Examination of Witnesses (Questions 20
- 39)
MONDAY 13 SEPTEMBER 2004
OFGEM
Q20 Mr Williams: Where are you in
that? 50% plus 50% to most of us makes 100%. So where do you come
in?
Mr Buchanan: The concerning news
is that for every 1% increase in fuel price in England and Wales
you have another 50,000 onto the fuel poor figure. In Scotland—and
I would like to develop Scotland a bit more—for every 5%
you have another 30,000. Yes, you are right; it is extremely worrying.
Just to come back to the energy efficiency message within the
NAO's Report, the Scottish Executive in their Scottish Housing
report last year identified 15% due to energy efficiency; 35%
price and 50% income. They broke it down just a little bit more.
Again, that shows that the energy efficiency message is important
as well.
Q21 Mr Williams: You have referred
to the way in which the figures were broken down differently.
In the last footnote on page 1—we are making progress, we
are right at the bottom of the page—they quote targets of
21 degrees in a living room, 18 degrees in any occupied rooms
and so on, but why is there a different set of targets for Scotland
and Wales? What is the justification for that and what is the
nature of the difference?
Mr Buchanan: The nature of the
difference is that in Scotland they wish to cut the 2002 figure
by 30% by 2006. Everybody has basically bought into the 2016 deadline
and the vulnerable customer deadline by 2010. In Wales the slight
change is that they have said that if it is vulnerable customers
in 2010 let us have non-vulnerable customers in social housing
by 2012. That is the slight difference.
Q22 Mr Williams: We have been told
that one of the problems for consumers switching is that their
suppliers can block their switch. Does this apply both in gas
and electricity or is it mainly apparent in one of them?
Mr Buchanan: That is a very good
question. The figures that we have shown in the Report are 9%
on average blocking, with 15% (rather more) in gas. What we have
sought to do here is to unblock the system, if I can use that
expression. 70% of pre-payment customers in debt have below £100
outstanding and consequently what we have sought to do—and
we are in a pilot scheme which in February next year we will be
very happy to send you a report as to what that pilot scheme shows—is
to take that block away and allow customers with that kind of
debt to switch as well.
Q23 Mr Williams: Switching to electricity
just for a second—I am sure you played a part in this—the
disconnection scandal of some years ago has rather disappeared
from the public perception. We are told that last year the number
of disconnections was up from 333 (which nationally is no large
number, obviously) to 1,361; that is a four-fold increase. Have
you had a similar problem on the gas side at all?
Mr Buchanan: The overall figure
has fallen from about 27,000 to 17,300 in the last year with basically
gas being 16,000 and electricity being 1,300. In terms of disconnected
customers, that is 17,300. In terms of those in debt there is
1.2 million for each fuel.
Q24 Mr Williams: So gas disconnections
are over 10 times greater?
Mr Buchanan: Yes.
Q25 Mr Williams: Why?
Mr Buchanan: Can I just give you
the good news then I will come to that? The good news, I think,
is the very rapid decline that we see from gas. Generally gas
has more disconnections than electricity. Part of that is to do
with the history of British Gas and health and safety.
Mr Neilson: It is much more complicated
to fit a pre-payment meter in gas because you have to go round
and check every gas appliance in a house if you cut the gas off.
What tends to happen, in these unusual circumstances when the
householder is not at home, usually the gas supply is cut off
if a warrant exists and then a couple of days later an appointment
is made when the customer is at home and the pre-payment meter
is fitted. In electricity it is a job of a few minutes; in gas
it is a complicated job which has safety aspects and which is
why it tends to be done as two separate ones. If it is two separate
jobs it counts as a disconnection.
Q26 Mr Williams: That makes it even
more surprising because it is 10 times more frequent.
Mr Neilson: It is because in electricity
disconnections have almost completely disappeared. Ten to 15 years
ago they used to run at a very large rate.
Q27 Mr Williams: We are going in
a circle here, are we not? The fact of the matter is that the
one that has the greater difficulty in justifying its disconnections
is disconnecting, in fact, 12 times more than the other; the gas
industry is disconnecting 12 times more.
Mr Neilson: Yes, it is.
Q28 Mr Williams: Yet according to
what you have just spelt out to us we could expect it to be the
other way round. That 16,000, is that divided up fairly proportionately
to market between the various gas suppliers or is it mainly concentrated
in the practices of any individual supplier of gas?
Mr Buchanan: We will get you the
detailed answer,[3]
but my overview answer would be that given that British Gas Centrica
has about 62% of the market it is proportionately going to be
British Gas Centrica.[4]
Q29 Mr Williams: So we have British
Gas which is responsible probably for about two-thirds of that,
let us say 10,000, which is still eight times more than the electricity
industry altogether, just one gas supplier. That gas supplier
is now going to increase its prices by 12%. What I would like
you to do—and tell us if this is impracticable—if
these price increases go through is to see if you can do a running
check on disconnections so that we can see if, in addition to
absolutely screwing the consumer, British Gas then goes along
and quite mercilessly goes along and cuts the gas off from people
who cannot afford it.
Mr Neilson: Everyone will be able
to see that because for two or three years we have published each
quarter the number of disconnections that each supplier is responsible
for in both gas and electricity. That information is regularly
published.
Q30 Mr Williams: In that case will
you make sure that—I am sure you will be willing to do this
as you publish it anyhow—a copy of your press release each
quarter for the next year is passed to PAC office.
Mr Neilson: Certainly.
Q31 Mr Jenkins: Mr Buchanan, I have
been sitting here listening to your answers and getting more and
more confused. I have to ask the simple question: why are you
there? Why do you exist? This is a private competitive market,
what effect do you have on the running of this market?
Mr Buchanan: You are absolutely
right, it is a competitive market. We would agree that it is a
competitive market from the retail side and from the wholesale
side. We would have taken action if we had felt there was any
abuse of the market in recent years; we have not felt that that
has been the case. Having said that, one of our roles is to monitor
markets to make sure that abuse does not take place on behalf
of the customer.
Q32 Mr Jenkins: So you do not trust
the market?
Mr Buchanan: There is a difference
between an overt interference monitoring the market and our responsibility
to the customer to ensure that there is an orderly market. This
slightly relates back to the previous question. You have mentioned
gas prices; can I give you a little bit of colour as to what has
happened in the last few years both on gas and electricity? There
was a strange movement in the gas price last October and we announced
at the end of May that there were two issues outstanding that
we could not resolve. There have been very high wholesale gas
prices this summer and there are very high prices for quarter
one, winter 2005. We have a team which is looking at these three
events and we would very much hope to be in a position in the
next few weeks to make a statement on each of these three areas.
Coming back to the previous question, because of the extent of
the increase I think there is a reasonable question to be asked
as to what it is that has caused that and we would seek to provide
you with an answer to that in the next two to three weeks and
we would be very happy to send a special report or whatever to
your offices.[5]
Q33 Mr Jenkins: When you have done
all your studies, do not come back with the fact of the dash for
gas, Britain has squandered all its reserves and now we are having
to buy dearer gas from the rest of the world. If you come back
with that, I could have told you it years ago. We have abused
our system. Fuel poverty is going down now and I think Mr Williams
pointed out to you it is because the price of fuel has gone down
and wages have gone up. If you were spending less than 10% of
your income on fuel you would not be fuel poor, would you. Is
there any chance that people who are just edging below 10% now—literally,
because they cannot afford to spend any more—are not classified
as being fuel poor?
Mr Buchanan: There might be that
proposition but I am in no position to suggest that. It is a really
interesting area. I have not seen any research. I have mentioned
some of the really good research, for example the Scottish Executive
Housing Report last year. I have not seen a sort of salami-slice
of what happens at 2%, what happens at 5% up to 10%; no doubt
that would be interesting.
Q34 Mr Jenkins: You could be in a
position of being too poor to be classified as fuel poor under
our guidelines.
Mr Neilson: The greatest problem
with fuel poverty is that many houses are in a poor state and
it takes a lot of energy to heat them to anything like the suggested
levels.
Q35 Mr Jenkins: We will come to that
later on. The pre-payment meters have gone up, right?
Mr Buchanan: There has been quite
a lot of work done on this and I think it is partly because customers
like them—as is referred to in the Report—to help
them budget and to help them plan. Ofgem has actually changed
its strategy here; Ofgem has changed its strategy from seeking
a reduction in pre-payment meters to actually improving the information
flow—coming back to the very first question it was absolutely
right to identify that—in terms of information about price,
information about products. Just last week the association of
suppliers published the research which had been done by NPower
and it said that 90% of pre-payment customers were satisfied.
If you go back to Ofgem's research in March, 74%; back two years,
Scottish and Southern did a poll and again it was 90% satisfaction.
Q36 Mr Jenkins: If I were regulator
I would have to do a study as to why pre-payment meters were increasing
even though they were more expensive, ie either people are too
thick to understand or there is an underlying reason for this
push? Did you do any research yourself as to why this push for
pre-payment meters occurred?
Mr Buchanan: The trend in increase
is mainly several years ago. In the last couple of years the numbers
are fairly flat; a few per cent have changed. The main reason
there was a change from 10 years ago is connected with disconnections.
At that stage the level of disconnections was far higher and what
has happened is that customers and companies have realised that
they both benefit by fitting a pre-payment meter instead of disconnecting
customers. I think that is the biggest factor that has led both
to more pre-payment meters and to fewer disconnections.
Q37 Mr Jenkins: That is a different
answer. Up to now you have been telling me that people opted for
a pre-payment meter. I think there were other reasons behind that.
Now you are telling me that the company has put them on a pre-payment
meter. Which is it?
Mr Neilson: I think both are relevant
factors.
Mr Buchanan: Coming back to customer
choice and customer preference—it is boring to go back to
opinion polls and what people think—but there is very strong
evidence in the three polls that I have given you that 90% of
people who had them liked them. I think this has seriously influenced
Ofgem's approach towards them because this appears to be a product
that customers like.
Q38 Mr Jenkins: If the customer likes
paying more and part of your job is effectively to tell the customer
where to get the best deal you are not doing a very good job,
are you?
Mr Buchanan: I think our team
does a pretty good job but I would accept the comment that if
35% of pre-payment meter customers are switching and 50% on average
are, we have fallen short here and that needs somehow to be promoted
further.
Q39 Mr Jenkins: If you look at the
costs so far as the implications are concerned for a customer,
if they never get the right bill, if they never get their meter
read from year to year and are frightened of being faced with
a bigger bill, that is why they are forced onto a pre-payment
meter. Have you looked at this in the market place?
Mr Buchanan: We do have enforcement
powers and were a customer to be abused particularly in a metering
way, we can take action. We have taken action, as you know, against
companies in the last year who have not carried out their responsibilities
to customers properly and fully.
3 Ev 14 Back
4
Note by witness: Out of 15,973 gas disconnections in 2003,
British Gas disconnections were 12,275 or 77%. Back
5
Ofgem's probe into wholesale gas prices-Conclusions and next
steps, Ofgem, 5 October 2004, http://www.ofgem.gov.uk/temp/ofgem/cache/cmsattach/8817
23204a.pdf Back
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