The Big Six Energy Companies

Memorandum submitted by Scottish and Southern Energy Plc (BSX 3)

HOUSEHOLD GAS PRICES FROM 1 DECEMBER 2010

SSE (Scottish and Southern Energy plc) has today begun notifying customers that it will increase its prices for household gas by 9.4% on 1 December 2010. The increase will affect around 3.6 million customers in the UK [1] .

There are two reasons for implementing this change:

1. SSE's gas supply business, Southern Electric Gas Ltd, has traded at a loss for several years, making a loss of £58.7m in the financial year ending 31 March 2010.

2. Forward wholesale gas prices (which are the prices energy suppliers pay for their gas) have risen 25% since March 2010.

This combination of rising prices and a loss-making gas supply business, at a time when SSE's annual capital investment exceed its annual profit levels, means that SSE is no longer able to absorb these losses as it had done previously.

What will this mean for customers?
Following this price change, a typical [2] annual gas bill for a customer of SSE (inc VAT at 5%) will
increase by £5.60 per month. The typical annual cost for an SSE gas customer will therefore be:

· £4.64 per month, to £650, based on a consumption of16,500kWh, the new typical annual domestic gas consumption proposed by Ofgem in July 2010 following a consistent decline in average domestic gas consumption levels; or

· £5.60 per month, to £782, based on the current typical annual domestic gas consumption value used by Ofgem of 20,500kWh.

However, there is an important distinction to be made between the rising price of units of energy and the amount customers are actually paying to heat their homes, and this is illustrated by the

£132 difference between the cost of the above two typical annual domestic gas consumption

values (16,500kWh of gas and 20,500kWh of gas).

All gas customers not already on a fixed rate tariff will be affected by this change.

What plans are there to put electricity prices up? There are currently no plans to increase electricity prices.

What impact does the wholesale price have on this decision?

We buy the majority of its gas on the forward, wholesale market. By securing energy in advance we seek to shield its customers from the volatility that occurs in the wholesale market and provide stable and predictable tariffs. This approach has meant domestic customers have not had to face the full increase in wholesale prices over the last five years - rather we have absorbed these costs and aimed to recover them over the long term.

When and how will you be informing customers about the price changes?

The independent energy industry regulator, Ofgem, is currently proposing that from the beginning of 2011 domestic customers should receive 30 days notice of a price rise in order for them to make changes to their budget and consumption. In the spirit of this proposal, we have tried to give our customers as much notice as possible by announcing our intention to increase prices more than 30 days before the effective date -1 December 2010. We have also started writing to every customer affected and the majority of these customers will receive their letters before the 1 December 2010.

What advice can be given to gas customers if they are concerned about their bills?

An increase in the unit cost of energy does not have to mean that the bills people actually pay have to go up by the same amount. Improving energy efficiency is the fastest and most cost effective way of reducing energy costs. One easy way to offset this price change is to get advice from our new dedicated website. www.southernwintertips.co.uk . It is designed to give customers energy saving tips and practical advice to save money, as well as explaining how customers can leave meter readings and update direct debit details. We are here to help any customer take the first step to make that change or to help them continue making changes and finding new ways of saving energy.

What are you doing to help vulnerable customers?

We recognise our role in helping customers who struggle to pay for their basic energy needs, and we're supporting more customers who need help than ever before. Over 150,000 customers are currently being given that help through an assistance package designed to reach customers who need it most. Customers who are spending 10% or more of their household income on fuel costs are eligible for extra help. How much help will depend on their individual circumstances. During the last this financial year (2010/11) SSE will spend £27million helping vulnerable customers.

Would a customer be disconnected if they could not pay their energy bill?

We offer payment plans to suit customers who need help, and at the moment, we have over 300,000 customers taking advantage of such arrangements. We also offer other payment methods. For example a prepayment meter is an option for customers who want to manage their budget carefully. Disconnection for non payment of a bill is extremely rare and is only taken as the very last resort to recover an outstanding account. For some time now it has been our policy not to knowingly disconnect vulnerable customers during the winter period. We have now decided to extend this to all customers for the period between 1 December and the end of February 2011 -except for reasons of safety and security or in circumstances of criminal activity such as fraud.

How will this price change affect prepayment customers?

As part of our package of price reductions in March, gas prepayment tariffs were reduced by 9% to bring them in line with quarterly payment customers. While prepayment customers will be affected by the price change announced today, effectively this means they will be paying almost the same price for their gas as they did last winter. Prepayment customers continue to pay the same price as quarterly payment customers. Whenever a prepayment customer tops up their prepayment meter after 1 December the new price will be automatically applied.

How can SSE customers be sure they are getting a competitive deal?

We believe we still offer real value over the medium term, excellent customer service and fair pricing. We've always said that we offer consistently fair and competitive prices for customers over the medium term. Our market leading products and services aim to help transform energy consumption. Our quality of service is recognised as being 'best in sector' - for example, we've just been voted Best Overall Energy Supplier by uSwitch for the 7th time in a row. This fair and consistent approach has meant that since January 2005 our typical' 'dual fuel' household customers have paid on average around £450 less for their energy than the equivalent customers of British Gas.

SSE Note on Energy Prices

On 29 October 2010 SSE (Scottish and Southern Energy plc) announced that it would increase its unit prices for household gas by 9.4% on 1 December 2010. The increase affected around 3.6 million customers in the UK. Customers have been individually notified (by letter) of these changes.

There were two reasons for implementing this change:

1. SSE’s gas supply business, Southern Electric Gas Ltd, has traded at a loss for several years, making a loss of £58.7m in the financial year ending 31 March 2010.

2. Forward wholesale gas prices (which are the prices energy suppliers pay for their gas) have risen 25% since March 2010, when SSE reduced prices for the second successive time.

This combination of rising input costs and a loss-making gas supply business, at a time when SSE’s annual capital investment exceeds its annual profit levels after tax means that SSE is no longer able to absorb these losses as it had done previously.

In November 2010 both British Gas and Scottish Power announced that they would be increasing prices for both gas and electricity.

Ofgem Review of the Energy Retail Market

On 26 November 2010 the industry regulator, Ofgem, announced its intention to review some aspects of the energy retail supply market.

At the same time it published its latest Electricity and Gas Supply Market Report.

According to Ofgem’s indicators, which incorporate the price changes announced by three energy suppliers, it estimates that the net margins on dual fuel customers that will be earned by suppliers for the year from December 2010 will increase from £65 to £90

SSE would make the following observations about Ofgem’s analysis:

- Ofgem's analysis is based on a relatively simple per customer measurement and as such cannot reflect the profit levels within retail supply.

- Domestic electricity and gas consumption has fallen steadily over the last few years.

- The typical consumption figures (4MWh of electricity and 16.9MWh for gas) on which Ofgem’s conclusions are based are higher than the latest available published statistics as reported in Ofgem and DECC sources [1] . These indicate typical (median) usage of 3.1MWh and 14.3MWh for electricity and gas.

- If these alternative figures are used then we estimate that net margins on dual fuel customers for December 2010 would be closer to £60. SSE believes that this figure is more representative of the current situation in the market.

- Ofgem even admits that "a declining consumption trend impacts on net margin, as a substantial proportion of supplier’s costs are fixed. Holding consumption constant over time means we may have overstated margin in recent years".

In addition:

- Ofgem agrees with suppliers that forward wholesale costs have risen in the last year and anticipates that these costs will continue to rise into 2011.

- As such, even on the basis of Ofgem’s inflated consumption figures, net margins will reduce from £90 in December 2010 to £55 (~5%) per customer in March 2011 because of the continuing rise in wholesale costs [2] .

- If the alternative consumption figures are used then net margins in March 2011 would be lower.

Margins in Previous Years

It also has to be remembered that, even according to Ofgem’s own analysis, suppliers have been making losses in their supply businesses for the majority of the last 6 years - in 54 of the last 74 months margins have been negative. Given that consumption has been lower than this, these losses would actually have been greater than Ofgem estimated:

It is clearly unsustainable for any business to continue to make these types of losses over the medium-long term. However it is especially challenging for the energy industry which is investing, and will continue to invest, billions of pounds in the UK each year.