6. Electricity supply competition required a legal
and commercial framework for the market, and systems to enable
information to be passed between different industry bodies and
electricity companies. Each of the 14 electricity distribution
businesses had to design and build their own systems. Ofgem took
into account the costs of implementing competition in their controls
over charges for distribution network services, and the incumbent
electricity suppliers' tariffs. Ofgem allowed companies to recover
some £850 million from customers over the seven years from
1998-99 to meet the extra costs the companies incurred, an annual
rate of some £120 million a year, amounting to about £4
a year or some two per cent on the average household's electricity
7. Our predecessor Committee asked Ofgem why they
allowed electricity companies to recover so much from customers,
and whether they had thereby favoured shareholders at the expense
of customers. Ofgem said that they had been persuaded after looking
very carefully at the figures that these were justifiable costs,
taking account of their responsibility to ensure that efficient
companies were able to finance themselves. Price controls had
reduced the prices of the electricity distribution businesses
in Britain by an average of 22 per cent in the first year, transferring
every year £900 million from the companies to their customers.
It had been a tough price control, and the overall balance had
been in line with Ofgem's objective of protecting and promoting
the interests of customers.
8. The 6.5 million customers who had changed their
supplier by June 2000 had seen their bills fall by 15 per cent
in real terms, an average of £45 a year. Nearly half of these
savings (some £140 million) were attributable to competition.
The National Audit Office found that, of 19 million customers
who had remained with their existing supplier, four-fifths (15.4
million customers) had not yet made savings on account of supply
competition, although they had benefited from Ofgem's caps on
supply prices. The bills of the other 4.2 million customers were
mostly no more than £2 a year below the price caps.
9. Ofgem said that they were improving competition
in the electricity generation market through changes to the structure
of the industry and new electricity trading arrangements. For
example, British Gas Trading's recent reduction in electricity
prices had been made possible by the new electricity trading arrangements.
10. Ofgem will continue to regulate the prices and
quality standards of electricity suppliers until they consider
that competition is sufficient to meet their principal objective
of protecting consumer interests, having regard to other duties
including the protection of vulnerable groups.
They have announced their intention to end price controls in April
2002, if they consider that competition has continued to develop
did not believe that the market was yet working effectively because
the former regional electricity companies were still dominant
in their regions, and very low numbers of prepayment customers
were changing supplier.
11. Our predecessors therefore asked how Ofgem would
decide when competition was satisfactory and price caps could
be removed. They said they would take a view on the relative strength
of regulation and competition. Ofgem believed that there was a
prospect of real competition in electricity. They had already
removed price controls from direct debit discounts and expected
by April 2002 to remove electricity controls across the board
although they had yet to take this decision. They had removed
price controls in the gas market but had made special arrangements
to protect prepayment meter customers, where competition was least
strong, by linking prices to direct debit prices where competition
was strongest. They expected to make a similar arrangement in
the electricity market.
12. 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.
13. 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.
2 C&AG's Report, paras 2.18 and 2.22 Back
Qs 5, 15, 17 Back
C&AG's Report, para 2.5 Back
ibid, para 8 Back
C&AG's Report, paras 3, 2.18, 2.22 Back
ibid, paras 2.23-2.24 Back
Evidence, Appendix 1, p13 Back
Qs 2, 41 Back