Energy network companies are raking in billions in “unjustified” profits that should be given back to customers, the Citizens Advice Bureau has said.
According research carried out by the charity, customers have overpaid by £7.5bn - an average of £285 per household - over the last eight years because of errors in judgment made by the energy regulator Ofgem. Citizens Advice has called for the money to be refunded through lower bills.
Energy network companies run the infrastructure to move gas and electricity round the country. They are not the energy suppliers whose names appear on consumers’ bills.
The companies control the network for the whole country, with each having a monopoly over a geographical area.
Ofgem is in charge of putting in place price controls to ensure that consumers don’t get ripped off by those companies abusing their monopoly position.
Citizens Advice said that the regulator has been far too generous to the companies in its approach, handing them and their shareholders an unearned windfall worth billions.
The companies are on track to make an average 19 per cent profit margin over the course of the eight-year price control cycle. That compares to a 4 per cent average margin at the largest energy suppliers, the research found.
This means investors in the network companies will earn an average 10 per cent return and the worst-performing company will hand 7 per cent back to shareholders, according to Ofgem forecasts.
The report says that energy networks are “fundamentally low-risk businesses so double-digit returns may well be inappropriate even for exceptional performance”.
According to Citizens Advice’s calculations, Ofgem significantly overestimated the risk of investing in a network company, costing consumers £3bn.
The regulator also assumed interest rates and returns for government bonds would be higher than they were, costing bill payers £3.4bn, and rewarded companies that inflated their initial estimates for costs by interpreting this as efficiency, at a further cost to consumers of £1.1bn.
Citizens Advice said Ofgem should follow the example of the water regulator which ensured £435m of profits was paid back to consumers after flaws in its price controls handed companies £1.2bn in excess profits.
Citizens Advice chief executive Gillian Guy said the multi-billion pound windfall came at the expense of consumers and was not justified by the companies’ performance.
“Through their energy bills, it is consumers who have to pay the £7.5bn price for the regulator's errors of judgment. We think it is right that energy network companies return this money to consumers through a rebate,” she said.
“If energy network companies fail to return these unjustified profits to the consumers that paid for them then the Government should consider stepping in.”
Ofgem said network energy costs make up 24 per cent of the average bill and have fallen by 17 per cent over the last 30 years.
Ofgem chief executive Dermot Nolan said: “Ofgem's regulation of Britain's energy networks is cutting costs, increasing reliability to record levels and improving customer satisfaction for consumers.
John Penrose, the MP who designed the energy price cap proposals in the Conservative manifesto and candidate for Chair of the Commons Treasury Select Committee, said:
“Even Citizens Advice is now attacking Ofgem for the woefully inadequate job it is doing to protect energy customers.
“Every year, energy companies are ripping us off by between £1bn to £1.4bn. Ofgem's proposals of 3 July don't go nearly far enough as they only protect 2 million customers, not the full 17 million we promised during the election."
