Ecotricity, said: "On average these guys make an operating profit margin of almost 50%, and a pre tax profit margin of over 30% – that’s big by any standard, in any sector. And yet they are being allowed (by OFGEM) to impose price rises well above inflation – averaging 5.6% across the UK this year and as much as 11% in some areas".

Together in 2011/12, these companies made a profit of £1.2bn and gave a dividend of £1.5bn to their owners, who are mostly based abroad.

On average, 16% of consumers' electricity bills goes to the DNOs. This compares to 58% for the wholesale cost of fuel supply, and just 2% for the subsidies that go to renewable electricity.

Most people haven't heard of district network operators. But these are the eight companies that run the regional electricity networks.

Called Distribution Network Operators (DNOs), they are licensed by Ofgem, which, in 2009, began regulating the revenues DNOs can collect from network users, i.e. the electricity suppliers.

They effectively run a monopoly but their own company reports show that they only pay an average rate of tax to the Exchequer of 6% of their pre-tax profit. Almost all of these distribution companies (85% by turnover) are now owned by foreign companies. This means their profit leaves the country, as the following table shows:

Company Area Owner Country of owner
SSE Power Distribution Plc Northern Scotland SSE Scotland
Southern Electric Power Distribution Plc Southern Scotland SSE Scotland
SP Energy Networks North Wales ScottishPower, part of Iberdrola Spain
Northern Ireland Electricity Northern Ireland ESB Group (the Electricity Supply Board) N.Ireland
Electricity North West North West Owned by bankers, with HQs abroad: JP Morgan Investment Management Inc and Colonial First State Global Asset Management, part of the Commonwealth Bank of Australia Australia & USA
Northern Power Grid owns Northern Powergrid (Northeast) Limited and Northern Powergrid (Yorkshire) plc, North East A wholly owned subsidiary of MidAmerican Energy Holdings Company America
UK Power Networks South East, East and London Cheung Kong Infrastructure Holdings,40%, Power Assets Holdings, 40%, and The Li Ka Shing Foundation, 20% China
Western Power Distribution South West, South Wales and Midlands PPL, formerly known as Pennsylvania Power and Light America

Cheung Kong Infrastructure is controlled by Hong Kong-based tycoon Li Ka-shing.

These companies made the following profits and dividends in 2011/12:

Company Profit (£m) Dividend 

Dividend as % of profit 

SSE Power Distribution Plc 167 200 120
Southern Electric Power Distribution Plc 58 100 172
SP Energy Networks 152 95 62
Northern Ireland Electricity unknown
Electricity North West 70 62 89
Northern Power Grid 218 70 32
UK Power Networks 348 175 47
Western Power Distribution 190 804 1886.75
Total 1,203 1,508

I asked various consumer groups to comment on these revelations. Richard Hall, head of energy regulation at Consumer Focus said: "While consumers can shop around for their electricity supplier, they can’t choose which network brings it to their door.

"The absence of competitors, and the certainty that there will always be demand for electricity, removes many of the incentives to keep performance up, and prices down, that most ordinary businesses face.

"Consumers therefore rely on the regulator to put rules and incentives in place to ensure the networks deliver high quality services at a reasonable price. With energy bills doubling in the last seven years, it’s imperative that Ofgem wrings every drop of value it can out of the price controls it agrees with them."

The Consumer Association, Which?, and uSwitch. They responded that this was a new area for them, which they had not considered before, and they all felt unable to comment. uSwitch said: “It’s not an area that we have commented on previously and we don’t know enough about it to be able to add any particular insight or value”.

And yet the implications are potentially huge with vast sums involved. These companies are spending, and making, billions of pounds, away from the public eye, although under the regulation of Ofgem.

A spokesperson for the Department for Energy and Climate Change (DECC) commented: “Ofgem’s new framework for regulating network companies’ investment activities (“RIIO”) introduces outputs for the network companies to deliver and they will get incentives or penalties according to how well they deliver them. One of these incentives the Broad Measure of Customer Satisfaction stakeholder engagement incentive, is to encourage network companies to address key social issues such as fuel poverty and consumer vulnerability”.

Customer satisfaction is overseen by an independent panel, chaired by Ofgem. The last time this panel met, in summer last year, it was made up of:
  • Philip Cullum, Partner Consumer and Demand Insight, Ofgem (Chair)
  • Colin Browne (Communications Consultant)
  • Mary Fagan (Group Communications and Corporate Affairs Director at ITV)
  • Teresa Perchard (Director of Policy and Advocacy, Citizens Advice)
  • Malcolm Rigg (Director of the Policy Studies Institute), and
  • Andrew Whyte (Communications Consultant).
These individuals said they were "favourably impressed by the number of references to activities providing additional assistance to vulnerable consumers". However, "some DNOs had failed to meet minimum requirements", they said, mentioning no names.

All of the DNOs’ submissions, detailing their community work, are available from the above link.

RIIO, regulator Ofgem's transmission price control system, stands for Revenue = Incentives+Innovation+Outputs. It is supposed to place much more emphasis on incentives to invest in upgrading the network and customer satisfaction.

The current round of improvements to the network which Ofgem has asked for will add an average of 5.6% two bills, though the amount varies significantly region to region. This averages out at about £4.30 per customer per year.

Ofgem is also in the third year of its Distribution Price Control Review 5 DPCR5, which runs from April 2010 to March 2015. A new eight-year agreement will be set after this, and other companies will be entitled to bid to control the networks, though this is considered unlikely.

Ofgem says that when the new contracts come in, then those who do not perform will be penalised, while any that outperform will be made to pass on any savings to their customers.

One of the incentives is to encourage customer satisfaction, where a reward of up to 0.2% of "allowed revenue" is given to those companies which achieve a certain level, as judged by the independent panel. However, this is yet to happen.

An Ofgem spokesperson said that "the price controls are needed as these networks are natural monopolies and therefore there is no realistic way of introducing competition across the whole sector".

It insists that since "Britain’s networks are undergoing a significant upgrade and through Ofgem’s price controls this investment is being secured at a fair cost to consumers.

"To further ensure value for consumers, during the current price control Ofgem set the toughest rate of return ever set for a regulated company (4.7% vanilla Weighted Average Cost of Capital)," they said.

As far as Ofgem is concerned, this state of affairs attracts outside investment into the country. "In 2011, the investment in Britain’s electricity network was twice the amount that was awarded in dividends," they said.

Ofgem is monitoring the situation. "We are currently in a position to consider the financial information relating to the first two years of this five year price control. It is important to note that DNOs’ spending will vary over the five years."

They said that the last time the DNOs put in their bids, in December, Ofgem shaved off £5bn of their costs, a significant amount, saying that they could implement their work programmes for less money.

"In addition," they said, "at the end of the control any underspends or savings will be shared with customers. Overall, we anticipate that at the end of the current price control returns for the DNOs will be within our anticipated range but come down from current levels, while consumers will have benefited significantly from improvements in quality of service."

David Smith, the chief executive of the Energy Networks Association (ENA), the trade body that represents the networks, insisted that his members gave value for money: “The networks deliver the vital services that keep our lights on, our homes warm and our industry and business in operation. It is a service that society depends upon and the reliability of the networks in the UK is unique at 99.9996%."

He acknowledged that they were "natural regional monopolies" but said, "There is no other logical efficient way to deliver this kind of infrastructure," and made the case that "a substantial proportion of profits are being ploughed back into critical investment to deliver a smarter, lower carbon energy system," which needed updating since much of it was installed a long time ago.

“It is estimated that jobs in the network companies will increase one and a half times over the next 20 years," he said.

“Focusing on pre-tax profit margins is inappropriate and misleading as the DNOs spend many hundreds of millions of pounds in capital expenditure each year which does not appear on the profit statement. The cash flows received by the companies are much less.”

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