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22 | 16Th - 22nd JanUarY 2015 | UTILITY WEEK Finance & Investment Analysis I t isn't oen that Conservative chancel- lor of the exchequer George Osborne and Labour party leader Ed Miliband see eye to eye. But both men have issued stark warn- ings to the UK's energy companies to pass on recent dramatic falls in the cost of energy to consumers, or face regulatory intervention. Osborne said it was "vital" that historic lows on the global oil markets were passed through to customers, saying the Treasury would launch an investigation into whether action should be taken, while Miliband called for Ofgem to enforce the cuts directly. With just months to go before the May general election, energy companies are back in the stocks. But are the cross-party calls to pass on lower costs to consumers unreasonable? Following the decision of the world's major oil producers last year to allow the price of oil to plummet, Brent crude prices have more than halved from levels above $100 per barrel in July 2014 to dip below $49/ bbl in the second week of January. The bear- ish super-commodity hastened the descent of already weak gas and power prices, which have since fallen to four-year lows – raising the political pressure on suppliers to offer lower bills to customers. But energy experts have warned that dra- matic wholesale losses cannot result in a similar impact on consumer bills. Whereas in 2007 the cost of oil would have been used to secure the price of more than 70 per cent of Europe's gas, supply contract terms are now far more likely to be based on the wholesale gas price itself. Now, only around 30 per cent of the gas in northwest Europe is bought based on the price of oil, a figure likely to be even less for the UK. Even weaker gas and power market prices will have a muted impact on utilities' costs. Energy analyst at market reporter Platts, Alex Froley, says: "A utility company will have a mixed procurement strategy. It could have some production of its own (North Sea gas fields or power plants) and some long- term import contracts and then top these up with spot market purchases. "The companies argue that even if the daily price falls, this may not mean their own costs have fallen by the same degree if they bought their supplies in the forward market a year or two earlier," Froley adds. In addition, wholesale costs make up less than half of the average consumer bill, according to Ofgem, with upward pressure coming from rising distribution and policy costs. Despite this, analysts agree that some reduction in bills should be possible. But how far bills fall, and how soon, is a com- plex decision, they warn. "The reduction in wholesale gas and power prices over the past 12 months should give some headroom for retail price reduc- tions, but energy companies face tough decisions," says Deutsche Bank's utilities analyst, Martin Brough. "Warm weather since the start of 2014 has reduced retail profitability, while forward hedging of purchases is likely to delay any reduction in purchase costs in the wholesale market," Brough adds. The typical purchasing strategy of energy companies, which can be years ahead of delivery, means the heavy losses across oil, gas and power markets late last year may only be felt by the companies at the end of this quarter, Citigroup analysts say. "It is important to remember, though, that the 2013/14 winter was extremely mild, with gas demand down 10-20 per cent in most European countries, meaning that overall customer bills might actually still end up flat or even up year-on-year just on weather nor- malisation of demand even if unit prices end up being lower," Citigroup adds. With the general election scheduled just weeks into the second quarter, and with the threat of a Labour price freeze still in mind, it might make sense to wait. "Rising social and environmental costs for 2016 and 2017 also make it dangerous to cut prices now and potentially have them frozen at a lower level," Brough adds. But companies in Northern Ireland and France are already recalibrating the price consumers should be asked to pay. French newspaper Le Figaro reports that the monthly French gas tariff revision will yield a bit more than a 1 per cent cut in February, to reflect falling oil prices. And the Northern Ireland regulator says its February study into costs could result in cuts from April. Energy firms over a barrel Historic lows on global oil markets have led to cross-party calls for the UK's energy companies to pass on cost savings to consumers. But just how much are companies saving? asks Jillian Ambrose. BrEnt crudE oil pricEs, July 2013 - January 2015 130 120 110 100 90 80 70 60 50 40 Price per barrel $ July 13 Oct 13 Jan 14 Apr 14 Jul 14 Oct 14 Jan 15 $45.85