CORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 1060-ii

HOUSE OF COMMONS

ORAL EVIDENCE

TAKEN BEFORE THE

ENERGY AND CLIMATE CHANGE COMMITTEE

ENERGY PRICES, PROFITS AND POVERTY

TUESDAY 16 APRIL 2013

TONY COCKER, JULIET DAVENPORT, JIM POOLE and ALISTAIR PHILLIPS-DAVIES

PAUL MASSARA, IAN PETERS, NEIL CLITHEROE and STEPHEN FITZPATRICK

Evidence heard in Public Questions 85 - 294

USE OF THE TRANSCRIPT

1. This is a corrected transcript of evidence taken in public and reported to the House. The transcript has been placed on the internet on the authority of the Committee, and copies have been made available by the Vote Office for the use of Members and others.

2. The transcript is an approved formal record of these proceedings. It will be printed in due course.

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Oral Evidence

Taken before the Energy and Climate Change Committee

on Tuesday 16 April 2013

Members present:

Mr Tim Yeo (Chair) Dan Byles Barry Gardiner Ian Lavery Dr Phillip Lee Mr Peter Lilley Christopher Pincher John Robertson Sir Robert Smith Dr Alan Whitehead ______

Examination of Witnesses

Witnesses: Tony Cocker, Chief Executive Officer, E.ON, Juliet Davenport, Chief Executive Officer and Founder, Good Energy, Jim Poole, Director of B2C, EDF Energy, and Alistair Phillips-Davies, Deputy Chief Executive, SSE, gave evidence.

Q85 Chair: Good morning and welcome to the Committee. There is, as you know, a lot of interest in this inquiry. We are televised today, so could you please identify yourself by name, starting with you, Tony Cocker. Tony Cocker: Tony Cocker, CEO of E.ON UK. Juliet Davenport: Juliet Davenport, CEO of Good Energy. Jim Poole: Jim Poole, Director of EDF Energy’s retail supply business. Alistair Phillips-Davies: Alistair Phillips-Davies, Deputy CEO of SSE.

Q86 Chair: Mr Phillips-Davies, can I start with you? Can you tell us exactly when SSE stopped mis-selling? Alistair Phillips-Davies: I would like to start in terms of the mis-selling announcement that Ofgem made. Personally and on behalf of the management team, individually and collectively, I would like to apologise for the issues that we faced, the fact that the standards that we showed during the period that Ofgem investigated us were not the standards we would have liked to have lived up to and were clearly not what customers would have expected. But in answer to your question specifically, we cleared all the items in relation to the Ofgem investigation principally during 2011, and then there were some minor clear-ups as well that took until September 2012.

Q87 Chair: It is the case, is it not, that your staff and agents continued mis-selling up to and after the point at which the Trading Standards Authority started to investigate? Alistair Phillips-Davies: The Trading Standards Authority? Chair: Surrey County Council. Alistair Phillips-Davies: Are we talking about the Ofgem investigation or Surrey County Council? 2

Chair: Surrey County Council. Alistair Phillips-Davies: In respect of the Surrey County Council investigation, which related specifically to scripts in 2009, all of those issues related to that were dealt with immediately after the judgment.

Q88 Chair: But you were happy for your staff to continue using dishonest selling methods and would have continued presumably doing so indefinitely for the benefit of your profits had Surrey Trading Standards Service not started their investigation? Alistair Phillips-Davies: No, I do not think that is the case.

Q89 Chair: What action did you take to stop this process prior to the investigation by Surrey Trading Standards Service? Alistair Phillips-Davies: In respect to the matter with Surrey Trading Standards, there was essentially one script where there was a detailed discussion between us and them around whether that script was appropriate. When it was ultimately decided that there were inappropriate elements within that script, we changed that script.

Q90 Chair: Illegal elements, not “inappropriate”; illegal and misleading. Alistair Phillips-Davies: We have apologised to our customers for what happened in regard of that. We have obviously been fined in regard of that, and we have put that matter right.

Q91 Chair: You will create a better impression with this Committee and your customers if you do not use weasel words like “inappropriate” for illegal and misleading sales scripts, will you not? Alistair Phillips-Davies: If you say so, yes.

Q92 Chair: It is not, if I say so, that is what the vast majority of people who have been in touch with this Committee have already told us. We have had the benefit of a lot of contributions from the public today about the questions we should ask you, and, not surprisingly, this is one of them. Will you just be absolutely clear that SSE continued the use of illegal and misleading sales scripts up to and after the point at which the investigation by Surrey Trading Standards Service commenced? Alistair Phillips-Davies: After the investigation commenced? Chair: Yes. Alistair Phillips-Davies: So, prior to the judgment? Chair: Yes. Alistair Phillips-Davies: There were a number of changes made to the scripts at the time that the investigation commenced, and then there were further changes put in place after the judgment was issued and there was a clear ruling on what had happened.

Q93 Chair: Prior to the commencement of the Surrey Trading Standards Service investigation, your company took no action to stop the use of illegal and misleading sales scripts, yes or no? Alistair Phillips-Davies: Can you repeat the question, please? Chair: Yes. Prior to the commencement of the investigation by Surrey Trading Standards Service, your company took no action whatever to stop the use of illegal and misleading sales scripts by your staff? Alistair Phillips-Davies: No, I have to disagree with that.

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Q94 Chair: What action did they take and when? Alistair Phillips-Davies: As a company, we have always sought to hold the highest standards in respect of dealing with our customers.

Q95 Chair: What action did you take to stop the use of illegal sales scripts and when? Alistair Phillips-Davies: We have a compliance function within the company and that compliance function would audit what was going on. We would review scripts and other materials that we used for sales to try to ensure that that complied with all relevant legislation, whether regulatory or legal. That is an ongoing process that we have had for a number of years and since we have been in the business of energy sales.

Q96 Chair: How many of your customers were mis-sold tariffs? Alistair Phillips-Davies: In the Ofgem report that was issued two weeks ago, they estimated in the region of 23,000 people would have been disadvantaged by some of the sales practices that went on during the period of their investigation.

Q97 Chair: Is it the case that these mis-sold tariffs started from 30 September 2008? Alistair Phillips-Davies: The Ofgem investigation did not cover the period that early. It covered the period from 2009; I think October 2009, from memory.

Q98 Chair: We have been contacted by Surrey Trading Standards Service to point out that this illegal and misleading sales script was used from 30 September 2008. Do you dispute that fact? Alistair Phillips-Davies: No, and we have a sales guarantee in place. If there is any customer who feels they have been mis-sold to, we have had in place for 17 months a guarantee that offers any customer who thinks that they have been mis-sold to the opportunity to come to us. We were the first and remain the only company that has sought to recompense customers fully for any disadvantage that they have received as a result of any mis-selling.

Q99 Chair: You will compensate people who were mis-sold from the beginning of October 2008? Alistair Phillips-Davies: Yes. If there was anybody who was mis-sold to who could prove that to us and wants to contact us, we would consider that case and we would compensate them for it.

Q100 Chair: So the onus is on the offended party rather than you as the guilty party? Alistair Phillips-Davies: We have placed adverts in national papers and we have written out to approximately 10% of our customer base or those people who may have been affected by these practices in an attempt to try to make sure that they all come forward and we can have a proper conversation with them about what compensation they are due. We have been doing that for the last 17 months. We have done it in conjunction with a well-known or leading consumer body and we estimate, in conjunction with Ofgem, that probably less than half of 1% of our customers would have been affected by this.

Q101 Chair: What date do the advertisements suggest you will pay the compensation from? Alistair Phillips-Davies: I would have to go back and look at the advertisements, but if there is any customer who feels that they have been disadvantaged by the mis-selling practices from October 2008, we would happily recompense them. 4

Q102 Chair: It was suggested to us that the compensation offer was only going to apply to customers from October 2009, but I am happy to note your on-the-record commitment to using the earlier date. Alistair Phillips-Davies: We will seek to rectify that, and we will also talk with the consumer body we have been working with about how we communicate with any people who have not been made aware of that.

Q103 John Robertson: I was interested in your advert, of which I have a copy here. Do you not think, considering this is 7 April 2013, that that is actually an insult to the people who buy their energy from you? Alistair Phillips-Davies: No.

Q104 John Robertson: You think that is fair, and yet you have already said that you were making changes to the script earlier at that time? You must have known you were cheating and all you were doing was trying to continue cheating but to manufacture some new words to try to convince people that you were not. Is that not right? Alistair Phillips-Davies: No.

Q105 John Robertson: You are a member of the board? One of our public who have tweeted us has asked if you were a member of the board during this mis-selling. Alistair Phillips-Davies: I was a member of the board during the period of the investigation that Ofgem undertook, the report of which came out two weeks ago, yes.

Q106 John Robertson: So why are you still a member of the board? Alistair Phillips-Davies: During the period of the mis-selling when Ofgem are investigating what we did, we took extensive action in regard to retraining, additional audit procedures, significant changes of staff. We took unprecedented action in respect of actually closing our doorstep sales activity in 2011, terminating a number of contracts of external agencies, and we have replaced a lot of the senior management within the retail business. We now have the right team to deliver for our customers and I believe I am the right person to lead that team.

Q107 John Robertson: So what you are really saying is, “It was a big boy who did it and he ran away. It is not my fault, guv”? Alistair Phillips-Davies: I am not running away from this. We have said we are sorry. We absolutely acknowledge that what we did—

Q108 John Robertson: Words are easy. To me that is an insult. Alistair Phillips-Davies: Words are easy but equally, Mr Robertson, we have spent the last 17 months— John Robertson: You knew before that you were cheating. You were cheating the public; you knew that. Alistair Phillips-Davies: As soon as we became aware of things that may have been misconstrued or viewed as mis-selling or illegal or anything else, we took action. We took significant action over the period of the investigation, and we have been taking action for the last 17 months to seek to recompense fully all of the customers who were affected, which again I would reiterate is less than half a per cent of our customer base.

Q109 Chair: How much profit did you make as a result of this mis-selling? 5

Alistair Phillips-Davies: In Ofgem’s estimate there were 23,000 customers who may have been mis-sold to. What they said was that they felt that we were making £45 a year out of those customers. Of the customers that we have spoken to to date and settled with, the average compensation figure we have paid—I am rounding up and adding a small amount on to cover any interest and other inconvenience—has been between £65 and £70. If you took £65 and £70 and multiplied by 23,000, I would imagine you would end up with a number of about £1.5 million in terms of the detriment that has been suffered by customers. We have obviously provided £5 million for that and we will go through a process to make sure that we deal with all the customers who contact us, and then we will go through a process that we have been discussing with a leading agency for any customers who have not approached us to try to make a fair and reasonable recompense to them by trying to identify what their circumstances were. On top of that, we have borne the not insignificant fine of £10.5 million, which we decided to accept to try to draw the matter to a close. John Robertson: Chair, can I come back? Chair: Yes.

Q110 John Robertson: Just so it is not just Mr Phillips-Davies who is getting hammered all the time, the other companies, are you squeaky-clean in all this or do you want to hold your hand up now and say guilty? Jim Poole: I can speak for EDF Energy. EDF Energy, in the past, has been through an investigation by Ofgem into this area. It did not identify any mis-selling activities, but it did identify control weaknesses, which Ofgem commented at the end of the investigation, that we corrected very quickly. We are confident now that those controls are robust and in place.

Q111 John Robertson: That is quite interesting, because I complained to your company about people phoning me up that had information about my energy, and yet they refused to tell me where they got their information from. Does that sound like being legal? Jim Poole: That does not sound right.

Q112 John Robertson: You are right, it does not, but that happened and it was your company. What are you going to do? Jim Poole: Certainly, if you give us the details of that, I will look into it. As I say, there was a thorough investigation and we have taken all of the actions that Ofgem asked us to take. As Ofgem said at the end of the investigation, the speed with which we did that was appropriate.

Q113 John Robertson: Mr Cocker, what about E.ON? Tony Cocker: Ofgem is currently investigating E.ON. We are working fully with Ofgem to understand their concerns. We have a very strong view that we want to provide the best products to our customers at fair prices and to enable customers to make the right decisions in terms of their energy tariffs, so we will work fully with Ofgem. If there are findings, we will implement those findings.

Q114 John Robertson: As far as you are aware, you are squeaky-clean? Tony Cocker: I think it is too early to say. We are working as hard as we can— John Robertson: I am bound to say, Mr Cocker, I would expect a company to know whether they are doing things right or not doing things right. You and I both know that you know whether you are squeaky-clean or not. Come clean now and tell us if you are or you aren’t. Tony Cocker: We are working as hard as we can to make sure we are squeaky-clean. 6

John Robertson: Not good enough.

Q115 Chair: One of the points that I think many people are concerned about is the lack of transparency in the operations of the big six, the fact that their corporate structures are extremely complex and with very large numbers of subsidiaries, with vertical integration, in fact with profits being generated partly in the generation business, partly in the trading business, partly in the supply business. I want to ask all three of you this. Why do you use these very complex and somewhat obscure structures? Tony Cocker: Mr Chairman, I think the way we think about it, we have a number of businesses in the UK, and each of those businesses has to stand on its own two feet. We have a retail business, which supplies electricity and gas to residential customers and business customers. We have a generation business, which generates electricity. We have a renewables business. We also have an upstream gas business and a gas storage business. Each of those businesses has to operate and stand on its own two feet, as I say. Then in terms of ensuring transparency for our customers, we explain as clearly as we possibly can what is the makeup of our customers’ bills and as clearly as we can what is the makeup of our profits, both in terms of the retail profits that we make in the retail business, which is providing a service to those customers, and also in the other areas of the business, the generation business or the exploration and production business. Jim Poole: I guess the easiest way to explain the structure is that we have an upstream business, which is largely generating energy, on one hand and we have a downstream supply business supplying electricity and gas to our residential and business customers. The segmented accounts that are produced accurately reflect the performance of those two businesses. Alistair Phillips-Davies: We have three business streams. We have a network stream that is completely regulated and separated. We also have a wholesale or generation stream, and then we have a retail stream that deals with customers. Those three streams are reported in our financial accounts every year, and they are subject to audit. Also, Ofgem have over the last three or four years asked us to produce specific accounts in relation to retail and generation businesses solely in the UK, because we do have some businesses based in Ireland as well. We produce those accounts. They are fully reconciled to the published accounts and the Ofgem auditors have given us a clean bill of health on the fact that what we are doing is entirely appropriate. I think they went as far as to say, in response to issues around trading profits, that because we reconcile those accounts fully and they are publicly available there was no opportunity for us to disguise or hide profits within either the generation or supply business. We do not have a central trading or hedging business that we attribute any significant profits or losses to, so they are all entirely attributed to either the customer business or the generation business. They are available every year. I have a copy here if you want to see them.

Q116 Chair: Is not the effect of these very complex structures to allow you to move profits at will from one part of the business to another? Tony Cocker: No, absolutely not. You keep calling it a complex structure. Actually, Mr Chairman, it is a very simple structure. As I said, we have a generation business. There is a team that runs that. We have a retail business and a team that runs that, a renewables team that runs that business, an E&P team that runs that business. It is actually very simple and straightforward and we report very transparently on each of those businesses, including through the Ofgem segmental analysis.

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Q117 Chair: Just on that, all the transactions between the generation business and the retail business are at prices that are available publicly, are they? Tony Cocker: No, the retail business buys all of its electricity and gas through our trading business. It is a service from our trading business, which is based in Germany. The generation business sells all of its electricity and procures all its fuel also through a service that is provided by the trading business. They are completely separate, completely standalone. Each of them, as I say, has to stand on their own two feet, and those transactions are at market prices.

Q118 Chair: This transparent structure involves a company in Britain buying from another company in Britain via an intermediary in Germany at a price that is not disclosed. That is your transparency? Tony Cocker: No. The retail business does not buy from the generation business. The generation business, through the trading business, sells all of its generation into the market and the retail business, through the trading business, buys all of the electricity and gas that we require for our customers through the marketplace.

Q119 Chair: Wouldn’t it be much simpler just to transfer it straight from the generating business to the retail business at a price that you could then publish? Tony Cocker: No, because we want to be very focused on simple standalone businesses, each of which stands on their own two feet and each of which is competitive in their own marketplaces.

Q120 Chair: How does it work in your case in EDF? Jim Poole: Very similar model. The upstream business sells its energy at market prices into the market and the downstream business, the business I am responsible for, effectively does the same. It buys from the wholesale market and the prices that impact the performance of both those businesses are the prices of the wholesale market. The view that vertically integrated businesses effectively self-supply is not the case. As I say, the upstream sell into the market and the downstream buy from the market, and that means that we get an accurate reflection of the downstream profitability of the business. It is appropriate, because clearly we are competing with businesses that are all doing the same thing in terms of buying energy from the wholesale market.

Q121 Dr Lee: How is the market price set? In each case, how do you arrive at a market price for any particular commodity? Tony Cocker: Our retail business buys the electricity or the gas at the market price, so at the prevailing market price in the traded market.

Q122 Dr Lee: Is that done at that time or is it done over a period? Is it a spot price? Tony Cocker: The retail business for our residential supply business will buy the electricity and gas gradually over the front of the coming two to three years to manage the volatility in the prices, so we get a smoother price than if we attempt to buy all of it on one day or all of it in one week or all of it in one month.

Q123 Dr Lee: Do you think that market price is set by country conditions or is it a global price? The price of liquid natural gas is different in different parts of the world, for example. You say it is based in Germany in your case. Clearly, the decision on nuclear has made a difference to the price of gas in the region. How do you make a calculation over two to three years on how much you are going to buy and at what price when something like that 8 can happen? How do you do it? I do not quite understand how you price something in that environment. Tony Cocker: For our residential business, for example, our risk management team here will say, “Okay, we are going to buy a certain amount of gas for summer 2014 now, and we will buy that in the market”. By “in the market” I mean it is the UK North West European traded gas market and the indicator of that price is the NBP price, which is published on a daily basis. That is a very clear and transparent price and a very clear and transparent way of doing it from our business perspective.

Q124 Dr Lee: Do you think that is truly subjected to market forces in the way that you can trade oranges and lemons and there is a proper market, or is there a danger that it is not really? Tony Cocker: The UK traded market, the North West European traded market particularly around the UK, is the most liquid, it is the most traded energy market in Europe. Therefore, the price that we procure our gas for through that market we believe is a fair price. There have been some issues and you will recall in September of last year there was accusations of traders attempting to manipulate the price. Clearly, that is bad behaviour and absolutely should not happen, and all the serious participants in the market absolutely do not condone that sort of behaviour.

Q125 Dr Lee: That was actually my next question. Is there any evidence of any of your companies being involved in an equivalent to a LIBOR scandal in terms of fixing of price at all? Tony Cocker: Absolutely not. Dr Lee: There is no game-playing, nothing at all? Tony Cocker: We have thoroughly reviewed it and absolutely not.

Q126 Dr Whitehead: Could each of you let me know how much you trade, bearing in mind what we have just been discussing, over-the-counter and how much over the wholesale markets, bearing in mind that all of you in one way or another self-supply? Alistair Phillips-Davies: I will answer. We routinely trade 100% of our generation in the day-ahead market and our demand as well, so it is relatively routine for us to put all of our power into the day-ahead market.

Q127 Dr Whitehead: These are not financial contracts? Alistair Phillips-Davies: Well, they go into an auction. There is an auction structure that Ofgem support, and the support has been fully transparent. Anybody can bid for that power and we routinely put 100% of the volume of our generation into that market on a day- ahead basis. In addition to that, in respect of I think both of the smaller energy companies here and four others, so therefore six in total, at our cost we have made available to them free credit so they can trade in that market. We have offered them favourable terms without quoting bid-offer spreads. We do a number of contracts with those six smaller companies. Therefore, in terms of short-term liquidity, which is this day-ahead auction market, and/or medium-term liquidity, offering to trade with the various companies, we have done clearly more than anybody else in order to improve that liquidity.

Q128 Dr Whitehead: Could I be clear that you put all your generation in— Alistair Phillips-Davies: We routinely put all of our generation into that day-ahead market. We can come up with figures. Do we do it absolutely every day? No, but we routinely put 100% of the generation into that market. If you wanted we could give some statistics or if 9 you want to send somebody to come and see our traders and look at it or verify that, we would be very happy for you to do that, but that is what we routinely do.

Q129 Dr Whitehead: Then you buy from that day-ahead market as if that were not your generation? Alistair Phillips-Davies: That auction, which is free to anybody to bid into, we end up selling in that auction, and we end up buying back from that auction for our supply business as well.

Q130 Dr Whitehead: You do not trade two years ahead, three years ahead? Alistair Phillips-Davies: No, we will routinely look to hedge our position further out as well. In terms of that day-ahead market we do routinely put all of our volume into that market, but we will actually keep contracts further out as well.

Q131 Dr Whitehead: What is the effect on the day-ahead trading and the hedging strategy? Alistair Phillips-Davies: Say that again. What is our— Dr Whitehead: You say you hedge against the day-ahead trading for longer term trading. What is the effect of that? Alistair Phillips-Davies: What do you mean? Sorry, I don’t understand the question. Dr Whitehead: Well, you have just mentioned that you put everything into the day- ahead market, which you then trade as if it were not your generation, but you hedge presumably in order to mitigate the effect of the day-ahead trading in terms of the long-term market arrangements, which is then relayed back to your own self-supply? Alistair Phillips-Davies: Yes. So, if we are trying to mitigate the issues around particular price spikes and things like that—so, for instance, in March we obviously saw gas prices more than double at times during March—then we would want to trade ahead for things like that in order to mitigate the risks to our customers of not being able to supply them. Similarly, we do the same within the electricity market, which is what you are talking about. We would seek to hedge some of our exposure forward and, therefore, we would end up putting generation into the market and our supply business would end up buying generation out of that market as well, that day-ahead market, to cover its position, because it could not take it straight from our generation business.

Q132 Dr Whitehead: How do you do that? Jim Poole: The model is very similar, actually. We trade over the horizon for both the supply business buying energy and the upstream business selling energy. The over-the- counter market it is about 86%, and the auction market is about 14%. Very similar to the way that Alistair has just described, we then do effectively the gross bidding process in the day- ahead market, so a very similar model. Buying over that longer period of time clearly helps to manage any peaks that we see in the market prices.

Q133 Dr Whitehead: Are you also hedging? Jim Poole: Yes. Juliet Davenport: We buy and sell in a very different way from everybody else. We buy power from about 500 independent generators on longer and short-term contracts. We then balance that in the day-ahead marketplace. One of the reasons why we buy power from a significant number of generators is that it gives us a forward position so that we are not changing our prices constantly for our customer base. In fact, we have only changed our price once in four years on the electricity side recently. 10

In terms of the percentages, that changes. Obviously, we trade in 100% renewables, so we have wind and solar on our portfolio. How much we are selling and buying in the day- ahead market will change on a daily basis. Essentially, we have a very different business model. We do buy power from our own generation as well, but we will balance that in the day-ahead market as well. Tony Cocker: Our approach is to hedge over the front three years both for our generation portfolio and for our retail portfolio, but separately as I described earlier, and then also to use the day-ahead market. We put about 60% of our volume through the day-ahead market. Right from the beginning of this day-ahead auction, which Alistair described, we have been very supportive of building that to ensure that there is adequate or good liquidity in that market. Overall, we churn our volume, so sell and buy our volume, for generation about four times before delivery. To your question about hedging and then day-ahead, we might hedge the volume out but then conditions might change on generation so we might sell it back. We do that four times overall on average for the generation side of the business.

Q134 Dr Whitehead: Selling back to yourself? Tony Cocker: No, back to the market; backwards and forwards into the market.

Q135 Dr Whitehead: I imagine you should have a very robust reference price right across the curve on the basis of that model, the model that, with the exception of Good Energy, you have all said is pretty much similar between companies? Alistair Phillips-Davies: I think one of the issues with electricity is that you have 48 half-hourly periods in every day, so despite the fact that you may have reasonable liquidity further down the curve, let us say a year out, for a season or a quarter or a month, it is more difficult to get liquidity if you happen to want to buy 5.00pm until 7.00pm on a Thursday afternoon in October 2014. That is a pretty difficult product to buy, and that is simply a function of the fact that you can’t store electricity very easily. Essentially, you have 8,000- odd hours in every year and for each of those hours it is split into two, so therefore you have an awful lot of chunks of electricity to try to trade to completely balance yourself further out. That is why you tend to go for either flexible supply contracts or have flexible generation on standby that you maybe own or contract with in some way, shape or form. I think there is good liquidity, but the problem is the granularity of that liquidity given how many half-hours the day is chunked up into. I do not know whether Juliet would agree, because it is probably an issue for you. Juliet Davenport: I think the issue with liquidity particularly for smaller suppliers is down the curve and how do you sort that. For the day-ahead liquidity we have seen improvements over the last two years, and that is good. We can now balance the position day- ahead. But in terms of further down the curve I think it is still very difficult. One of the reasons why Good Energy’s business model has grown up as it has is because by dealing with smaller generators we can get a forward position. But I do worry personally about some changes in policy we are seeing that might restrict that going forwards rather than improve it. Alistair Phillips-Davies: Also, further about liquidity, I would just add that you get unintended consequences from things like a carbon price support mechanism that makes it incredibly difficult to trade power in a period where you have a tax rather than something you can hedge in terms of the carbon price. Therefore, really there is very, very limited liquidity, if any liquidity at all, beyond the point in time where there is certainty from Treasury on what that carbon price support mechanism will be. It is not necessarily a bad thing but it is just because of the nature of it you can’t hedge your exposure to that tax and, therefore, trading the power will give you a significant exposure, potentially, to how that tax is set.

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Q136 Dr Whitehead: Ofgem’s liquidity project, did indeed mount a challenge to provide, they said, robust reference prices along the curve and they say that the big six in particular have failed to meet this challenge. That appears to contradict what you have said this morning in terms of the likelihood of a robust reference price indeed round the curve; unless hedging strategies actually detract from that? Alistair Phillips-Davies: From my perspective, SSE have clearly done more than anybody else to try to provide liquidity into this market and also to small independent suppliers who may have issues. As I said, I think it depends where you draw the line going down the curve. I think there is pretty good liquidity out a couple of years. Once you go much beyond a couple of years, you get these issues like the carbon price support mechanism, which make it very difficult to trade there or very risky. Tony Cocker: I have to say I would not agree with Alistair that SSE have done more than anybody else, but I would say that there has been progress made. Having said that, our proposals to Ofgem were to absolutely put in place a no self-supply restriction, in line with the comments we just made, and to require all generators to trade at least 30% of their generation in the day-ahead market. When I say “all generators” I mean all significant generators, which would include a number of the players who you have not invited to these sessions today, so the standalone generators. Those were two of the key things that we proposed to Ofgem to further continue to improve the liquidity in the wholesale market, which we believe is vital both for competition in the market and for confidence in the market.

Q137 Dr Whitehead: Just a closing thought: if you are all hedging in different ways as you have described, how come the results are all so similar? Alistair Phillips-Davies: I think if you look at the average weighted cost of going into the supply businesses across the different companies they are actually quite different. Maybe we end up making similar profits, but equally I think over the last two or three years you have seen reasonably steady rises in energy. There have been small blips, like clearly the last month or so has seen extraordinary prices for gas, but—

Q138 Dr Whitehead: Forgive me, if you are trading mainly transparently on the day- ahead market, and you are then hedging on forward markets in order to offset the effect of that and each company is working on its own information in order to hedge those results of what it has done on the day-ahead markets, you would anticipate that the results of the hedging for each company would turn out to be rather different. Therefore, the outcome in terms of performance and prices and what have you would also be different. But that is not the case, is it? Alistair Phillips-Davies: There is a very wide variation in domestic electricity purchase costs. I note, just looking at the last year where I have all the information from, the highest company is 30% to 40% different from the lowest company there. You perhaps are not—

Q139 Dr Whitehead: No, I am talking about the major generators and suppliers here; all the integrated generators and suppliers. Alistair Phillips-Davies: Okay, so ScottishPower, EDF, E.ON, RWE, British Gas and SSE—I am just saying there are significant differences in the purchase costs of energy that appear in their accounts that Ofgem sign off and have been looked at by BDO. You may not have seen the information, but I can give you our view of the information. There are very significant differences in those costs. I will send you a table if you want. I understand exactly what you are saying and I am just saying from what I see from analysing what public information Ofgem make available, we see significant differences and we would be happy to 12 send that through to the Committee afterwards so you can have a look at it and decide what you make of it. There are also significant differences in cost to serve and things like that as well. Some people have much higher cost to serve than we do.

Q140 Dr Whitehead: Do you have any view on that, Mr Cocker? Tony Cocker: I agree that the data show that there are significant differences in the cost of energy from the segmental accounts, and there are also significant differences in the cost to serve and there are significant differences in the profitability of the individual businesses. Underlying those differences, at the end of the day we are in a competitive market and in terms of the price that we offer to our customers we have to be competitive. What we try to do is to make sure we offer fair, competitive prices to our customers and simple products. Jim Poole: The only point I would add is that, as has been mentioned, the breakdown is in those segmental accounts. I think it is a good reference place to go to see the costs. Clearly, that also highlights the profitability of the businesses being quite different in terms of their supply side of the business. EDF Energy has not made a profit in that part of the business since 2009, so it is an improving picture but it is still not a profitable business for us. We are focused on trying to engage customers and grow our business in terms of the activities that we have in the market, because that is one of the challenges that we have. Although we are one of the major suppliers, we are a relatively small one of the major suppliers, and actually being bigger and having scale is something that we are very keen to do. An active, competitive and engaged market is something that we are very keen on. Juliet Davenport: I think also it depends on the type of product you are trying to deliver to your customer base and understanding what those customers want. Our customers particularly have appreciated stability in prices and I think customers do not want to see their prices constantly changing. What you see in profitability may change from year to year in terms of the supply business and not only the hedging policies are different but also the pricing policies will be different depending on what product you are delivering.

Q141 Sir Robert Smith: I just want to ask Mr Phillips-Davies: what motivated you to make the market more liquid? Alistair Phillips-Davies: Essentially, as we understood it, there were a number of people who were saying that the market was not liquid enough to be fair to some of the smaller suppliers. What we did was seek to put activities in place to try to provide more liquidity. We clearly have a large business. We have differing customer needs day in, day out, as you win and lose customers, and we also have a large generation portfolio. Having a reasonably deep and liquid market at a time when a lot of banks have exited the market because bank capital is not there to do it is helpful and, therefore, we were prepared to do that. Equally, with people criticising the big six for us trying to keep out small suppliers and whatever, we were perfectly happy to say, “No, that is not true. We will put our money where our mouth is”. We want to see a vibrant, competitive market, and therefore we made available credit terms to those small suppliers so that they could trade more actively. We are very happy to see a deep, liquid and competitive market, and we would support actions that delivered that. Tony Cocker: In the business model that I described earlier of how we operate the business as separate businesses, each of which has to stand on their own two feet, it is absolutely vital for us that we have a deep and liquid market in order to enable that business model to work. So we had a clear self-interest in supporting liquidity. In addition to that, I personally believe that it is very important to have liquidity in order to engender confidence in the market and competition. 13

Q142 Mr Lilley: I am obviously a bit obtuse, but if most of you are selling all your electricity into the market a day ahead, when you enter into longer-term contracts who are you buying from? Alistair Phillips-Davies: From the large generators.

Q143 Mr Lilley: So they are also selling you stuff they do not have? Alistair Phillips-Davies: No. There are large generators, so— Mr Lilley: Oh right, the people we are not seeing. Alistair Phillips-Davies: So, International Power—that is now GDF—I would imagine would have a long position in the UK because they have generation; they do not have a particularly big supply business. Intergen is a reasonable-sized generator, and Drax equally. I think the output from their power station is larger than their supply business. Then finally in the case of EDF, I would imagine since they have bought British Energy they have a significant surplus of generation, over-supply. So, all of those four people I would imagine would sell substantial volumes of energy into the market that some of us would need to buy, because we can’t cover all of our supply business with the generation that we currently have or own.

Q144 Mr Lilley: I can see that if you are supplying more than you are producing, you will have to buy from a third party, but I was thinking in terms of the term of contract that if you are all selling just a day ahead, who are you buying from a year ahead? Alistair Phillips-Davies: For instance, I suspect all four of those people will be looking to potentially hedge their business. I think generators look to hedge further ahead so they provide themselves with some certainty, particularly a generator who relies on coal, like Drax, because you will enter into forward physical contracts to ship coal to the UK and therefore you will want some certainty of making a profit out of it, so those sorts of people would. I think where you do get into difficulties, as I say, is where you get to the end of where you have certainty on carbon price support because the swing factor on that in terms of being able to hedge your position is very large basically. It is just a risk that is very difficult to deal with. Therefore I would imagine or I know that there is a reasonable market through into 2015, but much beyond that the market gets relatively patchy and, as I say, the spreads between bids and offers are quite wide at that stage. Tony Cocker: Can I just clarify, you said if you sell all day-ahead from generation, and I think your natural assumption is we sell all day-ahead. You are reserving it all to day- ahead; you are not doing any trade, any selling down the curve. In fact, what we do is we will sell on our generation side one, two, up to three years out, but then we will constantly need to adjust our position as gas prices change and coal prices change. We will unwind it, and then we will sell on the day-ahead market 60% of our generation. As I said before, we churn four times. So, let’s say three years out, where liquidity just about starts—as Mr Phillips-Davies just said—to today we will be buying and selling that generation in aggregate four times before we get to full delivery, because we constantly have to adjust that position.

Q145 Mr Lilley: The overall effect of that will be to smooth out peaks and troughs in prices but collectively, if one of you happens to be particularly skilful at trading, then the others must be losing a fraction on the trading side. Trading can’t itself generate profit. Tony Cocker: There are also other players in the traded market. It is not simply the electricity retailers and electricity generators in the electricity market in the UK. There are other players as well. Alistair before mentioned banks and there are also independent trading 14 houses and that is true both in electricity and gas. There are a large number of participants in these traded markets. Juliet Davenport: I think there is another element to that as well, because obviously there is the forecasting, how much your customers are going to use, what impact weather is going to have. The market of last resort is National Grid and as soon as you go into the market of last resort you are paying a penalty for being in the market of last resort, so you can be better as a trader by knowing exactly what your portfolio is doing. For us it is even more important because we trade wind and solar, so we need to know what the day-ahead weather is doing and we will be trading that within day, an hour ahead, depending on what is happening with the sun and the wind.

Q146 Mr Lilley: But if you are doing particularly well because you have better weather forecasters than the rest of us, which wouldn’t be difficult, someone else will be losing. It is just demand. Juliet Davenport: Potentially what you may not have is gen-sets coming on to fulfil that position, because expensive gen-sets are helping to balance the market. You are using those much less than you would need to if you are better at trading. Alistair Phillips-Davies: So, your assertion about having a good weather forecaster is correct. If you have a good weather forecaster, it helps, no doubt.

Q147 Mr Lilley: But the trouble is, in talking about this, the public often gets the impression that traders are making a profit, but if one trader is making a profit, another must be making a loss. Jim Poole: I think the interesting thing is that the way we are approaching energy is really around managing the risk of the business.

Q148 Mr Lilley: Collectively it is worthwhile doing it because you are smoothing things out? Jim Poole: Yes. Mr Lilley: But certainly it would be wrong to suggest that there are people who are traders who are making a profit in aggregate. Some traders will be making a profit; others will be making a loss. The overall effect will be to smooth things out over time. That is a sort of a question stated as an assertion. Alistair Phillips-Davies: Yes. I suspect, rather like the foreign exchange market, ultimately probably end-user consumers will pay a small premium for the bid-offer spread on the foreign exchange they are buying. Equally, the cost of us hedging out our exposures to our customers and doing that in a traded market, if you do it well that benefit will flow through to customers. If you do it poorly, that dis-benefit will either flow through to your customers or flow through to a reduced bottom line. Juliet Davenport: I think an efficient use of resource is what it comes down to.

Q149 Dr Whitehead: Your traders will have, clearly in terms of hedging strategy and down the curve, preferential information about your own generation, and therefore the trading on the basis that that preferential information will be loaded towards self-supply. Alistair Phillips-Davies: There are very clear rules in the remit in European legislation, where any information that we have in relation to generation sets we have to make available to the market for stock exchange announcements and things of that nature. Those rules been in place for—I don’t know if Mr Cocker can remember—a couple of years now, something like that, so therefore a screen is publicly available to everybody. We have to post what happens in the generation business and/or in the storage business. 15

Q150 Dr Whitehead: Right down the curve? Alistair Phillips-Davies: Yes. Well, if you make nominations to National Grid, National Grid will then publish that as well about when there are outages and things of that nature. It is generally the very short-term movements where you lose sets or where sets have had a problem that is going to affect things in the short term, which the remit market covers. Longer-term we will provide information to National Grid and they present plans as to roughly what is going on in terms of how people are setting there. So, there is quite a lot of information available and we are very careful to keep our traders or the people who hedge our retail and generation business away from that information until it is made public. They are not allowed to do anything with it until it is made public.

Q151 Barry Gardiner: I want to begin to explore with you accounting and transparency and what you referred to as the simple process earlier, Mr Coker, and the Chairman referred to Ofgem and their remarks that there were limitations to transparency and comparability, and that is particularly in relation to the CSS, the new Consolidated Segmental Statements. They allow you or they require you to separate your business out and show your gains and losses in terms of your generation, in terms of your domestic and your retail supply. The problem is though that there are inconsistencies here in the way in which you account for things and there are various lacunae, shall we put it that way, in the way in which the rules say that you have to allocate things. Just picking up on the trading element of what we were talking about and in particular the hedging that you discussed with Mr Whitehead, any gains or losses on financial instruments such as hedging, which have a major effect on the profitability of your businesses, the CSS include a checklist table where that trading activity can be allocated to the different segments, but there is also a box that says “another part of business”, and that box is frequently checked. Can you say for each of the three of the big six businesses whether you have allocated financial instruments gains and losses to that other part of the business box? Mr Cocker. Tony Cocker: I haven’t been back through our Ofgem postings.

Q152 Barry Gardiner: It may be an unfair question to put to you on the spur of the moment. Perhaps you could write to the Committee, all of you, and say whether you have allocated those profits and losses to the other part of the business box. Alistair Phillips-Davies: We will write to you. I just say for us we only have a generation and a supply business and they are reconciled to the accounts. There is nothing else in there. I suspect it would be the same for one other company as well. You are a publicly listed company in the UK, you have complete transparency for the publicly listed companies in the UK of what is going on. We will write to you as well, but I believe it is— Tony Cocker: Can I just add, we will write to you as well. I am told that we have not ticked that box and the Ofgem accounts cover the retail business here in the UK and the generation business in the UK, and it is as simple as that.

Q153 Barry Gardiner: Mr Poole, EDF Trading is a UK registered company, yes? Jim Poole: It is not part of the EDF Energy organisation in the UK. It is a group— Barry Gardiner: But it is a UK registered company, yes? Jim Poole: I didn’t believe it was actually, but—1

1 Note from the witness: In response to Q153 from Barry Gardiner MP, I said I did not believe EDF Trading was a UK registered company. This was incorrect – the business is registered in the UK (company number is 03750288) to the following address: EDF Trading, 3rd Floor, Cardinal Place, 80 Victoria Street, London, SW1E 16

Q154 Barry Gardiner: Okay, interesting. It is 100% owned by its French parent company? Jim Poole: It is, yes.

Q155 Barry Gardiner: Indeed. In the year ending 31 December 2011 it made pre- tax profits of £530 million. Is that correct? Jim Poole: That is right, yes. I think that is euros.2 Barry Gardiner: Euros? Jim Poole: I thought it was euros.2

Q156 Barry Gardiner: I thought it was pounds, but anyway, maybe you will write to us on that. The trading arm isn’t owned by the other UK-based parts of EDF, and so its activities are not separately reported within the segmental statements, although some of its revenues and expenses are allocated to UK segments. Is that not right? Jim Poole: So it is reported separately under our group financial performance, and it does the trading activity— Barry Gardiner: Not within the segmental statements is what I said. Jim Poole: Yes, so it is not within the segmental statements.

Q157 Barry Gardiner: So when you are looking at segmental statements, it is not giving you a complete view of the business, is it? Jim Poole: It gives you a complete view of the business, of how those two businesses performed in relation to the energy that was procured from the wholesale market, so it does isolate those businesses from any trading activity.

Q158 Barry Gardiner: Yes, this is one of the things we will come on to look at. The prices that can be shifted around groups through inter-company sales and loans and management fees and suchlike, that sort of transfer pricing is very difficult to get a handle on. In 2011 you and EDF Trading had a short-term intergroup loan of £1.6 billion, didn’t you, or was that euros as well? Jim Poole: I am not aware, sorry.

Q159 Barry Gardiner: You are not aware of that? Perhaps you could check that, and when you do could you tell us about paying interest on that loan and whether through that the company could repatriate profits to France and not show them in the consolidated accounts? Jim Poole: Okay, I will check and respond.

Q160 Barry Gardiner: Thank you very much. Why is that you use different accounting standards, so sometimes you use IFRS, sometimes you use GAAP? I think EDF Trading uses GAAP, whereas EDF Energy Holdings uses IFRS. Isn’t that just another way in

5JL. EDF Trading Markets Limited is also registered at the same address, with company number 04255974. This is the arranger for EDF Trading, and is authorised and regulated by the Financial Services Authority as an Energy Market Participant.” 2 Note from the witness: “In response to Q155 from Barry Gardiner MP I suggested that pre-tax profits from EDF Trading should be 530 million euros, rather than pounds. I suggested this because EDF Trading’s financial results usually are reported in euros. However Mr Gardiner’s figure, £530 million, was based upon a conversion to sterling from EDF Trading’s pre-tax profits, as reported in euros. EDF Trading’s 2011 pre-tax profit was €614.5 million, which is roughly equivalent to £530 million. Therefore Mr Gardiner’s figures were correct, and I retract my comments about the currency.” 17 which by using the different accounting standards you are not able or the public is not able— and indeed the regulator is not able—to compare apples with apples, but finds it is comparing apples with pears? Why do you use those different accounting standards in those different parts of the business if it is not for confusion? Jim Poole: It is not for confusion. They are the accounting standards that are relevant to the activities that are undertaken by that business and how those results are consolidated within the group’s position. Barry Gardiner: Sorry, could you say that again? I did not quite catch that. Jim Poole: It is not designed for confusion. Accounting can be—

Q161 Barry Gardiner: It may achieve confusion, but it is not designed for confusion. Is that the answer? Jim Poole: Accounting can be complicated, but our intent isn’t to try to do that. It is to use the appropriate standards that are relevant for the parts of the business and how those results are consolidated within the group.

Q162 Barry Gardiner: Mr Cocker, some companies can sell capacity and that earns revenue because it is available for dispatch even if it is never used. For a plant with low fixed costs that can be a particularly profitable venture, can’t it? Tony Cocker: Yes. It depends on the price. Barry Gardiner: It can be a particularly profitable venture. Is that right? Tony Cocker: It depends on the price. Forgive me, can you maybe carry on, and I can understand where you are headed?

Q163 Barry Gardiner: I would have thought you could always see where I am headed, but what I am saying here is—well, let me put this another way. You can allocate that to different parts of the business, can’t you? Tony Cocker: No, we are very clear. Generation profit arises in generation, retail profit arises in retail, upstream gas profit arises in upstream gas and optimisation or trading profit arises in trading.

Q164 Barry Gardiner: What about your overheads, then? Estates, administration, marketing, pensions, financing can be allocated to any of those segments, can’t they? There is no set method for doing that, so the way in which you do that may be entirely different from the way Mr Poole does it, may be entirely different from the way Mr Phillips-Davies does it, and therefore getting a handle on how you have allocated those overheads and comparing again company with company is extremely difficult. Tony Cocker: If we look at the Ofgem segment accounts, I would be very happy separately to discuss with you how we allocate overheads to, for example, the residential business, the industrial and commercial business and the generation business. I am very happy to discuss that. Of course what we are trying to do is to reflect the true profitability of the business and therefore when we are allocating overheads, we are trying to reflect what drives those overheads. For example, is it accounts, is it staff numbers or what? We apply them on a sensible basis and I believe there is also guidance from Ofgem on how to allocate some of those things.

Q165 Barry Gardiner: But you talked earlier, I think, about your trading arm based in Germany, didn’t you? Tony Cocker: Yes.

18

Q166 Barry Gardiner: Are any of those allocated to that? Would they be? Tony Cocker: The trading business in Germany has some services from us here in the UK— Barry Gardiner: So you are able to allocate across there. Tony Cocker: —so we allocate some costs to them, but it is relatively little service that they receive from here in the UK.

Q167 Barry Gardiner: BDO recently recommended to Ofgem that the Consolidated Segmental Statements require suppliers to report on trading activities and that was not brought forward. It would not be in your interests to have it brought forward, would it? Tony Cocker: In our case, it is a strange question. We simply receive a service from a trading organisation that is overseas. We have an exploration and production business, which produces gas and oil both in the Norwegian sector of the North Sea and the British sector of the North Sea. It is sort of consistent to saying we should report also the profits in Norway; it is clearly a separate jurisdiction and we wouldn’t dream of doing that. We have nuclear power stations in Germany, and undoubtedly from time to time the electricity from those power stations finds its way over here, and we would not dream of identifying the profit of that for the UK.

Q168 Barry Gardiner: But if you had done like EDF had done—Mr Poole hasn’t written back to me yet and told me whether he did do it, although I think he did—and had that short-term intergroup loan of £1.6 billion, the very fact that you do not have to record the transactions or pay any interest on that loan, the way in which you can shift that between trading arms—what I am saying to you is that is extremely beneficial to the way in which you are able to show either inflated or reduced profits in any one part of your business as it may suit the company at a particular moment in time. Is that not the case? Tony Cocker: No, I fundamentally disagree with you. The Ofgem segmental accounts are reconciled to our UK audited accounts, and they give a fair representation of the profits in our business. If you separate it out between generation and retail, our retail business makes a margin of less than 5%, as you have seen from the Ofgem reports. Our generation business is profitable, and at the same time over the last five years in our generation business we have invested more in capital expenditure in new power stations or upgrading existing power stations than we have made in profit in those businesses, and you can see that from our published accounts and from our Ofgem reports.

Q169 Barry Gardiner: Are you saying to me that it would not be possible that where a trading arm is based overseas, profits from the UK business activities might fail to show up in the segmental statements presented to Ofgem? Is that what you are really telling us? Tony Cocker: I am saying there is a business that is based overseas that may make some profit from trading around the UK, but at the same time there is also a business based in Germany—

Q170 Barry Gardiner: But I asked you what will show up in the segmental statement accounts. Tony Cocker: You are absolutely right; that will not show up in the Ofgem segmental accounts.

Q171 Barry Gardiner: So, in that respect, there is a failure of transparency, is there not? 19

Tony Cocker: The Ofgem accounts deal with only parts of each of our businesses. They deal with the retail business, and they deal with the generation business. They do not deal with the exploration and production business, they do not deal with the gas storage business and they do not deal in our case with the trading business. The key thing is I believe that the Ofgem segmental accounts were developed to focus on the retail business, to give transparency of the costs and profits of those retail businesses. I believe they do an adequate job of that, a good job of that, of showing the transparency of the retail business here in the UK for the residential customers and industrial and commercial customers.

Q172 Barry Gardiner: So, if in fact it is not to your advantage as a company to have trading excluded from the Consolidated Segmental Statements, why don’t you just include them? Why don’t you just say, “Yes, let’s include them”? You have given a very strong argument that you gain no advantage from this. Tony Cocker: I believe the data that we currently provide give an accurate description of the retail business here in the UK.

Q173 Barry Gardiner: You have told me that there is therefore information that is not provided in the Consolidated Segmental Statements; you agreed with me on that. So, even though there is information that is not provided, you say, “Well, because we are giving adequate, we will not give full”. That does not seem to be a very robust position for open transparency and simplicity. Tony Cocker: That is not what I am saying. I think it is a robust position for simplicity. We have a retail business and we are very clear on that, and there is then a question of how wide you want to cast the net. Do you want to cast the net to the E&P business in Norway, the nuclear generation business in Germany?

Q174 Barry Gardiner: BDO suggested in their report that it should be cast as wide as trading arms, but you disagree with that. Ms Davenport, you have been in a sense observing this discussion because you do not have the same structure as the big six. What do you make of the openness, transparency and simplicity of the way in which the accounts are reported to Ofgem? Juliet Davenport: I think we would appreciate more transparency to make sure. One point of view is that we are a publicly listed company here in the UK. We have to publish our accounts and there is quite a lot of detail. I think in terms of any energy company, a private company in the UK can restrict the amount that they publish as well. I do think there is a case for making all companies—not just necessarily the big six but obviously start there—across the board have more transparency so we understand what is going on. From my point of view, I think customers have lost trust in energy companies full-stop across the board, and the more transparency we can provide to customers across all types of energy companies the better. I think we need to start to rebuild that, and I think if we rebuild that, we can see a better functioning energy market in the future.

Q175 Barry Gardiner: Do you think including the trading activities in the CSS would aid that transparency and help rebuild that trust? Juliet Davenport: I think that is possibly one route to look at it, but I think you should look at the overall market as well, and there should be a complete review of what is happening in companies and how that is being reflected to consumers.

Q176 Ian Lavery: At a time when energy costs and energy prices are becoming unaffordable to many people, I am absolutely alarmed to learn of the fact that out of the big 20 six energy companies one of the big six never paid any corporation tax in any one of the last three years. In addition to that, it is suggested that three of the big six have enjoyed significantly less effective tax rates than should be expected. That is an absolute outrage as far as I am concerned. I might be totally naïve. I wonder if each of the individual companies could explain whether they are either one of the three that enjoy these significantly less than expected taxes, or indeed you are the company that has never paid any corporation tax within the last three years? Alistair Phillips-Davies: Okay, I will start. We are a UK-listed company. I think there was a survey based on our last report and accounts. We are between the 30th and 35th largest company in the FTSE and we were the 17th largest taxpayer in the UK. We paid around about £460 million of direct taxes last year, so I believe that means we pay our fair share. Jim Poole: EDF Energy, if I look at the performance of last year, had a corporation tax liability of £200 million.

Q177 Ian Lavery: Is that a significantly reduced rate? Do you enjoy better rates than others or is that what you would expect to pay? Jim Poole: Our EBITDA3 operating profit was £800 million and corporation tax I think is 24%, so I think it is the right amount that we would expect to pay. Tony Cocker: I think if I look over the last five years and average it, our total profits for E.ON in the UK, so all the elements in the UK, not just the retail business but also including gas storage and exploration and production, were nearly £5 billion. Of that, our total tax contribution was £2 billion including corporation tax, PAYE, National Insurance, VAT and CCL. Our total UK investment figure in that period was £6 billion and we also paid £330 million on business rates. We do have a lower corporation tax rate, as you would describe, than the standard corporation tax rate, but that is because we have invested so much money, £6 billion in that period in capital expenditure. In addition to that, we have also invested nearly £1 billion to repair the deficits in our pension funds for our existing pensioners and current and deferred employees, which we believe is very important. We have a very big pension fund with lots of pensioners; so, very significant investments into the UK, significant corporation tax and other tax paid. Yes, our rate is slightly lower, but that is because of those very, very significant investments.

Q178 Ian Lavery: At least you have said that. I just wonder whether the other two gentlemen would say whether they enjoy paying less than the normal rate. Tony Cocker: Mr Lavery, I would not say I would enjoy— Ian Lavery: Well, if you pay less, I am sure you enjoy it. Tony Cocker: No, it is a rate. We have invested £6 billion, and the way corporation tax works is the depreciation on assets for corporation tax purposes is different, at a different pace than the depreciation for accounting purposes, and therefore you end up with a lower rate. But in due course, of course, all of that will come back. Alistair Phillips-Davies: The majority of our profits are made in the UK despite the fact that we invest more annually currently than we make in profits. We invest in CAPEX. I think we pay a pretty full rate, because the bulk of our activities is in the UK, just subject to normal UK corporation tax. The number I quoted of £460 million was corporation tax plus NI and other direct taxes but excludes VAT and things of that nature because I don’t think they are direct taxes. Our total profits across the entire group are £1.3 billion. So I think you will find that our rate is somewhat as I stated. We are paying rather more than the average among

3 Note from the witness: “In response to Q177 from Ian Lavery MP, I said that “Our EBITDA operating profit was £800 million...”. However, EBITDA is the term for earnings before interest, and is not the same as operating profit. I would like to clarify that “our EBIT operating profit was £800 million”.” 21 large FTSE companies. If we are between 30th and 35th and we are the 17th largest taxpayer, we are paying rather more than many big companies in terms of paying our fair share within the UK. You can get our accounts to look at, but I think that is what you would find, and that is why I quoted that statistic.

Q179 John Robertson: How much of your £6 billion investment comes from the Government for renewables? Tony Cocker: None of it. We have invested— John Robertson: Because it is not all £6 billion from your company. Tony Cocker: Yes, it is. John Robertson: A lot of it comes through the Government for investment in other areas, is it not? Tony Cocker: I am sorry, John, it is money that comes from our company. We have invested in the last—

Q180 John Robertson: You do not get any money from the Government to invest into other areas; is that what you are telling me? Tony Cocker: We have invested in onshore wind, offshore wind— John Robertson: You do not get anything for that? You have paid all that? Tony Cocker: We invest upfront. Obviously in the case of the existing onshore wind farms and the existing offshore wind farms we will benefit from the Renewables Obligation Certificate.

Q181 John Robertson: Is that included in your investment figures? Tony Cocker: No, we invest upfront, and then— John Robertson: Are you sure? Tony Cocker: Yes, the ROCs, the Renewables Obligation Certificates, we will receive over effectively the lifetime of the plant. We have invested that £6 billion upfront in onshore wind, offshore wind, refurbishing Ratcliffe power station £750 million—it is about the same as Wembley Stadium—and also in upstream gas in the North Sea, Huntington Field that just opened yesterday, and also in gas storage facilities.

Q182 John Robertson: You do not get any money from the Government to help you with that? The £6 billion is purely out of the purse of the company? Tony Cocker: The £6 billion is investment from the company. The Renewables Obligation Certificate is a subsidy from which we will earn in due course—

Q183 John Robertson: Do you know how much you get from that? Tony Cocker: No. John Robertson: Could you write to us and tell us? Tony Cocker: We can.

Q184 John Robertson: EDF, how much money do you get for renewables and so on, and do you include that into your investment bill? Jim Poole: The investment number I gave was £1.3 billion, which was the money that was invested last year, primarily in our nuclear assets and our upstream coal gas generation and gas storage activities, and that is funded by the company.

Q185 John Robertson: You do not get anything from the Government, then? Jim Poole: No. 22

Q186 John Robertson: What was the dividend to shareholders recently, or last year? Alistair Phillips-Davies: Ours would have been in excess of £600 million in total for the year. Jim Poole: So we returned to the group £400 million, but I would stress that the inward investment was £1.3 billion. John Robertson: No, it is okay. I will come to the reason why I am asking the question in a minute. Tony Cocker: I do not recall the exact number, but it was less £200 million.

Q187 John Robertson: When you are calculating your dividends, does your dividend just mean the retail part of the industry, or does it also include the generating part of the industry? Alistair Phillips-Davies: For our business the retail part last year made about 19% of the overall profit and the rest came from regulated networks and generation and our dividend is obviously derived from the profitability of all those three business, which totalled just in excess of £1.3 billion last year before tax.

Q188 John Robertson: I take it that is the same— Tony Cocker: That is the dividend for E.ON UK.

Q189 John Robertson: I just wanted to know because I have a problem with that. You are paying out your dividends that cover your whole industry and yet when we ask you a question about how much money you are making you always split everything up into retail and generation. We know from the figures that Ofgem have given us you are making roughly 25% on the generating side of the business, as opposed to, which is always what you quote, a 6% or a 2% rise in retail. Yet when you pay your dividend out to your shareholders you bring them both together. Why can you not bring them both together when you are working out the price of your electricity for your customers? Why can you not reduce the 25% increase to 12% and do something that would help those that really need it? Why can you not do that? To me you just put the figures together and you use them for your own benefit and yet when it comes to the general public, and particularly those that are involved in fuel poverty, they are the ones that suffer and you guys are still making 25% profit. In effect, all the companies when they sell it are selling it to themselves. You might have put it into the market, but it is your electricity that you have generated, and now you are selling it back to yourselves. It is a con, is it not? Jim Poole: If I can comment on that, in terms of in EDF Energy the supply business did not make a profit, as can be seen and as I mentioned earlier on.

Q190 John Robertson: But what did you make in generation? Jim Poole: So the overall performance of the business in terms of EBITDA was £1.7 billion.

Q191 John Robertson: See this is the problem that ordinary people have, and we have many people who tweet us and ask us questions on this. Their problem is that you make all these billions of pounds of profit over the years in generating, you shove it basically into a big pot and then you all go in and you bid for it and you get it. But you are the people you put the stuff in the pot in the first place. 23

Tony Cocker: I am sorry; I am going to have to disagree with that picture. As I said right at the beginning, the way we run our business is that each business, whether it is retail or generation, is a standalone business— John Robertson: But not if you are a shareholder. Tony Cocker: I added them up. The ones that I have just described happen to be owned by E.ON UK plc, so I quoted the dividend. But each business has to stand on its own two feet and— John Robertson: Not if you are a shareholder. Tony Cocker: No. First of all, from a profitability point of view, from an analytical point of view, our profit last year in our retail business was £234 million, our profit in our residential business per customer was £27 per customer and in fact in our residential business over the next few years we will have to invest in smart meters, which we believe will cost us about £1.2 billion. So that is a huge—

Q192 John Robertson: Okay, I have made my point. Let me ask you a question that one of the general public has asked. How much money did you make from interest from customers paying in advance during the summer for their winter energy? How much profit did you make in interest? Alistair Phillips-Davies: I am not aware that we made any profit. We have clear rules about paying money back to customers. Ofgem have clear rules in place so—

Q193 John Robertson: But do you understand what these people—it is not just one person who has asked this question. They are paying upfront and yet they are paying for something that in effect they are not getting at that point in time and you can use that money. It must be sitting in a bank somewhere, or you have maybe invested it. They would like to know what you have done with that money. Tony Cocker: Let’s say a customer joined us in September 2013 on the basis of a direct debit, then they would owe us for much of the winter and then we—

Q194 John Robertson: Yes, but you have had all these customers, most of them a long time, so what do you do with that money? When you are getting it in the summer, what do you do with it? Do you invest it, do you stick in the bank to get interest or what? You are not spending it on electricity, because we do not need it. Tony Cocker: As Mr Phillips-Davies says, if the customer gets out of balance, if they have paid us too much, then we pay them back. Alistair Phillips-Davies: I would agree. You obviously know that the industry has worked reasonably hard, I think, to try to make sure that we repay credit balances to people but if we have a credit balance it would clearly be sat in our bank and therefore will help fund our business and we need to be aware that we have to pay those balances back to customers. If customers have any concerns about balances or excess balances they have with us we normally have a process to pay them back. but if we don’t and the customers request it. we will absolutely do so. If we are not living up to that then we will clearly take that away. But your basic assertion is right, John, that we should not be sat on any significant balances of customers’ monies, and that is correct. It does happen from time to time. and we will repay them. Juliet Davenport: Can I just—

Q195 John Robertson: Sorry, we think of you as one of the good guys at the moment, but if you want to change your mind on it— 24

Juliet Davenport: Just a comment. We have about 2,000 customers, a proportion of our customer base, who we pay a fee for depositing in advance and so we recognise that. That is potentially a way forward if people get a similar rate to what they might get in the bank on those credits. That is what we are looking at going forward over the whole lot.

Q196 John Robertson: So you are one of the good guys? Juliet Davenport: We already have customers on that, so maybe yes.

Q197 Sir Robert Smith: Obviously the argument has been that the retail price of the electricity is set by the market from the point of view of the companies, but part of the market is much less flexible and that is the dynamic teleswitching customers. So. I wondered, for those of you who have dynamic teleswitching customers, how you set the price for them? Alistair Phillips-Davies: It will be relatively similar and probably unfortunately for them—because there is a weighting of a lot of the policy scheme costs on to electricity more than gas—particularly those people therefore who have electric heating, they will probably bear an excessive share of the burden of those schemes. Looking at the figures recently, probably the rises in prices that may come over the next couple of years will be bigger for those people because they will get more allocation of costs from those particular schemes on a unit basis. I think there is definitely an issue around that. because what you are potentially doing is disadvantaging people who often fall into the more vulnerable and fuel poor groups by lumping costs, which are seeing the biggest increases, i.e. those from Government schemes, on to those particular customers. I think that is a genuine issue and one that the Committee might want to have a look at. If you wanted to do something very simple and straightforward around that, you would clearly ask for people to cap the ECO scheme. People have clearly said that they believe the ECO scheme will not be more expensive and in the impact assessment we are seeing costs run away at 50% plus above that. For somebody to cap that cost I think would be very helpful for customers generally, and particularly for those customers who are more likely to be prepayment electricity customers and therefore are more vulnerable groups. So, that is something you could probably usefully do for those people.

Q198 Sir Robert Smith: But those customers also find it very difficult to switch because of the— Alistair Phillips-Davies: There are some customers who are on historic heating tariffs that have very unusual arrangements around metering and things like that. Is that what you mean? Sir Robert Smith: Yes. Alistair Phillips-Davies: Where there are fewer suppliers who offer deals for those particular people—yes, I think that is a fair point and a fair issue that we have in our market, but equally, in respect of any of those customers that we may have, we are absolutely clear and transparent on our pricing and I think it is fair to say at the moment, given the burden of costs and where we are on things like ECO, they are probably enjoying a slightly lower unit rate than they might do if we were charging them at a proper cost reflective rate. That was something I saw recently announced, and that is why I flagged up that issue to you. Going forward next time prices do change, I think they will see a bigger increase than other people. Those are the numbers that we are looking at.

Q199 Sir Robert Smith: Do you other companies operate in the dynamic teleswitching? 25

Juliet Davenport: We are looking at time of day switching, which is not dynamic teleswitching, and I think with smart meters we could potentially offer more of those because they potentially do give customers the opportunity to load switch and therefore reduce their costs going forward. What you have is a tariffing system that is more retrograde than our current tariff in terms of buying train tickets. You can’t buy off peak and peak power easily and switch easily as well, but we are hoping to see, with smart metering coming in, that you may be able to offer more dynamic tariffs to individuals. But teleswitching is a very specific issue.

Q200 Christopher Pincher: Mr Cocker, earlier on when you were talking about transparency you said, “We try as hard as we can to explain our customers’ bills”, and I am sure you probably all claim that you would all try as hard as you can to explain your customers’ bills, but do you think customers would be surprised at that statement? Tony Cocker: When I meet customers and we discuss the bills and what is the makeup of the bill, roughly half from energy, 20% roughly from network cost, bringing the electricity or gas to their door, then customers do understand that and they do understand what are drivers on us: one, to give them that transparency; two, to provide them with a fair price and simple products; and, three, to control our costs, the costs we control, to help to hold the prices down where we can. So I think they do understand it when we discuss it with them, and they do understand that many of the costs are going up as we invest in our electricity and gas system, to refurbish it and make it cleaner, and that the best thing that we can all do is reduce energy waste. There is clearly a big focus on that, both ECO coming up, CERT and CESP where, as I think you know, we were the first to complete. So, I think customers do understand roughly the makeup of the bill, what is driving the increases and the need for all of us to help with energy efficiency.

Q201 Christopher Pincher: That is not what our Twitter feed is telling us. One of the questions that was put earlier on is why are bills and payments laid on in such a complicated manner. Consumer Focus are saying that you could be much more transparent in simplifying your bills. For example, you talk about costs rising in terms of percentages. Unless you know as a customer what the component of the bill that percentage relates to, which you probably do not, you do not know meaningfully what that price rise is. Tony Cocker: I think we can always explain better. We are learning each time. I am not sure whether Consumer Focus’ reference was to the explanation of what makes up the bill, as in the costs that go into it, or whether it was the simple, “Is your bill on one piece of paper?”

Q202 Christopher Pincher: I will give you an example. One big six supplier said that the cost of implementing the Government schemes has approximately doubled between 2011 and 2013. When you drill down, when you ask the company what is the component of the bill that relates to policy-related costs, it is 17%. So rather than talking about a doubling of the cost for a relatively small component of the bill and misleading your customers, why don’t you simply say, “As a result of Government policy changes, we are adding an extra £25 or £30 to your bill this year”? Tony Cocker: You are right, we can communicate better, we all have to learn and continue to improve on communication. From the fundamental conversations I have had with customers, they do understand that a portion of the bill is the wholesale energy cost, a portion is the cost of getting it to the door and a portion is the cost of Government subsidies either for energy efficiency or for renewable generation.

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Q203 Christopher Pincher: But can you not say what the cost is in pounds and pence of Government policy, what the cost is in pounds and pence for transmission, what the cost is of wholesale costs? You must know them. Tony Cocker: Yes, of course we can.

Christopher Pincher: It is a very simple structured business, so why can’t you tell your customers what those costs are? Tony Cocker: There is no reason why we can’t. I think it is just how we explain this picture. You are recommending we explain it in way A or way B. We have explained it in way A, and you are saying maybe it is a better explanation if we use way B. I think we are both trying to explain it to our customers in as simple way as we can.

Q204 Christopher Pincher: But you would accept that explaining in pounds and pence, which is what most customers are interested in—that is why if they switch at all they will switch probably—would be a more simple and sensible way, a more transparent way, to use an overused phrase. Tony Cocker: I am perfectly happy to explain it in pounds and pence.

Q205 Christopher Pincher: What about the rest of you? Juliet Davenport: Just as a general comment, our customer service team and our marketing team get very nervous when we have to do a price change. It is like jumping into a very cold swimming pool, you don’t know quite how it is going to feel until you get there. We do a lot of work in terms of explaining what is going on, if our prices are changing, why they are changing. Generally—and slightly touching wood here—we have very good feedback in terms of how we have explained that and how that has come across. I do not think there is any problem with explaining it in pounds or pence or percentages. You have to, to a certain extent, do it in both because some people appreciate one way, some people appreciate another. I think you should do it in as many ways as possible, using social media, using your website, using direct letters. We have a lot of communication tools now that can improve this, and I hope that we are doing a good job on that. Jim Poole: To the point around engaging in transparency and simplicity, the breakdown you ask for we now produce, so we are deploying a new bill. We have listened to some customer feedback about more clarity and more information and we are now deploying a new bill that regularly shows the breakdown of how the bill is made up to help build that education and transparency. We have also significantly simplified, I think, what it is we offer to customers to make it easier for them to engage. We now have just a standing charge and a single unit rate. We only have two tariffs in the market, which was something that generated some confusion before. As I say, we have deployed new bills and annual statements. We are very keen to see that sort of engagement from our customers and to help our customers engage. Those that can’t engage, and particularly our vulnerable customers, we are effectively now trying to automatically engage them in the market by moving them on to our cheapest tariff.

Q206 Christopher Pincher: Mr Phillips-Davies, can I ask you to answer the question to the Committee but not to me, because I am afraid I have a health question that I need to ask now, so my apologies. Alistair Phillips-Davies: Fine, okay. Thank you. I will be very brief, then. Simply, the bulk of the information that appears on the bills is often legal or regulatory requirements. I think the bills are a little complex and confusing for people generally. I think we should make 27 that information available, put more on an annual statement over the internet, through accounts or when requested, and we should seek to simplify the bills for people. Therefore, we would welcome working with Consumer Focus and Ofgem to try to simplify people’s bills, to make it clear what they are paying and why they are paying it.

Q207 Sir Robert Smith: In terms of understanding what is going to be happening to customers in the future, you have talked about the investments you have made in generating capacity. How does the scale of the investments that you have made in the last couple of years compare with the needs looking forward in the years to come in terms of generating capacity to meet the needs of this country? Alistair Phillips-Davies: I will go briefly. I think we have done quite a lot on the decarbonisation agenda, although if we are going to meet the legally binding targets for 2020, there is a lot more to be done. Whether I truly believe that everybody in Europe is going to get there, given the current financial constraints on Europe generally, I don’t know. That is quite an interesting debate as to how much we really have to invest and whether people are all going to meet their targets or a number of countries are going to decide when they get closer they will not meet them and therefore what the implications are for us. The other thing is that in terms of going forward, we could do with having some of the legislation that is being brought forward at the moment clarified earlier and made simpler. We have seen the regulator and other people comment on the fact that the UK’s electricity system is tighter, we have a number of plant that are closing at the moment and the investments that may need to be made for flexible thermal capacity are not being made. If you want an example of that, I would just ask anybody to re-run 12 December 2012 with a similar day in December 2013, and you will find that all the major generating plant that were available in the UK were turned on and actually 5,000 MW of that plant, or close to 10% of them, will not be available because they will be closed by the time you get to December 2013. Therefore, the UK could, not necessarily will, if a similar situation arose have a very serious situation indeed in terms of security of supply. So the quicker we can get the clear policy pieces in place then potentially the more of a safety net we will have and the more likely we are to avoid an issue. The thing to do is have a look on 12 December 2012 and you will see that there are six or seven major plants that will not be available that were all needed to keep the lights on that day.

Q208 Barry Gardiner: Mr Phillips-Davies, the supply market indicators, which you recently had a spat with Ofgem about, are indicators of the current state of the market and hence the future profits that you as a company might make, and yet you have heavily criticised Ofgem. You said, “Their methodology appears to have consistent bias towards overstating profit margins”. Are you aware of the statement that Ofgem has released, I think since we have been in Committee, on energy supply margin figures, where they say, “It is astounding that Centrica and SSE claimed that Ofgem initiatives to make the link between retail and energy prices more transparent is undermining public confidence in the energy market”. They point out that this comes just over a week after Ofgem fined SSE a record £10.5 million for mis-selling, and they say that you should be supporting their aim of making the market clearer. How do you respond to that? Alistair Phillips-Davies: We agree that we would support Ofgem if they were making the market clearer. What we find unusual is the fact that the figures that people trumpet in reporting Ofgem’s numbers—I remember a year or 18 months ago when they talked about making £125 or £130 margins from customers—never seem to materialise in our bottom line.

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Q209 Barry Gardiner: Maybe they do not materialise because you see the writing on the wall because they release those indicators. But you don’t dispute that they are a correct indication of the level of profit that you would make if you continued operating at that level, do you? Alistair Phillips-Davies: Unfortunately there are errors in those figures. They consistently overstate the consumption that people make. It is the most fundamental part of the errors they make. We could give you a list of the errors they make, but they fundamentally and consistently overstate the levels of consumption that people make and therefore that causes a fundamental overstatement of the profitability of those businesses.

Q210 Barry Gardiner: They point out that, “The weekly figures we publish are projections that will inevitably differ from the figures in the company’s yearly statements. The margins in these statements are for each individual supplier, and they reflect all the tariffs it offers, including discounted rates where they make lower margins. These margins also reflect the effective changes in energy consumption due to weather and actual operating costs, which vary by company and vary year on year. Our weekly indicators are a projection for a typical standard tariff consumer. These indicators have been helping provide consumers with more information about the relationship between retail and wholesale prices since 2009.” Alistair Phillips-Davies: I believe that their consumption figures are overstated. I think almost each and every time that they have published those numbers those consumption figures have been overstated. I do not think we have ever seen consumption in UK at the levels that they have there.

Q211 Barry Gardiner: So, the row between you and the regulators is going to go on? Alistair Phillips-Davies: I do not know whether it is row between us and the regulators. I think there is an issue about people being fair, honest and transparent and we do apologise—

Q212 Barry Gardiner: Who has a better record on that, you or Ofgem? Alistair Phillips-Davies: On what? Barry Gardiner: Honesty and transparency. That was not a question.

Q213 Chair: We are a bit over time. Just to wrap this up, on the basis of not just what you have heard today but generally, do the three of you representing the big six really have any conception of the level of public distrust of the way you run your businesses? Alistair Phillips-Davies: Yes, I think we do. I think a number of the businesses have worked very hard on trust and we will continue to work hard. Clearly what happened two weeks ago is going to require us to redouble our efforts.

Q214 Chair: Do you think the way in which your company particularly have handled the mis-selling issue has increased or decreased the trust of your customers in that business? Alistair Phillips-Davies: I would have thought for some of the customers it would have decreased the level of trust but equally, having looked at comments and listened to calls from customers who we have spoken to over the last two weeks, I think there are a number of customers who also feel that we have dealt with the issue well. We remain the only company in respect of any issues on mis-selling and complaints handling, and things like that, who have actually gone out and tried to talked to our customers and recompense them for the actual losses that they may have suffered. We are still the only company to do that.

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Q215 Chair: Can your industry not understand that there are those of us who support the idea that you should make decent, fair profits, and want you to do that so you can invest in the capacity that this country needs, and that the public tolerance of that would be enormously enhanced if you adopted the same kind of basic approach to transparency in the way you run your business as most other industries take for granted? Can you not see that? Tony Cocker: I think we, as E.ON, have worked hugely hard on this issue over the last 18 months. I completely agree with you; we recognised that the industry had lost the trust of stakeholders and many customers. We worked very hard last year to improve transparency, to simplify our bill—got it down to one page—to reduce our number of tariffs, to simplify our tariffs so they are much more comparable, to communicate much more clearly where we spend the money that customers give to us, so on the network costs, the energy costs, our own overheads. We have worked very hard. We have to continue to do that because we are on a journey, we have challenges internally and we all know we have not been as simple as we should have been in the past, and we need to improve on that, we need to continue to do that. At the same time we also know that the whole of the industry, not just the big six, needs to invest and therefore there are a lot of drivers that are pushing prices up. I think we have tried to be clear on what those drivers are and explain those both in public and also to customers in private, and we need to continue to engage on that. With respect to the question that Mr Gardiner had for Mr Phillips-Davies, we believe that the SMI has the right intent to give a transparent indicator of the pressures on prices, and there are opportunities to improve it and we would be very keen to work with Ofgem to improve it. So I completely agree with you, Chairman, that the industry has lost trust and the industry is working hard—or in our case we are working hard—to try to regain that trust, and we will continue to do so. Jim Poole: I think we have taken lots of steps, so I think we do need to start looking at the things that we have done because they are, and customers are telling us that they are, starting to have an impact. We have simplified our bills; we have simplified our tariffs down to two. We have launched a product where we proactively tell people if they could save money of more than £1 a week with another supplier and we have seen a significant response in terms of an increased trust with us through that offer that we have made. We have done, I think, the right thing for our most vulnerable customers and the ones that are perhaps least likely to engage in the market by automatically engaging for them and putting those customers on our cheapest product. We welcome more work in terms of transparency. We think the segmented accounts are a good reference point, but if we need to do more to make them clearer and more easily understandable, then we should do that. Coming back to the Ofgem supply indicator report, I think the things you read out are some of the weaknesses of it because it talks around the profitability of one product and it gets interpreted as being the profitability of a business, and that is where we get a disconnect. I agree it would be good to have something that was a robust indicator and I think it is in our interest to work collectively to try to improve it and make it the case. Juliet Davenport: Helping all of this and underpinning all of this is making sure this marketplace is fit for multiple types of players in the place, not least customers, and to make sure that customers feel part of this marketplace, that they can engage, they can reduce energy, they can change the way they use energy and in fact they can generate their own. I think by doing that and by engaging them in part of this market we can rebuild trust. We have two-way partnership with our customers. They sell us power as well as us selling them power. I think beginning to build that up as an overall marketplace and a possibility, and making sure there are more market players in this marketplace, is absolutely key to building trust for the future and bringing investment into this market. 30

Chair: Thank you for your time this morning. It has gone on a bit longer that we planned, but it is very illuminating from our point of view, and I am grateful to you all for coming in.

Examination of Witnesses

Witnesses: Paul Massara, CEO, RWE npower, Ian Peters, Managing Director, Energy, British Gas, Neil Clitheroe, CEO Retail and Generation, ScottishPower, and Stephen Fitzpatrick, Managing Director, Ovo Energy, gave evidence.

Q216 Chair: I am grateful to you for waiting. I am sorry we have overrun a bit. We will aim to wrap up by 1.00pm so you can protect the rest of your day. I will start on the same issue that we started the earlier session with, if you were here. Could you tell us whether any of your companies have been involved in any selling practices that you think were either illegal or unethical? Ian Peters: If I can start, Mr Chairman, British Gas has not been involved in any mis- selling investigation and is not currently under investigation, so to the best of my knowledge there is no systemic mis-selling practice in British Gas. Clearly with 30,000 people talking to customers every day I can’t absolutely assure every one of those conversations to be perfect, but there is no underlying mis-selling issue and there has not been in the last decade in British Gas. Neil Clitheroe: We take every instance of mis-selling, misleading customers very seriously and it is unacceptable. We are currently under investigation from Ofgem, are working with them. Where we have found historical problems, where we have misled a customer, we have paid compensation, we have made sure that we have put them on to the right tariffs and paid compensation. We have done that over the last four or five years. We have changed significantly in this area. We no longer do doorstep selling, but more importantly we have improved every part of our sales process over the last two years. We have come top of the Which? survey of telesales companies in the last two years. So, we have improved significantly, and if there are historical instances that we have, then obviously we will resolve the problem, we will pay compensation and we will apologise for that.

Q217 Chair: Do you expect to be paying compensation? Neil Clitheroe: There have been instances where we have had somebody who was doorstep selling in 2009 who did not present products correctly. We have paid compensation where we have found that. We have written to customers where we suspected that, we have had phone calls coming into us where we have discovered it and we have corrected it and done that. So yes, we have paid compensation to some customers.

Q218 Chair: The question, if you did not hear it, was whether your company has been involved in any kind of mis-selling of tariffs that is either illegal or unethical? Paul Massara: At the moment we have one outstanding investigation by Ofgem, which relates back to August 2010 in relation to explaining of direct debits. That is on information finding and has been continuing on, I must say, for nearly three years now. There has been no statement of case produced for it and we are still talking to Ofgem. We do not believe we have done anything wrong. Ofgem are still asking the questions. But we, like many of the players in the industry, have done a huge amount over the last couple of years to improve our services and our practices. Therefore we believe now, as we operate in this market today, that we are clean, completely.

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Q219 Chair: I am sure that you recognise that not contesting cases that turn out to have been ones where the company was at fault may be a way, in some small degree, of mitigating the degree of offence and mistrust that results from such cases? Paul Massara: Absolutely, but at the same time I think you would want a process that is fair. The fact that this investigation has been going on now for nearly three years, with no statement of case being raised against us, also raises questions, I think, about how Ofgem does its investigations.

Q220 Chair: If the company is absolutely confident that it has done nothing wrong, it can say so. If you think you might have done something wrong, it would be in your interest to try to clear it up before Ofgem have completed their process. Paul Massara: Absolutely, I agree with you, and that is why we have not reached any settlement with Ofgem.

Q221 Chair: So, you are not expecting any kind of criticism from Ofgem at all? Paul Massara: We believe we do not have a case to answer on it.

Q222 Chair: It is not quite the same thing, is it? Do you expect Ofgem’s conclusions, after three years’ investigation, to give you a completely clean bill of health? Paul Massara: Will they find something? It is impossible to say, to be honest. They have not even issued a statement of case so it is hard to know what they are driving for.

Q223 Chair: Let me just put the question one more time. Presumably you have looked quite carefully internally at what has happened. Are you absolutely confident on the basis of that analysis that you have done nothing wrong? Paul Massara: Yes.

Q224 Chair: Fine; thank you. On the question of the structure of your businesses, do you each have a supply, a generation and a trading aspect of the business? Ian Peters: We have a very clear separation between downstream supply and our upstream business. We do also have a smaller storage business that is held out to one side through undertakings we made to Ofgem relating to the Rough transaction. Our trading operations are a route to market for both downstream and upstream and are embedded in our upstream business. There was a lot of talk about transparency in the previous meeting, so for the Committee’s benefit the trading division executes the hedging business for our downstream business and we are charged a cost reflective fee, which in 2012 was £7 million. There is no transfer of value and every transaction is undertaken at market rate, so £7 million is the small amount of executional cost passed to the residential business through our trading arm. All of our numbers, as with one of the other suppliers, add up to our group accounts. There is no kind of black hole—or lacuna I think was your word, Mr Gardiner—in our numbers. They all add up to the total. Neil Clitheroe: We have a similar structure with three businesses, the generation business, the energy management business and the retail business. The energy management business manages the buying and selling of energy on behalf of the generation and retail business. All transactions, external transactions, internal transactions, internal offsets, are priced at market. There is no transfer price. Everything is priced at market. All of that reconciles back in terms of our accounts through to the statutory accounts, and obviously those are audited, but the key point for us is that everything that we have is referenced to the market prices. 32

Paul Massara: Ours would be exactly the same, and as of 1 January in fact the generation business is now a European generation business and therefore that is a separate P&L completely. The trading division will have their P&L and, effectively, the downstream supply business will have theirs. We trade everything effectively, or 90% of our supply, through the traded market and we buy from the market as well. Therefore we have a very similar structure to everyone else. In fact, we would not be allowed to pass profits around because of the taxation issues, that they would look at whether there has been profits moved between jurisdictions or cases. So, we have complete transparency and the transparency aligns very clearly with the segmental reports. Stephen Fitzpatrick: We run a very simple business model. We supply to UK customers only. We are a UK-registered business; we have no overseas operations. We are in the process of splitting out our trading from our retail business. We think it is the most efficient way to deliver better value for customers, and at the moment we do not have any generation.

Q225 John Robertson: I am sure my colleagues will come back with questions about corporation tax and things like that. There is this idea that RWE are transparent and yet you put everything into one pot from all over Europe together. How do I know what you are doing in the United Kingdom? What do I know about your generation here and how much it is worth? How do I find that out? Paul Massara: Up until now you have had our segmental reports that would give the position between the UK generation and the UK supply business, which is completely visible and transparent. I think there has been a very good insight into what we are doing.

Q226 John Robertson: What happens from now on in? We can’t see that? Paul Massara: No. From now on we will report both our retail profit and also our generation profit in the UK as a separate position so that you will have that full transparency, clearly to do it as part of the segmental statements.

Q227 John Robertson: Let me get this right; you are basically going to hide it? Paul Massara: No, absolutely not. We are going to continue to be transparent. I think it is completely—

Q228 John Robertson: If you were transparent, you would not be here today and you would not be in front of us so many times. The one thing the general public thinks is that you are not transparent. Why do you think they would say that? Paul Massara: I think that is a broader and wider question that relates to having an honest conversation with consumers and I do not feel necessarily there has been an honest conversation. I do not think the suppliers have necessarily got it right in explaining to customers what is happening to their bills, how their bills are made up, and indeed how their bills are likely to be made up. I do not think necessarily that we have it right, and I would share some of the concerns that my colleagues had earlier on before relating to Ofgem’s intermediate monthly reports, which I think are misleading and are not particularly helpful. I also would say that there has not been an open and transparent conversation from Government about the cost of Government policy and the impact on people’s bills.

Q229 John Robertson: I made a statement to one of your colleagues in the previous panel, and I am going to say the same thing to you, and that is it is always somebody else’s fault, “It was a big boy who did it, and he ran away”. When are you—I mean you as a group of companies—ever going to take responsibility for the problems that we have? The problem 33 is that people don’t like you and they don’t like you because they feel you are ripping them off. You can cover it anyway you like, you can use gobbledygook about having an intelligent conversation with somebody, but I have to say that most of the people that you might want to have a conversation with will not understand what you are talking about. You might think that they are being ignorant and that you are all knowledgeable, but at the end of the day they pay the bills. Paul Massara: I totally agree with that. John Robertson: You need to get down the level of letting them understand what you really mean. I think at this point in time you are nowhere near that. To be honest, Mr Massara, I think it is deliberate. Paul Massara: Can I answer that question, if I can? There are a couple things. As an industry I would say that we have not helped ourselves; we have not helped consumers to build trust, because I do not believe that we have given them the insight and the visibility. When we look at the bill that people get on their doorstep, that bill is incredibly complicated. It is not the bill that helps consumers understand it. It is interesting that there are 26 regulation issues from Ofgem that require things to be changed on that bill. We are simplifying bills, we are changing bills, and I think we have to be more open and transparent. The second issue that we believe fundamentally is that we have to explain to consumers how their bill is made up and where those components of the bill are likely to go in the future. We are launching an Energy Explained series, which effectively will do that, both to the general press and to the public, but also to go out to the public and explain to them how their bill is made up and how those different segments are likely to be impacted so they can make informed decisions about saving energy.

Q230 John Robertson: A question I ask at the end—and I only thought of it when I was listening to your answers—is: when you pay your dividends to shareholders, how much are you giving them these days? What was your last dividend? Paul Massara: I can’t remember what the last dividend is. It is probably £200 million or so.4

Q231 John Robertson: You obviously have too many shares. What about you gentlemen? Ian Peters: I would have to come back with the precise number. We have 700,000 small shareholders, which is a legacy of privatisation.

Q232 John Robertson: Does this include all parts of the industry? I don’t know how you are going to do it if you are including part of your international wings. Ian Peters: I suggest it does not give you the figures from Centrica in this context, because the dividends come from Centrica. Last year we reported £2.7 billion profit, of that, on the tax point, we paid £1.1 billion of tax, £773 million of that—

Q233 John Robertson: Don’t worry about the tax, my colleagues will come back to that later. I am sure they have some nice questions for you. What I am trying to say, the same point I made to your colleagues, is that the shareholders get all the benefits from the whole company and yet the general public are basically getting screwed into the ground because everybody always talks about retail. Ian Peters: I was going to give you all the numbers, Mr Robertson. Of that £2.7 billion, around £600 million, less than 25%, comes from residential energy supply, the rest of

4 Note from the witness: “The actual number is £125 million.” 34 it comes from our operations in North America. Our upstream business, which again is a focus of some questioning, last year made £1.23 billion. That is pre-tax 17%; post-tax it is 13%. Given the billions of pounds we invest in generating that, the return on that capital is in high single digits. So I think that is a fair return for all of that. These need to be looked at in the aggregate on a post-tax basis.

Q234 John Robertson: Do you know how much you get from Government to help you with that? Ian Peters: Virtually nothing.

Q235 John Robertson: They don’t give you anything? Ian Peters: Virtually nothing. I will have to come with precise amounts.

Q236 John Robertson: I wonder what they are spending the money on, then. Ian Peters: There are some subsidies for exploiting new gas fields. I think that is right. John Robertson: I think the exploitation is of the general public, if you ask me, never mind the oilfields.

Q237 Dr Whitehead: No doubt you are all going to say to me now that you trade transparently on the day-ahead market and then hedge in order to balance your positions. Would that be an accurate description of what you do as companies? Paul Massara: That would be an accurate description of what we do. We trade about four times what we actually trade in the forward market. We trade four times—recycle in the forward market, but 90% of what we do goes through the spot market, of all our production. Ian Peters: We do broadly similar. Again, in terms of the multiples we sell about 30% of our generated power into the day-ahead market. In terms of self-supply, in 2012 the downstream business bought about 10% of our power from Centrica Energy, the upstream operation, and only 6% of our gas. So, the underlying self-supply percentages are very small. Neil Clitheroe: We hedge over a two- or three-year period and 30% traded in the day- ahead market as well.

Q238 Dr Whitehead: You are obviously a different— Stephen Fitzpatrick: We buy between 12 and 18 months forward. We buy on the day- ahead market, we buy on the within-day market, so a pretty straightforward situation.

Q239 Dr Whitehead: I am trying to understand this better. Your hedging strategies as companies are in what relation to any day-ahead trading? That is, to what extent would you hedge before you went into day-ahead trading, and to what extent is the hedging as a result of what has happened as far as day-ahead trading is concerned? Paul Massara: From our perspective, we would look to hedge in the forward curve for two to three years. We want to give customers a longer-term duration for their standard tariff. Obviously for fixed price contracts for standard fix we would have to match it as best as possible. Then we would run into the day, but it would lead to incredibly volatile prices for customers if we were to balance everything in for customers and therefore we have a hedging programme over two to three years, which I think is similar to many of the other players. Neil Clitheroe: You obviously get an increased certainty the closer you get to the point of delivery. Two years out you can see maybe in January two years’ time an average weather pattern with an average customer base and you start buying a proportion of your gas or your power for that delivery in January, and then the closer you get the more certainty you get. Maybe your customer number has increased, maybe volumes on average have dropped in 35 terms of consumption, maybe the weather is different, all the way up to the point of delivery. So you are basically hedging against the certainty you know at that point. At ScottishPower we will leave some positions open right the way through to the point of delivery, but three years before we are likely to have covered hardly anything because you don’t know what is going to happen in three years’ time at that half hour when you are actually delivering that power. Ian Peters: For us it is a broadly similar story. To ensure primarily security of supply we buy anything two years up to cover all of that. We do leave open positions in the short term, that is primarily to manage weather volatility. How good your weather forecasters are is relevant, but the majority of the position is bought forward in layers.

Q240 Dr Whitehead: Essentially the impression that one might get that the hedging is a post hoc activity, actually that is an initial activity? That is, you will secure your positions with over-the-counter trading. Sometimes there will be an open position, but the minority of positions, that is the rump position that is left, will be then catered for on the day-ahead market? Ian Peters: That is right, and it is why you do see different outcomes in terms of hedging, because we do not all hedge the same. We take different risks and different rewards along the way and that is reflected in the segmental accounts that come out. But you are right, your fundamental point, Alan, is pre hoc rather than post hoc.

Q241 Dr Whitehead: So what proportion of what you might call pre hoc trading really occurs over the counter and what proportion really occurs in terms of what you might call competitive trades informed by transparency of those forward markets at the point in which you are undertaking your initial trades? Is it fair to say that there is very little relation between what you are yourself generating and what you are yourself purchasing at that point? Ian Peters: As I say, our own purchases from our upstream division is 10% in electricity and 6% in gas. I have no problem disclosing the splits but I do not have them with me in terms of over-the-counter. Dr Whitehead: It would be very helpful if that could be sent to us in writing. Ian Peters: I would have to come back to you, because I don’t run the upstream division. Paul Massara: I think we would obviously be buying to hedge our position. We have a strict hedging policy relating to our forward exposure in retail and therefore we have as systematic approach on how we hedge. We go into the market via the trading team, they give us a price and we buy. We do not know what the generation team are doing at any time. They may be buying or selling from their generation; that is their choice.

Q242 Dr Whitehead: But that is completely untransparent, isn’t it? Paul Massara: For us, we know we are getting a market price from our traders and that is it. That has to be the case from a tax position, and we have to know that and we pay a small fee for doing that. We do not know what the generation business is selling in at the same time because it is completely ring-fenced. In terms of whether that can that been seen through the segmented statements, no, it can’t be, but then what you have is us purchasing at market rate that feeds into the margin for our supply business.

Q243 Dr Whitehead: When you say you are purchasing at market rates, you are purchasing, I presume, on the basis of at least some information that you have relating to your own generating activities? 36

Paul Massara: To the market, whether it is the OTC market, on who is trading out there. As we talked about before, I think there are a lot of different players, independent power stations who are long, other people are buying and selling, so there are trades out there.

Q244 Dr Whitehead: But you will trade at the market rates and you will trade on the basis of your traders. How will your traders be incentivised in order to get the best deal on the forward curve prior to any patching up, you might describe it, taking place on the day-ahead market? How are they incentivised? Do you simply say, “Go out to the market and get the best deal, guys”, or are there any arrangements that can be informed by the nature of what it is that you are supplying yourself, i.e. are there any preferences on the basis of clearly a good market price for the fact that you have deals available to you that relate to over-the-counter trading? Paul Massara: Yes. As part of our formula, we would go to the traders and ask them to buy at market rate. We would want to make sure it is at market rate, because that affects my P&L, whether they are buying and the generation may be selling to them but they will also be selling at a market rate. There may be a bit of a spread, but that is it. If they decide to hold the position and trade it for themselves, then that is their trading position, and that is nothing to do with my P&L. My P&L is transacted at the market rate. Neil Clitheroe: It tends to be based on staying within risk parameters. What we are looking for from our energy management area is to hedge within risk parameters so it does not put a huge amount of risk at the point of delivery. Is the value at risk within parameters? Have they covered 18 months out, or two years out, 10% of the power at that point in time? So, the measurement of our traders tends to be based on those risk parameters.

Q245 Dr Whitehead: Your forward hedging strategy, and I appreciate that may be different between different companies in terms of, for example, how much of your positions you have covered early, how much of your positions you leave open, at what point on the curve you are taking positions. If you do that well you will make a particular return, won’t you? So you would make a good return and you will be ahead of other companies in terms of your proceeds from your positions. Ian Peters: Yes. To go back to your earlier point, there is no insider information here. There are no preferential deals, and our trading operation is simply an executional function. They operate to deliver a strategy that we define, the downstream business.

Q246 Dr Whitehead: But if you do it badly— Ian Peters: Then we can be out of the market. Dr Whitehead: The customer will have to cough up. Ian Peters: That way we are not competitive or, if we get it right, the other way round. That plays into the broader decisions we make around our operating costs, our profit returns and the degree to which we want to be competitive in the market. It is one of but not the only consideration.

Q247 Dr Whitehead: Bearing in mind the way round that you are undertaking the hedging process and then the patching process, shall we say, in terms of your overall positions, what perhaps I could suggest is that if you hedge very well, you get that right, then you are banking those proceeds. If you get it wrong, the customer coughs up, so either way you win. Ian Peters: Well, no. If you look at—again, in the spirit of transparency—British Gas’s residential accounts you will see movements up and down, and there are years when, to be frank, we have hedged well and we have passed that on in terms of lower prices to 37 consumers and we have grown market share. There are years when we have lowered our profits because we thought it was wrong to pass it on to the customer. So, it is one of a number of considerations.

Q248 Dr Whitehead: How might we know that you are doing that? Ian Peters: To an extent, you can see the outcome in terms of the overall margins around segmental accounts. British Gas have said that we aspire to make an average return post tax of 5%, and the weighted average costs of gas and electricity, which are the outputs of what we are discussing, can be derived from the segmental accounts. Paul Massara: I would absolutely agree with that. We lost money in the supply business in 2009, 2010 and 2011, and we could not pass that through to get a benefit and that is it. The fact is if you look at the consolidated reports they give a full breakdown of your energy input and of your margin, and the fact is on the whole the big six have earned 3% margins in the last four years. Those are the facts. Stephen Fitzpatrick: Can I offer an observation? I was a little bit confused as to the direction of the inquiry, but I have ended up completely agreeing with the point that you have ended up making, which is that it can certainly appear to be, from an outsider’s point of view, a one-way bet. Our observation, as an independent supplier that is only buying in the wholesale market, is that it appears to us that the free bets that our larger competitors have is that they can be pretty sure, within a certain margin, of the demand that they will need to satisfy their incumbent customer base and they can hedge that. If they get it wrong, they can be relatively comfortable that they will not lose too many customers. If they are able to achieve a better than market price, let’s say, they can use that lower commodity price to go out to win new business and undercut other competitors, including us. If one of my large competitors wants to take a directional position, betting that the market will go up or down, I would say they can put the cost of that towards their incumbent customers that they know are much less likely to switch away, and any benefits they can use either in profits or they can try to grow a market share through winning business on aggressive discounting. This kind of one way, it is a legacy from the ex-monopoly nature of my competitors here. That is what leads to anti-competitive behaviour, and that is one of the main reasons why 15 years after deregulation you have a very small independent retail sector. We think this price inconsistency, the gap between the cheapest prices available and the average or the most expensive, is by far and away the biggest reason for lack of trust in the sector and also lack of competition. Paul Massara: I would fundamentally disagree with that statement. If we go and bid or if we go and hedge in the sector than somebody, then effectively, yes, that would be a choice about how you would take that. The fact is that about 30% of all of the customers we lose now go to new suppliers. The reason they are going to new suppliers is because new suppliers are not required to meet the cost obligations that we are required to as a big supplier, that is ECO. The cost of ECO now is probably somewhere between £70 to £100 per customer, which small suppliers have an advantage for. So they have an inbuilt advantage to be in the marketplace. In a competitive marketplace you would expect suppliers to react to that and therefore we do. We react to that by trying to match them or trying to get close to them on the broker tables. That allows the discounting on the front, which allows the differential pricing. So because we have an ECO policy that does not apply to everybody equally, leading to a distortion in the marketplace, which is also leading to a distortion in the tariff structure.

Q249 Dr Whitehead: But the fact is that as three of the big six you are exercising very substantial power in terms of, as we agreed, your pre hoc trading arrangements down the 38 curve. Indeed, the Ofgem liquidity inquiry suggested that you do not have a robust reference price down the curve in a way that would actually enable trading to be placed on a more equal forward footing in the market in general, i.e. you are in a position where you are able to generally hedge quite successfully in the forward market. Would you say that that ability to do that outweighs, in terms of your overall market advantage, the disadvantages that you may face in terms of what you are required to undertake in regard to obligations as opposed to the very small traders? Paul Massara: Absolutely not. Stephen Fitzpatrick: I am just going to step in and say that we have never faced any challenges hedging in the wholesale market. We do not think that we are at a disadvantage, and if any one of my larger colleagues or smaller colleagues would like to ask me for a price I would be happy to quote them a price for electricity or gas for two or three years. I do not think there is a lack of a reference price. I have no axe to grind on that; I think—

Q250 Dr Whitehead: The Ofgem analysis is wrong? Stephen Fitzpatrick: We are on the record for the last two or three years as stating that the wholesale market—everybody wants more liquidity and more transparency but it is by far and away a much smaller piece of the lacuna that is missing in the regulatory framework to drive more competition. I don’t feel at a disadvantage. Ian Peters: As a general statement—and we talk to some of the small suppliers— liquidity, the aggregate is not the issue it was perhaps three to four years ago. There are pockets where it is. For example, the average clip size in power is about 10 MW. Some of the small suppliers we talk to would rather it be 1 MW, so we are talking to them about changing terms to enable that. As a general statement, I do not think liquidity is a barrier to entry. Neil Clitheroe: Access for small suppliers to generation from the bigger companies and the independent companies is an important issue that everybody needs to facilitate. We wrote to 56 small suppliers a couple of years ago. We are currently working with 20. We are transacting down to a clip size just now of 0.25 MW. Our lowest gas trade is at 50 therms, and we have given extended credit lines to a number of smaller suppliers. Putting a smaller supplier on an exchange, where they have to cover that collateral, is very difficult when they are trying to get started. So we are working hard with them. I think there is more that we are trying to do. We are trying to have more discussions on this topic, but I think that access to small suppliers, alongside the straight liquidity point, is as important to bring more retailers into the market.

Q251 Mr Lilley: Every economic transaction has two sides. If you are buying electricity ahead on a hedging transaction, someone is selling it. It seems to me there are two kinds of sellers. There are generators who actually generate it—in other words, instead of only selling it to the daily market they are selling ahead to you—or there are banks who are themselves taking the risk that when they actually have to deliver in three months or three years’ time, the price will not be too high, the price will be low. Which is it? If it is companies trading between themselves, then it means that the companies who are successful in hedging ahead will be matched by others who are less successful or fail. They wouldn’t say it like that because they would lose their jobs, but less successful. If it is between banks and the industry, then if you are doing well in hedging futures the banks will be doing badly. Is there something wrong with my analysis? Paul Massara: I think generally the analysis is correct. I think people may be hedging for different risk reasons, so people may have a different profile. Some people will be selling three years, two years, one year; some people may decide they have to get rid of it, they have a plant that has to despatch and they want to sell forward. Therefore, there are different risk 39 appetites. In general there are two equal parties who are coming to a fair price to trade on that. It may be banks, but banks have pulled back because of liquidity issues, but generally I think it is a fair position. I think there is more that we could do on transparency and it would help. I also think that obviously with the Energy Bill coming in it creates a degree of uncertainty. We do not know what the capacity mechanism is going to be like. We do not know how CFDs are going to be structured, therefore it is difficult to transact forward without a clear position in the marketplace. Once we get that clarity I think that may also help liquidity as well, is an honest point.

Q252 Mr Lilley: But I think the industry could help itself if it could make it clear that they can’t all be profiting at the expense of each through hedging. There is a degree of misunderstanding out there that somehow there is a magic, that hedging can make money out of the customer. Well, except in the way that Mr Whitehead is aware of as sort of a “heads I win, tails you lose” system, I do not see how that can be the case. Paul Massara: We certainly do not recognise the “heads I win, tails you lose”. I think we are in a competitive position and we look to see where the market is and where we are. We lose market and we have to look every day at what tariffs are out there and how we compete.

Q253 Barry Gardiner: You have all seen the first session so you know where I am headed. See if you can head me off at the pass. Mr Lilley: Why don’t you go straight to the pass? Barry Gardiner: You are such a killjoy, Peter. Mr Lilley: You have had the foreplay. Now let’s get on to it. Barry Gardiner: Right, here we are. Mr Clitheroe, in 2010 ScottishPower moved £119 million of profit away from generation in its Consolidated Segmental Statement and reclassified its carbon permits to another segment. Why did you do that? Neil Clitheroe: I will need to come back to you on that one, Mr Gardiner. I do not know the answer to that, in terms of the 2010 segmentals.

Q254 Barry Gardiner: But you understand, in terms of what we were saying about transparency, all that we were saying in terms of having consistency of presentation? Neil Clitheroe: Yes.

Q255 Barry Gardiner: For you to have whisked it out of one segment and put it into another looks as if what you are trying to do is either show less of a profit in that sector or more of a profit in the other sector. Either way it is not exactly transparent, is it? Neil Clitheroe: 2010 was the first year of the segmentals and there were improvements that we had to make in 2011. I think the key improvement that we made was to reconcile the whole of the 2011 accounts to a statutory audited account. So those are our legal accounts, the legal entities, and we did that in 2011. Those have been reviewed by Ofgem and they represent an accurate split between the retail and generation businesses. In 2012 we made further improvements; we will make further transparency improvements as we go through that. The key thing I can say is that the 2011 accounts, which are the latest ones that are within the retail and generation splits, are correct in those and have been audited by Ofgem and are aligned with our statutory accounts.

Q256 Barry Gardiner: Isn’t it the point that you have a discretion here as to which segment you show something in and, by varying it, you vary it to suit yourself and that in itself impedes transparency on behalf of the consumer? 40

Neil Clitheroe: I think there are various aspects to transparency, and the transparency that we have between retail and the generation business is improving. It improved in 2011 and we will improve it more in 2012. In 2012 we are transacting everything based on market rates, and therefore our ability to actually move anything is reduced because it is all at market rates and that is what is in the 2012 segmentals. We have also done a huge amount of work on transparency with regard to bill breakdowns, service standards and so on. There is work that we need to do. We made further recommendations to Ofgem in terms of the trading that we do. We have made recommendations to Ofgem that we will provide the information on the market for all our trades, provided other players do that, and we did that in the last liquidity consultation of the RMR. So, there are a number of steps that we have made since 2010. Are we there yet? No, but are we on line to do that—

Q257 Barry Gardiner: But you will provide the Committee with a note as to precisely why you moved that £119 million of profit away from generation? Neil Clitheroe: Certainly for 2010.

Q258 Barry Gardiner: Mr Peters, there are areas of accounting estimates, aren’t there, and they can distort the presentation of figures can’t they? Ian Peters: Are you talking about allocations of overheads here? Barry Gardiner: No, I wasn’t, although it is a perfectly reasonable one and I did mention that earlier, but with you I was looking more at the depreciation on asset values. Centrica has a disclosure that, “Generation EBIT earnings before interest and tax excludes depreciation of fair value uplifts to property, plant and equipment relating to the strategic investment in British Energy”. Do you think that that is fair and transparent? Ian Peters: It is very hard for me to comment on the specifics because I wasn’t a party to those conversations, and if there is anything I want to come back to you on— Barry Gardiner: So you are going to have to write to us as well then, I take it? Ian Peters: Yes, I suspect—

Q259 Barry Gardiner: But you take my point about accounting estimates and depreciation of fair value on assets? Ian Peters: I do. As a slightly broader point, we have not changed our methodologies for two years, and Ofgem and BDO recognise the consistency of that. I would surmise that the British Energy—

Q260 Barry Gardiner: Have not changed it in two years? That is not an awful lot of time, is it? Ian Peters: We have only been going since 2010, but this is the point about consistency and the way the segmental accounts are put together. As I say, there are no black holes. Depreciation, to an extent, is clearly a judgment call. The investment in British Energy was conditional upon the valuation around the new nuclear build, so I suspect that is what is behind it but I will have to write to the Committee and confirm.

Q261 Barry Gardiner: Mr Massara, income and costs relating to the levy control framework and Government policy are also not disclosed in full—feed-in tariffs, warm home discount, renewables obligation and the levy control framework. RWE npower states in a note that other direct costs of generation largely relate to the Community Energy Saving Programme and power purchase agreement costs, but you do not break that down, do you? Paul Massara: I do not think we do, not in that position.

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Q262 Barry Gardiner: Do you not think that again to break it down would provide people with much greater transparency here? Paul Massara: I think the greater indication of programmes, giving people greater insight would be helpful. There is a degree of competitive concern about it, but on the basis that these are post-dated, yes, I think that could be done.

Q263 Barry Gardiner: Could you perhaps provide us with a note after you have talked with your fellow directors as to whether you think you might be able to do that in the future? Paul Massara: I would need to go back and talk to them, yes, sure.

Q264 Barry Gardiner: Thank you. Mr Peters, some of the companies, such as yourselves, offer additional services, which can also distort profits presented at a group level. Centrica group offers boiler servicing, for example. They are not presented in the segmental statements. Particularly given your market share in gas, the very fact that you have that market share means that you tend to get quite a revenue stream out of that, don’t you, and yet that is not part of the segmental statements? Ian Peters: The segmental accounts only relate to residential energy supply, and all of our services business, which covers everything from plumbing to drains to electrical services, are all outside the scope of the segmental accounts. At the aggregate level it all adds through to the published accounts, so there are no black holes, but it is an entirely separate business outside the scope of the Ofgem returns.

Q265 Barry Gardiner: Can I ask all of you as well how often you have check listed, in relation to trading activities, the “another part of business” box? Neil Clitheroe: We check listed it I think on the 2011. We show that the activity is done within our energy management business and that is notated at the bottom very clearly, and we actually show where the P&L impact of that activity is within our retail and generation business. It is very clear on the last page of our segmentals where the responsibility and then where the profit and loss impact is for those activities. Ian Peters: To the best of my knowledge we have never done it, but I will come back and confirm that when—

Q266 Barry Gardiner: You never ticked the “another part of business” box? Ian Peters: To the best of my knowledge, but I will come back and confirm that when I write back on depreciation. Paul Massara: I will have to come back and confirm on that.

Q267 Barry Gardiner: Thanks very much. In terms of the BDO recommendation, don’t you think that trading activities should be reported in the Consolidated Segmental Statements? Ian Peters: I have already disclosed that there is no kind of out of market transfer. I have disclosed to the Committee, the £7 million that flows between the two. I think that is good in the spirit of transparency. As a general point, I think it would require the entire market to move in unison.

Q268 Barry Gardiner: Would you be in favour of that? Ian Peters: I would be sympathetic to that as long as everybody else moved in the same way.

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Q269 Barry Gardiner: Thank you. In that case, Mr Massara, when you are discussing with your colleagues the other positive news that you gave the Committee this morning, could you perhaps discuss whether you would be prepared to do that and disclose that as well? Paul Massara: I think it becomes problematic when you have a European trading business, which trades across all of Europe, and therefore you end up saying, “Well, are we disclosing what we are making in trading in Romania, Hungary and Poland?” I am not sure that helps the average consumer to get insight to the segmental reports. Certainly, we could disclose what fee we have for doing it but, like everyone else I think, we trade at market. There is a minute fee that we pay the traders for transacting that we could pay anybody. We happen to pay our traders. But I do not think it is going to add to insight for consumers to understand what our trading position is across the whole of Europe. Neil Clitheroe: In terms of being able to see for ScottishPower that the energy management area is simply a transactional area that is managing things on behalf of retail and generation and it is effectively a hedging mechanism, a post box mechanism for those businesses, then showing that on a confidential basis I think is fine, Mr Gardiner.

Q270 Barry Gardiner: Mr Massara, just a thought; you complained earlier in the session that the cost of Government schemes adds approximately £70 to £100 to the consumer bills. Do you not think it is therefore odd that you are not prepared to disclose how much those individual elements of the Government schemes actually cost you in your segmental accounts? Paul Massara: No, I think I have said already that I think that is a good idea. In fact, we are going to go out with an Energy Explained position where we will be showing people’s bills. As DECC themselves have said, 60% of the increase in electricity prices until 2020 is actually going to come from Government policy. It is absolutely imperative that we explain to consumers that bills will be going up because there is £110 billion of capital that needs to be invested in refreshing the infrastructure, and that comes with the cost. Barry Gardiner: I entirely agree with that. Neil Clitheroe: That is shown clearly on ScottishPower’s website. Most customers see their bill in terms of how much they pay per month, so we show very clearly for £100 direct debit precisely where every pound goes in terms of all those obligations, in terms of all those delivery charges, in terms of all those wholesale charges. That is there on our website today.

Q271 Barry Gardiner: Do any of your companies use base erosion and profit shifting or a tax haven in your accounting? Ian Peters: Not to the best of my knowledge.

Q272 Ian Lavery: I think you were all present beforehand at the earlier panel, but I have to raise this question. At a time when the public say the energy companies are making obscene profits, there are hundreds of thousands of people being added to the list of people in fuel poverty. There are millions of people in fuel poverty. It has been suggested that of the six big energy companies there are three of the companies paying significantly less corporation tax than would be expected and there is one company that never paid any corporation tax at all in the last three years. I wonder if Mr Massara could confirm how much corporation tax his company has paid in 2009, 2010 and 2011? Paul Massara: We will not have paid corporation tax in those three years. The very simple reason why is because we have invested £5 billion in the last five years building power plant, creating jobs, creating employment and helping to keep the lights on. If we had not made that investment, we would not have the deductibilities that we would be allowed. That 43 is a simple accounting UK rule. There is no mystery to it. There is no desire to not pay tax. We have fully paid all our taxes, the substantial employment tax, business tax and all the other taxes. The fact is you are allowed depreciation for your investments, and we have been the biggest investor by a mile in the renewable offshore business, and therefore we have allowed deductibilities. There is nothing amazing about that. In fact, I would go the other way to say if this country wants to get £110 billion of capital invested, then the basic levels you are going to need to allow people that deductibility. It is no different from any other industry. People should not be surprised that if you make heavy investment that you get deductibility for it.5

Q273 Ian Lavery: I am sorry, but I am absolutely amazed that you have not paid any. To say that it should not be a surprise—it absolutely is a surprise. Looking at the other statistics for the other companies, every other company has paid corporation tax, albeit at different levels. It might be an opportune moment to ask the representatives of the other companies if they have and if they currently enjoy a significantly less than expected tax rate? Ian Peters: From a Centrica point of view, the answer to that is no. Our 2012 tax charge in aggregate was £1.1 billion; £773 million of that relates to the UK. That is a tax rate of 44%. It is one of the highest in the UK. We will pay £400 million of corporation tax, which makes us the sixth highest payer of corporation tax in the UK. On top of that, roughly the same in supplementary corporation tax and petroleum revenue tax. When you add it all together, we are at the higher end of that range and that excludes the £140 million in National Insurance. To the investment point—and I will take issue with RWE on this—that is despite having invested £11 billion over the last five years, and £9 billion of that is in securing energy supplies in the UK, most recently the Cygnus gas field, which will keep 1.5 million homes going for the next 15 years. So, no, is the short answer. Neil Clitheroe: In 2009, 2010, 2011, we paid £669 million in corporation tax. In addition, obviously we paid the usual other taxes: employees’ National Insurance, business rates, and so on.

Q274 Ian Lavery: Did you pay less than would be expected? Neil Clitheroe: Over the five years that we look at, we have paid out £1 billion. We have paid less in the last two years because of capital allowances from the investments that we have made. Basically, in 2008 we were making between £550 million and £600 million of capital investment. In 2012 we were close to £1 billion. We have doubled our capital investment so we have seen a reduction because of that. The other reduction we have seen is just the reduction in the corporation tax rate that has occurred in this country, which has affected deferred tax liabilities. But in terms of the overall numbers—and for an energy company you do need to look at it over a longer period just because of the investment profile—we have paid £1 billion over the last five years. Paul Massara: If I can just add one clarification. I think over the last three years net profit has only been about £40 million, including generation and retail.6 Compared to that, the £5 billion we have invested over five years just gives you the view of where you would be paying tax anyway. We have been losing money in the retail business and in fact now we are losing money in the generation business too.

5 Note from the witness: “Please see our letter to the Committee on 17 April which provides clarity on our position on corporate tax and capital expenditure.” 6 Note from the witness: “The correct aggregate EBIT for the years 2009-2011 is £31 million.” 44

Q275 Ian Lavery: I am really sorry but according to my figures over the period I mentioned before, 2009, 2010, 2011, npower’s pre-tax profits were nearer £750 million and there wasn’t any corporation tax paid. It is astounding, isn’t it? Paul Massara: I have different numbers, so I can come back to you on that.7

Q276 John Robertson: I am amazed about this as well. We have had E.ON who said they had invested £6 billion, which was £1 billion more than yourselves, and they were paying, albeit a reduced—this is the Starbucks gambit, isn’t it? It is basically, “I employ so many people therefore I won’t pay tax”. Do you understand how the general public feel about this? Anybody watching these proceedings will be absolutely shocked that you are willing to stand up and say that, “We deserve not to pay tax”. If I said that I would get crucified. Paul Massara: I think there is an informed debate that needs to be had, which says there are general accounting rules that if you make significant investment creating jobs, education, if you create and keep the lights on—which I think we are all trying to do—then you are allowed to depreciate. That is no different from any other industry, and that is all we have done. We just happen to have been a very big investor and we have not made the profits out of the business that we expected.

Q277 John Robertson: So you have used the rules to suit yourselves. Paul Massara: No, not at all.

Q278 John Robertson: I can honestly say I am glad I don’t get my energy from you. If I did I would be switching as soon as I left this room. I am so annoyed about that. Let me ask you a couple of questions that some of the general public have sent us, one of which I asked earlier. What are you doing with the money that is paid during the summer months and that is stored up and makes interest for you? Ian Peters: Can I take that one? Across a whole year we try to get direct debits to balance out. The figures we have for 2012 would say across the whole of the year, on average, we were owed £550 million by customers in aggregate and we had £120 million of credit balances on the other side, so net the interest free equation actually worked against us. More particularly, if any customer has more than £100 on their account at the end of the period we will automatically refund it. We now have I think the unique ability for customers to go online and manage their own direct debits. They can get payment holidays and if they want a refund at any time they can take it. I don't think anybody else can do that. That is great in terms of putting customers in control.

Q279 John Robertson: ScottishPower? And I am one of your customers. Neil Clitheroe: We are pleased about that, John. We try to balance across the year. If a customer at the annual point is more than £100 in credit then we pay interest on that amount that is linked to the bank rates. I can’t remember the exact interest, I will have to come back to you, but we pay interest on that amount and then we refund that to customers. It is something we introduced about four years ago called “Credit where credit’s due”, so we have done that for quite a long time. However, we do try to balance it across the year. It is better for customers to be paying the right amount over the year, and there are troughs. At the moment with the cold weather most customers are in a negative position and over the warmer weather, over the next three or four months, they will play catch-up with that.

Q280 John Robertson: Mr Fitzpatrick?

7 Note from the witness: “Please see our letter to the Committee on 17 April which provides clarity on our position.” 45

Stephen Fitzpatrick: I am glad I have the opportunity to answer this one. About three years ago we decided that it was a bit anomalous that we were asking customers to pay in advance over the summer and we would keep their money and not pay them any interest. So three years ago—about six months after we launched—we brought in Ovo interest rewards where we pay customers 3% throughout the year on any credit balance at the end of every month. For every customer who is in credit over the summer we are paying 3% interest to every single customer, and if they fall into arrears over the winter, as is the case with many customers this winter, there is no interest penalty. It is their money. We want to encourage them to pay the same amount throughout the year and we think that if there is any benefit that we get from that we should give it right back to them. We set the rate at 3% so there would be absolutely no confusion as to the fact that we were not making any money. In fact we lose money from this, but we think we would rather be above suspicion on this point. Paul Massara: We manage it throughout the year and we may have balances from the customers in the summer but in the winter then clearly there is a big deficit. Funding them in the winter and not funding them in the summer is rolled into the general price, so we don’t pay interest, per se, but again if a customer has more than £60 on their account they would automatically get it sent back.

Q281 John Robertson: They don’t have to ask for it? They would get it? Paul Massara: Yes.

Q282 John Robertson: Here is a question that was asked at our evidence session in Glasgow, and also people have been tweeting it to us, and it is, why are low energy users penalised because the cost of usage goes down the more you use? I thought we were trying to encourage people not to use it. Ian Peters: This is about how costs play through. At one level it can look quite seductive to tip it the other way, but I think the Committee should be aware of the distortions that will then create. One consequence—and there are probably three—is it makes high consumers very profitable and low consumers unprofitable. I think the risk there is many of the vulnerable customers would get disengaged from the competitive market because they would be loss making. Secondly, there is not a great correlation between consumption and vulnerability, and I think perversely one of the bigger beneficiaries of that would be second homeowners who are sitting there with very little consumption. So there is a debate to be had in this area but I think we have to have it in the round, have a look at things in total, because I do worry at creating loss-making customers at a time we are trying to make pricing cost reflective.

Q283 John Robertson: The point that these people made was the fact that they probably would like to use more electricity in some cases but they can’t afford that, but they seem to be penalised and the number of people that are in fuel poverty seems to be going up and up year on year. Here is a chance for the companies to punish the people who are the big users, and I am not talking about businesses. I appreciate businesses have to have a certain level. As a city MP I have to say that, and the evidence session we took was in Glasgow where we do have more than a fair share of people in fuel poverty. The point I think was well made. The fact is that they feel as a low user who is probably trying to cut back on their usage they are punished, whereas others who can turn everything on are winning on it and they don’t think that is fair. Ian Peters: I recognise that perception. What I do think, though, is it puts the onus on us to do everything we possibly can for all customers, particularly the vulnerable ones, to keep their bills down and, despite rising prices, British Gas bills have gone up by an average 46 of about 3% or 4% over the last four or five years because of what we have done, particularly for the vulnerable market. Last year alone, we spent £223 million, I think, helping precisely those customers insulate their homes better, do everything we can to get them on to the right tariff. So I think it is in the bigger context of working with our customers to help them keep their bills down. It is not just about tariffs.

Q284 John Robertson: We talked to people in California about the same thing, and they are getting to the stage where they are talking about splitting the cost of electricity up depending on the time of day. Do you think you will go down that road at some stage? Ian Peters: That will get enabled by smart meters, and British Gas are very happy to lead the industry. We have about 80% of the smart meters. We have rolled out about 600,000. They have a kind of embryonic time of use tariff within them. I would expect within the next six to nine months to see a very significant breakthrough in enabling lower costs to lower price through smart meters. Stephen Fitzpatrick: Could I make a suggestion here, just on a practical point? If you want to see flat unit pricing—and I think the perception that people that use more energy get charged lower prices is to do with two-rate tariffs that are set up to hide the fact there is a fixed cost of providing the infrastructure. So a lot of companies have in the past marketed “No standing charge”. John Robertson: A lot of these accounts still have a fixed price on it. It is hidden in the bill. Stephen Fitzpatrick: What I would suggest we do is we start the conversation around convincing network operators that they should receive a pence per kWh transmission and distribution cost. As long as there is a fixed cost to retailers for providing infrastructure then the two options are you either create loss making low volume customers and you ignore the fact that a power line to a house that only uses a small amount of electricity and a power line to a house that uses a lot is broadly the same. So you either ignore that fact and lose money on small consumption customers or you end up in a position where you have this standing charge and then unit costs. If we can get to a point where National Grid and the other network companies can charge per kWh then retailers can pass on those costs on a per kWh basis. Otherwise there is very little that we can do that ends up in a good outcome for customers. Paul Massara: I agree with that. I think part of the changes under RMR is you are going to see more standing charges coming in. That is part of the development. In fact, we have just moved from having a two-rate tariff ahead of RMR in order to put in the standing charges, and people have written to us saying, “We don’t like having the standing charges because we are small users”. Some of those small users are actually second homes, and so you may have a different approach to that than you do to people who actually are in fuel poverty, which is clearly—

Q285 John Robertson: I am sure something can be done in that respect, but the small number of second homes compared to first homes is a very small number of people. I understand where you are coming from but I don’t accept that as a reason for it. I have to put the record straight because I have just been told that I mis-said that Centrica’s bills have gone up by 6% and not 3% or 4% as I said. Ian Peters: The prices went up 6% last year. There is an important distinction between prices and bills. John Robertson: I am just putting that on the record just to make sure that people understand that. Ian Peters: I will accept that prices went up 6%. The bills went up—

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Q286 John Robertson: Going back to the charging by usage, one of the great fears in California, in particular, is the fact that they try to encourage businesses to run at times when there is low usage so that they can meet the requirements that they have. At some stage if we don’t start getting investment into our electricity markets and start building some power stations, then we might get to the stage where we are talking about cutting people off because we don’t have enough power to meet the needs, particularly as the coal-fired power stations are closing. Have you looked at this and thought about how you are going to handle it? Again, I do not want to see the fuel poverty people being the ones that suffer. Neil Clitheroe: I think you are absolutely right, Mr Robertson, because the margin that is in generation is reducing all the time. We have closed a plant, as you have seen, in Scotland in the last three months, at Cockenzie. That is a good plant that we have closed, and that has come off the system and other plants are coming off the system. I think as usual there are two or three ways to solve that. One is we need plant, we need certainty in terms of that capacity, and that is going through on the Energy Bill at the moment. There are things you can do on demand. We are seeing a lot of business customers, refrigeration business customers, we are giving a lot of energy advice to them and moving their demand from the day into the evening and you can level that out. But how far you can take the peak down with those activities is questionable. I think that peak will still exist. Those three peak half hours in the winter will still exist, and we need to provide that. So there is a lot of work to do on this to provide more firm generation, and that will only come through some certainty through the capacity mechanism that is going through the Energy Bill at the moment. Ian Peters: From my point of view, the primary accountability for securing energy supply rests with National Grid. But this is an investment story. I think Centrica is doing its part. I talked about the Cygnus gas field. We have secured planning permission to build an 850 MWh offshore wind farm. I think there is a debate to be had around storage. The economics of storage now are very fragile. I think, as we have just seen from the near crisis we had a few weeks ago, it would probably be a good thing if we had more storage but we need to look at how that is incentivised and remunerated. We, as a company, are doing our part to invest in securing supplies for the future.

Q287 Sir Robert Smith: One of the answers has prompted this observation that you are all, quite rightly, highlighting that Government schemes put costs on to bills that consumers have to pay, but then you are also quite keen to take the credit for the insulation and energy saving measures you put into people’s homes. Do you recognise that those are coming out of those costs that are being put on to people’s bills as part of the Government schemes? Paul Massara: I think we would all say that fuel poverty is a combination of economic poverty and the housing situation. Obviously that is a real issue, and so, although we have some of the lowest costs per unit, we have some of the highest bills in Europe because effectively the usage is so high. As an industry we have a real issue, as actually as society we have a real issue with fuel poverty, because fuel poverty is not going down, it is going up, and we need a way of tackling it. The sensible way to do that is to effectively apply funds to those people who need it the most, who have the poorest housing. So I think that is absolutely the right thing to do. The question we would have is do the design of those systems and the processes achieve that lowest carbon position at the best possible price? Our assertion would be that on CESP it did not achieve that at the lowest possible price. Towards the end we were paying £50 or £60 a tonne of CO2 to get those obligations away, which is very expensive. We believe or we think ECO will be very expensive. The Government’s own position is it is 1.3, which is £77 a tonne. We believe it could be significantly higher. 48

So we absolutely agree that it is needed to be done. If anything, I would say that the Energy Bill is too light on demand side management and it needs to have greater emphasis on it. But everybody clearly has an interest in getting those costs in at the best and the lowest possible price for those people who need it. Our concern is that the way that some of these initiatives have been structured means that those prices are going to be higher than they otherwise would have had to be. Ian Peters: Just a couple of additions to your point, Mr Smith. We have done much more than our obligations, particularly around fuel poverty. We have the broadest criteria for the warm home discount. We have uncapped it and 530,000 of my customers will benefit from that—they already have, actually, by March—which is much more than we were obliged to do. I would support the point RWE made that there is a case for a mid-year review around ECO. There are many assumptions that have gone into that and we have some reservations about how that is playing out. We are doing what we can to roll it out at the lowest cost, but I think DECC’s assumptions are fragile and would warrant a mid-year review. Neil Clitheroe: You know my views obviously on Green Deal and ECO from the last Select Committee, but there is an interesting point on all of this and that is what is happening to consumption in the UK. Obviously all of these investments are going ahead and consumption is falling, but the averages that are used for consumption at the moment, in terms of the Ofgem average—16,500 for gas, 3,300 for electricity—have not been updated since 2010 to reflect the reductions that all the companies are seeing with regard to consumption. Therefore, when you look at the bill values then the bill values are effectively quoted too high, because there has been a drop. We are seeing numbers at 14,500 for gas, 3,100, 3,150 for power. We are speaking to Ofgem at the moment through Energy UK to try to influence that debate. But that is an important point because we are not seeing in the tariff tables the impact of all that investment into average bills in the UK. I do think that is a lost opportunity in terms of the transparency of what energy is costing. Paul Massara: To add to that, I think we would have the same problems that others have suggested about the Ofgem monthly analysis, on volumes and on types of tariff. Also in terms of when we are making decisions now, we are going into the market and making decisions about prices. We are having to make estimates of what ECO is going to be worth and therefore we are having to factor in those costs. Those don’t apply or don’t occur in Ofgem’s analysis. So there are significant faults with that and the worry is that people jump on a headline and say, “Wow, I can’t believe they are earning £125 a customer” but continuously, year after year, it comes out and shows that we are only earning 3% or 4%. To me that does not build trust in the marketplace, and I think it is right that we get those numbers correct in order to get a sensible conversation.

Q288 Mr Lilley: On profits and prices, opinion surveys consistently show that a very high proportion of consumers believe that the 50% increase in their bills in recent years is largely due to the increase in the profits of the energy companies. Indeed, when we went to Scotland that was the view of the audience that we had there. There were many activists, and some members of the Committee believe it. I would like to believe that it wasn’t so. If it were so, it would mean there was a margin being earned that had gone up from 100 to 150. Your profits are 50 of that 100, a third of the total. That is clearly extreme. We could bring in the Monopolies Commission and bring down prices. I suspect it is not so, but it would be helpful if we could have the information in a usable form. How much of the increase in prices in bills in recent years has been due to an increase in profit? Not just the profit at the retail and supply end but the profit at the generating end as well, because people outside do not distinguish between the two, and rightly not. They are part of the profit of the whole industry. We do not 49 get that. Somebody will say, “We only generate a fraction of what we supply and therefore we can’t throw the—”. What is the percentage to begin with and how much has it increased? Paul Massara: I think that data is there. It is all in the segmental reports. I think that the— Mr Lilley: Well, because it is all segmented— Paul Massara: But it is segmented between supply and between generation and it is very clear, and that is—

Q289 Mr Lilley: For example, if the generation profits are 20% they are 20% of what, of the wholesale price that is going—so not 20% of the final bill, so you are shooting yourself in the feet. Paul Massara: Absolutely. We announced in our last set of results that our profits in the UK as a whole were up 25% and everybody goes, “Oh my goodness, they are up 25%”. What they do not say is we have invested £5 billion over the last five years and therefore you would be amazed if your profit doesn’t go up. What they don’t say is in 2009, 2010 and 2011 we lost money in the retail business and are now making a wafer thin margin. What we have to do is be able to communicate better, because fundamentally we are not earning above margin.

Q290 Mr Lilley: Some of us would like to help you, but give us the figures. If the bill was £100 in the past and £3 of that was profit at the retail end and £5 was the generating end, and now it is £200 and it is £6, I would like to know that but I do not have it in that form. Paul Massara: Sure. We can provide that for you.

Q291 Mr Lilley: You can say, “Look, okay, profits have gone up a bit or down a bit or something but the big increase is either in fuel or in other operating costs, because of increased investments and these absurdly expensive forms we make you produce energy in now or Government add-ons and things”. We ought to be able to get those but as something for the total bill, not segment by segment. Ian Peters: We do that through our light bulbs. In short, British Gas residential’s profits in 2007 were 571. They were 606 in 2012. So the short answer is none, but we lay out the breakdown—the moving parts, wholesale, moving it around, transport and distribution— on the back of the bill every month for our customers. Stephen Fitzpatrick: Mr Lilley, if I could offer one observation, from all of my time in the energy sector, neither you nor the Government nor the Department of Energy and Climate Change nor Ofgem will ever chase these guys down on profitability because they are always a couple of years ahead of the numbers that they are reporting to you. As an observation from the customer’s point of view—and we speak to a lot of our customers all the time and we listen very closely—nobody cares about the profits that energy companies make if they feel they are getting good value. So all of the time that we have spent today, and all the time we have spent over the past years, about energy company profitability to me is a bit of a red herring because I think energy companies should be profitable. I think it would be great if we had more profitable energy companies. It would mean more investment in the business and maybe more money to spend on communicating the good that the energy industry does. But energy customers do not feel that they are being treated fairly because they keep finding out that there is a new deal that they can get offered by another company or even the same company. Their neighbour is paying less than they are. Their bills keep going up. I think it is a complex industry that, as industry participants, the larger industry companies have done a very bad job in trying to simplify that for the customer. 50

I would make one proposal to the Committee, that where we start to see a more uniform approach to energy pricing so that there is less of a disparity between the cheapest deals on the market and the most expensive deals, then people become a lot less suspicious that they are being overcharged. All this talk about profitability and where the money is going and so on, I think from a tax point of view it is perfectly reasonable to ask that if the profits are being generated in the UK that tax is paid in the UK. But otherwise I would say create a market where competition works and then people can see the results for themselves, whether that is in generation or in supply. But if you have more competition you do not need to ask these guys about their profits because good companies will be profitable and poor companies will leave the market. I would suggest to Paul that if npower are apparently not very successful in running their retail business over the past three or four years, then we will very happily talk to you about taking over the business and I think we would do a much better job. Ian Peters: I don’t always agree with Stephen but on this one I do agree with him. This is about stating values and there is no doubt that since we have started writing to our customers saying, “These are the other tariffs, the other prices you can get from British Gas” it absolutely has changed the perception. Stephen Fitzpatrick: But, Ian, you run Sainsbury’s Energy and you won an option yesterday offering customers buying Sainsbury’s Energy a £200 cash back deal sweetener to sign up for 12 months. You did not offer that to your 9 million British Gas customers and so that is what leads to lack of trust. Ian Peters: There are two things on that. That was a particular transaction to do with collective switching that involved local authorities, which was priced on a particular basis. Stephen Fitzpatrick: Next year for those customers the price is going to go up by £200 and they will wonder why. Ian Peters: I am not saying that. If a British Gas customer phones up our call centre today, and asks for our cheapest deal, we will explain to them the British Gas number and the Sainsbury’s number. Neil Clitheroe: Just coming back to the question, we do provide those details, so for £100 that you spend today in 2010 you would have been spending £81 as a monthly average. That £19 is made up of £4 of wholesale cost increase, £5 from the wires and pipes increase that has come from the investment, £8 from VAT and various sort of ECO, green levies and so on, a £1 increase— Mr Lilley: VAT and ECO? They are different things. Neil Clitheroe: In fact it is 5%, 5%, so it will be £2, £2 to £10 between 2010 and 2013, and operating costs are £1. So we do provide that detail on our website to try to improve understanding of this.

Q292 Mr Lilley: That includes the generating element in this? Neil Clitheroe: That is within that £4 increase from £46 to £50 for the gas and the power.

Q293 Chair: That does not tell you what Peter says in terms of presentation from saying that the profits of the company came from— Neil Clitheroe: It shows the profitability.

Q294 Mr Lilley: The figures in our brief do not show that. I would agree that complexity is a source of aggravation, but it is a source of aggravation if the price is going up. When the price is coming down or static it is not such a source of aggravation. There is great complexity in the price of computers, but computers are coming down. There is great 51 complexity in the price of mobile phones, but mobile phones are getting cheaper. People do not worry about the complexity when things are going down. When they are going up they blame them on you and if you do not give us clear figures about where the profits are they will blame it on your profits, so it would be helpful for us to know where the profits are, what they are on average for an average consumer and how much they were a few years ago. Then, when the BBC comes out with one of their things, “Oh profits have gone up by so much” we will be able to say, “This is what they were last year. This is what they are this year. The big increase has come somewhere else”, if it comes somewhere else. If it has come from rising profits, then we will be able to— Paul Massara: We have already stated in our papers the historical and the forward view of that, in terms of profit margins and how the bills are likely to rise in the future by each of those costs. Chair: Thank you for your patience. It has been a helpful and illuminating session for us, and we look forward to seeing you again in due course.