Examination of Witnesses (Questions 40-59)|
11 NOVEMBER 2008
Q40 Mr Weir: In your own letter you
point out that an alternative would have been the recapitalisation
of HBOS as an independent entity.
Lord Whitty: Of course they did
both: they recapitalised HBOS and they allowed the merger. The
Government's judgment was clearly that recapitalisation, at least
at the level the Government were prepared to do it, was not sufficient.
I am not arguing with the Government's judgment on that, I am
just saying the concomitant of that is a very, very close watch
on what the effect of that is on the market, on competition, and
on consumers. In the short term, if we had opposed the merger,
we would not have been doing consumers any favours.
Q41 Mr Weir: At the same time, one
of your suggestions was there should be a sunset clause on, if
you like, the waiver of the competition rules. Presumably that
is to prevent any further mergers of this nature going ahead.
Will the OFT be looking at the position of the merged bank in
the future if they continue to have such a huge share of the market?
Lord Whitty: Yes is the short
answer to that. Yes.
Q42 Mr Weir: You talked about HBOS
or Lloyds selling off some of their branches to competitors. There
is a particular situation, when you talk about 30% of the market,
in Scotland, where it is much larger because of the absence of
Barclays in the market. If you look at an average Scottish town,
all the banks are already there, so that it is not really much
option for selling off banks. Do you look at the different areas,
such as in Northern Ireland and different parts of the UK, where
there is much more concentration of the market than perhaps it
looks like in the UK as a whole?
Lord Whitty: Yes.
Mr Mayo: That is very apposite
in terms of the approach we take. We operate across a devolved
basis, which is one fundamental way in which we can look at different
markets. The operation of Consumer Focus Scotland, which builds
very strongly on the work of the Scottish Consumer Council and
Postwatch and energywatch in Scotland, has a beefed up capacity
for doing exactly this. They have the intelligence to feed into
our work on this. We know, for example, in relation to the excellent
report you put out on the Post Office Card Account yesterday that
the context in Northern Ireland, for example, is very different.
The competitors to the Post Office Network, say that Paypoint
simply do not have the same outreach because there is not the
same penetration. We do look at this in different ways across
the different markets.
Q43 Mr Weir: In recent years most
banks have been closing branches rather than opening branches,
with many of them moving onto the Internet. How feasible is it
that other banks are going to be interested in buying closing
Mr Mayo: I do not think we are
talking about very large number of banks here. This is about local
monopolies and therefore they have to be tackled at a local basis.
It is incumbent on Lloyds TSB, if they did go ahead with this
merger, to make sure they were not acting in an anti-competitive
way. We have also suggested in a modest way that we might set
up a consumer panel to be a scrutiny for them. That is a slightly
hippy suggestion in some ways, but we do think it is important,
if we are not to bring a super complaint in relation to anti-competitive
behaviour or the regulators do not take action, the need to bend
over backwards to make sure they are behaving correctly throughout
this. We would welcome that.
Q44 Mr Weir: What do you consider
to be a local monopoly? You have four banks in the Scottish sector.
You are going to lose one, almost inevitably, and be down to three.
Do you consider three banks, with the absence of one, as being
a local monopoly? Or is it just reducing choice from four to three?
Mr Mayo: Better people than me
could answer that question in terms of the competition economics
that surround local monopolies. It is a new area for competition
policy. It has been developed very much in the field of supermarkets
and pharmacies by the Competition Commission. One of the areas
in which we are interested, given particularly our focus and expertise
on the Post Office Network, something of concern to the Committee,
is to look at issues around access on a geographic basis and other
bases as well, to see what access people do have to central services.
The bank branch closure programme has slowed down since that which
we saw in the 1990s. It may well speed up again with some of the
change we have seen. There are other losses. There is the loss
of pubs and other amenities at the local level which means to
say that issues around the local market are clearly going to be
important to look at. My honest answer is that there is a technical
definition of local monopoly, and a better competition economist
than I would be able to make that input. There has been an investigation
in terms of the banking sector in Northern Ireland and one of
the questions is the extent to which you can define a market that
fits and to what extent is a market, for example, retail banking,
in Scotland or in a particular local area distinctive enough for
competition policy to apply. Sorrythat was a very long
answer to a quick question.
Chairman: I know two swallows do not
make a summer but a picture possibly emerging here is that we
have the Lloyds/HBOS merger, competition literally swept away
to meet a particular need, we have the EDF purchase of British
Energy, competition issues swept away to meet another particular
need. You have been very vigilant and there are some very difficult
decisions on these issues.
Q45 Mr Hoyle: Can we take you on
to energy? We all know that we live in rip-off Britain with immoral
profits, excessive salaries at the expense of customers, both
domestic and business customers alike, who really are under the
cosh with what is being charged. On what grounds can you as a
body call for energy companies to reduce their retail prices?
Lord Whitty: The powers, of course,
rest with the regulator and we have been very assertive in asking
the regulator to take a harder look at what is happening in two
senses in the very immediate term. We have said that when energy
prices were going up the lag between the price they were paying
in the market and the price increase to consumers was pretty rapid.
Now they are coming down it is significantly less so. Both energy
companies and Ofgem have taken exception to what we have said
but we believe the statistics, taken overall, do prove that, so
we are therefore campaigning for general prices to come down more
rapidly than has hitherto been the case and also wholesale prices
have reduced. We are also campaigning in relation to the distribution
of those tariffs and prices in an area essentially of fuel poverty,
although there are other areas.
Q46 Mr Hoyle: I will bring you on
to that. I just want to know what you can do on this and I will
come on to fuel poverty next.
Lord Whitty: Part of what we say
is, is the tariff structure fair, which includes fuel poverty.
There are other unfairnesses in the tariff structure. It is not
just a question of the average level of price. It is a question
of how people are unfairly dealt with under the present system,
which will include prepaid meter customers, will include those
who are off the gas pipeline, will include people who have retained
as their supplier the original regional incumbent, all of whom
appear under the present system to be unfairly dealt with whatever
the average level of price. We campaign on all of those.
Q47 Mr Hoyle: We both know that gas
has gone up 51% since the beginning of this year, electricity
has gone up 28% this year. We were told all the way along oil
and gas are linked, that is the way it is, that is why gas prices
have gone up; yet we know that oil has dropped 50% and yet gas
has not moved. Therefore, for all you are saying, what can we
do? Is there any more we can do, apart from standing on the side
shouting, "We don't think this is right"? Do you know
somebody who should have teeth? Do you think you should have teeth
to try and get these prices down?
Mr Mayo: On some of these areas
Ofgem is the regulator. It has got the teeth and it ought to bring
Q48 Mr Hoyle: We all know Ofgem has
no teeth whatsoever. Come on. That is why prices are so high.
Let us not kid ourselves. It is a toothless tiger.
Lord Whitty: One of our central
roles is therefore to address Ofgem's remit, which is largely
set by Parliament under a number of Prime Ministers, and to address
the way in which Ofgem attack their remit, and we have points
on both of them. We do not have the power of the regulator but
we do have the power to attack the regulator where we think they
are doing it wrong, attack the companies where we think they are
doing it wrong, and to raise in certain circumstances general
issues with the regulator. We do not want to be the regulator.
In that sense we are always on the sidelines, we do not have the
direct powers given to us by Parliament for that, but we can embarrass,
pressurise and advocate change here to the regulator to do an
Q49 Mr Hoyle: It took energywatch
to say there was a real problem in the market that actually got
Ofgem to waken up to do a report and investigation into it, so
we all know that Ofgem are fast asleep, are comatose, when the
problems are going along, and it took your previous organisation
to give them a nudge, along with this Committee, because this
Committee is very good at standing up for the consumer.
Mr Mayo: The issues in terms of
the underlying market have not been resolved by the Ofgem probe
and therefore some of the issues that you looked at in your early
summer report around the wholesale market in particular. The retail
sector is inextricably linked with the way that the wholesale
market works and, Chairman, you commented on the takeover of British
Energy. Again, we are just going to reduce liquidity. On your
point about the oil price gas link, that is an area where we picked
up on energywatch work in terms of writing to Commissioner Cruz
to ask her to explore whether there are any cases to see whether
the oil link is an abuse of the articles of the Treaty and that
may lead to change. The work on the fundamentals of the market
are important in relation to that and could lead to change. Our
other role in terms of companies is to argue for one of the companies
to break ranks, maybe EDF Energy if they are long on power after
the takeover, but we have seen the energy companies act like a
herd in terms of putting up prices, and if they act like a herd
in delaying bringing down prices now that the wholesale price
for both gas and energy has come down very significantly, and,
as you said, oil as well, I think that would raise further questions
about the nature of this market. Ofgem's conclusion that there
are no smoke-filled rooms and collusion does not answer the question
that in a market with six dominant suppliers you do not need to
get into a room to work out what the prices ought to be.
Q50 Mr Hoyle: I cannot disagree with
anything you have said. What you are trying to say to me is that
they do not work in the consumer's favour, in fact, they work
against it, so can we agree that it looks like there is a cartel
Mr Mayo: A cartel is one of those
areas where Ofgem throw barristers at me and say, "Get the
definitions out". I would not regard myself as an expert
on that. We do think that the market is broken. We think that
the Ofgem probe, despite the headline that the market is working
but these are the fundamental problems where people are losing
out so significantly or if you are not on dual fuel or if you
are in the original regions for the incumbent, shows that the
market is broken and there is a good deal more work needed to
be done. This particular issue that you reported on as a Committee
about it not being clear what is bought on the wholesale market
and what is bought spot or forward is a key area still for uncertainty
because in some ways we were assured that companies were using
the spot market, in which case they ought to be benefiting from
the reduction in wholesale prices that we are seeing, but in some
sense we get the response, "Oh, no, we have bought forward
at £100 a therm", or the like, a rather bad business
decision in retrospect, "and therefore we have got no room
for manoeuvre". It is very hard for us to tell and therefore
I think one of the areas that we need to look hard at is getting
better information out there, either us asking for that information
or the regulator doing the same or you as a select committee or
future select committees in that regard.
Mr Hoyle: There is one thing for sure.
Rather than getting upset by the word "cartel" and issuing
writs and legal proceedings the best way to show there is no cartel
is to see them reducing the prices, so maybe we ought to get that
message across: the sooner they do that the less likely we are
to worry that there is a cartel in operation. Can I take you on
to something that you were going to touch on, prepayment meters,
people who pay their bills up front? Why is it that they seem
to be on the wrong end of the energy companies? They are the people
that pay up front for the energy they have not used and people
who pay their bills very quickly suffer more and they pay more
for energy. What can we do about it? It is absolutely wrong.
Q51 Chairman: Can I just endorse
what Mr Hoyle has just said; it is not just prepayment customers;
it is the standard credit customers too. Most fuel poverty is
among standard credit customers and their needs I do not think
always get enough attention in public debate.
Lord Whitty: You are absolutely
right. One of the things we have been deeply critical of Ofgem
about and until this report came out Ofgem did not accept is that
prepayment meter customers and standard credit customers are not
dealt with seriously by the market and do not benefit from the
degree of competition that exists in the market at the moment.
Whilst there are bits of the Ofgem report which we would seriously
query and we think the headline report is complacent, there are
bits of that report we can now take back to Ofgem and say, "What
are you doing about it?", and that applies to those people
who are heavily concentrated in low income groups, for various
reasons, as to why they are effectively discriminated against
in terms of the way in which they pay. That must be one of our
priorities both on our fuel poverty campaign and our general approach
to fair tariffs.
Q52 Mr Hoyle: So when do you think
we are going to get an answer because this campaign has been running
for a long time, both on prepayment and standard credit customers?
What timescale do you envisage action being taken in?
Lord Whitty: I think it is not
likely, and this is the Ofgem timescale and they do have to consult,
et cetera, but this winter is going to see significant
changes in the PPM. I think there will be some and hopefully we
will see some companies change their systems where they are breaking
ranks, and once that happens ahead of Ofgem intervening that will
lead to other companies following, but we also need more in relation
to this winter than we have argued. The term "social tariff"
should be absolutely enforced by Ofgem this winter so that the
offer which each company makes to people who are in the more vulnerable
groups should genuinely be the lowest charge for that household
in those circumstances, and that should apply right across the
board. The things which are labelled social tariffs now have different
names, they are very confusing, nobody understands them, Ofgem
do not enforce it effectively, so for this winter, ahead of a
total rationalisation in favour of the fuel poor and against discrimination
by dint of how you pay, we need to see genuine social tariffs
Mr Mayo: Ofgem are in a consultation
period. They are running an eight-week consultation period, which
is probably welcome but actually it is a licence change, so if
a company said, "We accept that we have got it wrong. We
have been overcharging people on the basis of how they pay",
which is not what we want the market to compete on, "and
for the lack of a competitive process they are probably paying
too much because it is an inefficient process anyway", and
if the licence holders agreed then Ofgem could bring forward a
change on that basis, price controls essentially on payment method,
in advance of that eight weeks. It will be interesting to see,
and you as a select committee might have as much influence as
anybody on this, whether that could be brought forward.
Chairman: We have Ofgem coming before
us on 24 November and the Minister on 25 November before we lose
responsibility for this policy at the end of the calendar year.
Q53 Mr Hoyle: All being well, the
industry might find some morals and do it before any of us have
to put the real pressure on, so that is something I hope they
are listening to as well. The other thing, of course, is what
are the implications for the retail markets of the demise of Bizz
Energy and Electricity4Business, so two main independent retailers
out of the market and we are back down to what I can only describe
as the limited few that act against the consumer?
Mr Mayo: It is a consolidation
of the market. It has been good that the emergency mechanisms
seem to have worked in both cases. There is a possibility that
both cases also raise questions about the financing of infrastructure
for the energy market looking forward given the credit crunch.
There are two sides to it, one of which is a further consolidation
of the market and a reduction in wholesale market liquidity as
well with the takeover of British Energy, so things are going
the wrong way on that basis, but also I think there are these
other bigger questions looking forward in terms of the investment
that we need in energy infrastructure, how that is going to be
paid for, and who pays for that as well.
Q54 Mr Hoyle: One of my other worries
that the Committee has had brought to its attention, and I do
not know what role you can have in it, is the fact that there
is a lack of storage capacity in the UK. We are actually exporting
gas from the UK to store it in France to export it back to us
at a higher price than when we sold it, all because these companies
will not invest in storage capacity, not in this country. That
is the difference. What can we do because that is part of the
abuse that I feel is really letting down the market? Is there
anything you can do about that or have you no remit over things
like investment in storage capacity?
Mr Mayo: The big investment that
is going to be needed, including in storage capacity, raises very
big questions about how it is paid for and is it paid for by consumers,
is it paid by taxpayers? Are those costs fair? To what extent
can this be delivered by the market? To what extent do we need
more regulated solutions? Those are very big public policy questions
and we will need to have an input on moving forward. I think the
crunch issue for the UK, having liberalised and privatised the
market at a relatively early stageand we have been critical
of the market in our comments todayyou then get caught
in the fact that other European countries still retain relatively
protectionist systems so that, exactly as you say, the gas runs
one way in the pipelines but not both ways in regard to that.
I think that is a big question as to whether the European market
can effectively be liberalised on a reasonable timeline that can
give energy security to consumers and the public here as well,
or whether the UK will find itself having to move in the other
direction of greater regulation in the context of security. That
seems to me to be the issue, which is either that one moves to
more open, liberal European energy markets which would have benefits
for cost or the UK consumer gets squeezed and loses out as a result.
Mr Hoyle: But the fact is that they are
always then putting their money back into investments but, as
we know, not only have the salaries of chief executives substantially
increased but the share dividend went up to £1.62 billion,
which shows that we are not seeing the investment. The fact is
that our storage capacity is 9-11 days compared to over 100 days
on the continent and that is where the real difficulty lies, is
it not? We are always buying at the spike but the spike is being
supplied by storage capacity in Europe at the expense of the British
Q55 Chairman: Can I say on the subject
of electricity independent suppliers, Bizz Energy you will know,
I am sure, was in my constituency. A hundred and sixty jobs have
gone which is very painful. They were planning to expand the domestic
sector; that was the next expectation, but with the small business
sector. That now will not happen and I do not see why anyone in
their right mind should get into independent electricity supply.
This Committee and the company have been warning for years about
the issues here of procuring electricity, the way in which the
big six discuss the base, using the independents as a negotiating
ploy, basically. It is a scandalous business, and now two companies
have paid the price in a couple of weeks. This is a very important
issue for your organisation. If it is just the big six and no
prospect of new entrants then competition is dead.
Lord Whitty: Absolutely. The definition
of success on the competitive front which the regulator and the
Government and others in the industry have pointed to is not the
structure of the industry; it is the number of switches. We welcome
a large number of switches, although the figures need analysing,
but the structure of the industry is such that it is still not
a competitive industry and, as you say, in recent weeks it has
become less so. We thought competition was about bringing in new
suppliers and having genuine competition for every user of energy,
and that has not been the case either for business or for the
Q56 Mr Weir: I saw one brief glint
of light in Lord Whitty's original answer when he mentioned off-gas
grid customers. I represent a rural area and am greatly concerned
about those who use home fuel oil for heating, and it is something
the Committee brought up in its report into the market. One of
the things that concerned us was that nobody seemed to have any
responsibility in this market. Do I take it from your answer that
you accept you have a responsibility in this market and will be
including that in your investigation into energy prices for all
Lord Whitty: The answer to that
is we certainly have it within our remit and we will be looking
at all disadvantage in the supply of energy. The problem with
Ofgem's remit is that effectively it only covered the market that
had been privatised; that is their origin, and energywatch's remit
mirrored that. It did not therefore cover people who were outside
the grid supply. It did not cover people off the gas network.
It did not cover solid and oil fuels. It did not cover, for example,
district heating. For all those reasons those consumers need protecting
and have not hitherto been protected. We would regard it as part
of our remit to look at that and since we have a particular responsibility
for rural consumers where this is most concentrated, not exclusively
but most concentrated, that will be a big issue in the energy
market in rural areas.
Mr Weir: I am delighted to hear that
Q57 Mr Bailey: Before I turn to postal
services may I supplement the questions on this particular area?
You have drawn together a number of issues which have been touched
upon, first of all the Bizz Energy and Electricity4Business demise.
Given the fact that Ofgem are supposed to protect competition
in the area, if that is not a contradiction in terms, to a certain
extent they must be seen as a symptom of the failure of Ofgem
to do that. Can I also pick up a comment that was made by Ed?
You said you were joining with the Daily Mirror in a consumer
campaign on this. I am all in favour of that. I see nothing to
lose whatsoever in it and it is good potential publicity for yourselves,
but, given the fact that there has already been strong consumer
reaction to these prices, what sort of added value do you think
you can bring to that? My last comment is, you have already approached
the European Commission; good. I know energywatch did a lot of
research which provided evidence for this Committee. Presumably
you are drawing on that. What capacity have you to bring to the
submissions that in effect Ofgem have not done?
Mr Mayo: In terms of the Daily
Mirror, and I hasten to add that we work with a lot of other
media outlets as well, in addition to some of the comments that
we made earlier about the campaigning side, there is also an opportunity
to try and reward a company that does break ranks. We are not
going to deliver flowers to the headquarters but we will praise
those that break ranks. We will make sure that they are top of
the switching list. Our message is, "Consumers will reward
you for doing the right thing". We have got to try and build
not just public pressure but also understand the business drivers
for companies to do this. As time goes by, if companies hold out
against energy price cuts and they do that again as a herd, then
it is absolutely essential that companies explain their position,
that if they are not going to bring down prices they are absolutely
clear as to why that is, and I do not believe we have had those
kinds of explanations or that clarity as yet. Do we have the capacity
in terms of doing the work on submissions and tracing this? This
is one of the top priorities for us as an organisation and we
do have some of the core analytical team that was at the heart
of energywatch in terms of taking this forward, so I have a very
strong set of colleagues. We are recruiting, we are finding our
feet. This is top of the list for us and we will be making an
active input into this, and indeed I met with Ofgem yesterday
and we are meeting again on some of the issues exactly around
Q58 Mr Bailey: Can I move on now
to post office closures? You outlined that one of the projects
to be undertaken is to scrutinise the final closure proposals
in the current post office closure programme under the time limited
branding of Postwatch, so effectively you are carrying on the
work that Postwatch was doing. Having looked at the reasons for
the closure of one post office in my particular constituency,
it was outlined that there was in effectI will not call
it an appeal process because that will be done but it could be
reconsidered by Postwatch in the future. Realistically, what difference
will your assessment of the post office closure programme make
to some of the controversial decisions that are happening day
by day on the ground?
Mr Mayo: Postwatch, I think, had
been put into a tough position in the sense that if one post office
was reprieved then another one would be brought into its place,
which is a bit of a tough call. I think some of the very good
work that Postwatch has done, and we have had a very good team
working on this and are still working on this, led by Howard Webber,
has been working behind the scenes in the early work, developing
the access criteria and then applying those. That is some way
upstream from the point that you are raising around adjudications.
Therefore, I think Postwatch has been in a tough situation. It
has done a good and objective job for consumers but I think it
would be important to step back after this programme has finished
and look at the lessons that are there in terms of how this operation
has run, and I have no doubt there are lessons for Post Office
Ltd as well as for our own operation moving forward. We do not
want to see further rounds of closures but it is important that
we learn from the up sides and down sides of the approach that
we have taken.
Q59 Mr Bailey: I understand from
local councillors who attended a meeting between councillors and
Post Office Ltd and Postwatch that basically Postwatch's role
was that of a nodding dog. It did not really add anything or contradict
anything that the Post Office was saying.
Mr Mayo: It does occasionally
bite their heels, and I think that is fair.