Ben Chu: This energy debate has produced overpriced heat, but little reforming light

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The Independent Online

Outlook Multinational energy firm announces fat profits as pensioners freeze to death following an inflation-busting hike in fuel bills. It doesn't take a corporate public relations genius to spot that particular mantrap.

British Gas owner Centrica was duly in full-on damage limitation mode ahead of the annual results announcement, which showed a 14 per cent rise in operating profits. Sam Laidlaw was wafted across the media like a gust of heated air in order to explain why he is not, in fact, the boss of a gouging energy giant but the chief executive of a socially responsible enterprise that is selflessly devoted to keeping the lights turned on.

Mr Laidlaw made two points. First, British Gas's profit margins per household fell to £50, despite the 6 per cent price hike in November that provoked the wrath of customers. Second, Centrica needs to turn a healthy profit in order to be able to invest in new sources of energy production.

Neither is particularly convincing. The profits of British Gas's residential energy supply arm rose to £606m from £544m in 2011. Last year's price increases must, logically, account for a proportion of that growth. And investment to keep our lights on? That's a rather unfortunate claim given that Centrica this month pulled out of the UK nuclear industry. Moreover, the company has sufficient spare cash for a £500m share buyback. Equity repurchases are what companies tend to do when they don't know what to do with their cash, not when they're faced with a host of profitable investment opportunities. The Centrica dividend is also rising by 6 per cent.

The promise of energy privatisation in the late 1990s was that competition would work for consumers by exerting downward pressure on prices through the mechanism of competition between suppliers. Customer service would improve to boot. It hasn't worked out like that.

What we have, instead, is a rent-extracting oligopoly made up of six dominant players. Nine out of ten consumers never switch suppliers. It is an attachment born of confusion, rather than love. Suppliers deliberately make their bills complicated, and obfuscate their contracts to the extent that most of us don't even bother to hunt for a better deal.

The dodginess doesn't end there. The vertical integration of producers and distributors allows energy companies to make profits both upstream (wholesale) and downstream (distribution), insulating them from the need to focus on customer needs. The downstream operations also look murky. When wholesale prices rise, customers' bills quickly go up. When wholesale prices fall, customer bills are suspiciously sticky.

Mr Laidlaw is right on one point. It makes no sense to hold a public debate about an individual private company's profit margins, or to second-guess its investment decisions. Similarly, it can't make sense for David Cameron to announce new energy pricing regulation ad hoc from the floor of the House of Commons, as the Prime Minister did last year.

The Government and regulators should devote their energies, instead, to repairing the market structure of the sector and eliminating the abundant opportunities for rent extraction. The new proposed limitations on the array of tariffs offered are a good start.But the real challenge is opening up the market to new entrants and reversing the vertical integration that was foolishly waved through by the regulator a decade ago.

This market needs radical surgery if it is to be made to work for consumers. At the moment, we get a lot of overpriced heat from the political debate about soaring fuel bills. Time we had a little reforming light.