Gas Company Profit Margins Are Too High!

We've suspected it for months and now it's beyond doubt: gas companies are sitting on fat profits by refusing to pass on the savings they've made by buying their gas more cheaply.

A year ago, the price that utilities companies paid for gas (the wholesale price) dropped. Over the following twelve months, commentators like me have been asking when these savings will be passed on to consumers. The response of the gas and electricity companies has always been to say that they buy gas supplies in advance and that, when they bought, the wholesale prices were higher. Six to nine months is seen as a typical forward purchase.

The price we pay for gas (the retail price) actually went up just before winter, as utilities companies sought to maximise their profits during the time of year when our usage is highest. They continued to argue that it's because of the price they paid for the gas. However, it seems a great coincidence that as soon as the colder weather ends they reduce prices. That's not the worst of it though, as they haven't passed on all the savings, or anything like it.

A year ago, dual-fuel customers paying by direct debit paid an average £943 per year. Looking at the three major suppliers who have announced spring reductions, customers will now pay £867 on average, which is 8% (£76) less. However, this is deceptive, as it hides the fact that with massive reductions in wholesale prices, energy companies are sitting on unprecedented profit margins.

Florian Ritzmann of Xelector, which runs our gas and electricity comparison centre, reckons that a utility company needs an 8% margin to be profitable. He said: "Utilities that bought their gas and electricity one month ago would be looking at 15% to 20% margins, even after recent price cuts." This means their profits are perhaps two-and-a-half times what they should be.

In the case of Scottish and Southern Energy, despite spring price cuts, customers are still paying more than they were a year ago. As for suppliers that have not yet reduced prices and that bought more gas last month, Ritzmann estimates that they have margins far higher, probably a staggering 30% to 40%.

One year on and with wholesale prices low throughout the period, the excuse of old expensive gas has gone. it's clear that the savings are not being passed on to us.

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