E.ON, EDF Cut U.K. Prices to Placate Regulator, Watchdog Says

By Paul Dobson

Feb. 16 (Bloomberg) -- E.ON AG and Electricite de France SA’s U.K. units cut household electricity prices to avoid regulatory intervention and failed to pass on the full decline in wholesale prices, watchdog Consumer Focus said.

“It’s a damage-limitation exercise,” said Robert Hammond, Consumer Focus’ head of regulated industries. “I feel quite cynical about the price chops that we’ve seen” because they don’t reflect greater declines in the wholesale market, he said.

The London-based Office of Gas and Electricity Markets set a Feb. 20 deadline for utilities to respond to proposals on what it calls “unfair” price differentials based on location and payment method. It suggested remedies after a study last year found Britain’s five former regional monopolies charged higher rates for customers in their home areas and “earned significantly higher margins from electricity than gas.”

While U.K. politicians lobby for cheaper rates because of lower wholesale costs, E.ON, Electricite de France SA and competitors are addressing the differences by cutting power rates for customers that are paying a premium for supplies.

E.ON, which said last week it will cut power prices by 9 percent and leave gas prices unchanged, believes its price reduction is “in line with future regulations regarding cost- reflective pricing,” spokeswoman Jag Kahlon said in an e-mail on Feb. 13.

EDF cut prices Feb. 13 and said it now complies with recommendations from the energy regulator, known as Ofgem, that supply companies eliminate charging differentials between regions that aren’t reflective of costs.

Centrica Cuts

Centrica Plc, which wasn’t an incumbent electricity supplier, only cut gas prices in an announcement of lower rates Jan. 22. Scottish & Southern Energy Plc said Feb. 6 it will cut electricity rates 9 percent and gas prices by 4 percent. RWE AG’s U.K. unit and Iberdrola SA’s Scottish Power haven’t yet said they will cut prices.

“It really is about, if anything, trying to mitigate against anything Ofgem might come up with,” Hammond said.

Energy suppliers said costs remain high and volatile.

“Although wholesale prices have fallen recently, the market remains volatile,” EDF said in an e-mailed statement on Feb. 13 “As a result, the outlook for retail prices is still challenging. Forward annual wholesale prices for electricity and gas remain at relatively high levels.”

The energy companies put up prices twice in 2008 after a jump in energy and commodity costs in the first half of the year. They argue they need to increase profits from energy supply so they are able to invest in generation and gas-imports.

“The important issue for investors is that the industry continues to demonstrate considerable pricing discipline despite the political pressure,” Citigroup Inc. analyst Peter Atherton said in an investor note Feb. 13. “It is crucial that supply businesses return to profit in 2009,” after making losses last year.

To contact the reporter on this story: Paul Dobson in London at pdobson2@bloomberg.net