Examination of Witnesses (Questions 1
- 19)
MONDAY 13 SEPTEMBER 2004
OFGEM
Q1 Chairman: Good afternoon and welcome
to the Committee of Public Accounts. I would like to apologise
to our witnesses and to members of the public for the late start
of this meeting. However, this is an important issue and we are
very grateful that we are here. We are having a hearing today
on the Comptroller and Auditor General's Report on Ofgem: the
Social Action Plan and Household Energy Efficiency. We welcome
Mr Alistair Buchanan who is Chief Executive of Ofgem. Could I
please start the questioning, Mr Buchanan, by referring you in
the Comptroller and Auditor General's Report, paragraph 10B which
you can find on page four. You will see there that it says that
"Consumers who pay by pre-payment meter for both gas and
electricity could save up to £63 a year if they paid by monthly
direct debit." So we are talking about pre-payment meter
customers here. They obviously tend to be the poorest people in
society; they pay more than direct debit customers. How can it
be, Mr Buchanan, that the poorest in society pay most for their
energy?
Mr Buchanan: Thank you for inviting
us to talk about the Report which we found extremely useful. To
answer your question directly, I can split it into two parts.
First of all, taking your second statement which is about the
poorest in society, it is quite interesting looking at the fuel
poor figures which, I am very pleased to say, have fallen from
about 4.5 million to 2.25 million and in Scotland down from about
750,000 down to 280,000. That is all good news. At the same time
pre-payment meters have risen very substantially. As I am sure
you are aware in the last 10 years we have seen gas meters go
from about 0.7 to 2.1 million users; electricity have more or
less trebled to around 3.7 million. In the last year alone pre-payment
meters have gone up by 7.5% while fuel poor numbers are coming
down. The correlation is not a direct one but that does not mean
that we do not take seriously your first statement—indeed,
we take it very seriously—that you have, as you say, £63
as a comparator or £31 as a comparator depending on which
one you wish to take against direct debit or standing credit.
I think the key in terms of the pricing issue is that we work
I suppose—when you look at the recommendations on page 8
and 9 of the Report—as an economic regulator (which is the
top line on page 9) and we work within the confines of cost benefit
(which is in the bottom line, although referring to something
else, on page 8). Consequently there are costs associated with
these meters and the administration of the meters which makes
them higher. That sounds slightly negative but I do not want to
be negative. The positive message that we want to take from this
Report is through the very strong switching message which is that
these customers can switch and potentially save £39 on gas
and £62 on electricity and that we do very much want to take
this message forward because pre-payment meter customers are switching
at the rate of about 35% whereas on average the switch rate is
about 50% and that includes vulnerable customers as well. It is
a challenge, Chairman; you are right.
Q2 Chairman: That is a long answer
but it does not negate the essential point that I put to you that
here we have the poorest members of society—and you do not
deny this—who are paying more. If you look at the Executive
Summary on page one you will see there that you also have a "range
of secondary duties which include the duty to have regard to energy
efficiency, the environment and certain disadvantaged groups".
How do you equate your need to look after disadvantaged groups
with your policy of effectively charging the poor the most for
their energy?
Mr Buchanan: What we try to do
is, as you rightly pointed out, take our secondary duties extremely
seriously. We try to bring the benefits from competition to all
customers but, as you rightly identified, particularly those who
are vulnerable customers. That is why the switching message is
so important. In addition, we have taken a number of initiatives
such as referred to in the Report—such as in the London
Borough of Camden—where we are seeking in particular to
promote the message. We also, through our activities both in sponsoring
energy efficiency and in reviewing the priority services register—which
is obviously there for the priority group—seek to encourage
savings through both of those possibilities.
Q3 Chairman: That message is not
getting through. If you look at page 16, paragraph 2.4 you will
see that 33% of pre-payment meter customers did not know they
were paying more because they were using a meter; 25% of people
actually thought they were paying less. The surveys show that
there is a huge group of the poorest people in society who have
no idea that they are paying more because they are using one of
your meters. Do you not feel that you are not fulfilling your
statutory duty to these people?
Mr Buchanan: In terms of the relationship
fuel poor/PPM I do not want to sound boring on this although I
might do so, having already mentioned it.
Q4 Chairman: I'm not worried about
whether you are boring or not. What I am worried about is having
a clear answer to the questions that I am putting to you. It seems
that there is a clear dichotomy here between your role as an economic
regulator and your statutory duty to look after the disadvantaged.
It might just be better to give an honest answer and to say that
there is no way of resolving this.
Mr Buchanan: What we try to do
is to ensure that all customers benefit from the switching message
that we—as you can see on pages 16 and 17—seek to
assist the energy efficiency message as well. In terms of knowledge
and in terms of the licence conditions upon which they operate,
licence condition 36 outlines that companies should outline both
the advantages and disadvantages of PPMs. Quite rightly and very
helpfully the NAO at 2.6 has said yes, but companies tend to promote
direct debit rather than discuss the costs of PPM. It would be
a fair comment for you to say—and I think this is something
that we would take away with us to have a look at—that the
wording of licence condition 36 was not tight enough.
Q5 Chairman: Is your basic answer
that prices should reflect costs? Is that what you are telling
the Committee? That is actually contained in paragraph 2.2 on
page 15.
Mr Buchanan: To a large extent
that is, but as I say that is a slightly defensive statement.
We are trying to be more offensive in that by promoting switching,
by promoting energy efficiency.
Q6 Chairman: If that is the case,
can I put it to you that prices do not always reflect costs. After
all, if you are living on the top of Dartmoor you are paying the
same for your electricity as someone living in Exeter but it costs
a lot more to provide you with electricity. You already accept
that prices do not always reflect costs. If that is the case—in
the example I have just referred to—why can you not do more
to help people who pay for their electricity through meters because
they tend to be the poorest? Not just doing inadequate campaigns
which clearly are not having any effect because all the opinion
research shows that very large numbers of people—maybe up
to a quarter—actually come away with a totally erroneous
view that they are paying less for a meter where actually they
are paying on average £63 a year more.
Mr Buchanan: 50% of the fuel poor
group tend to be the elderly and under 10% of them use PPMs so
that correlation that I think you are trying to establish is one
which—I think you have to be quite careful about the establishment
of that link.
Mr Neilson: If you look at the
group who are in fuel poverty, under 20% are using electricity
pre-payment meters and under 15% use a gas pre-payment meter.
The vast majority of those in fuel poverty—those who have
to spend more than 10% of their income on energy—are not
using pre-payment meters. If you did introduce a cross-subsidy
in favour of pre-payment meter users in fact there would be many
more losers than winners amongst the fuel poor.
Q7 Chairman: That is a fair answer.
Thank you very much. Can I now go onto the Energy Efficiency Commitment?
This is dealt with in the Executive Summary at paragraphs 12B
and 12C on page 6. What I would like to ask you, Mr Buchanan,
is why you allow the energy savings from energy efficiency measures
to be over-estimated? Are they being over-estimated? Why have
you not undertaken your own evaluation?
Mr Buchanan: The detailed reference
within the text is 3.8, page 25 where again there is a discussion
of measurements. Further into that section there are also the
measurements relating to insulation. We do use a theoretical approach
to measurement. We take what I can see are some of the best research
and academic advisers available. For example, we are discussing
with the Environment Institute at Oxford, we are discussing with
Brunel University and we are discussing with various research
establishments the appropriate measurements.[1]
In terms of the programmes as identified in table 10 on page 24,
what you will see there is that in the current EEC it would appear
that we are going to meet the terawatt challenge that has been
set for this current period. I think the good news is that we
are on target to meet the challenge. I think the challenge that
is laid down—and I know you laid it down in your comments
to Defra on their Warm Front programme—is that it would
be good to institute further research in ensuring that we have
measurements that we feel confident with going through with.
Q8 Chairman: Exactly, because a lot
of these energy savings are in fact theoretical.
Mr Buchanan: You are absolutely
right.
Q9 Chairman: Could you look now at
page 7, 12H. You will see Defra's proposal for the EEC for 2005
to 2008 is for a doubling of the overall level of activity. Do
you think it is reasonable to expect suppliers to deliver on this
pledge when you are not undertaking a national campaign to stimulate
consumer interest or demand in this subject?
Mr Buchanan: That is a great question.
I have spoken to my team about this and they think that this is
do-able but challenging. If we can use an example that the NAO
very helpfully illustrated the Report with—which is on insulation—we
are currently running at about 0.3 million houses and the Government
has set out a target of 4.5 million in the period 2005 to 2010.
The team believe—and it is in the Report—that this
is a do-able target but it is challenging and the industry has
the capacity to meet that kind of target. I think it is absolutely
a correct question to ask us. As far as I can ascertain from my
own team we believe that this is a do-able target and is not too
aggressive.
Q10 Chairman: If you look at the
Executive Summary again, paragraphs 2 and 4 at the beginning of
this Report, you will see you have a difficult job because you
have to balance energy savings (which you are increasingly encouraged
by the Government to take action on) and you have to help vulnerable
groups (which was the subject of our first conversation). They
are struggling to maintain and keep themselves warm in winter.
So how do you make this balance between these two requirements
placed on you by the Government?
Mr Buchanan: To a degree I think
there is an element of complimentarity. If we look at the energy
efficiency requirements, arguably two-fold there. One is the Government's
carbon targets (targets, plural, because Wales, Scotland and England
have slightly different fuel poverty targets) and the other in
terms of the income focus of the EEC programme. It is the income
focus on the priority groups which is effectively the tie-over
onto the fuel poor question that you so quite rightly point out.
I think the link here is really, from our point of view, focused
on our assistance to promote the energy efficiency message. As
you will see on page 17 we outline what we think those challenges
are for the industry to resolve and we monitor that—and
have monitored it—through various mystery shopping surveys.
We are basically trying to promote an energy efficiency message
there. I think that is your link.
Q11 Chairman: Lastly I want to really
press you on the recommendations that are made on page 9 by the
NAO and it is 14A. It says, "We consider that Government
should be cautious about extending the responsibilities of independent
regulators such as Ofgem to administer detailed schemes".
What I originally understood your role to be, Mr Buchanan, is
that of economic regulator. You are there to try to try to promote
competition, to get the cheapest price possible for consumers.
Now the Government are giving you various other responsibilities
to promote energy efficiency. Is this not taking away from what
should be your primary role to reduce prices for the consumer?
Do you believe that this recommendation here, that the Government
should be cautious about extending the responsibilities of independent
regulators, do you think that is a recommendation that you can
live with?
Mr Buchanan: Very much so. I think
it is a very sound statement which we have used internally a lot
since this document was published. I think it is a very powerful
message for us as an organisation. We have roles, as you know,
set out in our primary and secondary duties. We have roles set
out through sustainability and we have roles set out in our social
and environmental guidance. At the same time we have responsibility—and
pardon me for quoting you from 8 August 2002—you said: "Regulators
have to do more to reduce the cost of regulation". We have
this balance: on the one hand we have roles either in terms of
our market role or in terms of the administration audit role which
is largely an executive function on the environmental side. At
the same time we would fully endorse what you said about regulators
watching their costs. You may or may not know that from April
next year we will place ourselves under an RPI minus X cost regime
similar to that that we give to companies. We are currently going
through that five year price review, as you know, with the companies
that we regulate.
Q12 Chairman: Will there always be
a need for your organisation? Surely you were supposed to be creating
a sophisticated market which could operate without the need for
an organisation like yourselves. Are you telling us that there
will always need to be an Ofgem?
Mr Buchanan: I think in terms
of the activities that we do there is a core of regulated networks—be
it pipes or wires—that could be done somewhere else but
arguably it is effectively done by a specialist niche unit. The
aim back in the 1990s of Stephen Littlechild, for example, was
to say, "Once we have introduced competition we have slayed
the main dragon". We believe that competition has been introduced
and one of the challenges that we outline in our corporate strategy
going forward and one of the challenges that John and I have as
a management team—under quite a lot of pressure from our
board in this—is to have a look at our businesses and to
see where it is that we can start to say that this is not a good
use of customers' money going forward. For example, we have basically
a bible of licence conditions, many of which have to be revisited.
That, frankly, could cut down a lot of the red tape that you hear
companies complain about Ofgem for.
Q13 Mr Williams: Following on from
the point the chairman has just made but putting a slightly different
direction on it, if we take sentence 2 of paragraph 1 of the Report,
it quotes the Utilities Act 2000 objective of your organisation:
"Its principal objective is to protect the interests of consumers,
wherever appropriate by promoting effective competition".
How are you going to fulfil that in relation to the recently announced
price increases proposed by the gas industry?
Mr Buchanan: In terms of effective
competition, one of the interesting things that I learned coming
into this job—having followed utilities globally and looked
at markets where they tried to open up to competition and markets
where they had not—is that in Great Britain where you have
50% switching you have customers tasting competition; that is
50% of available customers. By contrast to other countries that
is a staggering performance. In Germany it is about 4% to 5%;
Finland 13%; Sweden 10%; in the USA it is, on average 1½%
even though it is available in 26 of the states. I do think that
there has been a substantial success in Great Britain. You could
equally say that that means that 50% have not and that is the
challenge for us, which is to say to the 50% who have not, "Right
now you could get £39 off your gas bills or £62 off
your electricity bill" and that is a challenge which with
rising pricing we have to take very seriously. In terms of a competitive
market, what I think has been so interesting this year is that
you will be aware that British Gas put up its prices at the beginning
of the year as well as recently and at that time they lost nearly
a quarter of a million customers. I think they are going to have
to think very carefully—and it is up to them to think about
it—about what happens because they announced their price
rises—12% on gas which really took the headlines—in
August. What is interesting is that Scottish and Southern last
week said that they would not raise their prices and they have
seen a 20% surge in sales. Scottish Power have said they have
seen an increase of 25% in their call centres from customers primarily
from British Gas. It would appear that in this instance the different
companies are offering different approaches and that competition
is working. At the same time there are very different products
on offer. For example, Scottish Power and Powergen have, I think—I
am not putting words in their mouth, but I think what they said
is right—that they are going to try to carry some of the
phenomenal increase in coal prices and gas prices with a price
increase this year but then giving a price promise. That is fixed
until 2006. I think we have seen quite an interesting development
in terms of the competitive market with this challenge. The overall
message that we, as an organisation, want to pick up, is to say
that with the price increase, do look at the opportunity that
switching will give you.
Q14 Mr Williams: How is it that the
others are able to accommodate the 12% price increase or the pressures
they claim justify the 12% price increase?
Mr Buchanan: Here I have to be
very careful about assuming what one company does against another
company. I think the key issue is the contract strategy that a
company will follow and I have no view on the contract strategy
of any particular company; that is their position within the free
market.
Q15 Mr Williams: It may be their
position within a free market, but you do have to have a view
because you have to be able to point out—or I thought it
would be part of your job to point out—if you think someone
is ripping off the customers. It does seem to those of us who
listen to the information you have just given that there are companies
who are able to get away without a 12% increase but you have one
company—the major company, the major supplier—who
is hell bent on ripping off the customers of the UK, including
some of the poorest people in the country.
Mr Buchanan: British Gas Centrica
have to make a decision for themselves but I think the strong
message that we take into that is that there is an opportunity
to switch and save and that companies—I have mentioned Scottish
and Southern—who have made this very clearly competitive
move against British Gas are offering a different product.
Q16 Mr Williams: Are you going, in
the defence of the consumer, to launch a campaign: switch to avoid
the 12%?
Mr Buchanan: We have been saying
that in our press releases. We have been speaking to energywatch[2]
and we have for some time been planning to do a campaign.
Q17 Mr Williams: So the best thing
that could happen really as a result of this hearing would be
if television covered this issue and said that you can stop British
Gas if enough of you will change; British Gas would then have
to change. Would that be a fair assessment of what you think might
happen if there were a large number of changes?
Mr Buchanan: British Gas have
made their competitive decision and Scottish and Southern and
the other companies are making their competitive assessment—I
presume they are competitive assessments—and we have to
assume that they will win a lot of customers and that British
Gas may regret the decision that was taken, but it is up to British
Gas to take.
Q18 Mr Williams: When it is a 12%
saving that is far bigger than anything you are claiming to have
achieved through your overall policies. You could actually take
a lead here. You could champion the consumer which is what a regulator
is expected to do and you could lead the charge in saying to the
consumer: "Teach them a lesson; switch your account".
Mr Buchanan: And energywatch has
a slight leadership in this role over us. energywatch run their
own website; they recommend their own best price of the day, as
it were. This is being done and we are talking to energywatch
actively about how we might have a programme going forward.
Q19 Mr Williams: Putting the 12%
in perspective, we understand from paragraph 2—we are moving
slowly; I am going right through the Report from beginning to
end so it may take some time—that 50% of the reduction in
fuel poverty has come from lower prices up until now and 50% has
come from rising income. That must be rather disheartening news
from your point of view.
Mr Buchanan: It is concerning
news indeed.
1 Note by witness: Ofgem currently uses work
from the Building Research Establishment and the Energy Saving
Trust to evaluate the programme. Previously we have also drawn
on work from the Environmental Change Institute at Oxford and
Brunel University into appliances and low energy lamps. Back
2
See Ev 13-14 Back
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