Dispute dims power's big day

News Analysis: As the gas and electricity market opens, consumer bodies are balking at costs from electricity suppliers

THE OPENING yesterday of Britain's domestic gas and electricity markets to full competition was marred by a dispute between suppliers and consumers over the cost of the pounds 1bn exercise.

Electricity companies are pressing the Government to be allowed to pass on their full costs to customers, which would result in an extra pounds 270m being added to household bills next year.

However, consumer bodies are arguing that the pounds 726m which the energy regulator, Callum McCarthy, has allowed the industry to pass on is already excessive.

Yvonne Constance, chairwoman of the Electricity Consumers Committee for London, said: "The amount involved is outrageous, exorbitant, and far too high. We consumers are very unsympathetic about the extra costs the industry is facing."

Costs have risen mainly because electricity suppliers did not have their computer systems ready in time, resulting in the liberalisation timetable being delayed by more than a year. This in turn has resulted in the 14 regional electricity suppliers being fined pounds 45m by the regulator.

Despite the escalating costs, the modest number of electricity customers who have so far switched supplier and the fact that poorer consumers have done least well out of liberalisation, the Government maintains the exercise has been a success. John Battle, the energy minister, likened the complexity of the exercise to "sending a rocket to the moon" and insisted that the scale of the achievement should not be underestimated.

So far, 4.5 million gas customers - just over 20 per cent of the market - and 1.5 million electricity consumers - 6 per cent of households, have switched supplier.

The gas market has been open to competition longer and the savings are bigger - an average of pounds 78 on the typical pounds 350 annual gas bill. In contrast, the average savings that can be made by switching electricity supplier are equivalent to pounds 40 off a pounds 275 bill.

Even though all gas and electricity customers are offering "dual fuel" deals which offer consumers a similar discount, 100,000 electricity consumers are switching supplier each week.

The biggest benefit is being felt by Centrica, the trading and supply arm of the former British Gas. Roy Gardner, its chief executive, said that Centrica was signing up 30,000 electricity customers a week - twice the number of gas customers it is losing.

The industry and the Government has so far largely ducked the question of what to do with the "fuel poor" who have benefited least from competition. Of Britain's 26 million households, some 4.5 million have a pre-payment meter for either gas or electricity.

Ministers and regulators alike are keen to see more of these households switching to payment by credit, in which case they would reap the benefit of cheaper prices.

But they are loathe to set the industry mandatory targets and, although pre-payment customers are more expensive to service, suppliers themselves are reluctant to encourage more to switch to different payment methods because of fears of an explosion in bad debts and disconnections.

The consensus across the industry is that the liberalisation of the gas and electricity markets will mean the emergence of a handful of powerful suppliers. At least four electricity supply businesses - those owned by Swalec, Norweb, Seeboard and SWEB - are up for sale and National Power has recently bought Midland Electricity's supply arm.

Mr Battle said he had "an open mind" about mergers between supply companies, while Mr McCarthy said: "I expect that over the next 18 months I will be advising the Secretary of State on a lot of merger proposals."

The bigger question is whether the rest of Europe agrees to follow where Britain has led. Although Continental energy markets were theoretically liberalised this February with agreement to throw open one-third of the market to competition within six years, progress has been painfully slow.

The French have not yet adopted the relevant EU directive into their own legislation and will not do so until the autumn at the earliest. In Germany, meanwhile, only three domestic electricity consumers have switched supplier and one of those was a Green Party MP who was making a political point.

In Norway, consumers actually have to pay a charge to switch supplier while in Benelux, new suppliers are dissuaded from entering the market by high charges levied by incumbent suppliers to use the distribution network.

There are also physical bottlenecks which prevent British companies supplying customers on the Continent. The cross-Channel interconnector between Britain and France has only 2,000 megawatts of capacity, most of which is contracted by Electricite de France, while there is virtually no interconnector between France and Spain.

As Mr Battle put it yesterday: "Defending traditional interests seems to be causing something of a blockage." He suggested that if European governments could be persuaded to see their electricity consumers more as voters then the process might be speeded up. Meanwhile Britain, once again, remains the odd man out in Europe.