Select Committee on Trade and Industry Written Evidence


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
1,720,0001,418,000
102,235,0001,857,000
202,788,0002,318,000
303,286,0002,739,000


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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