A Review of UK Electricity Regulation 1999-2000+
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A Review of UK Electricity Regulation 1999-2000+ Stephen C Littlechild* 24 November, 2000 I prepared for this review by reading the previous CRI electricity reviews dating back to 1992. Several points struck me forcibly. First, the high quality and readability of the papers, where the highlights of the year were brought to life without neglecting duly to record the more mundane “things done”. The authors’ comments and predictions, sometimes delicate, sometimes vigorous, but always welcome, shed as much light on the authors’ own preoccupations as on the actions of the parties under review. Second, the broadly constant nature of the issues over the years. Promoting competition in generation and supply, regulating monopoly in transmission and distribution, the accountability of the regulator, the role of government: all these appeared every year, always with some new aspect. Some themes, like prices and profits, dominated the early years then faded somewhat; other topics, like the capital markets and industry restructuring, gradually came into greater prominence; yet others, like quality of supply, the environment and energy efficiency, made sporadic appearances but were never absent for long. Third, how often the author exclaimed, in effect, “another momentous year”. Regulation has not faded away, it has flourished. It has not merely coped with change, it has just as often instigated it. In every year there has been something new and exciting. Never a dull moment. And so it has been in the period under review. Actually two years this time, roughly from September 1998 to November 2000. But this time with one significant change, at least for me. I am now the reviewer, no longer the object under review (except for the last few months of 1998). I can hardly claim to be objective in this matter, and certainly I feel a great deal of sympathy for the new Director General, Callum McCarthy, and the new regulatory office Ofgem.1 I think I understand the kinds of situations in which they found themselves and the pressures and opportunities they faced. And on the whole, I must say, I have a great deal of admiration for how the regulator has acquitted himself. 1998 and Supply Competition Graham Shuttleworth opened last year’s CRI review with the following sentence. “For some time now ‘1998’ has symbolized the dawn of a new competitive era in the + Forthcoming in CRI Regulatory Review – Millenium Edition 2000/2001. * Honorary Professor, University of Birmingham Business School, and Principal Research Fellow, Judge Institute of Management Studies, University of Cambridge. I am grateful for comments and suggestions from Dr Eileen Marshall of Ofgem and from the editor Peter Vass. Responsibility for remaining errors lies with me. 1 Callum Mcarthy took over as Director General of Electricity Supply on 1 January 1999, having been appointed Director General of Gas Supply a couple of months earlier. The former regulatory offices Ofgas and OFFER were renamed the Office of Gas and Electricity Markets (Ofgem) on 16 June 1999. The Utilities Act 2000 that formally merged the two statutory functions is discussed in the text below. 1 electricity industry.” When the industry was privatized, it was agreed that all customers would have the right to choose their own retail supplier, with the market opening in three phases 1990, 1994 and 1998. Shuttleworth went on to say that 1998 had come and almost gone, the expectations of a year of competition had not been fulfilled, the costs had escalated, the reforms had been delayed and “retail competition in electricity will now be fully implemented only in 1999”. It is only right to begin, then, by confirming that retail competition was fully implemented in 1999. The market for customers with maximum demand above 100kW, accounting for about a half of the total demand, had of course been opened long before. The opening of the market for under-100kW customers was phased in between September 1998 and June 1999 according to the revised timetable established early in 1998. And on the whole all went smoothly and according to plan. Nearly a quarter of this market was open by the end of 1998, three-quarters were open by March 1999, and the whole market was open by 24 May 1999, a month earlier than planned.2 Much of the credit for this must go to Tony Boorman, the Director in charge at Offer and later Ofgem, who oversaw, guided and indeed drove the whole process. But the industry as a whole worked hard to achieve the target, and PA Consultants deservedly received the Annual Award of the Management Consultants Association for their contribution to the project management. Awareness of competition was high. A MORI sample survey showed that as early as February 1999 89% of customers in areas then open to competition were aware that they could buy electricity from other suppliers.3 And shop around they did, on a remarkable scale. By the end of May 1999, suppliers other than the local PES supplied some 1.3 million customers, nearly 5% of the total. Subsequently, customers transferred at a rate that has averaged nearly 100,000 per week over the last eight months. By the end of September 2000 over 33% of domestic customers had registered to change supplier. There have admittedly been some difficulties over this period. Most important, despite a considered and focused set of regulatory obligations and guidelines, there have been numerous concerns and complaints about the marketing tactics of certain companies, principally associated with doorstep selling.4 The number of complaints against PESs received by Offer and the Electricity Consumer Committees fell from 6320 in 1997/98 to 6152 in 1998/99. However, within that, Northern Electric’s complaints increased from 418 to 1447 over the same period. Ofgem attributed this to problems in the company’s handling of dual fuel complaints and in the introduction of 2 A Review of the Development of Competition in the Designated Electricity Market, Offer/Ofgas, June 1999. Unless otherwise indicated, all the references in this chapter are to Ofgem publications. They are available on the Ofgem website www.ofgem.gov.uk. 3 Electricity Competition Review: February/March 1999, Research Study Conducted by MORI for OFFER, June 1999. By October 1999 the awareness figure had increased to 95% nationally. Electricity and Gas Competition Review, A Research Study Conducted for Ofgem by MORI, January 2000. 4 The extent to which suppliers are relying on estimated meter readings at change of supplier has also been a cause of concern. In addition, Ofgem has claimed that some incumbent PESs have been unreasonably blocking the ability to move of some customers, such as those in debt, and it has been concerned to remove or reduce barriers to competition for disadvantaged customers. 2 a new computer billing system. In addition, there were for the first time 1230 complaints about second tier suppliers in 1998/99. The picture in 1999/2000 was worse. Complaints against PESs increased by 40 percent to 8610, within which they more than doubled for three companies. And complaints against second tier suppliers increased nearly twenty-fold to 22,507.5 In mitigation a number of points might be made. The problem was somewhat localized, associated mainly with three PESs within their areas and with two companies (British Gas and Independent Energy) selling second tier. The total complaint rate was small in relative terms: even 22,000 second tier complaints represent a complaint rate of less than one per one thousand customers. The total number of complaints seems to have decreased slightly from the peak in January to March 2000. Companies began to discipline their selling agents and explore alternative ways to win customers, for example by tele-marketing. Moreover, experience in the gas industry suggests that doorstep selling provided access to low income customers that would not otherwise have been aware of the opportunities, and customer surveys indicated that most people found such experience to be acceptable.6 Ofgem required Independent Energy to cease accepting new domestic and small business customers, and Northern Electric to limit its new acceptances, until their performance improved. Independent Energy, the most aggressive and apparently successful new entrant, not only experienced significantly higher complaints than other companies about direct selling, erroneous transfers and customer billing, it also failed to bill and collect the revenues it was due. It announced on 8 September 2000 that it was in receivership, and on 14 September the receiver announced that its major supply business assets had been sold to Innogy, the domestic successor company to National Power. In contrast, Ofgem announced on 20 November 2000 that Northern Electric had made good progress towards dealing with its problems, its complaints had fallen substantially, and its undertaking to limit the take-up of new customers was lifted. Some difficulties were to be expected given the enormous scale and pioneering nature of the policy of opening the domestic market to competition. They should be transitional rather than permanent problems. Price reductions and supply price controls What sorts of price reductions have been available in the competitive market? Offer’s June 1999 review showed best available savings averaging about 10 percent for standard quarterly payment customers, and about 6 percent for prepayment. These were savings compared to the PES charges, which in turn were broadly at the maximum levels allowed in the transitional price caps set in early 1998 for the two years to March 2000. 5 Reports on Services for Electricity Customers 1998/99, October 1999; 1999/2000, October 2000. Also Electricity complaint statistics 1 January to 31 August 2000, 12 October 2000. 6 A Review of Competition in the Designated Electricity Market, Offer/Ofgas, June 1999, pp.