Letter submitted by energywatch
1. A SOUND MARKET?
BERR and Ofgem have asserted that the GB energy
market is not only sound but is the most competitive market in
Europe. In fact they only recently dropped the "most competitive
market in the world" boast when the Australian State of Victoria
achieved a higher proportion of consumers switching supplier.
Ofgem has protested to the Chancellor that there
is no evidence of collusion or price fixing and that they invited
anyone with information to the contrary to come forward.
However, the focus on collusion is a red herring.
Only the Sunday Times has raised that possibility. However
a broad range of other bodies—British Energy (the largest
independent electricity generator), energywatch, small independent
energy suppliers, academics, Unison, the National Right to Fuel
Campaign and others—have maintained that there are structural
features of the market which constrain the extent of effective
competition. No accusation of collusion, but observations that:
— In the 10 years since competition
was introduced the number of active suppliers has dropped from
20 + to only 6. Market Concentration.
— In that 10 years the big six suppliers
have re-established interests in electricity generation and gas
production. This degree of Vertical Integration and the
existence of long term contracts with electricity generators effectively
forecloses the market to new entry and therefore stifles
real competitive pressure.
— It is argued that these market
structure issues mean that suppliers don't need to compete
vigorously on low prices because they do not need to fear the
price competition that a new entrant would provide. Given that
all the big six are in this comfort zone they know that
it is none of their interest to buck the trend and cut prices
dramatically. Collusion is just not needed in the energy market.
British Energy are quoted in the Sunday Times
as saying that the control of the big six suppliers over energy
trading "increasingly forecloses the market to new entrants".
What's the point?
The very characteristics that led to a competition
investigation by DG Competition in Brussels exist here (although
in a lesser form). The market has changed out of all recognition
over the decade of competition. Consumers have less choice, there
is no new entry, vertical integration ties up all electricity
generation in long term contracts, there is very little transparency
in the market.
2. FEAR OF
THE COMPETITION
COMMISSION
energywatch has called for a reference to the
Competition Commission to enable it to carry out a Market Investigation
into the GB energy market. A Market investigation is a tool available
to regulators and government where there is evidence that features
within the structure of a market is inhibiting active competition.
Peter Freeman the Chair of the CC has made the following points
in speeches over the past couple of years.
The purpose of market investigations [from
comp commission] is to enable the competition authorities to take
an in-depth look at markets where competition is thought to
be not working well, but where the problem does not at first sight
appear to emanate from the dominant position of a single firm
or the existence of hard core cartels. They are meant to be
detailed and thorough and to apply a cure rather than a punishment.
In their deployment of decision-making and remedy imposing powers
they are probably unique to the UK.
Despite the CC's powerful armoury of regulatory
and competition enforcement powers, its involvement in regulated
sectors in recent years has been minimal. Whatever the justification
. . . the fact is that regulators are not making references to
the CC for market investigations nor are they or regulated companies
using the CC to resolve licensing or price control issues.
September 2006. Bath
"This relative dearth of regulatory cases
has caused us some concern (we query if the threat of a Competition
Commission reference from a regulator can act as a `credible threat'
if that reference power is very rarely—if at all—used)
. . ."
May 2007. Edinburgh
What's the point?
The CC is a critical element in BERR's aspiration
to have the best competition and consumer policy in the world.
They are the experts in market structure and competitive forces.
Ofgem openly acknowledges that it spends 75% of its time and energy
on the monopoly network industry (ref its evidence to the House
of Lords inquiry into economic regulators). It either cannot or
will not apply itself to fundamental questions about market structure.
Given that there is a body set up to do exactly that, why will
Ofgem or BERR not make a reference to the CC? Has the Minster
discussed the energy market with the Competition Commission?
3. SWITCHING
NOT A
SUFFICIENT MEASURE
Ofgem regard the numbers of consumers switching
supplier as the key measure of competition in the market. Last
year they claim that 4 million out of 36 million energy account
holders switched supplier.
However, half of consumers have never switched
supplier, 65% of pensioners have never switched supplier, 6 million
people on pre payment meters cannot switch using an online comparison
site, 2 million people cannot switch because they are in debt
to their supplier, hundreds of thousands of consumers are on radio
controlled meters and cannot switch for technical reasons (dynamic
teleswitching meters).
Switching is not only more limited than some
maintain, research from the University of East Anglia have established
that around one third of all consumers who have switched, did
so to a worse tariff. Of course, every consumer who has switched
in recent years has done so to escape punishing price rises not
to make meaningful savings.
What's the point?
The numbers not as healthy as they appear at
first and they hide real barriers to switching and actual detriment
for those who do switched. There is contestability in this market.
But it's hard to claim that it amounts to effective competition
for all. Is the minister content that a glance at the latest switching
figures is sufficient scrutiny over a market that delivers essential
services to consumers and where that service is being priced out
of the reach of many low-income consumers.
4. GOVERNMENT
FUEL POVERTY
STRATEGY
Government will not meet its 2010 target for
eradicating fuel poverty from vulnerable households. Around 4
million households across the UK are considered to be in fuel
poverty, where they are required to spend 10% or more of their
income to heat their home. The price of energy has the biggest
impact on the level of fuel poverty, and price rises seen since
2003 to date of 74% for gas and 55% for electricity have
seen the number of fuel poor households double.
The pillar of the UK Fuel Poverty Strategy dedicated
to, "continuing action to maintain the downward pressure
on fuel bills" seems to have been abandoned. Government
said that it would use the Energy Bill to give itself a power
to require companies to provide social tariffs if they didn't
act themselves. It has not done so. It has said in the 2nd reading
of the energy bill that it prefers to see companies bring forward
voluntary and innovative solutions.
In stark contract, the company that has done
the least on social tariffs has itself argued for a mandatory
scheme. Npower wrote to Ofgem on 24 September last year and said:
"At present, government is encouraging the
delivery of a social action solution within a voluntary framework.
It is doubtful whether this is the most efficient approach and
it is also seemingly inconsistent with a market framework. We
believe that the interest of the fuel poor is best served by a
mandatory social tariff and this is the only means by which the
Government's 2010 and 2016 objectives can be achieved. There is
no obvious reason why these targets will be delivered within a
competitive retail market".
A recent energywatch report shows that suppliers
are currently spending 0.11% of their combined £24
billion turnover on social tariffs and bill rebates—the
measures that offer direct assistance with the cost of energy
to fuel poor households. The measures currently available only
reach the equivalent of 1 in 15 fuel poor energy accounts. If
energy suppliers fulfil their White Paper commitments the proportion
of industry turnover invested in social tariffs and rebates will
increase to 0.25%.
What's the point?
BERR has identified one lever to dampen price
rises for those in or at risk of fuel poverty—the power
to require social tariffs. It has chosen not to use that lever.
Since government challenged suppliers, through the Energy White
Paper, to do more to help their low income consumers, one company
has declared that it will launch a social tariff. Little else
has happened. On what evidence has BERR based its decision not
to take the power to require companies to develop social tariffs?
What percentage reduction to the price of energy needs to be made
for the 2010 target to be met?
22 January 2008
| 
