APPENDIX 12
Memorandum by energywatch
INTRODUCTION
energywatch, the gas and electricity consumer
council, was set up by the Utilities Act 2000 to represent the
interests of consumers, handle their complaints against energy
companies and provide information and advice about gas and electricity
matters.
Under the Act we are required to have special
regard for particular groups of consumers who may be vulnerable
to the cost of energy or to levels of services from energy companies.
energywatch welcomes the committee inquiry into
the impact of recent gas and electricity price rises. We are pleased
to submit a memorandum to the committee.
In the course of the memorandum we recommend
the following actions:
ON THE
CAUSE OF
WHOLESALE GAS
PRICES
— A European Commission investigation
into the wholesale gas market.
— A review of the DTI offshore gas
production licence regime.
— A single regulatory body with powers
over UK onshore and offshore markets.
— Greater transparency for all participants
in wholesale gas markets.
— A fine should be levied on gas producers,
if established that their super profits resulted from any anticompetitive
constraint of gas supply to UK.
ON THE
IMPACT ON
THOSE AT
RISK OF
FUEL POVERTY
— Government to review energy prices
and adapt fuel poverty initiatives.
— Innovative tariffs from companies
targeting priority groups.
— An end to the practice of blocking
consumers in debt from switching supplier.
— Mitigation of price increases to
prepayment meter customers.
— A benefits take-up campaign from
government and suppliers.
— The extension of the Winter Fuel
payment to other priority groups.
— Compliance and enforcement of debt
and disconnection guidelines.
— Overhaul the Fuel Direct scheme
1. WHOLESALE
GAS PRICES
In the past 18 months wholesale gas prices for
UK buyers have risen by 70% with only partial explanations for
increased costs. It is estimated that as result of these price
spikes gas producers will enjoy increased revenues of over £5.2
billion this winter from UK consumers.[26]
Over the same 18 month period domestic consumers
have seen cumulative increases of 21% on gas bills and 15% on
electricity bills. Business consumers have seen increases of 35
to 50% in contract prices between 2002 and 2004 and 30 to 45%
between 2003 and 2004.
— Cause of the price spikes
Ofgem has conducted an extensive, year long
probe into the gas price spikes and into the reasons for reduction
in UK gas supplies during the period of the price spikes. It has
been able to provide compelling evidence for 40% reduction in
UK gas supplies during the period of the price spikes, relative
to the previous year.
While Ofgem ascribes most of the price spikes
to a linkage to the rising global price of oil and to ageing UK
gas reserves, it ascribes almost 50% of the cause of the price
spikes to "market sentiment", or the extent to which
the mood or feeling of the market was itself responsible for the
price, rather than market fundamentals.
Analysis of Heren reports shows how traders
and others assessed movements in wholesale prices after the event.
By classifying the reported headline factor for the previous days
trading in the Heren "snapshot" it can be seen that:
— main reasons given for movements
in wholesale prices on a given day were offshore activity such
as maintenance and outages (34%)
— demand side factors such as weather
and unexpected increase in industrial demand are less significant
(22%)
Market sentiment alone is not a convincing explanation
for 50% of the price movements that have occurred over the past
18 months.
Given that the UK remains self-sufficient in
gas, albeit within the context of ageing gas fields; that there
were no extraordinary rises in demand and UK wholesale prices
are 40% above those on continental Europe where gas prices are
indexed to oil prices, consumers still require a compelling explanation
for 70% wholesale price increases.
In particular the question, whether market behaviour
by the gas producers, or some uncompetitive characteristic of
the offshore gas market, was in large measure responsible for
the gas price spikes, remains to be satisfactorily answered.
Ofgem itself identified that it was . . .
". . . concerned that the lack of transparency
prevailing in the period under investigation [October/November
2003] could have allowed operators to act in ways that, although
perhaps consistent with the prevailing market rules, might nevertheless
be in breach of competition law."[27]
— Limitations of the UK regulatory
environment
Ofgem has acknowledged that it was hampered
in its ability to deliver compelling findings for the remainder
of the price spikes because of the lack of critical information
available to it. In particular it identified three outstanding
issues;
". . . The first is whether any of the
European gas companies withheld surplus gas supplies and prevented
more gas flowing into the UK. The second is whether European gas
companies withheld transportation capacity on the European pipeline
networks and prevented more gas flowing into the UK. The third
is whether their decision to continue to place gas in store rather
than sell it to the UK, was reasonable given their forecast customer
demand and supply contracts for that winter."[28]
Ofgem later commented that:
". . . Ofgem has not been able to determine,
in the time available, whether patterns of maintenance were abnormal
compared with previous years. Ofgem has also not been able to
determine, in the time available, whether gas that was physically
available did not reach the market due to the nature of existing
contracts."[29]
Against the background of increasing prices
and concern at the lack of transparency in the wholesale gas market,
a number of authorities have investigated the market on a number
of different occasions. To date there have been seven investigations
from organisations such as Ofgem, the Financial Services Authority
(FSA), DTI and the European Commission. At present, Ofgem has
extended its investigations into the October 2003 price spikes
to include 2004 price spikes.
Unfortunately Ofgem's remit does not extend
offshore and as a consequence it has had to rely on goodwill rather
than enforcement powers. It is further restricted as it is unable
to investigate other European countries markets.
— Market transparency
It is widely argued that the lack of transparency
that exists within the wholesale gas market makes it impossible
for traders and energy suppliers to make timely and informed purchase
decisions in light of relevant offshore activity. It also makes
it impossible for traders to track movements in the markets.
Ofgem's interim report in May 2004 observed
that "Ofgem does not, for example, have access on a routine
basis to the level of available gas supply from the UK gas producers.
This contrasts with the situation in electricity where information
from generators is available to Ofgem and the market as a matter
of routine."[30]
That lack of transparency not only prevents
investigation by a regulatory authority, but also prevents the
day-to-day operation of a fair and open market. This is one area
where immediate remedies are being explored to re-balance the
availability of information within the market and thereby promote
effective competition.
energywatch makes the following recommendations
regarding the investigation and regulation of an effectively competitive
wholesale gas market:
— A European Commission investigation
into offshore market behaviour and the impact of liberalisation
in European Gas markets
UK and European gas markets are inextricably linked.
UK regulatory authorities have been unable to provide a compelling
explanation of the price spikes in large part because their remit
does not stretch offshore or into European gas markets. Such an
approach should focus on both the behaviour of key market participants
and on the impact of the state of energy market liberalisation
in continental Europe on UK prices.
— A single UK regulatory authority
for onshore and offshore markets.
The split of regulatory functions and powers for
onshore and offshore markets between Ofgem and the DTI is a major
factor in the difficulties the former has faced in producing robust
and comprehensive conclusions to its gas probe and must be addressed.
— Promote greater transparency through
the gas network code.
Markets work when all participants are able to make
informed decisions. In wholesale gas markets that means information
about supply constraints. energywatch has proposed a modification
to the network code that would require Transco to post real time
information about sub-terminal gas pressure and planned maintenance
on public websites. Further measures may well be necessary.
— A review of the DTI offshore licence
regime
Gas producers on the UK continental shelf are licensed
by the DTI. Those licences are, quite properly, designed to encourage
the exploration and exploitation of gas reserves. energywatch
believes that the licence regime should be reviewed specifically
to see how it might ensure the disclosure of information to all
market participants to promote confidence in an orderly competitive
market.
— Consideration of a financial penalty
to be levied on gas producers
If it can be established that the behaviour of gas
producers was anticompetitive insofar as they unreasonably constrained
the supply of gas to the UK market, a substantial financial penalty
on gas producers would be appropriate, with the revenue ring-fenced
for initiatives under the fuel poverty strategy.
2. IMPACT OF
PRICE RISES
ON CONSUMERS
All major energy suppliers have increased their
tariffs in response to wholesale price movements and many have
stated that they expect tariffs to rise again in 2005 and 2006.
Average price movements
Following price increases we wanted to examine
in detail the impact that these have had on consumers' bills.
We analysed supplier pricing data over four time periods, April
2003, October 2003, April 2004 and October 2004. This analysis
has allowed us to determine how consumer's electricity and gas
bills have changed over an 18 month period and the differences
between the six major suppliers, as well as the impact that these
price changes have had on their different customers by payment
type and usage. The pricing data was sourced by TheEnergyShop.com.
The price information we have shown in this section is consistently
exclusive of VAT.
In 2003, the price increases introduced by energy
suppliers to domestic customers, when weighted to reflect market
share, amounted to 3% for gas and 1.6% for electricity. Up to
November 2004 the increases were significantly higher at 17.6%
for gas and 12.9% for electricity. The cumulative increase over
the past two years, when weighted to reflect market share, is
21% on gas and 15% on electricity.
A more detailed analysis of the impact of the
increases between October 2003 and October 2004 by payment method
reveals that direct debit customers have borne disproportionate
price increases. On average, annual direct debit gas bills have
increased by £31 while prepayment bills have increased by
£26. Average annual direct debit bills for electricity have
increased by £16 and prepayment by £2 (charts 1.21 and
1.23 below).
Impact on Business consumers
Research undertaken for energywatch by Cornwall
Consulting has shown that business consumers are experiencing
very significant price increases driven by much higher prices
in wholesale markets.
Prices for annual fixed rate electricity contracts
renewed in 2004 are 30% up on levels struck in 2003. Similar gas
contracts are 40% up on 2003 and interruptible gas contracts are
up 45%.
The impact has been that many larger customers
are opting to buy on short-term pricing mechanisms, rather than
their now normal practice of fixed price annual contracts, as
a means of limiting cost increases. This has involved a fundamental
change in buying practices and is a strategy unlikely to be available
to small and medium enterprises.
Evidence in the research also suggested that
the consequences of volatility in the wholesale market were impacting
in particular on those organisations subject to EU procurement
rules for their energy purchasing. The rules apply to qualifying
public authorities (including government departments, local authorities
and NHS Trusts). The inflexibility attached to the procurement
rules can cause difficulties for users buying in a rising volatile
market when offers may only be available for a day or a matter
of hours.
In the course of the research we were also able
to compare in small part the experience of one participant who
provided us with data on delivered gas prices in Germany and Italy.
The data showed a clear downward trend for both Italian and German
prices in 2004 compared with 2003 in direct contrast with the
experience of British consumers. The participant also told us
that "the expected prices for 2005 (which have been based
on a sensible view of the appropriate indexation factors) are
below where forward UK wholesale prices have been.
Impact on those in, or at risk of, fuel poverty
The greatest contribution to reducing numbers
of people in fuel poverty in recent years has been through increases
in household income and lower energy prices. Current price rises,
coming as they do, at the same time as increases in water charges,
council tax and transport costs, are a serious threat to government
targets to eradicate fuel poverty among vulnerable groups of consumers.
Increase in numbers of consumers in fuel poverty
Preliminary analysis funded jointly by National
Energy Action, Unison and energywatch and undertaken by the National
Right to Fuel Campaign suggests that for every 10% increase in
energy bills, an extra 500,000 households in England are thrown
into fuel poverty, and therefore agrees with figures produced
by the Fuel Poverty Advisory Group figure. If, as we anticipate,
current price rises reach as high as 30%, the cumulative impact
may be 1.5 million more households in fuel poverty than is already
the case and more severe fuel poverty for those already there
(see table below).
In Scotland the estimate is that for every 5%
on the price of energy an additional 30,000 people in Scotland
are pushed into fuel poverty. The Welsh Assembly has estimated
that some 220,000 households in Wales containing almost half a
million people are fuel poor who will also be severely affected
by the price increases.
| Impact of price increases on numbers in fuel poverty in England[31]
|
Increase
% | Number of households in
Fuel Poverty
| Number of vulnerable households in fuel poverty
|
| 1,720,000 | 1,418,000
|
| 10 | 2,235,000 | 1,857,000
|
| 20 | 2,788,000 | 2,318,000
|
| 30 | 3,286,000 | 2,739,000
|
| | |
Price rises will hit priority groups hardest
The reality of living in fuel poverty means hard decisions
for households about how to prioritise over-committed incomes
between competing essential goods and services. For those groups
where a certain level of warmth has a particular bearing on their
health, it may be a decision between a more affordable bill or
a warm home.
A single mother receiving all appropriate benefits, will
have a weekly disposable income of around £101.73 (under
18) or £123.88 (over 18).
Her average weekly expenses, not including any debt repayments,
are estimated to be:[32]
Food and non-alcoholic drinks = £42.70
Clothing and footwear = £22.30
Transport = £8.50
Communications = £10.60
Taking October 2004 energy prices she will be paying £12.84
per week; an increase of 21% for gas and 15% for electricity in
cash terms since 2003.
Fuel costs as a proportion of her disposable income will
increase from 10.7% to 12.62%, if she is under 18, and from 8.8%
to 10.36% if she is over 18. Both calculated against 2004 benefit
levels.
Price increases since 2003 will have pushed an unemployed
single mother over 18 into fuel poverty and made more severe the
fuel poverty already being experienced by a single mother under
18.
These figures do not include any energy debt repayments and
do not assume a pre-payment meter, which would exacerbate her
energy costs.
In 2001 the DWP Research Report No. 138 Low Income Families
in Britain said:
"More than one in five lone parents said they could
not keep their home warm enough in the winter and 8% could not,
in their judgement, keep their children's bedrooms warm enough.
The primary reason for this was the cost of heating."
A pensioner couple who have negligible savings and rely on
pension credits and a range of benefits are estimated to have
a weekly disposable income of £166.72.
Their average weekly outgoings and energy costs are estimated
to be similar to those for a lone parent. For the pensioner couple
the average cost of fuel is estimated to be £12.84 or 7.7%
of weekly income, assuming average consumption patterns, although
for health and other physiological reasons older people can use
more energy, and therefore pay more than the average .
If this were a single pensioner household the income would
be £111.22 and the average cost of energy would represent
11.54% of the weekly income and would tip the consumer into fuel
poverty. Recent price rises threaten to tip even more low income
single pensioners into the characteristics of the fuel poor, consolidating
their status as the majority of those enduring fuel poverty.
Debt and Disconnections
As fuel prices increase, suppliers' debt management practices
will become increasingly important and the work that energywatch
and Ofgem started in 2002 on energy company guidelines on debt
and disconnections will take on a new relevance. Companies need
to commit now to managing sensitively and effectively consumers
who face problems paying for their gas and electricity supply.
Early indications suggest that there has been little by way of
significant overall improvement in the way in which suppliers
have adopted the debt and disconnection guidelines. This gives
us great cause for concern, especially since there had been limited
change in price during the period of measurement.
As a minimum Ofgem must closely track company performance
in relation to debt against price increases and report regularly
to interested parties including government, energywatch and TISC.
Ofgem should, and energywatch will, make compliance with regulatory
arrangements relating to debt and disconnection a priority area
for compliance and enforcement over at least the next two years.
Companies also need to be prepared to invest heavily in delivering
the commitments they have signed up to in "Preventing Disconnections
for Vulnerable Customers" and energywatch will monitor their
behaviour closely.
Impact on prepayment meter users
While prepayment is not a proxy for the number of people
in fuel poverty, it remains the best indicator for the impact
of price increases on low income consumers. Comparing 2003 average
prepayment annual bills for the six main suppliers with those
for 2004, it is clear that some suppliers, more than others, have
sought to mitigate the impact of prices on this group of consumers
(charts 1.22 and 1.24 below).
Between April 2003 to October 2004, British Gas increased
tariffs for their prepayment meter customers by 22%, a larger
amount than any other supplier. British Gas retains the largest
number of gas prepayment users. It also remains the case that
there is a greater incidence of debt for gas prepayment meter
users than for electricity prepayment users.
These consumers are in an invidious position because of the
fact that their debt (if over £100) prevents them from changing
supplier. In the case of British Gas, 76% of their customers in
debt are on prepayment meters and 33% of all their gas customers
in debt owe more than £100. We believe that this means there
is likely to be at least 200,000 consumers who are trapped with
BG's prices with a strong possibility that there are many more.
In contrast, Scottish Power has applied price increases to
their gas prepayment customers that are below the average for
all their gas customers, although their electricity prepayment
meter customers have had increases that are slightly higher than
standard credit or direct debit customers.
energywatch recommends the following actions to prevent hundreds
of thousands more consumers from falling into fuel poverty:
— Government to review the trend in energy prices
and adapt fuel poverty initiatives accordingly
Prices are expected to continue to rise into 2005 and 2006. Government
must urgently assess the impact of the recent price increases
on the numbers in fuel poverty and their ability to meet their
targets. Government must also address the probability of future
increases in energy prices within the context of increases in
the prices of other essential services such as water, transport
and council tax that will face consumers in 2005.
— Innovative tariffs from companies targeting
priority groups
energywatch would like to see energy suppliers respond to the
increase in fuel prices with the development of new and innovative
products for priority consumers. We welcome the call from the
Scottish Executive for companies to develop innovative responses
to the needs of the most vulnerable consumers. However, energywatch
does not regard the development of social tariffs to be a sufficient
public policy vehicle in itself, because other fuel poor households
may support such tariffs and where other priority groups who are
more difficult to identify are neglected.
— Observance of the protocol to prevent debt-blocking
for debts under £100
For a significant number of customers in debt the ability to transfer
to a cheaper supplier would mitigate the effect of higher prices
and enable them to manage their debt more effectively and get
out of debt more quickly. Companies need to observe the protocol
or stronger regulatory tools should be put in place to require
compliance.
— Companies should mitigate price rises on prepayment
consumers
While some companies have increased prices to prepayment consumers
by lesser amounts than for other payment methods, this is far
from being standard industry practice.
Pre-payment meters are a payment method that frequently incur
additional costs and can, if a consumer is experiencing considerable
hardship, lead to rationing of energy and self-disconnection.
energywatch supports companies who take the responsible decision
to increase pre-payment tariffs by less than other tariffs.
— Campaign to increase benefit take-up
There is much more that government departments such as the Department
of Work and Pensions, working with energy companies, could do
to ensure that consumers at risk of fuel poverty or indebtedness
maximise their take-up of eligible benefits.
Over 50% of pensioner households in England, Scotland and Wales
live in fuel poverty. The Fuel Poverty Strategy showed that 57%
of over 60s were in Fuel Poverty households. Work undertaken by
the Department of Work and Pensions showed that four out of 10
pensioner households miss out on council tax benefit to the amount
of £750 million.
The Centrica "Here to Help" programme identified average
annual savings of £1,600 per person. All energy suppliers
could be given greater incentives to deliver this sort of service.
The Energy Efficiency Commitment should be amended to require
benefit health checks as part of the work with priority consumers.
Every consumer in debt for more than three months might be offered
a benefit health check and no consumer should be disconnected
from supply without a benefit health check.
— Extend the Winter Fuel payment
Every household over 60 is entitled to an annual Winter Fuel Payment
of £200 to help toward fuel bills. Where a member of the
household is 80 years old or over the household will receive an
extra £100 top-up payment.
Not only should the Winter Fuel Payment increase to cover current
price increases to those already eligible, it should be extended,
at least on a temporary basis, to those groups of consumers who
will suffer the most from price increases. Should it be established
that there had been manipulation of the wholesale gas market we
would support measures to levy a one-off financial penalty against
gas producers to provide for the extension.
— Compliance with debt and disconnection guidelines
All suppliers have signed up to energywatch/Ofgem best practice
guidelines on debt management and recovery. Early indications
are that there has not been a significant overall improvement
in the way that suppliers have adapted their practice to the guidelines,
even though that assessment was made during a period when there
was limited price movement that might have forced more consumers
into debt.
energywatch and Ofgem will report on the guidelines early in 2005.
Without significant improvement Ofgem should consider as a mater
of urgency whether the current voluntary approach to the guidelines
provides vulnerable consumers with sufficient protection or whether
licence conditions need to be strengthened.
— Make better use of Fuel Direct
Fuel Direct was designed as a payment method of last resort. Recipients
of certain income related benefits (JSA, IS, Pension Credit) must
be facing disconnection for non-payment in order to qualify for
the scheme. At present, individual benefit offices have the discretion
to apply the scheme which leads to a more proactive use of the
scheme in some areas than others.
While the take-up of Fuel Direct has been declining for a number
of years, there has been a recent surge in demand which is likely
to continue while prices rise. energywatch believes that Fuel
Direct has the potential to deliver more benefit than is currently
the case and we would like to see greater use of the scheme including:
— a widening of qualifying criteria to include at
least disability benefits, the various tax credits and housing
benefit.
— A scheme that allowed debt prevention through
regular weekly payments, rather than just debt resolution
— an extension to in-work but low income consumers
to help prevent those in temporary or seasonal work from falling
into energy debt.
— the use of bank accounts as the basis for the
scheme which would not only advance the financial inclusion agenda
but would allow benefit recipients themselves the discretion to
opt into the scheme.
26
"Ofgem's probe into wholesale gas prices: Conclusions and
next steps" October 2004 (Summary). Back
27
Ibid (para 3.23). Back
28
Ibid (Summary). Back
29
Ibid (para 5.30). Back
30
"Wholesale Gas prices in October and November 2003: Interim
Report" May 2004 (Summary). Back
31
National Right to Fuel Campaign-Fuel Prices Project. Back
32
Office for National Statistics-2002/3 Expenditure and Food Survey. Back
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