Dermot Nolan
Chief Executive Officer
Ofgem

Dear Dermot,

Thank you for your letter of 4 June about the recent falls in wholesale gas costs and how we explain the impact on our pricing to consumers.

As one of the smallest major suppliers, we are anxious to grow our business. This means that we have to be competitive on price and service and we are always looking for opportunities to make our offering more attractive. One constraint on that is of course that our pricing has to be economically realistic for us.

In common with many other suppliers, we buy our fuel ahead in order to avoid price shocks from instability in the wholesale markets. This means that movements in wholesale spot markets up or down, are not immediately passed into our cost base: the majority of our energy for 2014 was bought before the start of the year. Unfortunately, the energy we are mainly buying now – for delivery in 2015 and later – is not falling much in price. We ought not to explain our hedging policies to our customers in too much detail as publishing this information would risk co-ordinated outcomes in the market, which would not be in the interests of competition, customers or our wish to grow the business.

We will of course continue to monitor both our cost structure, which continues to be affected by an upward trend in non-energy costs, and market developments, to see if there is an opportunity to reduce prices. One complexity we are currently facing is increased interventions in the market, which can impact pricing decisions.

We hope that the proposed inquiry by the Competition and Markets Authority will enable these issues to be thoroughly and authoritatively studied, so as to provide a firm base for consumer and investor confidence in the market going forward.

Yours sincerely

Neil Clitheroe
CEO, Retail & Generation