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Citizens Advice response to the Ofgem statutory consultation on amending the methodology for setting the allowance for supplier profit margin in the retail price cap

13 July 2023

Statutory Consultation on amending the methodology for setting the Earnings Before Interest and Tax (EBIT) allowance [ 290 kb]

We do not believe these proposals are in the interest of consumers. Whilst we support ensuring financeability and market stability, these proposals are not properly justified or evidence-based, with the weight of evidence indicating a reduction in profit margin would be appropriate. We are particularly concerned that the proposal to increase profit margin does not reflect the relevant evidence in the following ways:

● Ofgem has taken a series of decisions that have reduced the risk on suppliers and generally transferred that risk onto consumers. This has also set the clear expectation that further interventions will be made if the need arises.

● Comparisons to airlines have been preferred to clear evidence regarding the lower systematic risk in the energy sector.

● Proposals are based on how Ofgem wishes suppliers to behave, particularly with regard to capitalisation, rather than how it requires them to or how they behave in practice.

● Reliance has been put on ‘narrative stakeholder arguments’. These stakeholders are the suppliers who will benefit from increased profit margins.

● Evidence from the independent assessment provided by CEPA has been used selectively. CEPA does not conclude that profit margins should be increased.