House of Commons Energy and Climate Change Committee Ofgem's Retail Market Review
Sixth Report of Session 2010–12
Ordered by the House of Commons to be printed 19 July 2011
HC 1046 Published on 25 July 2011 by authority of the House of Commons London: The Stationery Office Limited £17.50 Ofgem's Retail Market Review
The Energy and Climate Change Committee
The Energy and Climate Change Committee is appointed by the House of Commons to examine the expenditure, administration, and policy of the Department of Energy and Climate Change and associated public bodies.
Current membership Mr Tim Yeo MP (Conservative, South Suffolk) (Chair) Dan Byles MP (Conservative, North Warwickshire) Barry Gardiner MP (Labour, Brent North) Ian Lavery MP (Labour, Wansbeck) Dr Phillip Lee MP (Conservative, Bracknell) Albert Owen MP (Labour, Ynys Môn) Christopher Pincher MP (Conservative, Tamworth) John Robertson MP (Labour, Glasgow North West) Laura Sandys MP (Conservative, South Thanet) Sir Robert Smith MP (Liberal Democrat, West Aberdeenshire and Kincardine) Dr Alan Whitehead MP (Labour, Southampton Test)
The following members were also members of the committee during the parliament:
Gemma Doyle MP (Labour/Co-operative, West Dunbartonshire) Tom Greatrex MP (Labour, Rutherglen and Hamilton West)
Powers The committee is one of the departmental select committees, the powers of which are set out in House of Commons Standing Orders, principally in SO No 152. These are available on the Internet via www.parliament.uk.
Publication The Reports and evidence of the Committee are published by The Stationery Office by Order of the House. All publications of the Committee (including press notices) are on the internet at www.parliament.uk/parliament.uk/ecc. A list of Reports of the Committee in the present Parliament is at the back of this volume.
The Report of the Committee, the formal minutes relating to that report, oral evidence taken and some or all written evidence are available in a printed volume. Additional written evidence may be published on the internet only.
Committee staff The current staff of the Committee are Nerys Welfoot (Clerk), Richard Benwell (Second Clerk), Dr Michael H. O’Brien (Committee Specialist), Jenny Bird (Committee Specialist), Francene Graham (Senior Committee Assistant), Jonathan Olivier Wright (Committee Assistant), Emily Harrisson (Committee Support Assistant) and Nick Davies (Media Officer).
Contacts All correspondence should be addressed to the Clerk of the Energy and Climate Change Committee, House of Commons, 7 Millbank, London SW1P 3JA. The telephone number for general enquiries is 020 7219 2569; the Committee’s email address is [email protected]
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Contents
Report Page
1 Ofgem’s Retail Market Review 3 Introduction 3 Issues raised in evidence to the Committee 4 Price increases 4 Complexity of tariffs and bills 7 Doorstep selling of energy contracts 8 Treatment of micro and small businesses 10 Liquidity 11 Conclusion 12
Formal Minutes 13
Witnesses 14
List of printed written evidence 14
List of Reports from the Committee during the current Parliament 15
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1 Ofgem’s Retail Market Review
Introduction 1. Ofgem, the regulator of the electricity and gas markets, describes protecting consumers by promoting competition and regulating the monopoly companies which run the gas and electricity networks as its first priority. It includes in this protection the reduction of greenhouse gases and the security of supply of gas and electricity.
2. In February 2008 Ofgem launched the Energy Supply Probe—“the Probe”—an investigation into the markets in electricity and gas supply for households and small businesses. It published its initial findings on 6 October 2008.1 It found no evidence of a cartel operating and found that retail price rises could be justified by rises in wholesale costs. However, it also concluded that competition was not yet fully effective, with the result that not all consumers were reaping the full benefits of competition. As a consequence, Ofgem introduced a number of measures for energy companies to implement.
3. In November 2010, Ofgem announced its intention to review the effectiveness of the energy retail market, including a review of the progress companies had made in implementing the reforms introduced as part of the 2008 Probe. The focus of the Retail Market Review (“the Review”) was to be on the domestic and small non-domestic markets.2
4. Ofgem used the Review to assess what further measures were needed to protect consumers. It published its interim findings on 21 March 2011.3 It concluded that the existing obligations on energy suppliers would not be sufficient, and that further action was necessary. Therefore it published five initial proposals with the interim findings of the Review in March 2011 aimed at making the energy market work more effectively in the interests of consumers:
• Proposal 1: Improve tariff comparability to make it simple for domestic consumers to compare prices and choose a better deal.
• Proposal 2: Enhance liquidity to address continued concerns on low electricity wholesale market liquidity and new entry by improving access to wholesale market products for new entrants and independent suppliers and generators.
• Proposal 3: Strengthen Probe remedies (domestic) to address the continued poor performance by the companies to Ofgem’s Probe remedies by making sure the Probe remedies are strengthened, and where necessary enforced, so that they achieve their original objectives.
1 Ofgem, Energy Supply Probe: Summary of initial findings and remedies, 6 October 2008 2 “Ofgem to review the effectiveness of the retail energy market to see if further action is needed to protect consumers”, Ofgem Press Notice R/18, 26 November 2010 3 Ofgem, Retail Market Review —Findings and initial proposals, 21 March 2011
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• Proposal 4: Strengthen Probe remedies (non-domestic) to address continued concerns Ofgem has found in the non-domestic sector by taking further action to prevent unfair contracting practices in the non-domestic sector.
• Proposal 5: Improve reporting transparency to address concerns on suppliers’ financial reporting by improving reporting requirements for vertically integrated utilities.
Ofgem issued a consultation on its proposals and asked whether there should be additional measures to protect “vulnerable” consumers. The deadline for responses was 1 June.
5. Ofgem undertook that if it received negative feedback or industry opposition to the proposed reforms then it would consider other options to address the consumer harm identified. This could include a referral to the Competition Commission.4
6. On 22 June Ofgem published two updates on its proposals (which differentiated between liquidity and non-liquidity proposals). In letters to all stakeholders from the Senior Partner for Markets, Ofgem stated that its views on the fundamental findings of its review were unchanged; and that whilst it would work with the industry and stakeholders to produce assessments of the options for each proposal (by the end of the year for non-liquidity proposals and in 2012–2013 for the liquidity proposals), it would still keep under review whether a referral to the Competition Commission was necessary.5
7. The “Big Six” energy companies (Centrica, EDF, E.ON, RWE npower, ScottishPower and SSE) gave evidence to us on the findings of the Review on 11 May, and Ofgem and DECC gave evidence on 22 June. We called ScottishPower, Centrica and SSE back in to give evidence on 28 June following the announcement by ScottishPower of a further increase in energy prices. The written evidence we received is published with this Report.
8. We do not intend to draw detailed conclusions at this stage, but have decided to publish the evidence we received. Because of our grave concerns we have decided to bring the Government’s and Ofgem’s attention to the serious issues which have been raised during the three evidence sessions and in written evidence to us. We intend to use this information when we return to these subjects in future inquiries and we will continue to hold the regulator and Government to account on progress made to tackle these pressing issues.
Issues raised in evidence to the Committee
Price increases 9. On 7 June ScottishPower announced that it would increase prices for domestic electricity bills by an average of 10%, and domestic gas bills by an average of 19% from 1 August 2011.6 It blamed its action on increases in wholesale gas and electricity prices,
4 Ofgem, Retail Market Review, para 1.10 5 Ofgem, Letter to Stakeholders: Ofgem’s Retail Market Review –update and next steps (liquidity proposals), 22 June 2011, and Letter to Stakeholders: Ofgem’s Retail Market Review –update and next steps (non-liquidity proposals), 22 June 2011, www.ofgem.gov.uk 6 ScottishPower Press Notice 2183, 7 June 2011, www.scottishpower.com
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continuing unrest in global energy markets, the cost of meeting Government environmental and social programmes, the cost of distributing electricity on the national grid, and poor returns in its retail business. 7 ScottishPower acknowledged to us in evidence that a quarter of their customers, previously on fixed term discounted deals, could in fact face significant price rises of up to 45% this summer.8
10. Although ScottishPower was the first to announce that it would raise prices, it was soon followed by Centrica and other companies have warned that they intend to do the same. Sir Roger Carr, Chairman of Centrica, had forewarned on 12 June that householders should expect further increases if wholesale power prices did not soften, because Britain’s other five power generators would have to pass on some of the cost. He is also reported to have said that it should come as no surprise that some of the costs involved in “decarbonising” UK power generation had to be recouped from customers’ bills.9 When Centrica announced on 8 July that it would raise domestic tariffs for gas by an average 18% and for electricity by an average 16%, on 18 August 2011, it blamed wholesale cost increases of 30% since the last winter for the latest price increases.10
11. Which? has argued that the price increases announced by ScottishPower were skewed in favour of high users and against customers who used less energy. Which? calculates that for customers on a “two tier” tariff, where customers paid a higher rate for the first “block” of units (Tier 1) and a lower rate for the rest (Tier 2), the price of Tier 1 units on this tariff had increased by 33% and the price of Tier 2 units by just 2%. This uneven apportionment of price increases between the two tiers meant that the increase in the annual cost of this tariff varied significantly depending on how much energy a customer used a year—and favoured high users. Which? calculated that the effective prices increases would be: Low user: 20%; Medium user: 15%; and High user: 11%.11
12. ScottishPower’s evidence to us stated that:
On average, across regions and all the principal payment methods, customers with low consumption (as defined by Ofgem) will face an 18% increase in Dual Fuel bills and customers with high consumption (as defined by Ofgem) will face a 14% increase in Dual Fuel bills.12
ScottishPower explained that this variation resulted from the increase in the standing charge which was intended to “try to ensure that customers of all sizes pay a fair amount for their energy”. ScottishPower believed that although it would result in large percentage increases for very low consuming customers, the impact in cash terms on electricity bills would be no greater than for higher consuming customers.13
7 Ev 112–113 8 Q 220 9 “Centrica chairman warns steep energy price increases are inevitable”, The Daily Telegraph, 12 June 2011, www.telegraph.co.uk 10 “British Gas gives customers three clear ways to beat rising energy prices announced today”, Centrica Press Notice 8 July 2011, www.centrica.com 11 “Scottish Power price hike penalises eco-conscious customers”, Which? Press Notice, 27 June 2011 12 Ev 116 13 Ev 116
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13. Despite average UK domestic energy prices (including taxes) in the first half of 2010 being the fourth lowest electricity prices and the lowest gas prices in the EU 15,14 speculation that the other four big suppliers will follow suit and increase prices is extremely worrying to the public— particularly those on limited incomes such as pensioners. In general the public does not appear to accept the rationale behind the increases. According to Which?, the cost of energy is UK consumers’ number one financial concern, with 89% saying they are worried about rising prices.15 Only 12% of people asked thought suppliers were being honest about what made up the cost of the bill and only 16% thought that suppliers tried to keep tariffs at a reasonable level.16 Alistair Buchanan of Ofgem suggested to us that energy companies had not been active enough in communicating their pricing decisions to customers.17
14. Our evidence also points to the danger of a backlash against the government’s green agenda if it means rising bills for consumers. In June, Centrica published the results of an opinion poll which showed that only 25% of respondents thought it vital that the Government stick to its plans for creating a low carbon power industry if it meant higher bills.18 Sam Laidlaw, Chief Executive of Centrica, published an article in The Daily Telegraph on 23 June 2011 which argued that the public was “totally unprepared” for price increases associated with levels of new investment required and the increasing cost of carbon. He said “We need constructive engagement from all sides to create better public understanding of the momentous changes we face. In particular, we need industry, Ofgem and Government to work together more collaboratively”.19 Charles Hendry MP, Minister of State, DECC, said of the public’s perception of socio-environmental charges on bills:
I don’t know whether they are willing to accept [socio-environmental factors] or whether they understand they are coming through. I don’t think there is enough understanding of the charges that are there and which are coming through, and that is why we want much greater clarity on people’s bills. I think that we also need to do more to persuade them why investment in these areas is necessary.20
15. Neither industry nor government appears to accept responsibility for communicating to the public the factors which are influencing the price of energy bills. Both sides must engage with the public. Ofgem also has a role in ensuring that consumers and businesses understand the components of bills.
Rockets and Feathers 16. There is a dispute between Ofgem and the energy industry over whether energy bills respond faster to rising costs than falling costs (the hypothesis that energy prices shoot up
14 Ev 101 15 Which? background briefing provided to the Committee. Not printed. 16 Which? background briefing provided to the Committee. Not printed. 17 Q 73 18 “Reality gap: Centrica calls for honest debate about the challenge of ensuring UK energy security”, Centrica Press Notice, 23 June 2011, www.centrica.com 19 “We have a year to make a low-carbon future happen”, The Daily Telegraph, 23 June 2011, www.telegraph.co.uk 20 Q 147
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like rockets but fall like feathers). Ofgem claimed that it had found “some” evidence that showed this was the case, but acknowledged that the implication for consumer harm was “not clear cut”.21 The energy industry continues to rebut this claim and Energy UK commissioned a report by NERA, the economic consultants, which questioned Ofgem’s analysis and modelling.22
Complexity of tariffs and bills 17. In the last 18 months the number of tariffs available to consumers had increased from around 180 to almost 400.23 Ofgem’s Review concluded that the complexity of tariffs limited consumers’ effective engagement in the energy market.24 The Minister himself admitted that whilst he thought that “switching was an integral part of the market”, he had been so confused by tariff options when trying to switch that he decided to stick with his current tariff.25 Alistair Buchanan told us that “legacy” or “sticky” single fuel customers (those who have not switched energy suppliers) were delivering a margin of almost 6% to the companies, whereas the competitive non-legacy customers were delivering 1.5% to 2%.26 With the higher margins delivered by “sticky” customers, there was a suspicion that firms may be incentivised to increase the number of tariffs, and thereby the complexity of the choice facing consumers, in order to prevent easy comparisons and inhibit switching.27
18. Consumer research as part of the Retail Market Review had found that a large number of those consumers who had switched supplier in order to save money were often none the wiser over the outcome of their choice—over a third did not know whether or not they had saved money following their switch.28 Ofgem subsequently told us that 40% of consumers who switched had switched to a weaker deal.29
19. Ofgem wanted to see a higher rate of switching as it believed that this was indicative of a healthy energy market with engaged, proactive consumers driving competition between suppliers.30 The findings of the Review led to Ofgem drawing up proposals to simplify the choice of tariffs available for consumers, to encourage consumer engagement with the market and the switching of suppliers.
20. The simplification of options was the aim behind Ofgem’s proposal to create a standard evergreen tariff—domestic tariffs not requiring contract renewal. However, both the industry and consumer groups expressed concerns to us over the potential restriction of choice for the consumer and the impact this could have on time of use (for example Economy 7) tariffs and the roll out of smart meters. Industry and consumer groups also
21 Ofgem, Do energy bills respond faster to rising costs than falling costs?, 21 March 2011, www.ofgem.gov.uk 22 NERA, Asymmetrical Price Response in Energy Supply: A review of Ofgem’s Analysis, 13 May 2011 23 Q 76, Ofgem, Retail Market Review, para 2.17 24 Ofgem, Retail Market Review, para 2.7 25 Q 153 26 Q 75, Ofgem, Retail Market Review, para 2.59 27 Office of Fair Trading, What does Behavioural Economics mean for Competition Policy?, OFT 1224, March 2010 28 Ofgem, Retail Market Review, para 2.14 29 Q 75 30 Ofgem, Retail Market Review, para 2.1
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feared that complex logistical challenges would result from the proposal and the necessary migration of a large number of customers over to the new standard tariff, including IT system changes and communications to customers. We were warned that this could lead to an increase in cost to the consumer.31 Consumer Focus also questioned whether tariff complexity was at the heart of consumers’ disengagement with the industry.32
21. Complexity of tariffs was part of a wider problem identified by the 2008 Probe: the lack of clear information provided by energy suppliers to their customers. This led to the requirement that suppliers improve the information that they provide to customers on their bills and the introduction of a new annual statement. However Ofgem described the energy companies’ performance against this obligation as “patchy”.33 The industry acknowledged the importance of improving the presentation of information to its customers, but claimed they were working hard to do this and were wary of further standardisation.34 Consumer Focus thought that Ofgem should be tougher on the industry and agreed with the proposal to name and shame companies that persistently fail to adhere to the spirit of existing regulations.35
22. It is clear that many consumers are bamboozled by the number of available tariffs from the whole energy industry. But Ofgem must pay close attention to the concerns of consumer groups and industry before implementing its proposals for a single tariff.
Doorstep selling of energy contracts 23. The 2008 Probe highlighted the problem of mis-selling of energy contracts, where consumers were switched without consent, pressurised into switching, or misled about the deal they were being offered. Ofgem emphasised that these practices could undermine confidence in the switching process and dampen competition. In October 2009, Ofgem introduced tougher obligations on suppliers to be proactive in preventing mis-selling to customers both face to face and over the phone.36 Suppliers selling contracts face-to-face were also required to provide customers with an estimate before any sales were concluded. In most circumstances customers should also receive a comparison of the supplier’s offer with their current deal.
24. Ultimately, if a company were found to be in breach of its obligations, Ofgem would have power to impose a financial penalty of up to 10 per cent of its total turnover. At the date we considered this Report, four of the Big Six were under investigation by Ofgem for mis-selling, and one prosecution undertaken by a local Trading Standards Office against one of the Big Six was under appeal.
25. Alistair Buchanan, Chief Executive of Ofgem, told us that 70% of pre-payment meter consumers were won on the doorstep, although he referred to research by Ipsos MORI
31 Ev 89 32 Ev 89 33 Ofgem, Retail Market Review, para 2.1 34 Ev 66, 103, 110, 121 35 Ev 81 36 Ofgem, Letter to stakeholders: Standards of conduct for suppliers in the retail market, 19 October 2009
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which showed that the figure was actually 62% for electricity customers and 61% for gas.37 Vulnerable customers appeared to be particularly targeted by sales staff on the doorstep. ScottishPower confirmed that 73% of prepayment customers switching to ScottishPower over 2010 and to date in 2011, switched to ScottishPower through the doorstep sales channel.38 However Centrica claimed that only 10.5% of its prepayment customers were acquired through doorstop sales.39 SSE told us that 19% of its prepayment customers were acquired through doorstop sales.40
26. On 7 July SSE announced that it was suspending all door-step sales activity with immediate effect. Its press notice stated that it had taken this action for four reasons:
• there was low confidence in the way companies sold energy on the doorstep, and the way in which salespeople were remunerated;
• energy was a significant purchase, and the sales process rightly required increasingly significant customer safeguards;
• customers have a growing need for objective information and help to enable them to use efficiently the energy they buy, especially in an environment of rising unit prices; and
• the energy supply market was evolving from the simple retailing of electricity and gas to providing a bigger range of smarter energy products and services, and engagement with customers needed to reflect this.41
27. Whilst we acknowledge that SSE’s decision could lead to a loss of some 900 jobs, we welcome the move by SSE to put the needs of the consumer first when seeking to attract new customers, and give proper consideration as to how best to protect those consumers who are more vulnerable whilst increasing consumer trust in the sector.
28. Whilst E.ON and Centrica told us that they were working to ensure that their sales staff did not target either No Cold Calling Zones (NCCZs) or sheltered housing, we are concerned that with the retention of doorstep selling by the other major suppliers consumers may be pressured into switching supplier on the door step without proper consideration of the available options when confronted with a vast array of complex tariffs and a hard sell.42 We want to see further evidence that Ofgem is monitoring both the conduct of energy supplier sales staff and the areas that they target and is taking firm action where it finds evidence of mis-selling or exploitation of vulnerable consumers on the doorstep.
37 Q 127, Ipsos MORI, Customer Engagement Survey, 29 August 2008, Question 24, page 23, www.ofgem.gov.uk 38 Ev 116 39 Ev 105 40 Ev 98 41 “Commission-based doorstep sales activity suspended”, SSE press notice, 7 July 2011 42 Ev 104, 105, 123
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Treatment of micro and small businesses 29. Following the 2008 Probe, Ofgem introduced a range of remedies to address contracting practices that it believed were adversely affecting micro and small business consumers. However, the Retail Market Review concluded that performance against those remedies had not been satisfactory and Ofgem has made a number of proposals to ensure greater protection for micro businesses. Those proposals were supported by Consumer Focus who identified a number of areas where businesses received fewer protections than domestic consumers—despite some micro and small businesses being no better equipped to deal with the complexity of tariffs. In particular, its helpline received a substantial amount of calls from micro businesses with complaints over unexpected back-billing.43
30. British Gas told us that it had 850,000 small business customers and was well aware of their business needs. It acknowledged that giving micro and small businesses the same protection as domestic customers over back-billing would be an improvement.44 Both ScottishPower and SSE admitted that they had not held discussions with business associations on the challenges facing small businesses but were willing to do so.45
31. Ian Peters of British Gas told us that the debate about providing more protection to micro-businesses had only started in the last few months, but that British Gas would be happy to engage with Consumer Focus and the Federation of Small Businesses on the issue.46 Alistair Phillips-Davies of SSE told us that the trade body representing the bigger suppliers had set up a meeting to look at what was being done for small and micro businesses.47 Ofgem had engaged in discussions with the Federation of Small Businesses and other organisations involved with small and medium-sized enterprises on what additional protections were needed for small and micro businesses.48
32. Industry welcomed the proposal from Ofgem to look further at the role of Third Party Intermediaries (TPIS) who sell energy contracts to businesses, about whom there have been allegations of mis-selling. TPIs are not licensed under the Energy Act and are not regulated by Ofgem. Instead they fall under the remit of the Office of Fair Trading.49 E.ON had proposed a code of practice for TPIs to control their activities whilst David Mannering of RWE npower believed that the regulation of TPIs should not be done through energy companies:
It would be preferable for Ofgem to be given direct powers or for the OFT, which is the existing regulatory body, to look at the area more directly, rather than do it second-hand through giving a licence obligation on us and to turn us into quasi- regulators.50
43 Ev 82 44 Q 58 45 Q 60 [Alistair Phillips-Davies] [John Campbell] 46 Q 284 [Ian Peters] 47 Q 284 [Mr Phillips-Davies] 48 Q 129 49 Q 130 50 Q 59
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Primary legislation would be necessary to give Ofgem powers over TPIs or to introduce licensing of TPIs. At present the only power Ofgem has to monitor TPIs was through the relationships that suppliers had with them.51
33. We look forward to learning the outcome of Ofgem’s discussions on the protection of micro and small businesses and on the future regulation of TPIs.
Liquidity 34. Liquidity is the ability to quickly buy or sell a desired commodity or financial instrument without causing a significant change in its price and without incurring significant transaction costs. A key feature of a liquid market is that it has a large number of buyers and sellers willing to transact at all times, leading to a significant volume of individual trades. However, Ofgem found that churn—a high level measure of overall trading in the power market—is on a downward trajectory in the electricity market.52 Ofgem believes that there are significant links between liquidity and effective retail market competition: a well targeted liquidity intervention could have significant benefits for retail market competition and for consumers.53
35. When one company owns both generation and supply businesses, it is described as being “vertically integrated”. The Big Six suppliers are vertically integrated players and dominate the market. They claimed that vertical integration was necessary and a natural outcome of the market structure because a generation business was necessary to hedge supply businesses.54 There has only been a single instance of entry into the electricity supply market since 2008.55 The Big Six still hold over 99% of domestic customer accounts.56 It is argued that vertical integration may increase entry barriers and reduce competition, and could have an adverse impact on liquidity.57
36. A specific concern of smaller market participants has been the availability of products with small clip sizes, with parties noting that the inability to purchase products in small volumes presents a barrier to entry and growth.58 The Retail Market Review made proposals for an intervention in the market aimed at helping entrants into the supply market, particularly those who found it difficult to enter the market at present.59
51 Q 130 52 Ofgem, The Retail Market Review, para 2.76 53 Ofgem, The Retail Market Review, appendix 1 54 Energy and Climate Change Committee, Fourth Report of Session 2010–12, Electricity Market Reform, HC 742, Q 168 [Ian Marchant] 55 Ofgem, The Retail Market Review, para 2.78 56 Ofgem, The Retail Market Review, para 2.78 57 Energy and Climate Change Committee, Fourth Report of Session 2010–12, Electricity Market Reform, HC 742, Q 14 [Andrew Wright] 58 A shaped product is a contract which specifies different amounts of electricity to be delivered at different times. Clip size refers to the size (usually in MW) of the contract to be traded. 59 Ofgem, GB wholesale electricity liquidity: summer 2010 assessment, section 3.70
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37. However, industry argued that, rather than liquidity, the main barriers to new entrants were the small retail margins and large balance sheet requirements that small companies found difficult to work with.60
38. The Retail Market Review questioned how much progress had been made by voluntary industry initiatives in improving liquidity in the market and concluded that intervention was necessary. We look forward to receiving further information on how Ofgem’s proposals will be implemented and whether there is evidence that the Big Six are making smaller volumes of products available to smaller suppliers and new entrants.
Conclusion 39. Our work has identified a number of serious problems with the electricity markets, which are having an adverse effect on consumers. Some of these problems are deep- seated: we suspect that the dominance of six vertically integrated companies is a consequence of the structure of the market and will need serious intervention from the Government and from the Regulator. We believe that Ofgem needs to resolve key questions about “rockets and feathers”, pricing transparency and liquidity with some urgency.
40. Other problems can have a much more immediate solution. The level of tariff complexity that confronts consumers is unacceptable and the continued blight of mis- selling should have been taken in hand years ago. We believe that the industry must address these problems immediately without waiting for either Ofgem or Government to act. In particular the possibility that a large number of consumers may have paid too much for their electricity or gas because of mis-selling on the doorstep should be examined at once and compensation paid where consumers have been misled by agents acting for the suppliers. Ofgem needs to take much tighter control on these issues in order to give consumers the ability and confidence to take part in switching, which is vital for real competition.
41. These issues have been of concern for too long. The Government’s Electricity Market Reform and Ofgem Review present an important opportunity to establish a market that will deliver consumer benefits, decarbonisation and security of supply. We intend to keep a close eye on Ofgem and DECC’s performance in these areas.
60 Q 44
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Formal Minutes
Tuesday 19 July 2011
Members present:
Mr Tim Yeo, in the Chair
Barry Gardiner Laura Sandys Albert Owen Sir Robert Smith Christopher Pincher Dr Alan Whitehead
The following declarations of interest relating to the inquiry were made:
Wednesday 11 May, Wednesday 22 June, Tuesday 28 June (afternoon sitting)
Sir Robert Smith declared the following interests: Shareholder Shell Transport and Trading, Honorary Vice- President Energy Action Scotland.
Tuesday 28 June (afternoon sitting)
John Robertson declared the following interest: Chair of the All Party Parliamentary Group on Nuclear Energy.
Albert Owen declared the following interest: customer of Scottish Power and Centrica.
John Robertson declared the following interest: customer of Scottish Power.
Barry Gardiner declared the following interest: customer of Scottish and Southern Energy.
Draft Report (Ofgem’s Retail Market Review), proposed by the Chair, brought up and read.
Ordered, That the draft Report be read a second time, paragraph by paragraph.
Paragraphs 1 to 41 read and agreed to.
Resolved, That the Report be the Sixth Report of the Committee to the House.
Ordered, That the Chair make the Report to the House.
Ordered, That embargoed copies of the Report be made available, in accordance with the provisions of Standing Order No. 134.
Part of the written evidence was ordered to be reported to the House for printing with the Report (in addition to that ordered to be reported for publishing on 11 May, 22 June and 28 June 2011).
[Adjourned till Wednesday 7 September 2011 at 10.00 a.m.
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Witnesses
Wednesday 11 May 2011 Page
Phil Bentley, Managing Director, British Gas, Centrica, Martin Lawrence, Managing Director, Energy Sourcing and Customer Supply, EDF Energy, Sara Vaughan, Director of Regulation and Energy Policy, E.ON UK, David Mannering, Director of Economic Regulation, RWE npower, Alistair Phillips-Davies, Energy Supply Director, SSE and John Campbell, CEO of ScottishPower Generation Ev 1
Wednesday 22 June 2011
Alistair Buchanan, Chief Executive, and Andrew Wright, Senior Partner Markets, Ofgem Ev 20
Charles Hendry MP, Minister of State, and Jonathan Brearley, Director, Energy Markets Infrastructure, Department of Energy and Climate Change Ev 32
Tuesday 28 June 2011
Ian Peters, Managing Director, Energy at British Gas, Centrica, Alistair Phillips-Davies, Energy Supply Director, Scottish and Southern Energy, Amparo Moraleda, Chief Operating Officer of Iberdrola and Acting Chief Executive Officer, ScottishPower, and Rupert Steele, Regulation Director, ScottishPower Ev 43
List of printed written evidence
1 RWE npower Ev 63, Ev 73 2 EDF Energy Ev 74, Ev 77 3 Consumer Focus Ev 78 4 Which? Ev 83 5 SSE Ev 87, Ev 91, Ev 94, Ev 98 6 Centrica Ev 100, Ev 104, Ev 105 7 Drax Power Ev106 8 ScottishPower Ev 109,Ev 111, Ev 112, Ev 115 9 Independent Generators’ Group Ev 117 10 E.ON UK Ev 119
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List of Reports from the Committee during the current Parliament
The reference number of the Government’s response to each Report is printed in brackets after the HC printing number.
Session 2010–12 First report Emissions Performance Standards HC 523 (807) Second report UK Deepwater Drilling–Implications of the Gulf of HC 450 (882) Mexico Oil Spill Third report The revised draft National Policy Statements on HC 648 energy Fourth report Electricity Market Reform HC 742 Fifth report Shale Gas HC 795 First Special Report Low carbon technologies in a green economy: HC 455 Government Response to the Committee's Fourth Report of Session 2009-10 Second Special Report Fuel Poverty: Government Response to the HC 541 Committee's Fifth Report of Session 2009-10 Third Special Report The future of Britain’s electricity networks: HC 629 Government Response to the Committee’s Second Report of Session 2009–10
Energy and Climate Change Committee: Evidence Ev 1
Oral evidence
Taken before the Energy and Climate Change Committee on Wednesday 11 May 2011
Members present: Mr Tim Yeo (Chair)
Dan Byles Dr Phillip Lee Barry Gardiner Laura Sandys Ian Lavery Sir Robert Smith ______
Examination of Witnesses
Witnesses: Phil Bentley, (Centrica) Managing Director, British Gas, Martin Lawrence, EDF Energy, Managing Director, Energy Sourcing and Customer Supply, Sara Vaughan, E.ON UK, Director of Regulation and Energy Policy, David Mannering, RWE npower, Director of Economic Regulation, Alistair Phillips- Davies, Scottish and Southern Energy, Energy Supply Director, and John Campbell, Scottish Power, CEO of Scottish Power Generation, gave evidence.
Q1 Chair: Good morning and welcome to this up more quickly than they are coming down? As meeting of the Committee. Thank you for making the E.ON said, that is not clear cut at all because they time to come in. You will be aware that there is a have made a number of assumptions. great deal of interest in this session, particularly from Secondly, even if they did, are there valid consumers. Could I start by asking all of you whether explanations for why that might be? The answer is you accept Ofgem’s statement that it now has most certainly, yes, because we all incur significant evidence that energy prices have tended to rise in costs in changing our prices. Supposing it costs £1 to response to wholesale cost increases more quickly write to each customer, that is £4 million possibly in than they have fallen with decreases in wholesale our case. Companies have a motivation to minimise costs? their costs to the benefit of customers by not changing Sara Vaughan: Shall I make a start on that? I think if prices too quickly. If you are in an environment—and you look at what Ofgem says, they say that there is there is evidence we have had more recently—where “some evidence” that prices move in that way. It is wholesale prices go up faster than they come down, not a definitive conclusion. I think that whether they then you might expect the retail price movements to do or not depends on some of the assumptions that follow that. In addition, if you are in an environment you make around the conditions that you apply when where there is continuous inflation, which of course you do your modelling. For example, they are we have, that is also an explanation for why you might applying a flat 18-month hedge in doing their find that prices go up more often than they go down. modelling, which is not necessarily the length of Because you are generally expecting price rises, and hedge that each of us at this table will apply. I think the cost minimising thing to do, in terms of how often also that they suggest that there are some plausible you write to customers, drives you to that strategy. reasons why, if that were the case, that might be the That is the second point. The third point is: even if it case and that this does not necessarily give rise to is true that prices did go up faster than they come consumer harm. If you like, there are two halves of down, which we do not accept, then that doesn’t their statement, and they suggest that consumer harm suggest in any way that the market is not competitive isn’t necessarily resulting as a consequence of this. because for that you would need to look at profits over Also, I think if you take a step back from it—and I a sustained period. am not an economist, I am a lawyer; forgive me for that—I think you have to look at the actual end result of all of this and whether or not prices are going up Q2 Chair: Ofgem did not do that, obviously? faster than they are coming down or going down faster David Mannering: No. than they are coming up; what the end result is. If you Sara Vaughan: What they did look at, as I said, in make it as far as appendix 9 of Ofgem’s document appendix 9 of volume 2 of the document; the profits where they actually look at the profitability of the that they did look at, their finding was that the profits companies, you will see that they find that, over the were rather below what they would expect. period from 2005 to 2010, companies are only making David Mannering: Yes, that is true. Yes, for the a margin of 1.6%, which is well below the margin that period that they did look at. they are seeing in supermarkets and other retailers. So John Campbell: Can I come back to the point of the it seems to me that those are the points that one should absolute level of profits? Our retail margin has been consider when looking at the suggestion that Ofgem between 1% and 2% consistently over the past two or makes. three years. We don’t believe that that is an David Mannering: Could I pick up on that, because unreasonable margin. We believe that is a very tight this operates at a number of levels: so firstly, is the margin to be operating at, particularly for a business analysis accurate? Does it show that prices are going that has huge investment in smart metering, and then Ev 2 Energy and Climate Change Committee: Evidence
11 May 2011 Phil Bentley, Martin Lawrence, Sara Vaughan, David Mannering, Alistair Phillips-Davies and John Campbell to deliver the Government’s objectives on energy “Actually, we are not making very much money and, efficiency and sustainability— therefore, you really ought to feel sorry for us. Even Chair: My question was not whether your margins if they were right in the first place, then it would all are sufficient. I said: do you accept Ofgem’s be justified by the fact that we are not making very statement. Mr Campbell is answering. Do you accept much money”. That might be because you are not the statement or not? very good businesses. So the whole structure of your John Campbell: No, I don’t believe that the evidence argument is really, really discomfiting for a member provided would justify the statement. I think there are of the public. some questions about the analysis and the implications You have come in and you’ve said, “Actually, it is all of the finding, even if it was true, about whether it is a load of BS”, but why is it that you guys aren’t a competitive market. proving that they are wrong? You haven’t come out Martin Lawrence: The time analysis: we have gone and shown for this reason, this reason, this reason and through and looked at our own numbers—because this reason this analysis was wrong and these are the clearly we have access to those and don’t have access reasons why they have not gone up quicker than they to competitors’ costs, or whatever—and we can find have come down. no evidence in our own numbers. Indeed, as you may Phil Bentley: I am sorry I was late, Chairman, to the be aware, during the period that Ofgem were making Committee. Obviously, Kate and Will had an easier their remarks, we were holding our prices constant journey here than I had this morning. over the winter and had not increased our prices as a I think we have to step back and understand a few result of our winter price freeze guarantee. So we facts. Firstly, individual companies do not see the don’t accept the analysis. I accept that there is a returns of the other companies, so only Ofgem has the version of the analysis that Ofgem has carried out, data on all six. We only have the data, for example, which may lead them to that conclusion, but it is still on British Gas, so I cannot comment on anybody else very early days to make it as a sweeping statement other than British Gas. What I can say, though, on of generality. British Gas—and the facts are absolutely proven David Mannering: I think there is another point that here—if we take last year, we lowered prices at the is really quite unfortunate, which is, as E.ON pointed beginning of the year. Prices only went up to out, the statements in the analysis document itself that customers at the very end of December. In that time, Ofgem produced are very equivocal. It acknowledges our margins halved, so our profits were down. Prior that its conclusions are based on certain assumptions, to that, we have had 18 months of lower prices. We and it also acknowledges that there are no clear have had 18 months of lower prices such that prices implications for consumer harm, whereas the press today are still lower than they were in 2008. We can release that Ofgem put out around that point very show all the analysis to Ofgem for our books. We much firmed up the statement and made a very cannot show them for the rest of the industry, and I definitive conclusion that this was evidence that do not think it is right that we should share with the competition was weak. We don’t think that you can rest of the industry. The ERA, the spokesbody for the jump from the analysis in the document to the very industry, is doing its own analysis and will try and hard statement that is made in the press release. It is refute through facts, but all I can tell you is our a great leap that is not justified by the evidence. margins were 4% in the second half of last year when Alistair Phillips-Davies: We do not accept the wholesale prices were rising, which were half what statement at all. Ofgem’s analysis was heavily they were in the first half. So the facts are— caveated and they said at best it made a suggestion. There are two very deep flaws in the analysis. One is, Q4 Barry Gardiner: Mr Bentley, you are addressing they ignored the significant reductions in consumption the issue of whether there might have been consumer over the period of time and the fact there was harm. You are not answering the Chairman’s question, significant fixed costs in the business, which have which is: do you accept that Ofgem is right to say that risen, and that means the analysis is fundamentally they have gone up faster than they have come down? flawed. One of the other key assumptions was, when Phil Bentley: No, absolutely not, and all the data you go through the detail of it, they are essentially would show that was the case. If we take even 2008, assuming that these businesses are loss-making and we had had a tripling of wholesale prices through should continue to be loss-making. People have 2008 and it was not until August that prices had to go mentioned a number of other assumptions that are up. So there was a cushioning effect before consumers made in there. Basically, the analysis is flawed. saw the impact of higher prices. We would absolutely stand by the assertion that, within our numbers, there Q3 Barry Gardiner: Scottish and Southern are, of is no evidence whatsoever for the assumption that course, the first people so far this morning to say that. prices go up faster than they fall. That is why prices Listening to the structure of your argument, you have been falling for the last two years and only went haven’t done yourselves much good with the public, up at the very end of the year in December last year. have you? Because the structure of your argument was, first of all, it is very complicated and it depends Q5 Dr Lee: Good morning, everyone. Yesterday what statistical modelling you use. Then, if it were to during the Energy Bill debate, a colleague of mine be the case that Ofgem were right, then there might be made the assertion that energy prices in this country good reasons for it. Then, ultimately, to deflect from, were higher on average than in Europe. I notice in the “There might be good reasons for it” to saying, submission from Scottish and Southern that we are the Energy and Climate Change Committee: Evidence Ev 3
11 May 2011 Phil Bentley, Martin Lawrence, Sara Vaughan, David Mannering, Alistair Phillips-Davies and John Campbell
fifth lowest in the EU, 15 according to them in terms about it, and so I take your comment and I will go of domestic electricity prices. The first question is: back to the office and we will try harder. who is better than us in terms of who is cheaper? Secondly, are we more expensive here? I don’t know Q6 Dr Lee: In terms of electricity prices, yesterday what the answer to that question is. we had our first session on the proposed North Sea Phil Bentley: I have a chart here that is based on supergrid. Have you done any analysis in terms of DECC data. This is based on gas prices. Who is more whether that will lead to a lower electricity price over expensive than the UK? Poland, the Czech Republic, a period of time or not? France, Belgium, Spain, Portugal, Germany, Ireland, Alistair Phillips-Davies: By the supergrid do you Greece, Austria, Italy, Netherlands, Denmark, mean the links into Scandinavia, Norway and things Sweden. Who is cheaper than the UK? Slovakia, like that? Luxembourg, Lithuania, Hungary, Bulgaria, Estonia, Dr Lee: Yes, and down to Munich and beyond. Finland and Romania. Those tend to be countries who Alistair Phillips-Davies: I suspect more are former Eastern Soviet Bloc countries or behind the interconnection will provide greater security of supply Iron Curtain where energy prices are subsidised by the and potentially lower costs, because you may not need state. In the free market EU 15, the UK has the lowest as much reserve plant. Particularly if in this country gas prices and has consistently had the lowest gas we have a strategy of going for more and more wind, prices since competition began. Those are DECC data, which is more interruptible, if you can link into not industry data. economies such as Norway, where they have a great Sara Vaughan: I think there is another point that we deal of hydro, you will be able to maybe balance out can look at here, which is: if you look at prices the peaks and troughs of the wind with some of their between 1990 and 2005, so after the industry was hydro. What the ultimate costs of building that privatised, they actually look pretty flat in real terms. supergrid, versus building additional thermal capacity In 2004 there was a shift that happened, which was to provide you with security of supply and to flatten that we became a net importer of gas. What that out the load, I don’t know. I think it is a very means is that since then we have been subject to the interesting area to look at and certainly something that world market in gas and, effectively, we are a price we will be looking at, as part of interconnection to taker, not a price maker. We are also subject to world Shetland, and places like that, that we will be looking prices on coal, and gas obviously feeds in also to the at and interconnection into some of the offshore wind price for electricity through power stations. farms that we are planning to build off the north of To pick up on the point that Mr Gardiner was making Scotland. earlier, I think we haven’t been as good as we could Martin Lawrence: The other thing that will determine have been at explaining that, at explaining the shift the future cost of electricity, of course, is what our that there has been in the market and explaining the generation mix looks like. At the moment, we have impact that has had on prices. We are getting better— fossil plant that is dependent on input costs, the costs sorry, we are trying to get better—but I don’t think of which are not under our own control. It is world we can be complacent about the way that we do it. markets in coal and gas that feed the input costs. We Certainly, from an E.ON perspective, we are trying to have about 20% of nuclear, which is a different cost explain things further. We are trying to go out and not component. So quite what the generation mix is going just do it in the usual way of, “Here is a press release to look like is going to also determine what the costs from Ofgem. Here is a press release from E.ON. Let’s are going forward as well. play the battle of the press releases”. What we are trying to do is talk to people, real people, customers Q7 Dr Lee: Do you think if we became a net exporter of ours, more on a direct basis, whether we are doing of energy—part of the selling point for the supergrid it online through blogs and that sort of thing, or face- is that we could export the wind farm that Mr Phillips- to-face. Davies was referring to; the wind energy—does that One of the things that I did last year was to go out lead to lower prices in the same way that in Norway, and do some town hall meetings in schools, in for instance, their electricity prices are historically gymnasiums and in small rooms in football stadia, and cheaper because they generate it themselves? talk to our customers and try to understand what the Martin Lawrence: I think the point that Alistair made issues were that were worrying them and try and give around trying to manage the volatilities is what is them some answers, both about how things can be critical. If we do have a very large wind portfolio in made better for them but also about why they are this country, when the wind is blowing hard and there facing what they are facing and why prices are going is an excess in the UK, then there will be opportunity up. to export to other countries to fill up their gaps as well. The other point, as well as world markets, is obviously the targets that we have signed up to. We talked about Q8 Dr Lee: Would that lead to lower prices? this in another inquiry that we had before this Phil Bentley: In theory, you could be right but I think Committee around the 2020 renewables target and the we have to be realistic because there is no way we are increased costs that that imposes on all of our going to be an exporter, given the demands that we customers, and also the decarbonisation targets. There have in terms of replacing coal that is going off; the is a lot out there. There is a lot of data to understand need to build new nuclear; the fact that we have now about what the impacts are on prices and we are trying taxed UK North Sea gas, one of the highest taxations very hard to get better at it, but I am not complacent prevailing in the world. There is no way we are going Ev 4 Energy and Climate Change Committee: Evidence
11 May 2011 Phil Bentley, Martin Lawrence, Sara Vaughan, David Mannering, Alistair Phillips-Davies and John Campbell to be a net exporter of energy. We are going to be give them a beating”. That to me is not symptomatic an importer. of a relationship with industry that is building trust in Sara Vaughan: Indeed, if we look at the Committee the eyes of the consumer. We would much rather we on Climate Change, the graphs and predictions that it sit down with the regulator and consumer groups and is putting forward, if we are to decarbonise the say, “Look, what problem are you trying to fix? Is it economy the best way we can do that is by moving to switching?” The UK has the highest switching rates greater use of electricity. Both they, and the of any market in Western Europe; 740,000 people Government’s own modelling, are looking at around switched per month in the fourth quarter of last year. a doubling of electricity use by 2050. I think on that Is it prices? Well, no, because we have addressed basis you have to support the point that Centrica is prices and we have said that UK prices are the lowest making that the chances of us being able to export in the EU 15 for gas. So what is the fundamental issue must be slim. we are trying to address? If we can understand that, John Campbell: I think further integration between working with the industry, I think we can get to a far the UK and Europe will be really important as part of better result for customers than currently we look to the renewables agenda. I think it will increase be headed towards. competition. I think it will increase trading and Sara Vaughan: I think there is a great deal of concern liquidity across European markets rather than the UK, around the way that the probe was presented; some of being an island. I think it ties in very well with the the rhetoric at the time, the suggestions in some of the UK’s policies on renewables. radio interviews, for example, that companies were— David Mannering: I think we also need to bear in and I have a quote here—“making a great deal for mind the trends in the extent to which the energy themselves”. Then, as I say, if you managed to wade industry delivers social and environmental through to the ninth appendix in the second volume, obligations. So, if we look at the growth in you would actually find that the truth of the matter expenditure on energy efficiency measures, for was very far from that. Equally, the figures around example, it has gone from about 200 million a year in some 60% of customers are disengaged; we do not 2002 to about 1,200 million a year currently. When recognise those figures either. They are at odds with we move into the next phase of the energy company our own experience. They are at odds with Ofgem’s obligation, which of course is part of the Energy Bill, own figures at the time of the probe a couple of years it appears that that level of spend may go up further. ago, when Ofgem was saying at the time that around If we look more particularly at the social tariff 75% of the market had switched suppliers. Certainly, support, where, up until April this year, we had a in our own ex-incumbent regions the facts show that voluntary agreement around the support of vulnerable at most 20% to 25% of customers have not switched. customers through preferential tariffs, the first year of I think there is a real underlying problem here which the Warm Homes Discount—the mandatory is: RWE referred to the Warm Homes Discount. One obligation—is 67% higher than the last year of the of the things that the Government is doing is relying voluntary agreement, and that too goes up every year. on energy suppliers to be the agent of government to So I think we need to bear in mind that the scale and deliver some of these decarbonisation measures, and scope of these kinds of obligations is increasing all go into people’s homes, talk to them and fit the the time and is set to increase further. insulation that people need in order to make their homes warmer so they are able to spend less on Q9 Ian Lavery: Getting back to the role of Ofgem, energy. If all we are doing is building up an increasing there has been a lot of criticism focused on Ofgem climate of distrust around energy suppliers—and I from industry. In particular, Centrica say that Ofgem have already said that I don’t think we are good has produced a selective and incomplete analysis of enough ourselves at dealing with this properly—it is the evidence on consumer harm. They go on to cite a steepening the incline on the curve or the hill that we number of reasons. What role does Ofgem have to have to climb. I really think that we need to change play in helping to build consumer trust in the market? that relationship to get to one that looks more like Phil Bentley: The point, for example, we questioned the sort of relationship that we want to have with our was on switching data. Ofgem had said that only 40% customers, which is one of a trusted partnership so had switched. Well, we have already lost 60% of the customers know that what we are trying to do is to market and actually we probably lost more than 80% help them to deal with some of the unavoidable facts and won some back, so that would be an area where that are coming down the road towards them. That is we simply do not agree with what the data say. I think where we would like to move to and I don’t think that for us we would rather work in collaboration with this latest debate is helping. Ofgem and with consumer groups. This is about the Martin Lawrence: Can I build on that because we Retail Market Review. We fundamentally welcome have an extremely aggressive and exciting programme things like transparency, openness, choice and ahead of us around smart metering, which is going to customer innovation. What we don’t welcome is require us to put in 46 million meters into every single forcing a one-size-fits-all that we think will have home in the country? That is only going to be done detriment to customers, and I don’t think we are the successfully if we get the level of customer only ones saying that. engagement that means that they want to have this to As for what we would say to Ofgem, we have had happen to them so they can take control of their rhetoric of the regulator saying, “We have given them energy consumption. To use a phrase that is used a left hook and a right hook and now we are going to elsewhere in this House, we are all in this together. Energy and Climate Change Committee: Evidence Ev 5
11 May 2011 Phil Bentley, Martin Lawrence, Sara Vaughan, David Mannering, Alistair Phillips-Davies and John Campbell
We have to work together with yourselves, with problem in terms of industrial relations or the Ofgem and with the consumer groups, to try and relationship between the industry and Ofgem. This engage our customers. Committee was wondering: how can you work You asked about the comments that Ofgem has made. together to take this relationship forward? It is We don’t think it is very helpful that, for example, interesting to hear Mr Mannering telling Ofgem they are referring to compliance obligations as exactly what they should be doing, but I was evidence of bad behaviour when actually the wondering whether it would be Ofgem that should be investigation is still ongoing. At this stage no telling the industry what they should be doing. conclusions have been reached yet. So we do think Phil Bentley: I think if you look back, the genesis of we need to work together much more effectively and this Retail Market Review was to look at the probe efficiently. that was done in 2008, and have all those John Campbell: I think Ofgem are in a very powerful recommendations been implemented? The truth is, position and I guess there is a danger that their sadly, not all companies have implemented all the statements become a self-fulfilling prophecy. I do not recommendations. That would have been something need to repeat those comments. We are not afraid of that we would welcome Ofgem being pretty robust challenge and ideas, but I think the regulatory about. It is quite interesting and topical that, yesterday framework has to be stable. It has to encourage in Guildford Crown Court, it took Trading Standards participation from us and from customers because we to actually take action against mis-selling. There are have a lot of investment in the UK, not just in retail clear rules on how selling should be done on the but across the whole chain. I think the positioning doorstep and Ofgem should be more vocal, in my statements that Ofgem make have to be of that mind; view, on how that should be done by the industry, so they are a powerful and influential voice in the I think there are opportunities for Ofgem. market. This issue, though, around—we talked about it—the David Mannering: That is not to say that there isn’t single tariff, is the nub of these new recommendations. a role for Ofgem. Ofgem’s Consumer First—sorry, I You can have any tariff as long as it is a single tariff. know they are under review, but that is not what I You can’t have a green tariff; you can’t have a smart meant. Ofgem’s Consumer First review fleshed out meter tariff. These are big issues, because if you can’t some interesting points. So, for example, customers have a smart meter tariff then the benefits of the felt there was a lack of a comparison mechanism for Government’s case for the rollout of smart meters and them to compare tariffs and a lack of a benchmark so time of use tariffs is at risk. That is an example where they could compare their current tariff with the we think they have come up with a clever idea but it suppliers’ alternative tariffs. In fact, the proposals that doesn’t bear witness to the light of what customers Ofgem implemented as part of its probe already deal want and where the Government policy is trying to with those issues. On bills and annual statements we take the industry. I think if we work together and say, already put the annual cost of the customer’s current “What is the problem you’re trying to solve? Let’s tariff. We also provide a comparison to the direct debit work together and we will come up with a better set standard tariff in our annual statements. It was clear of recommendations around single tariff, around pass- from Ofgem Consumer First that customers were through costs, than you get today, in the customers’ looking for more education from Ofgem to help them interests”. understand the market better, and I think there is a role so that Ofgem could do more there. Q11 Ian Lavery: Listening to what has been said, Secondly, there was a great call for Ofgem to run a there is a huge gulf, a huge difference of opinion switching site as a trusted switching site by customers. between Ofgem and yourselves. How can it achieve Maybe Ofgem should look at that more seriously. what needs to be achieved? Also, a key theme that Ofgem’s opinion researchers Phil Bentley: We can sit down and have dialogue. put to it was that it should promote an understanding What we received was a 60-page Retail Market by customers now that PPM prices are not more Review that now we need to engage with and say, expensive than standard prices, which was still a “This works and we support it, but here there are common misconception. I think it is a misconception going to be unintended consequences that do not serve held more widely as well. So there is a great role for the customers well”. We need to work through that. If Ofgem in promoting an understanding of what already Ofgem said to us, “Well, here it is, take it or leave it” exists for helping customers make comparisons and then we would say, “I am not sure this is in the best helping customers understand the market and get a interests of customers”. good deal. Q12 Ian Lavery: Is that what Ofgem are saying in Q10 Ian Lavery: Ofgem have stated clearly that if your view—take it or leave it? there is any industry opposition then they could refer Martin Lawrence: We have had our first meeting with it to the Competition Commission. Mr Bentley Ofgem to discuss this and they were quite open to mentioned before that he would like to work in some of the ideas, making the point that Phil was collaboration—I think those were his words—with making about some of the non-workability of some of Ofgem. I think it was Mr Lawrence who said we are the solutions, which they realise themselves are all in this together. I am not sure if that is the case, relatively high level at this stage. I think the way and I would not subscribe to that view politically or forward is to engage in dialogue, as Phil suggested, to in this room on this issue. There seems to be a huge try and work out exactly the problems they are trying Ev 6 Energy and Climate Change Committee: Evidence
11 May 2011 Phil Bentley, Martin Lawrence, Sara Vaughan, David Mannering, Alistair Phillips-Davies and John Campbell to solve and to come up with solutions that give the Sara Vaughan: I think there is scope to move to some customers what they need. of these things, like a standing charge and a single John Campbell: Looking at the responses, there is unit rate, and also a simplification of terminology. To quite a lot of similarity. Even from people like Which? come back to the question that you first asked: is there and non-suppliers, there seems to be quite an a point in having this discussion? Is there a discussion agreement around the needs for a common language that can be had? Again, I think this comes back to the so that customers can understand prices and tariffs; way that this was presented when it was first understand and compare between different companies. announced and what the facts are. When the I think there is something really strong to work on investigation was first announced I think it came out there. The financial industry has a language that as, “Here are the proposals; they are on the table. people tend to understand, whether it is APRs, and Unless the companies accept them they are off to the perhaps we need some common currency, and I mean Competition Commission and that is that”. As EDF “currency” in terms of language. We think that is said, when we went in and talked to Ofgem they said something that can definitely be built upon, and we these are presented as just some first suggestions, and can communicate better to customers in a way that is they are willing to listen to proposals that we had put easily comparable and allows them to make choices. forward around both liquidity, around simplicity and I think we have work to do within the industry to try around the complexity, so I hope that there is a and make that happen. I think the standardised tariff dialogue that we can have. What I think is also takes us into a completely different market. In our important is that we don’t end up in a situation either view, it could undermine competition and it could where there is a sort of salami slicing of what happens undermine the innovation that we need to address in the market. Because one of the questions we have smart metering, to address energy efficiency and sustainability. been looking at is: how long is it since the probe? David Mannering: One thing that Ofgem is proposing Well, Ofgem always go for, “Well, it is three years is that we translate all non-standard tariff products into since the probe”. Some of the remedies in the probe an equivalent standard tariff format. Now, you can have only been in place—as at the time this document only do that at one particular consumption level and came out—for about eight or nine months. What many customers will not be consuming that level. So possible track record can you have of how those are any comparison they make, between non-standard and working in the market, on the basis of eight or nine the standard tariffs, will tend to cause them to make months? I think that there is a real opportunity here, misleading choices. That seems less helpful than if Ofgem are prepared to listen to us, to work further where we are now, where currently each customer is on this. given information about their annual bill based on their own consumption, so it is not clear that these Q13 Laura Sandys: I am interested that Mr proposals are better than building on Ofgem’s existing Campbell was the first person to mention the third probe remedies. element of this, and that is the consumer. Because I Phil Bentley: I disagree. If you look at a bill—and think you have been presenting very much sort of an this is my bill here—you have so many units, so many Ofgem versus industry, but the consumers do find kilowatt hours at such and such tier 1 rate, then you these bills, as you have rightly explained, extremely have the tier 2 rate. It is complicated. The reason why difficult. I used to work for the Consumers it was done was to cover the standing charge. It is a Association and this has been an issue for years, not bit like line rental in telephone—you pay a line rental just since the probe, but long before that. Do you feel whether you use the phone or not. There are fixed that in many ways responding now—and some of you costs in serving customers whether you draw down are a little bit further ahead in transparency, I power or gas or not. That is what tier 1 and tier 2 are understand—in some ways it is not necessarily you designed to do. There is a high unit price in tier 1 and working with Ofgem but it is you working for the it covers the fixed cost; then you drop down to a lower consumer groups and working it from their tier 2. It is hugely complicated. Everyone has a perspective? Because ultimately otherwise it is very different tier 1/tier 2. Everyone has a different trigger much an industry costing base, rather than a consumer point at which it falls. I think those are areas where understanding and comprehension base. Do you feel you want to go down the street and say, “What are that you are doing— you paying for your energy?” and everyone says, “I David Mannering: We are doing that. Consumer know exactly what I am paying for my energy”. Today, people don’t. We would welcome that type of Focus made some helpful comments on our annual transparency provided there were choices and it is not statements, which we have taken on board and we one-size-fits-all. That is our issue. have improved our annual statements as a result. Martin Lawrence: It is for exactly that reason that in my company we got rid of these two-tier tariff bands. Q14 Laura Sandys: Mr Mannering, you were saying We have a single unit price for electricity with a in particular that Ofgem is the organisation that should standing charge element, going back to what used to come up with the benchmarks and the criteria. In be done in the old days, but actually there is some many ways that is not the right person, and it is really merit in the structure. It is a structure we are used to for the industry and the consumer groups to work in the telecoms industry, so I think there is something this through. to work on there. Phil Bentley: We absolutely agree with that. Energy and Climate Change Committee: Evidence Ev 7
11 May 2011 Phil Bentley, Martin Lawrence, Sara Vaughan, David Mannering, Alistair Phillips-Davies and John Campbell
Laura Sandys: In many ways it strikes me that there Alistair Phillips-Davies: Well, sorry— has been quite a lot of complacency over many years, even long before this probe was announced. Q17 Chair: Answer the question. Phil Bentley: I think there is a huge amount of Alistair Phillips-Davies: I don’t think there was any consultation with Consumer Focus, with Which?. suggestion that the agent had lied to the customer. They make their opinions clear on clarity of billing. What there was was a ruling where the jury thought British Gas happened to come out at the top. Part of that there had been a misrepresentation in a script. the reason for that is that we have a customer panel of all our customers who are feeding in all the time Q18 Chair: A misrepresentation? That is Scottish what they want to see. They would like to see us and Southern Energy’s word for a lie, is it? getting rid of tier 1 and tier 2 and we will work to do Sara Vaughan: I think this point about selling on that. Now, we want to make sure it is in their interests doorsteps is an incredibly important one. We and and not something that is forced on them that is not British Gas are the only companies who are not being what they want. We are working with Consumer investigated by Ofgem for mis-selling on doorsteps at Focus. We asked them the top 10 things they would the moment. That doesn’t make me complacent. What like us to fix and we will work on it. As an industry, that makes me do is it makes me look at the we might be in slightly different places but the technology that we use, which is pen tablet direction of travel is the same, which is: if we don’t technology, which is like a small, handheld computer. give customers good value and build trust, all of the People can actually see the workings out and the tariff future exciting opportunities about the way the energy in front of them, being worked out on the computer. industry is changing, we run the risk of losing their They can get a printout and they can take it away. If support. So we are absolutely putting the customer at our agents cannot find a saving for those customers, the heart of the business. they will walk away, unless a customer wants to Martin Lawrence: Can I give an example if I may? switch for reasons other than price. One of the biggest complaints we get from our Phil Bentley: I think that is the key because there is customers is around estimated billing and the fact that, absolute transparency on the doorstep. With the pen in the absence of smart metering, we don’t have tablet you put in the actual consumption, press the regular records of what people can do. Most of us button, it says, “You will save—”. “Oh, it is only 20p. have invested in systems now that we can allow our I am not going to switch for that.” You can’t just walk own customers—and I would encourage you to all do in, which some companies do, and look around the the same—to tell us every month what their meter house and say, “Oh, you will save £400 here”. There reading is. They can call us on the 0800 number, which is free, or go on to the internet and type it in, is no basis for that. The Ofgem probe said we should and we will bill them against their actual move to clarity on pricing on the doorstep and that consumption. hasn’t happened. That is why four companies out of six have been investigated. That would be an example where I think Ofgem could have been more assertive Q15 Chair: That is about consumption; it is not in ensuring the standards are upheld. about the tariffs. Is it not the case that the complexity of the tariffs has led to the situation where one of you was using sales agents who lied to the customers Q19 Chair: Let us ask the other three companies in about the situation and you were convicted yesterday? that case: are you also expecting to get convicted quite That couldn’t have happened if the tariffs were soon of lying to your customers? understandable, could it? Martin Lawrence: No, we are not. Alistair Phillips-Davies: I will take that because obviously the very disappointing result we saw in Q20 Chair: Hand-on-heart, you are quite confident court yesterday was against SSE. Eight of the 10 that no conviction will take place of any of your charges were dropped, but disappointingly two of agents? them were upheld. I don’t think it was anything to do Martin Lawrence: We are not expecting to be with tariffs. What it related to was specific items in a convicted of lying to our customers. We have also script, where people had only looked at part of a sales made the investment, which was described here, in process, and we will obviously look at our legal new computer technology to ensure that we can give options to appeal against that and all the rest of it. We the most accurate reading to customers during have obviously had Ofgem look at us on a number of doorstep selling as well. occasions, around our sales process. They have never taken any enforcement action against us over a Q21 Chair: You are completely confident that number of years. As a company we have offered some everyone who goes out trying to sell on your behalf of the lowest prices and, indeed, over the period when is not misleading their customers? this action was taken we offered the lowest or the Martin Lawrence: Absolutely. second lowest price in the UK. We offer the highest John Campbell: Yes, we are in the same position. We levels of service and we have the lowest levels of have put a lot of effort into improving the processes, complaints in the UK. automating the processes, putting in better supervision, better control, and we are working with Q16 Chair: If you are offering the lowest price, why Ofgem on the investigation. I don’t know what the do you have to use agents who lie to the customers? outcome will be, but I am confident that we as a Ev 8 Energy and Climate Change Committee: Evidence
11 May 2011 Phil Bentley, Martin Lawrence, Sara Vaughan, David Mannering, Alistair Phillips-Davies and John Campbell company have taken all the actions that are only speak on behalf of SSE. We offer base salaries appropriate. and a commission structure on top of that.
Q22 Chair: So there was some lying in the past, was Q27 Laura Sandys: What percentage is there, which you have now put right? commission? Or would you be able to provide all of John Campbell: I am not saying there was lying in that to the Committee? the past. Alistair Phillips-Davies: I think I would rather come back. I can give you a breakdown of sales staff that Q23 Chair: What are the improvements? What was we have and show you. For some of them it might be wrong? What did you find out that your selling agents 40% or 50% of their wages; for some of them it may were doing that you have had to improve? be even higher levels because some of them can earn John Campbell: For example, the tablets that have £10,000 to £20,000. We then top that up. been talked about, we were using tablets but not Laura Sandys: Very interesting information. 100%. We are moving towards that; I think we are over 90% but we will have 100% use of tablets. That Q28 Chair: I read in the papers in the last few days means that information is controlled rather than using something about Lloyds Bank having to pay quite a paper-based forms, and so on. Better supervision, lot of money back for selling products that customers better training and general tighter management and did not need. Do you think we should be control of sales agents: we have put a lot of effort into recommending to the Government that now we need sorting these issues out. The investigation continues to investigate the energy companies for the same and what comes out of it will come out of it, but thing? It sounds a bit like it to us. If you have guys meantime we have addressed all the issues as best out there incentivised to lie to customers, to sell them we can. products that are going to be more expensive than the David Mannering: I would point out that tablets are alternatives, that sounds to me like quite a serious not the panacea; they are not the Holy Grail. They issue. help, but in addition you need to be comparing your Phil Bentley: Why don’t you wait for Ofgem to offer against the existing tariff that the customer is on. complete their studies? They are in the middle of a If you are not comparing against the right tariff, then process and you have Ofgem coming back to this you will not get the right comparison. So they are not Committee in a couple of weeks, haven’t you? Ask a complete answer to giving the customer the exact them at that time where they are and where they think saving that they will make. I would point out that they are going to get to, and then take action if you npower is the only company that has a complete don’t think they are going far enough. validation process, where every aspect of the sale is independently verified by an independent call centre. Q29 Chair: I think if we have a responsibility to We believe that is the way that we are giving consumers, we ought to try and put a halt to this rather customers the most reassurance that they are being soon and pay back the money that you have taken sold to properly. from them, which they should not have paid. Phil Bentley: I am not trying to defend mis-selling, Q24 Chair: None of your agents is lying to your but the problem when people say, “Well, I switched customers or anybody else’s customers? and I did not get the savings I thought”, that is because David Mannering: One can never say that there is not in that time, subsequent to their switching, the whole the odd rogue agent. I am not going to pretend to you of the industry prices went up. that there isn’t, but we— Q30 Chair: They switched because one of your Q25 Chair: So you are expecting a conviction soon, agents lied to them about the prices. That is why they are you? switched. That is the problem. Okay, that seems to David Mannering:—are doing everything in our go unchallenged. power to put in place the training, the processes and Phil Bentley: No, it is not true. the auditing, to make sure that it is rooted out if and Alistair Phillips-Davies: Sorry, we do not set out to when it ever happens. lie to customers or mislead them. We all compete on price. People can go on the internet and decide which Q26 Laura Sandys: Can I add to that: first of all, Mr price they want to take. Equally, we can go to the Bentley’s point that Ofgem should have been more doorstep. Some people provide it via tablets. We proactive in controlling your mis-selling, I think it provide a written confirmation that we leave with the sounds like the policeman should be there following consumer there and then as to what we believe the the burglars around. It is for them to find whether you savings to be. If they don’t think that is true they can have mis-sold, but it is not for them to anticipate that come back to us on that. We also offer some of the you are mis-selling. That is your responsibility. most attractive prices, plus some consumers decide The second point I would like to ask is: how much they don’t like the energy company they are with, are your salesmen on the door incentivised to make a because they don’t offer the services or other things switch? Or are they not on incentives or not on sales that they need, and they decide to switch for a variety incentives? of reasons. Some of us may decide to shop at Alistair Phillips-Davies: I would imagine most of us Sainsbury’s or Waitrose rather than shopping at Lidl. here operate some form of commission structure. I can There are all sorts of reasons why people make Energy and Climate Change Committee: Evidence Ev 9
11 May 2011 Phil Bentley, Martin Lawrence, Sara Vaughan, David Mannering, Alistair Phillips-Davies and John Campbell decisions, but we do not set out to lie or mislead buy a major product from somebody who came consumers in any way. Therefore, if you want to knocking on your door? launch an investigation, well, that is obviously up to Alistair Phillips-Davies: I have bought products from you, but we do not set out to lie and do anything to people who have knocked on my door. consumers to try and mislead them. Chair: The competition between Tesco and Waitrose Q35 Barry Gardiner: Of what value, Mr Phillips- is rather clear, isn’t it? I don’t go into Tesco and find Davies? a little sign saying, “Actually, you could buy this more Alistair Phillips-Davies: What value? expensively in Waitrose”. Barry Gardiner: Maybe somebody coming round with their local charity tea towel or something— Q31 Dr Lee: Since you changed your script, as you brushes—but I mean do you buy your home insurance have admitted that you have changed at Scottish & on the doorstep? Do you buy your car insurance on Southern Power your—how shall we put it—script the doorstep? Would you buy your mortgage on the incentive you are selling, you have reviewed the doorstep? In terms of major purchases, why are you actions of the people on the doorstep and you have on people’s doorsteps? been convicted of mis-selling. Since you have Phil Bentley: I think it is a good question. I think the changed those scripts, have you seen a reduction in issue is the choice of energy supplier can often be a switching? Have you seen a reduction in business as low interest category for people. You don’t suddenly a consequence? wake up one day and think, “I know, I will change Alistair Phillips-Davies: I think switching level is as energy supplier”. high now as it has ever been. As a company we like Barry Gardiner: Just like home insurance, Mr switching. We have obviously gained a considerable Bentley, just like your home insurance, just like your number of customers on the back of the prices, the car insurance— price promises and things like that that we have had Phil Bentley: Let me answer the question. over a long period of time. Barry Gardiner:—you go there, you do it online and you know you have to do it once a year and you do it. Q32 Dr Lee: You have seen no increase in Phil Bentley: 17% now are switching online, so a lot commission payments to your chaps on the doorsteps of people are choosing to go online. Take our sales since the change? Clearly, you have changed your force, British Gas used to have a doorstep sales force script in terms of how they sell. Have you noticed any of around 1,200. Today it is only 300, so it is less and changes in commission rates? less an important channel. Alistair Phillips-Davies: We have changed our script any number of times over the last 10 or 12 years, as Q36 Barry Gardiner: The answer to my initial we have moved forward, and you would have to go question is: not one of you has or would or would through and track those things. I think what we have recommend that your children should buy this product seen is switching rates are more dictated to by times on the doorstep. Think about that and think about when people adjust prices, and whether you have seen disbanding your sales forces. prices going up or down, and how much awareness Sara Vaughan: I don’t disagree with the point that there has been in the press. Those sorts of things have you are making. If I could give you a bit of history, driven volumes, plus whether you have seen we did actually reduce massively our sales force, our significant offers and discounts offered on the internet, door-to-door sales force, a few years ago. and things of that nature. I think those things have had a much bigger impact on switching levels. Q37 Barry Gardiner: Where have you targeted it now, Ms Vaughan? Have you not now targeted at the Q33 Dr Lee: Which begs the question: why were you poor and the most ignorant people in society, the ones using the script in the first place then? you feel are most susceptible to doorstep selling? If I Alistair Phillips-Davies: We want to control the received a profile from you of where your agents have people we have out on the doorstep. Unlike the other been going and I mapped it against the data, would companies, we have a script that you can see, which that not show me exactly what I have just said? you will not see with most of the other companies. So Sara Vaughan: My CEO is on record before this if you want to audit that script you can, and when Committee as saying that he would love to be able to Ofgem has come forward and said, “We would like to do away with door-to-door sales. know how you are training your people and what you are doing with them when you put them through the Q38 Barry Gardiner: Answer my question, Ms programmes, what you are asking them to say?” we Vaughan. Answer the question. Will you provide do have something there. That was one of the me— safeguards we put in place to try and ensure that we Sara Vaughan: I will provide you with that. do root out rogue agents. It doesn’t always happen, Barry Gardiner:—every one of you, provide us with but at least you can see what we have said, which has the areas that your sales force go into and target? We not been the case for long periods of time with other will then match that against the social data and then companies in the industry. we will see who is right. Phil Bentley: We actually do that, so I can tell you Q34 Barry Gardiner: Have any of you, or would now our sales are less than 30% to those people you any of you ever yourselves, or advise your children to are indicating, because frankly— Ev 10 Energy and Climate Change Committee: Evidence
11 May 2011 Phil Bentley, Martin Lawrence, Sara Vaughan, David Mannering, Alistair Phillips-Davies and John Campbell
Barry Gardiner: It is who you are targeting, not yesterday what we said is, “What you need to do is where your sales are. look at something like an APR model where you can Phil Bentley:—a lot of people often switch heavily, say, ‘There’s a price and there’s a set of benefits’. so they churn all the time. A lot of people are living There is a clear unit price there and then there is a set in rented accommodation, and so they move all the of benefits on the side”. Having that sort of time and leave a final bill and final debt. So it is not consistency and transparency we are absolutely happy commercially that attractive to target those people that with, but there are unintended consequences: the fact you say we target, and that is why we don’t. that they would suddenly be presiding over a regime where we have created a competitive market that has Q39 Sir Robert Smith: We have touched a lot on been admired throughout the world for a number of this whole tariff thing. I think the most depressing things that it does well and then we throw all that thing for me is that this doorstep selling thing has away, seems very odd. been around for an awful long time as a problem area, An additional one would be smart metering. You and still seems to be one. I think the other depressing would have to look all over again at the whole thing was talking about going back to a tariff of a economics of smart metering, because forcing us fixed cost and a unit cost, which you all broke away down a single tariff route would probably mean that from. Do you accept that there must be suspicion we couldn’t have tariffs in place that would get people about a market where there are so many tariffs around engaged in smart metering. It is obvious, from the but it is not really about finding lots of little niches, it evidence we have seen in Italy and California, that is about an element of complexity that makes engagement of customers is critical if you are going comparison difficult? to get the reductions in usage and, therefore, bills and Alistair Phillips-Davies: We can understand exactly carbon that people want out of smart metering. what you say, but in this country we sought to Whether it is worth us spending any money on smart introduce a market where there was competition, metering I would call into serious question if you go where people would innovate to try to offer different down— tariffs. We went through in the last few days, in the David Mannering: In addition, if Ofgem specifies the run-up to this, what sort of tariffs SSE offer. There are fixed charge element, the standing charge element, a couple of tariffs that we offer around energy saving there is a significant risk that that will not match up or reduction. There are two or three tariffs that we with companies’ own fixed costs, in which case the have offered around green; one of them has been unit cost will have to adjust for that. You have the discontinued now. There are four or five where we potential for high consumption customers—some of offer things around rewards, such as M&S, AMRs and whom are going to be vulnerable customers with things of that nature. Then there were two or three larger families—cross-subsidising low consumption standard tariffs. On top of that there are some historic customers. Overall, it is not clear that that is in heating tariffs as well. customers’ best interests. It is also putting companies I think one of the key issues about Ofgem’s proposal in a position where if they are not sure they have more is that going to a single tariff would remove an awful risk about recovering their costs that needs to be lot of competition and innovation from the market. I reflected in the margin that they need to earn. That think it would potentially confuse consumers because again is not in customers’ interests. So putting tariff we would have to communicate to them why we have structures into a complete straitjacket is not moved them from the tariffs that they were on, that necessarily in customers’ interests. they had chosen to be on. We have 3 million-plus Phil Bentley: To be clear, there are two elements of customer accounts for customers who have chosen to what Ofgem are proposing. There is a variable tariff, be on tariffs that offer them particular rewards and an evergreen tariff, and they are saying you can only benefits or where they can give money to charities, have one. We are saying, “Open that up”. We only such as the British Heart Foundation. Therefore, have five tariffs anyway, so it is not that big a deal. moving to that regime seems odd. On the heating Then they are saying, “The only place you can have tariffs that we have, we would also maybe competition then beyond the floating tariff is fixed significantly affect customers’ bills where they get price, fixed term”. It is like saying to somebody, “You switched back to— have to buy all your petrol from BP for the next 12 months at this price and that is what you are going to Q40 Sir Robert Smith: Are they saying you can’t pay”. The reality is: the purchase of energy, buying it have those tariffs but if you do have those tariffs they forward you always pay more for the forward than have to be renewed? you do today, generally. So, if you are going to have Alistair Phillips-Davies: Yes, okay. If, let’s say, you a fixed price deal I am going to think, “Well, the price were a relatively elderly, vulnerable person in some of energy is going to go up, I am going to charge you housing scheme where you have electric heating, for more for that fixed price deal because there is risk. instance, and you failed to renew that tariff, you There is a risk you move house, there is a risk you would probably see your bill jump by 50% the switch tariffs. I have to buy that energy forward and following year because it doesn’t take any account of the price is higher”, so an unintended consequence some of the heating tariffs. There are an awful lot of again. Ofgem have this view that they want to move unintended consequences here and—as Scottish 80% of all customers on to fixed price, fixed term Power said earlier—surely what people are looking tariffs and that is not what research tells us customers for is transparency. When we went into Ofgem want. They want choice but they don’t want to be put Energy and Climate Change Committee: Evidence Ev 11
11 May 2011 Phil Bentley, Martin Lawrence, Sara Vaughan, David Mannering, Alistair Phillips-Davies and John Campbell into one size on the floating or a fixed price that is Q42 Sir Robert Smith: What is happening next? likely to be higher for them. I think that is a big You have had an initial meeting? mistake. David Mannering: I think the point is that, as other discussants have made the point, the Ofgem proposals Q41 Sir Robert Smith: What have Ofgem said about are currently at a very high level and they those who use off-peak heating? acknowledge that there are some difficult issues that Sara Vaughan: They don’t actually talk about them. need to be resolved. I can only speak for npower. We When we went to them and asked what was the are going in to see them next week to discuss some proposal in relation to Economy 7, there was a sort of those issues, to try and understand what their of, “Oh we haven’t thought about that”. It is not proposals mean in more detail and try and explain to them some of the difficulties we see with them to see mentioned in the document. if they can be made workable and overcome some of We have been talking to consumers about what they the problems. want in focus groups, as we do with all of our Martin Lawrence: The process you asked, going products that we put forward. Before we bring a new forward: we have been through this first initial product to market we always talk to consumers about meeting. We had a very open and frank discussion. it and get their feedback on it. I think there is quite We pointed out some of the unintended consequences high support for a common language, which I think referred to earlier if these policies are implemented: has been talked about before to reduce the complexity; the issue around, for example, Economy 7, which isn’t also potentially some more clarity around the standing adequately covered in the proposal, let’s say, at the charge, one rate, two rate piece. There is a very strong moment. We have had a first look at them. Now we dislike of this being forced to choose the end point, see a more detailed meeting between the subject- where people are actually required to act in order to matter experts. Then we are going to go back again in keep something that they might want and be very the summer and have another conversation with them. happy to have. One comment—and it is obviously a Presumably, at that point they will meld and listen to purely anecdotal comment—was that the proposals all the participants and come up with a more that Ofgem put forward seem to be designed to make coherent solution. life uncomfortable for consumers. This was feedback from a consumer focus group. I think you still have Q43 Chair: Let us move on to the wholesale markets the complexity that we have talked about, in terms of for a bit now. Do you agree with Ofgem that low a number of different fixed price/fixed-term products. liquidity in the wholesale market prevents new entry So you are not actually doing away with that, but what into the sector and therefore reduces competition? you are doing is you are introducing this additional John Campbell: I think the issue for new entry is step, when people are being forced to make a decision more about contestability than liquidity. We would as to what they want to do. The feedback we have had like more liquidity. It would improve the market, for to date is that that is not landing well with consumers. example. The other companies are in a similar John Campbell: The process of moving the market position. We trade four times the energy that we from the current structure to this new tariff structure consume. One of the big issues we have experienced would have big implications. There are going to be with smaller suppliers and generators is access to an winners and losers from the current tariff set-ups. understanding of the market credit terms, the There are going to be huge administrative costs. There administrative issues around managing energy and are going to be huge data management issues. We balances. Our response to that has been to identify a would have serious concerns about a market that has way of introducing products and trading arrangements been evolving. We would have serious concerns about that are much more suitable to small players: smaller trying to suddenly change its structure in such a clip sizes of energy, introductory credit terms and material way. In fact, it is not just us saying this. The management of some of the complexities on their response from Consumer Focus picks up, if you don’t behalf. I think what Ofgem are proposing on this front, in terms of market-making arrangements, can mind me quoting a very brief line, “The difficulties of build on that work and we would support that as the moving the majority of energy customers on to new key issue, in terms of making the market more tariffs, when several of the major suppliers are moving contestable on the wholesale side. their billing systems, should not be underestimated”. In terms of liquidity, we do have a concern about I could go on with a whole range of other points that auctions. We have a concern about how that would they make. interact with electricity market reform and we have a David Mannering: In one of Ofgem’s documents they concern from our own company’s experience in other cite some research by Ofcom that concluded that what markets that auctions can be detrimental. We do have customers really want to know is their annual bill and a concern there but are very supportive of market- they are not so interested in the individual tariff prices. making arrangements being built upon to encourage Yet Ofgem already has a remedy along those lines and all of us to open the door a bit more to smaller new it has not sought to communicate that to customers or entrants. to build on that. It is moving more to the kind of David Mannering: RWE was instrumental in setting prescriptive individual tariff approach that, as its own up N2EX, which is an exchange—I don’t know if you document acknowledges, Ofcom found was not are familiar with it—that has been going since the preferred by customers. beginning of 2010. We would hope that Ofgem would Ev 12 Energy and Climate Change Committee: Evidence
11 May 2011 Phil Bentley, Martin Lawrence, Sara Vaughan, David Mannering, Alistair Phillips-Davies and John Campbell participate with the industry in establishing our retail business or the relative size of our retail arrangements to build on that existing exchange business. Indeed there are many generators who are arrangement. We think that has the potential to meet not represented by companies in this room today. the needs of new entrant participants to have the kind Furthermore the requirement, as postulated, to sell of access to prompt forward and intra-day trading to shaped products forward into the future, we don’t change the hedging profiles that they need. have those today and it is very difficult for us to sell If one looks at the trading volumes on N2EX they something we don’t have and be mandated to do so. have been absolutely exploding in recent months. The David Mannering: One of the issues for market graph shows an exponential increase, particularly participants is the amount of collateral that they need since about July/August last year and every month is to put up against the trades that they are doing, and if showing a bigger increase compared with the previous you do it all in one place then you can net off the month. We are very optimistic that—if Ofgem will collateral that you need. So one trade that you have work with us—we can develop that into providing done can be netted against another trade. If you do it what Ofgem is looking for, rather than Ofgem in a completely separate arrangement then you can’t establishing separate proposals that will suck liquidity make those nettings off, you can’t make those savings, out of the existing market arrangements that already and in a separate arrangement you would need exist, and compete with and frustrate the collateral for that trade alone. That is another reason developments that are taking place. There is a meeting for trying to work with the existing arrangements of the Market Council that Ofgem participates in—I rather than setting up some competing forum think it is either this week or next week—and we are Martin Lawrence: I also think it is a myth that very much hoping that they will work with us to liquidity in this market is the single barrier to entry develop those arrangements. for new entrants. There are many other very important Sara Vaughan: I think it is important to build on the things out there: access to credit we have talked about; arrangements that we already have in place through huge investment in systems required to deliver N2EX, rather than trying to introduce new customer solutions; the fact that many of us don’t arrangements to fragment liquidity. One of the things make an adequate return in this business. There are that the Market Council of N2EX looked at, at the many other barriers to entry other than purely this previous meeting that they had, was this point that liquidity piece. was raised by Scottish Power about smaller clip sizes. Phil Bentley: I think that is the key point to exercise They are looking to reduce the minimum clip size in because I think, yes, the margin: there are probably a day-ahead auction from the current size, which is 1 things that the industry would work with Ofgem to megawatt down to 0.1 megawatts, which will make it improve liquidity on, but it will not, in and of itself, easier for new entrants to come in and to trade on that encourage new entrants. What will encourage new market. This is an exchange, it is not something we entrants will be margins that are attractive. Even control but it is something that we participate in. We Ofgem admit that retail margins are not attractive and were one of the founder members on it. I do think it the huge balance-sheet requirements small companies is very important to work with that market. simply cannot finance. That is why the industry is not Ofgem is proposing a mandatory auction as one way getting new entrants because of those two in which liquidity in the market can be increased. I fundamental reasons. The market liquidity will not think that if you work with the market, with what is fix that. there already, and perhaps look at putting any John Campbell: There is financial regulation, both mandatory auction arrangements around the existing UK and European, like MiFID, which is driving a day-ahead scheme under N2EX, then that could work very significant requirement across companies who quite well. That could equally work in the context of are trading futures products. I am not suggesting it is electricity market reform where one of the things that wrong, but for smaller companies it can be quite a is needed, in order to get a contract for differences in significant barrier because, even for companies like place to support investment in new, low carbon ourselves, it is carrying potentially very significant generation, is a strong and robust reference price. That administrative and financial implications going could be a double-whammy, where you can get the forward. So these things are part of the issue as well, reference price through N2EX and you can also help not just the simple issue of liquidity. increase liquidity in order to help new entrants come into the market. So that might be something that Q44 Chair: Would N2EX work even better if all six works well together. But what is important is that we of you were in it? don’t end up with lots and lots of different John Campbell: Can I point out that in our response interventions that then give rise to fragmentation of that was made it was highlighted that we were not liquidity, and something that doesn’t either meet the participating. We have participated in that exchange bill for EMR or give small players what they need in since July 2010, among a number of other exchanges order to get into the market. that are operating in the UK. N2EX is one of several Martin Lawrence: The idea that Ofgem can also fix ways of trading energy and we do trade on that, just reserve prices or bid/offer spreads, and so forth, is I to correct the statement. think potentially very dangerous, as it could reduce liquidity rather than increase it. Also their proposal Q45 Chair: Would it work better? looks at an obligation on us to auction up to 20% of Alistair Phillips-Davies: I think if we got more our generation capacity, which has nothing to do with participants trading on there. There are three large Energy and Climate Change Committee: Evidence Ev 13
11 May 2011 Phil Bentley, Martin Lawrence, Sara Vaughan, David Mannering, Alistair Phillips-Davies and John Campbell generators in the UK that are not vertically integrated. Q47 Barry Gardiner: Now that you are providing They are not represented here today. So that would separate supply and generation information to help. Then finally, the end-users or the smaller users Ofgem—they are demanding that—some of you who claim that they want access to the liquidity that I excluded significant profit elements from your 2009 think a lot of us provide—with the comments made segmental results. Could those of you who did exclude here from colleagues who provide flexible products to that profit element from the segmental results firstly, these individuals, and we deal with a lot of the own up to it, and secondly say why you did so? counter-parties—if they came in and traded on that Sara Vaughan: I am very happy to go first on that. I market that would give them access to what they think we were attributed with an amount of £81 wanted, and it would work with Ofgem to try and million, which it was suggested had not been properly improve access to N2EX for those people. I think it allocated. We talked to Ofgem about this over the is these smaller players who suffer the difficulties that telephone recently. They agreed with us that it could have been summed up by the other companies here, all have been cleared up by a phone call—if they had who seem to be the ones who think there isn't enough made one to us—before they published their liquidity in the market. I think we all trade very document, because £56 million of that related to profit significant volumes of electricity every day and are on the sale of a power station in Turkey, which should happy to trade with anybody who is a credit-worthy hardly be put down to supply or generation in the UK. counterparty. Equally, the remaining £25 million was neither attributable to generation nor to supply, which they Q46 Chair: Would a ban on self-supply improve agreed with us. liquidity? I think it is unfortunate the way that that document Sara Vaughan: Sorry, could you repeat the question? came out. I think it was unfortunate that it appeared in The Telegraph before it appeared on Ofgem’s list Chair: Would a ban on self-supply improve liquidity? of documents. I think it was unfortunate that they Sara Vaughan: Again, I think that picks up on a didn't pick up the phone and speak to us about it. We misunderstanding about the way that many of us are completely confident that we properly allocated operate our businesses. We have a completely separate between generation and supply and that we didn’t hide trading business that is based out of Dusseldorf. That any profits that should have appeared there. trading business sells all of our generation in the Phil Bentley: British Gas is the only company that market and buys more supply business in the market, produces its statutory accounts and its external and it broadly optimises each of those positions accounts and Ofgem accounts, and they are all the separately. Our generation business is about 29 same number. So all we would say is: we encourage terawatt hours; our supply business is about 48 everyone to do the same thing. Then there is absolute terawatt hours, but our sales of electricity are 108 transparency and you start to build some trust again. terawatt hours and our purchase of electricity is 122 Martin Lawrence: Our numbers are totally aligned terawatt hours. So we are not matching one off against with corporate accounts and statutory accounts. The the other—we are optimising each position separately. one-line item that we highlighted at the time was There isn’t a self-supply going on. We have a trading accounting— business that is trading everything out there. Barry Gardiner: Sorry, the one-line item that— David Mannering: RWE operates a very similar Martin Lawrence: That we highlighted at the time model. was an International Accounting Standard IS39, which Chair: What about the rest of you? tells you how you treat derivatives. So that is John Campbell: We do as well. We traded 112 something that Scottish and Southern and British Gas terawatt hours last year. Our retail needs were about do in their accounts as well. That is the only item that 25. Our generation business is not there to meet our was misrepresented as being an attempt to conceal half-hour by half-hour customer needs. There is a big numbers, which was not the case. and quite liquid market in between. We utilise that David Mannering: We sent Ofgem a complete market and we trade much more and we provide much reconciliation between RWE group number and the more liquidity than we take out. UK Gap numbers— Martin Lawrence: We do the same thing with a similar model. That is why we are very open to any Q48 Barry Gardiner: When was that taken? scrutiny of our segmented accounts, which we David Mannering: This is after— published as part of this requirement of Ofgem. We Barry Gardiner: This is after you had supplied the are using actual market prices to manage the relative initial information, yes? interfaces between the companies, so I suspect it is a David Mannering: I think this was before we similar situation elsewhere. published our results on the web, but after we had had Alistair Phillips-Davies: I think if you look at the an initial discussion with Ofgem about what we were statistics, most of us trade significant multiples of going to publish, and we explained the difference, what we generate. In the first four months of this year, absolutely. Most of it was due to a different pension we traded nearly 120 terawatt hours of power. Over treatment that we put in our public statement. Another the period of the next two to three years on an annual element was to do with one number including basis our total generation is between 40 and 50 amortisation and another number not, which we terawatt hours, so in four months alone we probably included in our public statement. Almost all of the rest traded that generation three times over. was due to the fact that some of the numbers in the Ev 14 Energy and Climate Change Committee: Evidence
11 May 2011 Phil Bentley, Martin Lawrence, Sara Vaughan, David Mannering, Alistair Phillips-Davies and John Campbell legal entities are not related to generation or supply at trade, banks trade, you know, it is trading the flow of all, and therefore ought not to be included in the your requirements of production and supply. segmental statements that we put on our website. Sara Vaughan: And managing that risk.
Q49 Barry Gardiner: Ofgem have agreed to all of Q53 Barry Gardiner: Why could you not do that in that? her method: you could buy lower, sell high— David Mannering: Yes, Ofgem fully understands all Phil Bentley: Because we are competitors and we of those points. So, as far as we are concerned, we are think we are better traders. very puzzled if there was any suggestion that we were Sara Vaughan: And we disagree. trying to understate our profits because that is John Campbell: It is also the activity that is driving absolutely not the case. the LNG supplies and the investment that is required; John Campbell: First of all, the statements we put out it is also the activity that is enabling the huge are fully reconciled to our statutory UK accounts. I investment in LNG; it is the activity that is enabling think there was a suggestion again in some papers that the physical delivery of coal to the UK; it is the because some of the companies are not UK Plcs that activity that is helping build the business case for somehow UK accounting rules do not apply. That is them to connect us with Europe. The commodity not the case. We have statutory accounts. What we trading market is a global market, it is a European submitted was fully reconciled to those and it market and it is the lifeblood of the industry. represents the profits that are related to the generation and retail businesses. The things that I think you Q54 Ian Lavery: On transparency, Ofgem have might be referring to would be commodity trading- readily accepted that a lot of progress has been made related issues, which could be losses or profits and are in terms of transparency since the 2008 probe. They not driven by the activities of retail or generation. are seeking more clarity and more transparency now. There are market-based proper trading arrangements, I think looking at what we have there has been an proper market-driven price relationships that apply to adverse response from industry. How do the levels of those businesses that we think are fair and we are very transparency in the UK compare with the happy to discuss with Ofgem. requirements from international competitors, Alistair Phillips-Davies: We are a UK-quoted Plc. We particularly those in Europe? have statutory accounts. When we produced the set Martin Lawrence: Which particular transparency are for the generation of supply accounts they were fully you referring to? reconciled in the statements that we put out in our Ian Lavery: What I am asking is: there are obviously statutory accounts. I am not aware of any ambiguity, levels of transparency required. Ofgem have been but I am happy to deal with anything afterwards if particularly happy with the progress made since the somebody thinks there was something. 2008 probe but, comparing the levels of transparency in the UK to the levels of transparency with the Q50 Barry Gardiner: In the previous question that competitors in Europe, what is the difference? the Chair was asking, many of you said that you have Phil Bentley: I think the question is: is the a separate trading entity. It is the quote that you have transparency now required from Ofgem higher than given us before, Ms Vaughan, about how you have the transparency in the rest of Europe? The answer is: this intermediary. You have this intermediary, does absolutely, yes. There isn’t anything like the that mean that you would be equally comfortable to transparency reporting generally in Europe. That is move into more of a pool arrangement where the because you don’t have competitive markets there; intermediary is a third-party intermediary, or the you don’t have the same requirements to disclose; you system operator provides that pooling function so that don’t have the same regulatory scrutiny. It is a very the trade goes into there? Why do you have to control different market. The UK is—coming back to the that intermediary? Is that not just another place to be point—the most competitive market; it is the most able to hide your profits? open market and it is delivering the lowest prices for Sara Vaughan: It is a European trading business. customers and we should be thankful for that.
Q51 Barry Gardiner: Sure, but you own it. Q55 Dr Lee: If we go back to your relationship with Sara Vaughan: We performed a strategy review—I your customers, the memo to this Committee from can’t remember exactly when it was, three or five Consumer Focus states its own research in February years ago—and looked at the market, and the market this year that only 46% of consumers remembered looked to us as though it was going to a European receiving an annual statement; of those who integrated market with trading occurring across remembered 79% found it easy or fairly easy to Europe as a whole. understand, but only 25% of these consumers took any further action, such as comparing the price or Q52 Barry Gardiner: You are controlling that switching supplier. How do you test the clarity of your trading platform. statements and other communications with your Phil Bentley: Of course you would, because you customers? would hope you do a better job than your competitors; John Campbell: We call it “voice of customer”. I am that you buy low and you are selling high. You are sure other companies have a similar approach, but we providing liquidity into the market. It is a key activity use extensive customer surveys and customer and any commodity-based company: BP trade, Shell interaction to design all these bills. They are Energy and Climate Change Committee: Evidence Ev 15
11 May 2011 Phil Bentley, Martin Lawrence, Sara Vaughan, David Mannering, Alistair Phillips-Davies and John Campbell completely driven by what customers want to see and Q56 Dr Lee: Is there information you would like to based on live, real customer research, face-to-face, not see removed? You say some of it is mandatory. by mail. It is a balance of that, plus the requirements. Phil Bentley: Calorific value. Nobody understands it. There are complexities: all the different unit rates, If you look at a bill, the problem is the meter is not calorific values and bits and pieces that have to go on metering in the units at which you are charging, a bill. Speaking personally, I can understand, looking because you would like it to say, “I have used 100 at a bill, why customers would find it awkward. It is units and that is 100 kilowatt hours and it is 5p, so it difficult and complicated, and if the message isn’t on is £5”, but it isn’t, because there is a conversion that the first page then the chances are the customer will converts a meter unit into a kilowatt hour using a not see it. So, as an industry, I think we have a bit of calorific conversion factor and a temperature factor. It work to do to improve on that and we are quite happy is hugely complicated. I don’t understand it—I don’t to take views from Ofgem or others on that. What I know anyone who really does—and why it is needed. would not like to see is a specification from Ofgem The simple answer is to say, “When you put in smart saying, “This is what a bill will look like”. I think meters let’s make sure the units that are clocking over companies should engage with customers. Everybody on the smart meter are the same units that we are has a slightly different mix and different focus and we pricing and billing, which is a kilowatt hour. The should adapt our communications to what our kilowatt hour: you run ten 100 watt bulbs for an hour customers want. We should try and manage the and that is a kilowatt hour. That is 5p or 6p. Then they complexity for them but we shouldn’t be straight- can get their head around it. Running a cycle on a jacketed on it. washing machine; that is a kilowatt hour. Then people Alistair Phillips-Davies: I think at SSE we do do start to get used to the unit. At the moment, the unit consumer research. As we mentioned earlier, it is on the meter is nothing like the unit on the bill, and interesting not only to talk to Ofgem, where they that is where all the confusion comes from. maybe have technical matters they want to see on Sara Vaughan: Absolutely right. We have talked to there, but to talk to consumer groups who have the consumers about it and their response absolutely consumers at heart, and get a lot of feedback as well echoes what British Gas just said. The other thing that directly from consumers and take on board what they consumers apparently don’t like is the electricity fuel are saying. We put out an annual statement, as we mix that you have to put on the bill, but that is an EU mentioned earlier. It hasn’t been around for a full year requirement; the EU requires that we have to put that yet. We are going through a process of updating that, on. So we do it in as user-friendly fashion as we in conjunction with consumer groups and customer possibly can but legally we are constrained. groups that we’re talking to. So, more work needs to be done but I think it is ongoing. Q57 Dr Lee: Moving on to Ofgem standards of Martin Lawrence: We work together with consumer conduct, which are a response to a provisional groups. We also had somebody come and look and programme. There was no clear process of make sure that the language we use is easily enforcement of the standards and no clear incentive understandable on our bills, and so forth. We would for why energy suppliers would comply with the love to have a much simpler bill if it is possible. A standards, and they state, “The behaviour of suppliers lot of the stuff we have on there is mandated on us as since has done nothing to change our view”. Do you a requirement and, as we go forward and the world of think it is practical to incorporate those in new or Green Deal comes, the bill is going to get even more existing licensing conditions? complicated, so we need to find a way of better David Mannering: I think it would be quite unhelpful, engaging with the customer there. in that a licence condition hazard; it requires you to David Mannering: At npower we have Crystal do very particular things and it is helpful that you Marked our bills and our terms and conditions. We know what those are and you know what you have to have launched a jargon-buster on the back of our bills do to comply, and the penalties for non-compliance to explain some of the more complicated energy are very serious. So the difficulty with incorporating industry terms. Following this discussion, perhaps standards of conduct into a licence condition is that there is scope for the industry to agree with Ofgem on they are quite vague, and it puts companies in an a standardisation of terminology across the industry. awkward position of not understanding what it is to Again at the beginning of this year we launched comply with that standard of conduct. Ofgem will straightforward, simple tariff guides to all of our then be in the difficult position of interpreting what products, as part of our mission to help customers that means and possibly making judgements. They understand the industry, which admittedly some of the have been helpful as a guide to the kind of thing that issues are not that easy. we should be doing and, indeed, we were all doing; Phil Bentley: I think the process is working. British certainly, at npower we were doing anyway. Frankly, Gas have been—both by Which? and Consumer it creates legal uncertainty. If we are going to have Focus—singled out as having the clearest annual licence requirements let’s be clear about what they statements. What that means is that hopefully next are. year competitors will mirror that and we will keep John Campbell: We have a rules-based regulatory raising the standard. So it is working as it is intended. framework and it is possible to move to a principles- Sara Vaughan: I am only smiling because we came based framework, but it would require a very different joint first with British Gas on the Which? study on governance structure and it would be quite a major bills, but it is all about consumers. change. I am not convinced—and I don’t think that Ev 16 Energy and Climate Change Committee: Evidence
11 May 2011 Phil Bentley, Martin Lawrence, Sara Vaughan, David Mannering, Alistair Phillips-Davies and John Campbell we are convinced—that that is a right step for now. It Phil Bentley: The broker isn’t transparent with what is possible, but it is a major regulatory compliance margin they make out of the deal. So they’ll say to a type change. I think there is a lot more we and Ofgem small business, “I can get you a better deal”, but they can do to monitor and highlight performance against may be trousering quite a lot of margin, and there is these issues and be challenged on them, rather than no transparency there and that is what we would try to force it into some very difficult licence welcome. obligation that would create a huge administrative Sara Vaughan: We proposed a code of practice for effort. third party intermediaries, which we hope they will be able to sign up to. I think across the industry there is Q58 Laura Sandys: Yes, we talk a lot about the quite a lot of support for that. We have mentioned it domestic consumer but there is also the small business to Ofgem who are also quite enthused by the idea, so consumer. Consumer Focus has called for more it may be that we can move forward with something protections for small businesses, for example, to on that basis. prevent the instant deep disconnection when you are David Mannering: I think the issue with third party retrospecting bills, and also support with greater intermediaries is that it is quite similar to the financial information to small businesses who are less equipped intermediary situation we had in the financial sector to deal with complex tariffs. In many small in the mid-1980s, where it was unclear where they businesses, certainly in my constituency, one needs were being paid from and how much they were being the same relationship as one would with the domestic paid, and there is scope for more transparency there. customer. How do you respond to your relationships We need to think about what is the best way to resolve with small businesses and how you feel that you the situation. There is a danger that it is done service them effectively? vicariously through regulation on energy suppliers, which is not the best way to tackle any perceived Phil Bentley: British Gas has 850,000 small business problems. customers, so we think we have a fairly good handle on what they need. More and more are looking around It would be preferable for Ofgem to be given direct powers or for the OFT, which is the existing and shopping around, and we would encourage that, regulatory body, to look at the area more directly, and I think they would say they benefit from a very rather than do it second-hand through giving a licence competitive market out there. The point, though, about obligation on us and to turn us into quasi-regulators. some of the blocking of transfers, a lot of that relates There is a danger—because there is already a to debt. You would be amazed at the end of a 12- regulatory opportunity on us—that that route is taken month contract how often the 12th-month bill isn’t and it wouldn’t be the best way to deal with this. paid, and in British Gas business alone that adds up to £100 million of bad debt. Q60 Laura Sandys: Similar to your commitments to You might say, “Well, let the small business off” but work with Consumer Focus and Which? from the someone else is paying for that £100 million because domestic consumer, are you in regular conversations it is being borne by those customers who are paying with the Federation of Small Businesses and the the bills. The idea that small businesses leave behind Chamber of Commerce, because they certainly debt or shouldn’t be stopped from breaking contracts feedback that they don’t believe that they are getting with penalties, I think all those are things that don’t as good a deal, or as clear a relationship, for their make good commercial sense, from a supplier’s point energy supply as possibly where there is more of view. When it comes to things like long back bills, regulation in the domestic market? then maybe we can do what we did in domestic that Martin Lawrence: Absolutely, we talk to our says that you can’t back-bill longer than 12 months customers about it, yes. and, therefore, it puts the onus on the energy company Alistair Phillips-Davies: I don’t know if we talk to to bill up-to-date; I think that may be an the CBI and the Chamber of Commerce, particularly improvement there. on the issue of small businesses, so we will if you think that is something that we should do. Q59 Laura Sandys: Why is it necessary to John Campbell: Yes, we are the same; that is not investigate the role of the third party intermediaries in something we were aware of. relation to small businesses? Alistair Phillips-Davies: Third party intermediaries in Q61 Sir Robert Smith: One of the things that has the business market clearly provide services to some been raised, which could affect consumers especially of their customers, but they do take a lot of the margin on the gas side, is the supplemental charge in UK out of the business as well. So therefore, with some offshore oil and gas profits. I should first of all declare of them, I think there are some questions over their my interest as a shareholder in Shell. Centrica has practices and their relationships and I suppose, just been very vocal in its concerns, and I wondered what like Ofgem wants to look at us, they probably want to dialogue you were having with the Government in have a look at them. taking those concerns to them? Martin Lawrence: The issue is to achieve Phil Bentley: As you know, just stepping back, the transparency, making sure that the businesses issue isn’t a Centrica issue, it affects the whole of the understand what the cost elements are for the services North Sea gas producers. There is a supplementary that are being provided and that is a bit opaque at tax on the oil industry, but the price of gas in energy the moment. equivalent of gas to oil today—whereas oil was about Energy and Climate Change Committee: Evidence Ev 17
11 May 2011 Phil Bentley, Martin Lawrence, Sara Vaughan, David Mannering, Alistair Phillips-Davies and John Campbell
$120 a barrel—the price equivalent of gas is about Q65 Sir Robert Smith: What is the decision time for $57 a barrel, but gas production is being captured by Morecambe Bay? the same rules applying to the oil industry. Of course, Phil Bentley: Morecambe Bay is the largest gas field the problem with that is that whereas you could argue in the UK, and it has been shut in at the moment. It it is appropriate in the oil industry, who are benefiting is taxed at 81%, but it has been shut in for regular from $120 oil, in the gas the prices are much lower scheduled maintenance and when it comes out of that but they’re being caught. It is not a Centrica issue— we will have to see whether it is producing at an 15 of the largest producers, representing 65% of the economic rate to justify continuing. I suspect we will. gas production in the UK, have all said it makes the We would want it to continue. I don’t think UK gas production tax one of the highest in the world; Morecambe Bay is the issue. only Indonesia and one other country are higher than The issue is: some of these other fields that we were the UK. Even Mozambique and Libya have a lower looking to exploit and produce but now—and I tell tax rate now than the UK for production. The you—we are looking at investing in Norway, which consequences—back to unintended consequences— has a similar tax rate but much more generous capital are: less investment in fields; less investment in jobs, allowances, as we used to have in the UK: low taxes and we are therefore not going to extract those last and low capital allowances. Now we have gone to few pockets of those gas fields, those orphan gas high taxes we haven’t moved the capital allowances fields, which if we don’t develop them now there up at the same level, which is a real problem. So won’t be the infrastructure in a few years time to do Norway and Holland are far more attractive. If we so. have a field we could develop in the North Sea, in The consequence then is that we are going to have to Holland or in Norway we will choose to do that. buy more gas from international markets. The difference between the UK market and international Q66 Dan Byles: We have heard from the Treasury— markets is that international markets for gas are linked and I am sure you have seen the evidence that they to the price of oil. If you want to buy gas from Russia gave to us—and from DECC. They are pretty adamant you would pay an oil-linked price. If you want to buy that this move is not going to have a significant impact from Algeria you pay an oil-linked price. Suddenly in on investment in the North Sea. I think the expression the UK, instead of paying local prices for our gas from used was, “No material impact on investment across the North Sea, we are going to be buying and the totality of the North Sea”, was the interesting Civil importing oil-linked gas prices that are higher. The Service speak they used. Why do you think there is consequence is that prices will go up to the end such a divergence in view here between DECC and consumer; so not only no investment and no jobs, the Treasury on one hand and industry on the other? higher prices. All around we think this is legislation Are they deluding themselves or are you screaming that could have recognised the fact that the gas too loudly? industry in the UK is different from the oil industry Alistair Phillips-Davies: I think we are only a very and, therefore, should have been treated differently. small player. We have very recently bought some small fields in the North Sea. I think it adds to the Q62 Sir Robert Smith: How do you respond to the uncertainty. At the end of the day, people like to see Treasury’s argument: gas may not be as high a price certainty and consistency if they are coming into markets basically; they don’t want to see people as oil, but it has gone up since you made the meddling in them and changing the rules. The investment decisions? purchase that we made relatively recently has clearly Phil Bentley: Gas bills today are lower than they were gone down in value because we are paying more tax two years ago. on that, so it is probably going to make it more difficult if I went back to the board and my company Q63 Sir Robert Smith: The gas that you are and said, “I’d like to buy some more assets” and receiving as a gas producer? they’re going to say, “Well hold on, you just had 15% Phil Bentley: Again, all I would say is the thinking to 20% of the value wiped off those assets by the was it was triggered on the back of $120 oil, but the Government, by the policy change. How do you know gas equivalent is about $60. that something else isn’t going to change that is going to do that?” Q64 Sir Robert Smith: Are you able to give an actual figure of the likely impact on consumers? Q67 Dan Byles: So you are saying it is not Phil Bentley: It is too early to say at the moment, necessarily the actual level of the charges, it is the because we import 50% of our gas anyway from principle of the charge? international markets; those prices have been going Alistair Phillips-Davies: I am saying the principle of up. Because of the link to the price of oil it has been the charges I think is quite an important point as well. going up. I think we are not alone in recognising that We have always argued whether it is some renewable wholesale prices of gas since the beginning of the year policy, similarly with things like N2EX where you are have gone up 25% to 30% and prices haven’t been set trying to encourage banks into providing liquidity in at equilibrium in terms of retail prices. So, who knows the market. What you need is consistency and not how much and when—I don’t think anyone would uncertainty around undue investigation on those want to comment—but the direction of travel is up, I markets. I think consistency gives certainty and am afraid. lowers the cost of capital for people to come in. Phil Ev 18 Energy and Climate Change Committee: Evidence
11 May 2011 Phil Bentley, Martin Lawrence, Sara Vaughan, David Mannering, Alistair Phillips-Davies and John Campbell would know more about this because he probably emissions target set by the Government. So again, you spends more money investing in these fields, but I have to think through: what are the consequences? think the fact the tax rate has gone up will affect our ability to put the investors in the outlying fields where Q68 Barry Gardiner: You have made a very strong we have small stakes as well, so there are two case for the fact that the introduction of the elements there as we would see it. supplementary charge, and the manner of its Sara Vaughan: We are also, again, a much smaller introduction without consultation, has meant that you player in the North Sea through E.ON Ruhrgas regard the UK as an unstable fiscal regime and, exploration and production. I think there are two therefore, less attractive from an investment point of principles around this: one is the impact perhaps on view. What is the single most important thing that the the more marginal investments that you may or may Chancellor could now do to address that lack of not have made, and this could clearly swing it one confidence by the investment community? Is it the way where it otherwise would have gone the other. I capital allowances that you spoke of or is there some think the other principle is the one that has been made other thing that the Chancellor could do or say that around the stability of tax regime when there is a would begin to restore that position that the UK had choice of investment. We are not talking today about as, broadly, a good place to do business? the carbon price support, but carbon price support has John Campbell: Sorry, you are talking beyond gas clearly been one whammy that energy companies have production? had. This is another one, and I think that when Barry Gardiner: This is an example within the European players are looking at where they put their industry and we are focused on the industry but from investment then all of these things are going to make the point of view of somebody investing in the UK’s a difference. energy industry, and energy future, and looking at the Phil Bentley: This is a letter to the Prime Minister, UK as a good place to invest that money, as we all so it is signed by Shell, Total, Gaz de France, Dom, want it to. ConocoPhillips, BG Greer, ourselves, and many John Campbell: The electricity market reform is others. So this isn’t a Centrica, British Gas issue; this going to be absolutely key. I know you have been is an industry. It concludes, “We believe that the UK looking into that separately, but there are issues natural gas cannot bear the burden of the increased around the feed-in tariffs for low carbon generation taxation. The consequence of this would be and capacity payments. Those present an opportunity disproportionately damaging relative to the modest to create and deliver the massive investment that the increase in tax revenues”. That is our view; clearly the UK requires, and to do it in a stable framework that Treasury have a different view but all I would say is offers fair return, clarity and durability of trading the industry is probably closer to this than anyone arrangements. else. Martin Lawrence: I have the same point; we have I want to also pick up that other point about sovereign some very large investment plans in this country, not risk. I think it is something that the Committee should in upstream gas but in generation and getting clarity reflect on, because all companies have investment about those key metrics that we need around choices and you look at the political sovereign risk of electricity market reform, planning permission, and so investing in a particular country. As you know, we forth, are the key things for us. have had the supplementary charge on tax, making the David Mannering: I think it is about stable, UK one of the highest taxed hydrocarbon producers; predictable and timely regulation across the piece, we have the Energy Market Review; we have the whether it is financial regulation of the tax regime, Retail Market Review; we have the threat of the whether it is economic regulation, statutory obligation Competition Commission. We have had 17 inquiries such as CESP, Warm Homes Discount, licence into this industry since 2001. Each time that happens, conditions, or whether it is environmental regulation the sovereign risk that you look at in the UK goes up. about the timeliness of permits being made available We have to make sure that all these policies come and permissions to build and develop power stations. together to deliver a stable environment for Phil Bentley: What you need is an energy policy that investment; good for the country; low prices; choice is strategic and coherent for the aims of the country. for customers and growing the economy. My concern We have aims around low carbon; let’s make sure our is: all of these disparate activities serve to have policies deliver that. We also want low prices, so let’s unintended consequences that do not deliver that. make sure it is coherent around that; putting up tax David Mannering: In our submission to the in the UK runs counter to that and encouraging coal Committee we listed the regulatory changes that had generation runs counter to that. So we have bits of taken place since the beginning of January 2009. I policy and somebody needs to step back and say, think it ran to about five pages which, I think, tells its “Let’s make sure, for the next five years—or even 10, own story. in an ideal world—we know what all these policies Phil Bentley: There is a final point. The other are going to give us in terms of an overarching consequence—again, unintended consequences, it is a strategic endgame”, and we don’t have that today. We bit like the RMR—if gas becomes more expensive have lots of different policies and none of them are then coal generation is more attractive. What is joined up together. happening at the moment is that gas generation has been shut in, everyone is trying to produce more from Q69 Barry Gardiner: The energy policy, you are coal and of course that runs counter to the carbon saying, is currently incoherent? Energy and Climate Change Committee: Evidence Ev 19
11 May 2011 Phil Bentley, Martin Lawrence, Sara Vaughan, David Mannering, Alistair Phillips-Davies and John Campbell
Phil Bentley: That wasn’t the word I used. of where policies are not necessarily aligned. So we know that, in order to move to the low carbon Q70 Barry Gardiner: You said we need it to be economy, we need to use much more electricity for a coherent and then you said we have lots of little bits much wider range of things—including transport and to do, that they’re not very well joined up. So I am heating—but that electricity needs to be low carbon. trying to go with the logic of what you said, Mr It is difficult to see how we are incentivising Bentley. Would you use the word “incoherent”? customers to use more electricity if, as is the case at Phil Bentley: I would use the words, “It could be the moment, many of the levies apply just to better joined up”. electricity and not to gas. So, for example, we have the feed-in tariff scheme, levies on electricity; the RO Q71 Dr Lee: Along those lines: as an industry, if levies on electricity, the Green Deal will be applied to there is going to be tax, would you rather see it on electricity customers, the carbon tax bears on production or on consumption? electricity, EU ETS bears on electricity. Phil Bentley: Did you say “tax”? So there are a wide range of taxes and levies that put Dr Lee: Yes. One could put an argument, for instance, up the price of electricity and encourage people to use with regards to reducing tax on petrol but increasing the fossil fuel of gas, when we want to encourage tax on getting oil out of the ground. The decision was people to use more power. I think that is something made to go one way during the Budget. As an that, going forward, if there is an example of where industry, and in terms of meeting these low carbon we could get policies more aligned some thought targets, fulfilling security of energy supply concerns, could be put into that. strategies of vision for the country as a whole, do you Phil Bentley: The only other one is speed of decision think the tax should be on production or is there— making, because how much delay will we have on Phil Bentley: I have a view; others may disagree. I nuclear new build now; there is a review, but how would be taxing more on consumption because it is long will it take? How long has it taken to get smart those nudge behavioural changes on the consumer that meters and we still aren’t really rolling them out in has the biggest impact. We know; we have seen volume? Three years of consultation? It is the speed customers can save 30% off their bill through of decision making. I think this Committee can really insulation, efficient lighting and heating, and so forth, emphasise the need; we need some big decisions in and higher efficiency boilers. I don’t think it is either/ this industry in the next couple of years and we don’t or, but if you were shifting I would shift to consumers have long to wait. because ultimately that is where the behavioural Sir Robert Smith: One thing back on the change will have the biggest impact. supplemental charge. We got conflicting evidence last Sara Vaughan: I completely agree with that, but I week from the industry showing a drop in capital would be very reluctant to answer your question in a investment after the previous Government’s vacuum, because I think this plays to the point that supplemental charge in 2006, and then the Treasury we get measures that are introduced that are not joined and DECC claiming that it was all rosy and there was up with other measures. So if we say “yes” to no blip because of 2006. They may well have been consumption without seeing the context in which it is measuring something different from each other, but being presented or “yes” to production, again, without maybe the industry could write to us with more detail seeing the context, I think it is really important to get about that discrepancy, because obviously the history the full picture and the roadmap of how that fits in to of what went wrong last time is quite important in the destination we want to get to. judging how bad it is this time. David Mannering: If I could answer your question in Chair: All right, is everyone happy? Okay. Thank you terms of the balance between levies on electricity as very much for your time, a very interesting session opposed to levies on gas, I think that is an illustration and we look forward to seeing you again soon. Ev 20 Energy and Climate Change Committee: Evidence
Wednesday 22 June 2011
Members present: Mr Tim Yeo (Chair)
Dan Byles Sir Robert Smith Barry Gardiner John Robertson Dr Phillip Lee Dr Alan Whitehead Laura Sandys ______
Examination of Witnesses
Witnesses: Alistair Buchanan, Chief Executive, Ofgem, and Andrew Wright, Senior Partner Markets, Ofgem, gave evidence.
Q72 Chair: Welcome to the Committee. There is a Fundamentally the package that we announced in lot of interest, as you know, in this inquiry and in the March was a wide-ranging package of the companies work that you are doing. We have a lot of ground that letting down their consumers. This was, in my view, we are going to try and cover between now and 11 another piece of evidence to bring that home. o’clock when we have the Minister coming in to talk Andrew, do you want to answer the specific question about the same subject. with regard to Energy UK? Could I start with one of the issues that your views Andrew Wright: Yes, what we said is there is evidence have attracted a lot of attention on, and that is the that prices went up more quickly during periods of suggestion you made, which I think is widely accepted rising wholesale prices than they came down in by some members of this Committee, and indeed by relation to falling wholesale prices. That is, if you consumers, that energy bills tend to rise more quickly like, a statistical statement and we have not had that in response to increased costs than they fall when challenged. Energy UK put their analysis out and they costs are going down? Obviously the industry is talk more about our interpretation of that rather than disputing this suggestion. What do you think about the analysis itself. I think we still stand by that the paper that Energy UK commissioned from NERA statement. What we said ourselves in our retail market about that controversy? review is there is a number of ways you could Alistair Buchanan: Perhaps if I can come to the paper interpret it. But our view is when you put it together from the industry second. There have been a number with all the various bits of evidence that we saw of comments from the companies. The background to elsewhere about features of the market, the mis- what is called the rockets and feathers—up like a selling, the confusion, then it gave an overall picture rocket, down like a feather—argument is that of a market not working as well as we would like and consumers have been concerned about this and we this evidence was consistent with that. So we stand by have been on watch, as you know, through our that and I do not think we saw anything in the Energy quarterly pricing reports, the latest of which we UK/NERA analysis that we felt challenged our published a day ahead of this meeting. We sensed last central conclusion. November that there may well be—and it would have been the first time—evidence of the companies using Q73 Chair: We will come on to some of the specifics this rockets and feathers analogy. Our work using you have mentioned like mis-selling a little later on, statistical and econometric work but also looking at which is obviously also of great importance to us. Can third party evidence, suggested that the companies had I just ask you about the most recent announcement gone too early last autumn and had effectively moved from ScottishPower that they are going to have too soon. They could see pricing pressures ahead and another quite hefty price increase in August? Do you had gone too soon. That was one of a number of think that their suggestion that rising wholesale prices concerns that we had that led to us coming out in and environmental and social costs justify the March, which has been pretty much vindicated in the increases that they are proposing? two months of consultation since then, that the Alistair Buchanan: It is not for a regulator, indeed it companies have frankly been letting down their is not in my statutory remit, to set their prices or consumers and that ranges not only from this rockets justify their prices. The management of ScottishPower and feathers analogy through to mis-selling, as you will have to look at a range of commercial information know. from their trading positions through to their appetite Picking up some of the analysis, there has been some for profit, through to their appetite for keeping interesting analysis done in particular by British Gas consumers and come to a judgment. I would have to Centrica and when my analysts and economists who say that there was a very important moment, I think, work for Andrew have looked at their analysis, on 8 June when they announced that 19% increase in because quite often they will say, “We are quite a long gas prices, this has taken a lot of consumers by way away from Ofgem,” we found that we are using surprise and has been one of the most talked about different consumption patterns and that we are using issues that I have come across in my seven years at possibly different averaging techniques. Ofgem. It was disappointing on the Today Consequently, when you have put them on to the same programme—which you yourself, Chair, went on to— basis they have not been so very different. that at the end of the Justin Webb extended piece on Energy and Climate Change Committee: Evidence Ev 21
22 June 2011 Alistair Buchanan and Andrew Wright that programme they had to say, “We invited the might be, and one of our concerns in March was, for company and the association on but they are not here example, that legacy single fuel consumers were today”. delivering a 6% margin to the companies, whereas the This is exactly the kind of thing that erodes trust from competitive non-legacy were delivering 1.5% to 2%. consumers. If you look at the forward wholesale price, I think it is a reasonable area for us to analyse as to it is up 30% between now and winter. Why? For a whether, in fact, it is the “sticky” customer who may range of global reasons that we can go into, but if well be vulnerable on a standard credit term, whether there is a good reason, get on and explain it to your they effectively have to shoulder some of the profit in consumer, do not just leave them hanging out there. a way that might seem unfair, particularly for a The companies have to explain the prices, and we vulnerable customer. We think that is a legitimate area analyse whether the consumer is getting the for us to have a look at. appropriate information, which is why we have triggered an Enterprise Act review under our Q76 John Robertson: One of the things they say as consumer protection powers today, because we think part of the competition is being able to switch a user. there is a potential for mis-selling and misreporting in How easy do you think that is in relation to the big their tariff package. We also have two licence six? conditions, one of which is on cost reflectivity, and Alistair Buchanan: From the data that we have had ScottishPower is being investigated under that. We from extensive consumer work that we have done and announced that in March, and their current price consumer polling, 96% of consumers know about increase that will come through on 1 August will now switching, and 77% say it is fairly straightforward. be included in that review. Also, we are reviewing— One of the really concerning points in the work that although my lawyers say that I can say no more than we did was that generally 40% of consumers who that—whether we need to trigger the section 25 have switched have switched to a weaker deal. So this clause, which is on undue discrimination. again comes back to the importance of ensuring about Within our powers we can go and look at various the quality of information, simplifying what I think aspects of their pricing, but can I set their price? No, has become a very confusing proposition. In the last this is not like pipes and the wire companies, where I 18 months we saw the number of tariffs available to do set their price, because they are monopolies. This is consumers go from around 180 to just shy of 400. It a company that has to set its price in the marketplace. is interesting also at the same time we saw, for example, in gas a 18% reduction in churn, in churn of Q74 Chair: Yes, you can’t set their price but I am switches. So I think the messages that we are getting sure that your views are more influential than those of from consumers, and their consumer bodies, is the average consumer. consumers want to have choice, want to feel confident Alistair Buchanan: We have to represent the average in their choice and a way to do that is simplify the consumer and this is why I think the announcement tariff choices— today is so very important. There is no sense of us asserting guilt on to ScottishPower but there is a sense Q77 John Robertson: You talk about choice but the that if a company has a difficult price rise to one thing you have not mentioned is competition. announce, and at the same time you announce a rather Alistair Buchanan: I was going to come on to attractive tariff product within that overall price competition. increase, if that is not as attractive as it first looks, John Robertson: Well, you would say that. The again you have a huge consumer erosion of trust going ordinary person does not understand all these tariffs forward. We have to make sure that—rather like a and while they might understand if they swap they phrase I used earlier, it is a bit like Ronseal, you have will get it cheaper for a short length of time, what has to basically deliver what it says on the tin. We are not been seen—and I believe you have done a very very keen to ensure that the companies are straight poor job in this—is to stimulate competition between with their consumers and sell them a product that they companies. Have we got to the stage where we can enjoy for a sustained time, if that is what they seriously have to look at the big six and start cutting are offering. them up so there is real competition out there? It is all very well complaining about the price of gas and Q75 Chair: I welcome what you said and we are the price of oil and whatever, but at the end of the day seeing ScottishPower again ourselves very soon, so there is no competition when it comes to delivering we shall put some of these points directly to them. the gas and the electricity to a customer. Can I ask a more general question now about margins Alistair Buchanan: Sure. What we are hoping is that in the industry? The industry point out that your through the simplification of tariff structure that the review said margins of around 1.6% lower than those consumer who thus far may have been turned off from made by supermarkets and various other people. Do triggering choice—40% seem to be almost you think that level of margin is a justification for permanently disengaged from wanting to choose. price increases? Only 20% appear to be seriously active choosers and Alistair Buchanan: Again, rather like prices, we do switchers so we have to get some engagement— not analyse what their appropriate profit should be, we do not start off as we do with a monopoly company Q78 John Robertson: Why is there not one tariff for saying what we think broadly an appropriate level of residential customers and one tariff for business capital return might be. What we are doing here is customers? In effect telephone lines used to be that looking at what some of the implications of pricing way. You knew exactly what you paid for and when Ev 22 Energy and Climate Change Committee: Evidence
22 June 2011 Alistair Buchanan and Andrew Wright you were going to get your bill and people could then Q80 Sir Robert Smith: What sort of representations balance their budget accordingly. Now we are at the have you had from consumer groups? stage where, as you say, only 20% of people are Alistair Buchanan: Generally the consumer groups looking at the tariffs and working out which is the have been extremely positive and I am very grateful best deal for them. How are you going to help these for what they have done in this area. people? Sir Robert Smith: Especially on the terminology, I Alistair Buchanan: I think we are very much on the think. same page. What we are looking to do going forward Alistair Buchanan: Indeed. is to say there will be a fixed offering and consumers can go in and buy one, two, three year, as long as Q81 Sir Robert Smith: I am just trying to get my they know when it ends and that there is no automatic head around some of the detail. What happens to time- rollover, and that is where companies can compete of-use tariffs, the smart meter rollout and the Green very actively and very aggressively with each other Deal in this? on those different offerings and be quite innovative. Andrew Wright: Yes, time-of-use tariffs, there are two We then want to have a single tariff approach called issues there. One is there are a lot of people on time- the Evergreen tariff, whereby you and I can of-use tariffs today, like Economy 7, and there are a basically—let’s say we are on standard credit—look number of different types of those. Certainly we are at the six on offer and look at who is giving us the best not going to put in place proposals that mean that price and not be bamboozled by multi-tiered offerings people can’t continue on those types of tariff. People within that. I hear what you are saying and that is the rely on those tariffs to give them affordable heating in direction of travel that we are going. most cases and so we are not going to prevent that Andrew Wright: So in summary it is one tariff per happening. So we need to find a way of dealing with payment method with one price for each tariff. From such legacy time-of-use tariffs. our point of view, it is difficult to see how you could Then there are the issues around smart meters going get simpler than that. forward and the likelihood of there being increasingly John Robertson: I appreciate what you are saying, complex time-of-use tariffs. I think that is something you hear what I say but I don’t want you to hear, I that we have to consider. Our initial position is that want you to act on it. these can be offered under fixed term contracts. There is no reason why that could not happen, but I think we need to consider whether or not time-of-use tariffs Q79 Sir Robert Smith: I had better remind the could be allowed under the Evergreen proposals that Committee of my Register of Members’ Interests we have put forward and that is one of the things we entry as a shareholder in Shell and also honorary vice will be looking into over the next few months. president of Energy Action Scotland, a fuel poverty charity. How much have you explored the Q82 Sir Robert Smith: So there will still be other practicalities of this simple one tariff per payment tariffs around as well as the Evergreen? method? Does the industry have any concerns that are Andrew Wright: There are a lot of people on time-of- genuine or do you just think that they want to muddle use tariffs today, which are on Evergreen terms and it the market? is not our intention to force people to change on to Alistair Buchanan: I am very encouraged that we tariffs they don’t want to. So I think we need to have had such a reaction over the last two months to consider how we transition those customers, given this basic proposition that we put down at the end of that we would expect those types of tariff to evolve March. The big six have been fully engaged in that into a smart meter world in due course. as well, which is very encouraging. In terms of the practicalities, we have had a number of suggestions Q83 Sir Robert Smith: Have you looked at the made such as we would need to focus on what the transitional arrangements and the logistics and terminology of the standard or fixed part of the bill is. overheads? Presumably they would be marginal to the The standardisation, is it fixed costs or it is costs you whole operation but there would presumably be costs can’t control? We have had recommendations on how involved in— you might present that. Is it easier to present in an Andrew Wright: We are beginning to have discussions APR style fashion as you get in financial service with companies about the practicalities, but I think products? We have had representations that you get one point I would make is, given these tariffs that away from the multi-tiered approach. EDF and British we are proposing are simpler than the tariffs that the Gas have both acknowledged, in quite strong language company has had to date, and there are fewer of them, in their submissions, the weaknesses of the current it is difficult to see why it is going to be such a approach to tariffs and have also made, I think, quite difficult logistic exercise. encouraging suggestions. Those that we feel will improve the transparency and the information for the Q84 Sir Robert Smith: Just finally, is it an consumer, we will take as we move forward now to admission that markets are not the best way of write the detailed plans and those that we do not we delivering a product like this, that you have regulate will not take. If some of the suggestions that the the product in the end? companies have made are deal breakers for them then Alistair Buchanan: I think what it is signalling is that they will have to think about going to the Competition the companies were given a very good opportunity in Commission, but this is the direction of travel that we 2008, with the six fairly basic requirements that we are going. put in front of them to achieve, mis-selling, accounts Energy and Climate Change Committee: Evidence Ev 23
22 June 2011 Alistair Buchanan and Andrew Wright that we understood, a good deal for SME and so on. give them a beating”. Do you think that that is They failed to meet even that level of requirement. So appropriate, professional language from a regulator I would say that what we have here is not so much a about the industry that they are supposed to be damning indictment of either choice or competition, I regulating? think it is more a damning indictment of behaviour. Alistair Buchanan: What I think is appropriate is that The companies have been signalled to very firmly we did set down a series of substantial improvements now that their behaviours have to improve that we wanted from their behaviours— substantially on behalf of consumers. Barry Gardiner: We can talk about the substance In an era of flat prices you would be saying that, but in after. That is not what I am talking about. I am talking an era of rising prices—and we see global wholesale about what was said, the style in which you engaged markets with serious increases, particularly in the gas and whether you thought it was appropriate, market, going forward, but we also know we have to professional language from a regulator; more to me find £200 billon to rebuild the GB energy system by the language of a professional boxer. 2020. It is absolutely critical in a period of rising Alistair Buchanan: At times you use an analogy prices that consumers have confidence in what the when you are describing things and that was an companies’ behaviours are. But I really do not sense analogy used at the time. at this stage—in the last two months the consumer groups in particular had a real opportunity to say, Q89 Barry Gardiner: Do you regret the analogy? “Throw the towel in on competition, throw the towel Alistair Buchanan: No, I don’t because I think what in on choice”. We have not had that feedback at all. I it was trying to assert was that the companies have to think is very important. The area where we need to understand that they effectively, by not espousing the do quite a bit more work—and it may be that we need challenges put in front of them in 2008, were giving to work certainly with you but also with their consumer a very poor deal and they had to Government—is on the vulnerable customer. Some of understand that that poor deal was not acceptable. I the feedback in the last two months, particularly from think therefore the key message in March was, “This the Fuel Poverty Advisory Group, has been trying to is not acceptable”. The key message from the focus on how we ensure that the vulnerable customer consultations that we have had in the last two months is protected, particularly in this Evergreen tariff is—and even the companies are now approach. They have put forward their own idea that acknowledging—that it was not acceptable. So we there needs to be some kind of index link between have now reached a position today where we are the fixed or the floating price and what a vulnerable saying we have some positive news, the companies customer can pay. have engaged positively. You would have to say that is against a background from, I think, not a great base Q85 Sir Robert Smith: So the vulnerable customer in March but they are engaging now much more is always getting the best deal? positively. We have had difficult news on the Alistair Buchanan: That is what their argument is and companies still in the last few months. SSE has had I think we have a statutory duty to vulnerable its trading standards issue. We have had to announce customers, as you know. We need to take this very another investigation into ScottishPower today. This seriously. is not encouraging news but there are good signs from the companies. First of all, they have engaged, Q86 Sir Robert Smith: I think you have made a very secondly their performance in the consumer focus important point, probably for policymakers and for customer complaints table has gone up so— consumers, that the underlying reality, unless there is some dramatic change in markets that we can’t see, is Q90 Barry Gardiner: My point to you, Mr an upward pressure in prices and, therefore, crucial Buchanan, would be this: the reason that you indulged that in that upward pressure there is no hidden extra in such rhetoric is because you had let things go too profits that do not need to be made. far. You had let things get out of hand since 2008; you Alistair Buchanan: That is certainly what we see as had not borne down upon the companies as you our remit. I get nervous about telling Ministers and should have early enough and that the very things that Government what to do with policy— you set them to do, which you have just outlined to the Committee, in 2008 had gone on far too long and Q87 Sir Robert Smith: Not what to do but to inform your language was a reflection of your failure? policy. If we are going to tackle fuel poverty and if Alistair Buchanan: I would say that I was reflecting we are going to— the failure of the companies to deliver the basic Alistair Buchanan: Indeed. premise that we put in front of them three years ago. Sir Robert Smith:—attack a lot of other issues we have to be realistic that your market review is not Q91 Barry Gardiner: Three years? So it had taken going to suddenly bring nirvana; a cheap price. you three years to get to the point where you started Alistair Buchanan: Exactly. shouting, instead of making sure that you were dealing with it appropriately during that period of time? Q88 Barry Gardiner: When people start shouting it Alistair Buchanan: Of course it was 2010 when we usually indicates that the relationship has not gone too started the review, so it was two years and when you well beforehand and that something has gone wrong. put things in place—and of course a number of You will recognise the quote, “We gave them a left companies have said that we have even started to look hook and then a right hook and now we are going to at changes too early now, particularly with regard to Ev 24 Energy and Climate Change Committee: Evidence
22 June 2011 Alistair Buchanan and Andrew Wright some of our liquidity ideas. So when you put a change of them are under investigation for mis-selling. It is in place you have to give it a decent amount of time for the companies to argue why, in some instances, to see whether it is going to work, whether their annual statements are very poor—because we are competitive forces are going to succeed and whether going to appoint an independent accountant to help we see companies stepping up to the plate. We did not us—but it is also for the companies to help provide see that. consumer confidence with transparency of accounting. Andrew Wright: Of those two years it took around It is for the companies to treat the SME market about one year to get the proposals in place, so in properly. That is where the responsibility lies. terms of making the licence changes and giving the I believe they are picking up that responsibility, and I companies reasonable time to implement the changes have been encouraged by the responses from the to their system. So the more common complaint companies in the last two months. among the responses from the big six is that we should have given the appropriate remedies more time to Q94 Barry Gardiner: So you will not be breaking work, not that we moved too early, or not that we up the big six? moved too late. Alistair Buchanan: At this stage, because of the way that they have responded, we feel that we have a range Q92 Barry Gardiner: I am sure it is, but then of options that we are now going to proceed with. perhaps you have listened to them for far too long in that way. Q95 Barry Gardiner: So that is a U-turn in record The industry make the point that the Government time. The press release here dated 22 June says, “We regulator and industry need to work together will also pursue breaking up the stranglehold of the effectively if the industry is going to go into people’s big six” and now you tell us you are not going to do it. homes, if it going to be able to deliver some of the Alistair Buchanan: That is with regard to the market, programmes that Government has in the Green Deal, and we are looking to introduce up to 20% potential and so on. Has the rhetorical war got to the point liquidity within the market, so other players can come where both of you, on both sides, are undermining the into the market and feel confident in trading in the confidence of the consumer that these are the sort of market. Why do we have to do that? Because they people that they want to let into their homes to deliver don’t feel confident coming into the market. Again, these projects? we have had over 40 responses on the liquidity Alistair Buchanan: Our responsibility is to ensure proposals in the last two months. that the consumer gets a straight offering from the companies, which it had not been getting and, Q96 Dr Whitehead: Perhaps we can talk about therefore, we needed to make that very clear so that liquidity proposals. Mr Wright, you said to us in they can then move forward and deliver January that a logical extension of companies improvements. We thought that the companies would effectively providing electricity to themselves is that step forward to deliver improvements that we set they are sell electricity use that is going to be sold on down in 2008. They did not, so now we are setting the market, so I think we expect vertical integration out a more radical package to ensure that consumers to have an adverse impact on liquidity. Then, Mr get the appropriate treatment from the industry. I have Buchanan, you also said at the same time, you were just mentioned to you—if you heard any of the questioning yourself about whether there has been commentary that this morning—we were not using gaining between wholesale and retail, “That our aggressive rhetoric this morning, what we were saying conclusion is we don’t have any evidence that the was that the companies have come to the table; they companies are misbehaving here.” Then you said, “It are acting in a positive way; there have been some is almost like the Scottish legal system of non-proven, signals in the last few months; the consumer focus we couldn’t land a punch.” Do you have evidence now complaints table and so on, that they are improving. that might enable you to land a punch, in the language Therefore, there is an appropriate time for we are using this morning? encouragement but there is also an appropriate time Alistair Buchanan: We carried out our work over the to say, “This just is not acceptable behaviour,” which winter and we came out with our view in March that is what we were saying in March. We are saying that the companies had got them too early, in terms of the things are moving in the right direction. wholesale/retail linkage at the end of last year. So we did come out with that proposition in March. Q93 Barry Gardiner: Is it not the reality that it is consumer focus in Which?, CAB and Age UK and Q97 Dr Whitehead: Yes, you came out with a uSwitch, and all the other people that have been proposition but you previously said you could not see banging on about this, that has forced you to get to that there was any evidence for the basis of your the point where you are doing this? It is because there proposition, as far as companies reducing liquidity by has been the public outcry about you not doing the trading with themselves as far as electricity was job properly that eventually you have been brought to concerned. this point and you rush out a press release the night Alistair Buchanan: It is quite interesting that through before you come into this Committee. that period, in fact, the liquidity that we expected from Alistair Buchanan: In terms of the press release, we the market last year with regard to churn was five can deal with that separately because I did inform the times, it declined through the year. I think three and a Chair as to our desire to get information to you. But half times is the average for the year. In fact churn it is for the companies to answer why four of the six went as low as two times in April this year, so we are Energy and Climate Change Committee: Evidence Ev 25
22 June 2011 Alistair Buchanan and Andrew Wright not seeing a pick up in a liquid market. The bid offer project products that they need to complete. That is prices at the long end are still very, very wide. I think what we are hearing. The main people telling us that we have only seen two independent players coming liquidity is a barrier to new entry are the people who on to the N2X platform so the signals there are slow are trying to enter the market. frankly, or going in the wrong direction. Q102 Dr Whitehead: Forgive me, but is that not a Q98 Dr Whitehead: But the energy companies bit like you take a car in for repair, and the mechanic themselves, the big six, are suggesting that other keeps taking bits out of the car and replacing them factors in liquidity such as retail margins are much with new bits until he finds something that works and greater barriers to new entry. Bearing in mind that you then tells you he has repaired the car? do not appear, other than by inference, to be able to Alistair Buchanan: What we are hearing is that the say anything definite about the relationship of vertical independent generators and suppliers—around integration and liquidity, how valid do you think those 20responded, which is encouraging because it means other facts might be, and does it have a bearing on that people are interested in the market. That was one what you are proposing on liquidity itself? of the reasons that I mentioned the numbers. It shows Andrew Wright: I think there are potentially a number that there is interest in the UK market, a number of of reasons why liquidity is not as high as we would them overseas, a number of them domestic. What we like it to be. I think vertical integration could well be are trying to do here, through the mandatory auction one of them. Quite how you would prove that vertical and market making approach, is to say that we will integration rather than other factors are causing it, I have a range of products of a clip size or product size do not know. But as I said previously at the last Select that can be traded, and that can be traded Committee, it is quite a sensible conclusion that if continuously, because those are the messages that we companies are selling their energy to themselves then are getting from the potential entrants to the market that is less energy that is being sold on to the market. saying, “I can’t get the right size. I can’t trade continuously, long end is very difficult. How can you Q99 Dr Whitehead: It looks like it, and that seems sort this out so that we can feel confident about to me all that you are saying, isn’t it? coming into your market?” So I think those are the Andrew Wright: No, I think there are potentially other things that we can work on. However, it is a great reasons why liquidity is less good, many of which we question, which is at what point might you say if will look at and we are intending to do a review of nobody does come into your newly reformed 20% electricity cash out arrangements at some point where open market that something has gone very wrong some people have highlighted an area of potential here. There will be a moment in the future where we barrier. But the key point is that we think liquidity is have to look at this, we will have to work out how not sufficient for new entrants, and not sufficient for long it is to see whether it has, in fact, attracted the independent generators, and we are putting in place kind of dynamic into the market place that we had proposals to try to do something about it. To the extent hoped. I think it is a very fair question. there is a vicious circle of falling liquidity, we are Andrew Wright: We are not naive here, we realise that trying to reverse that vicious circle and we think that there are a range of reasons why new entrants find it will be to the benefit of both new entrants and indeed, difficult entering the market but the least we can do is ultimately, consumers. try to address those that have been identified and that we can address. Q100 Dr Whitehead: What continues to worry me here is that you are putting these proposals forward Q103 Dr Whitehead: Alongside your proposals you on liquidity, and you have a surmise that falling did set a deadline, I think, of 1 June for industry to liquidity has a relation to the extent to which trades come up with alternative arrangements and it is now are taking place internally and therefore that is the 22 June. Any thoughts on that? driver, but you can’t establish that. On the other side, Alistair Buchanan: Sorry, with regard to? the trading platform that is developed, as you say, only Andrew Wright: Liquidity. has one new entrant. Is that your evidence? Dr Whitehead: To address liquidity concerns. Andrew Wright: Our proposals are designed to Alistair Buchanan: We had feedback up to 1 June. address the difficulties that independent generators Indeed, some companies, who were in active and potentially new entrants and small suppliers have. discussions with some of Andrew’s team, then put So we have targeted our proposals to those problems, their submission in up to two weeks after that. So we and I don’t think we need necessarily to have every have been taking in all the submissions since then. last detail about the causes of low liquidity to be able Andrew Wright: We have published an open letter to address the problems that it causes. We would hope today to the industry explaining that we intend to that would push liquidity into the right direction and proceed with the reforms that we have identified, start to move the cycle in the opposite direction. because we have not seen enough in terms of the progress in the industry, and so we are going to Q101 Dr Whitehead: So what will be your marker continue to proceed with the proposals that we put of being proved right on that? forward in the retail market review. Andrew Wright: Our marker would be that we no longer get complaints from independent generators, Q104 Dr Whitehead: So those are the two small suppliers and potential new entrants that they alternatives then? They came up with nothing by 1 can’t get hold of the wholesale and risk management June so you are proceeding with your proposals? Ev 26 Energy and Climate Change Committee: Evidence
22 June 2011 Alistair Buchanan and Andrew Wright
Andrew Wright: Well, they didn’t come up with a judgment that my board took at the time, was that sufficient to make us think that we did not need to go we are seeing enough positives, customers understand forward with it. choice and want choice; we have seen an Alistair Buchanan: Also, there have been good ideas improvement in the prepayment meter behaviour; we generated and we need to look at those to see how we have seen market shares improve, in particular for the will plug those in. Scottish and Southern, and to decline for British Gas; we have seen some of the indices with regard to how Q105 Dr Lee: A couple of questions following on we judge competition falling, that was called the HH from Mr Gardiner’s questions. Forgive me, I have index; we have seen, by contrast, other countries been here a year, the debate on domestic energy bills globally in much higher pick-up of switching and has been going on for some time, I suspect over a choosing and, therefore, we do not want to lose that. decade. Why now? Why have you suddenly decided In other words, the comparison of active switches in that there might be a problem within getting into the Britain being between, let’s say, 15% and 20% and I market liquidity? Why is this review taking place think one of the nearest countries you are going to get now? It strikes me that these problems have been is Holland is 7%, Germany has been down at 3.5%, going on for some time and if that is the case that they many of the states in America that follow the have been going on for some time, why do you think liberalisation competitive route have about 1%. So we Ofgem were a bit slow out of the blocks? wanted to try and maintain the good stuff that has Alistair Buchanan: The key marker here with regard come with competition and choice but get the to the domestic retail—and perhaps we could come companies to improve their behaviours. I think that is back to the market liquidity issues—was the probe what we have been trying to do going forward, so that that we did in 2008, based on the previous two years’ is how we have tried to meet this markets and pro- information. So the previous report to that had been competition approach while getting much better the domestic report of 2006. In that intervening behaviours from the consumers. period, 2006/2008, which I have acknowledged we probably got to possibly 12 months late at that time, Q108 Dr Lee: So why do you think you were slow we identified some very unattractive aspects of the in this? You have admitted that at least 12 months— retail market to do with disengagement, non- the customer will say, “Hang on, I have had to pay X switching, customers getting the wrong product, amount of money for the last 12 months, could it have which led us to offer basically—well, to more than been cheaper?” offer, to set out a range of improvements that the Alistair Buchanan: I think back in 2007/2008 we had industry should put forward. Then over the 2009/2010 a confidence in markets, particularly with regard to period we basically analysed what they were doing. sorting out the problem for pre-payment meters, off Through that period the companies were starting to gas grid customers and the in an area out of fall foul on virtually every one of those six, to a differential price, we thought competition would be greater or lesser extent. It is always dangerous making more active in getting rid of those differentials and it a generalisation here because some companies was not. That is why we had— reversed what had been quite a weak previous offering to consumers. I think British Gas improved quite Q109 Dr Lee: Now we are four years ahead and dramatically in a number of ways through that period, there is no more competition? but by the end of 2010 we were so concerned about Alistair Buchanan: In fact the churn over the last 18 the range of issues that the companies were falling month has gone down. foul on that we felt that we needed to do another review on consumers’ behalf. That led therefore to the Q110 Dr Lee: But is there more competition, Mr March conclusion that the companies really had Buchanan? played short the consumer over the previous period. Alistair Buchanan: Good question. No.
Q106 Dr Lee: But your primary role is to protect the Q111 Dr Lee: So your primary role is protecting the consumer by ensuring competition, yes? customer by ensuring competition and four years on Alistair Buchanan: Yes. no more competition? Dr Lee: Do you think you fulfilled that well in the Alistair Buchanan: Sure. Well, active competition last decade? If you do, on what basis do you conclude between the big six but there is only about 0.69% of that? Do you have some sort of demonstrable the domestic supply market that comes from anybody outcomes, “Well, we managed to control the prices in else outside the big six. X amount way” or, “There was a reduction in prices relative to wholesale prices”? Q112 Dr Lee: So no more competition? Alistair Buchanan: Yes, with regard to the broader Alistair Buchanan: No more competition in numbers, picture, which is why—the question I am frequently the companies may argue that they have been asked is why in 2008 did you not— competitive in their offerings but candidly when we look at the churn go down and the tariff complexity go Q107 Dr Lee: 2008. I can remember this being a up, it would not appear that customers have felt that. problem in 2000. I do not quite see the— Alistair Buchanan: No, I was going to use this as an Q113 Barry Gardiner: I am focusing now on example. Why in 2008 did we not take the action that proposal three and the proposals you had for we have just taken? The judgment that we took, it was strengthening domestic remedies. Consumer focus Energy and Climate Change Committee: Evidence Ev 27
22 June 2011 Alistair Buchanan and Andrew Wright reviewed annual statements in July of 2010 and found Q117 Barry Gardiner: So what you are saying is the that many suffered from poor design and confusingly companies got around the principles of the rules that worded information. How do you think bills can be you had set them? improved and how are you going to ensure that they Andrew Wright: In some cases, yes. are? Alistair Buchanan: One of the recommendations that Q118 Barry Gardiner: And you had no powers— has come through, and it is one that we will look at Andrew Wright: No, we— very carefully is whether we have a standard pro Barry Gardiner:—to then take them to task and say, forma approach for all companies on annual “I’m sorry, the moment this annual statement or this statements so that the consumer, whoever is supplying bill comes out and it is done in this way, you are them, can see the same piece of information in the clearly taking the Mickey”—I nearly said something same place. That is something that I think is very else—“and you are going to have to put it right much worth looking at. otherwise we will impose certain sanctions on you.” Andrew Wright: That is exactly what we are doing Q114 Barry Gardiner: But you did that, did you not, and in the future the companies are going to have to in your previous probe, and in fact you yourselves be a lot more prescriptive about what they put on their gave an example about where the 2008 probe had annual statements. gone wrong when you told the companies that they had to put, in a prominent position, that the domestic Q119 Barry Gardiner: So why did it not happen in customer may change their electricity supplier and the past? Scottish and Southern Electricity’s response to that Andrew Wright: Perhaps mistakenly we expected the was to put something at the bottom of their annual companies to comply with the spirit of what we were trying to do and not just the letter. Some of the statement that said, “It is easy to change supplier so companies did, but in some cases that was not the why don’t you recommend us to your friend so they case. can benefit from our great service.” You said this back in 2008. Don’t tell me you are saying the same thing Q120 Barry Gardiner: In terms of confusing now? information, things like calorific value that, let’s face Alistair Buchanan: No, the suggestion that has come it, does not mean much to most of us when we read is that it is even more formulaic, because if you have our bills and the conversions of calorific value and so different companies they are going to present their on. Do you think there is a case for removing those information in different parts of the page and in a from the bill and having something that is different way, and just whether you have that in a standardised in a way that people can understand? more formulaic approach for all players. Alistair Buchanan: I believe the Minister is coming to see you later today and I suspect will happy to talk Q115 Barry Gardiner: So you will give them a form about it. The Government is doing a big review of of words? bills and this may well be part of the thing that they Alistair Buchanan: We need to discuss that with the are looking at going forward. In fact I think it is industry but these are some of the ideas that have exactly this in terms of presentation. come up in the last couple of months. Andrew Wright: It is clear that where we give latitude Q121 Barry Gardiner: What advantage would there for companies to interpret what we want them to do, be to Ofgem running a switching site where customers in many cases—not in all cases, there are some very could log on when they get their bills, and that site be good examples as well—some companies will take advertised on the bill, so that they say, “Yes, I may as advantage of that to subvert the original intention of well see what Ofgem says I could be doing if I went what we were trying to do. I think the feedback that somewhere else with the number of units that this bill we have had is that even in its imperfect says I have consumed”, go on to your site as a implementation the annual statements has been switching site and say, “Oh goodness me, if for the welcomed by consumers and has had a positive past six months I had been on somebody else’s tariff impact on the market. I would have saved myself £50 here” or, “Thank goodness I am with whoever I am because I am £20 cheaper than anybody else in the market”. Why don’t Q116 Barry Gardiner: Welcomed by, what, the 30% you have something like that where people at the point of them that could remember getting one? that they get their bill have on the bill an email Andrew Wright: Exactly. When people— address that they can go on the web and find, and see Barry Gardiner: I do not think you can say it has what their bill would have cost them with each of the really been an effective tool when the majority of other suppliers? Would that not make sense? people say they can’t remember ever getting it, of Alistair Buchanan: It is a very interesting idea. As those that did remember getting it a proportion said you know, Consumer Focus have a switching site. that they thought it was intelligible but I do not think Sadly, again coming back to some of the similar data it has really been an effective tool, has it? you have just mentioned, 44% of consumers do not Andrew Wright: No, and we completely agree that it understand it when they get on to it. Therefore we has not been as effective as we want but that is the have had a number of recommendations and companies in their implementation, not our original suggestions in the last two months with regard to intent. It is fundamentally a good idea and it is— switching sites and linked to the tariff proposal. We Ev 28 Energy and Climate Change Committee: Evidence
22 June 2011 Alistair Buchanan and Andrew Wright will certainly take your suggestion away as part of in the most recent mis-selling. I would have thought that. that as a regulator you must be looking across the board to understand what is happening in other sectors Q122 Barry Gardiner: Without discussing the and learning from it. details of the case that is currently under appeal, why Andrew Wright: Once again it is quite difficult to talk was it left to Trading Standards to prosecute the recent about specifics, but I think if you look at our actions case of doorstep mis-selling? As I said, I don’t want we have significantly strengthened the marketing to talk about the details of the case and I respect the licence condition during the probe, including being fact that you can’t do that but you would understand very much more specific about the information that in such cases there is an expectation upon the companies have to provide on the doorstep. We are regulator. now undertaking enforcement cases against four Alistair Buchanan: Yes, our mis-selling companies under those strengthened licence investigation—and I will be very happy to come back conditions, and we have said in the recent retail and talk about this when this case reaches its market review that there may well be a case for conclusion, I have to be careful with my words here, strengthening that licence condition further, given as you will understand, but we have a case of mis- some of the—once again adhering to the letter not the selling that we are proceeding with SSE. I will have spirit of the proposals that we have seen, so being to wait until I am allowed to come and talk about that more specific about what companies have to do on the in more detail. doorstep. We take this issue very seriously. The flip Andrew Wright: Of course that is not the first case of side is that around about 40%, at the time of the probe, mis-selling that we have had to deal with. There have of all customer switching activity took place as a been previous ones. result of doorstep selling. Our objective is to try to make that work in customers’ interests rather than Q123 Chair: Would you agree, though, that what is against their interests as it probably does at the emerging is that this is probably only the tip of the moment. iceberg, that there may have been an awful lot of mis- Alistair Buchanan: Can I just add to that, which is I selling by a number of energy companies? think the point that you were making was: will lessons Alistair Buchanan: Certainly I would say that the be learnt and will you come and tell us what they are? responses to the mis-selling investigations, which we The answer to both of those questions must be yes. have announced, have been among the most supported To a certain extent E.ON and British Gas Centrica from consumers who have written into us directly may at this stage have been more beneficial to you in with examples and evidence. Yes, I can say that. their presentations to you a few weeks ago than we Chair: We will certainly be interested in talking to can be because, of course, they are not in the mis- you again when you are able to discuss this more selling investigation and they made some comments freely. I think having seen what has happened in the to you which suggested why they do not think they banking sector and the repayments that have been are, and why they think they have a superior approach. required for mis-selling the payment protection That is all minuted. insurance, we suspect we are uncovering something similarly scandalous in the energy industry. Q126 Laura Sandys: May I take it then a little bit beyond the mis-selling, because that obviously is Q124 Barry Gardiner: Perhaps you could say difficult for us to discuss openly. It is to do with the something about the type of complaints that led to appropriateness of the technique of doorstep selling. your current investigation into four of the energy That is really where the fundamental problem companies? potentially lies when it comes to mis-selling. On Alistair Buchanan: I would like to, but I know I principle are you comfortable with the fact that would be in enormous trouble about due process, so something like an energy contract is sold to you on the lawyer would kill me. the doorstep with all the connotations that doorstep Barry Gardiner: That is fine. selling comes with? Andrew Wright: I think there are additional risks Q125 Laura Sandys: Can I broaden this out a little when you are selling a product on the doorstep, in bit? You obviously have now decided to take action people’s own houses, people probably feel more with regard to the energy suppliers but when you start vulnerable and threatened and therefore I think it is to go back and look at the trust that you have really important to make sure that companies behave obviously built up with the companies it creates some well when they are marketing on the doorstep. concern, and picking up the Chairman’s point about the whole issue of mis-selling, are you comfortable Q127 Laura Sandys: But there are so many other with the way that firstly the big six profile certain different forms—you have mobile phones not sold on target audiences on their doorstep selling? Are you the doorstep, sold very effectively through expensive confident that their sales methods are appropriate and marketing campaigns, direct mail and so on. All these that they are appropriate to particularly the targeting things that are passive sales environments, where the of certain audience groups that they undertake? Are consumer reacts to the information. This is something you also comfortable about the incentives that are put that is a pressurised sales environment and always in place for their sales teams? As the Chairman said, has been. these are key issues that the financial services sector Alistair Buchanan: This is something that you will has been scrutinised on for many, many years, not just be surprised at the time of the 2008 probe and again Energy and Climate Change Committee: Evidence Ev 29
22 June 2011 Alistair Buchanan and Andrew Wright at the time of the March review we looked at. Not Again, some of the things that we have introduced for only is it 40% of sales are done this way, and you are the domestic market do have a rollover into that SME right, whether you have the interactivity there that you market, and I think it is a fair point, and we are very want is an interesting issue. Of course both E.ON and engaged in this area. British Gas have said they have handheld devices that helps them get information to give that interactivity to Q130 Sir Robert Smith: Do you share the industry’s consumers. 61% of pre-payment meter consumers are concern that trying to regulate the third party won on the doorstep. intermediaries through the supplier would not be the One of the issues that we have been advised by our most efficient route in, and it might be better for European colleagues of Ofgem is that—because I Government to give you— think there some direction you are travelling with your Alistair Buchanan: I think this is something that we question and if it isn’t then you will shoot me down, are working through at the moment and, Andrew, you so say stop, is should we ban doorstep selling. It looks might say a bit more. from the advice that I have had from my European Andrew Wright: Yes, the status quo is that we have team that we would find that very difficult to do under no powers to regulate third party intermediaries current European law and I can write you a short note directly. They are not licensed under the Energy Act on that if that would help. or any of the Acts that give us our powers. So therefore that is the responsibility at the moment of Q128 Sir Robert Smith: Just one thing that was said an OFT. If that is to change, there would need to be earlier about the bills and the regulation was that you primary legislation in order to give us those extended were surprised, or disappointed, that the companies powers or perhaps introducing licensing of third party had not adopted the spirit of the regulation. Is that intermediaries in some form. So the only route open really so surprising in a market that, if you give to us, under our current powers, is through the someone a frame of reference in which to try and relationships that the suppliers have with those third make a profit, they do not pursue the most profitable party intermediaries, and I understand what the route? suppliers are saying but there are few alternatives Andrew Wright: I think when we did the 2008 probe under current powers. there was a very clear signal in that probe that we expected the companies to up their game, that we Q131 Sir Robert Smith: Would you define small or were giving them a degree of latitude in how they micro businesses by the size of the companies, or implemented the proposals. We introduced a series of would you define them by the size of the energy standards of conduct that we thought represented the contracts that they are looking at? reasonable behaviour that customers should expect, Andrew Wright: We have a range of criteria, which I and we made it very clear that if they did not adhere can’t recall at the moment—we will get that to you— with spirit of what we were trying to do that we would but it is a mixture of numbers of employees, turnover, be back. They didn’t in many cases and hence we for defining what falls under the current micro came up with the next retail market review. businesses definition. Are we surprised? I don’t know, but I think in terms of principles of better regulation, we constantly try to Q132 Chair: Do you share the view that the methods adhere to those. Then we did not go for the very used by some third party intermediaries are very intrusive, very prescriptive approach from day one. aggressive and possibly should be made illegal? Alistair Buchanan: Yes, this whole area we are Q129 Sir Robert Smith: One of the remedies that investigating and we will be talking to Government needs looking at, certainly from my casework and I about if we need additional powers, yes. think from representations you have had, is that there isn’t much difference, when it comes to small Q133 Chair: And that often the activities of third businesses and micro businesses, between the energy party intermediaries are very damaging to small consumer and the domestic consumer, in terms of business customers? knowledge, time and ability to work the market, but Alistair Buchanan: Indeed. the protection is nowhere near the same, so small business users quite often finds themselves in a Q134 John Robertson: Yes, if we move to improved seriously disadvantaged contract. reporting transparencies. How would your latest Alistair Buchanan: We made this point in March and proposal—proposal 5—to review transfer pricing and we have been working with the FSB and other— hedge accounting practices, improve the transparency particularly SME related—organisations. Again I have in vertically integrated utilities? been asked elsewhere, “Are there additional powers Andrew Wright: Yes, during the work that we have that you might want?” It may be that this is an area done so far, I suppose we have come up against a bit that we may seek from Government additional of a brick wall in terms of being able to fully powers, particularly with regard to third party understand the different accounting practices of intermediaries. We may need a licence condition to different companies with respect to hedging and ensure certain standards of behaviour. We are looking transfer pricing, which is further complicated by the very closely at the back billing arrangements. We are multi-national nature of some of the companies and clearly looking very closely at rollover, or I should different business models. During the time we had in say banning rollover without notifying the SME, and the retail market review we weren’t able to get to the the basics on transparency and clarity of the bill. bottom of that because of the complexity, and so we Ev 30 Energy and Climate Change Committee: Evidence
22 June 2011 Alistair Buchanan and Andrew Wright have undertaken to go further on behalf of consumers Q137 John Robertson: It has to be seen in the to try to understand as much as we can, using the best whole, and the whole says that the costs were put up expertise that we can in this area. Coming out of that, as a result of the need to put increased financing into there would either be a greater understanding or research and development, or that they are not making possibly further recommendations about disclosure, enough money to pay off debts or whatever. That which would help consumers understand exactly what obviously does not apply to this company, and I have is going on. a problem where you put nearly five times the We are going into this with an open mind. We don’t inflation rate on to your prices, and that you transfer know what we will find. We don’t know whether the money from that, which could have gone to the outcomes will be useful and it may be that there is customer of the day: one, I would say it breaks the only so much you can find out about complex competitive rules; and two, it makes a mockery of accounting and hedging strategies within multi- your moral obligation to the customers who get the national businesses, but we are trying to do as much service from you. Is that not your job to support as we can on behalf of consumers to try to improve these people? transparency. Alistair Buchanan: I can give you limited confidence here; it is caveated and limited. In the area that I and Q135 John Robertson: Yes. Some of the reaction my colleagues have a direct responsibility for, which from the industry itself, other than one company, is pipes and wires, we have strict ring-fencing on seems to be positive with the hedging or their worry ScottishPower Distribution, ScottishPower about their competitors finding out information, and I Transmission and Manweb. Those are the three businesses owned by Iberdrola that are network can understand that. The SSE are the ones that don’t companies. In 2008, when we reviewed their debt want to go down that road at all because it is not their book we were uncomfortable with the fact that 80% way of working. So you have five out of the big six of their debt for the regulated entities was short-term. who have been fairly positive. Having said that, we Therefore, we said to the company, “Look—I think it have the position now—and you mention multi- was condition 41 for electricity distribution and B9 national companies—where a company can take one for electricity transmission—we think you may be in out from this country, take it to another country, and violation of that”, but to give you confidence the then transfer it to a third country. I understand they company reacted immediately and they created a will not be breaking the law on this, but there a moral balance sheet structure for the network companies obligation to the customers within the UK. How do whereby you only had 10% being short term, and the you see that? reason that we were so worried about that was the Alistair Buchanan: Just to answer—and it is linked volatility in markets and that a network company to your SSE question, I think—is that— normally would not carry short-term debt, they would John Robertson: Actually, it is not the company I normally carry long-term debt. was thinking of, let me say that. So I can give you limited confidence, Mr Robertson, Alistair Buchanan: No, I am aware of that. It is about the network side of the piece. I think your interesting that SSE probably have less to travel, as questions—I mean the ScottishPower Iberdrola group do Centrica, because they give full statutory accounts. are coming to see you—are questions I am sure that The amount of information that they give is you would want to ask them. incomparable with the amount of information that you are getting from the four of the big six that are linking Q138 John Robertson: While they are coming to see into group accounts. Our remit is to try and improve us, I want to know Ofgem’s position on this: the lack information, because information is critical to of transparency is what this section is about. The lack confidence in markets through transparency—and of transparency, a reputable newspaper had to do the coming back to Mr Lee’s question. If there are digging to find out this information and you probably taxation issues, I am sure HMRC will be looking at did not know it until you read it in the newspapers. those carefully. Alistair Buchanan: Where I have statutory responsibility, which is the network side, we have a Q136 John Robertson: I imagine the taxation part ring-fence and we sorted out ScottishPower’s debt will be taken care of. They would be very foolish if position in 2008 when we were not comfortable with they broke those rules. it. I don’t have statutory powers in this area. I don’t Alistair Buchanan: Yes. have statutory powers over Iberdrola SA’s balance John Robertson: The problem I have is where a sheet management, treasury management. I don’t company puts up its prices by 19% for gas and 10% know what they are doing. for electricity, and then transfers £800 million to a Spanish company who then transfer the money to an Q139 John Robertson: Do you need more teeth? American company who are only putting their prices Alistair Buchanan: I think it would be quite a up somewhere between 2% and 8%. Is it right that dramatic move if Government went down this route the customers of that company are subsidising other because it opens up many, many multi-national companies in another country? companies into a level of debate. There is quite a Alistair Buchanan: I hear what you are saying; I have macro-global debate. read the stories with interest. Our responsibility in this area is with regard to the regulated entities, as you Q140 John Robertson: So the difficulty then says would expect. That is my statutory duty. we don’t do it just because it is hard? Energy and Climate Change Committee: Evidence Ev 31
22 June 2011 Alistair Buchanan and Andrew Wright
Alistair Buchanan: I think you and the Government Grid provide. The second point I think, on a wider would have to change my statutory powers if you basis, is that for all the successes of RPI minus X would like me to do that. there is a price control formula for the sector from John Robertson: I would like you to do that. 1989/1990 onwards. What it failed to do—because it was basically a crushing formula, it crushed costs, was Q141 Chair: Let me come back to another aspect it drove out innovation and research and development, of transparency where I think you do have powers. and it drove out developments in technology. Can you Transmission costs represent a proportion of blame the management on that? Maybe. You might electricity consumers’ bills. There is widespread blame the price control formula. That is why we have concern—not least in my constituency in Suffolk— moved away from RPI minus X to the RIIO Price about the proposal for new overhead transmission Control Formula and part of that, one of the I’s within lines across beautiful countryside and an area of the RIIO is for innovation, and consumers are now outstanding natural beauty. It is felt very strongly by providing monies for innovation—and I did not say people—not only in Suffolk, I know there are this, Chair, you did—so that if a company has been proposals elsewhere in the country—that the marginal steeped in the 20th century, because they would argue extra cost of requiring National Grid to underground the price control did that to them, that is no longer an these lines, or to consider perhaps under sea excuse for them. transmission from new generating capacity, offshore Chair: All right. The Minister of State is waiting wind and coastal nuclear power stations, would be patiently in the gallery, but because of my pretty small. Do you think it would be helpful if there extraordinary tolerance and generosity towards my was more transparency so that consumers could see Scottish colleagues, I will ask John Robertson to ask how much of their bill related to transmission costs, the last question. and how relatively small the extra cost of preserving permanently against destruction of many landscapes Q143 John Robertson: Yes I am interested about by allowing National Grid to charge slightly more and your eight-year cycle for these developments because to use that money to invest in underground that means the Beauly and Denny line is now in at transmission? least its second cycle, it could even be in its third Alistair Buchanan: Where to start? This is a big area. cycle depending on where we started. The Overhead lines versus underground: a multiple I have transparency of it all is really the thing. We have heard National Grid provide 15 to 20 times more reached the stage where a line is still being built. It expensive—you will have heard the same thing—and will take years before it is completed and the cost will cables carry environmental issues with them as do be greatly increased because of the time delay. If they over ground. had put it underground in the first place we would National Grid negotiate with us, as do ScottishPower have had it completed years ago and the cost would Transmission or hydroelectric transmission, on an probably be good deal less than what it is. Should we eight year cycle what they need. What they do within not have independent costings of these things rather that pot of money that they negotiate is up to them than trusting the companies because, let us be fair, because, as you would expect, we then hire everything you have said today would suggest that we professional engineers to go through their plans. That can’t trust the companies to do anything is their management responsibility within the independently or on their own, we do have to keep an regulatory format. There is now a reward for visual eye on them. amenity, so the companies have an element within the Alistair Buchanan: Yes you are right about the price control package now for underground/over timescales. It is really extraordinary, Ofgem on behalf ground calculation. It may be that they want to think of the consumers awarded the two Scottish companies carefully about whether more work needs to be done around £300 million in 2004 to build Beauly Denny in this area and we now have a research fund, the Low and get on with it. The latest figures I think are 565. Carbon Network Fund, available for the first time for The negotiation that we had with hydroelectric—and transmission companies from 2013. It may be that this is a very important point and gets to the heart of they can do some work here on pure R&D to see your question—both in 2003/2004 and now, we have whether they can get some benefit out of under at least one company of professional engineers grounding versus over grounding matrix, but by and advising us and going through their numbers with a large this is a decision that National Grid will have to fine tooth comb. The agreement that we have with work through if it is in England and Wales. hydroelectric at the moment—and we are waiting for ScottishPower to give us their proposals—from memory, there is a gap of £50 million1 between Q142 Chair: Do you share the scepticism about the what they would like and what we think they need to claim that undergrounding is 12 to 17 times—or some spend to get it done. Therefore, consumers will fund extraordinary multiple—of the cost of overhead lines? the figure that our engineers have suggested, which is Do you also share the view that National Grid seems the lower figure, and therefore if I can give you some to be a business that is rooted in 20th century comfort that they are being reviewed, but when will technology whose solution to 21st century problems the line be built, 2015/2016? is to do what would have been done in the 1960s, and John Robertson: How long is a bit of string? it is the kind of business where the management like Chair: Thank you very much. A very useful session to go home at 5 o’clock? and some helpful discussion, and there are some Alistair Buchanan: The first question is: I have no evidence other than what the engineers or National 1 Note from the witness: “The gap is around £20 million” Ev 32 Energy and Climate Change Committee: Evidence
22 June 2011 Alistair Buchanan and Andrew Wright issues, which obviously we are going to return to you Alistair Buchanan: Of course. Thank you, Chairman. with you as soon as it is possible to do so. Chair: Thank you for coming in.
Examination of Witnesses
Witness: Charles Hendry MP, Minister of State, Department of Energy and Climate Change, and Jonathan Brearley, Director, Energy Markets Infrastructure, Department of Energy and Climate Change, and gave evidence.
Q144 Chair: Minister, welcome. I am sorry we have have bought at different stages of the cycle, and not quite got our 11 o'clock deadline, but you will companies that bought more gas when prices were have heard a bit of the last exchanges and, as you high have ended up finding that they have taken a know, this is an inquiry that is attracting a lot of bigger hit in that respect and are needing to recoup on interest from outside, not surprisingly. that respect, and different companies bought at Can I start by asking you whether you share the different times. So that is the driving factor, but there dismay that I and many other people felt at the is a small element in price increases that relate to other announcement by ScottishPower of very hefty price charges that are on people’s bills. increases recently? Charles Hendry: Inevitably we share the Q147 Chair: Do you think consumers are prepared disappointment, which you and every Member of for the impact of those other factors: the Parliament, and every consumer group and every environmental and social factors? consumer in the country will have felt at the scale of Charles Hendry: When you say “prepared”, I don’t those announcements. We don’t know yet whether that know whether they are willing to accept them or is going to be followed by similar price increases by whether they understand they are coming through. I other companies. Quite often I understand that the one don’t think there is enough understanding of the that comes first tends to be larger than some of the charges that are there and which are coming through, ones that follow, so we don’t know what the pattern and that is why we want much greater clarity on is going to be moving forward. The response that we people’s bills. I think that we also need to do more gave is that people must use it as an opportunity to to persuade them why investment in these areas is look around for the best deals, to see that they are necessary. Part of these, for example, ask for the getting a better deal as consumers because there are CERT programme, which is directly associated to very real benefits to consumers from seeking to switch energy efficiency work and, therefore, directly from different tariff rates. We are looking for greater reducing the bills of some of the consumers who can clarity in that respect, but switching is an integral part least afford to pay the bills, so something that I think of how the market should work. we would all accept is important work to be done. Part of it is also to do with our longer term energy Q145 Chair: Do you think the claim that this security, getting the vast amount of investment that increase was justified by rising wholesale prices and we need in low carbon infrastructure and which, if we additional environmental and social costs? Do you think that claim was right? don’t secure that, the impact on bills would be Charles Hendry: There is no doubt that wholesale radically worse because there wouldn’t be enough prices have increased significantly. If you look, the supply to meet the demand going forward. price has gone up by 30% for the winter price for gas, May to May, and 44% for the day ahead price for Q148 Barry Gardiner: Minister, you have an gas. So we have seen over the course of the last year ambitious programme in terms of smart meters, in significant wholesale price increases. That comes at a terms of the Green Deal, the Smart Grid, and all of time when we saw a harsher winter than had been these to a rather large extent depend on the companies anticipated in North America and northern Europe, at delivering and being able to implement. We have a time when we have seen faster economic recovery heard from the regulator earlier this morning that he in China and elsewhere, and at a time when people is minded to—he has not committed himself finally are expecting there to be greater demand because of but minded to—refer to the Competition Commission. events in Japan and to some extent in German as well. How is that going to affect the capacity of the So I think that we can understand why there is an companies to deliver, what do you think the effect on increase in wholesale prices pressure. That is a more the public perception of the companies is going to be, significant part of the changes and environmental and do you feel that people may think that these are charges. the sort of companies that they are not sure they want to have come in and do their insulation, and that they Q146 Chair: So the attempt by ScottishPower to don’t trust very much to do all the things that the blame part of this on the impact on the cost of Government is very keen that they should get on and environmental measures was not correct? do? Charles Hendry: There is an element but, in terms of Charles Hendry: My understanding—I wasn’t in the the biggest single factor in pushing up prices at the room at the time—is that the regulator indicated that moment, it is wholesale price increases that is driving he “might refer”, not that he was “minded to refer”, that. Also, one has to reflect that different companies which I think is an important distinction. Energy and Climate Change Committee: Evidence Ev 33
22 June 2011 Charles Hendry MP and Jonathan Brearley
Q149 Barry Gardiner: Oh I thought it was consumers feeling that they are able to get a good deal “minded”. Ms Sheridan obviously has a slightly from their supplier. That is separate from the work different recollection of it. that we need to do. We can’t meet our challenging Charles Hendry: That perhaps can be clarified in objectives, in terms of rebuilding the energy due course. infrastructure, without the big six. If they decided not There is no doubt that we need these companies to to invest—and they are global companies—we simply invest in our energy security for the future; that they can’t do it. have a very significant role to play in investing in the new generation capacity that we need, as you say, in Q152 Barry Gardiner: I agree with you, so let me smart metering, in development of the Green Deal, all phrase this in a yes/no answer way. I did not want to of the issues that we need to give us the energy try and corner you but let me try and do it in this way security in a low carbon future, which we want. We so that we do have clarity. Do you believe that the also need to bring in new entrants and some of the public’s lack of trust in the suppliers will have an work that Ofgem is doing, both in terms of trying to adverse impact upon the Government’s capacity to attract in new generators, and particularly on the retail deliver Green Deal, smart meters and Smart Grid? side to bring in new retail arrangements, I think is Charles Hendry: No. going to be a critical part of giving consumers John Robertson: That surprised me. I was really confidence, because at the moment—and this came putting money on we wouldn’t get a one word answer through in some of the questioning towards the end of there, but there you go. Well done, Minister. the regulator’s session—there is complete lack of Chair: You could try a one-word question on that. clarity as to where companies are making their profits. Is it because of the retail margin they are making here; Q153 John Robertson: Minister, you talked about is it the generation— choice and confidence and yet we heard from Ofgem that basically 20% of people understand switching, Q150 Barry Gardiner: You are rather making my and the other 80% obviously have no confidence in point for me that there is this lack of transparency, the system or understanding of it and, therefore, don’t lack of clarity, lack of trust between the public and have choice. So is it not a case where we need to the companies, and yet it is those companies that the simplify the system so as the 80% have that Government is relying upon to deliver the policy, and opportunity to get the best deal they possibly can? if the public don’t trust those companies do you not Charles Hendry: I am one of the 80%. I went on line feel that that is going to have a significant impact on to compare my tariffs and I was so confused by the their capacity to deliver your policies? options that I decided to stick where I was, and I think Charles Hendry: We recognise that we need those I am probably not untypical in that respect. I think companies. They have to invest in Britain. They have that is one of the reasons why the legislation going an established position in the British market and we through, the Energy Bill, which will require want them to invest further—billions further—and the information on people’s bills about the cheapest tariff indication is that they are prepared to do so. That does available from their suppliers, is going to be an not mean that the regulator in particular, on behalf of important part of that, because when you start to the consumer, should not take a robust line in compare the different time of day tariffs, the green defending consumer interests, but that also brings me tariffs, the whole range of them, that you can’t begin back to the issue of liquidity of competition. That is to work out where you are better off, and the evidence why we need additional players to be coming into this from Ofgem is that half the people who do switch end market, because that is the best way of ensuring that up on a higher tariff than they started with. So much consumers feel they have a very genuine choice. You greater clarity has to be part of the solution. have people like the co-op saying they are coming into this area, so people who are not actually generators at Q154 John Robertson: The other thing that was self- all, and that will be an important part of that consumer evident to everybody here was that there was a lack trust and confidence. of confidence in the big six, not so much lie to the customer but not to perhaps tell the full story. Q151 Barry Gardiner: Minister, I have a great Therefore, if you don’t have that kind of confidence respect for you and the command you have of your then, again, you don’t have the choice of being able brief but, with respect, you are not answering my to go to a company that you can trust. Is it not a case question. You are answering a number of other issues, that Ofgem really do have to get more teeth to take which I have no truck with you about, I absolutely on these companies, and perhaps you could also agree with what you are saying, but what I am really comment on something that I mentioned earlier, is it trying to get at is the issue of lack of trust on behalf not time that the big six should not be the big six and of the public in those companies, and the capacity that perhaps should be a slightly smaller 12? that lack of trust in those companies will have on your Charles Hendry: I think it depends on whether you effectiveness in delivering Green Deal, in delivering mean big six in terms of retailer or in terms of smart meters and in delivering the Smart Grid, and generation, but we do— that is what I would like you to focus on. Charles Hendry: Yes. There are two separate aspects. Q155 John Robertson: We will talk about retail at Lack of trust is a matter of concern and, therefore, the the moment; generation is different, it takes lots of steps that need to be done to address that relate to money for that, but in the case of retail where the transparency, they relate to liquidity, they relate to ordinary person is the one that is affected, that is my Ev 34 Energy and Climate Change Committee: Evidence
22 June 2011 Charles Hendry MP and Jonathan Brearley constituents, for them to get a better choice, then do might have, some say, is that they have an automatic we not really have to break the six up? hedge against the gas price going up and down, which Charles Hendry: I think what we have to do is to controls most of your costs. So when the gas price is bring in new entrants, and those don’t have to be small low you can offer a low tariff but when it is high you new entrants, the co-ops coming into this area, and have no way of getting into— they could come in in a very big way. There are other trusted High Street retailers who are indicating they Q160 John Robertson: So if this company would may wish to come in and could immediately be a big hedge against it, then it would end up cutting its retailer. They would shop around for the best deal. I competitors? think consumers would find that quite a comfortable Jonathan Brearley: My point being that if you look way of making sure that they get the best deal in that, at what Ofgem is doing in terms of the Retail Market and I think that competition would put significant Review, and its work on liquidity, it is to make sure pressure on the big six as well. So I don’t think it is we have those forward markets, which don’t exist in a question of breaking them up but what we do have a strong enough form now, that would allow that to do is to get more players in the market. insurance to happen, that would allow new entrants to come in because the best way to get competition is to Q156 John Robertson: If you are up against say if the incumbents in the market are making too companies that size, you don’t have much chance of much money out of this somebody else should be able getting some have you? to come in and do it, and we are beginning to see that Charles Hendry: If you are the co-op or you are one with the co-op and we do hope others will follow that. of the other big High Street retailers you have Charles Hendry: There is a real difference as well, in incredible market presence and clout— that the online prices that are available do show gains for consumers, the direct debit arrangements offer real Q157 John Robertson: Do we not just create another gain to consumers. So there are pricing structures— large company that, in effect, the consumer does not have any faith in? Q161 John Robertson: That doesn’t help the real Charles Hendry: Then I think you give the consumer couple up in Drumchapel in my area because they real choice, you give the consumer a choice between can’t get access to all these online facilities. I want to a vertically integrated company, which owns the help them because, in a sense, they are the people that generation through to the retail, and between those need the help the most. There is no competition; there whose job is purely to retail and to find the best deal. is no choice for them, not in the slightest. I expect you, Minister, to try and give these people the best Q158 John Robertson: I have to tell you, Minister, deal that is possible, and I don’t expect to see six I am looking at these tables here that tell you what prices that I can throw a blanket over. I expect them the price of electricity and gas is on average to the to be in competition with each other, whether they are customer, from all these companies, and I have to say going from one end of the market or another end of I can throw a blanket over them all. There is no the market, I don’t expect them all to have the same choice. There is very little choice in cost and the prices. amount of money. The only one that sticks out is ScottishPower because they have already added on the Charles Hendry: There is variation; you see different extra 20% and 10% on to their prices, but other than increases in prices. If you look at the last round of that they are all the same. So where is the choice? prices they go between 0% for EDF for some of their Charles Hendry: They are buying in the same prices and 9% for others before the ScottishPower wholesale market, so they are buying gas at the same ones came through, so that there is variation in terms price for their gas generators. of how those prices change over the time. I think the most significant problem at the moment is the lack of Q159 John Robertson: Where is the competition? If clarity, and what people are buying into about how a everybody buys something at the same price, and they tariff will change over time and whether people are all sell at the same price, then there is no winner here. buying into something that will give them a real long You can go anywhere and it spreads. Where is the term benefit, or whether it is a short term benefit and competition for these companies to make a profit that they need to continue to look around afterwards. makes them better than the other company? They are all playing the same game here. I mean we are Q162 Sir Robert Smith: Considering the tariff issue basically working a cartel here with all these and your own experience of going on line, do you companies. support Ofgem’s basic conclusion about reducing the Jonathan Brearley: If those prices were higher than number of tariffs and having just the one Evergreen they should be and if people could make unfair profits, tariff? then you would expect to see new entrants coming Charles Hendry: I think having an Evergreen tariff into the market. For example, you could see people has real benefits. I think that there are practical like the co-op coming in. To make this work there is differences about going too far in reducing the number a critical thing, which is different in energy compared of tariffs, that some are very historic and do you want to other markets, and that is the ability to be able to to force people to move off a tariff that they have buy forward and hedge your position. So if you come bought into? So I think having an Evergreen tariff, in just as a retailer rather than a vertically integrated which a consumer knows that they can look at and company, the advantage that the vertically integrated that is going to be the most beneficial one and run by Energy and Climate Change Committee: Evidence Ev 35
22 June 2011 Charles Hendry MP and Jonathan Brearley a certain set of guidelines and rules, will bring benefits part of the process of assisting that and making a more to the consumers without doubt. liquid market and I have no doubt, in terms of their instincts, that where they are coming from is that they Q163 Sir Robert Smith: Is it important that there is absolutely share our view that we need a more liquid a discounted social tariff that is related, so that the market. person who can’t shop around who may be finding their bills most challenging benefits from the market? Q167 Dr Lee: I was quite amazed with the admission Charles Hendry: The benefit of being able to benefit that four years ago they realised there was a problem, from the market should be available as far as possible and yet there seemed to be no discernible response by to all consumers and, therefore, to people who are on Ofgem to the absence of competition. If they are not social tariffs that one wants them to benefit in the successful in improving liquidity, will the Government same way. It is going to be more constrained intervene directly themselves? inevitably but, nevertheless, the principle of people Charles Hendry: I think the right framework, and I being encouraged to look around, able to switch, to think that is where we are getting clarity that wasn’t have a clarity about where they are switching to and there before, is the greater distinction between the role how that may benefit them, should apply to all of the Government, which sets the framework, the consumers. strategic framework, and then the role of an independent regulator to make things work within Q164 Sir Robert Smith: On the earlier point about that. Government will set out its desire to see greater consumer confidence, is it still the vision, as was up liquidity, and then it is Ofgem’s job to make sure that till now, that the retailer of energy is probably the that is delivered and that we get new entrants coming main source of marketing and information for the into that market. So we set the objectives and exactly energy saving as well, or do you see other companies how those are delivered then quite a lot of that would coming into that market? be for the regulator rather than the Government itself, Charles Hendry: I think we will see many others but there is no doubt by Government that we want to coming into that market. I think one of the issues see new entrants in the market. We think that is good involved in the Green Deal is it is going to bring in a for prices. We think that is good for consumers. lot of people, in terms of the insulation industry, some of the High Street retailers; they are all keen to be Q168 Dr Lee: Do you think if the low liquidity part of the energy efficiency market as well, and so problem continues that this will be a threat to the there will be many people who will be giving advice, proposed electricity market reforms? and that is why in the course of the Bill going through Charles Hendry: EMR is also designed to address we spend quite a bit of time focusing on doorstep that issue, and so the way in which the EMR is selling, on what is going to be permissible for people structured—and Jonathan is leading on this, so I will to try and sell on doorsteps. get Jonathan to add to it—is designed to encourage new entrants to come into the market. The contract Q165 Dr Lee: Liquidity: do you think the dominance for the different structure that we proposed would be of these vertically integrated supply generators are an part of that process, for specialist generators to benefit obstacle to new entrants into the market, Minister? under the capacity mechanism. So I think the whole Charles Hendry: The dominance of large companies structure of that is designed to enhance that, but, clearly makes it more difficult for small new entrants Jonathan, please add to that. to come in, particularly where you have an online Jonathan Brearley: Yes absolutely. So if you do have pricing approach, perhaps, which undercuts smaller a long term strike price then you are, to a great extent, companies’ ability to compete. So I think that is a insulated against some of these variations in the matter that needs to be clearly focused on. I think if wholesale price I described before. But liquidity is a you were to see larger companies—the High Street fundamental part of EMR, and if we are going to have retailers—coming into this space, then they do have reference prices in different markets we need those the financial clout to be able to come in in a more markets to be liquid and we need those markets to substantial way. What we have been concerned to do allow people fair access to be able to sell their is to try and reduce some of the pressures. So, for products, more from a generational perspective. example, the environmental requirement on However, I think we share this objective with Ofgem. companies we have lifted now to having to have I don’t think Ofgem are saying that they don’t agree 250,000 customers before you start being involved with us. We all want to see both more liquid markets with the CERT programme, so to try and reduce some in terms of the short term but, particularly, in terms of of the other pressures on the smaller companies to those longer term markets I described, and the ability enhance their ability to grow and to compete for retailers to be able to hedge against their position effectively. and to be insulated against some of these changes. I think that is the thing that will help new entrants into Q166 Dr Lee: The previous panel, Ofgem admitted the retail market as well as helping EMR. that they were perhaps a bit slow out of the traps on competition, the big six. Do you think they are Q169 Dr Lee: What would your response be to Drax equipped to deal with the low liquidity problem? Power’s assertion—they told us during our EMR Charles Hendry: Yes I do. I think the work that they report—that the capacity mechanism could reduce have been doing on liquidity has been very important. wholesale market liquidity “as the volume of capacity I think the requirement on auctioning is going to be that is subsidised increases in a market that already Ev 36 Energy and Climate Change Committee: Evidence
22 June 2011 Charles Hendry MP and Jonathan Brearley suffers from low liquidity”. What is your response to some things we otherwise might want to do and I am that? sure some things you might want us to do. That is to Jonathan Brearley: The key question on liquidity in give clarity to investors so that they can get the long the market is the transparency at which people trade term certainty they need. and how much volume goes through the market. Now there may be a marginal impact of a capacity Q172 Dr Whitehead: So how do you distinguish mechanism but lots of other good liquid markets have between a regulatory decision and a regulatory capacity mechanisms. The much bigger issue is: how strategy that may diverge from the strategic hierarchy transparent are the existing trades between the larger that the Government has set out for that body? Is it vertically integrated companies and how much of their not the case that decisions tend to follow from strategy product is traded on a kind of open basis, for example and, therefore, can be dug down into for the purpose through a process like the auctions that Ofgem were of stating that they are diversion and strategy and, describing. Those to me are much bigger factors than therefore, they should not have taken that decision? the impact that a capacity mechanism might have. Charles Hendry: I think if they were to make decisions outside the new framework then that would Q170 Dr Whitehead: As far as the role of Ofgem be an example of that happening, but the relationship itself is concerned, we just completed the Ofgem that we are seeking to have with Ofgem—and Ofgem review. Could that be characterised as a Government have been very keen to work with us in this capture of Ofgem, do you think, in terms of what you direction—is to have a very clear sense of direction said about the strategic direction of Ofgem and the set by Government for what is the wider Government stronger role of the Government in setting its energy policy and the relative balance between direction. affordability, decarbonisation and security of supply, Charles Hendry: I think what it is providing us and for them to have the very strong regulatory greater clarity, and we are certainly not seeing the powers that they need in order to drive forward Government moving into the work of the regulator. competition and the best deal for consumers. We are saying that it is the role of elected Ministers to set the policies, the strategic direction for the Q173 Dr Whitehead: If they are underperform Government. That will be set out in an annual strategy against those strategic goals that have been set by and policy statement, which will be there for the life Government, how would they be held to account? of the Parliament, and then within that framework Charles Hendry: How would they be held to account? Ofgem will regulate. So there is no diminution of the Dr Whitehead: Yes. powers of the regulator, in terms of what is expected Charles Hendry: As I say, they are accountable to of it under the European requirements of the Parliament and therefore the way in which they are independent regulator. Indeed, I think that can readily brought before this Committee, which is very effective be enhanced by making it clearer what its remit in holding Ministers— should be. Q174 Dr Whitehead: Forgive me, but isn’t there a Q171 Dr Whitehead: What particular limitations difference between giving an account and being held and safeguards would be put in place to protect and to account, and when you say they are accountable to ensure the independence of Ofgem, once that strategic Parliament you are effectively saying they are shaping of the remit of Ofgem has taken place? accountable to Parliament by way of giving an Charles Hendry: Ofgem is not accountable to us. It account to Parliament. That is different, isn’t it, from is accountable to Parliament and its budget is agreed being held to account? with Parliament. So it already has that independence Charles Hendry: I think if you look at the work of and what we are seeking to do is to give a greater this Select Committee, you are holding us to account. degree of clarity to the respective roles of the I think that is the way in which these Select Department and of Ofgem. To give a practical Committees work and that the parliamentary example of that: at the moment it is not clear that if structure works. the Government decided its priority was Jonathan Brearley: Is it worth talking a bit about how decarbonisation and moving to a low carbon economy, and why we came to the conclusions we did on the and if Ofgem decided its priority was energy security Ofgem review? If you were to go back five or 10 years it is not clear which of those would have legal then, in a sense, the roles of Government and the roles primacy, because the legislation makes it clear that of the regulator were much more separable than I Ofgem has flexibility within those. What we are think they are today. You had a world where you were saying is that it should be Government that sets the minimising costs; you were sweating assets and so policy directives and then, that being set, Ofgem essentially our decisions were still overlapping but should be a truly independent regulator. So we are not much more separable. With decarbonisation, these seeking in any way to fetter its powers, but we are decisions overall become much more interlinked, and seeking to focus them. the thing we heard most from all of the people we Jonathan Brearley: Can I add that the EU third talked to within the Ofgem review, and about the package is very clear about the areas in which a relationship between Ofgem and the Government, was regulator should be independent, and nothing we said a sense of confusion as to who was doing what. in the review is meant to undermine that. We all want So, for example, when Ofgem makes its judgment on an independent regulator and we want that for a series the type of network that we might need, it is going to of good reasons, which means sometimes we can’t do have to make a judgment on how successful we are Energy and Climate Change Committee: Evidence Ev 37
22 June 2011 Charles Hendry MP and Jonathan Brearley or are not going to be, in terms of rolling out heat to forcibly push back and say, “You are going too far,” pumps and getting people to have electric cars; when and we would have to take account of that. it thinks about its eight-yearly price reviews, for Jonathan Brearley: Just to say European law is very example. So what this is an attempt to do, as Charles clear on this. It is very clear on what are the auspices said, is to more clearly delineate between the context of the regulator and what the auspices of that Government needs to provide, the policy Government are. statement the Government needs to make and, therefore, allowing Ofgem the space to carry out its Q176 Barry Gardiner: Have you ever or would you independent regulatory decisions within the context of ever advise your family, your children, to buy a major the policy that government sets. It is that kind of financial product on the doorstep? delineation that we are trying to get through the Charles Hendry: No. I haven’t. Sorry, no, to the first Ofgem review. part. I have never. Barry Gardiner: Would you ever advise your Q175 Dr Whitehead: Yes I appreciate that, and there children to do so? clearly is something of a dilemma, for example, in Charles Hendry: I am one of those people who don’t making Ofgem’s strategy decision-making operations like being phoned at home. I don’t like people more transparent, and presumably putting a strategic knocking on my door. So I am perhaps a particularly guidance process in place that enables that to happen. grumpy offensive customer, so I am a bad person to— That is a process change. Nevertheless, there has to Barry Gardiner: Would you ever advise your be some sort of point, I assume, at which the children to do so? independence of Ofgem to take decisions on a regular Charles Hendry: If it was the right package and it basis, while it is informed by those process suited them. I wouldn’t say there should be a blanket arrangements it, nevertheless, remains separate from rule against it, but I personally don’t. what that strategic guidance sets out, in terms of the extent to which Government may do more than shape Q177 Barry Gardiner: You have just ensured that those decisions and the point at which, therefore, the you are going to say no, I think, to my next offer to strategic guidance becomes a point at which you, Minister, which was to be the consumer Government simply checkmates those decisions or champion, the champion of the public, and to give the takes over those decisions? general advice to the nation—not just to your Jonathan Brearley: There is a limit to what one can children—that buying things, particularly complex do within the legal framework, to guard against every financial products, on the doorstep is never a good single behaviour on both sides. I don’t think it is our idea. You are not prepared to say that to consumers? intention to try and second guess Ofgem or to try and Charles Hendry: I am not prepared to say it is never make Ofgem’s decisions for it, and I don’t think any a good idea but I would— of us want to be in a world where DECC tries to do Barry Gardiner: Usually a bad one? that because the record of Governments making Charles Hendry: But everybody should exercise detailed regulatory decisions is pretty poor. What we caution and so— are trying to do is to say, “Look, there are a series of Barry Gardiner: Is it usually a bad idea? strategic policy decisions that we are going to have to Charles Hendry: I don’t even think it is fair to say make as Government.” In doing so, we provide the that because I think there are good products that are context that allows the regulator to more effectively sold on doorsteps; I think there are significant— make their decisions and ensure that we are both more effectively joined up. So therefore, I don’t see this as Q178 Barry Gardiner: I agree with you, when it a vehicle through which we would necessarily try to comes to washers for the car and things for the kitchen interfere with what Ofgem does, but we all have to sometimes you can get a pretty good deal on the accept that, if we don’t have a shared vision of where doorstep. But that is hardly a major financial product, we are trying to get to, then it is very hard for both is it? sides to be working in the most efficient and Charles Hendry: But I think that what I have shown effective way. from my own description about my consumption Charles Hendry: I would tend to think, as a Minister pattern so far, is that I am a rather static consumer and in DECC, at the moment we have enough to do I don’t got into the— without trying to be the regulator as well, so we have Barry Gardiner: Okay, Minister, I just tried to help a very clear distinction in our own minds about what you become the consumers’ champion, but you have we think is the role of Government and where the resisted. regulator comes in. The annual statement—the Charles Hendry: I am very grateful for your help, strategy statement—will be jointly worked out by but my advice to them is to exercise caution; always Ministers and by Ofgem. It will not be the exercise caution, but they shouldn’t assume that Government simply saying, “This is how it is going everything they are being sold on the doorstep is to to be, you must live with this,” it is going to be their disadvantage. something that evolves through discussion between Chair: Even Cabinet seeking votes at elections? the Department and the regulator and, therefore, if Charles Hendry: Particularly. there were ever areas where the regulator felt that we Barry Gardiner: Always exercise caution in that were transgressing, as Government, into the area— case, Chair. which, as set out under the European Directive, should Charles Hendry: Well, that is a contract with no get- rightly be that of the regulator—I would expect them out. Ev 38 Energy and Climate Change Committee: Evidence
22 June 2011 Charles Hendry MP and Jonathan Brearley
Q179 Barry Gardiner: The recent prosecution by Q183 Laura Sandys: Thank you, Minister. Trading Standards suggests that Ofgem is not doing Following up from Barry’s point regarding trust, and enough. I don’t want to talk about that prosecution, linking that into the Green Deal, would you be happy but it suggests that Ofgem is not doing enough to for the Green Deal, which is a Government initiative protect consumers from potential cases of mis-selling. and demands a huge amount of trust—particularly Does Ofgem have the adequate resources and how when we look at the example in Australia where in will your proposals under the review improve the many ways the trust was undermined—to be sold on situation? the doorstep in this current fashion, or would you Charles Hendry: I think the work that Ofgem has want it to be sold through a more sophisticated and been doing recently shows the importance that they more deliberative method? are now attaching to this. They certainly have not told Charles Hendry: You have gradations; if you look at me they don’t have sufficient resources to do it, and how some of these products are sold—solar heating, bear in mind that their funding for their work is paid for example, solar thermal—at the moment you get by industry, if not funded by Central Government, so people who knock on your door and say, “Would you their costs are recouped from industry so they do have like this?” You get leaflets that come through your the ability to take on more people for carrying out letterbox. You get other adverts. Exactly where you their legal duties if they see that is appropriate. draw the line for what you think is acceptable is quite a difficult balance to strike. I think in all of these Q180 Barry Gardiner: Do you believe it is practical issues there have to be very strict controls on what to incorporate the standards of conduct into new or can be sold when people make their initial appearance on the doorstep. There has to be time for people to even existing licence conditions? reflect; there has to be time for them to think about Charles Hendry: It is possible, but where the other options and to opt out if they subsequently wish limitations and the difficulties in that will be then— to do so, and that would have to be an integral part Jonathan Brearley: Ofgem have already introduced of practice. new rules around doorstep selling, standards of conduct, and particularly standards of information, Q184 Laura Sandys: So you would make a and they are already investigating allegations that four differentiation between being informed on a doorstep out of the big six may have breached these. We will and sold on a doorstep, and I think there is quite a have to see how that goes and monitor that and make significant difference there. sure that that works. Charles Hendry: I think there is also an issue, which is concern about the selling of additional products as Q181 Barry Gardiner: You may have caught it, or well. If I can mention smart meters for example; you your officials may have told you that I asked Mr have someone installing a smart meter for you, I am Buchanan earlier whether he thought it might be a nervous that the installer may say, “And by the way good idea for Ofgem to have their own switching site your wiring is not very good but my mate Billy can and for bills to have on them an address, a web do that for £500”, and if you are an older person living address, that they could get in touch with, to then, on your own you may be sufficiently worried, you with their bill in front of them, compare what they think, “I’d better get Billy round straight away”, and would have been charged if they had been with other so the control is on cross-selling, which I think will suppliers over the billing period and, hence, make an be a key to maintaining consumer confidence. intelligent decision about whether it might be appropriate for them to switch tariff or switch supplier Q185 Laura Sandys: So as we go forward with the or not. Would you welcome such a move? big six being one of the largest groups of deliverers Charles Hendry: I think there is benefit in that. I think of the Green Deal in many ways, and certainly there is also benefit in giving people an indication on presenting the package of the Green Deal, you would their bill about how their household consumption like to have a significant say in how that was marketed would typically compare with a similar house in their and sold? locality, so they can decide whether they are using Charles Hendry: What we are doing, certainly for more than they might expect, or that they are efficient smart metering, and I think it will be for the Green consumers. It doesn’t give them clarity but it gives Deal as well, is a code of practice. A code of practice them the right question to ask and knowing whether is not a voluntary thing for the smart metering. It is a they are doing that sensibly. I think there is a balance licence condition; it is obligatory, they have to sign to be struck between information that is truly useful up to it in terms of how they engage with consumers. and a lot of information that becomes confusing, and So there are ways in which we can put very strong sometimes we can give an enormous amount of conditions on. These have been drawn up by a information, in the name of openness, which actually combination of the industry, the consumer groups, the ends up confusing consumers rather than helping trade unions, so it has been in a very robust way, them. which is getting a lot of buy-in on the smart metering side. I think that is the right way of dealing with this, Q182 Barry Gardiner: That is what has happened, but clearly if there are abuses then either the regulator hasn’t it? or the Government would have to get involved. Charles Hendry: I think that has happened. So I think we need more relevant, more concise information, Q186 Chair: Do you share the concern of this which is very directly targeted at helping consumers. Committee that the scale on which mis-selling by Energy and Climate Change Committee: Evidence Ev 39
22 June 2011 Charles Hendry MP and Jonathan Brearley energy companies may be very much larger than we that there is very little distinction between the issues had previously known. that they face and their ability to make sense of the Charles Hendry: I haven’t seen the evidence to different tariffs and options. support that, so I don’t think I can say yes or no on it. Q191 Sir Robert Smith: Finally, I think earlier on Q187 Chair: The issue seems to be one which could you recognised that we are in a basically rising price rather undermine confidence in a lot of the things the situation, probably globally and definitely Government is trying to do, so if we do find domestically, barring some miracle, and what we are evidence—and I think this Committee is inclined to looking at making sure that people don’t suffer pursue this matter—I hope that you would be prepared unnecessarily from the rising prices. We can’t hold a to react robustly and promptly to anything that we panacea that all these reforms and things are going to uncovered. suddenly create a consumer’s nirvana. But in Charles Hendry: It is an integral part of this market monitoring the working of the system in the UK, do working properly that products should not be mis-sold you have any sense of where we rank with our and that, I believe, is a bad business practice and it European neighbours in terms of consumers of should be stopped. I think it is interesting to see today electricity and gas, in terms of those bills? that one of the major companies is suggesting it may Charles Hendry: If you look at the EU15, so the pull back completely from doorstep selling because it major economies in Europe, we are fourth lowest in believes it has now had a very bad reputation and, electricity prices across those and our prices are, on therefore, this may be something that industry itself average, 20% below the median prices across the will rectify. But clearly, if there is evidence that you EU15 and for gas we are the absolute lowest of those have or that others have, then we would be prepared to countries and the prices is typically 30% below the act extremely robustly because mis-selling is wrong. average. So I think it is worth putting it into that context at a time when people are understandably Q188 Chair: Do you think a company that makes concerned about prices. We often consume more that decision is one that had complete confidence in electricity and gas than some of those European the integrity of its sales practices? counterparts because we do have colder winters and Charles Hendry: I don’t think I can answer that one. so sometimes— You can look at it either from a company that has seen Sir Robert Smith: And poorer housing stock as well. that the work that it is doing has been, they would Charles Hendry: Yes, and less insulated housing say, undermined by what has happened by others, or stock. else they are saying that because of the scale of the workforce you can never be 100% certain that when you’re offering people incentives they overstep the Q192 Sir Robert Smith: So we must not be mark. So I can’t say what their decision would have complacent? been based upon. Charles Hendry: Certainly not.
Q189 Sir Robert Smith: I think, Minister, you had Q193 Dan Byles: I would like to come back to the already arrived in time to hear Ofgem’s view on this. Strategy and Policy Statement that Ofgem will be We have been looking at a lot at the protection of required to report on with regards to delivering the domestic consumers, but there isn’t much difference policy requirements. Can you just go a little bit further in terms of knowledge and skill between a domestic over how you see that happening? Do you anticipate consumer in this market and a small business or micro DECC will effectively set out the policy outcomes business that isn’t concentrating on energy. So do you expected in qualitative and quantitative terms for feel that more needs to be done to protect that kind of Ofgem to then report on? I mean, how do you see that consumer as well? process happening? Charles Hendry: I did hear the questions and the Charles Hendry: Can you expand on that in terms of regulator’s answer and, as the regulator was saying, what sort of areas you think— this is an area that we are in discussion with the Dan Byles: Do you envisage that DECC will set regulator about as to what are the appropriate powers targets and benchmarks? Because Ofgem will be they should have and should that be extended to other required to report annually, will they not, against how areas. He was talking about intermediaries, about how they are doing against delivering the required policy one protects people from mis-selling by outcomes? That seems a bit woolly unless—if they’re intermediaries. There is a code of practice in the UIA. deciding themselves how they’re reporting, or are you Does that need to be taken further? So exactly what going to set down, “We want to see this; we want to Ofgem’s powers should be in this respect is something see that; we want to see the other”? Are you going to that we are looking at as part of the review. set down measurable targets, for example, for them to report against? Q190 Sir Robert Smith: Do you share their concern Charles Hendry: We are still deciding exactly the though that those consumers at the moment do face structure of the statement. The history of targets, I quite a challenge? think, doesn’t give one a huge amount of confidence Charles Hendry: There is undoubtedly greater in them. We should have had all vulnerable protection for the domestic consumer than there is for households out of fuel poverty by last year and all the small business and, in terms of the issues that households entirely should be out of fuel poverty by they’re facing, I think you are absolutely right to say 22 November 2016. Ev 40 Energy and Climate Change Committee: Evidence
22 June 2011 Charles Hendry MP and Jonathan Brearley
Q194 Dan Byles: Are you saying that is not going do have ongoing conversations with Ofgem, but it is to happen? Parliament, ultimately, where they are accountable. Charles Hendry: Well, I don’t think it is morning or afternoon yet, but it is a challenging target and I think, Q198 Dan Byles: You said you were going to look to us, what we are saying is wherever you have a at this in more detail as to how it is going to work. target you have to have a roadmap. You have to have Do you think you are going to be able to articulate a a delivery plan and that then brings the question of, bit more clearly just where that boundary is? I mean, “Is it Government’s job to deliver on a target or is it I do understand the problem that they are independent the regulator’s job?” So clearly one wants to give and it is quite difficult to have an independent Ofgem as much clarity as possible about the structure regulator reporting to DECC and Parliament about that we are trying to deliver in, but it has to be how well it is doing against policy outcomes laid measurable and meaningful. down by DECC and yet DECC is not directly Jonathan Brearley: Just to add, one of the things we responsible for them because they are independent. It are now doing as part of the next stage of the Ofgem just seems a little bit confused and I don’t know where review, or the post-Ofgem review work, is to specify that boundary should be. Do you think you’re going exactly what those might look like. So when we come to try and explore that a bit more or would it be to legislate this, we hope to have something that says, helpful to lay it down a bit more? “This is roughly how it would look. We haven’t fixed Charles Hendry: The statement will be required by all these things but here are the parameters and here primary legislation; so in the next Energy Bill. Then is the way we would set it out”. It is a genuine trade- we will be legislating for this and that will need to set off for us because obviously, as mentioned before, we out what the powers of the Secretary of State are in are mindful of the independence of the regulator. setting it. So when we come to the legislation then there will be the clarity that is necessary for that. Q195 Dan Byles: Yes, I accept that. Do you anticipate the annual reports on progress from Ofgem Q199 John Robertson: Moving back to to DECC, to Parliament or to both? transparency, consumer groups suggested to us that Jonathan Brearley: What we are not doing is greater transparency from energy companies in the changing Ofgem’s reporting line. So we are not reporting of their accounts would improve consumer suddenly having the same kind of accountability you trust in the market if they could see components that might have on NDPB and so on. I would expect DECC to have a discussion with Ofgem about how it made up energy prices. So are tougher reporting is doing and I would expect Parliament to hold them conditions needed to achieve this? to account, as they do now. Charles Hendry: I listened with care to what the regulator was saying on this and I think there is a fine balance as to what the powers are that are appropriate Q196 Dan Byles: Having a conversation isn’t quite for a British regulator to have in terms of the detail the same though as an annual report, is it? Who which they’re entitled for international companies. decides if they are on track or off track? The understanding that I have is that the margins that Charles Hendry: I think it is a combination. This they’re making on their UK products are significantly would be a public document, obviously. It would be less than their global margins. Now, these are made before Parliament and so there is scope for a parliamentary debate on it. If we don’t feel our companies that hold a vast range of interests in a wide objectives are being met, we clearly would need to range of different countries. But the extent to which it decide what action needs to be taken by us or by the is feasible to have greater clarity I think will be regulator to get us back on track. beneficial for the regulator and I think will be beneficial for consumers, because if consumers know where the profits are coming from then they are more Q197 Dan Byles: But you would see that as DECC’s role? You would see DECC’s role as saying, “Thank understanding than if they feel that they are paying you for your report. We don’t think that you are for them. performing well enough in moving towards the desired policy outcomes and so we want you to do Q200 John Robertson: Do you UK levels of this, that or the other”, or, “We want you to come back transparency put UK energy companies at a and tell us how you are going to get back on track”? disadvantage? You would see that level of scrutiny form DECC? Charles Hendry: In what way do you think it would Charles Hendry: Absolutely, and that ties as well with put them at a disadvantage? the annual energy statement we have committed to John Robertson: Well, in relation to their European making every year. So we can look at the issues competitors, if we are more transparent or less coming up for the forthcoming winter. We can look at transparent to European companies; therefore, people how we are moving towards the targets and the might be using the European companies as opposed objectives that we have set and that is parliamentary to the UK companies. debate, so it is a— Charles Hendry: If you look, for example, at our Jonathan Brearley: But I think what we wouldn’t do biggest companies like Centrica, then we have a better in that process is contravene the independence of the understanding of how Centrica is operating than we regulator; so there are limits to what we can say do about companies that are headquartered outside the Ofgem must do. Of course we can, and we do now, United Kingdom. As I say, the clarity is beneficial but say where we think things should be different and we there will be very strict limits on our physical ability, Energy and Climate Change Committee: Evidence Ev 41
22 June 2011 Charles Hendry MP and Jonathan Brearley our legal ability, to require information from the companies now are owned by other global companies. parent companies. So I don’t think this is a problem. Let me move on to— Q201 John Robertson: Yes. What is the Charles Hendry: But if I may respond to that. We Government’s position on ScottishPower in relation to need to secure investment at twice the rate in this the £800 million that went to the parent company in decade than in the past. So we have seen investment Spain, which then subsequently was forwarded on to coming through but it has not been of the magnitude an American company, another subsidiary of them, to that is necessary. It also hasn’t been of the low carbon subsidise them,? nature that is necessary. Charles Hendry: I think one has to look at this within the wider flows that are going on. There will be funds Q206 John Robertson: Well, it certainly won’t be that are being transferred to Spain or to the United invested if you take the money out of the country and States. There is, equally, enormous investment coming don’t leave it in the country. So that also has a knock- from Iberdrola into the United Kingdom. on effect and if you’re taking money out of the UK and taking it via Spain to the US then I can imagine Q202 John Robertson: Yet you said a moment ago companies wondering why you would want to invest that the margins of profit were less in the UK than in the UK; unless, of course, you were doing some they were compared to the global market. So why are form of asset-stripping. But let me clarify something, we subsidising globally rather than looking at our because you talked about clarity to do the job in own people? relation to Ofgem. I asked Ofgem if they needed more Charles Hendry: My understanding is, for example, teeth and they were very nice about not answering the if you’re looking particularly at ScottishPower, that question. You have already said that accountability is their margin on their UK domestic supply is 1.7%. to Parliament, yet it would be DECC that would have Their global margin was 18.4% and so the UK to bring forward any Bill and you said that with the represents a very small part of that, but we are getting new Energy Bill. Do DECC need to have more teeth an enormous amount of their global investment. to be able to handle these companies who, let us be fair, do not exactly do things unless somebody makes Q203 John Robertson: Yes, but that will be a net them do it? cost, or will it? In other words, will the £800 million Charles Hendry: I think it is a question of whether have been taken off that total before they even the regulator has the teeth rather than whether— calculate it? John Robertson: Well, that is what I am talking Charles Hendry: Absolutely. But then if one looks at about. You have already said you need to have the billions of pounds they’re investing in primary legislation for this. renewables— Charles Hendry: In terms of the powers that the regulator currently has and the power to make a Q204 John Robertson: But you see, Minister, I go referral to the Competition Commission, which would back to what I said earlier. I want to talk about the give a great deal of focus and light in some of these real couple up in Chapel who are now subsidising areas but would take two years and deter investment some nice rich people in America for getting cheaper over that period, the regulator already has a electricity, whose price rises range between 2 and 8%, tremendous amount of power. What it has sought to our price rises have already started at 19% for gas and do over recent months is to explain to the industry 10% for electricity. Should we not be more concerned very clearly that it is serious about the changes it about our own people rather than somebody else’s? wants to see; it is serious about the auctioning issues, Charles Hendry: But there are two sides to that, Mr about new entrants coming in and the liquidity issues. Robertson. First of all, there is the price that people The report that they issued today, I think, shows that are paying today. Secondly, what do we need to do to industry has responded to that pressure. Now, that is keep prices affordable in the future? If we drive away the right way for the regulator to work. companies like Iberdrola, which are looking to invest billions of pounds in our energy infrastructure, prices Q207 John Robertson: Well, just watching and will go through the roof and it will be your making a statement isn’t exactly the answer that we constituents—particularly yours in Scotland with are looking for. I want the regulator to have such higher electricity and gas consumption than other powers that will make companies think twice before parts of the country—which will suffer most. So we they start ripping off this country. have to maintain this country as an attractive place for Charles Hendry: But then what we have seen as well international companies to invest. We need £200 is the regulator expressed real concern when margins billion pounds of new investment in our energy reached £90. They then came down to £75 and the infrastructure over the next 15 years. We have to report today suggests that those retail margins are secure investment at twice the rate in this decade as down to £15. So the actions that they have taken have in the past decade. If we don’t do that, your resulted in significant drops, but we must at the same constituents will pay an incredibly heavy price. time remember that we are doing it against a backdrop of rising prices in wholesale prices, which are 30% to Q205 John Robertson: Again, with respect, 40% up on a year ago, and that is bound to impact Minister, we haven’t had the problem of people not consumers, both domestic and industry and business investing into electricity companies. So there must be users. We can’t suggest that, at a time when there is money there to be made and most of our big that degree of upward pressure on prices that looks as Ev 42 Energy and Climate Change Committee: Evidence
22 June 2011 Charles Hendry MP and Jonathan Brearley if it is going to continue, we could be expecting prices additional information that a commercial contractor not to be going up in this market. On top of that we couldn’t have. There are some projects that need a have this incredible rebuilding change. certain amount of financial detail that it would not be right for a commercial company to have and so that Q208 John Robertson: Yes, but do we expect all the needs to be done by Government or by a Government companies to put their prices almost in line with each institution. There are others that we think can be run other? Where is the competition? by contractors separately and, therefore, which could Charles Hendry: Well, we have discussed that, I be run by others on that basis. What we would try to think, a bit earlier. do for each project is decide who is best placed to do it given the requirements for confidentiality and the Q209 Sir Robert Smith: Just one other thing on the information that we required. relationship between DECC and Ofgem is on E- Serve’s role and the delivery of programmes. Who Q211 Sir Robert Smith: Are you coming up with a will make the case for responsibility for specific 10-point plan for improving your working programmes lying with either the Government or E- relationship? Serve in the future? Charles Hendry: With the regulator? Charles Hendry: The Government will. So the Sir Robert Smith: Yes. existing programmes that E-Serve are running they Charles Hendry: I think things have improved will continue to run, but as new programmes come dramatically in any case. I think what had been quite forward we will decide whether it is best to be run a stand-off in the past between the Government and internally within DECC, whether it should be handled the regulator is now a more constructive relationship. by E-Serve or whether there is another power that But I think what we have to try and make sure is that, should do that. moving forward into the future, there is clarity about who does what and how those structures should work Q210 Sir Robert Smith: What sort of criteria would and so putting that on to a more formal footing is be a factor in that sort of decision? probably beneficial. Charles Hendry: The advantage that E-Serve has, Chair: All right, thank you very much indeed for a because it is run by the regulator, is access to very useful exchange. Energy and Climate Change Committee: Evidence Ev 43
Tuesday 28 June 2011
Members present: Mr Tim Yeo (Chair)
Barry Gardiner Laura Sandys Dr Phillip Lee Sir Robert Smith Albert Owen Dr Alan Whitehead John Robertson ______
Examination of Witnesses
Witnesses: Ian Peters, Managing Director, Energy at British Gas, Centrica, Alistair Phillips-Davies, Energy Supply Director, Scottish and Southern Energy, Amparo Moraleda, Chief Operating Officer of Iberdrola and Acting Chief Executive Officer, ScottishPower, and Rupert Steele, Regulation Director, ScottishPower, gave evidence.
Q212 Chair: Good afternoon and thank you for just about to drop on the markets and not saying coming in again. I think I may have been asleep anything to us about it this afternoon? during the meeting in May. I do not recall any of you Amparo Moraleda: I beg your pardon. I do not saying that your customers would have price increases understand. on their bills of up to 45% announced just a few days Chair: In speaking this afternoon there may be some after our last discussion. Did I miss that or has some other ghastly secret up your sleeves that you intend to new factor come into the equation? keep secret. Amparo Moraleda: Rupert, do you want to take this Amparo Moraleda: No, this is not the case. one? Rupert Steele: Thank you very much, Mr Chairman. Q217 Chair: The fact was that you knew what the We obviously monitor the market on a continuing input price increases meant for your future prices, but basis. We have been dealing with price increases on you chose to keep that from us? our input costs for a long time and I think a number of Rupert Steele: We knew what the increase in input companies have made public statements to that effect. prices was because that was public data. We had not, Clearly we can’t announce a particular price change at the time we appeared before the Committee or at until we are ready to do so and at the time of the last the time my colleagues appeared before the hearing no decision had been taken by ScottishPower Committee, made a decision as to how or when we as to its prices. When that decision was taken it was, would respond. When we did make that decision it of course, immediately announced. was announced. Q213 Chair: But the input prices to which you refer Q218 Chair: Were you surprised at the reaction of and that apparently justify the decision presumably the Minister and the public and people like me to what occurred before you were last here. you announced? Rupert Steele: The main increase happened from Rupert Steele: Well, we knew that— March as a result of the changes in international Chair: markets, the Fukushima accident for example. So I am asking whether you were surprised. Just those things led to a sharp tightening of the market. yes or no will do. Rupert Steele: We expected that consumers and others would be concerned. Clearly we held off increasing Q214 Chair: It did not cross your mind when you the prices for as long as we could, but we were facing were here to be a bit more straightforward with this huge increases in our input costs. Committee? Rupert Steele: I don’t think that a question arose that encouraged the witnesses to answer that. Q219 Chair: Forty-five per cent? Rupert Steele: The 45% number relates to expiring Q215 Chair: Really? You do not think that a 45% special deals, which is a slightly different situation. increase in consumer bills was something that would have concerned any members of this Committee? Q220 Chair: So how many of your consumers will Amparo Moraleda: Well, the decision had not been face a 45% increase? made at the time, Mr Chairman, and we were Rupert Steele: We will have to get back to you on the scrutinising very closely the evolution of the precise number of people who are on— wholesale prices and the evolution of our retail Chair: So you have come here without even being margins. Given this evolution and given the forward briefed? curves, we made, as a company, the decision that we Rupert Steele: Twenty-five per cent of our customers needed to move forward into the price increases. are on special fixed-term products, which will expire at particular times. Those will have particular fixed Q216 Chair: So you will sit here with butter melting prices attached to them that will relate in different in your mouth quite aware of the bombshell you are ways to the current prices that are in the market. Ev 44 Energy and Climate Change Committee: Evidence
28 June 2011 Ian Peters, Alistair Phillips-Davies, Amparo Moraleda and Rupert Steele
Q221 Chair: Are we to assume that one in four of Q227 Chair: Which means having a double rate of your customers faces an increase of 45%? increase for a low user compared with a high user: Rupert Steele: No, it will be less than that. yes or no? Rupert Steele: There will be some low users for Q222 Chair: What is the increase in the wholesale which the increase is a higher percentage because the prices that you say justifies the 45% increase for prices were not cost-reflective prior to the change. those customers? Rupert Steele: The customers where the increase is of Q228 Chair: How many ScottishPower customers do that sort of order will have had their prices fixed some you estimate are pushed into fuel poverty by this long time ago. increase that you kept from the Committee and which you have graded in a way to penalise low users Chair: I am asking you what the increase in the particularly? wholesale price was: 10%, 15%? Amparo Moraleda: We do not have the precise data Rupert Steele: It would be much larger than that. We and we know these are tough times for our customers. would need to look at the specific product, as to when We will keep committed to help the groups of people its price was set— who are having challenges and difficulty with the new Chair: I am asking about the wholesale prices on energy prices. We have invested a significant amount which you base this package. of money over the last three years, over £250 million, Rupert Steele: The wholesale price between our last to help people with those kinds of programmes. We price change in November and now increased by of are committed to keep investing over the next four the order of 30%. We gave you written evidence years in the range of £120 million around the Warm around that. The prices for the fixed-price products Home Discount Scheme and we are advising all our that were expiring will have increased by significantly salespeople and all the customer-facing staff to larger percentages depending on when the fixed-price recommend our customers to shift into the tariffs that product was taken out. We will have to get back to can be more effective and more efficient given their you with a note setting out the numbers on that. circumstances.
Q223 Chair: Do you agree with Which? who suggest Q229 Chair: Do you think any of the ScottishPower that your price increases will penalise low energy customers who are facing these enormous increases in users? their bill were persuaded to take on a particular tariff Rupert Steele: No, the price increases are fair to users by a door to door salesperson? at all consumption levels. Amparo Moraleda: Regarding the door to door selling, we are currently in the process of informing our customers about the price increase that we are Q224 Chair: Is it not the case that low users face a making effective on 1 August. We are giving them price increase of 20%, medium users of 15% and high more than the 30 days’ notice that has been set by users of 11%? Ofgem as the rule. We are giving more than 50 days’ Rupert Steele: One of the things that we did in notice. We have all our sales force and call centres making these price adjustments was to correctly devoted to respond to their questions, to suggest a reflect through to our consumers the fixed costs that switch and to give them precise advice so that they we bear. can have a proper choice. When it comes to doorstep Chair: So it is true? selling, our focus and our effort is to make sure that Rupert Steele: It is true that we are correctly reflecting the salespeople have accurate data and accurate the fixed costs. information to make sure that the customers can make their decision based on factual, accurate and precise Q225 Chair: It is true that the rate of increase for a data to make a proper choice. low user is double the rate of increase for a high user? Rupert Steele: You will be able to find consumption Q230 Sir Robert Smith: I should remind the levels where that relationship exists. Committee of my entry in the Register of Member’s Chair: You must know. I cannot believe you have Interests as a shareholder in Shell and also as an come here without even having that information at Honorary Vice President of Energy Action Scotland, your fingertips. Is it true that the increase for a low a fuel poverty charity. user is double the increase for a high user? One of the things the industry has kept doing over the years that we have gone down the market road is to Rupert Steele: It depends of the definition of “low” say, “We act in the interests of consumers because we and “high”. There will be figures of low and high for hedge and we manage to smooth out the transitions in which that is the case. the wholesale market. We protect consumers from wild swings”. Has something gone wrong with Q226 Chair: Those are the figures used by Which?. ScottishPower’s hedging that the consumers are Are you saying Which? have it wrong? Is to double suddenly facing this wild swing? the increase for low users compared with high users Amparo Moraleda: As you very well know, the ScottishPower way to encourage people to use less procurement of wholesale energy is a very energy? Is that your contribution to energy efficiency? sophisticated activity. The trading of energy is a core Rupert Steele: Our approach is to charge cost- part of our business but it is a very sophisticated one. reflective prices. We do our best to try to shield and protect our Energy and Climate Change Committee: Evidence Ev 45
28 June 2011 Ian Peters, Alistair Phillips-Davies, Amparo Moraleda and Rupert Steele customers from the fluctuations of the market, but think it would be wrong for me, in front of two of our there are some elements that cannot be predicted. For competitors, to talk specifically about our pricing instance, we could not predict the unrest that was intentions. going to happen around the Arab countries and make the oil price go up. We could not predict the impact Q236 Albert Owen: But I must push you on that of the Fukushima effect and the fact that Japan was because we asked similar questions of all six going to require sourcing gas to compensate for 10 companies—so we are being very even-handed—in nuclear power stations. So we make our best effort to the last session. We did not get a response from them predict how these commodity markets are going to and now we have evidence to say that one company evolve, but this is far from being a science and, has put prices up. So I think it is quite a fair question therefore, we are subject to these kinds of fluctuations. to ask not just Centrica but Scottish and Southern Energy whether they have any intention—this Q231 Sir Robert Smith: We also heard this morning Committee will be going into recess in a couple of that there is a glut of gas coming to the world. There weeks—that we might hear that the prices are to go is shale gas in America, and America is exporting gas up? instead of importing it. Ian Peters: I am happy to talk about the general Rupert Steele: We are not seeing that in the gas fundamental trends. As Alistair Buchanan, the market at the moment. At the moment what we are regulator, himself said last week, the price of winter seeing is substantially higher prices of gas since gas is 30% higher than it was this time last year and March. We are not feeding any of that cost— across the whole of 2011 it is 40% higher. Those are genuinely considerable increases in our import costs. Q232 Sir Robert Smith: You were not hedged in a We watch the market literally on a daily basis. We way that could protect consumers from this kind of have made no decisions as we speak and we will try shock? and protect our customers as long as we can from Rupert Steele: We have been able to protect those fundamental forces. But the Committee may consumers from then until August and it is costing us have noticed that this morning we announced that quite a lot of money to do that. I have to mention that year-on-year our profits are down by 50%. So that is over the last two years we have made an average of something we are clearly very aware of. £10 a year on selling electricity and gas on a dual-fuel Albert Owen: I think the answer was a yes. bill of £1,000, so our retail business has been making Ian Peters: Unless there is a fundamental shift in the hardly any money at all. Since then we have faced a way the commodity markets are going to play out over big increase in our costs and it is, I am afraid, the next few weeks I think, on balance of probability, inevitable that that is something we had to pass on to we will reluctantly put the price up. But I am not our consumers. going to get drawn into precisely when or how. Albert Owen: I think you have answered the Q233 Sir Robert Smith: Just one last thing; did the question. fixed-term contracts get sold with a warning that they Alistair Phillips-Davies: We have not taken any could face a dramatic change at the end of the fix? decision on timing or quantum of any price increases. Rupert Steele: It was very clear to people on these We, as ever, remain committed to keeping them down fixed-term prices that they get a fix for a period and for as long as possible. I think our record stands for then we have to organise a new price. Clearly a fixed- itself in terms of being one of the lowest-cost price contract has a fixed term, when you come to providers of electricity and gas to consumers in the the end of it your new price has to reflect the market UK over the last several years and the highest levels circumstances at the time. Clearly that is an essential of service. As other people have noted, there are part of that. significant increases in costs. They come in three areas. One would be the wholesale market and Alistair Q234 Sir Robert Smith: But are people warned? Buchanan’s number of 30% is obviously fairly Because obviously when there is volatility in the non- accurate. We then have increases in costs in networks, fixed market people may think they are buying some which have been pretty considerable in recent times, sort of security, they are buying a term of security, but and you have increases in costs from Government- at the end of that term they could find it far more sponsored schemes. The only advantage of the difficult to budget for how the market has shifted. Government-sponsored schemes is that they have Rupert Steele: Our marketing is clear as to the period driven significant reductions in demand for users of for which the price is fixed and how the matter is energy and, therefore, what we have seen is that our dealt with afterwards. We are very happy to provide consumers have had a significant reduction in their examples to the Committee. bill because they are not using as much energy as they used to. Over the last two or three years we have seen Q235 Albert Owen: Can I just follow the same line 10% to 20% reductions in both gas and electricity of inquiry as the Chairman? I can share with the consumption. We will hold on for as long as we can Committee that I have received from ScottishPower a and when we have an announcement or when the letter saying that my prices have gone up. I am also a board has taken a decision, we will let the market customer of Centrica, British Gas. Can I expect such know promptly. a letter soon from yourselves? Ian Peters: We operate in a very competitive market Q237 Albert Owen: Mr Peters, you have quoted and we have the highest switching rates in Europe. I Ofgem and you agreed with them on that, but the Ev 46 Energy and Climate Change Committee: Evidence
28 June 2011 Ian Peters, Alistair Phillips-Davies, Amparo Moraleda and Rupert Steele industry and your company, I take it, do not agree statistically relevant conclusion, and at this stage we with Ofgem when they say, “When costs go up then cannot really make any final conclusion as to whether prices go up and when they come down they come this takes place or not. What we all have, I think, is down a lot slower”? You do not agree with them on the track record of what our margins have been over that point, I assume? I will ask other witnesses to the last two years and, despite how wholesale prices respond to this as well, but what evidence do you have and retail prices have evolved, we have provided as an industry to contradict that statement and that evidence that the margin we have made in the typical report by Ofgem? bill of £1,000 is just £10 per annum and this is a very Ian Peters: No, we do not agree with the fundamental tight margin. assertion made. Interestingly, if you read the detail in Ofgem’s own report it is far from clear. They Q240 Albert Owen: The problem I have and I am acknowledge that there are multiple variables at play sure other Members of this Committee and Members here and they could not draw any conclusive response. of Parliament will have is they have anecdotal Alistair Buchanan himself was more definitive about evidence from their constituents that prices go up very the way he portrayed that. Since then NERA, an suddenly and they do not come down very quickly independent economic consultancy, have done some and we have a duty to pass that on. We can see graphs work on behalf of Energy UK and they have and we can see reports, but the actual, if you like, coal concluded that there is no evidence of lagging or face does not really bear this out in many cases. So leading in that sense. As we have just said, I think we will, I am sure, come back to this and probe it the market shifted from around March off the back of further. Can I ask one final point with regards to Fukushima and the Middle East instability, and the Ofgem’s conclusions and analysis? What they say is majority of the suppliers have held off passing those basically that there are allegations of mis-selling; there through to the customer as long as we can. is customer confusion over tariff, and overall—I put it to you all—the picture is that the market is not Q238 Albert Owen: Can I just push you on that? working very well and customers are not doing very You said the report that you received from NERA says well out of it. How would you respond to that? that they cannot prove one way or the other, but do Rupert Steele: I think that at a statistical level, and you have conclusive evidence that prices have that is quite important, the market is working symmetry—that they go up at the same pace as they remarkably well. Britain’s electricity prices for come down? domestic consumers are the fourth lowest in Europe. Ian Peters: You can look at it over the long term and They are the lowest of the EU15 for gas. So you will see different— something is working quite well. Albert Owen: With the greatest respect, we are trying to get clarity here. We are getting reports that are Q241 Albert Owen: Sorry, Mr Steele, you raised contradictory and I do agree with you that it was not statistics. Do those statistics include the rates of the very conclusive, the Ofgem report, but do you have 18 different European countries? firm evidence that prices are asymmetric and they do Rupert Steele: That is inclusive of tax. go up and down at the same pace? Albert Owen: Inclusive of VAT? Ian Peters: The NERA report is as conclusive as we Rupert Steele: Inclusive of tax, yes. have seen. I think that was produced by an Albert Owen: VAT, yes? independent external and I am sure Members of the Rupert Steele: Yes. Clearly there is an issue that Committee have read that, but I think there are Ofgem has quite rightly raised about improving the different patterns prevailing at different times because transparency and clarity of communications with of the sheer number of variables at play in the market. customers and I think the industry may well accept that over time some practices have grown up that Q239 Albert Owen: Does anybody else want to say perhaps are not as clear as they could be. I think anything? everyone has said in their responses to the retail Alistair Phillips-Davies: There is a little graph we market review that they are very committed to doing shared. You can go into Monte Carlo simulations and something about that and making things much clearer decide whether you feel some of these things are for customers. I think that will be an important accurate or not, or whether there are biases, which advance, certainly to ScottishPower. It is absolutely is fundamentally what the problem with the Ofgem our intention to improve the way we do our business analysis was. The detailed technical paper, which you in this area; to be clearer and more transparent. It is seem to have read, indicates that they could not sometimes easier to say that than to do it because what conclude and I think there was a misrepresentation by one person writes and thinks is clear another person some sectors of the media who picked up on one or maybe confused by. We have to work at it, but it is a two comments and blew them out of proportion. But strong objective that we are now taking on board, there is a simple graph there in the evidence that we precisely to meet the regulator’s concerns. submitted beforehand—you should have a copy or we can provide you with another copy—and I think it Q242 Albert Owen: One thing we are not clear demonstrates that I don’t think there is a noticeable about is your response to the Chairman’s earlier trend there. question, whether low users were paying considerably Amparo Moraleda: As far as we are concerned, we more under your new price regime. are pretty much on the same line. I think that we all Rupert Steele: I think I said that at a particular agree that we need a bigger sample to make a consumption level there will be the statistic that the Energy and Climate Change Committee: Evidence Ev 47
28 June 2011 Ian Peters, Alistair Phillips-Davies, Amparo Moraleda and Rupert Steele
Chairman quoted. It depends what you define low and not say they were systemic they are going to get high user as, but what I would say— screwed, are they? Albert Owen: I believe there is some clarity needed Ian Peters: As we would do anyway, we would look there, to be absolutely frank. at every case on its merits and if there are examples Rupert Steele: We can come back with further clarity where we can prove that we have mis-sold— on that. Chair: That will take quite a long time. How many years will customers have to wait for the Q243 Chair: Mr Peters, in declining, allegedly for compensation? commercial reasons, to give a straight answer to Mr Ian Peters: Mr Chairman, we will do what is Owen’s question about your price increases, you appropriate. We will review all complaints and— quoted Alistair Buchanan in your aid. Do you agree with him when he said, referring to the Scottish Q246 Chair: Why not do what is right? Why not try energy price rise, “This price rise has taken a lot of and take a big step this afternoon towards restoring the consumers by surprise. It has been one of the most trust of your customers in your industry? Why not? talked about issues I’ve come across in seven years at Ian Peters: Speaking from a British Gas point of Ofgem. This is exactly the kind of thing that erodes view, Mr Chairman, we are not under investigation. trust from consumers.” Do you agree with him? Ofgem are looking at this. Ian Peters: From a timing point of view I think I Chair: So why can you not give the assurance in would acknowledge that did create a degree of that case? surprise from consumers; on that particular point I Ian Peters: On a case by case basis I will, but I have would accept it. I think the trust piece goes to no evidence in front of me that we have a systemic something much wider and that goes back to the way issue. the industry evolved from around 2005Ð06 when Chair: All right. What about the rest of you? prices went up. I think that is part of it. The industry, Rupert Steele: We are currently participating in an I would acknowledge, as well as Ofgem, has not done investigation. I think that process needs to run its as good a job as it could and should have done in course through its own channels. educating consumers on how the markets operate. On the specifics of mis-selling, I would accept that the Q247 Chair: When it has run its course what are you field sales channel is, regrettably, a significant driver going to do about compensating the ones that you of that level of distrust. Now, the way British Gas have misled? responded to that was we have spent £7 million on a Rupert Steele: That will depend on the outcome of new state-of-the-art handheld computer system for our the investigation. I don’t think we can— field sales team that will guarantee accurate point-of- sale, real-time comparative quotations against all the Q248 Chair: All right; that is a no from you. What other major suppliers in the industry. We are one of about you, Mr Phillips-Davies? only two suppliers not under investigation from Alistair Phillips-Davies: If it is finally proved that we Ofgem from that point of view. I think that level of have done something wrong and that the consumer rigour and transparency and openness is what the suffered some detriment and compensation is whole industry should aspire to. appropriate then we will consider that. Chair: Consider it? That is pretty clear, I think. There Q244 Chair: Let me give each of you the chance are a number who will be interested in that. perhaps to make the biggest step this afternoon towards improving the trust of consumers. Will each Q249 John Robertson: Let me answer your of you give this Committee an assurance that if any question, Mr Chairman, on how many people will be of your companies are found guilty of mis-selling to in fuel poverty. I can speak for Scotland here. If SSE customers you will recompense those customers in put their prices up the same as ScottishPower it is full; yes or no? reckoned there will be 1 million people in Scotland in Ian Peters: There is a difference, I think, between fuel poverty. That is 20% of the population who will systemic mis-selling and individual mis-selling. be in fuel poverty. How do you feel about that? Chair: That means no, does it, from Centrica? I just Amparo Moraleda: As we said before, we recognise want to be clear, that is all. that those price increases are not really helpful and Ian Peters: No, I am saying it depends on the that it is— circumstances, Chair. John Robertson: That is an understatement. Chair: I see; so it means probably no. Amparo Moraleda:—tough times for our consumers. Ian Peters: Ofgem are reviewing four of the players But on the other side we are trying to do our best at the moment for that and they will— to make sure the customers make the right and best Chair: If any of your companies are convicted of mis- decisions to opt for the best and more suitable tariff selling to customers will you or will you not for them. We also need to highlight that we are recompense all your customers to whom you have making significant investments in other areas in mis-sold in full; yes or no? Scotland as an energy company, and in the rest of the Ian Peters: If it was systemic mis-selling I think we United Kingdom, to drive investment, job creation and would look that, but I see no evidence of that. prosperity. We have invested more than £3 billion in the UK, 70% of it in Scotland, over the last three years Q245 Chair: So if you just happen to be an since we acquired the company. Our plans are to keep unfortunate couple of thousand customers who could increasing this figure up to an additional £15 billion. Ev 48 Energy and Climate Change Committee: Evidence
28 June 2011 Ian Peters, Alistair Phillips-Davies, Amparo Moraleda and Rupert Steele
Q250 John Robertson: How much of that is spent than our competitors for some time and lower than on renewables? our costs. Given the increasing focus on cost Amparo Moraleda: For this previous amount? reflectivity, we— John Robertson: Yes, where you get a very nice incentive from the Government. Q255 John Robertson: So you are in the business of Amparo Moraleda: Out of the— driving away customers. Is that what you are trying to Rupert Steele: £3.5 billion; I think it is about 25%. tell me? Because by putting up prices to that extent Amparo Moraleda: 25%, yes. you would, of course, you would think, move people John Robertson: So 25% of £3.5 billion you get— into another company’s books, would you not? Amparo Moraleda: Yes. Rupert Steele: It is always a risk in a business when John Robertson:—so you can’t count that, can you? you increase prices that some customers would choose Amparo Moraleda: Yes, we can. to go elsewhere. We think that many of our customers, having seen the media coverage around other Q251 John Robertson: So a quarter of your £3.5 companies’ intentions, may wait to see what other billion gets wiped out because the Government give companies do first before making a decision. That is you the money? a matter for them. Amparo Moraleda: Well, there is— Q256 John Robertson: Why is it that all your prices, Q252 John Robertson: Let’s move on. How much other than for the latest ones that have been profit did you make last year? announced by ScottishPower, from figures that we Amparo Moraleda: In the retail business? received last week, you could throw a blanket over all John Robertson: No, in your company; in the prices. It was lucky if there was about £5 or £6 a ScottishPower. How much did ScottishPower make? year between every single company. Is that just a Amparo Moraleda: The ScottishPower total EBIT coincidence? result accounted for £679 million. Alistair Phillips-Davies: I think one of the things that John Robertson: And the year before? you will see— Amparo Moraleda: This was down 15% from the previous year; so just 15% less. Q257 John Robertson: Do you all buy your stuff at John Robertson: I have for 2009, £1.3 billion, which the same time? Do you all buy gas at the same time? came from your website. Do you all buy oil at the same time? You do not do Amparo Moraleda: It is probably EBITDA—a value any hedging; you just say, “Let’s all buy it together so of different magnitude. we can split our price”, or do you do hedging and you work for your own company? Which? Q253 John Robertson: I have heard some good Alistair Phillips-Davies: All right, I will take the phrases already from ladies and gentlemen. “Timing first question. is bad.” Is there ever a good time to put a price up? John Robertson: Whatever you like; take them all. “It is Ofgem’s fault”—this is Mr Peters—“for not Alistair Phillips-Davies: Fine. On the first question educating people on how the market works”; yet Mr over prices, it is a clear indication it is a very low- Steele has quoted, “The market is working remarkably margin business. We pass on the costs the well”. Well, it certainly is, but not for the people in international oil and coal companies charge for the Scotland. So tell me this. Do you have any moral fuel that we put into our power stations to those obligation to your customers or are you just in it for people. That makes up 50% to 60% of the bill. We the money? then pass on the costs from the networks and we end Rupert Steele: We know that these are tough times up with a fairly slim piece at the end that pays for our for customers. customer service and collection costs. John Robertson: No, that is not what I asked you. I know what tough times are. Tell me, do you have a Q258 John Robertson: But why are other companies moral obligation to your customers? roughly the same price as you? Rupert Steele: We do not have an obligation to sell Alistair Phillips-Davies: Well, I don’t think they are products to our customers for less than it costs us to within £5 or £6. I think there are reasonably acquire them and service the customer accounts. significant differences.
Q254 John Robertson: So you will take money from Q259 John Robertson: Mr Peters says, and I quote, the poorest by increasing them the most. You have “We are in a competitive market”. Where is the already said that, without saying the actual words. The competition? You are all charging roughly the same medium term ones you are quite happy to leave in a price. I don’t see any competition. certain position and then the ones that spend the most Alistair Phillips-Davies: You have indicated that there money on their electricity will get the least increase. are clear differences in our prices and what I have said Let me ask you about another increase. I also received is those differences represent quite significant my letter from ScottishPower just at the weekend amounts of money in relation to the costs that we when I was home. Daily service charges: why have control because the costs that we do not control are daily service charges gone up, for me alone, 67%? those regulated by Ofgem for the networks and those Rupert Steele: This is exactly the same issue as the that we are charged in the international wholesale one about the size of customers. Our standing charges markets for the fuels that we procure. Therefore, the or the equivalent to standing charges have been lower bulk of the costs essentially are passed through from Energy and Climate Change Committee: Evidence Ev 49
28 June 2011 Ian Peters, Alistair Phillips-Davies, Amparo Moraleda and Rupert Steele those two areas and that is why there is relatively little Q266 Dr Lee: Yes. In the same article it says, difference or relatively small differences between “ScottishPower began notifying a number of its online those costs. discount customers last week”—two weeks ago— “that their gas bills will rise by almost 60%.” Are Q260 John Robertson: I always think if one thing is those customers in those areas? the same or roughly the same, it is a coincidence. Rupert Steele: I think that will be expiry of fixed- When you get six different companies all roughly the price tariffs. So that is back to the point that the same for all their prices it is not a coincidence, is it? Chairman raised earlier; that when somebody agrees You do talk to each other and work out the prices, with us to buy gas at a fixed price for a period of two don’t you? years, let’s say, and when the two years are up the Alistair Phillips-Davies: I would absolutely deny that. market could have gone up by 50%, 60%, 70%, 100% Amparo Moraleda: We do not, absolutely. in that time. At that point, when we have to reset the Alistair Phillips-Davies: I would absolutely deny that. price, you can get a big step. Sometimes it is a step down; sometimes it is a step up. It depends on what Q261 John Robertson: You would say that, the price was when the two-year or one-year or three- wouldn’t you? year, whatever, contract was entered into. Alistair Phillips-Davies: I would absolutely deny that. Albert Owen: You got one clear answer. Q267 Dr Lee: I still work as a doctor. If I prescribe John Robertson: Nearly. Unfortunately I do not something or if I refer somebody or make a medical believe that one either. decision about their care we have something called informed consent, the principle of informed consent. Do you think—this is to all of you—that your Q262 Dr Lee: We have been talking about similar customers gave informed consent to sign contracts for gains already. I have a newspaper article here by the deals they are now coming out of that are resulting Rowena Mason in The Daily Telegraph a few days in these 60% cases? ago. In it she makes statements that there are regional Rupert Steele: I don’t think that there is an issue in differences in prices to consumers in this country; this the sense that when people come out of the deal they is particularly with regards to ScottishPower. Why are are going to be getting the same price as everybody there such regional differences? She says, “There are else. So what they have done is take the decision that huge discrepancies in regional prices with customers they wish for a period of time to have a particular in the East Midlands and the East areas facing the price. When that price period comes to an end they biggest jumps.” Why? get the same price as everyone else. It is not as if there Rupert Steele: The prices that are charged by the is some kind of trap. network companies for delivering energy to people’s homes are set by Ofgem and they depend on the Q268 Dr Lee: But do you think they understood the particular characteristics of each network: how much potential risk that they may see a jump in their bills capital is involved, how many miles of pipes and of 60%? I do not share John’s preoccupation about wires and various other factors. Those calculations morality here. Energy is like any other commodity in end up with quite different numbers in different parts the world, but 60% is a pretty dramatic increase in of the country, depending on the type of network. anybody’s bills and I am not so sure that the people who have entered into this can have ever envisaged Q263 Dr Lee: Do you think your customers are that there would be a 60% increase. aware of that? Rupert Steele: It is difficult to know whether they Rupert Steele: I don’t know whether our customers would have envisaged that. What they would have are all aware of that. It is a detail of the way the envisaged— electricity and gas industries work. What we do is we reflect on to our customers the prices that we have to Q269 Dr Lee: I can tell you now if I was taken to pay for the delivery service in the various locations as the GMC or whatever I would have a professional they are set by Ofgem. obligation to prove that there was informed consent. I would have documented it. When you go cold-selling Q264 Dr Lee: So basically your postcode dictates on the doorstep do documents exist so that somebody your energy bill? says, “Yes, we agree that we have been fully informed Rupert Steele: Your postcode dictates the cost to us and we fully expect that if this happens down the line of delivering the electricity or gas. there is a potential for this to happen, such as a 60% Dr Lee: No, specifically the consumer— increase”? Do those documents exist? Alistair Phillips-Davies: It is a proportion of your Ian Peters: Yes, they do. I can’t comment on the 60% energy bill. So, for instance, in Scotland they get but where I think we have changed our approach is slightly lower gas transportation charges than England that fixed-term contracts in the industry, I think largely and Wales. So our Scottish gas prices, in terms of to this day, are automatically rolled over. In costing models, are going to be lower. conversations with Consumer Focus at the back end of last year we took a decision that that was an Q265 Dr Lee: I am not so sure that consumers are inappropriate way of handling the rollover. So from aware of this. the start of the year we stopped that practice. Now Ian Peters: It is the 20% that Alistair is alluding to— when a contract expires, we give customers options the network distribution costs. and if they want to choose to go into an alternative Ev 50 Energy and Climate Change Committee: Evidence
28 June 2011 Ian Peters, Alistair Phillips-Davies, Amparo Moraleda and Rupert Steele contract that is their option, rather than a default. I Amparo Moraleda: I honestly believe that keeping think that is much more transparent and a better way customers aware of the components of the electricity of the industry working. bill is very important. There is just a very small part of the final end-user bill that is under our control. We Q270 Dr Lee: Moving on to another regional talk about wholesale prices. We talk about regulated question. The parent company of ScottishPower, prices. We have talked about non-electricity charges. looking at the website, has activities all over the We have talked about all the elements that are out of world—a very successful business. Do you envisage, our control and predetermine a huge proportion of the or have they ever occurred, such domestic increases final customer bill. So I think the current situation has in energy bills in those countries? proven that we can all do a better job at Amparo Moraleda: We operate in different countries, communicating with customers. as you said, and the regulatory framework in different Dr Lee: Suggestions, how? countries is very different. Amparo Moraleda: Well, I think it is on our side to Dr Lee: Yes. But, with respect, the gas costs X; the make sure that the offerings are more comprehensive; oil costs X; the hydroelectricity, I should imagine, is that they are more clear; that the— within a sort of range but will cost X. I recognise that there are different taxation regimes and accept that Q275 Dr Lee: Mr Laidlaw, your Chief Executive, is there may be some difference but have you ever had saying that the public were totally unprepared for this. to be in front of a committee, if such a thing exists, Do you take any responsibility for that lack of in Spain or in Portugal or anywhere else you work preparation? where you have had to defend the potential increase Rupert Steele: I think quite a lot of discussion was of 60% in domestic bills? going on in the business pages—. Amparo Moraleda: The reality is that in those Dr Lee: Yes or no? I am not asking you to say, “We countries the prices are much more regulated than take 22% or 25%”. Do you take any responsibility for they currently are here, so there is not the same kind the lack of preparation? of market dynamics. So the way the markets are Amparo Moraleda: We are part of an ecosystem and regulated and the way the regulators operate in each I think that we can— country define pretty much how the prices work and, Dr Lee: Sorry? therefore— Amparo Moraleda: Ecosystem and its regulators, energy— Q271 Dr Lee: Is that reflected in your profit margins? Amparo Moraleda: Absolutely. Q276 Dr Lee: No. Keep it real, please. In this country the shock is palpable from these bills. I Q272 Dr Lee: So you make more profit here or recognised it, because I am a political anorak; I can there? see the energy prices coming round the corner because Amparo Moraleda: It varies country by country. I have taken an active interest in it. But the average Dr Lee: No, my point is that if you have a heavily person in the street doesn’t have the time. You must regulated country where these price changes are not at least take some responsibility here. In view of the likely to happen are you making more money as a fact that there are six companies that pretty much run proportion there or— domestic energy in this country, you should take some Amparo Moraleda: I have to tell you our margins in responsibility for preparing your customers for shocks Spain are higher, which is the country where we have to the system like this in terms of pricing. end-user customers because in the rest of the countries Alistair Phillips-Davies: Do you think that the where we operate we deal with transmission and reporting around what the Bank of England said and distribution activities or with generation activities. around what Ofgem say on a quarterly basis, which I Rupert Steele: The prices are higher in Spain than saw in the press obviously, was essentially missed by they are in Britain. most people? Because the Bank of England were Amparo Moraleda: Than they are in the UK. quoting a number around 15% and I suppose if I average out 10 and 19, I get to 15. Q273 Dr Lee: So your argument is that it is more of a constant price in those regulated situations instead of Q277 Dr Lee: I would say yes, it was missed because less regulated where there is a danger of more spikes? most people are not as sad as me, listening to the Amparo Moraleda: Well, the fact that there is a Today programme and reading The Economist. I think heavier regulatory framework gives prices a different the reality is— kind of shape and stability but, you know, it is the Alistair Phillips-Davies: I saw that in other pieces of choice of every country and of every Government to press than those two, I think, in all fairness. go for a more liberalised framework or to just be more Dr Lee: I just think it should be on your bills. I think deterministic about the how the market needs to you should be putting out correspondence in operate. As a company, we just operate and abide by advance—not coming out with 60% increases. I can the rules of each individual country. support you as businesses and I hope you are successful, but 60% is a big hit to somebody’s budget. Q274 Dr Lee: Finally, any suggestions in the future Ian Peters: Can I try and answer that question in a how industry, Ofgem and Government might work slightly broader context? One of the other things Sam better to communicate with customers so this type of Laidlaw, our CEO, said last week was that we should shock to the system is avoided? try and have an honest conversation here between the Energy and Climate Change Committee: Evidence Ev 51
28 June 2011 Ian Peters, Alistair Phillips-Davies, Amparo Moraleda and Rupert Steele
Government, the suppliers, the consumer groups and be able to alleviate some of that and basically have to the regulator, because we are trying to work our way put up prices and that is just reflecting what is going through three forces all at the same time. We have on in the wholesale markets. But I think the customer gone from being wholly self-sufficient on cheap North weighs extremely heavily on our decision and always Sea gas in 2003. Today we are importing 50% of that. weighs very heavily on our decision in these matters. It could be 75% in a few years’ time and that is a higher price and more volatile. So that is one driver. Q280 Dr Whitehead: But presumably, although We are committed as a country to reducing carbon there are some differences, the pressures that we have emissions significantly between now and 2020 and described in terms of forward prices and movements that has a cost to it. Thirdly, we have a responsibility are similar for all the Big Six— to try and keep bills as low as possible at a time when Alistair Phillips-Davies: But the bulk of the costs— household expenditure is under challenge. So those Dr Whitehead:—and, therefore, presumably are three forces that are quite difficult to reconcile and ScottishPower have been hung out to dry this time, I think the time is right—Sam Laidlaw said we have haven’t they, in terms of price rises? a year to do it and that is his timescale—to open this Alistair Phillips-Davies: Different people can do conversation up in a much broader context because different things. I don’t know what ScottishPower and those forces are with us for the foreseeable future. Centrica and the other guys do. All I know is that—
Q278 Chair: Last week the Minister said he didn’t Q281 Dr Whitehead: Or do you think, know whether consumers were willing or able to ScottishPower, that it is to your competitive advantage understand the socio-environmental charges on their overall to do this, inasmuch as you have some bills. Whose job is it to explain those charges? customers that you are putting on to new tariffs who Ian Peters: I said earlier on, Chairman, I think it is a are paying that for a while? What sort of calculation collective responsibility. I think part of that is on the did you go through and would you be willing to share suppliers and I would accept that. I think part of it is that with the Committee? on Ofgem and part of it is on the Government itself. Rupert Steele: In broad terms, we look at our income I think we can work together in a more effective way and our expenditure and if they are not in a proper to communicate all of that. Those elements of the bill balance then we need to look at adjusting our prices. are going up. The social element, which is going to Clearly consideration has to be given to the market move from the voluntary agreement to the Warm situation; whether we think that the problems are ones Home discount, will double in terms of its real cost that are general or applicable just to us, because if over the next 12 months. So I think that aspect is one they are applicable just to us we might have to absorb that we do need to have a better job of rather more. If it is a wider problem, that is something communicating. One of the areas we did agree with that eventually will have to be passed on. We look at Ofgem in terms of transparency of tariffs and bill these factors and we take a judgement. design is potentially looking at making all of those components much more visible on the bill than they Q282 Dr Whitehead: So why are these people are today. hanging back? Do they have it wrong? Rupert Steele: They have to make their own Q279 Dr Whitehead: You are in a very competitive decisions. It may be that they have seen that we have market, as we have heard, and you do not talk to each a bit of poor press and they may be thinking that they other about prices, as we have heard. When would like that to run for a bit before they reach a consideration of a price rise is in the air I assume, conclusion. That is a matter and a judgment that they therefore, that you have some kind of algorithm that have to make. you operate as to who has the competitive advantage of putting their price up first, as opposed to how many Q283 Sir Robert Smith: Mr Peters said something customers they might lose, as opposed to the long- about no longer rolling over contracts; does that apply term damage that putting the price up first might to small business customers as well? cause. The decision as to when to put a price up is, Ian Peters: No, it doesn’t and we are very happy to therefore, governed by that algorithm. Is that the sort review the way the small business market operates. of thing you do in terms of looking at each other’s There are different dynamics in the small business position as far as prices are concerned? market and I would draw a distinction between the Alistair Phillips-Davies: I think putting prices up is very small business and a mid-corporate, which is always very, very difficult. Nobody wants to go out more sophisticated. It is clearly a major topic of there and give incredibly bad news to consumers of review at the moment. We are talking to Consumer any variety; our consumers in Anglesey—I read some Focus about it and I think it is one that, as an industry, of the press in the paper—or the ones in Glasgow or we should look at. elsewhere who saw some very significant rises. I don’t think anybody wants to see that. So we do put the Q284 Sir Robert Smith: Because I think the industry customer very much at the heart of that decision. It is do recognise, as you say, the distinction between the the reason why we always try and hang on as long as micro and small businesses where, in a sense, the we can. But at the end of the day, we operate in a consumer is no more informed than a domestic competitive market. We have to compete for capital. consumer and, therefore, really needs a similar sort We have shareholders. There is an amount of pain that of communication and protection and hopefully the we can bear as a company; at some point we need to industry will be able to— Ev 52 Energy and Climate Change Committee: Evidence
28 June 2011 Ian Peters, Alistair Phillips-Davies, Amparo Moraleda and Rupert Steele
Ian Peters: That debate has just started in the last few Q287 Barry Gardiner: Indeed. But if they knew months. Overall we should expect to see a they had not spoken to the person who had the right convergence of the micro-business regulation and the to determine the supply to the property? domestic regulation over time. It is a question of pace Alistair Phillips-Davies: Well, it should not have and specifics and I am very happy to engage with the happened. regulator, Consumer Focus, the Federation of Small Barry Gardiner: It should not have happened? Businesses and others in that debate. Alistair Phillips-Davies: It clearly should not have Alistair Phillips-Davies: Following the last meeting happened. we were asked if we talked to local CBIs and things like that. Since that happened, the trade body that Q288 Barry Gardiner: You said, Mr Phillips- represents the bigger suppliers set up a meeting with Davies, that that person would be disciplined? a number of constituents to look at what we do for Alistair Phillips-Davies: Yes, and potentially— micro-businesses or small businesses. It is something we will clearly look to address and that is happening, Q289 Barry Gardiner: I have here a letter from I think, in the next couple of weeks. Southern Electric to me, “I am writing in line with our Rupert Steele: We are also happy to be positive conversation today and the above accounts. Firstly, I around this. As it happens, many years ago the am writing to confirm we have accepted your distinction between business and domestic was based comments and that you raised a valid complaint on consumption levels and the micro-businesses regarding the transfer of the above supply of gas and would have received the domestic protections electricity to Southern Electric from another supplier.” automatically. We have drifted away from that as a That related to both the points that I have just result of regulatory change and it may be that that was mentioned. They had not spoken to the person who an error. had any right to determine the supply and they had Sir Robert Smith: Hopefully we can get some been specifically advised that they must not make that positive news on this front at least. transfer. It then goes on to say, “I would thank you for bringing this matter to our attention and we have raised it as a training matter with the advisor and their Q285 Barry Gardiner: Do you think that your manager to improve our service in the future.” So that company would ever transfer supply to yourselves, to is all right then? your company, from a property when specifically Alistair Phillips-Davies: Sorry, can I just understand? advised not to do so? You said that they had not spoken with somebody, Ian Peters: I do not quite understand the question. but then they had been specifically told not to do so Barry Gardiner: If one of your salespeople were as well. speaking to the person of the house and were told, Barry Gardiner: Yes. I will give you the exact “No, you must not transfer the supply”, do you think instance if you like. The instance was as follows. The they would? Do you think your company would do person was moving house and they were advising that? Southern Electric of the fact that they were going to Ian Peters: I wouldn’t think so. move and they wanted their bills terminated and cut Alistair Phillips-Davies: A range of transfers are off at that particular point. They were asked where made when either people get wrong addresses or there they were moving. They told them that they did not is misunderstanding. know where they were moving. They were asked Barry Gardiner: But where there is no again, “But are you not moving somewhere?” Well, misunderstanding about the address or who the they might be moving into rented accommodation; supplier is. they might be moving into a property. Where was the Alistair Phillips-Davies: That should not happen. If property? They told them the property. They said, that does happen and somebody wilfully ignores the “Oh, well, we can transfer the supply”. They were wishes of the customer then that person should be specifically told, “No, you can’t transfer the supply disciplined, clearly. because no contracts have yet been exchanged and there has been no”—they don’t know whether they Barry Gardiner: Should be disciplined? own the property. Alistair Phillips-Davies: Correct. Alistair Phillips-Davies: Yes, I understand. Barry Gardiner: So you understand. I know the case Q286 Barry Gardiner: Do you think your company because the person that was talking to you was my would ever transfer supply from a property when they wife and you have confirmed that all the details were knew that they had not spoken to the owner of the correct, and that is since we last met. In a situation property? like that you said that the person should certainly be Ian Peters: Not wilfully. disciplined; yet your letter here says that it will be Rupert Steele: It depends whether there is a tenant in treated as a training matter to improve things in future. the property. Alistair Phillips-Davies: Well, I am happy to take that Barry Gardiner: Indeed, okay; or even a tenant in specific instance outside if you pass me some details. the property? Rupert Steele: We would expect to operate according Q290 Barry Gardiner: It hardly corresponds to what to the instructions of the person who has the right to you were talking about earlier today about being determine who supplies the energy to the property. proud of the lowest levels of cost and one of the Energy and Climate Change Committee: Evidence Ev 53
28 June 2011 Ian Peters, Alistair Phillips-Davies, Amparo Moraleda and Rupert Steele highest levels of service in the market, does it, Mr Q294 Barry Gardiner: Perhaps we could hear from Phillips-Davies? the other companies as well as to how they target. Alistair Phillips-Davies: Well, we do have the highest Amparo Moraleda: Pretty much as Ian has said; we levels of service in the market and we do have the do not like the word “targeting” because we would lowest levels of complaint, but clearly it is very use doorstep selling, face-to-face selling, as it is regrettable if we have any complaints and that is regulated by the rules for the regulation of doorstep clearly one of them. It is the case that we do have selling. So we just look at the broad range of the highest levels of service and the lowest level of customers who are not on our contracts who live in complaints of any of the Big Six, but clearly we have the areas where we have sales coverage. We believe fallen well short of the standards we should have in that by this sales method we give many people the this case and I would be very happy to take it up and opportunity to participate in the market, because there make sure that it is dealt with to our and your are many people who do not have access to internet, satisfaction. who do not have access to all the information Barry Gardiner: It will be dealt with in that way, but available to shift between suppliers. We really think not because of any relationship that we have. We will that doorstep selling is an effective way to inform customers about their choices, and this kind of pursue the proper process. “targeted” statement is not something I can recognise. Alistair Phillips-Davies: Fine. Q295 Barry Gardiner: Ms Moraleda, you sound Q291 Barry Gardiner: We have heard that 70% of very proud of your doorstep selling? prepayment customers are won on the doorstep and Amparo Moraleda: We really consider it is a powerful those, of course, are often the most vulnerable sales channel and we are investing— customers. How do you target those customers? Barry Gardiner: Sorry, I didn’t catch that. It is a— Ian Peters: Speaking for British Gas, that statistic is Amparo Moraleda: It is a very powerful and effective not true. Very few of our prepayment customers sales channel. overall come through the field sales channel. Targeting Barry Gardiner: I have no doubt about that. Is it is to do with the potential value to— fair? Are those people vulnerable? That is the question Barry Gardiner: Is that figure wrong for the industry you should be asking, not is it a powerful and or are you just saying that you are lower than 70%, effective sales channel. which means that everybody else must be Amparo Moraleda: What we do is on the one side, as substantially higher than 70%? has been previously— Ian Peters: I can’t give you the precise number, Mr Gardiner, but I will come back and confirm that in Q296 Barry Gardiner: We on the Committee writing. But ours would be nothing like it. believe it is a very powerful and effective sales channel. This is why we are so concerned about it. Q292 Barry Gardiner: But you accept it as an Amparo Moraleda: But again, we are not targeting average for the industry, for the Big Six? vulnerable people and our focus— Ian Peters: I am not privy to the figures that the other Barry Gardiner: We have just heard from Mr Peters suppliers have, but I will come back and confirm our that he is. What I asked you was how you did. own number. As a statement of fact, our sales Amparo Moraleda: Yes, and pretty much as he said, targeting—I think you are probably talking about field we will provide you with specific data about the sales here, are you, rather than the general targeting? percentages that we have, because I do not recognise Barry Gardiner: Yes, I am talking about targeting the 70% number that you mentioned. We can come for doorstep sales and specifically those customers back to you with the evidence about that. What we who are going to be on prepayment meters. focus on in this activity is to provide accurate data Ian Peters: They are the smallest percentage of and factual data. households we target. Many of them are tenants and, therefore, turn over very quickly. Q297 Barry Gardiner: Let me be clear, it is not that 70% of people who are doorstep sold are prepayment; it is that 70% of prepayment customers have been won Q293 Barry Gardiner: But you do target them? I on the doorstep through doorstep selling. The figure asked you not if you did but how you did. is that way round, not the other way round. Ian Peters: We do it off conventional models. We Amparo Moraleda: Sorry, okay. Anyway— look at the consumption of the household. There are Rupert Steele: I think that that seems a perfectly socio-demographic tools available. credible number. The field sales channel— Barry Gardiner: So you would use things like Barry Gardiner: What that means is that 70% of Experian to enable you to— your most vulnerable customers had been won on Ian Peters: And Mosaic and other such tools— the doorstep. Barry Gardiner: Mosaic, exactly. Rupert Steele: Well, I am not sure that— Ian Peters:—that are available in the market. They Barry Gardiner: They had been persuaded by high- are an element of the customer base we target but a pressure sales techniques, in Ms Moraleda’s words small minority. The majority, by overwhelming “effective sales channels”, to come over to you. number, are owner occupiers and credit customers. I Rupert Steele: What this is about is making sure that think there is an interesting dilemma here and it goes that channel of communication is open, back to— straightforward, accurate, fair and transparent. We Ev 54 Energy and Climate Change Committee: Evidence
28 June 2011 Ian Peters, Alistair Phillips-Davies, Amparo Moraleda and Rupert Steele have invested, like some others, in electronic sales put a written response in following last time. Our tablets to make absolutely sure that the advice given salary levels aren’t dissimilar but our lowest basic is accurate and to record the nature of the quotation salary is slightly higher than Centrica’s, it seems, and given. If we can go to the houses of people who are the top end is slightly lower. on prepayment meters and offer them cheaper energy, that is good for them. If we go, and do not have a Q302 Barry Gardiner: What percentage of your good deal, we should be telling customers that we are sales do not proceed? Do you keep that? unable to help them. If our advisers are not doing that, Alistair Phillips-Davies: I don’t know. I would be we need to know. surprised if we were at 70% but you may well be right because our doorstep salespeople earn less Q298 Barry Gardiner: Mr Steele, a statistic that commission from selling prepayment than they do might help the Committee—it would be useful to from selling other products. I would be slightly know if you all keep this statistic—is how many of surprised if that was the case. Currently, we win a your door to door sales people work out the deal on relatively small proportion of customers who are the doorstep for those vulnerable prepayment prepayment on the doorstep and our overall door- customers and then say, “Ah, I’m terribly sorry, stepping sales force is less than 50%. I would be according to my tablet I cannot provide you with a surprised but I will go away and look it. I take the better or a cheaper supply and, therefore, I am walking away”? What percentage of your attempted sales— point and I think we should go away and look at it, Ian Peters: If I can take that one, as a start point not but I would be surprised. We can let you know what all prepayment customers are vulnerable in that sense, the different incentives are. but that is a wider debate. The way our technology works is you do get on the screen in real time a Q303 Barry Gardiner: In Centrica’s follow-up comparative quote against all the other suppliers and evidence, you said that you were working to remove we show that to the consumer there and then. That is all no cold calling zones from all your walk lists. You completely overt. Where I do share your reservations, were working to do that. That means that at the I think, is that if there are inappropriate sales moment, I take it, there may well be representatives techniques being used in the prepayment market I walking around areas where they know today that it would be worried. We have invested to make sure we is a no cold calling zone but that they are going to are 100% confident that what the customer sees is a call nonetheless. Is that the case? clear and transparent choice based on price. We then Ian Peters: There are two levels to this. If there is a phone that customer back on every occasion, usually no cold calling sticker, we will absolutely respect the same day, to take them through exactly the same every one of those 100%. We are working as quickly process again so they can revalidate and that they have as we possibly can, so it is a matter of weeks before not been pressure sold. There is a double comfort in we disengage completely from no cold calling zones. there and we are very proud of that. A question that Again, I would be happy to confirm with the was asked, I think, of Phil Bentley at this Committee Committee the deadline for that. is would he buy from a door to door energy adviser. In my own case, yes, I would because I am absolutely Q304 Barry Gardiner: Thank you. Ofgem thought confident that the technology we use and the scripts that the announcement of one attractive sounding that are embedded in it give the best advice and open tariff amidst a general tariff increase would cause an and transparent comparisons. erosion of trust. How would you respond to that? Rupert Steele: We have now closed that particular Q299 Barry Gardiner: Do you keep records of how tariff. It did not particularly capture the imagination many attempted sales have not proceeded because of of our customers. the— Ian Peters: Yes, we do. Q305 Barry Gardiner: You mean it did not work? Q300 Barry Gardiner: Can you provide those to It was a trick that did not work? the Committee? Rupert Steele: Our customers preferred to go with the Ian Peters: I can furnish that. I do not have them in fixed price and capped offers that we were running at front of me. the time, roughly 25 times more take-up for those than for that particular product. It got a certain amount of Q301 Barry Gardiner: In that case, the follow-up criticism. We closed it. Sometimes you launch question would be how do you incentivise your sales products that people are not interested in. staff? Ian Peters: As a general point, they are salaried and Q306 Barry Gardiner: I think what Ofgem was the salary ranges between about £11,000 and £20,000 referring to here was the simultaneous launch of a to £22, 000 based on experience and expertise. I think product, which it turned out that people were not like the majority of sales forces there is an element of interested in but that superficially sounded attractive commission based on the type of sale and the value. at a time when there was a general price increase. Again, I think we have previously submitted how that Therefore, the marketing was very positive and is done to this Committee as a written response. shielded the criticism that you thought you might be Alistair Phillips-Davies: We have a written response getting. That is why they said it causes an erosion of to that. I can read it out to you if you want, but we trust. Do you accept that it caused an erosion of trust? Energy and Climate Change Committee: Evidence Ev 55
28 June 2011 Ian Peters, Alistair Phillips-Davies, Amparo Moraleda and Rupert Steele
Rupert Steele: I don’t think we had any expectation Ian Peters: I am happy to take the generality of it. I that that product would be on the front pages as think there is little doubt, in my opinion, that the opposed to our price rise. biggest issue facing the industry is one of lack of trust so I accept that start point completely. The way we are Q307 Barry Gardiner: I bet you didn’t. That was responding to that, we went out last year and formed not what I asked. Do you accept that that sort of a customer panel. We directly have customers now strategy, where you lead with something that looks engaged with us. Ann Robinson from uSwitch is here; superficially attractive and give that high publicity in she has been involved with that. We have now turned order to mask a general increase in your cost, is that into a permanent customer board on which I sit something that causes an erosion of trust in you as and Ann chairs. We get regular direct feedback from a company? our customers about what we are doing right—and we Rupert Steele: We don’t know how people trust us. do many things well—and what we are doing wrong. That is a matter that we will discover as we continue to work in the market. What we do know is that it Q310 Laura Sandys: Are you happy to be was clear to us from the beginning that the transparent about the things that come through from announcement of our price increase would attract a lot that customer panel? of attention. There was no attempt to hide. Ian Peters: Yes, indeed. The report, which is a 40- page report, written by the panel and which I did not Q308 Barry Gardiner: Of course it was, that is why edit, we published on our website. You can read every you put out something up front that looked word of it. It has the criticism in there and our superficially attractive to try and deflect the attention. proposed responses. We are working through it with That is precisely the point that Ofgem were making, the board, as they now are, page by page. Right at the wasn’t it? heart of that is the key issue around transparency and Rupert Steele: We announced that product to give our understanding about tariff structures. On that one, we customers an opportunity to transact with us on a new agree with Ofgem, there is much we can do and deal. They were not very interested in it. should do to simplify tariffs. We have talked a lot about bill design, whether the bills are as clear as they should be, and they are not. We are very pleased with Q309 Laura Sandys: From my perspective, looking the way Which? have given us top ranking in that and at the big six and how they engage with customers, we are working with DECC on signposting different how they organise their tariffs, how you structure your options. Whether that is the cheapest tariff or a whole sales channels, it seems so 1970s. This strikes signpost to a website or a helpline that can give you me as an industry that is still caught up in some advice on better tariffs, all of that is in test as we mindset of monopolistic sort of relationships with the speak and we will be responding to the Minister in customer. You do not help and assist customers the next two weeks with our proposals to take that migrate from fixed tariffs to a sudden 65% hike. You forward. It is about direct consumer engagement, I have door to door salesmen. Truthfully, the last thing agree with that completely, and it has to be at the heart I ever bought from a door to door salesman was some of building that trust. Channels are part of it and field brushes. You have a commission structure that is sales is now less than about 12% of our total channel extremely high in incentivising. You are penalising mix. We are much more now reliant upon the internet low users of energy, not focusing on high users of and those kind of channels, which, on Mr Gardiner’s energy. You have a lack of trust within the whole point, we cannot completely come out of that at the consumer sector. It strikes me that you need to look moment. at a total review of how you market this business, how you build and develop long-term relationships with Q311 Laura Sandys: But, Mr Peters, you said earlier your customers, and I would suggest that you should on that if your company was convicted of any form of be looking at a very comprehensive review, both mis-selling you would think about whether you would separately and collectively, to build trust in this sector actually reimburse all the customers or, if there were because you are going to be absolutely crucial and not that many, then you would not worry so much your relationship with the customer is going to be about reimbursing. It needs to be a contract of trust crucial into the future when it comes to energy between the individual and the company as well as efficiency. I wonder whether you are considering the collective. reviewing your customer relations fundamentally, Ian Peters: I accept that completely. I was trying to looking at ensuring that you have a director who is draw a distinction between systemic mis-selling, as experienced in a sophisticated industry sector when it the way you have it, for example, in the banking comes to customer relationships and customer industry with payment protection insurance, and what management, and whether you are looking at the goes on with individual cases. Clearly, we would whole trust agenda as being something crucial to in recompense a customer if we are demonstrably in the many ways looking at your long-term corporate wrong. In British Gas we have no evidence of that strategy and certainly Britain’s energy efficiency. kind of systemic mis-selling. Others are under review Ian Peters: Can I take that, Chairman? This is one of by Ofgem. On an individual basis, absolutely I would. those comments I think are specific to Scottish Power, Amparo Moraleda: I really share your concern about but I will take the generality of it. the trust and the image that we have in the Laura Sandys: I think it feels like a cultural issue marketplace. I have to reassure you that we want to about the whole sector. do things right and we are trying to invest in doing Ev 56 Energy and Climate Change Committee: Evidence
28 June 2011 Ian Peters, Alistair Phillips-Davies, Amparo Moraleda and Rupert Steele things better. We want to be a better sales and market Rupert Steele: The big increases are arising not organisation and despite the balance that it seems to because the new prices are high but because the old have in this market, the churns are tremendous. We prices are low. are going through 20% churns of clients, and for all of us the cost of acquisition and the cost of making Q313 Laura Sandys: But that is working in the customers more loyal and happier with our brands partnership with your customer and migrating and are really significant. We spend a lot of effort and ensuring that that is understood, but you have energy and time in customer focus groups to really try answered my question. to understand what are their buying behaviours, what Alistair Phillips-Davies: I think your point is well are their preferences, and how we can improve our made about the industry. On SSE’s behalf, I think we customer relationship with them or provide them with are clearly better than the bulk of the other companies energy services or enhancing our offering so that we out there. We clearly differentiate ourselves and it is become their preferred supplier above and beyond the a shame for our staff and all the efforts that we put in pure electricity bill. that we are lumped in with the rest of the big six. It Having said that, I think there are lots of areas where should be us and the other five. We demonstrated better value to people over a long period of time. You we need to improve and we are working on this. We are laughing, but I am absolutely serious. are all very concerned about the lack of trust created Laura Sandys: It is the funny looks. around mis-selling, and this is why I think collectively Alistair Phillips-Davies: I am absolutely serious. We we are investing a significant amount of money in have not been voted best on service seven years in a providing and enabling the sales force with row by uSwitch for no reason. We do not have the technology that will allow us really to track and to lowest complaint levels in the industry for no reason. monitor and to standardise the sales process and to We have been accused of being looked at on sales at keep really tracking evidence of the full dialogue the moment by Ofgem, and Ofgem investigate people. between the salesperson and the household. We are Both of these companies have three investigations training all our customer-facing personnel. We are outstanding against them at the moment by Ofgem; making sure that we are revisiting the code of conduct we have only one. I think we are clearly different to and the business conduct guidelines with all our the other companies. suppliers. I have to reassure you that if we do not do things better, it is not because we neglect our Q314 Laura Sandys: You say that with pride. responsibility. We just need to try to do it better and Alistair Phillips-Davies: Yes. We do care about our enhance and be more effective at doing so, but it is customers and while I would absolutely take your really an area of focus for us. point that people like to have a go at all of us and say that we are very, very poor, we operate in a relatively Q312 Laura Sandys: But a month ago you had low margin industry, which nobody seems to believe people on fixed tariffs who suddenly saw a 45% despite the fact that if you look at Ofgem’s graph over increase. That is a responsibility from your a long period of time the margins are very, very thin perspective to look at migrating those customers in our business. We do not have a lot of money to through the changes that are going on in your spend on doing some of these things. If you look at the wholesale market. That will build trust. price communications that people have talked about, I Amparo Moraleda: Yes, but hopefully over time those think we were the only company that tried to comply customers will have seen the previous increases in with the spirit of where Ofgem are going on their price tariffs that had occurred and that they have not communication. The last time we did it we actually suffered. It is a kind of a way to eventually prevent clearly announced more than 30 days in advance and themselves from suffering more instability and we clearly told all our customers, sent all the letters unpredictability in there. It can be right, it can be out to all of them beforehand. We are the only wrong, they can just go into a downturn of the market company, despite pressures, that have not put up our and find themselves just paying a bit more than the electricity prices since 2008. By the time we do it, it will be over three years since we have done it. Prices average price maybe, but they can find themselves in in real terms have gone down over 20% for our situations where prices keep climbing up and they customers since 2008. I think there is a lot of things avoid the heat of the price increase between the time that we have done for our customers, a lot of things they made the contract and the time this contract we still do. If we look in Scotland at CESP, we have expired. I accept what you said about them really Norrie Kerr who sits there and looks at what we spend understanding what they are subscribing for, what the our money on in CESP money, basically. He comes terms and conditions of the contract are and what are and sits there and looks and approves our the risks at the end of the period, but above and programmes, so we do try and engage with people. beyond that if they have saved money over the term We take away the points you raised on small business, of this contract, if prices have experienced a steep the points that Barry raised last time rightly about change over the duration of their contract, what we doorstep selling. We have a full investigation of our can guarantee is that they will get the best possible doorstep selling force going on at the moment, we deal in the market at the moment their contract have removed the management team, and we will expires. It is like an insurance for them but once the come back to you shortly once we have done that. But insurance expires they will have to go to the market we do take great pride in what we do and I am here and find the best suitable offer for them. trying to represent the 20,000 people who work day Energy and Climate Change Committee: Evidence Ev 57
28 June 2011 Ian Peters, Alistair Phillips-Davies, Amparo Moraleda and Rupert Steele in, day out to do something for all our customers. business model? Because the presentation so far in They do a lot of work and they do take great pride the short time I have been in Parliament gives the in that. impression of a cartel and when you get somebody saying, “Well, actually, we are better than this lot,” Q315 Chair: Just on the doorstep selling again, I I quite like that because that is the way the market think you said earlier on that your salespeople get should be. different rates of commission for selling different Ian Peters: I was given a right of reply to Alistair’s products? earlier point. I think it has been— Alistair Phillips-Davies: They do. Q320 Dr Lee: Argue. Q316 Chair: Does that mean, in effect—I am not Ian Peters: I am going to, don’t worry. Our saying this is the intention but the effect—that a turnaround, it is well documented the challenges salesperson might get a bigger commission for selling British Gas had a few years ago. The turnaround has a customer a product that was not the best product for been dramatic. We have almost caught up with SSE that customer? on many measures. Consumer Focus have just given Alistair Phillips-Davies: I would hope that that was us the same star rating as Alistair has and 30,000 not the case and that we try and safeguard that. To be people are utterly committed to overtaking them. honest, I think at the end of the review that we are Dr Lee: It is just an observation because I think if doing currently we could say definitely that that was people watch there is a sense that it is like a bit of a the case, but the incentives that they get are more boys club, with respect. based towards payment methods, the ability to pay for Chair: Well, there has been a happy breakdown of those people, and also there are some size-based ones. the harmony. If they are higher consumers we tend to focus them on that because there are— Q321 Sir Robert Smith: Talking of the club, the way the Minister put it to us is that the way this country is Q317 Chair: It does not sound to me as though there going in terms of trying to deliver the best deal for is a real duty to act in the customer’s best interest. the consumers is that an integral part of it is people Duty does not seem to rest on the door to door should switch if they feel they can get a better deal. salesperson. Do you think switching is the key part of what makes Alistair Phillips-Davies: I think the tools that we use this or should be making this market work? currently are relatively blunt there and that would be a Alistair Phillips-Davies: It shouldn’t be everything, fair comment and that is something that we are clearly but clearly that is the consumer’s choice. You can go looking at. The commission and everything else about to Sainsbury’s, Waitrose or Lidl, take your pick that business is being examined currently. basically as to which you want. Or you can go to O2 or Vodafone; again you can take your pick. I would Q318 Chair: As an ambitious door to door say O2 have clearly done very well on their customer salesperson, a job for which canvassing at elections engagement and—unfortunately Laura has gone—O2 probably equips me rather well—I have sold more have done very well against Vodafone and some of difficult sales than a dud energy policy in my time— the others in their customer engagement and things I actually might earn more money by selling energy like that in the mobile phone sector. Some of the plans that were actually not in the best interests. I see things they have done—adoption of iPhone and things the difficulty from your point of view, but I just want like that, dealing with the O2 Centre—have given to be absolutely clear about this. There is a danger in them advantages. Therefore, it is something that the present situation that the ambitious and successful consumers can do, particularly if price is what they salesman, perhaps a Member of Parliament who lost are worried about. You can hop from one to another. his seat in 2010, might be out there selling products It is just like banks who offer attractive rates of very effectively and getting a big commission, but interest but you have to hop fairly regularly in order actually selling products that were not the best ones to get that most attractive rate. I think switching is for the customers. important but it should not be the be all and end all. Alistair Phillips-Davies: Well, I can say there is a Hopefully, for us anyway in particular, we offer long- possibility that that might be true for all of us and that term value, excellent service, and we continue to is clearly regrettable. evolve that to make sure that we stay ahead of Mr Peters and the marauding hordes from British Gas. Q319 Dr Lee: It was not really a question, Mr Ian Peters: I would echo that. I think switching is a Chairman, it was just an observation that your good measure of a healthy, competitive market. I intervention, Mr Phillips-Davies, is the first exciting think, interestingly, in the fourth quarter of last year intervention I think I have had in any of these big six switching rates were higher than they had been for a meetings in that there is a sense that everybody turns very long time indeed, so I think that is good. But I up from the big six and it is all a bit, “Well, we are would also support Alistair’s point that it is not all all in this together, aren’t we, boys and girls?” The about price. Our Cardiff operation, which has just won responses are sometimes a bit benign and suddenly the best European call centre, has the lowest churn. you break ranks and the response of the other three Its customers are absolutely loyal to the style of was quite interesting. Can I encourage you, and service we give there. It is a blend of price and service indeed all companies, to show a bit of independence in the aggregate rather than just a leading price of position in terms of your business and your indicator that drives the market. Ev 58 Energy and Climate Change Committee: Evidence
28 June 2011 Ian Peters, Alistair Phillips-Davies, Amparo Moraleda and Rupert Steele
Alistair Phillips-Davies: One final point, going back argue five, six, seven is probably the optimum you to earlier as well, just on the compensation point, there want to give. If there are genuinely 180 then I would is an ombudsman scheme out there as well where agree with the basic point. compensation up to I think it may be £5,000 or something like that can be given to people. There is Q325 Sir Robert Smith: Do you share Ofgem’s an ombudsman scheme there, so if complaints are optimism that it would be logistically quite made then they can ultimately go to the ombudsman straightforward to migrate people to a simpler tariff? for compensation. They are reasonably substantial Ian Peters: No. sums of money. Alistair Phillips-Davis: We have given evidence to that effect. I think Ofgem make a fair point about Q322 Sir Robert Smith: Do you recognise the tariffs but the issues are about clarity for a customer; figures from Ofgem or Alistair Buchanan that we had them understanding it and having comparability and showing that those of us single fuel consumers who simplicity does not necessarily figure in there. If they are legacy customers probably pay about a 6% have comparability and they understand it then I think margin, whereas non-legacy are in the 1.5% to 2% that is what you need. Ofgem themselves have now margin? acknowledged that there could be a major problem for Alistair Phillips-Davies: There are some dual fuel heating for off-gas grid people if they are not careful. discounts where some people offer them. For us, we There could be a whole wasted spend on smart tend to offer cost reflectivity across the products, and metering if they do not allow us to put tariffs in place between tier 1 and tier 2—or the legacy customers, as that allow different times of day and things of that you put it, and non-legacy customers—I think you nature. will find that our prices are very, very level and there We have worked, and are working at the moment, is no indication of that. Certainly, when Ofgem looked with Ofgem, DECC and some of the consumer bodies, at us in a probe any small anomalies that were there, to put in place an APR-type model that I mentioned we ironed out. I would be very surprised if that was last time. We have a two-sheet piece of paper we can the case for us. leave with you; it is just a very simple model that Rupert Steele: Same for us. We are cost reflective would allow a very simple comparison between between our legacy and non-legacy areas and any everybody’s tariffs. I think Ofgem’s point or their anomalies were ironed out in November 2010. issue is absolutely right about getting clarity and focus. I think we need to tweak what their solution is Q323 Sir Robert Smith: The other rather more so that we get the right solution that allows innovation startling figure Ofgem told us is that 40% of in the market and gives comparability but not just customers who switch end up switching to a weaker simplicity and dumbing everything down to the lowest deal. level. Throwing away a lot of the competition Ian Peters: This comes back to the earlier innovations in the market and the benefits that are conversation about the way field sales operates. I have available to people are particularly disadvantaging not seen that 40% substantiated, but if the technology some people who do not remember to do rollovers, and the sales process is not as robust as it should be, because as soon as that happens we will come here, then worryingly, clearly, I think that is a risk. I have you will sit there and criticise us because we have talked about what British Gas has done in investing rolled somebody on to a tariff that is far more in that and I am as confident as I can be before this expensive for their overnight unit and we will say, Committee that that does not happen. “But that is what the regulations told us to do and you did nothing about it.” Q324 Sir Robert Smith: I think the point there was maybe wider: even if you go on the internet or Q326 Sir Robert Smith: Yours is similar? wherever, it is the transparency of the tariffs that is Rupert Steele: I think we are in a similar place. It is causing a growing concern, not the doorstep as well. absolutely important that we work to improve the way Ian Peters: I accepted earlier on, in response to an in which tariffs are presented to customers to make earlier question, I think the industry as a whole has them easier to understand. I think Ofgem have done work to do on transparency of tariffs and I would consumers a real service in identifying that that is accept that it is at the heart of the retail market for— something that needs to be addressed. Where I think Sir Robert Smith: I think it has gone up from 180 to we part company with Ofgem is the idea of boiling almost 400 at the moment. everything down to a single tariff, and it is not just Ian Peters: Again, those are numbers I do not us who have parted company with Ofgem, it is also recognise. From our point of view we have five core Consumer Focus whose response to Ofgem lists two tariffs. I think we have the lowest of anybody in the advantages and nine disadvantages in that proposal. industry. I tried to work out where the 400 came from So I think there is quite a widespread view that and I really struggled. We are down to five. We transparency and clarity, openness—absolutely. reduced one of them just two weeks ago. Tariff range, Boiling everything down to one product—really bad though, I think is quite important and where I think idea. we do have issues with where Ofgem are going in the extreme is to go to a single tariff per payment type. I Q327 John Robertson: If Ian Peters is right and they think that is going to stifle innovation and reduce only have five tariffs, that means the rest of you choice. It is about getting the balance right between between the other five companies have round about just one and a small number. We would probably 395. I would say that it is a deliberate complication Energy and Climate Change Committee: Evidence Ev 59
28 June 2011 Ian Peters, Alistair Phillips-Davies, Amparo Moraleda and Rupert Steele of the market to confuse people to make sure that they so it does not have—it really does not relate exactly do not understand exactly what they are getting and to the earnings or the benefits— why. I will take a really good close look at my gas bill next time it comes in to see if everything you are Q332 John Robertson: This is how a lot of English telling me is true. Anyway, I do not expect you to football teams get taken over, money was used to pay answer that because I know what you are going to say, for their own purchases. Why does this money end up so I will move on to something else. in the United States? Laura mentioned the comprehensive review of your Amparo Moraleda: As I said, there are several parts business. I just wonder if the big six should end up of the group that need, at different points of time, being a big 12 rather than a big six, or maybe a big money, and instead of it just going to the financial 18 or a small 18, because I do not see any competition markets and to pay higher interest rates or— between you all and if we want to introduce competition, as Phillip obviously does, while I want Q333 John Robertson: What was the rise in to see the lowest cost for the lowest people I feel that electricity prices in the United States last year? maybe that is a road we want to go down. And that is Amparo Moraleda: I do not have the figure in front a comment, Chair. I am not going to ask a question of me. because I know what the answers will be. Let me ask Scottish Power a question that I have been Q334 John Robertson: I have. It is 2% to 8% and flummoxed with for some time now. Can you give me you have just put my energy prices, and those of examples of any money flowing into the UK-based people who use your company, up by 19% for gas and arms of your company as a result of intra-company 10% for electricity, yet you can take money and give lending? it to the United States from a company that you are Amparo Moraleda: Would you mind repeating the investing in. Excuse me, £800 million disappearing question please? from one account to another account is still £800 million. Q328 John Robertson: Can you give an example of Amparo Moraleda: Mr Robertson, we do not have any money flowing into a UK-based firm, that is you, final customers in the US. We do not have any kind as a result of an intra-company lending? You have a of commercial— parent company in Spain and I have been working out how to pronounce your name. Q335 John Robertson: So you are just investing it Amparo Moraleda: Iberdrola. Moraleda. for a profit then? John Robertson: Moraleda. Senora, okay. You have Amparo Moraleda: No, we just have a transmission taken money out of Scottish Power; have you put any distribution interest. Let me just insist on the fact that money into it? this £800 million— Amparo Moraleda: You are probably referring to a press release that was describing an £800 million Q336 John Robertson: Do you not pay for these intra-company loan. I just want to reassure you that transmission interests? Do you get paid for these this money is Scottish Power money. It remains transmission interests? Scottish Power money and this £800 million will Amparo Moraleda: We receive a return for those represent the fact of a formal loan from Scottish transmission investments because at the end of the day Power to Iberdrola, so the way we operate is that those are capital intensive business. Iberdrola acts as a kind of bank and it manages the flow of money across the subsidiary, but, as I said, Q337 John Robertson: Do you understand how this Scottish Power receives a commercial rate for the looks to the Scottish customer? We think that you are money it lends to the group. As you can imagine, the taking money from us to subsidise another company £3.5 billion that we have invested over the last three in America and you are putting our prices up. It has years and the money that we are going to keep been said here that they have gone up 45%. Of course investing, the £15 billion that we are going to invest they have not gone up 45% because if you include the in Scotland in the future, are going to be funded both daily charge that we get for the domestic tariff it has through the parent company and through various ways gone up nearer 67%. Why don’t you tell people the of funding. truth? Why don’t you tell them that it is not just 19% and 10%, it is also another 22% that you are putting Q329 John Robertson: I have a problem with that on to bills as well? In fact it is a lot more than 45% because we were told by you that the profit you made of an increase. Do you see what I mean? We are not last year was £679 million. getting the truth here. We are getting lots of little Amparo Moraleda: That was before interest and tax. stories but we are just not getting the truth. Why don’t you tell the truth? Q330 John Robertson: So you take £800 million off Amparo Moraleda: Let me just try to be specific on that, that is a negative of £121 million. this £800 million loan. Let me just insist once more; Amparo Moraleda: It does not really work this way. this £800 million Scottish Power money remains Scottish Power money. It is an inter-company lending Q331 John Robertson: So you take £800 million out and Scottish Power is receiving a commercial rate of and then you put it immediately back in? interest for this money. The money is not going Amparo Moraleda: The £800 million is part of the anywhere, it remains Scottish Power’s money. It is a money that is in the bank and that the company has, way of handling treasury inside of— Ev 60 Energy and Climate Change Committee: Evidence
28 June 2011 Ian Peters, Alistair Phillips-Davies, Amparo Moraleda and Rupert Steele
Q338 John Robertson: I will accept what you are Q342 John Robertson: How many complaints do saying. It is not going anywhere but somebody you get a day? somewhere is getting £800 million, and I know who Amparo Moraleda: I do not have that. does not have it, and it is not the Scottish customer. John Robertson: I have to say, for companies the size Let me go back to this 67% increase. I received a of yours, you are particularly poorly prepared. I have letter as well from a customer who has a sister who lots of other questions I can ask but I just feel it is a lives round the corner from him, and the bills that they waste of time asking them because I am not going to received works out that in this case of this gentleman, get any answers. I think we need to get you here he gets a bill 89% dearer than his sister who lives again, and make sure you are well prepared before round the corner. How is that possible? you go any further. Rupert Steele: We would need to look at the individual circumstances. Q343 Dr Whitehead: Are you comfortable as companies with the degree of vertical integration that Q339 John Robertson: Let’s be honest, this will not you have in terms of your operations? be just a one-off case now, will it? It is not just, “I Alistair Phillips-Davis: I do not know about was lucky enough to get this information.” comfortable. It is probably a factor of the market that Rupert Steele: It will presumably depend on the level vertical integration helps reduce risk, and that is of consumption, whether the customer is on a dual probably a benefit to the consumer ultimately that we rate tariff, if they have electric heating or not. Possibly can pass on to the customer. It probably avoids some the kind of tariff they are on. There are any number of the companies going bankrupt like a lot of the non- of factors, how they pay for their energy, that may affect the relationship between the bills between two vertically integrated companies have done in the past. customers. I think margins, as we have seen, are low. I think there is a lot of competition in the market with the high levels of switching, so I personally think that vertical Q340 John Robertson: You will excuse me, the integration is a good thing because it reduces risk, it difference in the prices and then I look at my own reduces cost to capital, and it avoids some of the nasty prices that I get charged for—I have to say 400 consequences that we have seen happen to the likes different tariffs, trying to understand your letter that of Drax, British Energy, Independent Energy, Atlantic comes through from your company, and by the way and all sorts of other businesses in the past where there was a booklet that came with this to tell me all the different rules and regulations governing your shocks in the market have driven them under. Those company. I tell you, I need a new pair of glasses to companies that have gone under have often resulted be able to read it, the print was that small. I find it in additional costs being put on the industry, and insulting that you send this kind of stuff out to people either the rest of us have had to bear those costs or who, in a lot of cases, one, will not understand it and, they have been passed on to consumers, which I do two, will not be able to even read it. not think is helpful. What we do not want is a situation I know it is not just you that is doing that, it just so where you are bailing out energy companies similar happens you are the company who sent it out. I know to the bailout that we have seen in the financial sector all the companies will be doing something similar where people take too many risks. because you feel you are meeting your obligations, but you are only meeting your obligations to a minimum Q344 Dr Whitehead: But a suggestion is, and standard. You are not meeting your obligations to the certainly a suggestion made by Ofgem, among others, standard that should be met and be expected from is that that degree of vertical integration has a very your customers, particularly customers who have been substantial impact on liquidity, and indeed looks like with you over a lengthy piece of time. I go back and you are selling to yourselves on a number of occasions ask the question again: why do this lady and at the cost of liquidity. Is that a fair comment, do you gentleman who live round the corner from each other think, or not? have one set of prices and I have another? This is not Alistair Phillips-Davis: I do not think so at all. I think just about the tariff we are on. This is about the daily there is substantial liquidity in the market. I think we charge as well. Why should it be so different and why provided you with the figures but in the last two years does it have to be as high as 67% or, in the case of we have sold in the market more than three times the this gentleman, 89%? total amount of generation that we generate, therefore Rupert Steele: If you care to send us details of the we churned it at least three times, I think previously cases we will give you— some of the other companies have said, so there is a deep liquid market out there. If Ofgem wants to put Q341 John Robertson: That is a cop-out. That is just more things in place to improve the liquidity, market you telling me, “I will send you a bit of paper and makers, it is fine. Quite happy with that. The industry you will send me a letter back.” I want you to tell this invested a lot of time and effort to produce N2EX, Committee why people are charged that amount of which is the auctioning platform that can be used. We money and why you are not playing fair with them? are happy to put volumes through that. Rupert Steele: We cannot really respond to that without knowing the details and investigating it. Energy and Climate Change Committee: Evidence Ev 61
28 June 2011 Ian Peters, Alistair Phillips-Davies, Amparo Moraleda and Rupert Steele
Q345 Dr Whitehead: But it has not worked, has it? sheet?” of which we have about 100 with various Alistair Phillips-Davis: In what sense has it not people at the moment, yes, we would do that. If that worked? is what people ask for, if that is what Ofgem wants us Dr Whitehead: Only one new entrant into that to do, we will do that. We are happy to provide market. liquidity. Liquidity helps us. We want liquidity in the Alistair Phillips-Davis: Sorry? market because we need to balance our positions Ian Peters: There is a bigger issue than liquidity, like which change all the time. So liquidity is absolutely we traded 75% of our generation capacity in 2010. I fine with us. I suspect, we will get to the right answer think liquidity is a factor and I think that some strips with Ofgem on that. for certain hours of the day we would happily make those available. I think the bigger issue is the credit Q348 Dr Whitehead: I think Ofgem did give you and capital risk that new entrants look at. We are a until 1 June—I am asking this question collectively— relatively fine margin business and to go into large to come up with various thoughts on how the market scale hedging exposures requires quite a lot of balance or how better liquidity might come up. I do not think sheet capital, particularly in a volatile market. I think anybody met that date, did they? that capital risk is the bigger constraint to barriers to Ian Peters: We have done, it was formally part of entry rather than anything to do with liquidity per se. our submission to Ofgem. In fact we supported the Alistair Phillips-Davis: I think there is good liquidity auctioning concept in principle. We have been in the market and we offer a lot of substantial engaged in extensive discussions with Ofgem and are wholesale deals. If you come to us, whether you are a in details of working it through. large consumer or an independent third party, you want access to the market, we have over 100 deals Q349 Dr Whitehead: You all told them smaller clip called flexi-contracts where you can look at the screen size? of the market and say, “Right, I would like you to buy Rupert Steele: We have offered smaller clip sizes to that.” We will buy that on your behalf, and that is entrants in order to assist them. We have promoted what you get charged for it. We will pass that through that quite heavily as a product in order to help. We to you, and we will do a bunch of risk management. have also responded to Ofgem positively on the If you give us a term sheet and say, “This is what I various initiatives. Obviously there are details to work would like. I am a company that has this many out. What, if they are going to auction things, exactly customers or thinks will have this many customers, are they going to auction, how is it going to fit in with and this is what I would like from you”, we will price DECC’s energy market review, which also needs a that term sheet, and I am sure a number of the other reference price? Lots of detail to work out. But what companies in the sector would do likewise. you have not seen is us saying, “No, no, no.” We are I think the points that British Gas make are probably absolutely happy to see this liquidity problem sorted the more relevant ones why you struggle in this to the extent there is one. market. I think the margin one, is the other one. All the companies that come into this market have either Q350 Sir Robert Smith: If the retail market is gone bankrupt or have looked at the margins and working very efficiently in driving out margin, how is decided it is not for them. It is interesting—I welcome it that the vertical integration makes it less risky to be Co-op coming into the market, Co-op have a well in the generation side? respected brand, so you think we would be very Alistair Phillips-Davis: I think what you have is a fearful but I think it just goes to show, if you look at balance between both of them. So at certain times you their prices, they are not very different from the rest may need more margin on one side than the other. of us. It is a low margin business with not a lot of That is what we find. We run an integrated business money to be made. Maybe you should get the Co-op where we look to make a margin across the two sides. in next time. So, yes, if generation is suffering then the retail market may be benefited from that and vice versa. I Q346 Dr Whitehead: Do you think arrangements would say generally over recent years generation is such as, say, clip size which— the one that has probably sat there and tended to Alistair Phillips-Davis: If people cannot deal with clip provide support for the retail side. size we would be prepared to sell smaller volumes. If Ian Peters: Where I think there is more to do is in the somebody gives us a term sheet and says, “Give us transparency. We think we have led the industry on a volume”— separating out the various components of our business Ian Peters: As long as they have an appropriate between upstream, downstream, retail business and so credit risk. on. We welcome Ofgem’s intent to make that even more transparent because I think again it is one of Q347 Dr Whitehead: You really would be prepared these aspects that can drive suspicion as to what is systematically to sell smaller clip sizes? really going on behind the scenes. So we are out there Ian Peters: As long as the counterparty has an leading this and we would absolutely support greater appropriate credit risk. transparency and segmentation of accounts. Alistair Phillips-Davis: Yes. Whether you could do it through the exchange is another matter, but if you say, Q351 Sir Robert Smith: Moving back to the earlier “I see that price on the screen, can I buy half the question, the reality is for the consumer that we need volume because I do not need all of it?” to us, and, a massive capital investment, and that is going to have “Can I do that on the basis of the standard term to be paid. Ev 62 Energy and Climate Change Committee: Evidence
28 June 2011 Ian Peters, Alistair Phillips-Davies, Amparo Moraleda and Rupert Steele
Ian Peters: Yes, which is the honest conversation that Chair: On that note of absolute agreement and Sam Laidlaw has alluded to. consensus we will end the proceedings. Thank you Alistair Phillips-Davis: Yes. very much for coming in. I am sure we will meet you again before too long. Energy and Climate Change Committee: Evidence Ev 63
Written evidence
Memorandum submitted by RWE npower In Summary: — The key reason given for launching the review was a purported large increase in retail margins, but Ofgem acknowledges margins have been low or negative over many years. — Ofgem’s calculations of retail margins are inaccurate as they do not include discounted and online tariffs or accurate consumption levels (which have been declining). — Ofgem claims to find evidence that prices rise faster than they fall in response to changing wholesale costs, but concedes there are limitations to the work and found no clear evidence of consumer detriment. — Ofgem finds no evidence of excess profit or cartel behaviour. — The timing of the review is inappropriate as insufficient time has elapsed to properly assess the efficacy of the Probe remedies. — The proposals are highly interventionist, with potential to seriously distort the operation of the market and provide no robust evidence of likely customer benefit. — Ofgem’s proposals on tariffs are in direct conflict with the richness and diversity of tariff choices which are a major justification for the introduction of smart meters, which are themselves important to energy efficiency and the low carbon agenda. — Ofgem has a key goal of promoting new entry to the market, but does not consider that low average margins and the uncertain regulatory environment may be important barriers to entry. — Energy companies are not always without fault, but limitations need to be considered against the explosion in number, scale and scope of licence conditions and statutory social, consumer and environmental obligations added to our remit since 2009. — RWE npower has been working hard in recent times to demystify energy supply for customers. Initiatives range from crystal marking documentation, our customer charter, a jargon buster guide to energy terminology, “Did you know” series of fact sheets and tariff guides summarizing the essentials of our tariff offerings.
1. The Timing of the Review 1.1 Profits The retail review was launched ahead of the winter following price rises by three retailers. In particular, having advanced the publication of its quarterly report by a month, a major plank of the justification for the review was the alleged 38% increase in margins. From a supplier perspective this justification is puzzling: 1. the quarterly report looks only at standard tariffs and so does not reflect overall profitability; 2. Ofgem has itself acknowledged that energy companies had been making low or negative margins for several years; and 3. The segmental statements for 2009 showed that most of the companies had made low or negative profits in that year. So price increases should not have been unexpected in a competitive market, given also a range of upward cost pressures including a growing list of licence obligations, the increasing scale and scope of environmental and social obligations and rising network charges. Indeed, Ofgem acknowledged expected cost increases in its Quarterly Report. There are also significant questions about the assumptions adopted by Ofgem including the consumption levels it has chosen for its calculations. In particular, the gas level looks too high and will therefore overstate profits.
1.2 Consumer Harm A second motivation for the review was the perception that some customers were having difficulty engaging in the market. However, Probe actions 1 and 2 were targeted at exactly this issue: promoting customer engagement and helping customers make well informed choices. In our view, the review’s proposals are premature because Ofgem has not allowed sufficient time for key Probe remedies to bed in. The remedies required companies to project annual charges on bills from January 2010. In addition, annual statements were rolled out commencing July 2010 and all of a company’s customers as at April 2010 should have received a statement by December last year. This remedy is intended to make it straightforward to compare alternative tariffs with the annual bill on the existing tariff. We believe it is premature to evaluate whether this remedy has been successful. There will be some customers who switched after April before receiving a Ev 64 Energy and Climate Change Committee: Evidence
statement from their old supplier and who have yet to become due for an annual statement from their new supplier. This group might be expected to dwindle towards zero by the autumn 2011. And yet the retail review already proposes an alternative solution to this question, namely standardized tariff structures. Given that Ofgem has already implemented a remedy around total bill costs, its haste to impose additional restrictions is puzzling since it cites evidence from Ofcom’s experience (para 5.19 of the Behavioural Economics report) that customers found total bill costs more helpful than info on individual call prices. It appears that in conducting its customer research, Ofgem did not explain the potential of the existing Probe remedies and in particular the information about total bill costs which is now available to customers. Nor did it ask customers to rate this method of simplifying tariff decisions, possibly with refinements, against the newly proposed options. Had Ofgem done so, it seems likely that customers would have preferred the existing information. In which case, a proportionate remedy would have been to improve awareness and perhaps presentation of the existing information. These omissions are significant shortcomings in Ofgem’s process. The tariff simplification remedies also supplant a second suite of Probe remedies relating to cost reflectivity both between regions and between tariff types. Again, we believe the implementation of alternative or additional remedies is premature. The evidence in the retail review shows that the existing remedies are having the desired effect. Figure 2.2 (figure 5 of appendix 8) of the retail review report shows the gap (after allowing for cost differentials) between in area and out of area prices has closed almost completely by January 2011.
1.3 Liquidity As regards liquidity, the N2EX product is beginning to take off. In an initiative led by market participants (some from the so-called big 6 and some from other utilities) NASDAQ and Nordpool have been chosen to introduce a cleared financial and physical power market and day-ahead auction. The vision for the market is one where any company can hedge exposure to power prices through financial contracts, traded on a cleared exchange. Credit terms are the same for all companies, and are set by the exchange, based on industry standard practices. In April this year, N2EX launched its spot market, and NASDAQ announced two market makers for financial contracts, providing liquidity from week-ahead to 2014. The auction, which forms the reference price for those contracts, also allows access to transparent hourly shape prices. Approximately 40% of prompt trades now take place on N2EX either through the auction or via cleared physical trading. Average auction volumes in April have been greater than 30GWh and up to 57GWh, with 23 regular active participants. As liquidity on financial contracts improves we expect auction volumes to increase, and vice versa.
1.4 Conclusions The overall conclusions are that it is hard to detect an objective justification for the review and that the new proposals have been brought forward before sufficient time has elapsed to properly assess the efficacy of the Probe remedies and wholesale market developments. This is a concern as a key principle of Better Regulation is that interventions should be designed to achieve their objectives with the least intrusion and distortion to market operation. Without doubt, the new proposals are markedly more interventionist with potential to seriously distort the operation of the markets. In the next sections, we look at some of the review’s claims and proposals in more detail.
2 Profitability There is a theme throughout the review around the profitability of the companies. For example, launching the review (R/18 26 November 2010) Alistair Buchanan said: “Consumers have the right to expect that the energy retail market is providing them with value for money. Our analysis published today shows an increase in company margins from £65 to £90 at a time of rising energy prices, which causes Ofgem to rightly ask if companies are playing it straight with consumers”. And the headline bullet points read: “Latest analysis from Ofgem shows retail margins increasing from £65 to £90 after recent price rises Ofgem to review the effectiveness of the retail energy market to see if further action is necessary to protect consumers Ofgem to investigate energy companies’ newly available retail accounts and the facts behind the numbers”. The phrasing of these comments suggest that the regulator thinks that price rises were unjustified. Given the context set out above regarding the historic profitability of the industry, one might conclude that this wording betrays a lack of objectivity. For example, elsewhere Ofgem acknowledges that the figures cited are not an indicator of energy supply company profits. Moreover, it is notable that Ofgem subsequently revised downwards its £90 figure and has never satisfactorily explained the marked premium between its figures and those produced by independent economic consultants NERA. Second, in Appendix 9 (figure 4) of the report, Ofgem applies an unspecified analytical framework to move from a benchmark retail return of 5.8% to a vertical integrated energy supplier required return of 3%. The Energy and Climate Change Committee: Evidence Ev 65
chart presents the average retail margin of 4.2% based on 2010 Ofgem estimates. It is hard to comment on the robustness of Ofgem’s analytical basis because no details are supplied. What is clear is that Ofgem has omitted the impact of the heavy burden of regulatory and political risk, unique to the energy sector, not the least of which are the frequent short notice non-discretionary changes to our cost base. Third, in its review of the 2009 segmental statements, Ofgem (para 3.7) discusses the pros and cons of different treatments, seeming to acknowledge that there is no absolute “right” answer. However, in the following paragraph, it makes a series of adjustments, describing the companies figures as “reported margins” and its adjusted figures as “true margins”. Ofgem thereby confers the status of absolute precision to its own interpretation of accounting data, contrary to the commonly accepted understanding that the interpretation of accounting data necessarily involves an element of judgement (a point seemingly recognized in the previous paragraph). Indeed in its choice of reporting format at the time of implementing the Probe remedies, Ofgem acknowledged that “the financial accounts of the Big 6 are all different and inherently complex” (Impact assessment page 40, 7 August 2009). In any event, it is doubtful that aggregating the returns of a highly capital intensive activity like generation with those of retail and expressing that as a margin on turnover is a sensible way of reporting profits. In short, none of Ofgem’s profitability analyses demonstrate that companies are earning excess returns, a point acknowledged at para 1.24 of appendix 9.
3. Competitive Intensity Whilst we welcome Ofgem’s re-confirmation that there is no collusion in the industry we do not recognise Ofgem’s allegation of weak competition. The latest review seeks to reverse the findings of the Probe regarding the relationship between retail and wholesale prices. The main Ofgem claim appears in the press release: “The clearest example [of weak competition], being the finding that for the first time there is evidence that the Big Six have adjusted prices in response to rising costs more quickly than they reduced them when costs fell”. “Lack of effective competition means that for the first time Ofgem has found evidence that suppliers are putting up prices quicker in response to wholesale price rises than they are cutting them when wholesale prices fall”. The conviction and certainty with which this finding is expressed in the press release exhibits a marked disconnect with the more measured and equivocal conclusions of the report itself. Paragraph 3.14 reports: “This analysis found some evidence that energy bills follow an asymmetric trajectory”. “This finding is dependent on both our choice of technique used as well as how far we assume suppliers purchase their energy requirement in advance”. The conclusions go on to note: “Because of the number of different possible reasons for finding asymmetry, the implication for consumer harm is not clear cut”. Even if the findings of the study are accurate, it is wrong to conclude that this proves competition to be ineffective. Ofgem’s analysis is based only on standard tariffs, excluding online and other innovative products where Ofgem’s own report (para 2.65) acknowledges competition is especially vigorous. Ofgem’s conclusion is therefore invalid. On the contrary, profitability, switching and product choice evidence indicates competition to be strong.
4. Ofgem’s Proposals 4.1 Tariff Simplification We have outlined above why we believe the tariff simplification proposals are premature. In essence, it appears that Ofgem intends to impose a regulated standing charge (which might vary by region) and require companies to apply a single unit charge across all regions and consumption levels for any given payment method. This proposal has a number of shortcomings: — It is not clear that the regulated standing charge will be set at sufficient level to enable companies to recover the per customer costs which are subject to competition. — Ofgem does not appear to have considered the impacts of their proposals on affected customer groups, in particular the cross subsidies that are likely to be introduced by the inflexible tariff structure proposed. If suppliers are to recover some fixed costs via unit rates larger users will cross subsidise lower users. Larger users may be low income families in badly insulated homes. — Due to the recently tightened requirements of SLC23, companies now have a long lead time to change their prices. Will Ofgem allow sufficient advance notice of changing the regulated standing charge for companies to reflect these to customers? And/or adjust for over-under recovery of “pass- through” costs. Ev 66 Energy and Climate Change Committee: Evidence
— Ofgem proposes that fixed term contract tariffs should all be converted to the same format as regulated standard evergreen tariffs (SETs) for comparison purposes. However, in tabular form, this can only be done at a limited number of standard consumption levels. If this consumption level does not reflect a given customer’s own consumption this could result in misleading comparisons and poor switching decisions. By contrast, Ofgem’s Probe remedy allows and encourages customers to (correctly) compare annual bills at their own consumption. In short, these proposals will restrict customer choice and restrict the scope for suppliers to compete. In addition, if Ofgem’s pricing straightjacket fails to reflect suppliers’ incurred costs, suppliers will be exposed to added risk which ultimately will need to be reflected in their required margin. Looking to the future, Ofgem’s proposals directly conflict with the richness of tariff choices which are a major justification for smart meters, contributing to demand side engagement in the market and hence to the energy efficiency and low carbon agendas. Suppliers will be discouraged from offering seasonal time of day (STOD) tariffs if they can do so only on fixed term contracts and without the scope to increase prices with costs. More generally, we believe that the assertions regarding the profusion and complexity of tariffs are overstated. We have been trying to play our part in helping customers understand and engage in the market As regards tariff proliferation, npower had a total of 18 available tariffs during March across all payment types, 3 of which are the social tariff. We seek to strike a customer focused balance to the range the products we offer: — To a considerable extent, the market self segments—few customers are interested in full range of alternatives. Ofgem’s behavioural economics paper notes (para2.11) the use of rules of thumb to make choices. This accords with our experience where customers use the type of tariff they want as an initial screen (e.g. fixed, green, standard). — It is in our interest to identify the product types of interest to a particular customer prospect. — In practice, the range of choice is little different to markets as diverse as bread, milk and car insurance markets. Prices vary with product type, over time and sometimes with payment method (noting the special characteristics of energy supply which make payment type relatively more important). As regards complexity, we have long been working to reduce the complexity of the energy market for our customers. Some specific examples demonstrate this commitment to the customer (launch dates in brackets): Crystal marked Ts & Cs (Jan 2010), Crystal marked Bills (Feb 2010), Did you know campaign bill inserts and website (Mar 2010), Customer charter (March 2010), Tariff charter (November 2010) and Tariff guides (February 2011). We enclose a copy of one of our tariff guides for information and would be happy to supply copies of other guides if that would assist the Committee. There is clearly a question as to whether Ofgem’s focus has been optimal. We have noted the potential advantages of refining the existing approach rather than restricting tariffs. We also observe that a key recommendation (p4) of Ofgem’s vulnerable customer research was that Ofgem should publicize more widely the fact that PPM customers pay similar prices to other customers. The researchers had found a misperception that PPM customers paid more, a misperception still held amongst a broad group of stakeholders. Neither Ofgem’s press release nor fact sheet follows up the recommendation and we are not aware of any references in Ofgem’s media communications. There is clearly a role for Ofgem in disseminating accurate information about the market.
4.2 Promoting New Entry Ofgem proposes to promote new entry by requiring the six vertically integrated companies to sell wholesale products at regular auctions and to maintain a continuous market making function close to real time. Plainly, this will impose a significant cost burden simply in operating the arrangements. In addition, there are likely to be added costs arising from the restriction on hedging strategy. The proposals demonstrate a lack of clarity in important respects. The motivation for providing entry assistance to new entrants appears to be a perception that competition between existing participants is not sufficiently effective and that tariffs are too complex1. We have sought to demonstrate above that neither of these assertions stand up to scrutiny. Second, the record of entry to the supply sector has been patchy. Typically, small scale new entrants enter the market when wholesale prices are declining, but when wholesale costs rise start rising again they exit, often in circumstances where their outstanding costs are imposed on other participants and their customers. 1 Alistair Buchanan (26 November 2011): “Energy companies have failed to play it straight with consumers and so Ofgem is proposing to break the stranglehold the Big Six have over the electricity market by making them auction up to 20% of their generation output. This would increase price transparency and make it easier for new players to enter the retail market”. Energy and Climate Change Committee: Evidence Ev 67
Third, even on Ofgem’s own analysis, it is hard to see how entry assistance is going to help customers. The Retail Review purports to show that stand alone suppliers need a 6% margin premium compared to integrated participants and at the same time the proposal raises the costs of obligatees. Our conclusion is that a policy through various entry assistance measures of promoting entry which would not of itself be sustainable is ultimately to the detriment of the generality of customers. It is instructive to ask why credible new entrants such as financial institutions and large retailers have shied away from entering the retail energy market. As discussed by the recent report by economic consultants, Frontier2, the most plausible explanation is that the market has been insufficiently profitable given its risk profile and a perception that Ofgem is operating an implicit price control regime.
5. Conclusion When he launched the retail review Alistair Buchanan asked whether companies were playing it straight with customers. At that time, he appeared to mean charging too much. Announcing the results of the review, he concluded “Energy companies have failed to play it straight with consumers” by which he appeared to mean, in addition, offering too many and too complex tariffs. In this note we have explained why these are characterizations of the industry which we do not recognize. To sum up, Ofgem’s review has not found any evidence of excess profits. It has not demonstrated that its tariff proposals are the ones preferred by customers, nor has its demonstrated that its entry assistance measures are in customers’ interests. And yet, it proposes two highly interventionist measures. Nonetheless, we will work constructively with Ofgem to flesh out its proposals and evaluate their impact. The key proposals are indeed very radical, possibly unique insofar as they are being applied to competitive markets, but very high level. The next stage will be engagement with Ofgem to fill in the gaps and allow a considered assessment of their impact. We do not get everything right all the time. But we would submit that this needs to be seen in the context of the explosion in the number, scale and scope of licence conditions and statutory social, consumer and environmental obligations which have been added to our remit since the beginning of 2009 (a list of which is appended to this note). In npower, we are fully focused on putting customers at the heart of everything we do. We are working hard to build trust. Regrettably, the tone of remarks by some other stakeholders has the potential to sabotage that effort, we believe to the detriment of customers for whom we now deliver so many social and environmental services.
2 Competition and Entry in the GB electricity retail market—Frontier Economics, January 2011 paragraph 2.3. Ev 68 Energy and Climate Change Committee: Evidence Type / Description Informal: Suppliers required byspend Government an to agreed sumprogrammes of to money help on alleviatenpower’s various fuel case, poverty. this In hasfor amounted the to years circa 2008–11 £100 Quasi-regulatory: Final guidelines onsuppliers how should market greento electricity make tariffs, it clear"green". whether such tariffs areQuasi-regulatory: truly Minimum steps supplierstake to when withdrawing tokenfacilities, prepayment to meter ensure nosupply customer left without Voluntary: Agreement by suppliersDECC to on report efficiency to measuresFormal: for Requiring SMEs. suppliers tometers install for advanced all profilecustomers class by 5–8 2014 business anddata provide on consumption request. Statute: Parts of HESS,target £350 households, of across measures Greatgeographical will Britain, areas in to given improvestandards, energy and efficiency permanently reducewill fuel be bills. funded It bysuppliers a and, new for obligation theelectricity on first generators, energy time, to an achievecarbon obligation an emissions on overall reduction targetOctober between 2009 1 and 31Formal: December New 2012.. rules requiringdifferent the terms justification offered of tocustomers different and groups that of differentpayment terms methods between are cost-reflective. ATTACHMENT- NEW/REVISED OBLIGATIONS FOR SUPPLIERS SINCE 2009 Suppliers’ voluntary spend Ofgem Green Supply Guidelines Ofgem principles for the withdrawal of token prepayment meters Business Energy Efficiency agreement New supply licence condition in relation to Advanced meters for Non-Domestic premises (SLC12.20–25) CESP—The Electricity & Gas (Community Energy Savings Programme) Order 2009 Prohibition of undue discrimination(SLC25A and & requirement SLC27.2A-B) for cost-reflectivity between payment methods Effective Date01/04/2008 Obligation Topic / Source 04/02/2009 05/02/2009 01/02/2009 01/04/2009 01/09/2009 01/09/2009 Energy and Climate Change Committee: Evidence Ev 69 Type / Description Quasi-regulatory: As part ofdisconnection Ofgem’s project, debt this and jointConsumer Ofgem/ Focus review intointroduced supplier commitments procedures to re-connecthours within any 24 vulnerable customerdisconnected; inadvertently follow up anydisconnected customer where no contactvulnerability; to improvements check to for theAssociation’s Energy self-regulatory Retail Safety Netwill which be subject toarrangements independent Q211. audit Quasi-regulatory: Suppliers must adherestandards to of 5 conduct inbusiness the market, domestic to and complementpackage small the of Probe remedies. Ofgemstandards has when regard investigating to potentialbreaches. the licence Formal: Introduction of anto overarching ensure objective face-to-face salesactivities and are telesales transparent andFormal: not Obligation misleading to publishfinancial segmental information for thethe different Big parts 6 of energyFormal: companies’ Written businesses comparisons/estimates for domestic face-to-face sales; tighteron restrictions debt blocking, 30and working switch days to to avoiddebt repay price assignment debt increase, threshold prepayment increasednew to processes £200; and documentationbusiness for customers micro to improveterms transparency and of limit roll-overFormal: of Fixed contracts. direct debiton payments the to best be availableclearly based information explained and to to domesticcredits be customers. must Any not be unreasonably withheld. Ofgem/Consumer Focus safeguards to protect vulnerable customers from disconnection Ofgem Energy Supply Probe: Standards of Conduct Ofgem Energy Supply Probe: Revised Marketing licence condition—overarching objective (SLC25) Ofgem Energy Supply Probe: Financial information reporting (SLC19A) Ofgem Energy Supply Probe:blocking specific & measures revised for debt face-to-facenotification assignment marketing of protocol (SLC25); domestic (SLC14); customer supply Supply transfer contract to terms micro-business consumers (SLC7A); New Direct Debit licence condition (SLC27.13–16) Effective Date08/10/2009 Obligation Topic / Source 19/10/2009 21/10/2009 21/10/2009 18/01/2010 18/01/2010 Ev 70 Energy and Climate Change Committee: Evidence Type / Description Quasi-regulatory: A new certificationlabel scheme electricity to tariffs withcredentials. genuine The green scheme formallyOfgem’s implements Green Supply GuidelinesFebruary published 2009. Self-regulation: In response toconcerns, stakeholder suppliers agreed notregistered to no call cold in callingcustomer zones displayed and a where noticeunsolicited a indicating visits that not welcome.updated Code to also reflect Ofgemrelation probe to changes SLC in 25Formal: (estimates Implemented / via comparisons). licencerequiring conditions, suppliers to payfor electricity the customers power theyscale produce renewable from electricity eligible andand small- Combined Power Heat (CHP) units.installations All receive participating a guaranteedthe payment electricity for generated andelectricity a exported payment to for theStatute: grid. To provide furthergeneration support technologies to by renewable increasinggiving targets additional and ROCs togeneration. offshore The wind increase isthat designed electricity to makes ensure ato significant the contribution UK’s EUscheme 2020 to targets. 2037. Extension ofStatute: RO Primarily to introducefor revised electricity standards distributors, alsogeneral increased level the of payments(e.g. to from reflect £20 inflation to £22 for a failed appointment) “Green Energy Certified” label New provisions in the EnergySure Sales Code in relation to cold calling Feed-In-Tariffs (FITs) —new SLCs 33 & 34 Renewable Obligation Order 2010 Revised Electricity Standards of Performance Regulations 2010 Effective Date09/02/2010 Obligation Topic / Source 01/04/2010 01/04/2010 01/04/2010 01/04/2010 Energy and Climate Change Committee: Evidence Ev 71 Type / Description Quasi-regulatory: As part ofand Ofgem’s disconnection wider project, debt thishow joint suppliers review deal into withintroduced indebted 6 customers, key principlesconsider that to suppliers ensure must theyproactively are taking properly account and ofability a to customer’s pay. Quasi-regulatory: Sets out Ofgem’son general the view basis ofstatutory its provisions, interpretation that of gaswould the and/or need relevant electricity to bedeemed consumed contract in to order arisesupplier for between and a a the licensed occupier/ownerThis of would premises. effectively preventfixed the costs recovery through of aabsence standing of charge, a in contract the Formal: on Bills express / terms. statementsconsumption to and include projected 12 costs;Statement months Annual to provide thepremium/discount same relative + to details standarddebit, of direct principal any terms, switchingsignpost reminder impartial and advice Quasi-regulatory: Guidance to supplierslicence on conditions the relating toprepayment disconnection meters and where ainstalled supplier a has smart meterremotely and disconnect has the the premisescustomer capability or to to switch prepayment the terms. Formal: Clarifying that licenseestake are all obliged reasonable to stepsof to a ascertain customer the anddomestic status the premises occupants before of disconnection. any affected Ofgem, Consumer Focus, Citizens Advice Bureau "key principles" (ability to pay) Ofgem statement on Deemed Contracts Ofgem Energy Supply Probe: information on bills about consumption / costs, annual statements (SLC31A) Ofgem interim guidance to suppliers—remote disconnection and remote switching to prepayment Modification of the supply licence in relation to disconnection (SLC 27.11A) Effective Date03/06/2010 Obligation Topic / Source 24/06/2010 01/07/2010 16/08/2010 01/10/2010 Ev 72 Energy and Climate Change Committee: Evidence Type / Description Quasi-regulatory: Sets out Ofgem’sregarding views the obligations onto suppliers meter in interference relation andshould how be statutory exercised powers tocustomers protect and the take interests intovulnerable of account customers. the needsFormal: of Obligation on suppliersparticipants to with provide an CRC annualto statement assist of with supply calculationInformal: of Suppliers their have emissions. signedConsumer up Focus. to They these shouldthe with help way to prepayment improve works,support provide for extra vulnerable consumersbetter and communication encourage between suppliersprepayment and meter consumers. Statute: The replacement ofvulnerable the customer voluntary expenditure (seeentry the above). first It requiresspending suppliers in to each incur yearprovision up of to benefits 31/03/2015 toof on consumers fuel the in poverty. orFormal: at Amends risk the notificationrequire obligations 30 to calendar daysa advance price notification increase of orsignificant other disadvantage contract of variation theFormal: to customer. Draft the SLCs beingto laid give before effect Parliament to3rd various Package requirements e.g. of customers thewithin to EU 3 switch weeks; suppliers additionalrequirements. billing / information Formal: Licence protection formovers early prior smart to meter theestablished. mandated In rollout particular rules itremote being includes disconnection proposals and on switchingprepayment to and on ensuringswitch consumers suppliers. can Ofgem guidance for suppliers on the use of theft disconnection powers New SLC 21A in relation to the Carbon Reduction Commitment Energy5 Efficiency Key Scheme Principles for Prepayment Meter Customers Warm Home Discount Modification of the supply(SLCs licence 23, to 24, require 14) Advanced Notice of Price Increases EU Third Package (draft modifications to the supply licence) Spring Package Effective Date20/10/2010 Obligation Topic / Source 31/03/2011 11/03/2011 01/04/2011 28/04/2011 Pending Pending May 2011 Energy and Climate Change Committee: Evidence Ev 73
Supplementary memorandum submitted by RWE npower Energy and Climate Change Select Committee Questions Following the 11 May Session Ofgem has estimated that its proposal to restrict the number of tariffs for standard evergreen products would impact on 75% of all customers currently on those products. What would be the logistical challenges involved in moving this number of customers over to one new “standard” tariff? In order to answer this question we require more information about the structure of the proposed Evergreen tariffs, i.e. would they have a standing charge, a two-tier block structure, a twin-rate structure or a combination of one or more of the above? Ofgem’s initial consultation paper leaves all of the above options open. We also require further information on how the transition to the new evergreen tariff regime might be achieved. It could either be over a period of time with suppliers introducing the new tariff structures at a time of their choosing providing that a final deadline date is met or by a ‘Big Bang’ approach proposed where all suppliers would be required to make the transition on a common date. Whichever approach is taken, suppliers would need an extended period of notice after the final tariff structures were agreed to permit the necessary IT changes to be made and fully tested. Sufficient time would also be required in order to notify affected customers of the changes in accordance with SLC23. Furthermore, until we have transferred our customers onto our new SAP system which is expected to be completed next year, we are unable to transfer customers from one product to another in bulk. In addition, with our current IT system, it is very time consuming and costly to change an existing tariff structure e.g. from two-tier to standing charge. Lastly, Ofgem’s initial proposals made no reference to what Evergreen tariff options would be required for customers with multi-rate electricity tariffs, notably Economy 7, which is in operation in around 20% of UK homes. If flexibility is not given to allow existing tariffs such as Economy 7 and Super Tariff to continue, this could, at worst, require changing meters and could potentially cause significant disruption to customers’ space & water heating arrangements.
The subject of small and micro businesses was raised during the session. Please could you provide more information on the contact you have had with the Federation of Small Businesses and the Chamber of Commerce to discuss issues around energy supply and the possible need for greater protection of micro businesses. If there has been no contact, please confirm this. We have attended a Consumer Focus meeting on micro-business issues with a Federation of Small Businesses representative present some weeks ago. We have had discussions with the Chamber of Commerce on infrastructure and related planning issues, but there has been no contact on micro-business issues.
On the subject of sales staff, please could you provide details of the basic salaries and commission structure for doorstep sales staff and the areas targeted by doorstep sales? The majority of RWE npower’s doorstep sales are carried out by our own staff but we also use an agency, Appco. Salaries for our doorstep sales staff are competitive and reflect the industry standard with a basic salary for sales advisers of typically about £12,000 with the potential to earn more than that through commission. However, the level of commission is based on criteria that increasingly reward achieving “live sales” levels over 70% of contracts, that is those resulting in the customer taking supply, as well as meeting minimum thresholds for sales and complying with our own procedures. Appco provides Field Representatives who sell electricity and gas contracts to customers at their homes. RWE npower has a contract with Appco which governs these sales. RWE npower pays to Appco an amount per sale which varies depending on how many sales are achieved. We have worked hard to develop and implement market leading validation procedures. All doorstep sales are immediately checked through an “on the door” phone call to an independent validation centre.
How large was your generation business, how large was your supply business, what volume of electricity sales did you make and what volume of electricity purchases did you make in terawatt hours in 2009Ð10? As part of the RWE group, RWE npower reports in calendar years. Provided below is the information for 2009 and 2010 from the RWE Annual Report 2010 (pp 76–81) and 2009 (pp 58–61). RWE npower 2010 2009 Electricity Generation Capacity 11, 757 MW 10, 258 MW Electricity Generation Output 34.3 TWh 26.7 TWh Electricity Supplied 49.9 TWh 49.9 TWh Customers (at year end) 4.003 million 4.147 million Residential market share (at year end) 14% 15%
The majority of RWE npower supply and generation volume (approximately 90%) is traded via RWE Supply & Trading GmbH (RWEST)—a separate company to RWE npower. It operates in the energy wholesale Ev 74 Energy and Climate Change Committee: Evidence
markets as the RWE Group’s sole face to the wholesale markets. All transactions with both the generation and supply businesses are made at arm’s length and are subject to stringent and routine “fair value” testing. June 2011
Memorandum submitted by EDF Energy EDF Energy — EDF Energy is one of the UK’s largest energy companies and the largest producer of low-carbon electricity, producing around one-fifth of the nation’s electricity from its nuclear, coal and gas power stations, as well as combined heat and power plants and wind farms. — We supply gas and electricity to more than 5.5 million business and residential customers and are the biggest supplier of electricity by volume in the UK. — Our multi-billion pound investment programme in the UK includes plans to develop four new nuclear stations in the UK at two separate sites. Collectively those power stations will meet up to 40% of the UK’s low-carbon domestic electricity demand by 2025. Each of these developments will employ 5,000 people.
Key Points EDF Energy believes Ofgem’s motive for its inquiry into the retail market is sensible. Our detailed written response to Ofgem will set out our principal concerns and offer alternate solutions where we believe better remedies exist. Our key points address the following: — We believe that any concerns Ofgem has about the timing of margin changes needs to be seen in light of its conclusions on the size of margins being earned. Retail margins for the energy market have been negative for much of the last decade. — We firmly believe the electricity sector is competitive: the sector has one of the highest switching rates of any energy market in the world. — We share consumer concerns regarding the complexity of energy tariffs. Following consumer feedback we have recently simplified our tariffs so customers pay one unit rate for energy and a small standing charge. — We support Ofgem’s aim of making it easier to compare energy products but we believe this needs to go beyond just the price element of the bill. — We have particular concerns over Ofgem’s proposals regarding how time of use tariffs would be included. Particularly the implication this will have on the benefits of smart metering. — We believe Ofgem’s liquidity proposals should be targeted to place the obligation on generators. — Finally, we believe Ofgem should only intervene in wholesale prices if it observes anti-competitive behaviour in the market.
World Energy Markets 1. Retail energy prices are driven primarily by energy companies’ input costs and in particular by energy costs. Energy is purchased by suppliers in the GB wholesale market but prices are driven by global forces such as Chinese demand for primary fuel or geopolitical instability that could threaten production. It is not possible for companies in the UK to insulate their customers from underlying global trends even with sophisticated hedging strategies. 2. In this context, rising prices do not equate to rising margins—quite the opposite in fact, as competitive pressure make suppliers reluctant to pass on increased input costs for as long as possible.
Market Structure 3. It is incorrect to refer to “the big six” energy suppliers, as the number of suppliers differs between markets. In the Industrial and Commercial (I&C) sector material levels of penetration have been achieved by GDF Suez, Haven Power, Opus Energy and Total (representing around 10% of the business market at October 2010). Indeed, the presence of such entrants in I&C suggests that there are other reasons specific to the domestic market that explain the lack of new players. 4. The term “big six” also carries inappropriate suggestions of homogeneity. EDF Energy is a relatively small player in the domestic market and does not benefit from the economies of scale (or margins) enjoyed by its larger competitors (particularly British Gas). The companies also differ in terms of mix of gas and electricity customers, in terms of regional/national focus, and with regard to the range of other services provided (eg boiler maintenance). EDF Energy was also the only major company to put in place a prize freeze guarantee over the last winter. Energy and Climate Change Committee: Evidence Ev 75
Margins 5. Retail net margins have been negative (i.e. loss making) in respect of typical dual fuel consumers for much of the last decade of market opening. Negative margins are evidence that the market is highly competitive. 6. Ofgem’s Retail Market Review (RMR) was launched following its December 2010 estimate of retail margins, and indicated a rise of £35pa to £90pa for a typical dual fuel domestic consumer (reflecting the combination of price rises announced by Scottish and Southern Energy, British Gas and Scottish Power, and EDF Energy’s winter prize freeze guarantee). We note that Ofgem’s 21 March 2011 market report indicated that suppliers’ estimated margins have already fallen by 17% to £75pa. 7. The gas and electricity industry is highly competitive, as can be illustrated by looking at a range of classic competitivity indicators. For example, it continues to have one of the highest switching rates of any energy market across the world (Ofgem 2008 Probe Findings p44); in our case EDF Energy experiences a domestic annual churn rate of around 17%. The competitive effort and cost needed to replace these customers should not be dismissed, nor should it be underestimated by regulators. EDF Energy’s Winter Price Freeze is evidence that we are following our own strategy in the market place. 8. Despite its initial focus on margins, Ofgem’s RMR concluded that average supplier profits are not excessive, and are actually below those earned in other retail sectors. Ofgem’s evidence about consumer prices rising faster than falling (in relation to wholesale cost movements) is highly dependent on the analytical technique and assumptions used, and is inconclusive as to whether any consumer harm has arisen. 9. We believe that any concerns Ofgem has about the timing of margin changes needs to be seen in the light of its conclusions on the size of margins being earned.
Retail Market 10. Over the last ten years, Ofgem has consistently found evidence that customers know that they can switch supplier (around 95% in 2001 and 96% in 2010), and Ofgem has consistently found high levels of customer satisfaction. As far back as 2002, it found 81% to be very satisfied, with only 2% dissatisfied. In 2007, Ofgem concluded that “our analysis and review of developments in the domestic energy supply market over the past 12 months suggests that the market remains dynamic and highly competitive”. 11. We share consumer concerns regarding the complexity of energy tariffs. This is one of the reasons why we have already removed unit price banding for standard metered customers (these customers pay a single unit rate for energy plus a small standing charge). We also believe that the annual statement of consumption provided to consumers (only recently introduced in 2010) will help consumers to choose the most appropriate energy product.
Retail market improvements 12. We support Ofgem’s aim of making it easier for consumers to compare energy products, but we believe that this needs to go beyond just the price element of the bill. We therefore do not believe that the sole focus should be on a pence per unit comparison (which according to Ofgem proposals requires a regulated standardised element of the tariff). Our preferred approach is outlined in point 14 below. 13. Consumers are now receiving an annual statement which sets out details of their annual energy consumption. These statements will help customers make effective product choices, for example when interacting with a sales agent or using a price comparison web-site. 14. We believe that consumers should also value the provision of consumption data in a standard format (which suppliers/intermediaries could more easily use to help consumers make appropriate choices). Building on the annual statement, such an approach would preserve the benefits of complex pricing (such as cost reflectivity) whilst facilitating choice. It would be consistent with obtaining the benefits of smart meters, and would also align with the behavioural economics approaches set out by BIS/Cabinet Office in their recent paper entitled Better Choices: Better deals—Consumers Powering Growth (for example, the “mydata” proposals). We believe that this approach would be more “future-oriented” than Ofgem’s proposals. 15. We have doubts as to whether Ofgem’s proposal to limit the number of tariffs for evergreen (ie non time-limited) contracts to one per supplier per payment method is practicable. In particular, Ofgem’s proposal would be inappropriate for customers on a time of use tariff (ToU), such as Economy 7, Economy 9 etc. Being unable to offer ToU tariffs would also undermine one of the main benefits of the Government’s smart metering programme. 16. We believe that it is in customers’ interests that they have a choice of evergreen tariffs. For example, consumers may value evergreen price-tracker products that reduce their search costs and also place value on non-price attributes (such as fuel source—eg green tariffs). We do not believe it would be appropriate to deny consumers these legitimate choices. We note that Ofgem’s proposal not to ban fixed term prices would mean that a large number of (potentially complex) products is likely to remain the norm. Ev 76 Energy and Climate Change Committee: Evidence
Market Liquidity 17. Any actions aiming at increased market entry need to be focussed on the relevant entry barriers. Small suppliers say to EDF Energy that the main wholesale market issues they face are: (a) Access to long-dated shape products (to secure electricity for typically a number of years ahead which matches the domestic load profile), eg to facilitate growth of market share. (b) Substantial credit/collateral requirements 18. EDF Energy already sells significantly more power in the wholesale market than that consumed by its domestic and business customer base. The EDF Group also has experience of being a (voluntary) market maker in European markets. 19. EDF Energy continues to support initiatives that facilitate voluntary participation in the wholesale market (such as the new and developing N2EX power exchange) and believes that such initiatives need to be given time to develop. We have also publicly committed to offering small suppliers an aggregation service that enables power to be purchased in relatively small amounts and avoids the need for complex market trading systems. 20. EDF Energy notes that there are few natural providers of shape in the market and that large suppliers face similar challenges. Credit/collateral concerns reflect the financial status of the entrants concerned and will not be affected by Ofgem’s proposals. EDF Energy notes that the trend in financial market regulation is to encourage more robust credit/collateral requirements. 21. It is unclear why Ofgem’s liquidity proposals are targeted solely at the six main domestic suppliers. We believe that it would make more sense to place an obligation on all generators. 22. We have strong reservations about Ofgem’s proposed intervention in wholesale prices. Setting “reasonable” reserve prices in the proposed mandatory auction and controlling the “maximum bid-offer spreads” of the mandatory market makers will be difficult to achieve in practice and would undermine the market and deter non-physical participants. This could reduce liquidity rather than enhance it. We believe that Ofgem should only consider such intervention as a last resort if it actually observed anti-competitive behaviour in the market.
Supporting small suppliers 23. All suppliers, from the very largest to the smallest, find it difficult to access long-duration domestic shape products (ie to cover the variable demand element of their portfolio of domestic consumers) and to assess the price of such products in order to gauge the value of such deals. 24. EDF Energy has a portfolio consisting largely of nuclear stations which provide base-load power (ie a flat profile) and needs itself to procure domestic shape products in the market. 25. EDF Energy has voluntarily made a number of public commitments to small (ie entrant) suppliers regarding the provision of an aggregation service in which the other’s volume is added to ours (avoiding the need for complex trading systems). 26. Ofgem’s proposals are aimed at promoting entry to the retail market, by encouraging the so-called “sticky” customers to change supplier, and in providing access to small/shaped wholesale electricity products. However, other significant barriers exist which need to be overcome: 1. Significant costs of trading/billing systems. 2. Credit risk collateral requirements. 3. Historic low margins (domestic). 4. Regulatory uncertainty. 27. Not only will these barriers remain, but it is unclear to what extent Ofgem’s proposals will nudge the “sticky” customers into changing supplier. These customers are rational decision makers (indeed, many have already made the decision to switch to dual fuel contracts) and no doubt have a variety of legitimate reasons for not switching again. In its Regulatory Impact Assessment, Ofgem will need to demonstrate robustly that the consumer benefits of its proposals outweigh the detriment (e.g. restricting innovation).
Enhanced “Probe” Remedies 28. EDF Energy supports Ofgem’s proposal to look further at the role of Third Party Intermediaries (TPIs) in the business market. We believe that TPI’s need to be more transparent with regard to their commission arrangements. 29. Ofgem’s proposals for enhanced “probe” remedies in the domestic and non-domestic markets are only very high level in nature. EDF Energy will continue to support enhancements to the regulatory framework which address inappropriate practices or enhance the welfare of our customers (eg we supported the requirement on suppliers to give 30 days’ advance notice of price rises). Energy and Climate Change Committee: Evidence Ev 77
30. We are disappointed that Ofgem has referred to its various compliance investigations as evidence of supplier bad behaviour, when they are ongoing and no conclusions have yet been reached. It is important that Ofgem’s media approach helps build consumer trust in the market.
Segmental Accounts 31. Market prices already underpin our internal transfer prices between our supply and generation licensees. We believe that our segmental accounts provide a robust demarcation between upstream and downstream margins. 32. We are happy to have our accounts inspected by Ofgem’s appointed experts. May 2011
Supplementary memorandum submitted by EDF Energy Ofgem has estimated that its proposal to restrict the number of tariffs for standard evergreen products would impact on 75% of all customers currently on those products. What would be the logistical challenges involved in moving this number of customers over to one new “standard” tariff? We would like to take this opportunity to note that we are engaging proactively with Ofgem with a desire to seek changes that will result in the market operating in a way that clearly provides choice for consumers, whilst allowing them to engage easily, at minimal personal cost in terms of time and effort. We believe that Ofgem’s proposals may have a detrimental impact on competition and do not offer enough choice e.g. to time of use (Economy 7 etc) consumers. These consumers would need to take a time limited product, or could be forced onto an unsuitable single rate evergreen tariff. We have provided Ofgem with some constructive amendments to their proposals that, we believe, provide consumers with the ability to retain choice, but also significantly simplifies the decision making process and allows them to engage in a confident manner. There are significant challenges in implementing the proposals as outlined, as all customers would need to be written to, either by ourselves or Ofgem or both. In addition we would almost certainly need to make IT system changes in order to reflect both the new tariffs and the proposed standardised element. We would need to train our sales and customer service staff to be able to clearly explain the new tariff structure and support customer queries. It is anticipated that we would need to add incremental resource to our call centres to cope with consumer calls in response to the mailings and changes made, assuming that all consumers experienced the change at the same time. We estimate the cost to EDF Energy to be several millions of pounds:
The subject of small and micro businesses was raised during the session. Please could you provide more information on the contact you have had with the Federation of Small Businesses and the Chamber of Commerce to discuss issues around energy supply and the possible need for greater protection of micro businesses. If there has been no contact, please confirm this. EDF Energy is particularly keen to engage with all our customers, regardless of their size. Since the end of 2009, the company has gone through a major reorganisation with departments now matching our customer segmentation. We therefore have a whole business unit working specifically on the SME market. This includes customer services, sales, revenue management, commercial, marketing and customer data and insight teams all dedicated to work on the SME market. Our Customer and Data Insight team works full time to engage and understand the various profiles and needs of our SME customers in order to better understand what they expect from an energy supplier and to make recommendations for product innovation, campaigns and process improvements. Using a variety of qualitative and quantitative research methodologies we have spoken to 5,550 small business customers as well as 5,244 non-customers in this period about a wide variety of issues. In addition to engaging directly with our SME customers and those of our competitors, we have attempted on several occasions, between 2010 and 2011, to join the Federation of Small Businesses, in order to be in a direct relationship with one of the key small businesses association. Unfortunately, due to the nature of our business, our requests were declined. We have met with the Federation of Small Businesses and the British Chamber of Commerce on several occasions, through industry meetings, where the need for greater protection of micro businesses and energy supply were specifically discussed (e.g Consumer Focus micro-business roundtable, DECC Small Emitters External Stakeholders Meeting). Although we are not members of these organisations, we remain committed to developing these relationships further. We believe that the extended remit of the Energy Retail Association to the micro-business market will provide us with a forum to share best practices and discuss these particular matters with other suppliers. It will also help us strengthen our relationship specifically with the Business Chamber of Commerce and Federation of Small Businesses. Ev 78 Energy and Climate Change Committee: Evidence
On the subject of sales staff, please could you provide details of the basic salaries and commission structure for doorstep sales staff and the areas targeted by doorstep sales? Our directly employed Field Sales Advisors are paid a Basic salary of between £12–14,000 pa and typically, based on the average Advisor, they can double that by earning commissions. Our very top performers can potentially achieve earnings of £50–60K. We pay our third party sales agencies commission on a per contract basis. The commission varies dependant on the segmentation value assigned to the household and the product sold by the agency. We operate at a regional and national level with directly employed staff and external agencies who are incentivised firstly by value, quality (incl. no sales complaints) and, lastly, by volume. We specifically recruit staff and agencies in areas that deliver good value and we consistently rotate our teams within regions and have prospect and customer contact policies in place so as to avoid revisiting areas within a given timeframe.
How large was your generation business, how large was your supply business, what volume of electricity sales did you make and what volume of electricity purchases did you make in terawatt hours in 2009Ð10? Generation 2009: 87 TWh. Supply 2009: 66 TWh. Generation 2010: 71 TWh. Supply 2010: 64 TWh. June 2011
Memorandum submitted by Consumer Focus Introduction Consumer Focus is the statutory consumer champion for England, Wales, Scotland and (for postal consumers) Northern Ireland. We operate across the whole of the economy, persuading businesses, public services and policy makers to put consumers at the heart of what they do. We have specific responsibilities for the energy and postal sectors.3 We are yet to respond formally to Ofgem’s consultation on its proposals and are still considering their possible impacts. In areas this submission represents policy in development rather than finalised views. We are happy to copy our formal response to Ofgem to the Committee when it is ready. Following the executive summary, we provide high level feedback on each of the five key proposals contained in its 21 March 2011 “The retail market review—findings and initial proposals”.
Executive Summary We are in broad agreement with the findings of Ofgem’s Retail Market Review (“RMR”) and support the majority of its recommendations. We consider that Ofgem could do more to protect micro-businesses by preventing suppliers from back-billing further than one year and requiring them to consider repayment plans rather than demanding instant payment. The most problematic areas of its proposals are those seeking to tackle tariff complexity. The regulator’s ideas have real merits but we are concerned that there could also be significant unintended consequences.
Proposal 1 Tariff complexity and proliferation 1. The proposal to simplify standard variable tariffs such that each supplier may only offer one per payment method and in a prescribed format of a defined standing charge and a single unit rate is genuinely radical. It has significant potential advantages and disadvantages that will need to be bottomed-out as Ofgem further develops its proposals. 2. Simplified standard variable tariffs have the potential for significant unintended consequences. Ofgem is trying to tackle three distinct problems—tariff complexity, proliferation and low consumer engagement in the market. 3. The proposals could make standard variable tariffs far easier to understand for customers who remain on them. Price comparison should be much easier and confidence improved that they understand their product. 3 For further information on our role and duties, see http://consumerfocus.org.uk/g/4p4 Energy and Climate Change Committee: Evidence Ev 79
3. It may also better align consumers’ and suppliers’ interests as complex tariffs could only be offered to those consciously willing to take them on (ie by switching to a fixed price/term product). Consumers would otherwise be on a simple tariff by default. 4. We suspect that this approach may mitigate, though not eliminate, some of the problems of dubious discounts4 that many customers cannot qualify for. Such discounts would appear to be incompatible with the product structure that Ofgem envisages. 5. We particularly welcome the proposal to prevent suppliers from automatically rolling over consumers at the end of fixed term deals. These deals can be attractive, but the choice should always be for the consumer to opt-in. Automatic rollover locks in those consumers most naturally inclined to switch supplier or tariff. It therefore frustrates the development of a competitive marketplace and has a dilatory effect on the extent to which consumers can punish or reward supplier performance. 6. There is considerable evidence that consumers are reluctant to read extensive contracts (for any product). We therefore think that Ofgem should require the suppliers to produce short “key facts” documents (similar to those for financial services products). These should set out the principal terms and conditions of their non- standard products so consumers can more readily understand and compare tariffs without needing to wade through the small print. 7. We are worried by the suggestion that the standing charges may include environmental levies. Applying these on a per household basis rather than per unit would be a significant backward step on both social and environmental grounds. It would be inconsistent with polluter pays principles, because all households would pay the same towards decarbonisation regardless of their carbon footprint. It would also disproportionately load the cost burden on to the poorest in society, because (in broad terms) there is a correlation between income and energy usage. 8. The difficulties of migrating the majority of energy consumers on to new tariffs when several of the major suppliers are moving their billing systems to new platforms should not be underestimated. 9. Furthermore, migrating consumers from a wide range of existing tariffs on to a much narrower range with different characteristics is likely to create distributional impacts, with some better and some worse off than they were before. The scope of these distributional impacts is not clear at this stage. There may also be significant costs in applying and explaining the change to consumers. 10. There is a substantial risk that there will be limited pressure on suppliers to offer competitive pricing for their new “standard” tariff. The majority of consumers could be worse off if they are migrated, particularly if low engagement levels continue. There will be substantial costs associated with any migration and the bulk of consumers could find themselves cross-subsidising the (already empowered) group of consumers who are most likely to take advantage of fixed term tariffs. The distributional impacts will need to be very carefully explored in the Impact Assessment. 11. The proposals are not clear on how time of use tariffs—whether existing simple ones (like Economy 7) or more complex ones facilitated by smart metering—would be configured (or indeed, whether they would be allowed). It is also unclear what will happen to consumers on preserved (pre-competition) tariffs. 12. The key question is whether consumers will engage with the market and switch even if tariffs are considerably simplified. Ofgem’s and our research suggests that only a minority of consumers are actively engaged in the market and that informational remedies have only limited effect. 13. Consumers’ primary engagement with tariffs is via their energy bills. Research shows that many consumers’ overall understanding of their energy bills is quite poor. There is a wide range of evidence (see Consumer Focus 20105; Which? 20096; Uswitch 20097 and Ofgem Consumer First Panel 20098)to suggest that energy consumers find bills confusing. 14. It is unclear whether the root of the problem is complex tariffs, a combination of complex tariffs and complicated energy bills or just widespread disengagement. If it is the former then Ofgem’s proposed remedies are likely to have a much greater impact. 15. Suppliers have been successful in communicating some key messages to consumers via “nudges” on energy bills. For example, the proportion of consumers paying their bills by Direct Debit has increased from 36% (electricity) and 42% (gas) in 2002 to 51% (electricity) and nearly 54% (gas).9 The success of other more complex messages still remains to be proven, including information about annual consumption. 4 For further details on the nature of such discounts, please see our open letter to Ofgem of 2 December 2010, http://tinyurl.com/ 5rc2svy 5 Online survey conducted by ICM on behalf of Consumer Focus on smart meters and energy billing. 2,048 consumers aged over 18 years took part in March 2010 6 www.which.co.uk/documents/pdf/bamboozling-bills-203858.pdf 7 http://www.uswitch.com/gas-electricity/confusing-energy-bills/ 8 http://www.ofgem.gov.uk/sustainability/cp/cf/Pages/CF.aspx 9 http://tinyurl.com/42uh6pm and http://tinyurl.com/66ourxd Ev 80 Energy and Climate Change Committee: Evidence
16. In May 2011 we will publish the results of a series of research studies on how consumers are reacting to these existing nudges and whether messages were successful at reaching all groups of consumers. 17. We are happy to make this research available to the Committee when published. Our headline findings show: — Widespread consumer disengagement with energy bills continues. — Distrust of energy suppliers colours consumers’ views of information provided on energy bills. — Consumers from low income groups tend to be less engaged with their energy bills. — Information on energy bills does not act as a prompt for behaviour change for the majority of consumers.
Proposal 2 Liquidity 18. We welcome the intention to intervene in the wholesale electricity market. Such actions are fundamental to ensuring the success of the Government’s Electricity Market Reform proposals. Liquid markets are needed to provide a credible reference price for use in the Government’s favoured Contracts for Difference Feed-in Tariff model and create an attractive investment environment for new generation. There has been a lack of wholesale power market liquidity for many years, particularly in the forward market (the market for contracts of longer maturity). 19. The main industry solution to combat low levels of liquidity has stagnated. Traded volumes on the N2EX exchange are low. A large amount of traded volumes are executed initially on the OTC market and then given to the exchange for clearing (“OTC give up”). Virtually no small and/or independent market participants have signed up to the new exchange citing excessive credit requirements as a barrier to participation. The slow progress of the N2EX to attract significant traded volumes and a significant variety of market participants proves the need for regulatory intervention (the N2EX took over five years to be established). 20. The development of liquid traded wholesale markets is fundamental to ensuring that consumers receive a fair, efficiently determined market price. This risk premia can be observed on wholesale electricity markets by comparing forward contract prices with outturn spot prices for delivery on the same day, as well as wide bid-offer spreads. Any risk premia will be ultimately paid for by consumers. 21. Liquid wholesale markets also promote efficient competition in electricity generation and supply which will tend to foster efficiently determined market prices. Potentially most importantly in the case of the GB electricity market, liquid wholesale markets (particularly forward markets) provide efficient price signals for future investment in generation assets. This is particularly important in the case of the GB market with major investment expected to be made in the next decade and beyond. It is clear that the Big Six do not have the balance sheets required to make these investments on their own. These balance sheets are also highly leveraged. As such liquid wholesale energy markets are crucial to encourage new equity investment. Without investment the cost to current consumers is likely to be prohibitive in terms of ensuring affordable energy suppliers. 22. The two proposals suggested by Ofgem, a mandatory auction (MA) and mandatory market maker (MMM) are not sufficiently developed at present to give a definitive verdict on their suitability for improving wholesale market liquidity. However, we provide some initial thoughts on both measures below:
Mandatory Auctions 23. It is important that products that are made available meet the needs of independent market participants. It is essential that the auction provides a sufficient volume of forward contracts. It must not be allowed to develop in to a purely day ahead auction. Liquidity is thinnest in the forward market; solutions should be developed to solve this problem. However, there might also be a need for more bespoke product offering. 24. The main area of weakness in this proposal is the lack of detail on credit arrangements. While both intermediated OTC markets and exchanges can provide adequate price transparency, the collateral requirements for smaller market participants on exchanges can be prohibitive to trading. As such a solution that provides “fair” collateral requirements still needs to be proposed. There might be some scope to introduce centralised credit arrangements but careful thought needs to be given to any unintended consequences. There is a trade off between encouraging competition and inadvertently facilitating inefficient entry. However, such concerns should not represent a barrier to the development of proposals to foster greater wholesale market liquidity. 25. We are also unsure why the option of a self supply restriction has been ruled out by Ofgem. Such measures have worked in other electricity markets (in the US for example). Greater discussion would be welcome.
Mandatory Market Maker 26. There is even less clarity on how this proposal will work compared to the MA. It could provide smaller market participants with the electricity products they need. However, if the MMM is focused on providing Energy and Climate Change Committee: Evidence Ev 81
products to manage electricity imbalance, there is some doubt as to how much this will help smaller market players. In addition, the issue of credit requirements is not adequately tackled. 27. The use of the regulated market making entity might also have unintended consequences in terms of creating market inefficiencies and discouraging “actual market makers” (like large financial institutions). However, a lot of detail still needs to be finalised before being able to give a definitive judgement on these proposals.
Proposal Area 3 Fairness 28. We broadly support Ofgem’s proposals, although they could go further. 29. We agree that there is a need for further standardisation of the format of information on bills and annual statements to ensure they provide consumers with clear, useful information. We reviewed suppliers’ annual statements in July 2010 and the overall results were poor. Many of the new statements suffered from poor design and confusingly worded information. 30. Our research in February 2011 showed that only 46% of consumers remembered receiving an annual statement. Of those who remembered receiving the statement, 79% found it easy or fairly easy to understand, but only 25% of these consumers took any further action such as comparing prices, switching supplier, etc. 31. The standards of supplier conduct introduced following the 2008/09 Energy Supply Probe have not led to meaningful improvements for consumers. Since the Probe’s conclusion, Ofgem has opened a series of investigations into supplier practices. These range from compliance with the complaint handling standard to the sales and marketing licence condition and the cost reflexivity of certain suppliers’ offerings. Consumer Focus’s December 2010 open letter to Ofgem on tariff confusion, was prompted in part, by the explosion in new and increasingly complex tariffs that followed the Probe’s conclusion. The absence of licence backing weakens the prospect that the suppliers will embed these standards in their ways of working because they are not enforceable. Ofgem should introduce the standards of conduct into licence conditions. This could include a new duty on suppliers preventing them from offering unnecessarily complex, confusing or inappropriate products to consumers.10 32. We welcome the intention to make increased use of reputational regulation—“naming and shaming” and “naming and faming”—to try and improve supplier standards. It is important that such tools are seen as supplements to, and not alternatives for, the application of traditional regulatory tools, such as sector specific and general consumer law. The RMR highlights that about two-thirds of energy consumers are disengaged from the market and that consumer trust in energy companies is very low. This combination of high reluctance to switch and a common perception that energy firms are “all as bad as each other” mean it is unlikely that reputational regulation will be effective in improving consumer outcomes in isolation—because consumers may only punish or reward suppliers (by switching or staying) to a limited degree in response to these signals. 33. We welcome the proposal to boost monitoring of supplier compliance with regulations and to increase the speed with which enforcement investigations are carried out. We have been concerned that the resourcing and priority given to enforcement activity has been insufficient to deliver a credible compliance regime; we are still awaiting the outcome of several investigations commenced more than a year ago. We would like to see a clearer articulation of how Ofgem will deliver a more timely and muscular enforcement regime; for example, will it be increasing its headcount in this area and/or modifying its approach to investigations? 34. We have long called for Ofgem to use a wider range of indicators to monitor the competitiveness of the energy retail markets and we welcome confirmation that it will do so. We particularly welcome its increased use of direct consumer feedback, for example through its Consumer First programme and far more frequent polling of consumer experience, to inform and develop policy and hope that this continues. 35. We recognise that the proposals to directly provide consumers with information and advice regarding the switching process and how they can use available information to assess their options is intended to help them consider switching. However, we consider that the evidence from existing schemes is relatively limited on how many consumers actually change their behaviour. It is also unclear whether a sector regulator is best placed to provide such information as it does not deal directly with individual consumers. 36. The remedies are largely silent on specific problems facing customers with prepayment or dynamically teleswitched (“DTS”) meters. Competition and choice has been particularly limited here and this will need to be tackled through the RMR and the smart meter programme.11 37. We would also like to see Ofgem publish its long awaited guidance on the application of the Unfair Terms in Consumer Contracts Regulations 1999 (UTCCR) in order that its interpretation and use can be understood. 10 This could include making the requirements in SLC 23 (Notification of Domestic Supply Contract terms), SLC 25 (Marketing electricity/gas to domestic customers) or SLC 31 (General information for Domestic Customers) more explicit. 11 See Annex 4 in our Cutting Back, Cutting Down, Cutting Off report http://consumerfocus.org.uk/g/4lx Ev 82 Energy and Climate Change Committee: Evidence
Proposal Area 4 Small Businesses 38. We support Ofgem’s proposals but would like it to go further in a number of areas. In particular we would like to see: — protections on back billing for micro-businesses that are comparable to those granted to domestic customers; and — better consumer protections around debt and disconnection. 39. We agree with Ofgem that it is appropriate to conduct a review of supplier compliance with gas and electricity supply Standard Licence Condition 7A, “Supply to micro business consumers”. We would like to see more detailed monitoring and reporting on the state of competition in the non-domestic market. 40. We recently conducted research12 into the activities of Third Party Intermediaries (“TPIs”) which suggested a range of problems in that sector, most notably that: — Micro-business consumers are being committed to contracts that are not best-suited to their needs. — The disclosure of commission to consumers, who ultimately bear this cost in the prices they pay, can be poor and this impedes consumer understanding of the value and appropriateness of TPI services. 41. The evidence suggests that it may be appropriate to grant Ofgem additional powers to tackle problems in the TPI sector. 42. Back billing remains a major source of detriment for micro-businesses. Last year, Consumer Direct’s helpline received 1,848 complaints from micro-businesses who received unexpected bills after their energy charges were initially underestimated. 40% of all the complaints it received from small businesses about energy bills related to back-billing issues. The problem is compounded as energy suppliers can back-bill businesses for up to six years of usage, compared to just one year for domestic consumers, and can demand instant repayment. 43. Ofgem should extend the domestic back-billing protections to the micro-business sector. Ofgem should consider the introduction of protections that require suppliers to take into account the businesses’ ability to pay the debt in setting a realistic timescale for repayment, rather than demanding full payment immediately. 44. There is little evidence to suggest that micro-businesses are better equipped to deal with the complexity of tariffs than domestic consumers are. We think that Ofgem should ensure that both types of consumers are provided with the same kinds of “key facts” information summarising the main points of their contract. 45. There are a number of areas where non-domestic consumers receive fewer protections than domestic consumers, summarised in the table below Domestic Non-domestic Contracts Evergreen or fixed—and RMR should Rollovers at punitive rates, expensive deemed improve things rates otherwise Back-billing Back-billing code = 1 year Up to five or six years Debt and ERA vulnerable Safety Net, Disconnection in a matter of weeks even when disconnection negotiation and ability to pay LC debt due to back-billing Marketing SLC25, self-regulation, consumer Unregulated brokers exploit businesses’ lack protections of knowledge Information SLC31 & 31A—Annual Statements Lack of visibility of contract terms, minimal info on price in public domain Switching Debt Assignment Protocol, Confidence Churn at half domestic rate, levels of Code objections
Proposal Area 5 Improving transparency 46. We broadly welcome Ofgem’s proposal to appoint independent accountants to review the transfer pricing and hedge accounting practices of the Big 6; report on the likely impact of these practices on reported profits and transparency; and make recommendations on how the usefulness of the reporting could be enhanced in future years. 47. To be successful, the reporting will need to focus on three key principles: comparability; integrity and timeliness.
Comparability 48. The guidelines should be developed to ensure consistency in whether items are reported as direct or indirect costs to ensure that the regulatory accounts are mutually consistent and comparable. 12 Watching the middlemen—brokerage services for micro business energy consumers, 18 March 2011. http://tinyurl.com/3nh3mkz Energy and Climate Change Committee: Evidence Ev 83
Integrity 49. The reporting needs to be cost reflective; suppliers should be obligated to report figures based on actual operating behaviour. 50. The apportionment of costs, revenues and profits to different parts of the business should be adequately explained. 51. The reporting also needs to unwind any international distortions. Ofgem’s analysis of the Big 6 companies’ 2009 results suggests that that RWE and Eon effectively expatriate fuel costs and profits from their UK generation activities into their overseas trading arms through their tolling agreements. This is likely to distort the regulatory accounts, artificially reducing the scale of revenues and profits attributed to these firms and impeding meaningful comparison between the Big 6.
Timeliness 52. The older data gets, the less informative it is—because it becomes less indicative of current performance and drivers. 53. The Big 6 companies prepare and report their statutory or group financial accounts within three months of the end of the financial year, but are given six months to prepare their regulatory accounts. The lag between the final regulatory report for 2009 (by SSE) and the publication of Ofgem’s analysis has been a further six months. 54. We recognise that the complexity of the reports significantly constrains how quick the publication timescales can be. But we do think the timeline could be significantly tightened. We would like to see the deadline to prepare accounts shortened to three months from the end of the financial year. Ofgem should commit to turning round its own analysis within a similar timescale of receiving the last annual submission. May 2011
Memorandum submitted by Which? Which? is an independent, not-for-profit consumer organisation with around one million subscribers and is the largest consumer organisation in Europe. Which? is independent of government and industry, and is funded through the sale of Which? consumer magazines, online services and books. Which? is a consumer champion working to make things better for consumers. Our campaigns make people’s lives fairer, simpler and safer. Which? is grateful for the invitation to submit a written statement to the Committee’s evidence sessions on Ofgem’s Retail Market Review. However, as Which? is still in the process of preparing its formal response to Ofgem’s consultation on the Review, the statement below should be considered an interim response and not Which?’s definitive position on the Review.
Overview After more than a decade of retail market competition, the Review’s finding that two thirds of consumers are disengaged from the energy market is deeply concerning—even more so in light of evidence that as many as one in three of those that do engage in order to switch their tariff or energy supplier actually ends up paying more.13 A well-functioning market depends on efficient interactions on both the demand (consumer) side and the supply (firm) side—a so-called “virtuous circle” where engaged consumers play a key role in driving vigorous competition between firms, who respond by delivering competitive prices, better customer service, and innovation that benefits consumers. The worryingly high levels of consumer disengagement and frequency of poor switching decisions, coupled with the absence of a significant “competitive fringe” representing a material threat to the dominance of the Big Six, make these positive effects difficult to detect in the energy market. It is doubly disappointing that the Review’s effective indictment of the energy market comes almost two and a half years after Ofgem published the findings of its Energy Supply Probe in 2008. While many of the Probe remedies were designed to increase consumer engagement and enhance competition, by Ofgem’s own analysis only a minority of the key findings of the Review are indicative of any kind of improvement for consumers since the Probe. In most areas there has been no change at all, or—in the cases of the volume and complexity or tariffs, evidence of less timely price adjustments when wholesale prices fall than when they rise, and the number disengaged “passive consumers”—marked deterioration. We discuss the issues raised in the Review and Ofgem’s proposals for reform14 in greater detail in the remainder of this submission. However, for a very brief summary of our positions please refer to the bullet points below. 13 http://else.econ.ucl.ac.uk/conferences/consumer-behaviour/wilson.pdf 14 Regarding the interventions proposed by Ofgem, Which? intends to respond to Proposals 1, 2, 3 and 5. We will not be responding in detail to Proposal 4 as this relates specifically to the small business sector. Ev 84 Energy and Climate Change Committee: Evidence
— There is considerable evidence to suggest that tariff complexity presents a significant barrier to consumer engagement with the energy market. Much-needed reform of tariffs should not only consider the number of tariffs but also the ease of comparing offers across the market. Ideally, all tariffs should be structured in the same way, with no more “tiered” pricing models. — Ofgem’s proposals to increase liquidity are welcome, but liquidity should not be considered the only barrier to entry—Ofgem must also satisfy itself that other features of the market are also not contributing to the absence of a significant “competitive fringe”. More detail is also required on the proposals for the Mandatory Auction, specifically the volume and type of products that will be made available and how these will be determined. — The benefit of the 2008 Energy Supply Probe remedies to consumers is questionable at best. The largely cosmetic Standards of Conduct have manifestly failed to address the problem of tariff complexity and should give Ofgem cause to reconsider whether “principles” can deliver required market outcomes. — In light of evidence that retail prices are more sensitive to increases than decreases in the wholesale cost of energy, Ofgem’s scrutiny and consumer protection objectives will be better served by a more comprehensive and prescriptive system of regulatory accounting than the enhancements to the current system that Ofgem has proposed. This should also address consumer concerns about unfair pricing and profiteering, and generally contribute to improving worryingly low levels of trust in energy suppliers. — Which? hopes that suppliers will engage constructively with Ofgem’s proposals and the explicit possibility of referral to the Competition Commission before the end of 2011 should provide a strong disincentive to efforts to frustrate reform. However, we remain concerned by the lack of a clear administrative timetable for the development and implementation of the remedies.
Proposal 1
Improve tariff comparability
Which? voiced concern about problems caused by the volume and complexity of tariffs in our response to the Probe in 2008. Since then the number of tariffs has increased, and consumer engagement with the energy market has weakened. Which? does not believe these two developments are unrelated. “Choice” is a relatively new concept in the energy market, and familiarity with products will generally be lower in newer consumer markets, particularly those without frequent opportunities for interaction, than in more mature markets where consumers have become accustomed to acquiring information and making decisions. Therefore it is essential that tariffs are easy for consumers to understand and compare against each other. As an essential-for-life service that ranks as consumers’ number one financial concern, it is simply wrong that OFT research found that 46% of consumers spent more than one hour comparing different energy suppliers’ offers but did not feel informed or confident they had made the right choice, and that a recent Ipsos Mori survey shows that the energy sector has the highest proportion of consumers (38%) that do not know if they have switched to a better deal.15
In light of this, Ofgem’s proposal to make it “far easier” for consumers to compare prices and choose a better deal is welcomed by Which?. However, it is not explicit in Ofgem’s proposal that it intends to require suppliers to structure all tariffs (as opposed to only “standard evergreen”16 tariffs) in the same way, with a “standardised element” or “standing charge” covering pass through costs and some environmental and social charges and a single unit charge (p/kWh) covering the actual energy used.
For tariffs to be instantly and directly comparable, Which? believes they should all be structured in the same way—this means that “no standing charge” tariffs, where pass through costs are simply subsumed into the overall price using complicated “tiered” pricing models that vary significantly across suppliers, should be phased out in preference for the model Ofgem has proposed for standard evergreen tariffs. All discounts (e.g. dual fuel, direct debit, paperless billing) should be included in the single unit charge to eliminate the use of complicated discount structures such as those used on a number of British Gas tariffs17 that preclude easy comparison between tariffs and any assessment of the true value of any “bundled” products and/or services included with the tariff (e.g. boiler servicing, energy monitoring device, air miles and loyalty points). Which? is also keen to examine whether rather than limiting the number of tariffs available, which may reduce choice, standard terminology or a cross-industry “naming convention” for tariffs could be agreed to convey the pricing principle behind each tariff to consumers. In the financial services industry, for example, the terms “tracker”, “fixed” and “standard variable” are readily understood by mortgage and investment products” customers and widely used by companies to describe their products. The rail industry also developed a naming convention 15 http://www.ofgem.gov.uk/Markets/RetMkts/rmr/Documents1/Behavioural_Economics_GBenergy.pdf 16 Ofgem uses this term in the Review to describe a variable-price tariff with no contract term. Which? considers this equivalent to the ‘standard’ tariffs currently offered by suppliers. 17 Consumer Focus wrote to British Gas in November 2009 and again in January 2010 raising concerns about the discount structure offered to consumers on its Standard, WebSaver 4, Track & Save 2011 and Zero Carbon. This discount structure could not be achieved by typical medium and high users, as the discount was based on Tier 2 consumption usage and capped at a quarterly level. (http://www.consumerfocus.org.uk/files/2010/12/Letter-to-Ofgem-Request-for-investigation-into-energy-tariffs.pdf) Energy and Climate Change Committee: Evidence Ev 85
for ticket types in response to demands from consumer groups and government to make products in this market easier for consumers to understand.18
Proposal 2 Enhance liquidity Ofgem is correct to address the issue of wholesale market liquidity. While it is true that First Utility and Ovo Energy—the one instance of electricity market entry since the Probe—appear to be gaining market share, it is too early to say whether this can be sustained over time given current wholesale electricity market access issues for non-vertically integrated suppliers. It is also important to acknowledge that while liquidity is undoubtedly a significant barrier to access, in developing its proposals for improving liquidity through the Mandatory Auction and Mandatory Market Maker initiatives, Ofgem should also consider other features of the market that may also constitute barriers to entry to smaller, non-vertically integrated suppliers, such as economies of scale, branding, cost of finance, and regulatory and compliance requirements.19 New competitors can spur meaningful innovation and intensify price competition in any market—the impact of discounters like Aldi and Lidl in the UK supermarket sector is a case in point—but at present none of the smaller suppliers present a material threat to the vertically-integrated Big Six, who still hold over 99% of domestic accounts and enjoy improved risk management and lower collateral requirements relative to their smaller competitors. Although the inclusion of concrete proposals for wholesale market intervention in the Review represents a major advance on the Probe remedies, Which? intends to seek clarification from Ofgem regarding the rationale for the figure of 10% to 20% of power generation it proposes the Big Six make available to the market as part of a mandatory auction, and, specifically, what the justification would be not to require the largest proportion of generation (i.e. 20%) in the range to be auctioned. It is equally important that Ofgem listens carefully to the requirements of smaller suppliers when determining the size and granularity of wholesale market products it intends the Big Six to make available.
Proposal 3 Strengthen Probe remedies—domestic Which? agrees with Ofgem’s assessment that performance against its Probe reforms has been “patchy” and that “significant shortcomings”20 remain. Regarding SLC 31A (information on energy bills and annual statements), Ofgem’s concerns about the variable quality of implementation between suppliers and the need for improvements merely adds weight to the argument made by Which? in its response to the Probe that Ofgem should consider not only the type of information provided on bills and annual statements but also the format in which that information is provided to consumers. As energy is a homogenous product often consumed on a credit basis, bills form the main and most tangible point of “market contact”. Accordingly, Which? maintains that at a minimum all bills and annual statements should contain a standardised summary box on bills providing itemised key information at a glance. On SLC 25 (requirements on suppliers’ marketing), Which? continues to receive anecdotal evidence from members of the public regarding potentially misleading marketing practices. While reforming the structure of tariffs and improving comparability should improve the transparency of suppliers’ marketing, the fact that four of the Big Six are currently under investigation for potential breaches of SLC 25, and that energy suppliers are considered trustworthy by just one in five consumers21, monitoring of suppliers’ marketing activities remains a necessary part of building consumer confidence in the energy market. Ofgem notes that the introduction of SLC 25A (prohibition of undue discrimination) and SLC 27.2A (cost reflectivity between payment methods) have, respectively, coincided with a reduction in unfair tariff differentials between “in area” and “out of area” customers, and—with the exception of one supplier22— between different payment methods. However, that Ofgem felt it necessary to address what are essentially pricing practices in a competitive market through the licence conditions effectively lays bare the failure of consumer engagement as a mechanism to impose sufficient discipline on energy suppliers. The effect of this appears to be the overcharging of certain groups of consumers in the apparent knowledge that suppliers’ will not lose a large number of customers as a result. It is reasonable to expect that more engaged consumers with the capacity to easily identify tariffs23 offering better value would have “voted with their feet” and taken their business elsewhere. As a general point, it may be the case that regulatory intervention better serves the objective 18 In 2008 the Association of Train Operating Companies (ATOC) simplified the range of tickets sold by the 24 train operators to just three types—Anytime, Off-Peak, and Advance (http://www.atoc.org/media-centre/previous-press-releases/simpler-rail-fares- for-all-journeys-100107). 19 http://www.ofgem.gov.uk/Markets/WhlMkts/CompandEff/Documents1/ Liquidity%20Proposals%20for%20the%20GB%20wholesale%20electricity%20market.pdf 20 The Retail Market Review—Findings and Initial Proposals, p53 21 Which? surveyed a sample of 2,000 UK adults between 30 April and 7 May 2010. Results were weighted to reflect the UK adult population. 22 Scottish Power’s compliance with SLC 27.2A is currently under investigation. 23 Following the arguments made above, the latter is a precondition of the former. Ev 86 Energy and Climate Change Committee: Evidence
of increasing consumer engagement (e.g. through measures to address tariff complexity) rather than ex post correction of the outcomes of ineffective consumer engagement.
Concerning suppliers’ adherence with Ofgem’s Standards of Conduct, Which? stated in its response to the Probe remedies that there was “no clear process for enforcement of the Standards and no clear incentive for why energy suppliers would comply with the Standards”.24 The behaviour of suppliers since has done nothing to change our view. On the issue of tariff complexity, it is manifestly clear to Which? that the two Standards that are of direct relevance to this issue—“You must not sell a customer a product or service that he or she does not fully understand or that is inappropriate for their needs and circumstances” and “You must not offer products that are unnecessarily complex or confusing”—have failed to deliver improved performance by suppliers in an area that presents one of the most significant barriers to consumer engagement. In fact, it is difficult to envisage how the Standards of Conduct, as currently constituted, would be incorporated into a new or existing licence condition, as Ofgem has proposed in the Review. However, it would be easy to see the “spirit” of the Standards in, for example, a new licence condition to ensure that tariffs are easy for consumers to understand and compare.
Proposal 5
Improve reporting transparency
Evidence cited by Ofgem in the Review that energy prices have “tended to rise in response to wholesale price increases more quickly than they have fallen with decreases”25 is not only an indication of weak competitive intensity, but a real concern given the fundamental importance of consumer confidence in the prices offered by suppliers in any market, particularly that they are determined fairly and relate to the costs incurred in providing the product. Research by Which? has found that 85% of Which? members feel that it is difficult to assess whether price changes are a fair reflection of the underlying cost of energy.26
As an essential-for-life service, it is crucial that the mechanism—whether market or monopoly—used to deliver energy to consumers is scrutinised to ensure that costs are fair. This is not possible without transparency. In the context of the energy sector, improved transparency and scrutiny could also contribute towards an improvement the current low levels of trust and confidence in suppliers.
In Which?’s recent response to Ofgem’s consultation on financial information reporting we welcomed the Review’s proposal to appoint a leading firm of accountants to review suppliers’ transfer pricing and hedging strategies given the potential of such an exercise to bring greater clarity to the relationship between retail prices and wholesale costs. However, in terms of improvements to the mandated disclosure of suppliers’ financial information, Which? believes that the regulator’s scrutiny and consumer protection objectives would be better served by the proposal to enhance the financial information licence condition through a move to a more comprehensive and prescriptive system of regulatory accounts than the “lighter touch” approach27 favoured by Ofgem.
Timetable for reform
Finally, it was a notable weakness of the Probe that Ofgem failed to provide a clear administrative timetable—which could be based on the framework used by the Competition Commission for market inquiries—for development and implementation of the remedies. This would have allowed stakeholders to monitor reform of the energy sector and focus attention as to when Ofgem will take enforcement action if sufficient progress to resolve the problems identified had not been made. The absence of such a timetable is likely to have contributed to the poor response to the Probe remedies by suppliers, which has ultimately made the intervention proposed in the Review necessary. Which? hopes that suppliers will engage constructively with Ofgem’s proposals—with the explicit possibility of referral to the Competition Commission before the end of 2011 providing a strong disincentive to efforts to frustrate reform. Nonetheless, we believe that Ofgem would best serve the interests of consumers by setting out a transparent process in which it is clear that energy suppliers are neither able to avoid implementing remedies arsing from this process, nor impose undue influence on the determination of those remedies. May 2011
24 Which? consultation response to Energy Supply Probe—Proposed Retail Market Remedies, 1 June 2009, p4 25 Retail Market Review, p18 26 Which? surveyed 7,883 members between 9 and 30 November 2009. 27 This entails keeping to the broad outline of the current licence condition, but amending the template and the detailed Guidelines in “ways that will improve cross-company comparability and discourage the least helpful accounting treatments”. Energy and Climate Change Committee: Evidence Ev 87
Memorandum submitted by SSE 1. Executive Summary — Supportive of objectives behind many of Ofgem’s proposals. — Reassured that switching rates remain high and that there is no evidence of foul play. — Concerned that defaulting to “evergreen tariffs” could result in some customers ending up worse off. — “Evergreen tariffs” could stifle innovation and negatively affect the development of smart tariffs. — There may be value in exploring “APR” type comparisons in order to better empower customers. — Ofgem’s liquidity proposals appear sensible and workable. — European companies need to be as transparent with their financial reporting as UK companies. — There are clear flaws in the Ofgem analysis of the wholesale/retail link (see separate paper).
2. Overview As well as being the UK’s largest generator of renewable energy, SSE is now the second biggest retail supplier of electricity and gas, having been the fifth largest in 2004. Through multiple award winning customer service and competitive pricing, SSE, with its regional supply brands (Scottish Hydro Electric, Southern Electric, Swalec and Atlantic) has been very active in and benefited from a competitive energy market. In its Retail Market Review Ofgem announced a number of findings and proposed a number of solutions. This submission tackles the key findings and provides an SSE view on them.
3. No Evidence of Foul Play The review has confirmed SSE’s opinion by finding no evidence of any wrongdoing. There is no implication that there is any form of cartel-like behaviour, any abuse of market power or any form of predatory pricing. This is an important point as it shows that, while there may be room for improving certain functions within the energy market, there is absolutely no evidence at all to back up some of the things that have been asserted about the industry.
4. Switching Rates Remain High Ofgem’s Retail Review found that 15% of gas customers and 17% of electricity customers switched during 2010. While some stakeholders play down the switching rate it is important to remember that Ofgem’s 2008 probe found that switching rates were higher in the UK market than virtually any comparable electricity market in the world and most other consumer markets in the UK. See graphs below.
SELECTED ANNUAL GAS AND ELECTRICITY SWITCHING RATES (OFGEM PROBE 2008) %
30 28% 26% 25 23% 20 18% 18% 15 12% 11% 10 8% 7% 7% 6% 5% 5% 5 4% 3% 3% 3% 2% 2% 1% 0 ^ ^ ^ ^ ^ ‡ ‡ ‡ ‡ ‡ 4 4 4 2 1 3 1 5 1 2 GB GB3 ‡ Texas Victoria ^ Victoria Norway ‡ Sweden ‡ Austria Victoria Germany † New York Netherlands Netherlands South Australia Massachussets New South Wales (NSW) ^ New South Wales Belgium (flemish Region) † Belgium (flemish Region) ‡ Belgium (walloon Region) † Belgium (Flemish Region) † Australian Capital Territory Electricity Gas † Based on total volume ‡ Based on total number of sites ^ Based on customer numbers
Data is from: 1 07/06/07 2 07/05/06-07 3 05/06-04/07 4 01/07-01/08 5 10/05-09/06 Ev 88 Energy and Climate Change Committee: Evidence
THE PROPORTION OF PEOPLE WITH VARIOUS PRODUCTS WHO HAD SWITCHED PROVIDER IN THE LAST FIVE YEARS (OFGEM PROBE 2008)
While SSE understands Ofgem’s desire to increase the switching rate further, SSE believes that further consideration is needed of Ofgem’s finding that of those who have never switched, more than three quarters said that this is because they are happy with their existing supplier. While the switching rate is a good indicator of market competitiveness, there are other indicators which the Committee should be aware of. Two such indicators are: 1. In 2009, average UK domestic electricity prices, including taxes, were the fifth lowest in the EU 15. In 2009, average UK domestic gas prices, including taxes where not refunded, were the third lowest in the EU15. 2. The fact that only three countries in the EU 27 have more than 6 major (5% share of market and above) energy retailers.28
5. Tariff “Simplification”—The Proposals Ofgem believes there is some confusion in the market and has proposed restricting the number of domestic tariffs not requiring contract renewal (Ofgem call these “standard evergreen products”) from each supplier to just one per payment method. There would be a standardised format across suppliers with both a fixed (by Ofgem) element of the bill and then a variable element, with suppliers competing on a single “per unit” price. Suppliers will be allowed unlimited fixed-term products but there would be no automatic contract rollovers at the end of the period, with customers defaulting back to a standard evergreen product unless they make a positive choice for a new fixed term product.
6. Tariff “Simplification”—An End To Customer Choice? Ofgem’s objective appears to be to enable customers to make better informed choices in the retail market, believing that there are too many tariffs. However, its proposals potentially remove customer choice and stifle tariff innovation in the retail market. Instead of being able to choose an enduring energy tariff that suits their needs and let their supplier get on with procuring their energy, customers will have to repeatedly opt-in every time their contract ends or be defaulted onto an “Evergreen” tariff that they did not choose to be on in the first place. We are concerned that if this approach is adopted, it will not enhance customers’ trust in the competitive market or suppliers, which is the primary criticism within Ofgem’s review. At this point it is worth just looking at a few tariffs/customer choices which would appear to be jeopardised by Ofgem’s proposals and be forced to become temporary contracts:
Load shifting tariffs Many customers have long been on load shifting tariffs, particularly if they have electric heating and are off the gas grid. This includes Economy 7 and 10 type tariffs and “Dynamic Tele-switching tariffs” (DTS). If any of these customers forgot to renew their fixed term contracts and defaulted to standard “evergreen” tariffs, they 28 http://epp.eurostat.ec.europa.eu/statistics_explained/index.php/Electricity_market_indicators#Electricity_markets_-_retail Energy and Climate Change Committee: Evidence Ev 89
could pay up to 50% more than their whole current bill. SSE has 860k customers on load shifting tariffs, of which 160K are DTS customers.
Charity affiliations Some customers choose affinity deals, such as with the British Heart Foundation, where SSE makes an additional charitable donation each year at no extra cost to the customer. The unit prices these customers pay are identical to SSE’s standard domestic rates.
Demand reduction incentives 150k electricity and 125k gas customers have chosen to go on SSE’s “betterplan” product. This has the same unit rates as standard domestic rates, but participating customers get a cash prize if they reduce their energy use.
Smart tariffs SSE’s i-plan is a precursor to smart meter tariffs. It provides 25k customer accounts with a smart display device which offers unique ways of engaging the customer in demand management. While it would be disappointing to see this tariff cease to be an enduring option for customers, it would be an even bigger loss if all the future innovations offered by smart meters are not allowed to occur on an enduring basis. — Prompt pay discounts—Customers who pay their standard credit bills on time are given discounts to reflect the fact that it reduces our costs — Paperless billing—Customers who opt for paperless billing receive a discount to reflect the cost saving It would seem odd to make all of these tariffs, which customers have chosen to be on, suddenly become fixed-term, particularly as we move towards a world of smart metering and particularly as many of these products and choices are based on standard tariffs, In particular, it should be remembered that it is expected that “seasonal time of day” tariffs are expected to become more prevalent with the mandated mass market roll- out of smart meters from 2014. A further impact of Ofgem’s proposal is that it also risks confusing and perhaps angering customers when they are suddenly switched onto an alternative tariff if they forget to “opt-in” periodically.
7. Tariff “Simplification”—Other Potential “Knock-On” Effects The following are also potential unintended consequences of Ofgem’s proposals:
Huge movements to fixed-term deals If Ofgem’s proposals force every customer not on companies’ standard domestic tariffs on to fixed term deals, suppliers may have to transfer very large quantities of customers on to fixed term contracts. This will have many associated IT and administration costs, and will also subsume suppliers’ workforces ability to deliver on other programmes, e.g.mass market smart meter roll-out and Green Deal. It also signifies more renewals which means a greater “cost to serve” each customer and may also mean that SSE has to start applying termination fees to fixed term tariffs more stringently than we do currently.
Stifling new entrants and hurting existing small players Companies, such as M&S and the not-for-profit group Ebico (see attached statement from Ebico),29 work in a partnership with SSE to serve their customers. If these have to become fixed term this may damage their businesses. Furthermore, new entrants typically offer niche deals to customers which are likely to be categorised as fixed term offers. This means new entrants will face additional costs if they also have to offer default “evergreen” tariffs to their customers.
8. A Better Way—An “APR Type” Model SSE believes that there may be a better way of improving understanding of the energy market while not damaging innovation. A simple “APR type” model, with a standardised metric could be explored to help people compare offers and prices across suppliers. If suppliers were encouraged to use a “pence per day” standing charge metric alongside a “per unit” usage metric, then it may improve the customer switching experience and better empower customers. An “APR type” model, if made to work, would mean that there would be no need for limits on tariff numbers, meaning the market would be both accessible and innovative. Ofgem’s model does not achieve either of these: it just shifts innovative tariffs into the fixed market while not allowing any pricing metric to differentiate between them. 29 Not printed. Ev 90 Energy and Climate Change Committee: Evidence
9. Liquidity—Auctions Or Market Maker? Ofgem is proposing a new licence condition that would require generators to make available between 10% and 20% of their generation for sale into the market through a regular Mandatory Auction. Ofgem is also consulting on Mandatory Market Maker, a body (or bodies) that would be obliged to trade energy in the market in order to increase liquidity. Across the world, the GB wholesale market is renowned for being highly liquid. However, as the UK’s second largest generator and supplier, SSE understands the importance of optimum liquidity in the market and is keen to participate in anything which will make a material difference. Correspondingly, SSE trades with a wide range of counterparties, providing volume and shape into the market, and has over 100 flexible bilateral contracts going to less than 1MW/day on average. SSE has an open-door approach and, subject to counterparties meeting credit requirements, it already offers appropriate “clip sizes” for small players at a fair price. In addition to this activity SSE has also been involved in the introduction of a new trading platform (N2EX) which it believes has further enhanced liquidity. N2EX offers a cleared market where transactions are conducted with one counterparty (N2EX) yet access is provided to multiple counterparties. When founded N2EX was aimed particularly at addressing the concerns that had been raised by smaller players (suppliers and generators). It is disappointing therefore that to date these players (and two large players, Scottish Power and Centrica) have not been participating in N2EX, and that Ofgem considers that there is a need to intervene. With regard to Ofgem’s proposals SSE believes that any intervention to promote liquidity in the traded electricity market should build on the existing N2EX platform, as the introduction of a new cleared platform could take a few years to establish and is not without costs. SSE considers that Mandatory Market Makers would be the most effective measure and suggests that National Grid or N2EX should run a tender process with the objective of attracting maximum participation from a range of players, including the major six, large independent generators and the financial institutions. Such an approach would, we believe, meet Ofgem’s objective of facilitating liquidity and provide the tight bid-offer spread, depth and range of products required. This is preferable to mandatory auctions, which we are not convinced will address the underlying issues identified by Ofgem or provide the price transparency required as they will distort the market and will make it difficult for all suppliers, regardless of size to hedge customer contracts.
10. Liquidity—Do Ofgem’s Proposals Really Help The Small Players? SSE is aware that credit risk and collateral will remain issues for smaller participants which are, however, more difficult to address. When transacting with any counterparty every market participant must take into account the credit risk associated with players defaulting on payments. In our experience this has been a real issue and, provided the credit and collateral arrangements are market based, we consider it to be a fair safeguard for customers and a fair requirement for market entry. We are keen to ensure that any initiatives to improve liquidity, whether voluntary or otherwise achieve the desired outcome and therefore we have suggested that Ofgem facilitates another round table meeting of all interested parties to ensure that any solutions adopted really address the needs of those players to be able to access the right bundles of electricity for their business at a reasonable cost. We would be concerned if new obligations were placed upon us which do not tackle liquidity issues to the benefit of the market generally and smaller participants in particular.
11. Proportionate Enforcement Measures The Ofgem announcement underlined how Ofgem is keen to take a tough approach to enforcement measures. While SSE wants a fair market, we believe that a focus on proportionate regulation and enforcement would be the correct approach. In particular, an area of concern is the proposal that Ofgem should be more prescriptive in how it expects suppliers to comply with Licence requirements. The indications are that Ofgem will tell suppliers not only what to do and when, but how to do it as well. In a competitive market, it is vital that suppliers have the ability to differentiate, especially in their communication with customers. If Ofgem wants to move towards the standardisation of design, wording and layout of communications, coupled with the narrowing of competition around prices, then there will be very little space for suppliers to compete with each other. This will not encourage consumer engagement and switching, which is the key objective underpinning ofgem’s proposals. SSE would also like to back Ofgem’s approach of investigating Scottish Power over the significant difference between its standard and direct debit tariffs, which is not in keeping with the licence obligations. We had never understood how such a differential could be considered cost-reflective.
12. Financial Reporting SSE supports a transparent approach to publicising financial accounts and as a UK based company, we have been doing this for some time. We have one concern in this area, namely that the way Ofgem has written the report is that it believes that all activities should be allocated to either Generation or Supply, suggesting that an energy trading function does not exist, or that its profits or losses should be attached in some way to supply or generation. In all of Energy and Climate Change Committee: Evidence Ev 91
this, it is important not to overlook the real benefits to customers of vertical integration between Generation and Supply, particularly in terms of price stability. Overall, we support an approach which makes things transparent, while allowing companies to maintain some commercial confidentiality. We would however appreciate it if the same approach to the UK companies were applied to our continental competitors.
13. Rockets and Feathers SSE has some real concerns about Ofgem’s (heavily-caveted) suggestion that there is evidence that suppliers are quicker to raise retail prices when wholesale prices rise than they are to reduce them when the wholesale price falls. More detail is laid out in the attached paper with this submission,30 but SSE questions Ofgem’s analysis as it: — Ignores observed reductions in customers electricity and gas usage—by ignoring the observed 20% reduction in average gas use and 10% reduction in electricity use over the last 5 years, the necessary recovery by suppliers of fixed costs is understated in the analysis; — Is based on a long-running assumption that supply businesses should make a loss—The figures look at a period where companies were losing money in their retail businesses and focusses on gross margins and not net margins, thereby excluding a whole host of other changing costs (including customer service and debt); — Makes a range of wide-ranging assumptions—including stylised estimates of how much energy suppliers buy in advance and no analysis of actual weather conditions (which affect consumption and price); SSE hopes that Ofgem undertook some form of peer review of the analysis before publishing.
14. Consistency of Approach As a final thought, SSE would take this opportunity to mention that there are, at times, some inconsistencies in the way that Ofgem evaluates the market. For example, on page 37 (para 2.71–2), Ofgem highlights the savings between switching supplier but keeping the same payment method, mentioning potential savings of £256 a year for prepayment switching between the cheapest and most expensive supplier. However, on page 29 (para 2.79), Ofgem criticises suppliers for pricing similarly and highlights a difference of under £40 for an annual dual fuel bill. It seems odd to praise the industry for large differentials and criticise the industry for small differentials on near-consecutive pages. May 2011
Supplementary memorandum submitted by SSE This note addresses the Select Committee’s interest in: — Logistical challenges involved in moving customers to one “standard tariff”. — Discussions to date with the Federation of Small Businesses and the Chamber of Commerce to discuss issues around energy supply. — The basic salaries and commission structure for doorstep sales staff and the areas targeted by doorstep sales. — Size of generation business, size of supply business, volume of electricity sales made and volume of electricity purchases made in terawatt hours in 2009–10. SSE has also included information on its direct sales court case, which was discussed at the Select Committee. In confidence, SSE would like to inform the Committee that it is undertaking a wide-ranging review of its doorstep sales activities. This is in the context of, and part of, the “long-term transformation” of SSE's energy products and services referred to in the company's annual results statement on 20 May. We will share the results of this with the Committee when they are complete, which we expect to be in the next couple of months.
Responses To Questions “Ofgem has estimated that its proposal to restrict the number of tariffs for standard evergreen products would impact on 75% of all customers currently on those products. What would be the logistical challenges involved in moving this number of customers over to one new “standard” tariff?” Moving customers in large numbers on to an alternative tariff has a number of logistical challenges. These are summarised below: 30 Not printed. Ev 92 Energy and Climate Change Committee: Evidence
Suppliers’ systems and workforce — Suppliers have varying systems, with varying degrees of flexibility. Those at the less flexible end of the spectrum would require staff to manually open up each customer account and move the customer onto a new payment plan. SSE would estimate that this would mean approximately 30 minutes of customer service work for each customer. — If we assume the “worst case scenario” outlined above, then 75% of the UK’s 26 million electricity customers and 18 million gas customers will need to be manually changed. This is 33 million customer accounts and therefore 16.5 million “man hours”. This obviously has a huge associated cost which would end up being passed through to customers. It would also use staff time which could be used to deliver Government projects like Green Deal. — If suppliers’ systems are markedly different and some suppliers have to undergo the above, while others do not then some suppliers will be heavily penalised and others will not, severely distorting the market. — Suppliers would have to increase workforces to deal with the inevitable amount of complaints received as customers objected to their previous tariff choices being seemingly undone.
Renewals — The movement of customers on to fixed tariffs will significantly increase the numbers of contract renewals, which will also mean more staff hours will need to be spent in this area, increasing the cost to serve. — Systems among some suppliers would have to be changed to accommodate signals for ensuring contract renewals are appropriately flagged up and the appropriate paperwork is sent to the customer advising of what has happened. — In an increasingly fixed tariff world SSE would have to start applying termination fees to fixed term tariffs more stringently than we do currently.
Other impacts — Each transfer or renewal needs a meter reading. If customers do not provide this then estimates are performed. Estimates significantly increase the chances of billing problems and complaints — If suppliers are obliged to move customers onto or off existing tariffs, or change the structure of their tariffs this may mean meter changes. On occasions, this will mean rights of entry to change meters for people who do not want to move from arrangements like Economy 7 meters. — If Ofgem introduces this package and fixes a standing charge for recovering fixed costs then low users become less attractive to suppliers. — Off gas grid customers who use electricity for heating will lose out significantly if they forget to opt in. — Customer confusion and dissatisfaction at being moved off a tariff that they have previously chosen to be on. — The ending of enduring smart tariffs and an effective curb on the benefits of smart meters.
All of this could be avoided, whilst improving comparability by exploring an “APR type” model, where suppliers are encouraged to use a “pence per day” standing charge metric alongside a “per unit” usage metric. This, if made to work, would mean that there would be no need for limits on tariff types, meaning the market would be both accessible and innovative. SSE has been developing a model on this which is attached in a separate paper.31 We would be interested in hearing the Committee’s views on this.
“The subject of small and micro businesses was raised during the session. Please could you provide more information on the contact you have had with the Federation of Small Businesses and the Chamber of Commerce to discuss issues around energy supply and the possible need for greater protection of micro businesses. If there has been no contact, please confirm this.”
SSE has not had significant or organised contact with these organisations, tending to deal directly with businesses. SSE has suggested to its trade body, the Energy Retail Association that a round table with suppliers, these organisations and the Regulator could be useful.
Following the last retail market probe and the introduction of complaint handling standards in 2008 microbusiness customers are already afforded similar levals of protection to domestic customers. For instance there are requirements in relation to the renewal of contracts for energy supply and to the way in which complaints are handled, meaning that microbusinesses can escalate complaints to the energy ombudsmen. 31 Not printed. Energy and Climate Change Committee: Evidence Ev 93
On the subject of sales staff, please could you provide details of the basic salaries and commission structure for doorstep sales staff and the areas targeted by doorstep sales? Sales Remuneration Like in virtually every other sales industry, SSE’s sales staff are remunerated through a structure which incentivises sales. The average basic salary is £13,500 per annum and can rise to £15,500. The average commission value is £13,400 per annum and will vary dependent upon the level of sales activity by the individual sales agent.
Prospective Customer Selection We currently have 29 sales branches spread across the country. Each of these covers an agreed geographic area. Each branch manager requests “walksheets” from our central Sales Process team. These walksheets flag up properties where the customer is one of ours already or where there is a customer who we should not call (eg vulnerable customers or where there is an outstanding complaint). In addition, in accordance with the Energy Sure Code, sales agents will not call in agreed and properly defined “No cold calling zones”. In order to provide useful evidence for the Select Committee, SSE has undertaken an analysis of doorstep acquisitions over the last two months (27 March to 15 May). The table below includes a comparison of the UK population socioeconomic “cameo codes” as compared to our doorstep acquisitions. This demonstrates that there is a wide spread of customers being acquired across this channel and this is largely in line with the distribution of the UK population.
Protection of Elderly/Vulnerable Customers In order to protect elderly or vulnerable customers, SSE has introduced the following controls: 1. It is SSE policy that Sales Agents are instructed not to call on any properties in Warden Controlled Areas or Sheltered Housing. 2. To further protect elderly customers, all Sales Agents are instructed to ask the following questions of customers who appear over 70: (a) Do you deal with the bills? (b) Do you want to have a relative or friend present? (c) Do you wish to discuss this decision with a family member or friend? 3. As a further safeguard, sales are independently verified by a dedicated call centre who will take the details from the Sales Agent and then confirm these with the customer. These staff do not receive sales commission and will also check that the customer fully understands that they are entering into a contract and that they are happy to do so. At this point, they will check the age of all customers and, if the customer is over 70 or if the call centre operative considers that the customer may be vulnerable or confused, they will ask the questions outlined above (2a to 2c). Dependent on the customer’s response, the call centre operative would decide whether to allow the sale to proceed.
Sales Checks: To prevent any mis-selling, SSE has adopted a number of clear checks and balances (highlighted below) which every sales agent has to go through before they can finalise a sale. This is in addition to the regular training that these staff receive: 1. The agent must clearly set out in writing what he estimates the customer will spend in their first year with SSE. If this is less than their current deal, he must also set this out and explain the basis for the assumption. 2. The customer will be asked to initial the contract against the elements that have been used in making the estimate and / or comparison, to show that they have understood it. 3. Once the customer has agreed to the contract, the sale is independently verified by a dedicated call centre, who will take the details from the sales agent and then confirm these with the customer. They will also check that the customer understands that they are entering into a contract and that they are happy to do so. They will also check the age of all customers and, if over 70, ask the additional questions outlined above (2a and 2c). The call centre has the power to refuse to load any sale if the customer indicates that they are unhappy or if they feel that the customer is unsure of what they are agreeing to. 4. If for any reason (e.g. customer has no time for the call or problems with telephone signal) the sale has not been able to be verified with the customer on the telephone, we send a communication the next working day offering the customer the opportunity to contact us on a freephone number either to cancel the contract during the following 7 working days or for further clarification. 5. Where a sale is not loaded or is cancelled after the customer receives the verification communication, the sales agent has his commission reclaimed. 6. Once a customer's transfer is confirmed to SSE, we try to contact as many as possible by telephone Ev 94 Energy and Climate Change Committee: Evidence
as part of our Consolidation process. This call will further confirm that the customer is happy to transfer to SSE and gives a further opportunity for them to raise any issues.
How large was your generation business, how large was your supply business, what volume of electricity sales did you make and what volume of electricity purchases did you make in terawatt hours in 2009Ð10? Volume Type 2009Ð10 (TWh) 2010Ð11 (TWh) Total Generated 45.1 45.6 Total supplied 59.7 (all customers) 56.7 Total Buy Trades 150.6 174.0 Total Sell Trades 138.1 165.8
In the table above: — All generation and traded volumes are NBP volumes. — The total supplied figure is at Customer Meter. — The traded volume only relates to power which was delivered in the relevant period.
Direct Sales Court Case
Surrey County Council Trading Standards have brought a case against SSE under the Consumer Protection from Unfair Trading Regulations 2008.
There were seven parts to the case against SSE and five parts to a related case against a former sales agent. All of the counts against the former agent were found “not guilty”, as were five of the counts against SSE. However, SSE was found guilty on two counts. These two guilty verdicts relate to a sales script in use in February 2009. The prosecution alleged that the script contained misleading statements about the nature of the sales visit. It is these statements that were behind the “guilty” verdict.
We are and always have been confident of the integrity of our overall sales process. In this regard, it is important to note that there is much more to our sales process than the agent's script, including a detailed training and compliance programme. In addition, as has been described above, our process provides for sales to be verified by a neutral customer service adviser before they are processed to make sure that the customer is fully aware of the contract they are entering into. We also regularly review and refine our processes to ensure this is the case. The sales script at issue during this trial is not in use today. We would therefore reject any suggestion of institutional mis-selling.
SSE is clearly disappointed with the verdict and is appealing against the decision. April 2011
Further supplementary memorandum submitted by SSE
Factors Influencing Household Energy Prices
A typical bill is made up of: — Wholesale energy costs including the cost of buying electricity and gas from the global market. — Network charges which are set by Ofgem and levied on suppliers for using the network of gas pipes and overhead lines and underground cables to deliver energy into the home. These vary according to regions. — Environmental and social costs for government programmes such as Carbon Emissions Reduction Target (CERT), Warm Homes Discount, Community Energy Saving Programme (CESP), Renewables Obligation, Feed-in Tariff and the EU Emissions Trading Scheme. The costs of these required socio-environmental schemes, set by Government, are expected to be passed through to consumers. — VAT. — Other costs including metering provision and other costs associated with running a retail business eg meter reading, billing and customer service.
The Changing Structure of a Bill
The below table and corresponding graph show the changing nature of energy bills between October 2008 and 2011 for a dual fuel typical customer. Energy and Climate Change Committee: Evidence Ev 95
Factor 2008 Yr Tariff 2011 Yr Tariff Retail Price £1,119 £1,094 VAT £53 £52 % of retail price 5% 5% Network Use of System Costs (UoS) £186 £239 % of retail price 17% 22% Gov’t Schemes £71 £107 % of retail price 6% 10% Other Supply £121 £151 % of retail price 11% 14% Residual (including cost of buying energy and any margin) £688 £544 % of retail price 61% 50%
GRAPH SHOWING CHANGES TO TYPICAL “YARDSTICK” CUSTOMERS 100%
80%
Residual (Energy + Margin) 60% Other Supply Costs Gov't Schemes 40% Network Costs VAT
20%
0% 2008 Dual Fuel Bill Today's Bill
As can be seen from above, the growing cost of network and government schemes now means that the wholesale cost of energy is only around 50% of a typical dual fuel customer’s bill.
Reducing Volatility The cost of buying and producing electricity and gas make up the largest part of a bill and wholesale energy prices and the cost of fuel for electricity generation can change frequently and fluctuate heavily on a daily basis. Some energy is bought on the day, but a large amount can be bought well in advance on the forward market. It is up to suppliers to balance their risk and make the best buying choices they can, based on meeting customer needs and anticipating costs may be in the future. This process is known as “hedging”. Ofgem states in its Updated Household bills brief (2011) that “Forward purchasing of energy by suppliers will tend to smooth the costs of energy passed on to consumers. This keeps consumer prices from rising and falling as frequently”. SSE maintains a diverse portfolio of electricity generating stations with an increasing pipeline of renewable energy cementing our position as the largest generator of renewable energy in the UK. Our generation business helps us manage the risks associated with primary fuel procurement and this diverse portfolio enables us to increasingly meet the electricity needs of domestic and small business customers with power generated from the UK. The operational and commercial risks in these markets are exceptional due to the limited opportunities for storage combined with the need to deliver to the customer “at a flick of a switch”. These factors are particularly intense when there are unexpected variations in weather conditions. It should also be appreciated that variations from the expected hedged position are usually a cost whether they are upward or downward. When demand unexpectedly falls, the supplier must sell cover at a time when wholesale prices will be falling and when demand rises, they must buy at a time when there is upward pressure on prices. As SSE owns only a tiny proportion of upstream assets, we have to purchase nearly all of the gas that we need either direct for delivery at the beach or on the wholesale traded market. We enter into a diverse range Ev 96 Energy and Climate Change Committee: Evidence
of contractual arrangements to help us manage the risks so that we can meet the gas needs of domestic and small business customers and deliver gas to generate electricity in our power stations.
Upward Pressures on Retail Prices There are a number of factors currently providing an upward pressure on retail prices. The first of these pressures are the increasing costs of using the transmission and distribution networks to transport energy. These costs are set by Ofgem and are designed to be passed through to customers. Since August 2008, when SSE last raised electricity prices, these are up 30% or £22 on a typical electricity customer and 23% or £25 on a typical gas customer. The second factor is the cost of Government socio-environmental schemes, which, set by Government, are expected to be passed through to consumers. Since August 2008 these have increased by 57% or £25 on a typical electricity customer and £12 on a typical gas customer. However, it should be noted that these schemes have been instrumental in helping customers reduce their bills through energy savings measures. Even between 2010–11 and 2011–12 network and Government schemes, taken together, will add £38 to a typical dual fuel customer’s bill. They are also expected to increase over time as the Warm Homes Discount, Carbon Price Support and Energy Company Obligation come forward. The third factor is the wholesale price. Companies secure energy on the wholesale market, generally in advance, or by generating it themselves and then sell the energy on again to customers. Since December 2010 there has been a marked increase in the wholesale price. Wholesale energy prices for the forward year have risen by over 33% on gas and 25% on electricity. Events such as the earthquake and tsunami in Japan and political upheaval in the Middle East, and longer- term trends such as the fast-increasing energy needs of the Asian economies, have contributed to the rise in wholesale energy prices. Ofgem has characterised this as “turmoil in global energy markets in 2011. The UK is increasingly exposed to such turmoil because its own oil and gas resources are declining.
Steps taken to protect vulnerable customers As well as offering consistently competitive prices, SSE currently undertakes a vast quantity of activity designed to help our vulnerable customers. During the financial year (2010/11) SSE spent £27million helping vulnerable customers. Over the financial year 2011/12 this will increase to £45million. Over and above this significant funding is given to vulnerable customers through CESP and CERT schemes. Our flagship social tariff, energyplus Care offers the deepest discount (currently 30% off standard prices) to vulnerable customers available in GB. We currently offer this to customers spending 20% or more of their income on their energy bills. We also offer those spending between 15 and 19% a £100 rebate, and those spending between 10 and 14% a £50 rebate. Outside of these core discounts, we also offer assistance through a trust fund, SSE Sustainable, and provide tailor-made payment arrangements, discounted appliances, benefits-entitlement checks and debt-write-offs on a case by case basis taking account of energy bill affordability. We also participate in a range of energy efficiency programmes, estimating that to date we have assisted 735,000 households with cavity wall insulation and loft insulation. The gas distribution network business (Scotia Gas Networks), in which SSE is a 50% shareholder, also offers free or low-price gas connections which can remove people from fuel poverty by switching them to gas heating. The UK Government has just recently legislated to provide greater direction over companies’ expenditure in this area. We are supportive of these initiatives and are actively trying to use the new framework to find ways to assist the most hard pressed customers in a way which will make the maximum positive impact on them.
Impact of energy efficiency on bills Using energy more efficiently is the fastest and most cost-effective way of reducing customers’ energy costs, sustaining supplies for the long term and reducing emissions of carbon dioxide. As an energy supplier, SSE has obligations under the Carbon Emissions Reduction Target (CERT) scheme to deliver energy efficiency measures to households throughout Great Britain and in 2010/11 funded the installation of cavity wall insulation in 87,000 homes and loft insulation in 106,000 homes (excluding DIY insulation). In its CERT Annual Report, a review of CERT in 2009/10, published in August 2010, Ofgem stated that SSE had met 78% of its overall carbon emissions reduction obligation for the three years to 2011. SSE is the energy supplier which has delivered the highest share of its CERT obligations through appliances, via a number of consumer electronics schemes. These have the benefit of helping to address directly demand for electricity. Complementing CERT, the Community Energy Savings Programme (CESP) is an obligation placed on energy suppliers and electricity generators to make savings in customers’ homes by helping to install energy efficiency measures. The programme is designed to ensure that suppliers work in the lower income areas and Energy and Climate Change Committee: Evidence Ev 97
to incentivise a “whole house” approach to energy savings. SSE has some exciting potential schemes in the pipeline but it should be noted that the administrative delays and other aspects of the scheme may result in it costing more than the Government originally planned for. CESP and CERT will be superseded by the “Green Deal” and Energy Company Obligation (ECO) when they are introduced. However, we are concerned that the transition to the new obligations is properly managed in order to minimise any undue impact on customer bills. Our statistics show that, on a weather-corrected basis, these energy efficiency programmes are having an impact. SSE household customers have continued to reduce their use of energy, and on an actual basis in 2010/ 11 SSE household customers used, on average: 563 therms of gas, compared with 598 therms in 2008/9 and 4,408kWh of electricity compared with 4,748kWh in 2008/9. Similar trends have been observed across the country.
Funding Future Investment in Decarbonising Energy SSE supports the UK and Scottish Government’s commitment to a low carbon economy and their respective emissions targets. SSE’s internal target is to reduce the amount of carbon dioxide per kilowatt-hour of electricity generated at plant in which it has an ownership or contractual interest by 50%, between 2006, the first full year after it acquired coal-fired power stations, when it was just over 600g/kWh, and 2020. We are committed to investing in the UK and Ireland’s energy infrastructure. In the last two years, SSE’s group capital investment has exceeded its profit after tax and it will be the same again this year. Amongst other things, this investment will deliver secure, lower carbon sources of energy and make households less exposed to wholesale prices in the future. SSE’s investment plan across the UK involves Greater Gabbard (one of the largest offshore wind farms in the UK), Clyde (will be the UK’s largest onshore wind farm), Aldbrough gas storage facility, a potential gas CCS project at Peterhead and a potential interconnector connection with Norway. However, the future development of SSE’s low carbon energy portfolio will depend to a significant extent on the outcome of the UK government’s consultation on Electricity Market Reform. SSE believes a workable package of reforms can emerge from this process, based around carbon price support, a mechanism to reward all electricity capacity that is available to generate electricity, and continuing support for the production of electricity from renewable sources. The UK government is expected to publish a White Paper later this year and SSE continues to feed into this consultation.
SSE’s Retail Prices SSE last increased electricity tariffs in August 2008. Since then we decreased tariffs for both electricity (8%) and gas (4%) in March 2009 and again in March 2010 (gas 7% and a small reduction in electricity). We last announced an increase of 9% in gas prices at the end of October 2010 (implemented December 2010). Of the six largest energy companies we were the only supplier not to increase electricity prices. At present, due to the pressures outlined above, SSE is trying to hold on as long as possible to the current pricing structure. Delivering value for customers and protecting them, where possible, from these pressures is central to what we do.
Profit Margins Contrary to popular belief, energy retail businesses are not high margin businesses. Since January 2004 Ofgem have calculated that supply margins have averaged -£25 (-2.7%) and have been negative two-thirds of the time. SSE’s Generation and Supply business, covering electricity generation and the supply of electricity and gas, achieved an operating profit of £882.8m in 2010/11, a fall of 1.5% on the previous year. From this operating profit, SSE has to pay tax to the UK Government and interest on the money it has borrowed to finance its investment programme. Under that programme, SSE invested £910.9m in electricity generation in 2010/11— more than it achieved in operating profit. Without any contribution from supply, SSE could not make the investments Scotland needs in order to move towards the low carbon economy. In addition, given that supply businesses are distinct parts of businesses, no company would sustain loss-making activities over the long term.
Competitiveness of the UK market According to Ofgem, 15% of gas customers and 17% of electricity customers switched supplier in 2010. This compares favourably with almost every energy market in the world (only Ireland in the EU as a higher switching rate for electricity) and most consumer markets. Across Europe, just two other countries (Slovenia and Denmark) have a larger number of suppliers than does this country with a market share of more than 5%. The extent of the choice of tariffs and services available to customers means there is a wide variety of prices, consistent with a competitive market. This has been added to by the recent launch of Co-operative Energy. Ev 98 Energy and Climate Change Committee: Evidence
SSE does agree with Ofgem and consumer bodies, however, that steps need to be taken to make price comparison easier for everyone. However, we believe we have come up with a more customer friendly solution than the one proposed by Ofgem in their consultation. Rather than putting limits on customer choice, we advocate an “APR” style metric to be adopted in the industry to allow customers to compare alternative offers on a consistent basis. We are currently consulting with stakeholders on this area. A European Commission study on the functioning of retail electricity markets for EU consumers found that mystery shoppers could find more cheaper offerings in the UK than in all other countries except Sweden. This shows that the opportunities are there, but people are not sufficiently engaged in the market to find them. June 2011
Annex 1 The below graph shows changes making up a retail bill, indexed at 1:1 in January 2004. It very clearly shows how the retail price (blue dotted line) has closely followed the movements in the wholesale price (shown as a red line for actual wholesale market costs and a grey line covering a likely 18 month hedge). It also shows the significant growth in the cost of Government schemes and network costs (green line). It also shows that over time, the retail price has not risen as much as the wholesale price, which underlines Ofgem’s analysis of negative supply profits over this time period. 4.00 W State Energy Cost 18m Energy (Ofgem) Current Cutlock UoS & govt sch Cost Tariff 3.50
2.50
2.00 Index Jan 04 = 1.00
1.50
1.00 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13
Further supplementary memorandum submitted by SSE Response To Questions Following Evidence Session on 28 June 2011 Q. Alistair Buchanan claimed that 70% of prepayment customers were won on the doorstep. What percentage of your prepayment customers were won on the doorstep? A. SSE estimates that 19% of existing prepayment customers joined via doorstep sales. Since 2008 less than 10% of our customers acquired via doorstep sales were prepayment. 75% of customers recruited via this channel over the same period are Direct Debit customers. Approximately 11% of our customers are prepayment.
Q. What percentage of attempted sales lead to nil returns due to your salesperson being unable to find the customer a better deal? A. SSE does not have historic information to support any conclusion. However, we believe that the majority of our acquisitions have been price driven.
Q. How many customer complaints do you receive a day? A. Having considered the request, we do not consent to the information being released. SSE would instead direct the Committee to other sources of information which are readily available. SSE sends this information on consumer complaints to Ofgem each month. However, they choose not to make it public due to subjectivity in defining what constitutes a complaint. This lack of a definition remains throughout the industry and could skew any conclusions that the Committee and the customer may draw. Energy and Climate Change Committee: Evidence Ev 99
What is more, this information may be used to compare supplier performance without taking into consideration each supplier’s market share. Again, we are concerned that if the information is presented in a certain way then inappropriate conclusions could be drawn. However, due to this ambiguity in defining a complaint, Consumer Focus have decided to publish their Energy Supply Performance analysis which serves as a proxy for performance as it is based on the number of consumers that have contacted an independent organisation for advice or support with an energy problem. The companies have been ranked on the number of customer contacts to Consumer Direct, Consumer Focus and the Energy Ombudsman in relation to their market share during the last quarter. As figure 1 shows, SSE has been rated as the most effective supplier at handling customer complaints for the last two quarters.32
Figure 1 How do the domestic energy suppliers compare on complaint handling?1 January - March 2011
Supplier Rating Change Find out how to complain 5 about your energy supplier: Scottish and Southern Energy 4* No Change 4 British Gas 4* Up 1 Download (76kb)
E.ON 3* Up 1
ScottishPower 2* No Change view a template energy supplier complaint letter: EDF Energy 2* No Change View npower 2* Up 1
What is more, from April 2010 to March 2011 inclusive, SSE maintained its number one position in the Consumer Focus Report for complaints performance with an average in each month of 58 complaints per 1,000 customers, compared to an industry average of 92. In terms of resolving complaints, Suppliers Complaint Handling Reports are published on companies’ respective websites as are required under the CEAR Act, along with an annual complaints report which outlines the number of complaints unresolved after the first day.33 Figures within SSE’s document show that for the 12 months ending 30 September 2010 SSE, the second largest UK energy supplier with over 9 million customers in the GB market, was contacted over 15 million times by our customers with the majority of contacts resolved by the end of the next working day. Of these contacts there were 92,712 cases (0.6% of total customer contacts) which took a little longer to resolve, and took further work to ensure all aspects of the problem were fully addressed.
Q. How many tariffs do you have? A. SSE has 11 tariffs that go with both the standard single rate electricity and electricity/gas meter configurations.
Electricity We have two meter configurations: — Single rate (all day). — Two rate (day/night). The tariff for each of the meter configurations has two variants—with and without Standing Charge.
Gas Gas is only available in a single rate meter configuration—with and without Standing Charge. Each of the above variants is available with one of the following customer options: — Standard Energy Category (2): Standard gas and standard electricity—28 day. 32 http://energyapps.consumerfocus.org.uk/performance 33 http://www.hydro.co.uk/uploadedFiles/CoreMarketingSites/Assets/Documents/ComplaintsReportHydro.pdf Ev 100 Energy and Climate Change Committee: Evidence
Standard gas and standard electricity—Fixed Term. — Energy Reduction Rewards Category (2): Betterplan. Iplan. — Loyalty Rewards Category (4): M&S Energy. Energyplus argos. Moneysavers retail discounts. Energyplus Pulse (British Heart Foundation). — Care Category (2): Warm Home Discount. Equipower/Equigas. — Green Category (1) Oplan. July 2011
Memorandum submitted by Centrica Summary — We understand that at this time of rising commodity prices against a challenging economic backdrop Ofgem needs to maintain its scrutiny of the energy market as a whole to ensure a fair deal for customers. In general we agree with the principles and objectives that underlie Ofgem’s Retail Market Review (RMR), such as the need to increase tariff simplicity and transparency, and to ensure full compliance with both the letter and spirit of the 2008 Probe remedies. — The RMR has raised a number of important issues for consideration, but overall we disagree with Ofgem’s conclusions in relation to consumer harm and barriers to entry in the energy retail markets. The GB energy retail market is the most competitive in Europe—we currently enjoy the lowest average domestic gas prices of the EU15 and the highest level of switching. Increased customer choice and innovation is a direct benefit of this competition. — Ofgem fails to recognise these points sufficiently in its consultation document, and has instead presented a selective and incomplete analysis of the evidence on consumer harm. We also have concerns that Ofgem’s consumer research methodology is seriously flawed in key areas and we are conducting our own research on these issues which will be available in mid May. — As a consequence, Ofgem proposes a set of regulatory changes that are disproportionate to the size of the perceived problem and which are not aligned with what the majority of consumers want from this market. Centrica fully supports measures which will deliver on the principles of simplification, transparency, fairness and competition. Any amended framework also needs to maintain the principles of appropriate customer choice, cost reflectivity, encouraging energy efficiency and protecting the vulnerable. Ofgem’s current proposals represent extreme solutions which are not fit for purpose for the majority of UK energy consumers, and which could have the overall effect of reducing competition, creating market distortion and undermining the sustainability agenda. In terms of Ofgem’s specific proposals: — As regards the proposals for a single evergreen tariff per pay type, we have real concerns the proposals are seriously flawed and will stifle tariff innovation. We recognise that there is room for improvement within the industry on tariff complexity. Our own Customer Panel identified this as a major issue and we already have the smallest tariff range of the major suppliers in the industry, with further changes planned. — Ofgem’s proposals seek to engineer a move towards fixed term contracts and we have seen no compelling evidence that the consumers Ofgem wish to engage are attracted to these products or wish to make periodic decisions on product selection in this way. We also have concerns that the measures in relation to pass-through costs are poorly thought through. If improperly designed by not reflecting industry costs, they could lead to a market distortion which effectively creates a structurally loss making and potentially neglected group of low consuming customers. Ofgem’s proposal will lead to consumer detriment through removing choice, and is also incompatible with the sustainability agenda (in particular, the threat to time-of-use tariffs which enable realisation of the benefits from smart metering). — British Gas has made every effort to implement the 2008 probe remedies—both the letter and spirit. However, we agree with Ofgem that performance has been patchy across the sector as a whole. A consistent application of regulations by all suppliers will benefit consumers. Energy and Climate Change Committee: Evidence Ev 101
— Ofgem’s continued use of the quarterly wholesale/retail report to comment on supplier profitability is misleading and damaging to consumer trust. We strongly dispute Ofgem’s assertion that retail prices rise quickly when wholesale prices rise, but fall slowly when wholesale prices fall. Ofgem’s own analysis shows that these conclusions are highly sensitive to assumptions on the hedging strategy adopted by suppliers, and the analytical method used to estimate the relationship between wholesale and retail prices. We do not believe that our hedging assumptions reflect industry practice. — A generator auction could improve power market liquidity. However, Ofgem needs to extend the proposed requirement to cover all large generators, not just the big six. There is no basis to discriminate against vertically integrated players. We also question whether a mandatory market- making requirement is necessary or helpful, since exchanges have incentives to appoint market- makers if there is a demand for their services. — Finally, while we recognise that energy suppliers must do their utmost to maintain consumers’ trust, we consider that the Regulator’s overtly “populist” comments in public have directly contributed to a lack of trust in the industry, and fail to recognise the pivotal role the energy industry must play in the key instruments of Government energy policy (such as Green Deal, Smart Meters, Smart Grids) which are needed to deliver sustainability, security of supply and investment.34
Effectiveness of Retail Competition
Ofgem has confirmed it is confident that energy suppliers are pricing independently and that there is no evidence of cartel activity. There have been 17 different inquiries into the UK market since 2001—none of which have found any evidence of anti-competitive behaviour.
The UK continues to have one of the most competitive energy markets in Europe. This has brought significant benefits to customers in terms of low prices and innovation. In the six months to June 2010, UK households enjoyed the fourth lowest electricity prices of the EU15 and the lowest for gas.
The existence of six major competitors compares favourably with many other markets (fixed and mobile telecommunications, supermarkets, pay television, high street banking, etc). Industry churn levels are also high compared to other industries. Ofgem cites consumer survey data suggesting that 41% of gas and 40% of electricity consumers have switched at least once, but our market share data shows clearly that this is a significant understatement.35 Independent third party research (Morgan Stanley Energy Survey 2011) indicates that between 71% and 79% of consumers have switched depending on the supplier. Ofgem’s analysis also shows that 15% of gas customers and 17% of electricity customers switched their supplier during 2010. The regulator’s claim that switching rates have been on a “downward trend” since 2006 is not supported by the data: in fact, switching rates peaked (along with commodity prices) in 2008, and while they have subsequently fallen back slightly, transfer volumes in Q4 2010 were higher than in 22 of the previous 32 quarters.
In addition to lower prices, consumers have also benefited from the innovation and improvements in customer service that competition delivers. British Gas has invested significantly in improving its customer service. This includes modernising our billing systems and improving training for our call centre and customer facing staff. This has seen a dramatic improvement in customer satisfaction levels. Industry-wide, Ofgem’s data shows that 77% of consumers say they are happy with their current energy supplier, which suggests that in many cases a lack of switching may reflect customer satisfaction rather than disengagement from the market.
Since market liberalisation, energy suppliers have also innovated by developing a wide and varied range of products and services which has provided consumers with value and choice. We offer fixed or variable prices, green energy and social tariffs, energy services packages and a wide range of incentive and affinity deals. Customers have different needs and wants, and the expansion in product offerings has contributed to consumer welfare by giving customers choices in the way they receive and pay for their energy that did not exist prior to liberalisation.
In recent years, suppliers have also responded to consumer demand for greater certainty by offering a range of fixed or capped price tariffs and we now have around 1.6 million customers on fixed rate tariffs who are protected from price increases.
Summary
The GB energy market is the most competitive retail energy market in Europe. Increased customer choice and innovation in product range is a direct benefit of competition. Ofgem fails to recognise these points sufficiently in its consultation document. 34 “In 2008 we gave them a left hook to try to knock some sense into them and today we are giving them the right hook. If that doesn’t work they’re going to get another beating by the Competition Commission”. 22 March 2011. (A Buchanan) 35 British Gas as the former monopoly supplier in gas currently has a 42% gas market share, so a simple calculation demonstrates that an absolute minimum of 58% of gas customers must have switched at some point in time, even if British Gas had not won back a single customer since deregulation. Ev 102 Energy and Climate Change Committee: Evidence
Complexity of Tariff Information Despite finding no evidence of anti-competitive behaviour, Ofgem’s lead proposal in the review is the regulation of retail tariffs. This would limit the number of tariffs suppliers are able to offer, prohibit the linking of additional offers / discounts to tariffs and introduce a regulated (standardised) element to tariffs. This is justified by Ofgem on the basis that tariff complexity and the number of tariffs available at present causes consumer harm. We agree there are some improvements that could be made to improve the transparency of tariffs offered by suppliers (e.g. possibly simplifying the way in which tiers of tariffs are determined and the way discounts are applied). However, our feedback shows that consumers benefit significantly from having a range of tariffs available to them, from which they are able to choose the product that most suits their preferences and consumption level. This benefit would disappear were Ofgem to insist on a “one size fits all” regulatory policy. Consumers currently enjoy a wide-range of discounts and incentives (e.g. dual fuel discounts, discounted online offerings, social tariffs, Economy 7 rates and tariffs with affinity products). Under Ofgem’s proposals, suppliers would be prohibited from offering these incentives on their standard evergreen tariffs. Instead, Ofgem is suggesting that consumers would be forced to sign-up to fixed term contracts to take advantage of the range of discounts and offers currently available in the market. This approach is inconsistent with our customer research and in extreme could be against the interests of consumers. While some customers do find fixed rate tariffs appealing, contracts such as these are not appropriate for all customers as they can be perceived as inflexible and complex. For example, customers who do not place a high value on price stability may prefer to be supplied on a tariff—and would expect to enjoy the same range of discounts and offers available to them as are available today. We also have concerns that some customers may not be willing or able to take on the commitment of a fixed term contract (particularly some vulnerable customers). Recent evidence also suggests that fixed term contract markets are no guarantee of achieving the best outcome in terms of consumer welfare.36 Development of new tariff offerings is also a key enabler to the benefits which can be realised from innovative technologies. For example, much of the benefit from smart meters and smart grids will only be realised if the price consumers pay for their energy varies by time of use; as currently drafted, Ofgem’s proposals will destroy the public interest/economic business case which underpins the Government’s mandation of smart metering unless there is a wholesale switch to fixed term contracts. We have real concerns that restrictions on time of use, green tariffs and other structures which incentivise energy suppliers to help consumers reduce consumption may be detrimental to a number of our environmental initiatives, including Government plans to roll out the Green Deal. Furthermore, Ofgem’s proposals as they currently stand, are inconsistent with the Authority’s duty to contribute to the achievement of sustainable development. It is important that customers retain a reasonable degree of choice over their energy tariff, and we do not believe Ofgem has presented sufficient evidence of the harm that this product innovation causes. The idea that more new entrants will be attracted to the relatively low margin and volatile retail market, given how prescriptive the terms are on which they will compete, does not stand up—the proposals may well weaken competition rather than strengthen it. Ofgem’s arguments certainly do not justify the re-regulation of the retail tariff market. We also believe Ofgem has so far failed to consider a number of less extreme ways of addressing the issue of tariff complexity (such as encouraging suppliers to subscribe to an industry code that would promote good practice in tariff range and structuring). We would be happy to work with Ofgem, Consumer Focus, CAB and Which? on developing such a code.
Summary There is more that can be done to improve transparency of energy retail tariffs. However, the extensive regulation proposed by Ofgem is not proportionate to the size of the problem nor can we see how Ofgem’s proposals are in line with consumer preference or behaviour. We have real concerns that the proposals are also incompatible with the sustainability agenda, specifically reducing the benefits of smart meters. Ofgem’s proposals will actually be counterproductive, denying customers many of the benefits of competition they currently enjoy, and potentially undermining the scope for new entry.
Supplier Conduct The 2008 Ofgem Probe made a range of recommendations to improve supplier conduct across a number of areas. These included new standards for bills and statements, debt blocking, field sales, financial information reporting, regulatory reporting requirements and new micro business rules. We have been very robust in ensuring that we have implemented solutions which are compliant with both the letter and the spirit of these rule changes. We would have preferred for these changes to have had time to 36 Billmonitor research on mobile contracts showed 76% of consumers were on the “wrong contract” wasting an average of £194.71 each per year. Energy and Climate Change Committee: Evidence Ev 103
embed and mature before further changes were made, as this level of constant change runs the risk of further undermining consumer trust. Our commitment to providing information to our customers that is simple, straightforward and easy to understand has been recognised by consumer groups. Both Which? and Consumer Focus have singled us out for the quality and clarity of information on our bills and annual statements. In addition, doorstep comparisons have become much simpler and more transparent for consumers with the introduction of Hand Held Terminals for all our field sales advisors. We are also seeing an increasing number of customers choosing to receive their bills online. Reaching these standards has been costly for us and has involved extensive investment in new systems, processes and training. We therefore believe that any further changes should focus on rolling out our best practice model across the sector, in order to ensure that all customers benefit. We do accept the need for increased billing simplicity. However, over time, the number of regulatory/ mandated information requirements has increased to such an extent, that the majority of the bill now contains information which customers are neither interested in nor understand, such as calorific value conversions. This restricts our ability to make changes to the format that would be more accessible to consumers without increasing the number of pages. Working with DECC, Centrica is supporting a number of billing initiatives to test the Government’s proposals for further information on bills (e.g. comparative consumption information). Ofgem should not force further changes to bills until the changes required by DECC have been tested and implemented.
Summary Although British Gas has met the letter and spirit of the 2008 Probe remedies, we agree with Ofgem that take-up across the industry has been patchy. We support a consistency of application of the regulations by all suppliers in this area to maximise benefits to consumers.
Pricing and Hedging When Ofgem announced it was to investigate the retail supply market following recent price rises, we supported Ofgem in calling for greater transparency in financial reporting in the energy sector. We believe that being clearer about the profits we make, and the way we set our prices will help to build the trust of customers. We pride ourselves on being the most transparent energy supplier and we have provided full disclosure of profits and costs, both upstream and downstream, in our audited accounts since privatisation. We have also ensured that the segmental accounts for the retail business which we supply to Ofgem are reconciled to our Group Annual Reports. Profit measures in Annual Reports are generally corrected for exceptional items to highlight underlying business performance. They are also the profit figures that are most likely to be recognised by industry stakeholders—unlike the reported profit in the Statutory Accounts. While we do not have direct visibility of the hedging strategies adopted by our competitors, we are not aware of any evidence that these strategies are converging over time. To the extent that Ofgem believes this is the case, we strongly disagree with any assertion that this could reflect a lack of competition among suppliers. Ofgem itself has found no evidence of any coordinated behaviour in the market. However, Ofgem’s own actions may potentially increase the risk of convergence in hedging strategies—particularly the publication of the quarterly wholesale/retail price link publication, which may create a default “benchmark” strategy for suppliers to follow. Ofgem proposals for a single evergreen tariff would tend to exacerbate this risk, by increasing the downside of picking the “wrong” hedging strategy. We do not agree with Ofgem’s assertion that there is any evidence that suppliers’ retail prices tend to rise in response to increases in wholesale costs more quickly than they fall when wholesale costs fall. We have submitted confidential analysis to Ofgem clearly showing this is not the case. We also note that the results of Ofgem’s own analysis are not robust—being sensitive to the analytical technique used, as well as (crucially) assumptions on how suppliers purchase their energy in advance.
Summary Ofgem’s continued use of the quarterly wholesale/retail report to comment on supplier profitability is misleading and damaging to consumer trust. Instead, segmental accounts are the clearest and most objective measure of supplier profitability. Ofgem’s guidelines should be tightened to ensure these are prepared on a “level playing field”. In addition, we dispute Ofgem’s assertion that retail prices rise quickly when wholesale prices rise, but fall slowly when wholesale prices fall. Ofgem’s own analysis shows that its conclusions are sensitive to assumptions on hedging policy and analytical method. We have shared confidential data with Ofgem that shows no such relationship exists.
Liquidity Wholesale markets work well and liquidity is sufficient to sustain effective competition in generation and supply. The emphasis put by Ofgem on increased liquidity to further stimulate retail competition seems to us Ev 104 Energy and Climate Change Committee: Evidence
misplaced, given that new entry is unlikely to be commercially attractive at current levels of industry profitability. Ofgem itself recognises that retail profitability has been relatively low over a number of years.37 For small suppliers, the biggest issue they face is not so much liquidity but the capital requirements for credit risk. The margin calls required to manage volatile power prices will tend to be very large relative to the operating margins they can expect to earn. Nonetheless, we think a generator auction could enhance market liquidity provided it does not force generators to sell at uneconomic prices or credit terms. It must also be a requirement that all large generators participate in it, not just the six big integrated players, since generators such as Drax and International Power are just as important in providing liquidity as other market players. We do not think Ofgem has made the case for mandating market-making. Power exchanges have incentives to appoint market-makers where their presence would help to promote liquidity. So Ofgem should seek to better understand the demand for new market- makers and the costs of providing the service, rather than proposing a blanket obligation for the six integrated players. This proposal also risks triggering a need for companies to comply with the Markets in Financial Instruments Directive (MiFID) by virtue of being market-makers. The industry already faces the threat of regulation designed for the banking sector applying to the energy commodity market, reducing the funds available for investment, as companies adapt to more demanding cash and collateral requirements.
Summary Ofgem’s proposal to mandate an auction for power generators could enhance power market liquidity. Ofgem however needs to extend the requirement to cover all large generators as part of ensuring the mandatory auction is effectively designed. May 2011
Supplementary memorandum submitted by Centrica Please find below our response to the Committee’s follow-up questions:
Ofgem has estimated that its proposal to restrict the number of tariffs for standard evergreen products would impact on 75% of all customers currently on those products. What would be the logistical challenges involved in moving this number of customers over to one new “standard” tariff? Centrica response: The biggest change will be to billing systems but will also affect online, smart, billing formats, call centre systems and prepayment third party value chain. We will also need to engage in extensive customer communication and education. A further logistical challenge will be if significant numbers of customers are forced onto fixed term contracts which will create increased work for both customers and increased cost for the suppliers each time the contracts expire.
The subject of small and micro businesses was raised during the session. Please could you provide more information on the contact you have had with the Federation of Small Businesses and the Chamber of Commerce to discuss issues around energy supply and the possible need for greater protection of micro businesses. If there has been no contact, please confirm this. Centrica response: We welcome regular contact with FSB and Chamber of Commerce and have offered briefings. However, contact to date has been limited.
On the subject of sales staff, please could you provide details of the basic salaries and commission structure for doorstep sales staff and the areas targeted by doorstep sales? Centrica response: Our basic salary for field sales staff ranges from £11,240 to £22,000 (this is for a full time adviser, part timers are pro-rated) depending on length of service and experience. In addition, we offer commission on sales. This is based on the volumes of energy products sold (just gas and electricity) and ranges from £8.50 to £37.50. The areas targeted by our field sales staff represent a mix of customers across our different payment types i.e. direct debit, pre payment and cash cheque. We recently issued a note on the back of the SSE prosecution reminding advisers not to knock in a No Cold Calling Zones (NCCZs), and we are currently working to remove all NCCZs from all our walk lists.
How large was your generation business, how large was your supply business, what volume of electricity sales did you make and what volume of electricity purchases did you make in terawatt hours in 2009Ð10? The following data applied to the period 1 January 2010 to 31 December 2010 which is the latest full year data available which we felt was a more accurate picture of the current situation than 2009–10: 37 “Looking at the industry average over a number of years, the average retail energy margin has been below that earned in other retail sectors, and this result holds after making adjustments for key differences between sectors”. Ofgem Retail Market Review, March 2010, Appendix 9, p.47. Energy and Climate Change Committee: Evidence Ev 105
Amount generated 33 TWh Amount electricity supplied to end customers 49 TWh Electricity sold—in traded markets 44 TWh Electricity purchased—in traded markets 48 TWh
This shows that the 48 and 44 TWh of wholesale buying and selling reflect our activity in the traded market, providing liquidity. So 92 TWh of trading—compared to the 16 TWh of purchases we would simply make if all we did was buy to cover the rest of our customer position.
Further supplementary memorandum submitted by Centrica
Response to Questions Following Evidence Session on 28 June 2011
Q. Alistair Buchanan claimed that 70% of prepayment customers were won on the doorstep. What percentage of your prepayment customers were won on the doorstep? What percentage of your customers won on the doorstep are pre-payment customers?
A. Field sales accounts for around 10.5% of new PPM customer acquisitions (post leakage) per month. This percentage has been relatively consistent over the past year moving within a ranging from 10–13% month on month. All Field Sales energy sales are either electronically or via a phone call passed to a call centre and an agent then calls the customer back within a few minutes to verify the sale.
Q. What percentage of attempted sales lead to nil returns due to your salesperson being unable to find the customer a better deal?
A.52.8% of quotations produced on our hand held electronic device are declined by customers during the period 1 January 2011 to 31 May 2011.
Q. How many tariffs do you have?
A. British Gas currently has five individual tariffs available on its website. We have two online tariffs, one of which is available with EnergySmart; one standard tariff with a variety of payment options, including prepayment; one green tariff; and a fixed tariff option providing price certainty. We then have a range of discounts depending on payment method and product holding. Our website allows customers to filter tariffs by different options e.g. to find the greenest or cheapest options. See http://www.britishgas.co.uk/products-and- services/energy/our-tariffs.html
Q. How many customer complaints do you receive a day?
A. British Gas publishes an Annual Consumer Complaint Report which includes the number of complaints received from domestic customers in the previous year. This can be viewed at https://www.britishgas.co.uk/ pdf/cust_compl_online.pdf
Between 1 October 2009 and 30 September 2010, we received 149,728 complaints from domestic energy customers, which could not be resolved on the same day or the next working day after the complaint was received. This is a 27% reduction on the number outstanding for the same period last year. Encouragingly, the number of customers taking complaints to the Ombudsman is now 37% less than our residential market share (the percentage of domestic customers we supply across the UK compared to other suppliers). The next report will be published in October 2011. (Note this is a more accurate reflection of complaint levels than daily rates which are subject to variation)
Q. Please provide the Committee with details of when Centrica finally remove all No Cold Calling Zones (NCCZs) from its walk lists
A large number of NCCZs have already been removed from our walk lists; for example, when they are notified to us directly (or via the ERA) by Local Authorities, Trading Standards, customers themselves who have formed one etc. with the remainder (which have recently been notified to us) being removed by the 12 July 2011. July 2011 Ev 106 Energy and Climate Change Committee: Evidence
Memorandum submitted by Drax Power Liquidity 1. There are two separate liquidity related issues that must be addressed in the wholesale electricity market: (a) Contestability: the inability of small suppliers to gain access to particular traded products, shapes of volume (ie the profile of demand over a period of time) and small clip sizes (ie the minimum quantity traded per transaction), which small suppliers require to manage their risk exposure; and (b) Medium-term liquidity: a lack of liquidity in standard products in the GB wholesale electricity market, particularly two to five years forward, which independent generators (ie generators that are not vertically integrated with a sizable supply business) require to hedge their investment and to signal investment in new capacity. 2. With regards to contestability, it is widely recognised that market platforms/standard contracts may require modification to provide small suppliers with access to particular products, clip sizes and shape. The development of a Mandatory Market Maker,38 such as that proposed by Ofgem,39 may be one solution to ensuring the provision of such products. 3. However, it should be noted that significant (arguably more important) trading issues must be addressed if such a proposal is to prove effective, such as credit and collateral arrangements and the cost of administering and transacting via a Mandatory Market Maker facility. It is widely acknowledged that these issues remain a greater barrier to market entry for small suppliers than the availability of shape and small clip sizes. 4. Small and independent market participants (both suppliers and generators) do not have parent companies with large balance sheets with which to provide the same level of security as, say, large vertically integrated companies. Nor do such companies have positions on both sides of the market (generation and retail) with which to net collateral requirements. 5. Small suppliers that attended Ofgem’s Liquidity Roundtable Event in November 2010 signalled that addressing the wholesale electricity market’s lack of liquidity may be the most effective way to resolve issues surrounding contestability. A focus on increasing liquidity across the forward power curve is crucial if new entry is to be encouraged from both energy and non-energy sector traders. 6. Non-energy sector traders, such as financial institutions that take more speculative positions and, in turn, provide greater market liquidity, may be better placed to provide market making facilities than energy companies. Banks and other financial institutions are attracted to markets which display high levels of liquidity, open interest and a degree of volatility. Without a robust wholesale market where electricity suppliers and generators create sufficient liquidity to support the entry and exit of trading parties, it is unlikely that the UK power market will benefit from a significant influx of new entrants and financial institutions. 7. Whilst there is a wide range of products currently available in the GB wholesale market, trades are concentrated in a few products and further concentrated in short-term products, with a very limited volume of medium-term trades being transacted (ie two to five years forward). 8. Low liquidity and limited term continue to have a detrimental effect on the level of new investment by new entrants and independent generators. This, in turn, is damaging to the development of price signals, hence investor confidence in the GB wholesale electricity market is reduced, jeopardising the provision of adequate future generation capacity. 9. To date, “market-led” initiatives have focused on the creation of new platforms, rather than addressing the causes of low liquidity. A prime example is the N2EX auction platform that has failed to establish alternative market tools for trading power, instead delivering services that are already available to market participants, further fragmenting liquidity. 10. Over the last twelve months, the N2EX auction platform has failed to increase market liquidity, ie deliver new traded volume to market. A major shortfall of the N2EX auction platform is the cost to participate. High collateral requirements and transaction costs have resulted in the effective exclusion of a number of independent market participants. 11. It is questionable how a Mandatory Auction, such as that proposed by Ofgem,40 would differ in its approach from the N2EX auction platform. Unless the same credit, collateral and transaction cost issues are adequately addressed, the platform is unlikely to delivery an increase in market traded volume to those companies that require it most. 12. Independent market participants will continue to trade via the most cost effective route to market. The danger of mandating a particular route to market is that certain parties may be unable to participate in the mandated platform if the cost to participate is not adequately addressed, effectively excluding them from the traded volume. 38 A market maker is an organisation that commits to posting continuous buy and sell prices to help support a liquid traded market. Ofgem has indicated that a Mandatory Market Maker could be, in effect, obligated to provide a set catalogue of products. 39 Retail Market Review, Proposal 2, Ofgem, April 2011. 40 See Footnote 1. Energy and Climate Change Committee: Evidence Ev 107
13. It must be recognised that existing trading mechanisms are not to blame for the low level of market liquidity two to five years forward. A liquid wholesale market can support multiple trading platforms, which in turn will create competition and drive down transaction costs. The real issue is the way in which market participants interact with the traded market and the effects of such interactions on market liquidity and price signals. 14. Independent market participants rely on the ability to trade bilaterally via the brokered Over The Counter (OTC) market or other market platforms (such as power exchanges and auctions) to hedge their investments. Vertically integrated participants have a natural hedge for a significant proportion of their generation investments in the form of a large domestic customer base. 15. The vertically integrated companies (the “Big Six”)41 account for 99.5% of the domestic retail sector. It is this largely “sticky”42 sector of the retail market that provides a natural hedge and renders these companies less reliant on wholesale market liquidity. 16. The key to improving liquidity across a range of products and across the forward curve is to ensure that the six large domestic supply companies source a significantly greater volume of their demand requirement from the GB wholesale electricity market. 17. This could be achieved by introducing self-supply restrictions on the Big Six, which is not a new concept in the GB electricity market. By forcing more trades to take place via the wholesale market, rather than via internal trades/transfers, the six large domestic supply companies would be required to source their needs from the wholesale market on the same basis (price and terms of sale) as their independent counterparts. 18. Such a move would increase the total volume delivered to the wholesale market, allow efficient price discovery, ensure price/investment signals are visible to all parties (existing and potential new entrants) and, ultimately, promote greater competition in both the retail and wholesale markets. The restrictions do not have to be permanent and could contain sunset clauses that relax the restrictions should overall liquidity significantly improve. 19. An alternative approach could be to mandate a percentage of demand that each of the six large domestic suppliers must source from the traded market across a five year curve (similar to the hedging strategies of independent generators). The curve could mandate 25% of expecting demand to be sourced in Year+1 through to 5% in Year+5. This approach would ensure adequate market liquidity across the short- and medium-term market, providing independent participants with adequate volume with which to hedge, along with the development of investment signals over investment timescales. 20. Each of the above suggestions could be combined with the introduction of a market maker that would ensure small independent suppliers and generators could gain access to a range of products, clip sizes, shapes and tenure that they require in order to invest, compete and grow organically. 21. However, it may be less onerous on the regulator, and more suitable for independent participants and new entrants, for the regulator to place an obligation on the six large domestic retailers to trade a greater percentage of their demand via existing market arrangements and avoid mandating a specific route to market (such as via a Mandatory Auction or Mandatory Market Maker). 22. The obligation to trade, rather than offer, volume would allow the large vertically integrated companies the freedom to decide on the most efficient and cost effective way to meet their obligations, whilst ensuring that they consider the needs of independent market participants. 23. Such trades could be transacted via existing market platforms, the brokered OTC market or new, innovative solutions developed by market participants (this could potentially take the form of a market maker). 24. The action of trading via the wholesale market, rather than internalising the transfer of volume between vertically integrated generation and supply businesses, would result in a more efficient market and promote greater competition. This will ultimately lead to lower costs to the end consumer. 25. Accountability is also crucial if the regulator is to increase investor confidence. An obligation to demonstrate to the regulator that such trades have been transacted would provide greater scope for monitoring. The regulator’s role in monitoring participants’ transactions and behaviour could be greatly enhanced by the use of trade repositories under the new European REMIT proposals.43 26. Overall, a successful resolution of liquidity issues for small / independent suppliers and generators should result in the following: (a) Large domestic suppliers increasing the volume of generation they source via the GB wholesale electricity market; (b) The volume of power traded across the curve increasing, particularly over the medium-term (ie two to five years forward), resulting in efficient market price formation; 41 RWE, E.ON, EDF, Centrica, SSE and ScottishPower. 42 “Sticky” customers being those that do not switch supplier on a regular basis, if at all, as identified in Ofgem’s retail Market Review consultation. 43 REMIT proposes that all transacted trades are reported and recorded in a database (trade repository) accessible by the market regulator. Ev 108 Energy and Climate Change Committee: Evidence
(c) Small suppliers being able to satisfy their trading requirements on a similar basis to their larger counterparts, with access to a wide range of products and clip sizes; (d) Competition between the six large supply companies noticeably increasing, with such businesses competing for market share; and (e) Optimisation of trading and investment taking place via the wider GB wholesale electricity market, rather than via six “mini-markets” held within vertically integrated company structures. 27. The five goals listed above would ensure efficient market price formation, deliver investment signals that are visible to all market participants (including new entrants), deliver the most efficient and cost effective new investment, promote greater competition and, in turn, drive down prices to end consumers. 28. If the regulator believes that they do not have the required powers to appropriately address these liquidity concerns, then it may be more appropriate for a Competition Commission referral to determine the most appropriate solution.
Non-Domestic Supply 29. Proposal 4 in the Retail Market Review consultation concerns three areas of the non-domestic retail market (i.e. supply to business customers, such as Small and Medium Enterprises (SMEs) and Industrial & Commercial users (I&C)). Ofgem have three main areas of concern that they wish to address. 30. The first issue surrounds the enforcement of Standard Licence Condition 7A (SLC 7A), which relates to the protection of micro-business customers. Ofgem is concerned that a number of non-domestic suppliers have not performed satisfactorily in protecting micro-business customers since the introduction of the licence condition.44 31. Ofgem intend to require suppliers to comply with the licence condition more rigorously and aim to contact suppliers to highlight areas that require improvement. Ofgem will also consider extending the protection beyond micro-business customers to all non-domestic customers. Overall this proposal appears reasonable. 32. The second issue surrounds the use of the “objections” process, which effectively enables a supplier to block the ability of a customer to switch to a new supplier. When used correctly, this is an important tool that allows suppliers to flag issues such as a customer attempting to move part-way through a contract term, a customer having outstanding debt on their account, etc. 33. However, the regulator is concerned over the volume of objections raised by suppliers, particularly the level of objections that are raised and subsequently withdrawn. Ofgem believes that the process is being used to frustrate the switching process. The document proposes that the regulator monitors the use of objections more closely and investigates suppliers that are potentially abusing the system. This proposal also appears reasonable. 34. The third issue concerns the practices of Third Party Intermediaries (TPIs). TPIs effectively broker supply contracts between non-domestic suppliers and business customers. TPIs make a profit by charging suppliers for brokering a contract, although it should be noted that the initial relationship is between the TPI and the customer, not the TPI and the supplier. 35. Ofgem is concerned that TPIs are unregulated and the relationships between suppliers and TPIs (i.e. the commission TPIs earn) are not transparent. There have also been reports of TPIs mis-selling supply deals. Ofgem proposes that (a) suppliers are best placed to regulate the practices of TPIs, (b) the commission paid by suppliers should be more transparent and (c) measures are taken to expose TPIs that mis-sell. 36. Whilst measures to improve transparency of costs and to expose those TPIs that mis-sell seem sensible, the proposal to impose a licence condition on suppliers to regulate TPIs is wholly unreasonable. Suppliers are not best placed, nor do they have the required expertise and regulatory powers, to regulate market entities; that is the role of a market regulator. If the regulator is unable to perform this task, then the issue should be referred to the Competition Commission or the Office of Fair Trading (OFT) for further consideration.
Financial Reporting 37. Proposal 5 in the Retail Market Review consultation concerns the transparency of financial accounting for vertically integrated companies. Ofgem are concerned that transparency is frustrated by company specific policies on transfer pricing.45 38. Ofgem introduced segmental accounting statements for vertically integrated generation and supply businesses as an outcome of the Energy Supply Probe. Whilst Ofgem believe this measure has improved transparency (although independent market participants may question this statement), they recognise that there is room for substantial improvement to allow greater comparison of costs between vertically integrated companies. 44 The licence condition resulted from Ofgem’s Energy Supply Probe, which began with a Call for Evidence in March 2008. 45 The cost associated with / value assigned to the transfer of energy between vertically integrated generation and supply businesses. Energy and Climate Change Committee: Evidence Ev 109
39. Ofgem have proposed the use of a leading firm of accountants to review transfer pricing and accounting practices; the accountants will report on the impact of these practices on reported profits and suggest ways of improving transparency.
40. To be successful, it will be crucial that the accountants understand the information that independent market participants and new entrants require from such reporting. It is essential that such parties are confident that the transfers of volume between vertically integrated entities occur on the same basis as trades within the wholesale market (ie on the same terms, at the prevailing market price, etc).
41. There should be no cross-subsidy between vertically integrated entities; cross-subsidies harm market competition and have an adverse affect on the costs faced by consumers. As discussed earlier in this document, the most efficient solution would be to prohibit self-supply between vertically integrated generation and supply business, thereby ensuring all trades take place within the traded wholesale market.
42. Preventing self-supply would provide existing market participants and new entrants with the confidence that all trades are transacted on similar terms and conditions and are valued at market prices. This solution would ensure efficient market price formation, deliver transparent investment signals, promote greater competition and, ultimately, drive down prices to end consumers. May 2011
Memorandum submitted by ScottishPower
Introduction
1. ScottishPower welcomes the opportunity that Ofgem’s Retail Market Review (RMR) has provided to check how competition is working for consumers and examine the scope for improvements. We continue to believe that competition is the most effective way to meet the needs of customers, drive innovation and secure the returns needed to drive investment. Indeed, a well-functioning competitive market can play a crucial role in attracting capital, as investors understand the process of price formation in such a market and that efficient investment will be able to gain a fair return. Within this competitive market, vertical integration has provided important efficiencies in the management of risk that have reduced costs for consumers.
2. It is particularly important that the market works well for customers and is contestable. As a customer facing business, if our customers are not satisfied with the way the market works, we are not satisfied. And we understand how the challenge of new ideas can help stimulate and develop our business. It is for this reason that last year we unilaterally launched our “Six Commitments” aimed at making it easier for new entrant suppliers and generators to work with us in the market.
3. Considerable success has of course already been achieved with the GB energy markets. As Ofgem observed in the 2008 Energy Supply Probe—Initial Findings Report (“the 2008 Probe”): “The level of consumer participation in GB energy supply markets is amongst the highest of any retail energy market throughout the world. The annual switching rate of 18 per cent also compares well with other retail services in the UK, such as fixed and mobile telecommunication, insurance products, mortgages and personal current accounts. Almost all consumers (96 per cent) know that they can change energy supplier and most (70 per cent) feel confident that they know how to do this”.
4. Furthermore, the competitive UK market has driven a level of efficiency which has ensured that prices have consistently scored well in comparisons with other EU Member States. Of customers that have not switched supplier, very strong majorities say that this is because they are happy with their current supplier and that they know they can switch if they want to. Following the 2008 Probe, Ofgem undertook, with the support and co-operation of the suppliers, a major programme of reform designed to make competition work better for consumers. RMR now provides the opportunity to assess where there are gaps and where further improvements might be made.
5. The RMR sets out five initial proposals indicating the types of intervention that Ofgem considers might be necessary to ensure that the energy retail market works as effectively as possible in the interests of consumers. It recognises that the proposals are “high level and preliminary” and will be subject to detailed evaluation and discussion (including full impact assessments) as part of a full consultation process. This is very important since it is crucial to avoid unintended consequences which are detrimental to the interests of consumers—or a group of consumers, such as the vulnerable—when considering possible new interventions in the energy retail market. It is also essential to ensure that any new interventions would work together with the Government’s proposals under the Electricity Market Reform (EMR) so as to deliver the huge investment needed to achieve a low carbon energy system which delivers security of supply at a price that the economy can afford.
6. We are in the process of analysing these important proposals, but our initial observations are as follows. Ev 110 Energy and Climate Change Committee: Evidence
Proposal 1 Simplification of tariff structures 7. This proposal is intended to improve tariff comparability so as to encourage switching by customers, especially those who are less active in the market. Steps have already been taken to do this by simplifying energy bills and improving the information available to customers, including through annual statements. 8. We agree that active consumers are likely to get a better deal than those that are passive. Indeed, this process is an essential element of competition as some reward for shopping around is needed to encourage consumers to be active in the first place. The benefits for the more active customers then spread to others as suppliers seek to defend their market share. We at ScottishPower have encouraged our customers to be active through a succession of campaigns—most recently “Perfect Match”, where we have invited our customers to contact us to check that they are on the tariff and service that best meets their needs. By engaging customers in this way, we enable them to form a positive view of ScottishPower. 9. We think that more work can and should be done to improve ease of price comparability. It is clear from the consumer feedback that the industry is yet to find the ideal way to describe its products that is clear and easily understood and we are keen to engage with Ofgem on its recent initial thinking in this area. We are currently analysing Ofgem’s specific tariff simplification proposal and its possible implications for the dynamics of competition. We are also looking at alternative proposals, trying to find a better balance between simplification and restriction of consumer choice. Our overriding concern is to ensure that any new intervention avoids unintended consequences that might be detrimental to competition. We are also very focussed on avoiding the risk of anything that might undermine the important work we currently do promoting social tariffs for vulnerable customers and to reduce fuel poverty. Finally, any measures need to avoid prejudicing the innovation that the industry’s major investment in smart metering is intended to promote.
Proposal 2 Improving wholesale market liquidity 10. It is important to distinguish between measures intended to improve contestability (ie the ability of companies to enter the market) and those intended to improve liquidity (i.e. the total amount of power traded in the wholesale market). Ofgem has in fact made one specific proposal in each area: first, addressing contestability, a new licence condition to ensure the establishment of Mandatory Market Making (MMM) arrangements; and second, addressing liquidity, a new licence condition that would require the Big 6 to make available between 10% and 20% of their power generation into the market through a Mandatory Auction (MA). We are considering these proposals and their implications for operation of the current market. Our initial response to the MMM proposal is to note that this could build on the kind of steps we have already taken under our Six Commitments initiative, though we would need to consider more fully the precise terms of any arrangements put forward. 11. In the case of the MA, it is less clear that there is a liquidity problem. The UK physical market trades several times generation volumes in any event and we are unsure whether the significant intervention in the existing market arrangements that the MA constitutes is worthwhile. If the impetus is around getting a clearer price reference to support Electricity Market Reform (EMR), then it will be important to establish whether the MA would provide the right kind of reference information or whether an alternative approach would be more efficient. It would not be sensible, and risks fragmenting liquidity, to have both MA and a separate reference price initiative under EMR. If an MA proposal is taken forward, issues of design, governance and the terms covering participation will be absolutely crucial. In this context, we note that Ofgem plans to allow the Big 6 suppliers to buy as well as sell in any such auction and we consider that this balance would be vital to establishing a competitive auction process with efficient price setting.
Proposals 3 and 4 Strengthening existing measures to increase consumer engagement in the domestic and non-domestic sector 12. Ofgem is currently reviewing the operation of the changes it brought in under the 2008 Probe. In particular, it is considering whether to strengthen existing licence conditions to ensure that domestic customers receive clear and transparent information, possibly requiring more standardised information on bills and annual statements. We are committed to making our customer billing and other information as user-friendly as possible. We very much recognise the importance of core standards in this area though we would also note the importance of allowing for some flexibility to allow suppliers to innovate and compete in their customer service. 13. The RMR also invites views on the possibility of incorporating the existing Standards of Conduct drawn up by Ofgem into the licence conditions of suppliers. We welcome the introduction by Ofgem of these general Standards of Conduct—they provide an important set of core principles that should guide the conduct of all suppliers. They are, however, a set of high level general principles rather than an attempt to set out specific rules. We think that to move from a rules-based framework to a principles-based approach is an option which deserves further study. However, it would have wider consequences including the need to have clearer appeal routes in the event of enforcement action. Energy and Climate Change Committee: Evidence Ev 111
Proposal 5
Improving further reporting transparency
14. Ofgem required reporting of separate financial information for supply and generation under the 2008 Probe. The RMR now proposes a further review to consider possible ways to improve reporting in future years. We are currently engaging with Ofgem on incremental improvements to transparency and cross-company comparability. As Ofgem has noted, there is a delicate balance to be struck between additional transparency and avoiding disclosing too much commercial data about each supplier to competitors. We are happy to work with Ofgem to help find an appropriate way forward here. May 2011
Supplementary memorandum submitted by ScottishPower
Following the evidence session on 11 May, this note provides further information in response to the questions raised by the Committee in its consideration of Ofgem’s Retail Market Review (“RMR”). Our answers to the questions raised are as follows.
Q1. Logistical challenges involved in any potential transfer of customers to a single “standard” tariff
Without further clarity on the final proposal to transfer customers to a “standard” tariff, it is difficult to fully understand the challenges of moving customers to such a tariff. Nonetheless, we envisage that there would be significant practical and logistical issues with any such migration.
Based on current tariff numbers, our initial view is that the move to a single “standard” tariff would affect at least 60% of our customer base, that is, some 3 million customer services. To transfer this number of customers on to a new tariff at one time would in itself present significant logistical challenges in terms of customer communications and technical issues. However, there would be a particular challenge arising from this process in that we estimate that depending on the price of the uniform product, around half of these customers could be at risk of losing out by being moved off their existing product. Many others might be displeased to be moved to a tariff different from the one they had chosen. These circumstances would present us with difficult issues in terms of our relations with our customers.
This process of customer handling would also place significant pressure on our customer engagement staff in our contact centres. Indeed, the volume of customer interaction could well mean that we would have to recruit and train additional staff on temporary contracts. Since this would be an industry-wide move, this recruitment challenge would be faced by all of the energy companies.
Also, it is worth noting that a number of the energy companies, including ScottishPower, will be moving their billing systems on to new platforms in the near future. Any migration of such a large number of customers on to a new tariff at the same as implementing this change programme could raise further operational and technology issues. That said, we consider that the greatest challenge of all would be simply explaining to customers why this change was happening.
Q2. Contact with small business organisations
We are currently exploring through the Energy Retailers Association ways in which stakeholder organisations representing small and micro-businesses, such as the Federation of Small Businesses and the British Chambers of Commerce, might engage with ScottishPower and other energy companies. One option might be to convene a regular forum in which the representatives of the various energy companies come together with representatives from small business organisations. We are very happy to engage with such organisations in whatever way they consider would best help them in representing the views of their members.
Q3. Sales staff
ScottishPower directly employs around 220 sales advisers working in the central belt of Scotland from East to West and neighbouring areas in both Scotland and Northern England. Members of this sales team are paid a basic salary of over £11,000 and earn commission on top of this based on a tiered structure which recognises sales of gas and electricity and other products such as gas boiler breakdown cover. Last year, average annual earnings for this sales force taking account of both basic salary and commission payments were some £31,000. ScottishPower also uses the services of Third Party Sales Agencies to provide teams of sales advisers to support working in these and other areas such as the North West of England and North Wales. Terms are commercially agreed with each Agency which in turn has commercially agreed terms with the individual advisers making up their teams. Ev 112 Energy and Climate Change Committee: Evidence
Q4. Size of generation business and volumes traded/ Size of retail supply business Generation ScottishPower generated 26 Terawatt hours of electricity in 2009–10 and during the same period traded 114 Terawatt hours of electricity. Thus, the volume traded was over four times the amount generated. 23 Terawatt hours of electricity were sold to final customers.
Retail Domestic customers Total domestic customer service numbers46 as at 31 December 2009 5,046,792 Total domestic customer service numbers as at 31 December 2010 5,033,570 Non-domestic customers Total non-domestic customer service numbers as at 31 December 2009 202,012 Total non-domestic customer service numbers as at 31 December 2010 200,740 April 2011
Further supplementary memorandum submitted by ScottishPower Q1. Your press notice stated that the price increases would affect approximately 2.4 million households across Britain—what percentage of your customers does this represent? 77% of our domestic households (representing 75% of services47) will be affected by the price increase. Conversely, 23% of households (representing 25% of services) are on a fixed or capped price product, which means that they are priced on a different basis and will be protected from price increases until the end of the product period. In addition, the 70,000 households currently supplied on our Fresh Start tariff will continue to benefit from substantial savings against our standard prices.
Q2. How many times have you increased your prices in the last four years? Since 2007, we have increased our standard domestic prices on four occasions, including the one announced for August 2011. During the same period, we have also decreased our standard domestic prices on three occasions. The table below shows the general price changes announced by ScottishPower since 2007. Date Overall Change 15 June 2007 Decrease 2 February 2008 Increase 1 September 2008 Increase 31 March 2009 Decrease 31 March 2010 Gas Decrease (Some regional electricity increases and decreases for cost reflectivity) 25 November 2010 Increase (Further cost reflectivity changes—some regions decreased one fuel) 1 August 2011 Increase
Q3. Why is it necessary to increase your prices by so much this year? Our pricing has been under pressure for two reasons. The first is that our retail business has been making poor returns, especially in relation to domestic customers, and this has contributed to results for the first quarter of 2011 for the generation, wholesale and retail segment that were 54% down on the prior year. This level of profitability is insufficient to sustain our investment programme. The second reason was that our costs have risen as a result of market changes and increases in non-energy costs. Since our last price change in November 2010, energy markets have risen as a result of a number of factors including the “Arab Spring” of political instability and pro-democracy movements in a number of Middle Eastern countries, and the temporary and permanent decisions to close nuclear power reactors principally in Japan and Germany as a result of the Fukushima accident. These changes have raised oil prices and gas prices and increased the demand for electricity generated from these fuels. They have also increased carbon dioxide permit prices. 46 A “customer service” is the supply of gas or electricity to a customer. A dual fuel customer is therefore scored as two services. 47 A “service” is gas or electricity, as the case may be. A dual fuel customer therefore takes 2 services. Energy and Climate Change Committee: Evidence Ev 113
The result of this has been a steep increase in wholesale gas prices, especially since March 2011. Together with higher CO2 permit prices, these have in turn influenced electricity prices. Energy being delivered from April to July already includes an increasing element of these costs, which we have had to absorb.
Energy price movements typically last several months. Accordingly, it is helpful to look at how the prices for deliveries in the period July 2011 to December 2011 have risen between November 2010, when we last raised our prices, and now. The result is a rise of 29% for gas and 21% for electricity.
In addition, there are a number of non-energy costs as set out in the attached tables: Non-Energy Costs—Electricity 2010 2011 Transmission & distribution charges £88 £99 Renewables Obligation £13 £15 CERT / CESP (DECC estimates) £24 £30 FITs £0 £1 Fuel Poverty £3 £5 Total £128 £150
Non-Energy Costs—Gas 2010 2011 Transportation £144 £157 CERT / CESP (DECC estimates) £24 £30 FITs £0 £1 Fuel Poverty £3 £5 Total £171 £193
The changes in these costs between 2010 and 2011 amount to an extra £22 (4%) on a typical gas bill, and £22 (5%) on a typical electricity bill.
The combination of the changes in wholesale costs and non-energy costs, which will apply to other suppliers as well, meant that a substantial increase in our pricing was inevitable.
Q4. What percentage increase or decrease have your net margins on gas and electricity supply and generation for the domestic sector seen in the last four years?
We only have segmental statements for the years 2009 and (shortly to be published) 2010. In order to provide a longer series, we have looked at the statutory accounts of the retail and generation businesses. This omits the specific adjustments which the segmental accounts make to give a more accurate and comparable view. We do not have comparable data for 2007 because of the takeover by Iberdrola that year.
On this basis, retail and generation net margins (domestic plus non-domestic) increased by 14% between 2008 and 2009, followed by a fall of 21% from 2009 to 201048. The overall movement from 2008 to 2010 is a fall of 10%.
Looking at Domestic Retail net margins, the tables below clearly indicate a peak in retail margin of only £9/service in 2009, which has dropped significantly in 2010. This is further demonstrated with net margin/ revenue falling from 1.7% in 2009 to -0.2% in 2010. Net margin (£m) 9 months ending Dec 2010 2007 2008 2009 (draft) Domestic not available 22 46 –4 Non Domestic not available 33 96 85 Total 98 55 142 81
9 months Net margin per ending Dec 2010 service (£) 2007 2008 2009 (draft) Domestic not available £4.29 £9.23 -£0.90 9 months Net margin / Revenue ending Dec 2010 (%) 2007 2008 2009 (draft) Domestic not available 0.9% 1.7% -0.2%
48 2010 figures are still draft. Ev 114 Energy and Climate Change Committee: Evidence
Q5. Your press notice stated that you have invested millions in helping to improve customers’ energy efficiency and also plan to spend £4bn on delivering a major investment programme to modernise infrastructure and help to reduce carbon emissions. How much has Scottish Power invested in electricity generation infrastructure in Scotland since 2007? Between 2007 and the first quarter of 2011, ScottishPower has invested £3.5bn in energy and related infrastructure, of which nearly 75% has been invested in Scotland. The Generation and Retail investment in the period is around eight times the retail margin from domestic customers.49 A summary of capital spending across our main business areas is given below: Capital Investment 2007—Q1 England and 2011 Scotland Wales Total Generation and Retail £0.7bn £0.2bn £0.9bn Energy Netweorks £1.1bn £0.6bn £1.7bn Renewables £0.8bn £0.1bn £0.9bn £2.6bn £0.9bn £3.5bn
Investment in Generation and Retail in Scotland relates primarily to the enhancement and refurbishment of our thermal asset base, including expenditure on Flue Gas Desulphurisation (FGD) plant to improve environmental performance at Longannet Power Station. Energy Network investment includes the modernisation and replacement of transmission and distribution network assets in Scotland, to improve the reliability and quality of electricity supply, and expenditure on new renewables connections and infrastructure. In our Renewables business, investment has mainly been focused in onshore wind farm developments, including Whitelee, Whitelee extension and Black Law wind farms. Expenditure has also been incurred in marine and biomass developments. Going forward the Iberdrola Group expects to invest £15 billion in the UK through to 2020, on the assumption that the regulatory framework is in place to support this spending. It is proposed that the bulk of the investment will be deployed in transmission networks (47%) and renewable energies (33%). It is expected that 70% of this investment will be made in Scotland.
Q6. The Committee understands from recent press reports that Scottish Power loaned £800m to Iberdrola in 2009. What is the total amount of loans that Scottish Power has made to Iberdrola since 2007? As is common practice amongst large organisations, Iberdrola provides a “treasury” function for all subsidiaries within the ScottishPower group. This means that all material cash sums within ScottishPower and other subsidiaries are deposited with Iberdrola, which manages the cash requirements of the subsidiary companies on an integrated basis. This is more efficient than holding the cash separately in each subsidiary. Cash deposited by ScottishPower is formally a loan to Iberdrola or, if the money is passed onto other companies within the Iberdrola group to meet their cash requirements, a loan to the relevant Iberdrola company. In any event, the making of such loans does not affect ScottishPower’s ownership of the money, and the borrowing company will pay ScottishPower a commercial rate of interest. Nor does it affect ScottishPower’s liquidity, as Iberdrola will make cash available to ScottishPower to support its activities. This “bank” function allows funding to be managed at a group level and ensures that the cash requirements of all subsidiaries are met. This practice is standard among large organisations including (to name but a few) Shell, BAE systems, EDF and EON. As well as having funding relationships with Iberdrola companies through the central treasury function, ScottishPower also sources funds from external sources to support its investment plans. At 31st December 2010 ScottishPower had net debts of c£800m comprising external borrowings of c£1.6b of which c£800m had been lent on to other Iberdrola companies.
Q7. What were the terms of those loans? Of the £800m that remains funded to other Iberdrola subsidiaries: — $650 million (c£400 million) was funded to Iberdrola USA. This was originally a “loan” of £800 million, the remainder of which has been repaid. Of the $650 million, $300 million is due to be repaid by May 2013 at a rate of 5.9% and $350 million is due to be repaid by April 2019 at a rate of 7.08%. — £400 million was funded to Iberdrola SA. This is a floating cash fund, repayable on demand at a rate of 3 million GBP LIBOR—2bp. 49 If we assume that around half of the 2007 nine month margin is domestic (£49m), the total domestic margin comes to £113m. This is around 12.6% of the £0.9 billion Generation and Retail investment. Energy and Climate Change Committee: Evidence Ev 115
Q8. What impact have those loans had on the liquidity of Scottish Power and the ability of the company to keep prices low for its customers? These have not affected the liquidity of ScottishPower, as all ScottishPower cash requirements have been fully satisfied by Iberdrola since it acquired ScottishPower. Internal group funding policies are not a factor in relation to any pricing decisions. The loans have had no impact on the need to increase retail prices.
Q9. What proportion of customers live in Scotland, England and Wales? As of June 2011, the proportion of households and services supplied by ScottishPower living in England, Scotland and Wales is as follows: Proportion of Proportion of households services England 65% 68% Scotland 29% 27% Wales 6% 5%
June 2011
Further supplementary memorandum submitted by ScottishPower This note responds to the additional questions asked by the Committee following the oral evidence given by ScottishPower on 28 June 2011. The questions and our responses are set out below. [Section not published as submitted in confidence due to commercial reasons]
1. What are the wholesale costs for customers on your discounted deals? When customers sign up to a fixed or capped price deal, we adopt a procurement strategy that aims to lock in the wholesale cost for the duration of the deal. The wholesale price may therefore be different than for our standard products. The OLE Reward August 2011 product is the one that led to the highest increases shown in the answer to Question 1. That product was launched in April 2010 when forward energy prices in the wholesale market were particularly low, but the wholesale prices now (which are influencing our new standard prices) are much higher. This is set out in the following table. Electricity Gas (flat £/ (Baseload £/MWh) MWh) April 2010 (12 months forward, used to set OLE Reward Aug 2011 product) £36.74 £11.95 June 2011 (period July-Dec 2011) £66.89 £19.13 Percentage increase +82% +60%
In the case of variable discount products, our wholesale costs are the same as for standard products. (The discount relative to standard prices represents a special offer to help us win new customers, and may also reflect some cost to serve and debt efficiencies.)
2. Mr Steele said that he would be able to provide the Committee with example scenarios of what happens when a fixed term contract ends for a customer. Each fixed term product has a set of product-specific terms and conditions, which are clearly set out separately from the general contract terms, and are drawn to the customer’s attention at the time of sign-up. Our current product-specific terms provide that, after giving the customer written notice at the end of the offer period, we will move the customer to either: 1. the closest equivalent product that we have available at that time; or 2. our standard domestic product. It is not possible for us to be specific at the point of sale about what the “closest equivalent product” would be, as these tend to be short term offers, which are only available for a set period of time, and we do not know that far in advance what will be available. We enclose as an example the product terms for our Online Saver Reward product which matures in August 2011.50 These state in the fourth paragraph “We will write to you before the end of your Offer to let you know what will happen next. This will involve moving to an alternative product offer or our standard monthly Direct Debit prices.” 50 Not printed. Ev 116 Energy and Climate Change Committee: Evidence
On the current batch of maturing products we are moving our customers to our standard monthly Direct Debit tariff (option 2 above) and where possible we are offering an alternative product on an “opt-in” basis. Where we roll over customers onto a new fixed term product, we always employ a minimum of two separate communications, seeking to make all details clear: — one at least 30 days in advance of the fixed term product end date, giving the customer full details of our proposed next steps, including price and key features of the new product that we are offering to move the customer to, details of alternative options, and a reminder of their right to cancel if they are not happy with the next steps; where the new product offering is more expensive than our standard prices, or has a termination fee, this will be specifically mentioned; and — one after the move, reminding the customer of the move and giving them a further chance to opt out of the new product without incurring a termination fee. All of this is designed to be flexible for the customer and provide them with full and transparent information on their options.
3. Which? has stated that the price increases will be unevenly proportioned between two tier tariffs. It estimates that the effective price increases will be 20% for low users, 15% for medium users and 11% for high users. Is Which? right in its analysis and can you prove that low users will not bear the brunt of the price increases? The actual price increase experienced by a customer will depend on their consumption level and region. On average, across regions and all the principal payment methods, customers with low consumption (as defined by Ofgem) will face an 18% increase in Dual Fuel bills and customers with high consumption (as defined by Ofgem) will face a 14% increase in Dual Fuel bills. For prepayment customers, the average price increase will be 16% for low consuming customers and 14% for high consuming customers. The reason for this variation is that we have focused the increase, especially for electricity, on the standing charge (or in the case of “no standing charge” products, on the first tier of unit charges51). We have done this to try to ensure that customers of all sizes pay a fair amount for their energy. We had not materially changed the overall level of our standing charges for electricity customers since 200652 and over the course of time they had become lower than our fixed costs (i.e. costs which do not vary in line with customer consumption), and lower than the standing charges levied by many of our competitors. We felt it was right, at the time of this price change, to rebalance the relative pricing to different sizes of customer so it more closely reflected costs. While we recognise that this has resulted in large percentage increases for very low consuming customers, the impact in cash terms on electricity bills will be no greater than for higher consuming customers53. Low consuming gas customers will see a smaller cash increase than high consuming customers. We recognise that these increases will be difficult for low consuming consumers, but we also have to be aware that there is a significant proportion of fuel poor or vulnerable customers who have higher than average consumption. This may be because their property is poorly insulated, because they need to keep the property warmer due to their particular needs, or are off the gas grid and have to use electric heating54. It is this category of customers who would have seen a particularly large impact in cash terms had the increase been only on the unit rate, and by rebalancing the standing charge we have mitigated that impact.
4. Alistair Buchanan claimed that 70% of prepayment customers were won on the doorstep. What percentage of your prepayment customers were won on the doorstep? What percentage of your customers won on the doorstep are pre-payment customers? 73% of prepayment customers switching to ScottishPower over 2010 and to date in 2011, switched to ScottishPower through the doorstep sales channel. Of the total number of doorstep sales over the same period, 27% were made to prepayment customers.
5. What percentage of attempted sales lead to nil returns due to your salesperson being unable to find the customer a better deal? Of total face to face contacts by a ScottishPower sales agent, circa 87.5% did not result in a sale being completed. This number includes all marketing attempts, including any case where, after the sales agent introduced him or herself, the customer declined to enter into a discussion with the agent. We define a “better deal” as one that better suits the customer’s circumstances, although this may not necessarily be cheaper than the customer’s current prices. For example, in a time of rising prices, a customer 51 Customers on No Standing Charge tariffs pay a higher unit rate for the first 225kWh of electricity and 670kWh of gas used each quarter and a lower rate for every kWh used thereafter 52 We made some regional adjustments to standing charges in 2010. 53 The only exception is pre-payment meter customers in Scotland, who are facing a relatively small increase in standing charge and a very slight reduction in unit charges. 54 For example, there are 26,000 customers on our electricity-only Fresh Start (social support) tariff. The average consumption for this group is more than double the Ofgem standard level. Energy and Climate Change Committee: Evidence Ev 117
may choose a slightly more expensive product with the benefit of a fixed or capped price. We do not have a breakdown of the above 87.5% of incomplete sales, as to which were as a result of the customer declining to enter into a discussion with the agent, and which were due to the agent not being able to find the customer a deal that was better for their circumstances than their current deal.
6. How many tariffs do you have? ScottishPower currently offers six tariff options and three payment options, which are available in the nine combinations shown in the table below. In most cases the customer can also choose between Standing Charge and No Standing Charge variants. Payment option Monthly Prepayment Tariff type Tariff name Direct Debit Credit meter Standard variable Standard ✓✓ ✓ Capped Jan 2014 ✓✓ Capped (for a fixed period) Unifi Capped55 ✓ Fixed Price Energy ✓ Fixed (for a fixed period) Platinum Fixed56 ✓ Discounted (for a fixed period) OLE Saver 14 ✓
The details of the tariff may also depend on the customer’s circumstances, for example: — Which region they are in (as distribution costs vary from region to region). — Whether they have a standard or multiple rate57 meter. However, these variants do not increase the number of choices available to a particular customer, unless they change their circumstances. Finally, we have a “back catalogue” of 35 offers which are no longer available to new customers but which existing customers may still be on. These will be subject to regional and other variations in the same way as the six current tariff options.
7. How many customer complaints do you receive a day? Where customers have an issue which we are unable to resolve they can refer it to the ombudsman service. In some cases, customers may raise issues with Consumer Focus. We receive around 10 cases per week from the Ombudsman and 15–20 from Consumer Focus. For internal purposes, we operate with a very broad definition of complaints, which includes any expression of possible dissatisfaction from our customers. On that basis, we receive around 8,000 complaints a week; based on six days, this amounts to a little under 1,350 a day. It is around 6% of the total traffic in our customer contact centre. This number has to be seen in the context of our customer numbers. Based on a total of around 3.1 million households supplied, this is equivalent on average to each household we serve with energy telling us that they are dissatisfied about something once in seven and a half years. Around 60% of these cases are dealt with to the customer’s satisfaction on the same day—often in the same call.
Memorandum submitted by the Independent Generators Group Following the evidence session that the Committee held with the “Big 6” energy companies on 11 May as part of your inquiry into Ofgem’s Retail Market Review, the Independent Generators Group would like to respond to some of the comments made about the wholesale market. The Independent Generators Group is an informal group which consists of seven non-vertically integrated electricity generating companies who collectively represent around 20% of capacity in Great Britain. The group’s current members are ConocoPhillips, Dong Energy, Drax Power, Eggborough Power, ESB International, InterGen and International Power. During the hearing much was made of the current and potential benefits of the N2EX exchange for improving wholesale market liquidity. In particular David Mannering of RWEnpower said, “if one looks at the trading volumes on N2EX they have been absolutely exploding in recent months. The graph shows an exponential increase, particularly since about July/August last year and every month is showing a bigger increase compared with the previous month.” 55 Includes an in-home electricity monitoring system 56 Includes boiler cover 57 This could involve for example Economy 7 or one of the special arrangements we have in place to support customers with electric heating systems in the Manweb and ScottishPower areas Ev 118 Energy and Climate Change Committee: Evidence
However, the evidence does not back up these assertions and indeed actually contradicts them. The actual figures for the volume traded on the N2EX are contained in the Ofgem Retail Market Review document and are reproduced below: 350
300
250
200
GWh 150
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50
0 Jul-10 Oct-10 Apr-10 Jan-10 Jun-10 Jan-11 Mar-10 Feb-10 Feb-11 Nov-10 Dec-10 Aug-10 Sep-10 May-10 N2EX Day Ahead Prompt (OTC Cleared Vol) N2EX Day Ahead Auction APX continuous market Linear (N2EX Day Ahead Prompt (OTC Cleared Vol)
From this chart you can see that the day ahead auction volumes have shown a gradual increase from a low level rather than an explosion. The only trades actually conducted on the N2EX facility are the N2EX Day Ahead Auction volumes (the red line in the above graph). Whereas the trades in the N2EX Day Ahead Prompt (OTC cleared volume), the blue line on the graph, show trades that have originally been made in the existing OTC market and then subsequently “given up” to the N2EX for clearing purposes.
Looking at the issues raised over the structure of the market and the internal trading arrangements of the vertically integrated companies, it is true to say that the most common internal structure here is of an in-house upstream “Generation Company” that internally sells or transfers its output to an in-house “Trade Company” which also sources power (either from its generation business or from the external market) on behalf of the in- house “Supply Company”.
The issue with this set up is the almost complete lack of transparency of the relevant internal transfer prices and the allocation of profits to different parts of this vertical chain.
The response given to the Committee was that the profits made in the Big 6 Trade Companies are purely down to their superior traders. However, we would argue that trying to split out what profits were made from advantageous transfer prices and what were made from proprietary or other trading is, in practice, almost impossible to do, particularly as many of these companies operate complex trading operations typically across a number of markets and products. It is not the centralised trading function itself which is the problem (trading being essential to the market) but the lack of transparency which makes it difficult to determine what profits relate to advantageous transfer prices.
In the view of the Independent Generators Group poor visibility of these “internal” transfers affects market confidence and serves to keep a limit on GB market liquidity. This then potentially leaves existing independent generators, and indeed independent suppliers, at a competitive disadvantage, and will for the same reasons also increase barriers to entry for new entrants.
Therefore, we support Ofgem’s recommendations in the RMR document to significantly develop the segmental statements such that they become a standardised and useful source of information for the rest of the market. However as well as ensuring improved transparency around those volumes that are transferred internally, it will also be vital to implement measures which ensure that “internal” trading does not become the default route by which supply business needs are met—in other words, to support the development of stronger liquidity and a healthier wholesale market significantly more of these volumes must be traded in the external market in an open, competitive and transparent manner.
We hope this is of use to the Committee and should the members want any further information we would be more than happy to provide it. June 2011 Energy and Climate Change Committee: Evidence Ev 119
Memorandum submitted by Sara Vaughan, Director of Regulation and Energy Policy, on behalf of E.ON UK plc Thank you for the opportunity to submit further information following our appearance in front of your Committee on 11 May. You asked a number of questions, which I deal with below.
Question 1 Ofgem has estimated that its proposal to restrict the number of tariffs for standard evergreen products would impact on 75% of all customers currently on those products. What would be the logistical challenges involved in moving this number of customers over to one new “standard” tariff? Before responding on the specific question of logistical challenges, I would just make a few introductory remarks. We believe that there is always value in seeking to reduce complexity in the market. This is especially so against the background of an expectation that prices are likely to rise in the future because of movements in wholesale costs, the impact of the costs of decarbonisation and a greater proportion of renewables on the system and other increasing burdens that Government policy is placing upon energy suppliers, for example in relation to fuel poverty. Consumers do not like paying energy bills, as these are unavoidable costs upon them (they are not a choice product, like mobile phones, for example) and if they do not understand them, or find them more complex than they need to be, this will not help in building trust in the energy system as a whole. Therefore, we should all seek to do what we can to assist consumers’ understanding. However, we do not believe that the evidence presented by Ofgem supports the case for intervention along the lines that Ofgem proposes. The proposals themselves appear to us to be disproportionate in their impact and inappropriate. At the time Ofgem launched its Findings and Initial Proposals of the Retail Market Review (the “Initial Proposals”) in March 2011, it also published the results of an Ipsos MORI poll58 on Consumer engagement with the Energy Market, which actually make quite encouraging reading and do not support Ofgem’s basic premise of lack of engagement and confusion. The Ipsos MORI poll found that: — Among those who have never switched supplier, the overwhelming majority (87%) are now aware that it is possible to switch supplier.59 — In addition, 85% found switching to be very or fairly easy, with 46% judging it to be very easy and only 4% finding it fairly or very difficult.60 — Of those who have not switched, the vast majority (77%) have not done so because they are happy with their current supplier, i.e. because they are satisfied rather than because they are disengaged.61 — Of those who did switch, a significant majority—77% for gas and 77% for electricity—said that they found it easy to decide which deal to switch their gas or electricity to.62 — Moreover, 76% (gas) and 77% (electricity) felt they fully understood the key features of the deal they switched to.63 — Of those who did switch to another deal, only 12% in gas and 11% in electricity did not feel that they were paying less with by far the majority, 62% in gas and 64% in electricity, believing that they were paying less.64 Ofgem suggests that confusion in the domestic market could be addressed by a proposal to restrict the number of tariffs for standard evergreen products to only one per supplier per payment method. Frankly, this seems like rather a “baby out with the bathwater” response to the issues that Ofgem perceives exist in the market. The existing range of products have emerged in response to customer demand, to provide a choice depending on what is important to the customer, for example if they are looking for price protection, or are elderly and possibly on a fixed income and therefore want a guaranteed charge no matter how much energy they use, or the benefit of additional cold weather payments or green electricity. Propositions are generally tested on consumer focus groups before introduction, reinforcing the view that they are responding to need. Ofgem says that it will still be possible to provide a variety of products, but that they must be offered on a fixed term basis, with no adverse unilateral variation and no automatic roll-over. This seems a somewhat strange compromise, since it still allows the complexity in terms of number of tariffs, about which Ofgem has expressed concerns, but forces customers to have to opt-in to remain on a product with which they are happy. Ofgem’s proposals would lead to an unfair and disproportionate reduction in consumer choice, affecting over two million E.ON customers, without any argument being presented by Ofgem as to how they would be effective or which customers would be expected to benefit65. In practical terms they would: 58 Ipsos MORI, Consumer Engagement with the Energy Market—Tracking Survey 28 January 2011 59 Supra, page 19 60 Supra, page 33 61 Supra, page 20 62 Supra, page 31 63 Supra, page 32 64 Supra, page 19 65 Nor has Ofgem shown how the certain detriment to many consumers is outweighed by the supposed benefits to others. Ev 120 Energy and Climate Change Committee: Evidence
— Force over 700,000 E.ON customers on our Age UK, StayWarm, Go Green, WarmAssist and Energy Online products to confirm each year that they wished to stay on their preferred product; — Put over 500,000 E.ON customers on our Fixed, Capped and StayWarm products at risk from surprise price increases if they did not promptly confirm at renewal a desire to stay on their preferred product; — Potentially cause over 1.5 million E.ON customers to forfeit the benefits of Tesco Clubcard points or of the No Mains Gas Discount, depending on the exact constraints of the evergreen product;66 — Particularly adversely affect suppliers such as E.ON who have offered customers a simple range of alternative products, whilst having no impact on those suppliers who still have 75% or more of customers on a standard product. By contrast, we only have 53% of customers who are still on a standard product, since many of our customers have exercised their right to choose in response to innovation in products; — Prevent customers from switching to our Age UK product range, developed with our partner Age UK; — Prevent customers from a choosing a lower priced variable price product, avoiding the premium of a fixed or capped product; — Reinforce the benefit to British Gas of its unique asymmetry in gas and electricity pricing (lower electricity unit rates), undermining the Ofgem Probe remedy of making total annual bills (incorporating gas charges for customers who prefer a dual-fuel product) the appropriate comparative metric; and — Complicate our efforts to attract customers who have never switched gas supply by preventing a simple reward offer and requiring any substantive saving to be of an unfamiliar type (fixed, capped or tracker). The greatest weakness of Ofgem’s proposals, apart from the fact that it does not have adequate evidence upon which to justify such a wholesale change to the competitive market, is that the customer detriments of the proposals it makes are definite and irreversible, whilst it is unclear how or whether they will actually lead to greater consumer engagement: — Consumers who have not switched at all will be on the same, standard evergreen, product as before; — Consumers will mostly still be prompted to switch by media message, a price change, a high bill, poor service or a contact from a sales agent; — When following up a prompt, consumers will still have a range of products to choose from and be primarily attracted by a projected saving, very likely based on the product being a promotion; — Consumers who wish to check the projected saving will still be at risk of getting a different savings message if they have used the wrong information; — Consumers with, or wanting, dual fuel or time of use products will still have to use their consumption data to get a price comparison;67 — Consumers will have the additional complication of having to understand a change of product at the end of their fixed term; and — Consumers who come to the end of a promotional period are still likely to see a significant price increase and be prompted to search alternative offers. We do not therefore believe that there would be any greater switching under Ofgem’s proposals, except possibly as a result of withdrawing the benefits of existing products from customers. However, it is surely unacceptable that the greatest effect arises from reducing the proportion of customers who are happy with their current supplier. It is important to note that Ofgem’s proposals involve much more than transferring customers on our standard evergreen product to an industry standardised product; they require all evergreen products to convert to the standardised product and all consumers on fixed term products who do not confirm they want to stay on their preferred product to move to the standardised product. The logistical challenges in making these changes include: — Reinstating a per day charge in our billing system and removing the “first kWh” presentation; — Changes to our billing system so that discounts (e.g. for prompt pay) only apply to the unit rates; — Changing customers’ prices to the standardised level and the name of their product; — Resetting prepayment meters to record standing charges; — Annual price changes to incorporate any change made by Ofgem to the standardised element, potentially additional to any need to react to wholesale energy movements; 66 A genuine single electricity rate would also raise prices to Economy 7 and other time of use tariff customers, but we assume this is not what Ofgem intend. 67 We also doubt many single electric consumers will really want to compare unit rates (e.g. 10.97 p/kWh v 9.73 p/kWh) and not consider their potential annual bill (£464 v £421) Energy and Climate Change Committee: Evidence Ev 121
— Redesign of the fixed term renewal process so that the “no contact” default is to the standardised product and there is an easy opt-in to the customers’ preferred product, which may need to be backdated; and, as discussed above; and — Explaining to our Age UK, Go Green, Tesco Clubcard, No Mains Gas Discount and Energy Online customers that their product has been withdrawn.
In our response to Ofgem we proposed a detailed set of remedies to further reduce complexity and increase consumer engagement. We believe these will be more effective in increasing consumer understanding of products and confidence in the benefits of switching than Ofgem’s current proposals and without the downside of removing choice. We summarise our proposals in the Table below. Our proposal Benefits Common language for products and product Easier to compare products components Reduce product mystique Explore the options for a common price element. Potential to make it easier to compare products and to For example, a possible £100/£200/year/fuel check forecast annual cost, although each option has standing charge for all products downsides Enhanced product description at sale: Easier to compare products — Present in “key facts” format Should deter overly complex products, as they will — Identify risks require greater disclosure — Present action required at end of fixed term Will increase consumer understanding of risks of price change Would increase consumer horizon, beyond the initial forecast annual cost Internet sales to be subject to marketing licence Presents clear information, helping customers identify condition the appropriate product for their needs Suppliers would seek to raise standards, as required by confidence code Advertising to go further than ASA requirements, Consumers less likely to see “multiple claims of best through inclusion of requirement to have regard to value” (contributor to complexity68) the risk of confusion Enhanced information at renewal (end of fixed Clearer presentation term), including comparison to relevant evergreen “Moment of decision” encouraged, without a risk that product customers are forced off their preferred products Consult on conditions to allow the roll-over to a Ensure that customers clearly understand the risks of fixed term with an exit fee taking the benefit of an exit fee product (if allowed— further assessment required) Sunset clause on SLC25A (no undue discrimination) Shows industry commitment to fair pricing (increasing extended to July 2016 consumer trust). Allows time to assess implications for smart meters
We believe these proposals will be effective in reducing complexity as a barrier to engagement and in prompting a decision point at renewal, but without depriving customers of the choice they have at present. Our proposals will significantly raise the standards and attraction of internet based switching (whether between suppliers or products), providing a solid base for the evolution of the market to a greater variety of products based on smart meters.
Question 2
The subject of small and micro businesses was raised during the session. Please could you provide more information on the contact you have had with the Federation of Small Businesses and the Chamber of Commerce to discuss issues around energy supply and the possible need for greater protection of micro businesses. If there has been no contact, please confirm this.
Our small and medium-sized enterprise (SME) team is proactively seeking to build relationships with trade bodies, associations and not for profit organisations so that we can better understand the needs of the organisations that they represent, and develop the products and services to support them.
As such we have developed the role of a SME Partnerships Manager, although this role is relatively new, and we have had productive discussions with organisations such as the Royal Institution of Chartered Surveyors, the National Farmers’ Union and the Institute of Chartered Accountants in England and Wales. We have requested meetings with the Federation of Small Businesses but have not yet been able to secure a meeting date. However this is a relationship that we would very much like to improve. In a similar way, we will also seek a meeting with the Chamber of Commerce. 68 OFT 2010 Advertising of Prices Survey Table C16 Ev 122 Energy and Climate Change Committee: Evidence
Question 3 On the subject of sales staff, please could you provide details of the basic salaries and commission structure for doorstep sales staff and the areas targeted by doorstep sales? We are committed to providing open, honest, and above all, accurate information to all customers who choose to switch their energy supply following a face to face discussion. Face to face activity has and continues to be an important channel in reaching out to our customers who may not otherwise have the opportunity or access to alternative methods of switching suppliers. We currently have circa 700 directly employed Energy Consultants who engage with customers in a range of locations including high streets, retail outlets, and on the doorstep. However, as you will be aware, the Residential market has changed in recent years, with many customers preferring to make decisions about their energy tariffs online and, as a result of that, our face to face agents have reduced by around 12% since 2008. There are, however, still a large number of customers who do not have access to the internet and/or prefer to talk face to face. Our Energy Consultants provide an opportunity for these people to talk to one of our team, to help them choose the right product for them. Ofgem has also recognised the importance of this sales channel as an alternative method for some customers and we continue to see around 25% of our new customers choosing to switch to E.ON following a conversation with one of our Energy Consultants.
Sales Processes As I explained to the Committee, our face to face sales techniques, systems and management controls ensure that we provide a quote or estimate based on accurate information. Following this, all agreed information is confirmed in our follow up correspondence which ensures that customers can see both the estimated cost or saving given and also the information upon which this has been based, including their current supplier and product. We are well-aware of our responsibility to protect vulnerable customers and so work closely with local Trading Standards officers to make sure that we fully observe registered no Cold Call Calling zones and we will also not call at properties that clearly display a “Cold Calling Zone” sticker or notice. All of our Energy Consultants use a “Pentablet” device—which is a hand-held computer—to provide an instant, like for like comparison based on information provided by the customer. Where the customer does not have this information, we will only present back to them an estimated cost and there are no savings messages displayed. We have designed our face to face sales tool to enable customers to see very clearly on screen whether a saving can be made and if so by how much. I wanted to clarify a point I made at the committee hearing, where I indicated that agents would walk away if a saving could not be made. Whilst generally speaking customers are more inclined to switch suppliers on the doorstep when a saving can be seen, there are a number of people who choose to transfer their supply based on other reasons, such as fixed price or improved customer service, even if a saving cannot be made. In those circumstances, the agent would proceed and not walk away, but the customer would be aware as to whether or not a saving would be made or, as described above, whether the information presented was only an estimated cost because the customer had not had full information to give to the Energy Consultant. Our Energy Consultants are trained to present E.ON based on our complete offering rather than solely on price (for example, the availability of Tesco Club Card points) and they prefer to have an open conversation where they can talk to customers about what is right for them. If the customer chooses to proceed with the sale at that point, the Energy Consultant explains what will happen next and captures additional information such as contact details. We also provide a welcome booklet which is left with the customer, which contains clear information about E.ON, and explains how to cancel the switch if the customer changes their mind. Our Pentablet provides us with a secure way of holding and transferring data electronically direct to E.ON systems. The receipt of this information triggers an additional welcome letter and contract which details everything that was explained at the point of sale. This letter contains clear information on the customer’s rights during the switching process and details the 14 calendar day cooling off period within which the customer can choose to cancel the switch. We believe that it is vital that customers are able to make informed choices about switching and both sales techniques and electronic equipment are integral to this. This is demonstrated by our recent £5m investment in our Pentablet hardware. We continue to review both our software and hardware to ensure that we continually improve the sales experience our customers receive. This includes plans to roll out the improvements made to our telephony sales tool into our face to face channel which we hope to complete by the end of 2011.
Targeting In terms of the areas targeted by doorstep sales, our Energy Consultants are located across the whole of England and a large part of Scotland and Wales. Our starting point is basically all properties in the UK, which Energy and Climate Change Committee: Evidence Ev 123
we will then reduce down, through a number of steps, to a smaller pool of prospective new customers. Those steps, and the factors we apply, are discussed below. Each of our Energy Consultants is based in a particular geographical location in England, Wales and Scotland and they will be provided with a pool of prospective customers following that process, according to their geographical location. Our sorting is on the basis of our own information, supplemented with additional information from data agencies such as Experian. The starting pool will be “cleaned up” to remove our own existing customers, then any customers who have registered with the Telephone Preference Service or have been recently contacted. They will then be sorted based on two factors; credit risk and consumption. We target those customers who would be a low credit risk to us and who would likely to be higher consumers of energy. Our information on credit risk comes from the GeoFraud segmentation tool and the consumption information is largely based on property size.
Reward and Recognition Our pay and reward scheme has been designed to both be attractive in the market place and also to ensure that only positive behaviours are recognised. Our Energy Consultants receive a base salary of £15,500 and an E.ON branded company vehicle, together with standard holiday and sick pay. In addition to the base salary our reward scheme can enable an agent to earn OTE of £25,000. This scheme includes penalties based on customer cancellations and industry drop out including previous supplier objections to the transfer and so our Energy Consultants are in fact encouraged to make sure that each switch is genuine. The scheme rewards successful and compliant individuals and also prevents rogue sales activity. Our colleagues understand that any rogue or fraudulent activity is not acceptable here at E.ON and the necessary disciplinary action would be taken should any incident be identified. Our team managers work closely with their team of Energy Consultants to make sure that they have the feedback and guidance they need to be successful in their role. We also have a dedicated Quality and Audit team who are responsible for monitoring compliance across all field sales. This team conducts a number of activities which include face to face sales audits, telephone audits direct with customers, and complaint analysis. They use this information to work with team managers to provide feedback and action monitoring to help develop and train our Energy Consultants. Recently we developed and introduced an internal customer satisfaction survey which ensures all areas of customer feedback are utilised to help continually review and improve our sales processes.
Question 4 How large was your generation business, how large was your supply business, what volume of electricity sales did you make and what volume of electricity purchases did you make in terawatt hours in 2009Ð10? In calendar year 2010 E.ON UK generation generated 29.6TWh69. The amount of power supplied by our supply business totalled 48.3TWh70, meaning that our supply exceeded our generation by some 19TWh. In calendar year 2009, E.ON UK generation generated 34.4TWh71 and the amount of power supplied by our supply business totalled 43.7TWh72, meaning that our supply exceeded our generation by some 9TWh. As I explained at the session, we have a single trading business, E.ON Energy Trading (“EET”), based in Germany, which trades power (and gas) on behalf of the UK generation and supply businesses. EET’s activity in 2010, for delivery in 2010 and beyond, saw power sales outside E.ON equal 106TWh and power purchases from outside of E.ON of 122TWh. The difference reflects the supply activities being larger than our generation activities. This gave a total trading volume of 228 TWh. The comparable numbers for 2009 saw power sales outside E.ON equal 107TWh and power purchases from outside E.ON of 115TWh. This gave a total trading volume of 222TWh. June 2011
Printed in the United Kingdom by The Stationery Office Limited 07/2011 013852 19585 69 Including generation from jointly owned power plant but excluding generation by E.ON Climate and Renewables in the UK and through small combined heat and power plant 70 Licensed supply only—excluding supply to combined heat and power customers. 71 Including generation from jointly owned power plant but excluding generation by E.ON Climate and Renewables in the UK and through small combined heat and power plant 72 Licensed supply only—excluding supply to combined heat and power customers. PEFC/16-33-622