Select Committee on Public Accounts Eleventh Report


The Committee of Public Accounts has agreed to the following Report:



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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