RPT-UPDATE 3-SSE freezes prices as pressure grows on UK utilities

Wed Mar 26, 2014 10:54am EDT

Related Topics

(Repeats to add link to story on small energy suppliers)

* SSE freezes household prices until at least January 2016

* SSE to legally split wholesale, retail divisions

* Hit on profit estimated at 100 million

* Other suppliers expected to follow suit on price freeze

By Karolin Schaps

LONDON, March 26 (Reuters) - British power utility SSE said it would freeze prices and separate its wholesale and retail businesses after an outcry over soaring energy bills prompted a review of competition in the sector.

Britain's 'Big Six' energy suppliers, which control around 95 percent of the retail market, have come under fire for consistently increasing tariffs and regulators are deciding this week whether to open a full antitrust investigation.

The price increases have put SSE, Scottish Power, Centrica, RWE npower, E.ON and EDF Energy at the centre of a political row over the cost of living, nearly one year before a general election.

SSE, the country's second-biggest household energy supplier, promised on Wednesday it would freeze bills for its customers from now until January 2016, a move that would lop 100 million pounds off its profits over the entire period.

The strategic shift came in the first major announcement by Chief Executive Alistair Phillips-Davies' since he took over from long-serving executive Ian Marchant in July last year.

The price freeze forces SSE's rivals to consider similar moves as customers increasingly shop around for the best deals.

It also pre-empts opposition Labour leader Ed Miliband, who last year promised an industry-wide freeze on bills if his party wins the election. Labour has also vowed to force utilities to separate their retail and generation businesses.

Prime Minister David Cameron and Miliband both claimed SSE's price freeze announcement as personal victories in a parliamentary debate on Wednesday.

"It is hugely welcome in our country that energy companies are cutting and freezing their bills," said Cameron, who has taken a less confrontational approach to the utilities than Miliband.

BREAK-UP?

SSE said it would raise 1 billion pounds ($1.65 billion) through the sale of its street lighting contracts and other assets, and would cut an additional 500 staff in Britain.

It also plans to shelve two planned offshore wind farm developments, adding to a string of project cancellations in the sector in recent months.

It forecast capital investments of 1.6 billion pounds in 2014/15. The company had warned in January that number could fall below 1.5 billion, blaming changes in government policy that had cast doubt over future projects.

SSE shares were up 2.7 percent at 1438 GMT in London.

"The positives of the disposals/cost-cutting and the price freeze will be countered by the warnings on medium-term profitability," said Angelos Anastasiou, equity analyst at Whitman Howard.

Utilities had blamed their sharp price increases on higher wholesale costs and increasing expenses for transporting energy and government social programmes, for example to stem fuel poverty.

As household bills became a growing focus of voter discontent, Cameron's coalition government has balked at price controls and looked instead to market forces to drag down energy costs.

Last month it announced new rules obliging the energy companies to disclose long-term power prices twice daily in an effort to draw new entrants into a fairer energy market.

INVESTMENT BURDEN

Critics of price freezes say the utilities will find it harder to invest in new projects, with the industry already struggling to raise around 200 billion pounds to replace ageing and polluting power plants and build new transmission lines to cope with growing renewable energy production.

Breaking up the industry into smaller companies might generate more competition, but those companies may also find it harder and costlier to finance their investments.

Three regulators, including energy watchdog Ofgem, have been carrying out a review of competition in energy and are due to decide whether to refer the sector for an antitrust investigation this week.

The companies stand accused of trading with each other at discounted prices to inflate their profits and of drawing new customers with discounted bills while keeping many other customers paying higher prices on standard tariffs.

Britain's Secretary of State for Energy, Ed Davey, called on the regulators last month to consider breaking up energy companies if they were found to be abusing monopoly positions.

SSE said the legal split of its wholesale and retail arms would improve the transparency of how the two businesses operate.

Competitor Centrica already separates its upstream and downstream businesses and breaks out profit numbers for both, showing how the two units interact with each other.

"The complex vertically-integrated structure of the Big Six makes it difficult to determine where profits and losses are being made between the generation and supply part of their business," said Tim Yeo, chair of the parliamentary Energy and Climate Change Committee. ($1 = 0.6059 British Pounds) (Editing by Paul Sandle and Tom Pfeiffer)

FILED UNDER: