Examination of Witnesses (Questions 20-39)
ENERGYWATCH AND
FUEL POVERTY
ADVISORY GROUP
25 JANUARY 2005
Q20 Sir Robert Smith: Therefore, would
Ofgem be in a position to understand the world's investment climate
and needs, to encourage further exploration and production of
the oil and the wet gas?
Mr Asher: They do have, as a result
of the recent Energy Act, a broader remit in some of these areas,
but we are not saying they should become the regulator of all
offshore licences. There is a separate regime for that. They should,
however, have adequate tools to do the job that the statute gives
them, and clearly they have not. Look at their own report and
you will see at least three occasions where they point to inadequacy
of their tools.
Q21 Chairman: Is it not the case that
Ofgem's responsibilities extend to the beach and no further as
far as economic regulation, the promotion of competition, protection
of the consumer and the like? The problem is that there has never
been a recognition that there was a dysfunctional market operating
offshore and that this may or may not be evidence of dysfunctionality
in that respect. No-one has ever suggested, as I understand it,
that the DTI has an economic regulatory role in respect of pricing
in the North Sea. It does have what is perhaps a conflicting responsibility
for the promotion of exploitation and the regulation of exploitation.
While that does relate to price, from their point of view it has
been more about the facilitation of this exploration. I am not
quite sure you are accurate in what you are saying about the relative
powers of either the government department or, for that matter,
the existing economic regulator. Is it not the case that we have
not really thought through what may be a new market situation?
Mr Asher: That is my very point,
Mr Chairman, about recognising that we are an integral part of
a European market. The prime regulator is very limited in its
jurisdiction, whether it is to the watermark or not. The reality
is that, to understand properly a market, to be able to understand
the structure, conduct and performance of that market, you need
to have an ability to obtain information, an ability to understand
the things that drive that market. Ofgem, because of its concurrent
jurisdiction under the Enterprise Act, has some powers that go
to Europe and some that do not. I think there are discontinuities
there. Perhaps now that we are net importer, it is time that we
looked at those regulatory powers to make sure they are the right
ones, not simply to pour jurisdiction on, but to make sure they
are able to do the job that their statute requires them to do.
At the moment the evidence is it does not.
Q22 Sir Robert Smith: When we are talking
about Europe, we mean the Europe Union in terms of regulations.
Mr Asher: Yes.
Q23 Sir Robert Smith: But of course the
consequences of what the Government are doing with their strategy
of standing back and letting the market drive things, is that
the market has sent signals to suppliers and one of the big suppliers
that is coming in is Norway, which of course is not part of the
EU. So how would you see that supplier being regulated?
Mr Asher: I think in the same
way that the UK has negotiated information arrangements so far
with Norway. I cannot think of any reason that willing buyers
and willing sellers should not facilitate the best market arrangements.
But when you talk about market signals, the signals that Lord
Browne gives is of a market that is not working so that our health
system and our education system and others are paying millions
and millions unnecessarily for markets that are not working properly.
Q24 Chairman: By your own admission,
these other bodies are taking a risk because they have gone for
interruptible contracts. If you go for interruptible contracts,
then the interruption could well happen or you would not be getting
the price advantage.
Mr Asher: I do not think there
is anything wrong with the availability of interruptible contracts.
They are a good market mechanism. The problem is where you have
people who are constrained, such as any government buyer of gas.
They are quite limited as to what sort of contracts they can enter
for supply and they are often disadvantaged. Primarily though—and
this was my earlier point about the one-sided information—the
producers know it all; the buyers know very little.
Q25 Chairman: Mr Lehmann, in a previous
incarnation you were involved in the gas business yourself. From
your personal experience, do you think that the new provisions,
which are being suggested as more likely to provide information
about gas flows, go far enough? Do you think the information is
going to be sufficiently helpful to enable proper market analysis
and informed buying by wholesale purchasers?
Mr Lehmann: I am answering that
personally, not for the fuel poverty Advisory Group.
Q26 Chairman: I am asking you because
I know this was your trade in days gone by.
Mr Lehmann: I agree with Alan
on that point. I am not blaming the producers for anything that
is happening, but the information flows clearly are not as good
as electricity, and they should be improved to make the market
work better. My own view is that even if it was working somewhat
better, prices would be high, and there would be these very big
profits—which is not their fault, but it is not just the
hospitals that are losing out: the fuel-poor and low-income customers
and all other customers are losing. Our view is that there are
very large extra sums of money that are genuine windfalls: the
companies have not had to do anything more to get this money.
The very same prices rises that are bringing those extra profits
to them are harming individual customers. We would like to see
some of those profits recycled back into extra fuel poverty programmes.
Q27 Linda Perham: My questions are to
the fuel poverty Advisory Group. The Government acknowledge that
there are about 200,000 people who will fall into fuel poverty
as a result of the recent price rises. I think your estimate is
that if prices go up by 10%, then the numbers double to 400,000.
What do you think is the best way of helping those people? Is
it raising the level of benefits? Or targeting energy efficiency
measures? Or putting more money into energy efficiency? Is it
any of those or others?
Mr Lehmann: Two things. I will
cover one and go to Gill for the other one. First, as we have
said, the Government has done a great deal to expand the fuel
poverty programmes, to increase the energy efficiency of the homes
of low-income customers. Given the price rises, we think more
is needed to try to make sure that we meet the fuel poverty target,
and some of that should come from government sources and some,
as we have said, from the profits that the oil and gas producers
are making. That is one thing: expand the fuel poverty programmes.
The other thing, which Gill will pick up on, is to make sure that
low-income customers are getting the best possible prices of those
available in the market. Would you like to pick up on that, Gill?
Ms Owen: Yes. Obviously a lot
of the low-income customers are paying by expensive methods. They
are paying on pre-payment meters. One of our concerns is how we
can make sure we can get down the prices for those people who
are paying the highest prices. Here, I think we would like to
see more action by Ofgem, to look at the ways in which we could
get better forms of metering to bring down those prices, so they
have more sustainable solutions, both of energy efficiency and
better forms of pricing that will help people pay less in the
future. We cannot predict the way that prices will go in the future—they
may go up, they may go down—but the best thing is if we
can insulate those who are in the worst situation from those problems,
by energy efficiency and by the methods of payment that they have.
Q28 Linda Perham: We are bombarded with
suggestions from energy ministers, Ofgem and energywatch that
we should switch energy suppliers to save money. This has not
been enough to convince low-income groups. Given what you have
said about best possible prices, what about low-income groups
switching suppliers? If they do switch, I think they come off
the priority service register. Is it really a good thing to encourage
low-income customers to switch suppliers? Does that do them any
good in getting the best possible price?
Ms Owen: Obviously people can
save by switching. The pre-payment customers can save by switching,
but not as much as the direct-debit customers by switching, although
things have improved a bit in that area. Obviously there are issues
about having to come off one priority service register and then
get on another one. It is complicated, this process, so it is
not the only solution just to say switch is the message we would
want to give.
Mr Lehmann: Part of it but not
the only one. I think we would still encourage people to switch
if they can save money, and obviously there is a point that energywatch
make a lot—rightly—that if the energy companies know
that customers are going to switch if their prices are higher,
that will act as a discipline on them and make them think twice
about raising their prices. It helps to make the market work.
Q29 Linda Perham: I am not sure if you
cover this, but another question we had is about the three examples
you mentioned in your memorandum, possible programmes to help
the customers most affected by energy price rises. There has been
criticism of the effectiveness, particularly of the targeting
of those programmes. What could the Government do about that?
Mr Lehmann: I think it is fair
to say those programmes generally have been very good. They have
improved the energy efficiency of the homes of low-income customers,
so, in that sense, they have been good. Secondly, there have been
some changes—announced at the end of last year by the Government—to
improve the targeting of Warm Front which will be very helpful.
Thirdly, while we agree to some extent with the criticisms, we
think they have been a bit overdone. Let's give you an example.
If the programmes had been much more heavily focused on the people
who were in fuel poverty a year ago, we might have gone along
to somebody and said, "You are not in fuel poverty, therefore
we will not insulate your home," and those same people might
now be in fuel poverty because of the price rises. So it is a
bit of a moving target. We think the scheme is generally pretty
good. There have been improvements and we think basically this
should be expanded further.
Q30 Mr Clapham: Mr Lehmann, could I pick
you up on your reply to the Chairman about social responsibility
and how you thought that some of the companies that are making
profits may redistribute them, shall we say, to help to tackle
fuel poverty. Given that some of the companies do not have supply
arms, how do you feel this could be done in a fair way that would
encourage companies to come on board?
Mr Lehmann: I believe that is
a very helpful summary of our views on it, because the companies
which do have supply arms are doing a lot, partly because they
have to and partly because they have actually taken ownership.
If you talk to their chief executives, they have taken ownership
of the fuel poverty problem, which they did not have some years
ago. The people who produce oil and gas in the North Sea are obviously
further from customers and do not feel that same ownership but
we think that the money should be recycled. There are basically
two ways that it could be done. One, UKOOA, the trade association,
or individual companies could voluntarily give some money to fuel
poverty programmes—and we have suggested some ways in which
that could be done—and Neighbourhood Energy Action is trying
to talk to some of them to encourage them to do that work with
them on that. If the companies do not do that, then we think there
should be a tax to recycle some of that money. But we hope very
much they will do it. It would be a much better solution all round.
Q31 Mr Clapham: Given that you have put
some ideas to try to encourage the companies, what has been their
response so far?
Mr Lehmann: One or two have shown
some interest, but I think the general problem is that those who
are interested do not want to do it on their own and they cannot
necessarily bring everyone along. But no doubt they will tell
you about it. There is one other source of money, as well—much
less important. As you know, National Grid Transco have sold some
of their distribution companies and made a very substantial gain
from that—which is absolutely fine, nobody has done anything
wrong there, and they have been very supportive generally on fuel
poverty. But, again, here is another possible source of money,
to get a little bit of that money back into fuel poverty programmes.
Q32 Mr Clapham: Given that the Government's
figures suggest that for every 1% increase in income there are
about 40,000 families lifted out of fuel poverty—and of
course that situation is under threat as a result of gas prices—is
there a role for greater liaison with some of the social services
departments to work on that very vulnerable group of people?
Mr Lehmann: Absolutely. We are
working with them, and we are making a bit of progress—not
as quickly as we would like. The Department for Work and Pensions
are trying to persuade people to take up their benefits and the
energy and energy efficiency companies are trying to get them
to take advantage of these grants, so there is clear scope for
us working together. They are showing some interest. It is hard
work, but they are beginning to show some interest, and any encouragement
you could give them would be helpful. We have had much more difficulty
with the Department of Health centrally. Some of the local health
staff are very good but we have not had any encouragement yet
from the Department of Health centrally, even though cold homes
are bad for health. We are working on that.
Q33 Sir Robert Smith: Keep working! I
had a private member's bill many years ago trying to encourage
the Department of Health of the benefits of fuel efficiency. You
have raised the idea of a windfall tax to try to get more money.
Obviously, even without a windfall tax, the Chancellor is already
better off than he planned to be. Do you think, as a start, he
should be looking to make use of his own windfall?
Mr Lehmann: Yes. To be fair, there
was a very substantial increase in the funds available for fuel
poverty in the last spending round, which we had not expected
in a very tight spending round. So he has done part of his bit,
but, yes, we think it should be a matched thing: the companies
should give something and the Treasury should give something.
Match it and that will help a great deal.
Q34 Mr Clapham: Do you understand the
worry of a windfall tax? If you were an investor, sitting in Calgary
deciding where to go with your next investment to find oil and
gas, and you have a choice of coming to the North Sea, where you
hear talk of a windfall tax, and you have seen, a couple of years
back, a surprise tax that frightened the market, do you think
you might decide to go elsewhere, where you might see more stability
for investment, or to come here, where it is an expensive operating
environment and a mature province where reserves are beginning
to be difficult to find?
Mr Lehmann: Clearly a tough balance,
and somebody has to weigh those risks, but other countries are
obviously thinking of similar things. We are not alone. There
are many advantages of investing here, but a key point is that,
when the companies make investment decisions, they are assuming
much lower oil prices than the current ones. They are usually
using $30 or less, sometimes $25—and, again, no doubt you
will be able to ask them. So they are investing at those levels
and they do not expect the profits above that. So, if some of
them are removed, then I do not think that would have a major
impact. But you have to weigh them up.
Q35 Sir Robert Smith: If the price were
to fall, do you think the Government should step in with a subsidy
to the industry to cover the fact that the price is below what
they expected?
Mr Lehmann: No. The normal swings
and roundabouts one lives with, and the companies have benefited
from relatively high prices in the past at times. It is only when
they get exceptionally high, as they have done now, with exceptional
amounts of money flowing in, that we think there is a case.
Q36 Sir Robert Smith: How do you, as
an investor, factor into your investment decision windfall taxes?
Surely, as an investor, you have a lot of reasons—the price
going up and down, the geology being difficult, the hostility
of the North Sea and lots of other things—and if the Government
then throws in an unstable fiscal regime, does that not say, "Go
and look elsewhere where you might find life easier, bigger reserves
and long-term returns"?
Ms Owen: But surely the nature
of a windfall tax is that it is not factored in, because it is
a windfall and therefore it is not something which is going to
happen regularly. I think that is the point. It is not going to
happen with the ups and downs of the market generally. There are
precedents for this in other countries. The United States did
this in the '70s and a lot of the money there was spent on insulation
programmes for low-income households. It is not something that
is going to happen, as Peter Lehmann said, with every up and down
of the market.
Q37 Sir Robert Smith: But as the Government
have said, their whole energy strategy is designed in not interfering
in the market, except in extreme circumstances, such as the last
resort of potential risk of safety. Surely consumers have benefited
from that market keeping prices lower in the times when the market
is really operating, and therefore the market going up is now
saying to the Norwegians, "Bring gas into Britain" and
so that other people build energy plants and so on. It is sending
signals and that is how the market is designed to work. If the
Treasury then keep stepping in and out at random and without warning
. . .
Mr Lehmann: I would just make
one quick point. Obviously one has to make a judgment about the
relative risks and advantages, but in other markets these profits
would not be made because immediately there would be new entry.
That does not happen in the oil and gas industry, so they have
an extra advantage. If part of that is taken away—only part
of it, I am not suggesting taking all of it—they are not
at any disadvantage compared with other industries.
Q38 Sir Robert Smith: Where has this
pipe from Norway come from, if it is not a new entry?
Mr Lehmann: There is no new entry
into exploration and production in the North Sea very easily.
If these profits are made, you do not get people coming in and
competing it away.
Q39 Sir Robert Smith: Then why is there
more drilling now that the price is going up?
Mr Lehmann: Fine, there is some
more, but it takes quite a while, which it does not in other industries.
We may not agree on this. It is a judgment. I think the main point
we would make is that the fuel poverty targets will not be met
unless the programmes are expanded. It is not quite clear that
it is going to come from the public sector, therefore we have
to be creative in finding new sources and we have to weigh the
advantages against the risks.
Mr Asher: Might I add one sentence
on that market structure. The implicit deal with governments,
not just in the UK, is that governments will provide a framework
that provides for contestability and innovation on the supply
side through competition policy and that the market will work
well. Sadly, over the last 15 years we have seen a great concentration
on the production side. The mergers in the oil and gas companies
have led to only four companies having more than 50% of gas reserves
for the UK, and then in the UK we have had a very permissive regime
for allowing vertical re-integration, so that now all of the suppliers
have hedged their generation, and they are increasingly expanding
into gas, so that the market is functioning less well by the day.
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