Examination of Witnesses (Questions 1
WEDNESDAY 28 FEBRUARY 2001
1. Today the Committee will be considering the
Comptroller and Auditor General's Report on the Office of Gas
and Electricity Markets (Ofgem): giving domestic customers a choice
of electricity supplier. We have as witnesses Mr Callum McCarthy,
the Chairman of the Office of Gas and Electricity Markets, and
Mr Stephen Reid, Chief Executive of the Gas and Electricity Consumer
Council. You have somebody else with you, Mr McCarthy, would you
(Mr McCarthy) John Neilson, who is the
Managing Director for Customers and Supply in Ofgem.
2. Welcome. Mr McCarthy, you have been with
us before so you are used to the procedure. I will try to give
you some indication as to where in this Report I am referring
before I give a question. I will start with Mr McCarthy since
he is an old hand now with paragraphs 2.23 and 2.24. 2.23 notes
Ofgem's intention to end the remaining caps on supply prices from
2002 if competition is satisfactory, but the next paragraph indicates
that the incumbent suppliers have yet to reduce their prices significantly
in response to competition. How will you decide when competition
is satisfactory and price caps can be removed?
(Mr McCarthy) Chairman, I think this question goes
to the very centre of what Ofgem does because everything we do
is aimed towards improving the position of customers, and we do
that wherever we can by promoting competition, and where we cannot
by regulation, and this decision is a view on the relative strength
of regulation and of competition. If I look at it in terms of
regulation of electricity, you have to understand that about half
the end cost that we all pay for our electricity is the cost of
generation, about 40 per cent is cost of transmission and distribution
(which we price control by RPI minus X) and about ten per cent
is the actual supply cost. We are able within that to particularly
control the transportation and transmission element. We are able
to cap the supply costs, and the generation cost is a very difficult
variable which can only be attacked by ensuring that competition
works, and we are working on that. So regulation is to some extent
at this level a blunt instrument both in gas and electricity.
The other thing we have to look at is do we believe that competition
is really working, which is fundamental to this Report and our
consideration of it. If we look at it we look at it in terms of
awareness of competition. 95 per cent of people are aware that
there is a competitive offering, and that figure is growing. We
know that there is good knowledge of the process. We know that
people find it easy to switch. Indeed, those who switch find it
easier than those who are contemplating switching think they will.
We know there is quite good information, although that is an area
which we are working on, in terms of knowledge of the price offering.
We believe that for a variety of reasons there is a prospect of
real competition in electricity. Ending electricity supply price
controls is not a decision that we have finally taken. We have
already taken direct debit out of price controls and we expect
by April next year to be able to do the same thing for electricity
across the board, as we have done just now for gas, and as for
gas we expect to make special arrangements to make sure that where
competition is least strong, which is in a particular form of
payment, that is linked to where competition is strongest, which
is direct debit.
3. A key test of competition is prices and prices
have not come down particularly in any of those areas, have they?
(Mr McCarthy) Overall the prices have come down in
the period 1995 to 2000, in electricity (depending on method of
payment) between 24 and 27 per cent and in gas by comparable figures,
4. Particularly in direct debit?
(Mr McCarthy) No, the figures for electricity are
that credit came down by 25 per cent, direct debit by 27 per cent
and pre-payment meters by 24 per cent. All of those are in real
terms not money of the day.
5. Paragraph 2.22 of the Report tells us that
you are allowing companies to recover £850 million for customers
to cover the costs involved in modifying their computer systems.
Why are you allowing them to charge so much?
(Mr McCarthy) Because we were persuaded after looking
very carefully at the figures that those were justifiable costs.
6. They seem very high to me but no doubt others
will come back to that. We are quite used to seeing IT project
costs in Whitehall. Given you have got customers paying £4
a year for the introduction of competition, that is the same number
divided out, I see from paragraphs 2.24 and 2.26 that most of
the customers who have yet to change supplier have not seen significantly
lower prices due to competition. That is at odds with what you
have just been saying. When do you expect the customers to benefit
from the process they are paying for?
(Mr McCarthy) We believe that they are already benefiting
though not from the direct results of switching because, by definition,
they have not switched. If you look at all that we are doing,
we are getting competition in generation through changes in the
structure at the industry level, we are getting changes in competition
by introducing new electricity trading arrangements, and critical
for that to work through is a competitive market because if there
were not a competitive market and the prospect of competition
suppliers would be indifferent as to whether they pay expensively
or cheaply for their electricity, and this is therefore a critical
component. This is not just a theoretical argument. It is interesting
that when BGT two weeks ago announced their reduced electricity
and gas prices, the reason they were able to reduce electricity
prices (and therefore bring competition on all electricity suppliers)
was the changes that were taking place in the electricity trading
arrangements, so you have to look at the whole chain and if you
do that I think that everybody has benefited.
7. Others may want to come back on that. Perhaps
I can turn to Mr Reid for a little while and give him something
more than a spectator role. I want to talk about paragraph 3.8
which tells us that many customers find it difficult to compare
prices and very few customers shop around for the best deal. What
are you doing to help domestic customers find the best deal for
(Mr Reid) That strikes at the very core, the raison
d'etre of energywatch and we see our role as being precisely
to develop information available to consumers to enable them to
become what we call confident and assertive. This means that our
whole set of activities planned for forthcoming years is to reach
out to consumers who do not know about the offerings, to help
clarify what those offerings might be, and to encourage them and
companies to be clear about what is in the market. We see our
role as exploring new and unusual ways of getting to these consumers.
This may mean through community gatherings, through outreach work,
through making friends with organisations like NACAB, Trading
Standards and the like, so through them we can get to potential
8. One side effect of all this is in paragraphs
2.12 and 2.15, another aspect of competition, which tell us that
the number of complaints from customers who changed supplier are
about six times greater than those who have not changed. What
are you doing about that?
(Mr Reid) Firstly, I would like to express my view
that that is of deep concern to energywatch. It seems to us that
that is an indication that although the competitive market may
be helping many consumers, there are clearly groups of consumers
who are not deriving benefits as quickly and as openly as they
should. We therefore want to work with companies and with Ofgem
to improve things like the transfer process, to ensure that any
evidence of mis-selling is remedied by contacting companies and
exploring with them how to remedy problems of rogue salespeople
or inadequate billing techniques. Our whole purpose is to work
on behalf of consumers as their champion in face-to-face dealings
that we have with the companies.
9. Again others will want to come back. It is
an interesting area that you have and what you do. Can I come
back to Mr McCarthy on paragraph 3.21 which sets out the steps
you have taken to prevent high pressure or misleading selling
techniques appearing in the electricity market as they did when
the domestic gas market developed competition. It is clear, however,
that the number of complaints in the first year of electricity
competition was just as high as in the first year of gas competition.
This is disappointing, I am sure you would agree. What are you
doing to tackle that?
(Mr McCarthy) We have approached this by three particular
steps. First of all, we tried to apply the lessons that we had
learned from gas to electricity from the very beginning. In gas
it had taken some time in the opening up of the market.
10. That does not appear to have worked, does
(Mr McCarthy) With respect, the figures that we have
for complaints of direct selling are now down as of December 2000
to 0.5 per cent per thousand transfers,
which is exactly the same level as it is in gas and that is after
gas has been going for two extra years. So complaint levels have
actually come down very markedly indeed.
11. They started at the same level but came
down very fast?
(Mr McCarthy) They came down very fast. The second
thing that we did, as the report recognises, was to introduce
a whole raft of specific additional constraints and licence requirements
on direct marketing. The third thing that we did was to take action
against specific companies whose performance we thought was inadequate.
We took action in December 1999 against London and we have just
taken action this year against Npower. There are three lines of
12. Others will no doubt want to come in on
that. I want to move on to the issue which aggrieves me most in
this. The reference is page four, paragraph 13(b), figure 2. When
we looked at gas competition we found that people on low incomes
who use the prepayment meter were not benefiting from competition
as much as others, they were unable to switch for example. Exactly
the same problem appears to be apparent in the electricity market
and such customers are now paying up to £15 a year more than
other customers who have not switched. When can we expect to see
people on low incomes benefiting as much from competition as the
rest of society because, after all, they are the ones who feel
(Mr McCarthy) I think I have to reply in two ways.
One is specifically about prepayment meter customers and, secondly,
about what has happened to those who are on low incomes, because
the two groups are not exactly the same.
13. There is a large overlap.
(Mr McCarthy) There is a large overlap but it is important
to recognise that most low income customers are not prepayment
customers. If you look at what we have done in relation to prepayment
meter customers in electricity, first of all we capped the amount
that could be charged additionally for prepayment meter customers
at £15. We looked at that very carefully. We have worked
very hard to try to identify why prepayment meter customers do
not move to other means of payment. It is, in fact, really a complex
area. Most of them have access to bank accounts, three-quarters
of them have bank accounts. Most of them profess to be content
and actually like prepayment meters as a way of paying and do
so because it gives them a means of controlling their budget.
As part of the Social Action Plan we have initiated a whole series
of actions by companies to try to find ways of getting prepayment
meter customers to have access to different and better means of
payment. We can describe what those are.
14. One area where you have so far failed anyway
is to get the issue of debt blocking resolved, is that not the
case? That does strike me as a really rather serious concern.
Can you talk us through that?
(Mr McCarthy) First of all, can I say, Chairman, that
we share your concern. It is important to recognise that debt
blocking is a complicated issue on which there is no simple and
agreed view as to what the right answer is because it is correct
that there should be means for stopping people skipping round
the system and leaving bad debts. The question is how to prevent
that in an effective way. Our means of doing it essentially depend
on persuasion. We have come forward with proposals which, if they
are to be implemented, need 90 per cent both by volume and number
of licensees to agree to them. It is a source of great regret
that we have not actually yet got agreement on that. We came forward
with proposals last year, we have had meetings, and one of the
reasons why we did not withdraw the price controls from BGT on
gas was because we did not believe that enough progress had been
made on this, so we have kept this. Mr Neilson is in the lead
in leading the companies involved in a series of experiments to
see what is the best way of dealing with it. The simple answer
is we have not made the progress that we wanted, we regard it
as a continuing problem and we do not have the legal powers to
compel and impose an answer on the industry.
Chairman: Perhaps we will broaden things out
and I may come back to some questions later.
15. I would just like to pursue one of the points
the Chairman touched on. That was on page three, paragraph nine,
which tells us "All customers are paying an extra £4
each year on average to meet the costs companies incurred in introducing
competition . . ." which is a total of something like £850
million over a period of seven years. When the Chairman asked
you why you had allowed this to happen you said that you were
persuaded but you did not tell us why you were persuaded. Why
should the customer pay for that? These companies earn huge profits,
why should they not pay for it? I thought you were supposed to
be there to defend the customer, not the companies.
(Mr McCarthy) The responsibilities that we have include
the responsibility to ensure that efficient companies have enough
finance to finance themselves. The figure of £850 million,
which were costs allowed to the distribution companies, whose
costs are capped by a price control.
In the last price control we increased the allowable cost by £136
million to account for this. It was part of a price control which
had the effect of transferring every year 900 million sterling
from the companies to their customers and a price control which
was described, I believe incorrectly at the time, as harsh. It
was a price control which I think is correctly described as a
tough price control. I believe that the overall balance of that
price control was absolutely in line with Ofgem's objective of
protecting and promoting the interests of customers.
16. What do you reckon would be the profits
of these companies over the same period of time?
(Mr McCarthy) I am sorry, I do not carry that figure
in my head. It would be undoubtedly substantial but you would
also expect it to be substantial given the amount of capital invested
by those companies. I would say that from the beginning of my
tenure in this job I have made it quite clear that we believe
that distribution companies, which is what we are talking about
here in relation to this money, are a very low risk business and
that they should expect a return on capital that is commensurate
with that low level of risk. The price controls that we introduced
were widely seen to achieve that.
17. I always find it quite amazing that privatised
industries whose investors put their money into the industry on
a risk basisalways state that their main consideration
is: "it's the investors might not like this" or "what
about our investors?". It is never a case of the customer,
it always comes back to the investors rather than the customers.
(Mr McCarthy) With respect, we did a price control
that has had the effect of reducing prices in the first instance
in one year at a stroke by an average of 27 per cent.
It has had the effect of transferring every year 900 million sterling.
It incidentally had the effect of very severely knocking all the
share prices of all the distribution companies. With respect,
I do not think there is any evidence from that that we erred in
the direction of the shareholders.
Mr Steinberg: All right. I want to be very personal
now. Not to you, I would not dream of being, but can I give you
an example. This is to do with the issue of transfer. I have been
dying to get at you now for about six or seven months and when
I saw your name on the agenda I was delighted because I was told
to speak to you because you were responsible and you can put it
right. Over the last six months, both at home in Durham and in
London in my flat, at different times I have suddenly out of the
blue received a letter from British Gas telling me to pay my final
bill because I had been transferred to another gas supplier without
my knowledge, without my knowing anything about it whatsoever,
and coming out of the blue. When you ring up and try to find out
what is going on you are told "it is nothing to do with us,
it is not our responsibility". You ring up British Gas and
they say "I am very sorry, we cannot give you any information,
all we are told is you are no longer a customer of ours. Why do
you not contact Transco because they will be able to let you know?"
So you ring Transco and they say "I am very sorry, we cannot
give you that information because of the Data Protection Act.
What we can tell you is the company you have been taken over by
is so and so". So you ring them up and they say "yes,
you are a customer of ours now, did you not know?" and I
certainly did not know. It takes about an hour on the telephone
to try to sort this out, to sort out something which you are not
at all responsible for in any way whatsoever. You are pushed from
pillar to post, you cannot get a satisfactory response, you are
held on the phone until somebody tries to find out who is responsible.
They say they will ring you back but never do and you have then
got to ring again to find out and eventually after about an hour,
an hour and a half, you put it right. When you complain they say,
"It is nothing to do with us, you had better contact Ofgem."
Are you aware that this is going on?
Chairman: We can take this as a metaphorical
question about electricity even though it is gas.
18. The point is if it is happening with gas
presumably it is happening with electricity as well. They have
not taken my electricity off me yet but no doubt the day will
(Mr McCarthy) It is clearly a great concern to anybody
who wants to make the competitive market work properly that there
should be a whole series of problems with the transfer process.
The level of erroneous transfers, if you measure it by complaints,
has come down this year, it has halved in electricity and is running
at 1.5 per 1,000 transfers, and in gas it has come down to 2.8
per 1,000 transfers. I am not for a moment claiming that that
is an adequate figure, but there are a number of reasons for erroneous
transfers, some of them are clerical mistakes, some of them are
meter numbering mistakes, some of them are address mistakes, and
some of them are clearly bad selling techniques. Our concern has
been to do a number of things, first of all, to clarify and simplify
as much as possible the transfer process. It is an inherently
complicated process, not least to make sure that the customer
has the right to check on the transfer that is taking place. In
the example that you have given of your own experience clearly
that did not happen, but we have been trying to clarify the transfer
process. We have been taking steps against people who are not
meeting the necessary standards and one of the other things that
we are doing is putting up on an Ofgem website information about
the complaints that customers make so that people can understand
which companies are doing well and which companies are doing badly.
19. That does not give me any sort of satisfaction
whatsoever because I do not know whether it was an unscrupulous
agent who did it or whether it was a slip of pen. I did not give
my permission for it to be changed and therefore it should not
be changed. It is no good saying you are looking into it. The
fact of the matter is that there should be a completely fundamental
change on how you transfer to a different provider. The customer
should in all instances be able to either sign something or agree
by contract, and not be told that they have been changed without
their knowledge. If there were to be a signature requested, a
letter coming through to you saying "we understand you wish
to change, please sign a new contract before we disconnect you
from one company and put you to another", that would stop
it. Why does that not happen? Because it would cost the companies
too much money?
(Mr McCarthy) No, that is not the Ofgem concern about
that. The concern that we have is, for example, we are keen that
it should be possible for there to be well-conducted telephone
sales. We are keen that there should be Internet sales. We have
put in place a requirement for people to check up but we would
not favour preventing people doing telephone sales in this instance
as in other markets.
1 Note by Witness: The figure for complaints
direct selling is down to 0.5 per thousand transfers, not 0.5
per cent per thousand transfers. Back
Note by Witness: The £850 million included some costs
attributable to supply companies, the Pool and Scottish settlement. Back
Note by Witness: The average price reduction was 24 per
cent for distribution businesses in England and Wales, and 22
per cent across Great Britain. Back