ELEVENTH REPORT
The Committee of Public Accounts has agreed
to the following Report:
OFFICE OF GAS AND ELECTRICITY MARKETS:
GIVING DOMESTIC CUSTOMERS A CHOICE OF ELECTRICITY SUPPLIER
INTRODUCTION
AND
SUMMARY
OF
CONCLUSIONS
AND
RECOMMENDATIONS
1. The 26 million households in Great Britain spend
£8 billion each year on electricity. The regulation of the
electricity industry is the responsibility of the Office of Gas
and Electricity Markets (Ofgem), created following the merger
in 1999 of the gas and electricity regulators. The Utilities Act
2000 specified that Ofgem's primary objective is to protect consumer
interests, where appropriate by promoting competition. The Act
also set up a separate Gas and Electricity Consumer Council (energywatch)
to take over from Ofgem the handling of complaints from customers
about electricity matters and representing their views.
2. Between September 1998 and May 1999, in line with
Government objectives, Ofgem introduced competition into the domestic
electricity market. As a result, domestic customers can now choose
from whom they buy their electricity. The introduction of competition
was intended to encourage suppliers to offer lower prices, more
choice, and better service. By June 2000, 6.5 million customers
had exercised their choice and changed their supplier.
3. On the basis of a Report by the Comptroller and
Auditor General,[1] our
predecessor Committee took evidence from the Chairman of the Gas
and Electricity Markets Authority and the Chief Executive of energywatch
on which this report is based. The Committee examined the costs
and benefits of electricity supply competition, how it could be
made easier for customers to change supplier and what Ofgem were
doing to tackle abuses in the market.
4. This Committee draws three main conclusions:
- Since the introduction of competition into the
domestic electricity supply market, over 6 million customers (a
quarter of the total) have switched supplier, thereby saving in
total £140 million a year; but the costs to electricity companies
of modifying their systems to support the introduction of competition
are costing all domestic customers an extra £120 million
a year. As a consequence, while some customers will have benefited,
others will be worse off overall. Ofgem need to ensure that the
newly competitive market is operating in the interests of customers
and that all customers are adequately informed about the choices
available.
- If the remaining 19 million domestic customers
switched suppliers they could save up to £670 million, or
13 per cent of their annual bills; but changing suppliers can
be complicated; many customers find it hard to compare prices
and very few shop around for the best deal. Following the failure
of their attempt to devise a usable energy cost index, Ofgem should
press on with their new proposals to provide price and quality
information to customers in a way that enables them to make direct
comparisons between the prices and service on offer.
- The numbers of complaints known to Ofgem about
misleading selling techniques and erroneous transfers on the part
of suppliers and their agents have fallen; but many more customers
than those who complain have had cause for dissatisfaction about
the way they have been treated. Ofgem should implement the outcome
of their review of the transfer process without delay, focussing
on measures to curb high pressure and misleading selling techniques
and on reducing the scope for erroneous transfers, including carefully
examining the case for a standard contract. They should not hesitate
to use their new powers to fine suppliers who do not correct selling
malpractice.
5. Our more specific conclusions and recommendations
are as follows:
Competition and price caps
(i) The prices that suppliers can charge
domestic customers who have not changed supplier are currently
capped by Ofgem. Ofgem plan to remove these caps, as they have
done in the gas market, once they are convinced that competition
has developed satisfactorily. While all customers have benefited
from price caps, the majority have gained little from competition.
While Ofgem believe there is a prospect of real competition in
the market, energywatch do not believe that the market
is yet working effectively because of market dominance at regional
level and the very low numbers of prepayment customers changing
supplier. Before removing price caps Ofgem should demonstrate
that the market is working effectively and will protect customers
(paragraph 12).
(ii) It is not clear how exactly Ofgem will
decide on whether competition is sufficiently robust to permit
the removal of price caps without harming customers, including
those using prepayment meters. They should set out in advance
their criteria for making this decision, having regard to energywatch's
concerns expressed by energywatch, and publish an evaluation
of progress against these criteria before removing price caps
(paragraph 13).
Making it easier for customers to change supplier
(iii) Many customers find it difficult to
compare prices. As a result, few shop around for the best deal.
Ofgem recognise the value of making price offerings as comparable
as possible for potential customers. The Committee is therefore
of the opinion, following the failure of their attempt to devise
a usable energy cost index to help customers, that Ofgem should
now come forward with new proposals so as to provide price and
quality information to customers in a way that enables comparisons
to be readily made (paragraph 27).
(iv) The proportion of customers benefiting
financially from competition varies between parts of the country,
depending in part on the extent of doorstep selling. Ofgem are
seeking to promote information about the competitive market in
rural areas, where fewer customers are changing supplier, by working,
for example, with organisations such as Action with Communities
in Rural England. Ofgem and energywatch should set targets
for improving consumers' knowledge of how to obtain the best deal,
so as to reduce regional disparities in switching rates (paragraph
28).
(v) Customers on low incomes are less likely
than those with larger incomes to benefit from competition by
changing supplier. This is, in part, because many use prepayment
meters, for which few companies offer competitive tariffs. As
a result, tariffs for those on low incomes are commonly higher
than for customers using other payment methods. Although Ofgem
are promoting alternatives to prepayment meters to provide customers
with cheaper means of payment, many of them do not wish to change
payment method. Ofgem should, therefore, encourage greater competition
and reduced prices in this market, for instance by promoting technological
improvements that would reduce the costs to suppliers of supporting
these meters (paragraph 29).
(vi) The ability of suppliers to prevent
customers with outstanding fuel debt from changing to another
supplier, which our predecessors highlighted in relation to gas
competition, applies also in the electricity market. Ofgem have
still not succeeded in identifying a solution acceptable to the
industry, and should work with suppliers to find a way of allowing
customers with debt to change supplier without avoiding their
obligations to their original suppliers (paragraph 30).
Tackling Market Abuses
(vii) Although the level of complaints has
fallen substantially since competition was introduced, there are
still over 55 complaints a week about high pressure or misleading
selling techniques against a background of 113,000 transfers a
week. Ofgem accept that the level of dissatisfaction will be higher
than the number of customers who go to the trouble of complaining,
and they do not regard any level of mis-selling as acceptable.
While Ofgem can compel companies whose sales agents act improperly
to tackle malpractice, they will not be able to penalise such
companies until financial penalties provided for in the Utilities
Act 2000 come into force. These penalties will provide a stronger
incentive to deal with improper practice, and Ofgem should not
hesitate to impose them on companies which do not tackle marketing
malpractice on the part of their agents (paragraph 42).
(viii) Ofgem are working with the Direct
Marketing Association to develop a scheme whereby people can elect
not to be approached by sales agents. Energywatch believe
that giving advance warning of doorstep sellers operating in an
area would also be valuable. In these ways or otherwise, Ofgem
need to take early action to protect customers from inappropriate
selling techniques (paragraph 43).
(ix) Ofgem rely on suppliers to take action
against sales agents who engage in fraudulent activities such
as forging customer signatures. Suppliers reported 126 cases to
the police in 2000 and took some form of disciplinary action against
5,400 agents, confirming that there is a serious problem. Ofgem
should systematically check that suppliers are taking appropriate
action against sales agents who fail to meet standards of behaviour
(paragraph 44).
(x) Being transferred to a different supplier
without their having given authority can cause considerable inconvenience
and anxiety for customers. Ofgem have been receiving complaints
about erroneous transfers, which often result from sales agents
misleading customers, at a rate of some 600 a month, and acknowledge
that many customers transferred in error do not complain to them
or energywatch. Ofgem should work with energywatch,
who now have responsibility for representing consumer interests,
to obtain a much clearer picture of the extent and nature of involuntary
transfers, for example by surveying consumers and encouraging
customers to raise complaints with energywatch (paragraph
45).
(xi) One problem is that customers may not
be aware that they have signed a contract to change supplier.
We agree with energywatch that requiring suppliers to use
a standard contract format would help make clear to customers
what they are signing and would reduce the scope for involuntary
transfers. Ofgem told us that many suppliers already use contract
forms that make clear to potential customers what they are signing.
Ofgem should consider making an approved standard format obligatory
(paragraph 46).
1 C&AG's Report, Giving Domestic Customers a
Choice of Electricity Supplier, (HC 85, Session 2000-2001) Back
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