Examination of Witnesses (Questions 40
- 59)
MONDAY 13 SEPTEMBER 2004
OFGEM
Q40 Mr Jenkins: What do you think
of a company that does not read a meter for over three years although
the customer constantly requested a meter reading? When the bill
comes, when they actually did read it, there was over £1,000
difference and she could not afford to pay it. Then the company
installed a pre-payment meter and they increased the tariff. They
not only took her to court, they judged her and put the executioner
in. That woman paid £38 into her meter over a weekend to
try to keep warm. In the end she could not and she had to send
her children to her mother. I got involved with this company and
we had words. They re-changed the tariff rate and they brought
it down and actually cut some of the bill because they accepted
some of the responsibility themselves. But why should I have to
get involved? Why is it not your job to get involved and why are
you not nailing companies like this?
Mr Buchanan: I very much appreciate
your getting involved. You wrote to us and we obviously acted
insofar as we contacted energywatch and clearly working with energywatch
you resolved this. So we do appreciate very much your help in
this issue. It is very regrettable that it happened.
Mr Neilson: Under the rules that
we are responsible for, the company clearly did not follow in
that case because an important part of the pre-payment meter procedures
involve the amount of debt recovered having to be related to the
customer's ability to pay. That sounds as if it clearly was not
the case in the circumstances that you referred to. It is precisely
behaviour like that, if there is repeated contravention, we would
be investigating.
Mr Buchanan: And we do.
Q41 Mr Jenkins: I want to move on
to switching and blocking now. If someone owes an amount of money—not
a large amount, a couple of hundred pounds—if I owe on my
credit card £500, £600 or £1,000, if I go to another
credit card company they are delighted to see me. They will give
me zero on that thousand pounds for up to six months while clapping
their hands. They will pay my debt for me. That is a market that
seems to work very well. So what is the problem with your market
then? Why can I not go from supplier A to supplier B and supplier
B will pay my debt to company A and I carry on merrily with supplier
B? Why is there a difference?
Mr Buchanan: As you will be aware
from some of the earlier comments, we are looking to unblock this
particular area and we are running a pilot scheme currently that
will run through to February next year. Again, I am happy to come
back with a report on that to you in terms of how successful it
has been. To pick up your point—and it is a fair point—in
this pilot scheme, a one year study, we have gone for a £100
ceiling; only 5% of customers in debt have over £600. What
we will need to look at next February is how successful the scheme
has been; it is a recommendation from the NAO—their third
recommendation in this area—that we look very carefully
at what the options are of extending that but within the remit—and
again this is in the NAO's recommendations—of cost benefit
analysis, which we started immediately.
Q42 Mr Jenkins: Why do you not come
to a minister and ask him to pass a regulation that forbids this
operation of blocking?
Mr Buchanan: What we have to do—as
we are very much invited to do by the NAO within the Report—is
analyse the cost benefit associated with this particular situation.
We will analyse the results of this test programme in February
next year and, as I say, we will then be very happy to come back
and tell you whether we think it is telling us that we should
go higher or not.
Q43 Mr Jenkins: The last point I
want to ask you about are the pre-payment meters and the cross-subsidy
which you are totally opposed to so far as your policy is concerned.
The cost for any meter must be met by the client or the customer.
So why are you now, if cross-subsidy is abhorrent to you, cross-subsidising?
Why are you charging me, as a user and a tax payer, through the
Warm Front? Why are you doing this cross-subsidy now? Why have
your policies changed?
Mr Buchanan: Warm Front is a government
programme and ministers will take that view on Warm Front and
the appropriate level of investing in it.
Mr Neilson: Ministers will also
decide the level of the support that every household has to pay
on the Energy Efficiency programme.
Q44 Mr Jenkins: Let us get this right.
According to you and your principles and your policy you would
not like to see this cross-subsidy occur.
Mr Buchanan: The cross-subsidy
that you are suggesting we think would not be appropriate, that
is correct.
Mr Jenkins: I was hoping we could utilise
this money some other way. I worked it out that by the funding
of the Energy Efficiency scheme and the Warm Front scheme it is
just more than meets the additional costs of the pre-payment meters.
So it actually meets all these costs of pre-payment meters so
they would be on the same level playing field as every other type
of payment system and the rest we could give to energywatch to
improve their role because I think they have a much greater benefit
to consumers at the present time than you do.
Mr Buchanan: I think that may
come back to recommendation A on page 9 of the NAO Report which
is that Ofgem has to be quite careful in understanding its independent
role rather than a ministerial role. I think arguably you are
really focussing now on government ministerial issues.
Mr Jenkins: My time is up. Thank you
very much.
Q45 Mr Allan: I will be touching
on some of the same themes, but starting with pre-payment can
you give us an approximate percentage figure of the difference
between what somebody pays if they have pre-payment and what they
pay at the cheapest which, as I understand it, is direct debit
dual fuel discount? What kind of order of magnitude are we talking
about in terms of percentages over my total fuel bill if I am
on the pre-payment as opposed to the dual fuel direct debit dirt
cheap option which richer people tend to use?
Mr Buchanan: I am going to use
the comparison of standard credit because I was looking at that
figure to help you earlier. Because companies offer a broad range,
your combined energy bill for an average medium using house would
be about £590 to £650 a year and that is before the
recent price increase.
Q46 Mr Allan: That is standard credit.
And if I were dual fuel direct debit that would be cheaper.
Mr Buchanan: Yes. For pre-payment
there is £32 on top of that.
Q47 Mr Allan: So we are talking about
maybe a £50, £60 difference between the two; so 10%
more expensive in percentage terms. Whatever it goes up to it
will be about 10% more expensive. I think we have discussed today
that there is a choice and people choose to be on pre-payment
for budgetary reasons. Is that right?
Mr Buchanan: Yes, very much so.
Q48 Mr Allan: The choice used to
be between disconnection and pre-payment which is not a particularly
attractive choice, but that choice has now built up over time.
People who would otherwise have been disconnected are now on pre-payment.
Mr Neilson: That is correct.
Q49 Mr Allan: If we see how that
develops, what if somebody wants to go back the other way? What
if they say, "I have looked at the hearings of the Committee
of Public Accounts and I am paying 10% over the odds. I am on
pre-payment; I have no debt"? Do they have an absolute right
to insist on the credit meter being put back into their house
and does their fuel company have to put one in to allow them to
have the cheaper option?
Mr Neilson: They do have a right.
Depending on their credit history they may have to pay a security
deposit. Over 200,000 customers a year do change back from pre-payment
to credit, so it does happen.
Q50 Mr Allan: If someone has a clean
credit history, if they ring up and ask for a credit meter, the
company must come and put that in, and you, as the regulator,
would have a problem with a company that would not do that.
Mr Neilson: Yes, because you have
a right to the different types of supply, yes.
Q51 Mr Allan: Have you ever tried
to help somebody who is on pre-payment with two different suppliers
to get onto the dual fuel discount cheapest credit meter system?
As a piece of research I think it might be quite interesting to
look at the number of phone calls, the number of stages of complexity
for the average user of trying to negotiate; many people do not
even know which company they are with any more when you speak
to them, never mind how to get to the best option. Have you looked
at that?
Mr Neilson: Yes, and obviously
it depends on the customer and how much help they might need.
Clearly some customers will need more assistance than others.
Q52 Mr Allan: Do you have a responsibility
to assist?
Mr Buchanan: Not individual customers.
The suppliers ought to help, so should energywatch in practice.
Local agencies like Citizen's Advice frequently help in those
circumstances when there is a vulnerability issue with the customer
that will make it difficult for them to cope with it all themselves.
Q53 Mr Allan: As the overall regulator
do you have any concern that the companies in reality prefer to
cherry pick and that actually the middle-class consumer who is
the easy direct debit dual fuel customer is the one that they
want and the person who rings up and says, "I am on a pre-payment
meter, I want to get to the cheaper option" then actually
the companies are not that interested?
Mr Buchanan: In terms of market
they are a very important part of the market: 10% of the gas market,
15% of the electricity market. It is a brave company that says
that that is not an important market and we can see through some
of the developments that Scottish and Southern have worked with—EquiGas
and EquiPower—to develop a refined product for that market.
I think it is a very important part of the market that a company
would have to think very carefully about not taking seriously.
Equally, to come back to the point about cross-subsidy, if you
start to introduce cross-subsidies then a company's view on whether
the market is valuable or not might become somewhat undermined.
I think it is quite an important issue.
Q54 Mr Allan: Are there legislative
powers available for you to insist as a licence condition that
you do charge an equal tariff across different meter types? Could
you do that were you so minded from a policy point of view?
Mr Neilson: Only if we decided
it was in accordance with our statutory duties to protect the
interest of customers—which obviously means all customers—and
it is a question of how you interpret your duties. Either we or
ministers would have to take a positive decision to introduce
such a cross-subsidy because clearly at the moment the market
works and there is a considerable variation between companies.
There are some companies who do not have any difference between
some of their credit tariffs and some of their pre-payment tariffs;
other companies do always have a difference. There is considerable
variation at the moment.
Q55 Mr Allan: I think I was taking
you back to the chairman's point about the Dartmoor and the Exeter
customer. At the moment presumably the licence conditions say
that you cannot charge different tariffs according to where you
are. Could a company come along and say that people in rural areas
are going to have pay more because it is more expensive to get
the stuff to you?
Mr Neilson: The way that works
is not through supply companies at all. The fact that there is
not a rural variation is because the distribution companies who
own the monopoly networks, the way their charges are structured
at the moment, does not contain a differential between rural and
urban areas. The costs that are passed on to the supply companies
do not differentiate between rural and urban which why there is
absolutely no need for the supply companies to have any differential.
Q56 Mr Allan: So the distinction
here is that the metering companies who have developed as this
separate creature are charging different amounts per customer
according to the meter type.
Mr Neilson: Metering is the responsibility
of the supply companies who sell the gas and electricity to the
final customers. Clearly they do face different costs depending
on whether they have to install an expensive pre-payment meter
or a cheap credit meter. They also have different costs in operating
the system because there are a lot more systems unfortunately
in how pre-payment operates. The companies who are selling to
the final customers just have different costs depending on whether
the customer is on pre-payment or not.
Q57 Mr Allan: And the difference
is that Transco National Grid do not do that; they charge a similar
amount wherever you live.
Mr Neilson: For providing the
wires. Anyone who provides meters broadly charges what it costs
to provide them. Metering is now a competitive service so that
the supply companies can go to any company they choose to buy
meters; it is a competitive market.
Q58 Mr Allan: Moving on now to the
overall costs for everybody and the long term trends in the market,
I received a very nice booklet from British Gas that told me about
how all our energy prices are going to be much more expensive
over the next few years. Do you agree with that assessment?
Mr Buchanan: What we have currently
is an increase in gas prices of 20 pence up to north of 40 pence;
we have coal prices from £33 a tonne to £50 a tonne.
So we have had a very major increase in price. A key element here
is the linkage of gas and oil price particularly with regard to
Europe but also, looking forward on the coal price, a large proportion
of that increase in the coal price has been due to activities
within China. In the short term looking at forward prices that
are traded it is looking is as if we are going to have high prices
through 2005. One of the interesting things about gas is that
the UK is going through, as it were, a funnel in terms of availability
of gas. In the next two winters we are going to be at a point
where it is quite tight in terms of availability of gas. One of
the interesting prognoses coming from the major commentators on
gas prices is that with the arrival of Norwegian gas, a gas pipeline
from Holland, there are three major developments that will bring
gas by ship from Nigeria, Trinidad, probably Russia (rather than
coming across the continent of Europe). There is a really good
chance that we are going to have excess gas capacity; there are
a number of analysts who are saying that by 2008 gas prices are
going to be falling rapidly. It is very interesting looking forward,
looking at that dynamic.
Q59 Mr Allan: Given the figures you
have quoted earlier and the fact that half of the reduction in
fuel poverty is down to decreased fuel prices and therefore the
inverse applies, we can expect, in terms of headline figures,
between 2005 and 2008 the number of people defined as being in
fuel poverty to increase in the United Kingdom.
Mr Buchanan: From those figures
that I have given you earlier, sadly prices are going up and 1%
is 50,000 people.
| 
