House of Commons - Public Accounts

Select Committee on Public Accounts Eleventh Report

MAKING IT EASIER FOR CUSTOMERS TO CHANGE SUPPLIER

Helping customers find the best deal

14. Nearly all the 19 million customers who have not changed their electricity supplier would save money by doing so. For example, if they all changed to the cheapest supplier in their area together they would save approaching £670 million (13 per cent of their bills).[11] Ofgem told our predecessors that they had noted that 95 per cent of people were aware that there was a competitive choice. Attitude surveys had showed them that 70 per cent of people believed that switching was very easy, and that just under 90 per cent of people who had switched had found the process very easy.[12]

15. Consumers are likely to obtain a deal that best suits their circumstances when they can easily compare prices and terms of competing offers. Many customers, however, find it difficult to compare prices and very few shop around for the best deal - in an Ofgem survey 40 per cent of those questioned said it was very or fairly difficult. Of the six million people who had changed supplier, 88 per cent could have got a better deal if they had shopped around.[13]

16. This is not the first time the Committee of Public Accounts have examined problems experienced by consumers finding the best deal in newly competitive markets. Our predecessors' Report on the work of the Office of Telecommunications found that there was a need for greater transparency and clarity in telecommunications pricing structures if customers were to make informed choices between different operators.[14] And their report on the work of Ofgem in overseeing gas competition noted that customers were encountering similar problems.[15]

17. Ofgem stated that they were very keen to ensure that as many people as possible knew about the advantages and ease of switching. They said that they produced detailed information on their website, regularly updated, on the price offerings available, and received something like 45,000 hits every month.[16] Many of the people who downloaded information from the website were in a position to act as "multipliers" of the news, and many newspaper reports on the subject of electricity competition had drawn on information from the website. The freephone service, for which energywatch were now responsible, received some 5,000 calls a week. Customers could call it and be sent an information pack to help them find the cheapest supplier. The telephone number (0845 601 3131) was on the back of every bill for gas and electricity.[17]

18. Asked whether they were worried that most customers who have changed supplier had not got the best deal, Ofgem said that people did not always optimise the very best solution but that this did not necessarily imply market failure. The best choice today might be replaced by a new offer a month or two later.[18]

19. Ofgem agreed that one of their aims was to make the price offerings made by different suppliers as comparable as possible to potential customers. To this end, Ofgem had tried to devise an Energy Cost Index, which they had tested on groups of consumers. They had found in testing, however, that groups of consumers had not found the index helpful, while the Consumers' Association was sceptical about its usefulness. Ofgem had not found anywhere in the world a single useful index where there was a competitive market, but they considered that there were ways of making comparisons easier and they would be coming forward with proposals.[19]

20. Asked what they were doing to help customers find the best deal, energywatch said they saw their role as being to develop information to enable consumers to become confident and assertive. They wanted to see price and quality information conveyed in a standard format that would enable easy comparisons by individuals.[20] They needed to become known to consumers, and that involved exploring new and unusual ways of communicating with consumers. The activities they had planned for the coming years were intended to reach out to consumers who did not know about the choices available, and to encourage companies to be clear about what was in the market. They might include building links with organisations like the National Association of Citizens Advice Bureaux and local authority trading standards services.[21]

Rural customers

21. A National Audit Office survey showed that there were significant variations in the proportion of customers who had switched electricity supplier, and that rural customers were less than half as likely to have changed their electricity supplier than those who lived in urban areas.[22] Ofgem said that doorstep selling was the most effective way of marketing and was most effective when houses were close together which was not the case in the countryside. Making customers aware of the competitive choices available in the countryside was a problem. Ofgem were taking a number of steps with groups such as Action with Communities in Rural England and the Women's Institute with the aim of making sure that customer awareness was properly spread through the countryside.[23]

22. Ofgem said that a further reason why rural customers were less likely to change supplier was that more than three-quarters of those who switched did so to a combined gas and electricity deal. Such deals were available to a smaller proportion of customers in the countryside because fewer of these customers were connected to mains gas.[24]

Customers on low incomes

23. When our predecessor Committee examined gas competition they found that people on low incomes who used a prepayment meter were not benefiting as much from competition as others.[25] A National Audit Office survey showed a similar picture in the electricity market. While 30 per cent of customers with household income above £25,000 a year had changed supplier, only 20 per cent of customers with household income of less than £9,500 a year had changed supplier. A major reason was that a higher than average proportion of poorer households used a prepayment meter. Few of the new entrant companies competed with the tariffs of the former monopoly suppliers for customers with a prepayment meter who cost more to serve.[26]

24. Asked when people on low incomes would benefit as much from competition as the rest of the community, Ofgem said that they had capped the additional amount that could be charged for prepayment meter customers at £15, although they pointed out that most low income customers did not use prepayment meters. As part of their Social Action Plan, Ofgem had also encouraged actions by companies to try to find ways of giving prepayment meter customers access to different and better means of payment. When prepayment meter customers were asked why they did not change to other means of payment, most of them said they liked prepayment meters because they were a means of controlling their budgets.[27]

25. Gas and electricity suppliers have the power to prevent customers who owe them money from moving to a competitor, which was intended to prevent customers changing supplier to avoid paying their debts.[28] When our predecessors reported on gas competition, they recommended that Ofgem pursue vigorously their work with companies to make it easier for prepayment meter customers to change supplier.[29]

26. Ofgem told our predecessors that debt blocking was a complicated issue and there was no simple and agreed view as to the right answer. They regretted that it was a continuing problem but they did not have the legal powers to compel and impose an answer on the industry. Progress depended on persuasion. It was reasonable that there should be a means of stopping people moving around the system and leaving bad debts. Ofgem had in 2000 proposed changes to market rules to remove a supplier's ability to stop customers in debt moving to another supplier. Inadequate progress on the debt issue was one of the reasons why Ofgem had not withdrawn the price caps over gas prepayment meter customers. Ofgem were, however, now encouraging companies in a series of experiments to find the best way of dealing with the problem.[30]

Conclusions

27. 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.

28. 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.

29. 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.

30. 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.

11 C&AG's Report, para 3.2 Back

12 Q41 Back

13 C&AG's Report, paras 3.8, Figure 11 and 3.11 Back

14 64^th Report of the Committee of Public Accounts, Countering Anti-Competitive Behaviour in the Telecommunications Industry, (HC 842, Session 1997-98), para 4 Back

15 8^th Report of the Committee of Public Accounts, Office of Gas and Electricity Markets: Giving Customers a Choice-The Introduction of Competition into the Domestic Gas Market (HC 171, Session 1999-2000), para 3 Back

16 Qs 41, 58, 91 Back

17 Qs 60-61, 63, 94 Back

18 Qs 57, 90 Back

19 Qs 83, 85, 88-89 Back

20 Q69 Back

21 Q7 Back

22 C&AG's Report, para 13 Back