Examination of Witnesses (Questions 200-219)
CALLUM MCCARTHY, JOHN NEILSON AND VIRGINIA GRAHAM
THURSDAY 23 MAY 2002
200. When we talk about a bill, let us say for a household, it is of the order of what? Is as much as 45 per cent accounted for by monopoly price?
(Mr Neilson) A bit less than that. About 45 per cent of a domestic electricity bill would be the generation element, about 25 per cent the supply elementmaybe a little bit less than thatand the remaining 30-odd per cent for distribution and transmission; perhaps about 5 per cent transmission and 25 per cent distribution.
201. So when talking of a bill of £100, up to £30 is still going to be subject to price controls of one kind or another.
(Mr McCarthy) Yes.
202. I just wanted to get that on the record. I think there was a certain lack of clarity there. There is a view abroad that you have thrown away all controls so that must be put on the record.
(Mr McCarthy) You are absolutely right. We have kept those controls on the natural monopolies. We have made it clear that we believe it necessary to continue to do so and we are working very hard to maintain the real discipline on monopoly businesses and also look at the sort of questions raised by your Committee previously about security of supply.
203. Given that you have this price control over the distribution and transmission side of it, in relation to Transcowho will be coming in later onit has been stated by Ministers that access to gas could be an important contributory factor in the reduction of fuel poverty, not its elimination but reduction. Are you giving any attention to that in your price reviews in relation to that particular area to encourage the distribution network to be extended by taking account of an investment element in the price mechanism?
(Mr McCarthy) The way in which we are making our contribution to this difficult problem is by changing the rules about the payment period for extensions to the gas network. It is five years. The authority at its last meeting resolvedit is a decision reserved for the Authorityto extend that period from five to 20 years and that is at present awaiting ministerial signature so that we can implement that. We believe that will be a significant help in reducing the cost of any extension. I would also add that we have taken steps to enable people to compete with Transco for investing in particular gas transmission systems.
204. How successful have you been in getting competitors into the frame? The impression we got from the official who gave evidence was that there was not much interest in this.
(Mr McCarthy) If you look at the business of providing gas networks to the housing estates, that is a generally competitive business and a number of people compete for it. It raises problems and further opportunities.
205. On the other hand that is for new house build, not for providing gas to existing houses.
(Mr McCarthy) The principle is the same. If there is a group of houses where it is possible and sensible to extend it, it is possible for independent gas transporters to do that as well as Transco.
Sir Robert Smith
206. On the breakdown of price control, how would that percentage vary for the gas side of things?
(Mr McCarthy) It has changed because the electricity wholesale prices changed significantly and therefore the cost of electrons as a proportion of the total has been reduced over the last two years. The rule of thumb used to be about 50 per cent for electrons and the total bill has now come down to 43 per cent.
207. No, the Chairman's point about how much of the price of electricity was free market and how much was regulated. You said 30 per cent was still regulated. What is it in gas?
(Mr McCarthy) It is broadly the same. I can give you the detailed figures.
208. Could you explain how the five- to 20-year thing works in terms of encouraging?
(Mr Neilson) It is to avoid free riders. It is about the periodI shall send you a note if this is wrong. My understanding is that contributions are sought from all people who want to connect to the new network which is being built and you have to make a contribution at the moment, under the existing law, if you connect within five years of the new line being built, which means that unfortunately there has been an incentive for people to wait just more than five years. We thought that if we moved that to 20 years, if people want a gas supply they are not going to wait a generation before signing up and therefore there ought to be a higher proportion of customers willing to make a contribution in the first instance, which is what you require to get these infill schemes running in the first place.
209. Possibly some people willing to take a bit of a risk might actually be able to invest in a network in the hope of tempting people on.
(Mr Neilson) Yes; absolutely. This is why having a variety of companies who are able to offer that service and not having a monopoly provision is useful.
210. Ofgem will approve the suppliers' energy efficiency schemes and then monitor them. I understand that at the moment you have approved something like 200 schemes under EESoP 3. Have you actually made an overall assessment as to the possible inefficiencies which may arise from the proliferation of so many schemes? How many schemes do you think you will be monitoring under the EEC proposals which are coming into place?
(Mr McCarthy) EESoP 3 was the last one for which Ofgem set the sum and it was a scheme under which we extended the previous scheme, which had been confined to electricity, to gas plus electricity. The figure of 200 programmes is slightly misleading because that covers 15 companies providing those schemes, so it means each company has about 12 schemes and that seems not an unreasonable number for any company to have to deal with the wide variety of problems which we are trying to deal with. We have not yet, because the final winding up of EESoP 3 has not been completed, done an exercise to look at it, but we intend to do so.
(Ms Graham) What might interest you is that under the Energy Efficiency Commitment which started on 1 April, which is a much bigger scheme, three times larger, what is happening is that the companies are coming forward with bigger schemes. They are not more but bigger and so far to date we have approved 53 schemes under that and that accounts for about one third of the total savings of the programme. If you extrapolate that up, we could expect maybe another 100 which over the course of three years would be a total of 150 schemes. You will see that is fewer total schemes under the Energy Efficiency Commitment but bigger.
211. Although you have not done a review yet, what sort of things do you think are going to come out of it?
(Ms Graham) Out of EESoP 3?
212. You said you were going to have a look at the variety.
(Ms Graham) Yes.
(Mr McCarthy) We would look at the same sort of questions we were concerned about with EESoP 1 and EESoP 2, questions like the balance between energy efficiency savings in terms of environmental objectives and social objectives, the split between the sort of end use which has actually been promoted, which particular problems we think are still unresolved and what lessons we should draw from it. I would not want to be drawn on the conclusions before we establish the data.
213. What is the timing of that?
(Ms Graham) At the moment the companies are winding up, so we would expect that all the schemes would be complete probably by December; substantially most of them before that. The monitoring would be complete by the end of the financial year.
214. It would come out with your Annual Report, would it?
(Ms Graham) Yes.
215. You have recently commissioned a mystery shopper survey of suppliers to establish the quality of advice they give. I love mystery shopper surveys. Could you tell us whether you have any preliminary findings on this?
(Ms Graham) We do not have the final conclusions. We have seen some of the field work. It would be true to say that it showed a mixture of experience. We hope the conclusions will give us indications of areas where people could concentrate effort more in order to reach those most in need.
216. What is the worst piece of feedback you have had?
(Ms Graham) Some of it is really just along the lines of people giving advice. Not everybody will have taken NVQs, not everybody will have achieved a qualification in energy efficiency, so they could tend to be giving information about other people, giving information rather than specific information about a home survey. There are some areas we can look at as regards how much individual qualifications are required in order to provide efficient advice.
217. The best examples of advice?
(Ms Graham) Best examples of advice are where people do understand exactly what the individual circumstances of a home are. You will appreciate that is quite hard just by telephone conversation. To really understand the needs you need to go into a home to see what is happening there. What we are looking at is how much it is reasonable for people to provide targeted individual advice on the telephone.
(Mr Neilson) It may be that the general call centres of suppliers could be better at identifying more vulnerable groups of customers for whom this kind of advice would be particularly valuable. There is a variety of good practice which we hope we shall be able to publicise much more widely through having done this exercise.
218. That is very helpful. I was going to ask you about targeting next. I am wondering what advice Ofgem would give on the effective ways of identifying vulnerable customers. Would this mystery shopper survey assist? What would your advice be? There is a problem targeting vulnerable customers. Given your experience, what is the best way of doing it?
(Mr McCarthy) It is a very difficult question to answer. We had a high proportion under EESoP 3 of the groups which we required the companies to go to. It was a less tightly defined grouping than the smaller proportion the Government have used in the Energy Efficiency Commitment. I truthfully do not know which is the best outcome. The advantage of a degree of ambiguity means that you are not caught by the very starkness of the problem that if you draw a very clearly defined line, somebody who is a step beyond it falls out, which is the problem of clarity. On the other hand, there was a degree of ambiguity in our approach which had disadvantages as well.
219. In your written submission to the Committee in paragraph 11 you make the comment, ". . . it is not practical to expect energy companies to target households whose income is just above benefit level". On the other hand it looks as though the requirements of the EEC do not give any incentives to governments to do that anyway.
(Mr McCarthy) One of the problems about any of the energy efficiency schemes is that if you want to achieve your energy efficiency saving target, as distinct from your social benefit target, there is huge benefit from going above the people who are most in need. The easiest way of getting your energy efficiency target is to target middle class families for whom an actual reduction in energy consumption is a reality rather than people taking it in improved comfort. There are some tensions which always pull people above the target area in terms of the social targets.
3 Note by witness: EESoP 1 and EESoP 2 were confined to electricity, in 2000 EESoP 3 was extended to gas as well. All suppliers were included, not just former Public Electricity Suppliers, so long as they had 50,000 customers. Back
4 Note by witness: Under the EEC, the carbon savings have been adjusted to take account of improved comfort rather than energy savings. Back