Consumer Focus - Business and Enterprise Committee Contents

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 branches?

  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. Sorry—that 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 prices down.

  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 effective job.

  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 operation here?

  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 in force.

  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 stage—and we have been critical of the market in our comments today—you 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 consumer.

  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 household.

  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 suppliers?

  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 answer.

  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 the probe.

  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 effect—I 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.

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