Citizens Advice response to the Ofgem further consultation on amending the methodology for setting the Earnings Before Interest and Tax (EBIT) allowance.
We continue to support this review of supplier profit margin (EBIT) allowance within the retail price cap. We still believe the allowance of 1.9% of costs should be reduced to reflect the series of decisions Ofgem has taken that have reduced the risk on suppliers and generally transferred that risk onto consumers.
We now have a number of additional concerns arising from this further consultation:
The level of fixed assets proposed to be included appears to be too high. Our expectation, given the relatively asset-light nature of energy supply compared to other parts of the energy industry, is that the level of capital related to fixed assets should generally be low.
The previous consultation was published before the government announced the Energy Price Guarantee (EPG). The impact of the EPG on switching needs to be taken into account.
Collateral should not be included as part of capital employed. Suppliers covering the vast majority of the market will be using letters of credit and parent company guarantees instead of lodging collateral. This must be reflected in the capital employed or suppliers will be over-remunerated at the expense of consumers.
Suppliers already have protection against inflation risk. By applying the profit margin as a percentage of the costs allowed under the price cap, supplier profits automatically adjust. Indeed, some cost elements within the price cap are indexed to inflation.