Electricity Market Reform Proposals

Energy and Climate Change Committee Ofgem’s Retail Market Review

Ref Organisation Page

OMR 01 RWE npower 2 OMR 01a RWE npower supplementary 16 OMR 02 EDF Energy 18 OMR 02A EDF Energy supplementary 25 OMR 03 Consumer Focus 27 OMR 04 Which? 35 OMR 05 SSE 43 OMR 05A SSE supplementary 47 OMR 05B SSE further supplementary 51 OMR 06 Centrica 56 OMR 06A Centrica supplementary 64 OMR 07 Drax Power 66 OMR 08 Scottish Power 71 OMR 08A Scottish Power supplementary 74 OMR 08B Scottish Power further supplementary 7 OMR 09 Independent Generators’ Group 76 OMR 10 E.ON UK 78

Memorandum submitted by RWE npower (OMR 01)

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 3 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; 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 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 (para5.19 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 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 (para2.65) 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

• 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 (Feb 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.

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.

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 per cent of their generation output. This would increase price transparency and make it easier for new players to enter the retail market.” 2 Competition and Entry in the GB electricity retail market – Frontier Economics, January 2011 paragraph 2.3

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.

- 9 - ATTACHMENT- NEW / REVISED OBLIGATIONS FOR SUPPLIERS SINCE 2009 Effective Date Obligation Topic / Source Type / Description 01/04/2008 Suppliers' voluntary spend Informal: Suppliers required by Government to spend an agreed sum of money on various programmes to help alleviate fuel poverty. In npower's case, this has amounted to circa £100 for the years 2008-2011 04/02/2009 Ofgem Green Supply Guidelines Quasi-regulatory: Final guidelines on how suppliers should market green electricity tariffs, to make it clear whether such tariffs are truly "green". 05/02/2009 Ofgem principles for the withdrawal of Quasi-regulatory: Minimum steps suppliers to take when withdrawing token token prepayment meters prepayment meter facilities, to ensure no customer left without supply 01/02/2009 Business Energy Efficiency agreement Voluntary: Agreement by suppliers to report to DECC on efficiency measures for SMEs. 01/04/2009 New supply licence condition in Formal: Requiring suppliers to install advanced meters for all profile class 5-8 relation to Advanced meters for Non- business customers by 2014 and provide consumption data on request. Domestic premises (SLC12.20-25) 01/09/2009 CESP - The Electricity & Gas (Community Energy Savings Statute: Parts of HESS, £350 of measures will target households, across Great Programme) Order 2009 Britain, in given geographical areas to improve energy efficiency standards, and permanently reduce fuel bills. It will be funded by a new obligation on energy suppliers and, for the first time, an obligation on electricity generators, to achieve an overall carbon emissions reduction target between 1 October 2009 and 31 December 2012..

01/09/2009 Prohibition of undue discrimination and Formal: New rules requiring the justification of different terms offered to different requirement for cost-reflectivity groups of customers and that different terms between payment methods are cost- between payment methods (SLC25A & reflective. SLC27.2A-B) ATTACHMENT- NEW / REVISED OBLIGATIONS FOR SUPPLIERS SINCE 2009

Quasi-regulatory: As part of Ofgem's debt and disconnection project, this joint Ofgem 08/10/2009 Ofgem/Consumer Focus safeguards to / Consumer Focus review into supplier procedures introduced commitments to re- protect vulnerable customers from connect within 24 hours any vulnerable customer inadvertently disconnected; follow disconnection up any customer disconnected where no contact to check for vulnerability; improvements to the Energy Retail Association's self-regulatory Safety Net which will be subject to independent audit arrangements Q211.

19/10/2009 Ofgem Energy Supply Probe: Standards of Conduct Quasi-regulatory: Suppliers must adhere to 5 standards of conduct in the domestic and small business market, to complement the Probe package of remedies. Ofgem has regard to the standards when investigating potential licence breaches.

21/10/2009 Ofgem Energy Supply Probe: Revised Formal: Introduction of an overarching objective to ensure face-to-face sales and Marketing licence condition - telesales activities are transparent and not misleading overarching objective (SLC25) 21/10/2009 Ofgem Energy Supply Probe: Financial Formal: Obligation to publish segmental financial information for the different parts of information reporting (SLC19A) the Big 6 energy companies' businesses 18/01/2010 Ofgem Energy Supply Probe: specific measures for face-to-face marketing Formal: Written comparisons/estimates for domestic face-to-face sales; tighter (SLC25); customer transfer blocking & restrictions on debt blocking, 30 working days to repay debt and switch to avoid price revised debt assignment protocol increase, prepayment debt assignment threshold increased to £200; new processes (SLC14); Supply to micro-business and documentation for micro business customers to improve transparency of terms consumers (SLC7A); notification of and limit roll-over of contracts. domestic supply contract terms 18/01/2010 New Direct Debit licence condition Formal: Fixed direct debit payments to be based on the best available information (SLC27.13-16) and to be clearly explained to domestic customers. Any credits must not be unreasonably withheld. ATTACHMENT- NEW / REVISED OBLIGATIONS FOR SUPPLIERS SINCE 2009

09/02/2010 "Green Energy Certified" label Quasi-regulatory: A new certification scheme to label electricity tariffs with genuine green credentials. The scheme formally implements Ofgem's Green Supply Guidelines published February 2009. 01/04/2010 New provisions in the EnergySure Sales Code in Self-regulation: In response to stakeholder concerns, suppliers agreed not to call in relation to cold calling registered no cold calling zones and where a customer displayed a notice indicating that unsolicited visits not welcome. Code also updated to reflect Ofgem probe changes in relation to SLC 25 (estimates / comparisons).

01/04/2010 Feed-In-Tariffs (FITs) – new SLCs 33 & 34 Formal: Implemented via licence conditions, requiring suppliers to pay electricity customers for the power they produce from eligible small-scale renewable electricity and Combined Heat and Power (CHP) units. All participating installations receive a guaranteed payment for the electricity generated and a payment for electricity exported to the grid. 01/04/2010 Renewable Obligation Order 2010 Statute: To provide further support to renewable generation technologies by increasing targets and giving additional ROCs to offshore wind generation. The increase is designed to ensure that electricity makes a significant contribution to the UK's EU 2020 targets. Extension of RO scheme to 2037. 01/04/2010 Revised Electricity Standards of Statute: Primarily to introduce revised standards for electricity distributors, also Performance Regulations 2010 increased the general level of payments to reflect inflation (e.g. from £20 to £22 for a failed appointment)

Quasi-regulatory: As part of Ofgem's wider debt and disconnection project, this joint Ofgem, Consumer Focus, Citizens review into how suppliers deal with indebted customers, introduced 6 key principles 03/06/2010 Advice Bureau "key principles" (ability that suppliers must consider to ensure they are properly and proactively taking to pay) account of a customer's ability to pay. ATTACHMENT- NEW / REVISED OBLIGATIONS FOR SUPPLIERS SINCE 2009

24/06/2010 Ofgem statement on Deemed Contracts Quasi-regulatory: Sets out Ofgem's general view on the basis of its interpretation of the relevant statutory provisions, that gas and/or electricity would need to be consumed in order for a deemed contract to arise between a licensed supplier and the occupier/owner of premises. This would effectively prevent the recovery of fixed costs through a standing charge, in the absence of a contract on express terms. 01/07/2010 Ofgem Energy Supply Probe: Formal: Bills / statements to include 12 months consumption and projected costs; information on bills about consumption Annual Statement to provide the same + details of any premium/discount relative to / costs, annual statements (SLC31A) standard direct debit, principal terms, switching reminder and signpost impartial advice 16/08/2010 Ofgem interim guidance to suppliers - remote disconnection and remote Quasi-regulatory: Guidance to suppliers on the licence conditions relating to switching to prepayment disconnection and prepayment meters where a supplier has installed a smart meter and has the capability to remotely disconnect the premises or switch the customer to prepayment terms. 01/10/2010 Modification of the supply licence in Formal: Clarifying that licensees are obliged to take all reasonable steps to ascertain relation to disconnection (SLC 27.11A) the status of a customer and the occupants of any affected domestic premises before disconnection.

20/10/2010 Ofgem guidance for suppliers on the Quasi-regulatory: Sets out Ofgem's views regarding the obligations on suppliers in use of theft disconnection powers relation to meter interference and how statutory powers should be exercised to protect the interests of customers and take into account the needs of vulnerable customers. 31/03/2011 New SLC 21A in relation to the Carbon Formal: Obligation on suppliers to provide CRC participants with an annual statement Reduction Commitment Energy of supply to assist with calculation of their emissions. Efficiency Scheme ATTACHMENT- NEW / REVISED OBLIGATIONS FOR SUPPLIERS SINCE 2009

11/03/2011 5 Key Principles for Prepayment Meter Informal: Suppliers have signed up to these with Consumer Focus. They should help Customers to improve the way prepayment works, provide extra support for vulnerable consumers and encourage better communication between suppliers and prepayment meter consumers. 01/04/2011 Warm Home Discount Statute: The replacement of the voluntary vulnerable customer expenditure (see the first entry above). It requires suppliers to incur spending in each year up to 31/03/2015 on the provision of benefits to consumers in or at risk of fuel poverty. 28/04/2011 Modification of the supply licence to Formal: Amends the notification obligations to require 30 calendar days advance require Advanced Notice of Price notification of a price increase or other contract variation to the significant Increases disadvantage of the customer. (SLCs 23, 24, 14) Pending EU Third Package (draft modifications Formal: Draft SLCs being laid before Parliament to give effect to various requirements to the supply licence) of the EU 3rd Package e.g. customers to switch suppliers within 3 weeks; additional billing / information requirements. Pending Spring Package Formal: Licence protection for early smart meter movers prior to the mandated rollout rules being established. In particular it includes proposals on remote disconnection and switching to prepayment and on ensuring consumers can switch suppliers.

May 2011

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Supplementary memorandum submitted by RWE npower (OMR 01A)

Energy and Climate Change Select Committee questions following the 11 May session

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.

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 11, 757 MW 10, 258 MW Capacity Electricity Generation 34.3 TWh 26.7 TWh Output Electricity Supplied 49.9 TWh 49.9 TWh Customers (at year end) 4.003 million 4.147 million Residential market share 14% 15% (at year end)

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 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 (OMR 02)

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.

1 • 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 (e.g. boiler maintenance). EDF Energy was also the only major company to put in place a prize freeze guarantee over the last winter. 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

2 (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 £75p.a. 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 dependant 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.

3 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 (i.e. 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 – e.g. 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. 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:

4 a. Access to long-dated shape products (to secure electricity for typically a number of years ahead which matches the domestic load profile), e.g. 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 (i.e. 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 (i.e. a flat profile) and needs itself to procure domestic shape products in the market.

5 25. EDF Energy has voluntarily made a number of public commitments to small (i.e. 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 (e.g. we supported the requirement on suppliers to give 30 days’ advance notice of price rises). 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.

6 32. We are happy to have our accounts inspected by Ofgem’s appointed experts.

May 2011

7 Supplementary Memorandum from EDF Energy (OMR 02A)

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

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.

• 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 p.a. 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.

Generation 2009: 87 TWh

Supply 2009: 66 TWh

Generation 2010: 71 TWh

Supply 2010: 64 TWh

April 2011

Memorandum submitted by Consumer Focus (OMR 03)

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.1 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. 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.

1 For further information on our role and duties, see http://consumerfocus.org.uk/g/4p4 4. We suspect that this approach may mitigate, though not eliminate, some of the problems of dubious discounts2 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.

2 For further details on the nature of such discounts, please see our open letter to Ofgem of 2 December 2010, http://tinyurl.com/5rc2svy 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 20103; Which? 20094; Uswitch 20095 and Ofgem Consumer First Panel 20096) 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).7 The success of other more complex messages still remains to be proven, including information about annual consumption. 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

3 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 4 www.which.co.uk/documents/pdf/bamboozling-bills-203858.pdf 5 http://www.uswitch.com/gas-electricity/confusing-energy-bills/ 6 http://www.ofgem.gov.uk/sustainability/cp/cf/Pages/CF.aspx 7 http://tinyurl.com/42uh6pm and http://tinyurl.com/66ourxd 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 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 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.8 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?

8 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. 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.9 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.

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 - 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 research10 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

9 See Annex 4 in our Cutting Back, Cutting Down, Cutting Off report http://consumerfocus.org.uk/g/4lx 10 Watching the middlemen – brokerage services for micro business energy consumers, 18 March 2011. http://tinyurl.com/3nh3mkz 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 Rollovers at punitive rates, expensive should improve things deemed rates otherwise

Back-billing Back-billing code = 1 year Up to 5/6 years

Debt and ERA vulnerable Safety Net, Disconnection in a matter of weeks disconnection negotiation and ability to pay even when debt due to back-billing LC

Marketing SLC25, self-regulation, Unregulated brokers exploit consumer protections businesses’ lack of knowledge

Information SLC31 & 31A - Annual Lack of visibility of contract terms, Statements minimal info on price in public domain

Switching Debt Assignment Protocol, Churn at half domestic rate, levels of Confidence 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.

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 (OMR 04)

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.1 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.

1 http://else.econ.ucl.ac.uk/conferences/consumer-behaviour/wilson.pdf

We discuss the issues raised in the Review and Ofgem’s proposals for reform2 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.

> 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.

2 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.

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Improve tariff comparability (Proposal 1)

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.3

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’4 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 tariffs5 that preclude easy comparison

3 http://www.ofgem.gov.uk/Markets/RetMkts/rmr/Documents1/Behavioural_Economics_GBenergy.pdf 4 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. 5 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

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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 for ticket types in response to demands from consumer groups and government to make products in this market easier for consumers to understand.6

Enhance liquidity (Proposal 2)

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.7

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

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) 6 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). 7 http://www.ofgem.gov.uk/Markets/WhlMkts/CompandEff/Documents1/Liquidity%20Proposals%20for%20the%20GB% 20wholesale%20electricity%20market.pdf

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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.

Strengthen Probe remedies – domestic (Proposal 3)

Which? agrees with Ofgem’s assessment that performance against its Probe reforms has been ‘patchy’ and that ‘significant shortcomings’8 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 consumers9, monitoring of suppliers’ marketing activities remains a necessary part of building consumer confidence in the energy market.

8 The Retail Market Review – Findings and Initial Proposals, p53 9 Which? surveyed a sample of 2,000 UK adults between 30th April and 7th May 2010. Results were weighted to reflect the UK adult population.

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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 supplier10 - 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 tariffs11 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 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’.12 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.

Improve reporting transparency (Proposal 5)

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

10 Scottish Power’s compliance with SLC 27.2A is currently under investigation. 11 Following the arguments made above, the latter is a precondition of the former. 12 Which? consultation response to Energy Supply Probe – Proposed Retail Market Remedies, 1 June 2009, p4

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decreases’13 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.14

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’ approach15 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

13 Retail Market Review, p18 14 Which? surveyed 7,883 members between 9th and 30th November 2009. 15 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’.

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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

Page 8 of 8 Memorandum submitted by SSE (OMR 05)

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)

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.1

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 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.

1 http://epp.eurostat.ec.europa.eu/statistics_explained/index.php/Electricity_market_indicators#Electricity_markets_-_retail 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), 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.

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 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, 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 (OMR 05A)

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 2009–2010?

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:

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. 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.

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 (e.g. 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 2 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 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 2009–2010?

Volume Type 2009/10 (TWh) 2010/11 (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 7 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 2 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 (OMR 05 B)

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.

2008 Yr 2011 Yr Factor Tariff 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 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 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.

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

Annexe 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.

Memorandum submitted by Centrica (OMR 06)

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:

o 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). o 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. o 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. o 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.1

1 "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" March 22 2011 A Buchanan) 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.2 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.

2 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. 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.

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.3

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.

3 Billmonitor research on mobile contracts showed 76% of consumers were on the “wrong contract” wasting an average of £194.71 each per year. 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 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 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.4

4 “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. 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

8 Memorandum submitted by Centrica (OMR 06A)

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.

• 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 2009–2010? The following data applied to the period 1st January 2010 to 31st December 2010 which is the latest full year data available which we felt was a more accurate picture of the current situation than 2009/2010

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.

Memorandum submitted by Drax Power (OMR 07)

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 (i.e. the profile of demand over a period of time) and small clip sizes (i.e. 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 (i.e. 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 Maker1, such as that proposed by Ofgem2, 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 (i.e. two to five years forward).

1 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. 2 Retail Market Review, Proposal 2, Ofgem, April 2011. 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, i.e. 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 Ofgem3, 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.

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"4) account for 99.5% of the domestic retail sector. It is this largely “sticky”5 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.

3 See Footnote 1. 4 RWE, E.ON, EDF, Centrica, SSE and ScottishPower. 5 “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. 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 proposals6.

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 (i.e. two to five years forward), resulting in efficient market price formation;

6 REMIT proposes that all transacted trades are reported and recorded in a database (trade repository) accessible by the market regulator. 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 condition7.

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.

7 The licence condition resulted from Ofgem’s Energy Supply Probe, which began with a Call for Evidence in March 2008. 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 pricing8.

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.

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 (i.e. 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

8 The cost associated with / value assigned to the transfer of energy between vertically integrated generation and supply businesses. Memorandum submitted by ScottishPower (OMR 08)

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.

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 (i.e. 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.

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 from Scottishpower (OMR 08A)

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.

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 numbers1 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

1 A “customer service“ is the supply of gas or electricity to a customer. A dual fuel customer is therefore scored as two services.

Memorandum submitted by Independent Generators Group (OMR 09)

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.”

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:

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.

ESBI Investments on behalf of the Independent Generators Group

June 2011 Memorandum submitted by E.ON UK plc (OMR 10)

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 poll1 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 supplier2;

• 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 difficult3;

• 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 disengaged4;

• 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 to5;

• Moreover, 76% (gas) and 77% (electricity) felt they fully understood the key features of the deal they switched to6;

1 Ipsos MORI, Consumer Engagement with the Energy Market – Tracking Survey 28 January 2011 2 Supra, page 19 3 Supra, page 33 4 Supra, page 20 5 Supra, page 31

• 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 less7.

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 benefit8. In practical terms they would:

• 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 product9;

• 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;

6 Supra, page 32 7 Supra, page 19 8 Nor has Ofgem shown how the certain detriment to many consumers is outweighed by the supposed benefits to others. 9 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.

• 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 comparison10;

• Consumers will have the additional complication of having to understand a change of product at the end of their fixed term;

• 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.

10 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)

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;

• 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 Potential to make it easier to compare element. For example, a possible products and to check forecast annual £100/£200/year/fuel standing charge for all cost, although each option has products downsides

Enhanced product description at sale: Easier to compare products • Present in “key facts” format Should deter overly complex products, as • Identify risks they will require greater disclosure • Present action required at end of Will increase consumer understanding of fixed term risks of price change Would increase consumer horizon, beyond the initial forecast annual cost

Internet sales to be subject to marketing Presents clear information, helping licence condition customers identify the appropriate product for their needs Suppliers would seek to raise standards, as required by confidence code

Advertising to go further than ASA Consumers less likely to see “multiple requirements, through inclusion of claims of best value” (contributor to requirement to have regard to the risk of complexity11) confusion

Enhanced information at renewal (end of Clearer presentation fixed term), including comparison to relevant “Moment of decision” encouraged, evergreen product without a risk that customers are forced off their preferred products

Consult on conditions to allow the roll-over to Ensure that customers clearly a fixed term with an exit fee understand the risks of taking the benefit of an exit fee product (if allowed – further assessment required)

Sunset clause on SLC25A (no undue Shows industry commitment to fair discrimination) extended to July 2016 pricing (increasing 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.

11 OFT 2010 Advertising of Prices Survey Table C16

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.

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 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 2009–2010?

In calendar year 2010 E.ON UK generation generated 29.6TWh12. The amount of power supplied by our supply business totalled 48.3TWh13, meaning that our supply exceeded our generation by some 19TWh. In calendar year 2009, E.ON UK generation generated 34.4TWh14 and the amount of power supplied by our supply business totalled 43.7TWh15, 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

12 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 13 Licensed supply only ‐ excluding supply to combined heat and power customers. 14 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 15 Licensed supply only ‐ excluding supply to combined heat and power customers.