Memorandum submitted by energywatch
BUSINESS AND ENTERPRISE COMMITTEE: INQUIRY
INTO POSSIBLE ANTI-COMPETITIVE BEHAVIOUR IN THE ENERGY MARKETS
EXECUTIVE SUMMARY
1. energywatch welcomes the Business and
Enterprise Committee inquiry into possible anti-competitive behaviour
of the energy markets. Our response focuses on the fuel poverty
and competition elements of the terms of reference.
Fuel poverty
2. To mitigate the impact of punitive prices
on fuel poor households, Government must take the powers necessary
to oblige suppliers to offer social tariffs in accordance with
minimum standards. Standards should include a stipulation that
a supplier's social tariff represents a rate lower than any other
rate available to its other customers, regardless of the eligible
customer's payment method.
3. To address the inequities faced by prepayment
meter consumers:
BERR to take steps to abolish prepayment
premiums that are shown to be non-legitimate and inefficient.
Ofgem to reinstate obligation on
suppliers to provide annual statements to prepayment meter consumers
and to specify that these provide pricing transparency, including:
comparison of cost with other payment methods offered by supplier
and breakdown of component costs that underpin the differential.
The statement should also offer a comparison with competitors'
prepayment meter terms.
"Health warning" on till
receipts at charging points such as shops and post offices, which
state that prepayment meter is most expensive payment method,
unless supplier can demonstrate otherwise.
A condition of doorstep acquisition
of prepayment meter consumers should be that the acquiring supplier
guarantees in the contract a better per unit deal at time of acquisition
than their current supplier offers.
Priority given to prepayment meter
consumers in smart meter roll out.
Provide greater access for prepayment
meter consumers to switch through price comparison services.
Competition
4. energywatch believes there are reasonable
grounds for suspecting that a feature, or combination of features,
prevents, restricts or distorts competition in the GB energy market.
We believe the threshold set under the Enterprise Act 2002 for
the Secretary of State for Business, Enterprise and Regulatory
Reform or Ofgem to refer the GB energy market to the Competition
Commission (CC) has been met.
5. energywatch recommends that the GB energy
market be referred to the CC without delay for a full and
independent investigation. The CC is the only body with the necessary
powers, competence and resources to:
Demand access to the relevant
commercially sensitive and confidential information held by market
participants.
Investigate the extent to
which any feature or combination of features prevents, distorts
or restricts competition in the GB energy market.
Determine whether any feature
or combination of features of the GB energy market has an adverse
effect on competition.
Quantify the level of detriment
to gas and electricity consumers in GB created by higher prices,
lower quality, less choice or less innovation.
Decide what remedies need
to be put in place to ensure that the GB energy markets are competitive
and can function efficiently and effectively.
6. energywatch believes that consumers have
been and continue to be detrimentally affected by the lack of
effective competition in the GB energy markets. We are concerned
that:
Consumers pay prices above the competitive
level putting affordable energy beyond the reach of many households.
An estimated half a million households
have been put into fuel poverty as a direct result of the price
increases in 2008 alone.
The near doubling of average domestic
energy bills since 2003 has been mirrored in a 100% increase in
the number of vulnerable households in fuel poverty.
Prepayment meter consumers pay up
to £456 more per year for their energy than consumers paying
by online direct debit.
Small businesses are frequently locked
in to higher priced contracts.
Business consumers' international
competitiveness has deteriorated.
Production has fallen contributing
to over 100,000 manufacturing job losses.
Investment has been cut back and
investor confidence is now under threat.
Lack of supplier and generator/production
diversity negatively impacts innovation, delivery of the environmental
and carbon agenda and security of supply.
Customer service levels are deteriorating
rather than improving with consumer contacts with energywatch
increasing by nearly 50% between 2004-05 and 2007-08.
7. energywatch believes the key features
of the GB energy market that need investigation by the CC are:
The supply markets are highly concentrated
and consumers are vulnerable to abuse of market power. The regional
supply markets are dominated by two suppliers with British Gas
and the incumbent electricity suppliers controlling at least 60%
of each of the domestic supply markets.
The electricity market is dominated
by six vertically integrated firms inhibiting competition in the
retail and wholesale markets.
Firms adopt similar supply and trading
policies reducing wholesale market liquidity and leaving consumers
vulnerable to abuse of dominance.
There has been no scale new entry
in the 10 years since liberalisation due to high barriers to entry
including credit policies, complex industry codes and information
transparency. This can negatively impact prices, quality, choice
and innovation.
There is a lack of strategic storage
inhibiting our ability to store summer priced gas as an alternative
to high priced gas during winter.
Where other measures are considered
insufficient, separation of vertically integrated firms through
divestment of plant or function.
8. energywatch believes there are remedies
that the CC could put in place to help ensure there is effective
competition in the GB energy markets including:
Requirements for firms to trade minimum
gas and electricity volumes through the "over the counter"
markets to enhance liquidity and address concerns about the move
towards long term "off market" contracting and self
supply.
Enhanced reporting and disclosure
requirements for firms to aid transparency and price discovery.
Greater transparency on gas flows
from Europe and the North Sea including flows from outside of
our current jurisdiction.
Creating incentives for investment
in strategic storage to ensure GB can benefit from access to lower
priced gas.
Measures to reduce search and switching
costs for consumers particularly for domestic consumers paying
by prepayment meter and small businesses.
OUTLINE
9. This paper sets out why energywatch believes
there are reasonable grounds for suspecting that competition is
not working effectively in the GB energy markets, most clearly
evidenced in the electricity market. It outlines the features
of the market we believe need to be investigated in a full and
independent market investigation by the CC.
10. In preparing our submission, we have
reviewed in detail the experience of two groups of consumers who
face particular problems in the energy marketsprepayment
meter consumers and small businesses. We have analysed retail
and wholesale prices in GB and undertaken comparative analysis
of prices across Europe. We have also tested our concerns about
the lack of effective competition in the GB energy markets and
the need for a CC investigation with academics, industry commentators
and market participants. We provide three energywatch commissioned
papers to support our submission:
Cornwall Energy Associates, Why
the British energy markets in gas and electricity require a competition
investigation, April 2008. Update of our 2007 analysis of
the aspects of the supply market that act against the best interests
of consumers and our 2004 review of competition in the business
market.
Dominic Whittome, Competition
Report on the GB Gas and Power Markets, March 2008. Analysis
of the uncompetitive aspects of the wholesale markets drawing
on almost 50 interviews with market participants and other interested
parties.
Dr Philip Marsden (British Institute
of International and Comparative Law), It is time for an Energy
Market Investigation by the Competition Commission, April
2008. Analysis of recent CC investigations and the role of the
CC.
BACKGROUND
11. energywatch is the statutory independent
watchdog representing gas and electricity consumers in GB. We
help domestic and business consumers with their complaints against
energy companies, provide them with advice and information about
the market and act as an advocate for their interests to energy
companies, government and regulators.
INTRODUCTION
12. GB energy markets are failing to meet
the needs of GB consumers. We have seen energy bills double over
the past five years yet service levels have deteriorated rather
than improved. Prices are not determined on the basis of effective
competition and there is distrust in the way prices are set.[79]
We are continually told that we have the most competitive market
in Europe yet our electricity prices remain amongst the highest
in Europe. Some of our most vulnerable consumers are not able
to access the cheapest tariffs in the market as they pay by prepayment
meter. The price increases we have seen this year alone mean an
estimated extra half a million households are now in fuel poverty.
Small businesses find themselves locked into higher priced contracts
due to complex contractual arrangements and business consumers
more generally are concerned about their lack of choice due to
the low number and type of contract offers. Our international
competitiveness has deteriorated and we have seen significant
job losses.
13. energywatch believes there are reasonable
grounds for suspecting that competition is not working effectively
in the GB energy market. This undermines consumer confidence and
creates consumer detriment. energywatch recommends that the GB
energy market be referred to the CC for a full and independent
investigation.[80]
A CC market investigation is necessary to unpick the complexities
of the structure and competitiveness of the GB energy market that
previous reviews, probes and investigations by the regulator and
others have failed to do. The CC can put in place the remedies
necessary to help ensure GB consumers benefit from effectively
functioning and competitive energy markets.
14. energywatch supports markets with fair
and healthy competition combined with protections for consumers
who are vulnerable or have little chance of influencing a market's
competitiveness or a supplier's willingness to trade fairly. We
believe vigorous competition should drive firms to deliver higher
quality, increased choice, greater innovation and lower prices
to the benefit of all consumers. Consumers need to be confident
that they are and will be well served by the market. Confident,
informed and empowered consumers are a critical driver of economic
change. We believe significant reform is required to ensure that
prices are determined on the basis of effective competition.
COMPETITION COMMISSION
15. The CC helps ensure healthy competition
between companies for the benefit of companies, consumers and
the economy. We believe the CC is the only body with the necessary
powers, competence[81]
and resources to undertake a full and independent review of the
GB energy market. The CC can[82]:
Demand access to the relevant
commercially sensitive and confidential information held by market
participants.
Investigate whether any feature
or combination of features prevents, distorts or restricts competition
in the GB energy market.
Determine whether any feature
or combination of features of the GB energy market has an adverse
effect on competition.
Quantify the level of gas
and electricity consumer detriment in GB created by higher prices,
lower quality, less choice or less innovation.
Consider whether competition
is restricted due, in part, to limited ability or incentive for
consumers to search or switch between suppliers.
Decide what remedies need
to be put in place to ensure that the GB energy markets are competitive
and can function efficiently and effectively.
FEATURES
16. We set out below the key features of
the GB energy markets that we believe are a concern and need investigation
by the CC.
Consolidation, concentration and market shares
17. We have seen considerable consolidation
in the GB energy markets since liberalisation. There has been
no scale new entry and 20 suppliers[83]
have exited the market since 2000 so there are now effectively
six dominant firms. These firms are vertically integrated, control
over 99% of the domestic supply markets, dominate the business
supply markets[84]
and own six of the nine power generators. There is a real threat
of further consolidation and vertical integration.
18. On a national level, the combined domestic
gas and electricity supply markets are highly concentrated with
a Herfindahl-Hirschman Index (HHI),[85]
the most commonly accepted measure of market concentration, of
nearly 2,000. Looking more closely at competition across consumer
groups, we see even greater levels of concentration. The domestic
gas retail market has an HHI of around 2,800. The regional domestic
electricity markets are dominated by two firmsBGT and the
incumbent electricity firmand have HHIs in the range of
2,500 to 6,500. Research suggests that electricity suppliers who
remained vertically integrated with their local distributor have
retained a higher market share than those where these functions
have been undertaken by separately owned companies.[86]
19. These levels of concentration suggest
the six dominant firms have considerable market power. Where this
is exercised, the prices charged to consumers will be above the
competitive level. We believe the CC should investigate the extent
to which consumers have paid higher prices as part of a market
investigation.
Prices
20. Domestic gas and electricity bills have
risen by 109% and 70% in the past five years.[87]
These increases equate to a combined average bill in excess of
£1,000[88]
meaning affordable energy is beyond the reach of many households.
This year alone the six dominant firms have increased domestic
prices by up to 15% for electricity and 17% for gas putting an
estimated half a million households into fuel poverty.
21. The spread in prices varies across payment
methods. For example there is only a £26 annual differencea
mere 50 pence per weekin the prices the dominant firms
charge for dual fuel paid by direct debit but £107 by prepayment
meter. The difference in price between payment types is significant.
Prepayment meter consumers can pay up to £456 more[89]
for their energy compared to consumers paying by online direct
debit.
22. It is often stated that the GB energy
market is the most competitive market in the EU.[90]
The expectation is that energy prices should be lower in GB than
in the rest of the EU. However, domestic electricity prices in
GB excluding tax are not the most competitive in Europe and are
amongst the most expensive.[91]
Business consumers have been hit by even more significant price
increases than domestic consumers as contract rates offered by
suppliers are more closely related to forward market prices. This
has had a detrimental impact on their international competitiveness
putting investor confidence at risk.
23. energywatch recognises there is upward
pressure on prices from the delivery of the environmental and
carbon agenda, this makes it all the more important for the wholesale
and retail elements of our energy bills to be competitive.
Coordinated effects
24. Given certain market conditions firms
may realise that it is in their mutual best interest to "cease
to compete" and sustain high prices today rather than face
the threat of fierce competition tomorrow. If this behaviour is
maintained without explicit agreement then the resulting impact
on competition is called "coordinated effects".[92]
25. energywatch considers that the conditions
necessary for coordinated effects to emerge and be sustainable
are present in the GB energy market.[93]
This means the market is susceptible to abuse of dominance and
consumers will pay more than the competitive level for their energy.
An analysis of the domestic supply markets suggests:
Awareness of competitor behaviour:
there is a high degree of market concentration so firms are aware
of each others actions. Prices are transparentcontract
terms including price are available on demand under the supply
licences and there are a range of price comparison services where
firms can readily access comparative price information.
Costly to deviate from prevailing
market behaviour: it is in a supplier's interest to act in
a similar way to competitors. Prices charged to domestic consumers
can change quickly so any deviation from the prevailing market
behaviour can be punished. The prevailing strategy in the domestic
supply markets appears to be "risk minimisation" in
that the dominant firms seek to be neither significantly better
nor significantly worse than their competitors.
Weak competitive constraints:
there has been no new scale entry and there is no evidence of
a "competitive fringe" influencing behaviour of the
dominant firms. It is not clear that the dominant firms actively
compete across all consumer groups and regions. For example no
supplier has ever actively marketed to consumers in Scotland with
dynamic teleswitching and some suppliers do not allow consumers
paying by prepayment meter to switch through price comparison
services. With respect to the business supply market, business
consumers tend to have only two or three contract offers to choose
from.
26. The CC would need to undertake a more
detailed analysis of the existence and effects of coordinated
behaviour in the domestic supply and wider GB energy markets.
Switching
27. Though energywatch does all it can to
encourage switching, we believe it is a gross error to view switching
as hugely successful and many consumers who have switched have
ended up paying more. After 10 years of liberalisation around
50% of consumers have never switched and this increases to 65%
for consumers over the age of 60.
28. The regulator has argued there has been
considerable switching and this is direct evidence of competition.
We do not agree that switching is a sufficiently good barometer
for healthy competition and is not a theoretically sound basis
for a regulator to determine whether there is effective competition.
29. There have always been problems with
the switching data as it can be inflated by involuntary and mis-selling
transfers and fails to identify multiple switchers. Switching
to new entrants appears to have been moderate and tends to reflect
the introduction of dual fuel offers. Some consumers are unable
to switch due to debt blocking,[94]
others state they are very unlikely to switch[95]
and some state that they will never switch.[96]
Further survey evidence shows[97]
that switching is often ill-advised and consumers have ended up
on a worse deal.
30. Search and switching costs are a particular
problem for prepayment meter consumers and for small businesses
due to the application of complex contractual arrangements by
suppliers, a lack of clarity on terms and conditions and a lack
of comparative price and service information.
Elasticity of demand
31. Gas and electricity are "necessity
goods" and consumers have little choice other than to use
energy as and when they require it. In general, the demand for
energy might be considered relatively inelastic, the quantity
of energy demanded does not change significantly with a change
in the price.[98]
There is a low cross elasticity of consumption between fuelsthere
are effectively no substitutes. It is unlikely that a domestic
consumer would change from gas to electricity for heating particularly
as gas accounts for 40% of electricity production and would require
considerable investment by the consumer. It is unlikely that consumers
could survive without electricity and still function in the modern
world. Energy is also essential to the day to day functioning
of the vast majority of businesses, even if it is not a key input
into making a good or delivering a service. These factors make
consumers particularly vulnerable to dominant firms being able
to extract monopoly rent.
Vertical integration
32. energywatch notes there may be economic
rationale for vertical integration. However, it must also be recognised
that vertical integration can have a negative impact on supply
competition and inhibit the development of effective and healthy
wholesale markets. The detrimental effects of vertical integration
flow from the likelihood that a vertical structure will empower
firms to behave in ways that may be damaging to competition.
Monopoly profits: it can allow
firms to extract monopoly profits from the market as a result
of control throughout the supply chain.
Cross subsidy: it can facilitate
cross subsidy between the generation and supply business and between
different groups of consumers.
Price discrimination: a vertically
integrated firm can offer different prices for the same product
even when the generation costs are basically the same.
Barrier to entry: a vertically
integrated firm can deter new entrants by effectively increasing
the costs of entry throughout the supply chain.
Vertical foreclosure: a vertically
integrated firm can limit the supply of wholesale products and
reduce liquidity in the wholesale markets.
33. Despite repeated concerns being raised
with the regulator,[99]
it has failed to undertake any open or comprehensive review of
the effects of vertical integration on the GB energy markets and
consumers.
34. Through a market investigation, the
CC can demand access to the relevant commercially sensitive and
confidential information that would allow it to determine whether
vertical integration has had an adverse effect on supply and wholesale
competition and to quantify any associated detriment to non-vertically
integrated firms and consumers.
Liquidity
35. energywatch believes the failings of
the GB energy market can be most clearly seen in the wholesale
markets. Diminished wholesale market liquidity can seriously affect
the retail markets.
36. There has been a shift away from trading
through the "over the counter" GB wholesale markets,
particularly in electricity, in favour of "off market"
contracts. There is a lack of visibility about these contracts
and there is no transparency of the terms and conditions for other
market participants. A lack of transparency will benefit the incumbents
and undermine new entrants.[100]
We have seen reduced liquidity in the wholesale markets and this
has had a detrimental impact on price discovery. Illiquid markets,
where there is limited trading and price is formed on the basis
of a few or even a single transaction, are usually considered
to be volatile and do not necessarily reflect the true market
value.
37. Volumes that are being traded in electricity
appear to be heavily skewed to shorter durations, particularly
in the front quarter or season. The volume traded is only three
times physical consumptionconsiderably below the ten times
level said to evidence a healthy market and means liquidity is
significantly less that markets such as Germany and the Netherlands
that have deregulated more recently. Entrants advise that there
is a mismatch between the wholesale products on offer and the
volume and shape they require to meet the needs of their customers.
There are few independent counter-parties to trade with and where
there are volumes, the integrated players insist that monies are
posted in advance because they say they are concerned with the
credit status of small players in volatile markets. The dominant
firms reference the forward market when changing consumer prices
yet they are not exposed to these prices for significant volumes
as they are vertically integrated. There is no transparency of
transfer prices.
38. The wholesale gas market is considered
to be more liquid than the electricity wholesale market. However,
a significant proportion of gas is subject to long term contracts
and the remaining 30% is primarily traded in the run up to delivery
rather than months or seasons ahead.[101]
Forward curve prices are therefore based on limited trading activity
and may not be a robust indicator of future costs.
39. The regulator often presents prices
from the wholesale forward curves to be representative of supplier
costs despite the dominant firms being vertically integrated and
without having analysed transfer prices or the impact of reduced
liquidity in the wholesale markets.
40. Through a market investigation, the
CC can demand information from firms about their trading strategies
and obtain copies of their long term contracts under which the
majority of gas and electricity are bought and sold to determine
whether these have constrained new entry. The CC can also access
information about their actual costs of supply to determine whether
consumers have and continue to pay more than the competitive level.
Cash-out
41. energywatch believes there is an urgent
problem with the cash-out arrangements that needs to be remedied.
Market participants have compared the risk of exposure to penal
cash-out prices to "playing russian roulette"in
that it may be possible for a smaller player to manage exposure
to prices in five games out of six but it is the prices in that
one game in six that can undermine the business and could lead
to a firm exiting the market.
42. The imbalance settlement or cash-out
arrangements are an important part of the wholesale trading arrangements.
Problems with cash-out rules harm consumers who are ultimately
exposed to the costs resulting from higher wholesale prices, contract
risk premia and use of system charges. The dual cash-out arrangements
are complex and can act as a barrier to entry particularly where
they produce artificially high or volatile cash-out prices. They
also make it difficult for new firms to invest in technology to
help deliver the environmental and carbon agenda.[102]
43. The regulator has stated there `is a
proven defect with the current [cash-out] arrangements, namely
"system pollution".[103]
energywatch is concerned about the level of detriment consumers
have borne and will continue to bear from defective cash-out arrangements.[104]
It is unclear whether the changes to industry codes that are currently
being progressed will address all non-energy actions which may
be detrimentally influencing cash-out prices, for example ability
to influence prices behind a constraint in certain periods.
44. These arrangements would benefit from
an independent investigation by the CC. The CC would be able to
determine the extent to which complex market rules constrain new
entry and quantify any associated detriment to consumers.
Storage
45. We have relatively low levels of gas
storage capacity compared to European peers.[105]
Investment in GB storage is expected to double capacity by 2015.
However, investment appears to be more geared towards small and
medium range storage rather than long range storage. Long range
storage allows for low priced gas (typically in the summer in
GB) to be injected to provide an alternative source to high priced
gas (typically in winter in GB) particularly during periods of
unexpectedly high demand. Long range storage should be viewed
as an asset that can be used to capture volumes of gas at lower
prices as well as better ensuring supply continuity in more testing
times.
46. Given our increasing dependence on gas
imports and storage, it is important to ensure that the third
party access provisions cannot be used to limit market opportunities
for other firms and create a barrier to entry. Further, it is
important to ensure there is greater transparency of information
on flows from Europe and the North Sea including flows from outside
of our current jurisdiction.
47. As part of a market investigation, the
CC could identify real barriers to investment, review the need
to create incentives to invest in strategic storage and consider
the potential for market rules on access to storage to create
a barrier to entry.
CONCLUSIONS AND
RECOMMENDATIONS
Fuel poverty
48. To mitigate the impact of punitive prices
on fuel poor households, Government must take the powers necessary
to oblige suppliers to offer social tariffs in accordance with
minimum standards. Standards should include a stipulation that
a supplier's social tariff represents a rate lower than any other
rate available to its other customers, regardless of the eligible
customer's payment method.
49. To address the inequities faced by prepayment
meter consumers:
BERR to take steps to abolish prepayment
premiums that are shown to be non-legitimate and inefficient.
Ofgem to reinstate obligation on
suppliers to provide annual statements to prepayment meter consumers
and to specify that these provide pricing transparency, including:
comparison of cost with other payment methods offered by supplier
and breakdown of component costs that underpin the differential.
The statement should also offer a comparison with competitors'
prepayment meter terms.
"Health warning" on till
receipts at charging points such as shops and post offices, which
state that prepayment meter is most expensive payment method,
unless supplier can demonstrate otherwise.
A condition of doorstep acquisition
of prepayment meter consumers should be that the acquiring supplier
guarantees in the contract a better per unit deal at time of acquisition
than their current supplier offers.
Priority given to prepayment meter
consumers in smart meter roll out.
Provide greater access for prepayment
meter consumers to switch through price comparison services.
Competition
50. energywatch considers the threshold
set by the Enterprise Act 2002 for the Secretary of State for
Business, Enterprise and Regulatory Reform or Ofgem to refer the
GB energy market to the CC for investigation has been met. We
believe there are reasonable grounds for suspecting that a feature,
or combination of features prevents, restricts or distorts competition
in the GB energy market. energywatch recommends the GB energy
market be referred to the CC for a full and independent market
investigation without delay.
51. The CC can investigate and determine
whether any feature or combination of features of the GB energy
market has an adverse effect on competition. The CC can also determine
what action should be taken to remedy, mitigate or prevent adverse
effects on competition or any detrimental effect on consumers.
energywatch proposes that consideration be given to:
Mandatory trading: firms to
trade a defined level of output through the over the counter wholesale
markets to enhance liquidity.
Regulatory reporting requirements:
firms to submit information to the regulator on purchase costs
to ensure only efficient cost pass through.
Disclosure requirements: firms
to publish trading data including prices and segmented financial
and operating data about their electricity and gas production
and retailing operations to aid price discovery.
Simplifying market rules and entry
requirements: a fundamental make-over of the market rules
(including cash-out and third party access) to ensure smaller
and low carbon operators can access markets and consumers fairly.
Information transparency:
greater transparency of information on gas flows from Europe and
the North Sea.
Investment incentives: creation
of investment incentives for long term strategic storage.
Reduced search and switching costs:
introduction of standard terms and conditions and a confidence
code for price comparison services for small businesses.
Market monitoring: regular
business market monitoring by the regulator.
Price controls: reintroduction
of supply price controls for certain consumer groups if alternative
measures are unsuccessful.
Separation of vertically integrated
firms: if other measures are considered insufficient divestment
of plant or function.
Annex A
PROGRESS IN REDUCING FUEL POVERTY AND THE
APPROPRIATE POLICY INSTRUMENTS FOR DOING SO
1. The Warm Homes and Energy Conservation
Act (2000) obliged the UK Government to publish and implement
a strategy for reducing fuel poverty and to set targets for
the implementation of that strategy. The resultant UK Fuel Poverty
Strategy saw the Government set itself binding deadlines for the
eradication of fuel poverty in all vulnerable households by 2010;
and in all remaining households by 2016.
WHAT IS
FUEL POVERTY?
2. Fuel poverty arises when three factorspoorly
insulated energy inefficient dwellings with sub-optimal heating
systems, low disposable household income and the price of fuelconspire
to put thermal comfort beyond the reach of the household affected.
3. The UK Fuel Poverty Strategy classifies
households as fuel poor if they would need to spend in excess
of 10% of household income to maintain a satisfactory heating
regime.[106]
For some fuel poor households the cost of warmth can rise to 20,
30 or even 40% of income. For many low-income households, spending
10% of their income on heating remains an aspiration.
4. The lived reality of fuel poverty is
cold, damp homes and the human manifestation of fuel poverty is
respiratory illness, depression and heart disease, increased risk
of strokes and other cold-related ill health; all of which contribute
to the UK's high rate of excess winter deaths.
PRICE AND
THE UK FUEL
POVERTY STRATEGY
5. The UK Fuel Poverty Strategy recognised
that if it were to achieve its stated targets, actions to address
the three causal factors of fuel poverty would be required. Most
significantly for this inquiry, a key pillar of the Strategy was
built on "continuing action to maintain a downward pressure
on fuel bills, ensuring fair treatment for the less well off,
and supporting the development of energy industry initiatives
to combat fuel poverty".
HIGH PRICES
HAVE SINGLE-HANDEDLY
UNDERMINED THE
STRATEGY
6. Since 2003 the escalating cost of domestic
gas and electricity has single-handedly undermined the progress
that was being made towards meeting the Government's targets.
The reality of competition thereafter has seen suppliers chasing
competitors' prices ever upwards. The collapse of the Strategy's
price focused pillar has left a debilitating policy vacuum at
a time when action on the actual price that fuel poor households
are paying for their gas and electricity is essential. However,
Government have declined to take decisive steps to ensure fuel
poor households can access energy at the most affordable prices
in the market; relying instead on repeated appeals to suppliers
to volunteer assistance.
THE REALITY
OF HIGH
PRICES FOR
LOW-INCOME
CONSUMERS
7. energywatch research published in December
2005[107]
found that:
most consumers perceive their energy
bills to be rising rapidly and feel that this is having an impact
on their household finances;
organising their finances to be able
to spend enough to stay warm is the top priority for most consumers
of all ages and income levels, although this may not always be
achieved; and
consumers on low incomes will cut
back their expenditure in other areas and budget for their gas
and electricity use in order to maintain some level of warmth.
8. More recent research has shown that price
increases in the period since have exacerbated the situation further.
In 2006 the not-for-profit Home Heat Helpline, the supplier sponsored
advice line, published research on the difficulties that single
parents experienced with the cost of energy. This revealed that
three quarters (73%) of the single parents polled admitted they
set their heating at a lower temperature to save money. Over half
(55%) also said they heat only selected rooms to reduce their
bills.[108]
9. A survey published by Help the Aged in
November 2007[109]
established that:
One fifth of elderly people spend
their winters in one room to reduce heating costs.
2.2 million have turned off their
central heating.
1 million cut back on food expenditure
in order pay heating bills.
10. Similarly, research undertaken for energywatch
in 2007 found that almost a fifth (18%) of energy consumers say
they currently find it difficult to pay their energy bills. This
figure rises to 28% of consumers with an income under £11,500.
COMPETITION LOSERS
11. The competitive energy market has shown
itself to be ill-equipped to recognise and serve the needs of
low-income consumers. They are frequently expected to pay more
for the gas and electricity they use and are disproportionately
affected by the industry's more negligent practices, such as debt
arising from late token meter recalibration.
PREPAYMENT METERS
12. Prepayment meters (PPMs) present the
most vivid example of punitive and discriminatory pricing policies
in the energy market. There is a strong correlation between the
use of prepayment meters and low-income; and when fuel poverty
is measured on the "basic income" definition[110]
Government data shows that around a third of the fuel poor pay
for their electricity through a PPM. This consumer segment live
on a budget, are forced to budget their energy use, yet are left
paying the market's premium prices. Where a consumer is using
a PPM for both gas and electricity they will on average pay £255
more per annum than a consumer using direct debit, online only
tariffs.
13. energywatch analysis has shown that
three of the six major suppliers do not accept PPM consumers seeking
to switch to them via price comparison sites and in some instances
will seek to vet PPM users wishing to switch. Agreements between
the other three suppliers and price comparison sites to facilitate
PPM switching are limited. This means that this highly promoted
and commonly used route to market is closed in great part to PPM
users. These practices suggest further discrimination against
this consumer segment and limits their options to door step sales
agents or suppliers' call centres, which can both present additional
problems.
14. The accelerating trend of suppliers
installing PPMs to recover debt means that close to 1 million
PPM users (c 1 in 6) are effectively chained to both their current
supplier and this punitive payment method. On average 1,000 prepayment
meters per day were installed to recover debt in 2007.
LIMITATIONS OF
SWITCHING
15. Ofgem's 2007 review of suppliers' voluntary
initiatives[111]
restated its view "that competition is the most effective
way to ensure customers are protected from high prices".
Such an outlook is at odds with the experience of the 2 million
plus households that have become fuel poor as a direct result
of escalating energy bills.
16. This view is also at odds with the Sustainable
Development Commission which concluded that switching supplier
"is not a particularly helpful or appropriate method of reducing
low-income household fuel bills and that more proactive steps
need to be taken to protect low income and vulnerable consumers".[112]
Interestingly, the view appears to be increasingly at odds with
recent statements by Energy Minister, Malcolm Wicks:
If people are concerned that they are being
charged too much, considering switching is very important, but
I think that I know enough about this subject to recognise that
switching is easier said than done for some of the most vulnerable
people, particularly if there is a record of debt payments.[113]
17. In a number of instances switching can
provide a saving and hence play a role in making energy more affordable.
energywatch has pioneered projects to actively help low-income
consumers make the switch to a better deal wherever that is possible.
However, these projects have given energywatch unique first-hand
experience about the realities of switching for low-income and
vulnerable groups. It has taught us that switching is at best
only a partial answer and that in some cases it's not the answer
at all. Switching to a more advantageous deal is not as straightforward
as its most enthusiastic champions advocate. When the factors
that may hinder the process of switching for vulnerable and low-income
consumers are taken into account, the picture becomes even more
complicated. A paper that discusses the difficulties vulnerable
and low-income consumers can face in switching is attached at
Appendix 1.
18. Analysis has highlighted the difficulties
that low-income and vulnerable consumers can face: Switching
is most prevalent among higher social groups, particularly the
professional and managerial ABs. Some of the groups least likely
to switch are the state-supported social group E, those aged 65+,
those in rented accommodation and PPM users.[114]
19. It must also be recognised that in a
high price environment where the average bill exceeds £1k
per annum,[115]
the least expensive deal does not equate with affordable energy
for those on low-fixed incomes. It is also somewhat academic to
point to the best deals in the market and use these as the basis
on which to calculate the savings that are available to low-income
consumers. Personal circumstances, financial exclusion, market
place exclusion and any combination thereof will mean that in
reality, the lowest priced offerinternet only direct debit
tariffsare beyond the reach of those consumers who would
benefit the most from them.
PROGRESS AGAINST
TARGETS
20. Between 1996 and 2001 when the Strategy
was published fuel poverty declined from around 7.5 million households
to 3.5 million. The introduction of initiatives heralded in the
Strategy contributed to continuing year on year reductions in
the years 2001-03, with the global UK figure declining further
to 2.75 million in 2002 and then to 2.5 million in 2003 (on the
basic income definition). Appendix two provides Government data
on trends in the level of fuel poverty.
21. In England reductions in fuel poverty
were attributed to the following[116]:
61% attributable to improvements
in incomes.
22% attributable to energy price
reductions.
17% attributable to energy efficiency
improvements.
22. This shows a benign price environment
prior to 2003 actually making a positive contribution to reductions
in fuel poverty, much as the Strategy had envisaged. However,
since 2003 escalating prices have outstripped income growth and
outpaced the rate at which energy efficiency and heating improvements
can be installed in fuel poor dwellings.
23. The Government's 2007 Annual Progress
Report on the UK Fuel Poverty Strategy concedes that its 2010
target to eradicate fuel poverty in vulnerable households will
not now be met and estimates that up to 1.3 million vulnerable
households will still be in fuel poverty in 2010.[117]
INSUFFICIENT GOVERNMENT
RESPONSE TO
IMPACT OF
ESCALATING PRICES
24. Significantly, the Energy White Paper
formally set out a challenge to suppliers to develop adequate
programmes of support, with the implication being that if this
did not happen, legislation could be used to ensure all suppliers
offered adequate programmes of support.[118]
25. Following the White Paper, energywatch
commissioned Cornwall Energy Associates to examine the adequacy
of those initiatives that directly related to the actual cost
of energy paid by fuel poor households, namely social tariffs
and bill rebates. This review was undertaken in line with the
methodology that BERR had indicated it would use to assess suppliers'
responses to the White Paper challenge. The findings of the report
exposed the great variability in suppliers' commitments:
The six major suppliers are currently
committing an estimated £28.1 millionor 0.11% of the
domestic supply industry's £24.6 billion turnoverto
social tariffs and bill rebates.
If and when suppliers fulfil the
commitments made to government, the industry will invest £62.5
million, or 0.25% of its estimated turnover, in social tariffs
and bill rebates.
For individual suppliers this ranges
from British Gas committing 0.49% of its turnover to a mere 0.079%
of turnover for npower and Scottish & Southern Energy.
British Gas has committed to making
assistance available to 4.7% of its consumer base, while for npower
and Scottish & Southern this figure is 0.79% and 0.34% respectively.
Only Scottish and Southern Energy
and EDF Energy offer social tariffs that cost less than the best
deal they offer in the open market.
The commitments made by British Gas
will equate to 71% of the total industry assistance offered, while
its market share represents just 33%; whereas npower has an 11%
market share but has a social package commitment that will represent
4% of the total.
26. energywatch estimate that if suppliers
fulfil the commitments they have made in light of the White Paper,
social tariffs will be available to, at best, only 1 in 6 fuel
poor energy accounts. A full summary of findings is presented
at Appendix 3.
27. Despite it being readily apparent that
the White Paper challenge has not forced sufficient progress from
suppliers, the Government has hesitated in obliging suppliers
to do more, passing up the clear opportunity to use the Energy
Bill to at least take the relevant reserve powers. However, increasing
pressure, has seen the Government use the Budget to lay down another
challenge to suppliers:
There is common agreement on the need to do
more. Energy companies currently spend around £50 million
a year on social tariffs; the Government would like to see that
figure rising over the period ahead to at least £150 million
a year. Acting with the companies and Ofgem, the Government will
draw up a plan for voluntary and statutory action to achieve that.
To underpin this as necessary, the Government will legislate to
require companies to make a fair contribution.[119]
28. Based on the expertise it has developed
on the role that effective social tariffs could play in mitigating
the impact of high prices on fuel poor households, it is the firm
view of energywatch that the Government has to now take the powers
necessary to oblige suppliers to offer social tariffs in accordance
with minimum standards. This would:
Provide a policy response to the
escalating prices and ensure that the Government's fuel poverty
strategy has an effective action in relation to the cost of energy
to fuel poor households.
Ensure fuel poor households have
access to the most affordably priced energy, thus mitigating the
detrimental impact of rising prices and discriminatory pricing.
Complement investment in and efforts
on raising incomes and the provision of energy efficiency and
heating measures; ensuring a more coherent approach to tackling
fuel poverty in the process. Energywatch has advocated that social
tariffs should be offered as an integral part of an energy assistance
package, which also comprises energy efficiency and benefit entitlement
elements.
29. Following a consultation exercise with
a range of stakeholders, energywatch last year published a comprehensive
set of recommendations which highlighted the minimum standards
required and how social tariffs could work with the grain of a
competitive market. A summary of these recommendations is provided
in a briefing paper at Appendix 4.
APPENDIX 1
VULNERABLE CONSUMERS AND SWITCHING
energywatch discussion paper for Ofgem
Social Action Strategy Review Group 12 December 2007
WHO IS
A VULNERABLE
CONSUMER?
Vulnerable consumers are not a homogenous unit.
There is a range of vulnerabilities thateither individually
or in combinationact as barriers to the consumer's engagement
with the energy market. Consequently, there is no one size fits
all strategy to stimulate switching. A range of tailored approaches
are required to promote and, more importantly, enable switching
amongst different vulnerable groups.
That said, one facet of vulnerability that frequently
occurs in combination with and exacerbates others in the energy
market context, is the need to survive on low or fixed incomes
and the distinct barriers that arise from this.
Ensuring low-income, vulnerable consumers can
identify and then successfully secure the greatest savings available
to them in the market can play an important role in reducing bills
in a high price energy environment. However, stimulating switching
amongst this segment remains a significant challenge. As the Ipsos
Mori Switching Rates for Vulnerable Consumers[120]
report for Ofgem noted earlier this year:
Switching is most prevalent among higher social
groups, particularly the professional and managerial ABs. Some
of the groups least likely to switch are the state-supported social
group E, those aged 65+, those in rented accommodation and PPM
users.
KEY ELEMENTS
TO EFFECTIVE
SWITCHING
Switching entails more than a simple transaction
between the consumer and the chosen supplier. In reality, for
a consumer to engage in an advantageous switch, the presence of
the key elements discussed below is required. The absence of any
of these will likely leave the consumer either locked out of the
market, or in a position where the deal they choose proves to
be less than advantageous (leaving the consumer disillusioned
by the process):
(1) An awareness and understanding that
the market in energy exists, that changing supplier is an option
in this market and that switching is potentially advantageous
to the consumer in terms of bill savings and/or improved customer
service; or can lead to a product that better reflects the consumer's
conscience (ie switching is to a green supplier).
Those close to the industry tend to take it for
granted that there is a universal awareness of this, but as the
work of energywatch's Priority Consumer Team with elderly consumers
last winter revealed, a number of consumers still believe they
are being supplied by the long defunct gas and electricity boards.
The Prepayment Meter Customer Workshop undertaken
for Ofgem by Mori earlier this year revealed a low-awareness amongst
PPM users of the premium they were paying:
Participants were shown evidence
that on average annually prepayment meter customers pay more than
direct debit, or occasionally standard credit customers. Many
participants were surprised by this. In fact, only 3 of 20 gas
PPM customers and 7 of 28 electricity PPM customers knew theirs
was not the cheapest method of paying; many simply did not know.[121]
(2) Once the awareness and understanding
of the energy market is in place, the consumer then has to display
a willingness/confidence to engage with that market, to
acquire appropriate information, calculate whether a better deal
is available and resolve and have sufficient confidence to act
on this information.
Brand awareness and familiarity appears to play
a key role in whether a consumer has the confidence to switch
or not, especially for elder consumers. For many, the comfort
zone may seem a rational place to stay. Many of those consumers
who turned to energywatch for assistance during its "Are
You Missing Out?" switching campaign last winter would have
realised the greatest savings by switching to Ebico. However,
because this brand is largely unknown, many consumers were unwilling
to opt for this supplier.
Frequent price changes can also inhibit confidence
in switchingespecially where the savings available are
less significant. They reinforce a common consumer perception
that although a supplier may appear to offer a good deal in the
present, that could well change in a fast moving price environment.
Brand awareness and familiarity and the perception
of changing prices also came through strongly in Mori's research
for Ofgem into the experiences of PPM users:
Still other participants are sceptical
about switching supplier because they do not have the information
to be able to discern between an energy deal that is good for
them and one that is not. For instance, participants say they
know the difference between the quality of a product from Asda
compared with Waitrose, but energy companies do not have a brand
personality or image that they know about or can relate to. So
in that sense, participants say they find it hard to compare the
benefit of choosing one supplier over another. There is also some
feeling that costs for suppliers are all much the same.
(3) Personal circumstances need to
be such that the consumer has the means to assess, obtain and
then utilise the deal most advantageous to them. This relates
to a range of abilities and capabilities being in place. These
include, but are not limited to:
The ability to deduce which offer is
in consumer's best interests from available information (ie reasonable
literacy and numeracy skills and a working understanding of English).
Financially "included": ie
a bank account with a direct debit facility that the consumer
has sufficient funds to use with confidence (ie no risk of unexpected
payment pushing consumer into overdraft territory), no debt to
previous supplier and a credit history that demonstrates "dependability"
to new supplier.
Ready access to the Internet and ability
to use it effectively: the internet represents the primary source
of information on which to make switching decisions and the gateway
to best value tariffs. Forthcoming energywatch research indicates
that only 11% of social class DE use the internet as a source
of switching related information.
(4) Availability of price and service information
on which to base switching decisions that is free of charge,
impartial, clear, accurate and easy to access. In addition, search
costs (accessing, processing and acting on the information) should
be minimalotherwise a consumer's willingness to switch
will be exhausted. The inability to switch through price comparison
websites, for example, will undoubtedly increase the search costs
faced by PPM users who seek a better deal.
(5) Routes to market/gateway to best tariffs
must be universally open to all consumers (ie not be a
filter device by which suppliers skim off more affluent consumers).
The experience of energywatch suggests that major
suppliers are discriminating against PPM consumers by refusing
to accept them via price comparison sites. This leaves this consumer
segment at the mercy of either aggressive doorstep sales agents
or suppliers' call centres, which as Mori's PPM research for Ofgem
also demonstrated, can put consumers off switching.
(6) A commitment from suppliers to
facilitate the free, unimpeded movement of consumers in the market
(between payment methods and tariffs and between suppliers).
The experience of PPM consumers suggests that
this is not always the case. The debt assignment protocol has
not worked, price comparison sites are closed doors to PPM consumers,
and suppliers can be resistant to recruiting PPM consumers in
certain regions (especially token meter consumers). This suggests
a dearth of contestability in the PPM market, which in turn shields
suppliers from competitive pressures on pricing in this arena
and makes the stasis of the status quo a commercially attractive
proposition. As a result PPM users are left captive to the resultant
price premiums and with limited "escape" routes available
to them.
It is also clear that supplier innovation has
focused on developing online direct debit tariffs that deliver
lower cost energy to more affluent consumers. This has left those
consumers who are living on the tightest budgets and are compelled
by circumstances to budget energy expenditure through a PPM, as
the group least likely to enjoy access to what are effectively
the market's budget tariffs.
Without supplier commitment to the unimpeded
movement of consumers, any project to help low-income, vulnerable
consumers become effective switchers will struggle (and the premium
prices they pay will be maintained).
(7) An independent arbitrator for
consumers to turn to when attempts to switch stall; when consumers
are dissatisfied with the handling of the transfer; or when consumer
expectations on which the decision to switch was made are unmet.
WHAT CAN
MAKE SWITCHING
DIFFICULT FOR
VULNERABLE CONSUMERS?
Conclusions of University of East Anglia research[122]
on the switching decisions of electricity consumers found that
amongst consumers who had switched suppliers exclusively for price
reasons:
Only 8-19% of consumers switched to the firm
offering the highest surplus and, in aggregate, switching consumers
appropriated only between 28% and 51% of the maximum gains available
to them ...... (and) that 20-32% of switching consumers appear
to have lost surplus through their choice of supplier. These consumers
lost an average £14-35 per year in increased bills, apart
from any other switching costs they may have incurred.
This suggests that switching to a more advantageous
deal might not be as straightforward as its most enthusiastic
champions have advocated. When the factors that may hinder the
process of switching for vulnerable consumers are taken into account
the picture becomes even more complicated.
For vulnerable and low-income consumers some
or all of these key elements are frequently absent, effectively
meaning that they either remain locked out of the market or that
the switching process is short circuited. In particular, the absence
of the key abilities and capabilities listed under personal circumstances
can cause acute barriers to switching in general, and more so
in relation to accessing tariffs that offer the greatest savings.
THE WORK
OF ENERGYWATCH
ON SWITCHING
Over the last seven years energywatch has been
active in offering a range of services and undertaking a range
of activities that have helped empower consumers to successfully
attain a better deal in the energy marketplace:
Campaigns such as the Energy Smart initiative
undertaken jointly with Ofgem have raised consumer awareness of
the competitive energy market, the right to switch and the potential
benefits that can accrue from participation in the market.
Through its media and publicity activity energywatch
has consistently raised consumer awareness of the energy market
and, with considerable effect, has not shied away from pinpointing
overpriced, underperforming suppliers that consumers should leave
behind.
energywatch has also provided consumers with
a source of accessible and impartial pricing information on which
switching decisions can be based. It has also introduced the Confidence
Code, to reassure consumers when using accredited price comparison
sites. Both are discussed in further detail below.
energywatch has also been effective in the role
of independent arbitrator. At the micro-level it has resolved
individual consumer grievances that have arisen from the switching
experience. At the macro-level energywatch has taken the evidence
presented by its caseload to stamp out the root causes of the
barriers that have deterred effective switchingdoorstep
mis-selling and erroneous transfers being two high profile examples.
This in turn has helped increase consumer confidence to switch
and forced suppliers to address a number, if not yet all, of their
practices that have impeded effective switching.
PRICING INFORMATION
AND THE
ENERGYWATCH CONFIDENCE
CODE
energywatch's price comparison service has provided
an impartial facility for consumers to view and compare the different
prices on offer from electricity and gas suppliers. This service
has helped make consumers aware of their rights as energy users
and the choice of suppliers available to them.
The 28 factsheets, available from the energywatch
website and in hard copy, compare annual bills for the major suppliers
for three different energy usage levelslow, medium (average)
and high. There are guidelines which sit behind the factsheets
to ensure that suppliers featured are treated equally, and so
that prices are comparable.
In relation to external price comparison sites,
the energywatch Confidence Code is a set of nine requirements
that participating online price comparison services must meet
and which aim to ensure that consumers can fairly compare prices
from all major suppliers. The Code ensures accredited internet
price comparison sites deliver impartial, accurate and reliable
information to the millions of energy consumers looking to save
money by comparing and switching energy supplier. Although participation
is voluntary, there are currently twelve service providers that
have recognised the benefit of gaining accreditation. In order
to be compliant with the Confidence Code, sites participate in
a rigorous, independent audit process to ensure that consumers
can have confidence in the services they provide.
A recent survey conducted by YouGov for energywatch,
found that 60% of respondents advised that they had used price
comparison sites to check domestic gas/electricity prices. Overall,
79% of consumers said that they would be more confident using
a price comparison site endorsed by energywatch.
energywatch recently completed its review of
the first ten months of the Code's operation and carefully considered
all the points raised by the accredited service providers, consumers,
suppliers and other interested parties during this time. energywatch
proposed that further modifications were needed to the Confidence
Code and Code Guidance, to ensure that it remained relevant, robust
and transparent in today's market. The results and decision paper
are nearing publication.
HELPING VULNERABLE
CONSUMERS
The initiatives listed above have undoubtedly
assisted the generality of consumers. However, from the outset
energywatch has been conscious of the challenge posed in reaching
and assisting low-income, vulnerable consumers. This segment of
consumers has been the least likely to approach energywatch for
assistance, either for advice, or for help when things have gone
wrong.
energywatch originally sought to overcome this
by taking advice and information to the consumer through broad
reach out activities which delivered generic messages to vulnerable
groups. This approach was necessarily constrained in the number
of consumers it could reach. Its use of targeting was limited
and the approach fell short of offering bespoke messages and services
tailored to the specific vulnerable groups encountered.
It became clear that this approach was only
partially successful in accessing those consumers who most needed
our help. It was also clear that the reach out activities were
not capturing the experiences of low-income vulnerable consumers
in a systematic way that would enable us to change the way we
worked to help them more effectively.
After a reassessment of its strategy for vulnerable
and low-income consumers, energywatch introduced its Priority
Consumer Team in 2005. This team has, in a short space of time,
made significant headway in developing successful pathways to
a range of vulnerable, low-income consumers. The team's approach
has been based on developing strong partnerships with a wide range
of trusted intermediaries who, through their core activities,
have access to and a dialogue with otherwise hard to reach consumers.
Through their partnership with the Priority Consumer Team these
agencies are able to bolt on an energy dimension to their core
work and in doing so take the message to those consumers who would
not normally reach energywatch. The intermediaries have then been
able to link vulnerable consumers back to energywatch where assistance
is required. The Priority Consumer Team have then been able to
offer a holistic service by, in addition to delivering its own
service, linking upwards to those agencies who are able to offer
further relevant assistance: typically Eaga, the DWP/Pensions
Service, and in a number of instances suppliers' voluntary initiatives.
The Priority Consumer Team registered approximately
5,000 people for free services via their supplier between April
2006 and March 2007. Approximately 8,000 vulnerable consumers
received direct support by being referred on for energy grants
and funding support, energy audits and benefit checks.
HELPING VULNERABLE
CONSUMERS SWITCH
EFFECTIVELY
Last year (2006), in face-to-face interviews
around the country, the Priority Consumer Team identified many
older consumers on basic state pensions who could not afford to
heat and power their homes, but were reluctant to switch energy
supplier. Some of these consumers were paying too much for their
energy and a number had a very low-awareness of the energy market.
It was also apparent that older people mistrusted supplier information
and were left confused by pricing information.
In response, energywatch's Priority Consumer
Team devised a switching service to encourage older people to
participate in the energy market that could deliver bespoke information.
Its "Are You Missing Out?" campaign provided older people
and their families with a hotline to call and speak to a member
of the Priority Consumer Team. The campaign was promoted through
local media and partner agencies. Once consumers made contact
the team sourced the best possible deals based on actual consumption.
After looking at every tariff to see where savings could be made
and wrote to the consumer setting out the top three savings. This
allowed the consumer to make an informed choice, based on independent
information, in their own time. If the consumer was already with
the cheapest supplier the team looked at other ways they could
save energy. In addition to providing a pathway by which low-income
older consumers could participate in the energy market, this campaign
was invaluable in generating strategic intelligence which energywatch
has used to highlight the barriers that low-income consumers can
face when looking to switch.
Headline figures from the "Are You Missing
Out?" campaign include:
Close to 1,400 price comparisons
were conducted, highlighting average annual savings of £115.15.
238 consumers transferred, achieving
an average annual saving of £177.28.
198 consumers were already on the
cheapest deal, with the cheapest supplier.
936 of consumers could save money
by changing either their tariff or supplier with an average saving
of £139.50.
The range of savings highlighted
was £4-£974.
KEY FINDINGS
AND RECOMMENDATIONS
FROM THE
"ARE YOU
MISSING OUT?"
INCLUDED
Likelihood to switch increases in line with
potential savings:
Of the consumers for whom it was
identified that savings of £51-£100 were possible (the
majority of consumers who contacted the Priority Consumer Team)there
was a 21.7% transfer rate.
Within the £251-£300 saving
bracket there was a 36.8% transfer rate.
Within the £451-£600 saving
bracket there was a 50% transfer rate.
The campaign proved extremely time and resource
intensive, leaving the Priority Consumer Team struggling to maintain
its targeted response time (not least after a brief mention of
the campaign in a national newspaper caused an unexpected wave
of calls). It is likely that resultant delays in providing the
bespoke information will have eroded the willingness of consumers
affected to engage further in the process.
Key to providing a bespoke price comparison
service is cooperation from consumers' current suppliers in providing
historical meter readings. The team spent a disproportionate amount
of time trying to source this information, despite suppliers being
made aware in advance of the campaign that this would be required.
The team was successful though in agreeing a referral pathway
with SSE which enabled it to obtain necessary information by email.
Unfortunately, despite requesting a similar referral pathway with
other suppliers this did not materialise.
Internet Access: the majority of consumers contacting
the team did not have internet access, or were not comfortable
in accessing online accounts which offered the best deal.
PREPARING FOR
THE POST-ENERGYWATCH
WORLD
energywatch continues to push for its successor
body, the new National Consumer Council, to carry forward and
build upon a number of these initiatives and also to adopt the
Priority Consumer Team. Despite this pressure and also negotiations
with a range of agencies, it remains unclear which bodies will
pick up where energywatch will leave off. This has a number of
ramifications that will need to be resolved in the coming 10 months:
(1) Related energywatch initiatives could
potentially be dispersed across different agenciesnone
of which will have the clear remit (or equivalent resource) energywatch
has had for undertaking work of this nature.
(2) Resource intensive initiatives may be
scaled back or dropped.
(3) Consumers seeking arbitration in relation
to switching grievances will have no clear path of advice or redress.
(4) Partnerships established by the Priority
Consumer Team that have been successful in reaching hard to reach
low-income, vulnerable consumers could lose the energy dimension.
(5) The already limited support available
to encourage and assist vulnerable consumers in their engagement
with the energy market will be eroded.
(6) The continuous and close scrutiny of
suppliers' behaviours in relation to switching will diminish.
WIDER ISSUES
As the headline figures from the "Are You
Missing Out?" campaign have shown, even with intensive, bespoke
advice and the availability of energywatch support, only around
1 in 6 vulnerable consumers (primarily low-income elderly consumers
in this instance) switched supplier. Although this ratio appears
to increase as the savings on offer become greater, half of those
who could have realised a saving in excess of £450 still
chose not to even attempt switching supplier. This poses some
fundamental questions on what else, short of forced switching,
can be done.
As stated earlier, the crucial role played by
personal circumstances and the consumer's abilities and capabilities
therein (and the limitations these place upon a consumer's ability
to access better tariffs) should make us cautious about simplistic
assumptions that switching to the best deal is an option available
to all vulnerable consumers. Scratching below the surface can
reveal fundamental underlying problems that either need to be
addressed before the consumer is in a position to switch to a
more advantageous deal; or are entrenched to the point that the
vulnerable consumer is unlikely to ever be able to switch to the
deals that are theoretically available to them.
Also, if we are serious about including vulnerable,
low-income consumers in the energy market, and increasing the
proportion of this segment that switch to more advantageous deals,
the market itself must offer products that are more responsive
and amenable to the circumstances of this segment. It must:
(1) Offer payment methods that reflect the
needs of low-income, vulnerable consumers to budget without charging
the penalty premium that PPMs currently attract. Options could
include a weekly direct debit system, priority access to smart
metering for PPM users, and looking at new "stored value"
technologies and the potential these have for enabling some low-income,
vulnerable consumers to manage their accounts using mobile telephones.
(2) See a genuine commitment from suppliers
to permit the free movement of consumers in the energy market.
This would require full cooperation with those agencies that are
helping vulnerable consumers access the best deals and a willingness
to share historical consumption data with those agencies.
In this respect, there is also a clear need to
develop an effective, straightforward mechanism that can replace
the Byzantine and ineffectual debt assignment protocol.
(3) Ensure switching gatewaysprimarily
the price comparison websitesare available for use by all
consumers, including PPM users. They should not act as a filter
by which suppliers can skim off more affluent consumers.
APPENDIX 2
TRENDS IN THE LEVEL OF FUEL POVERTY
HISTORIC AND PROJECTED NUMBERS OF HOUSEHOLDS
IN FUEL POVERTY IN ENGLAND, 1996-2016

Source: DTI, 2007.
Positions in 2005 and 2006 are based
on the modelling of the impact of income, energy prices movements
and energy efficiency measures on the number of vulnerable households
in fuel poverty.
Positions from 2007 to 2016 are based
on modelling and show central, low and high price scenarios. These
are based on the fossil-fuel price assumptions published at the
same time as the White Paper.
Source: UK Government
Energy White Paper, May 2007
http://www.berr.gov.uk/energy/whitepaper/page39534.html
NUMBER OF HOUSEHOLDS IN FUEL POVERTY IN THE
UK, 1996-2005

Source: 5th Annual Progress
Report 2007
http://www.berr.gov.uk/files/file42720.pdf
NUMBER OF HOUSEHOLDS IN FUEL POVERTY (MILLIONS)
| 1996 |
1998* | 2001 | 2002*
| 2003 | 2004 |
2005 |
England | 5.1 | 3.4
| 1.7 | 1.4 | 1.2
| 1.2 | 1.5 |
| (5.5) | (4.0)
| (2.3) | (2.0) | (1.5)
| (1.5) | (1.8) |
Scotland | 0.7 |
| | 0.3 | 0.4
| 0.4 | |
| |
| | |
| | |
Northern | |
| 0.2 |
| | 0.2 |
|
Ireland | |
| | |
| | |
UK | About 6½ |
About 4¾ | About 2½ |
About 2¼ | About 2 | Aboput 2
| About 2½ |
Estimate | (7½) | (5¾)
| (3½) | (2¾) | (2½)
| (2½) | (3) |
Figures in brackets do not include Housing Benefit/ISMI as part
of income
* Figures for England in 1998 and 2002 are estimates based
on movements in energy prices, incomes and energy efficiency
Source: Fuel Poverty MonitoringIndicators 2007
http://www.berr.gov.uk/files/file42702.pdf
APPENDIX 3
SUMMARY OF CORNWALL ENERGY ASSOCIATES' REPORT ON THE PROPORTIONALITY
OF SUPPLIERS' SOCIAL TARIFFS
The Energy White Paper challenged the big six energy suppliers
to offer adequate and proportionate programmes of assistance to
those in most need. To assess suppliers' responses to this challenge,
energywatch commissioned Cornwall Energy Associates to independently
examine whether the commitments they have made are proportionate
and adequate when compared against each other. Cornwall Associates
have found that the industry's contribution to social tariffs
represents a sub-zero percentage of turnover and that commitment
and investment varies significantly at the supplier level. A copy
of the full report is available at:
www.energywatch.org.uk/uploads/Proportionality_of_suppliers_social_tariffs_13_January_2008.pdf
This review has deliberately focused only on those initiatives
that have a direct impact on the cost of gas and electricity to
fuel poor consumerssocial tariffs and bill rebates. It
therefore excludes trust funds, benefit entitlement checks etc,
but it should be noted that the suppliers who come out well in
this report also perform well in comparisons of these additional
programmes.
The methodology used by the consultants reflects the measures
that BERR are likely to use in assessing suppliers' responses
to the Energy White Paperprimarily the cost to the supplier
as a proportion of turnover, cost per meter supplied by the company,
and the benefit to the recipient relative to suppliers' open market
tariffs. Using these metrics ensures that the comparisons between
supplier and the gulf in performance that results is not merely
a reflection of market share. As you will see, this approach has
been effective in revealing the disparity between those who do
most and those who do least.
The report's key findings are presented below:
ANALYSIS OF
CURRENT SOCIAL
TARIFF AND
REBATE OFFERINGS
COMBINED SHOWS
THAT:
The supply industry as a whole commits 0.11% of its estimated
£24.6 billion turnover to social tariffs and rebates. At
the supplier level this ranges from British Gas committing 0.18%
of turnover to its Essentials social tariff to RWE npower committing
less than 0.003% of turnover to its First Step social tariff (prior
to its new rebate and the widening of its First Step social tariff
becoming available).
When the "costs" to the companies are divided by
all the gas and electricity accounts they serve (described as
"cost £/meters" supplied in the tables) this ranges
from £1.04 for British Gas down to £0.02 for RWE npower.
The average benefit to gas and electricity social tariff
recipients (excluding rebates) ranges from £181 per annum
(gas and electricity) for Scottish & Southern's Energyplus
Care to £98 for British Gas's Essentials. Although E.ON UK's
Staywarm arrangement comes in at £424, the report was unable
to make direct comparisons with the other social tariffs and highlights
where further information is required from E.ON UK in relation
to Staywarm.
The coverage of tariffs and rebates expressed as a proportion
of each supplier's customer base ranges from 1.74% for British
Gas to 0.04% for RWE npower (again, E.ON UK is highest at 2.28%,
but this is skewed by the 160k recipients of its £10 Age
Concern Cold Weather Payment).
ANALYSIS OF
SOCIAL TARIFF
AND REBATE
OFFERINGS IF
AND WHEN
SUPPLIERS FULFIL
THE COMMITMENTS
MADE FOLLOWING
THE ENERGY
WHITE PAPER
SHOWS THAT:
In response to the Energy White Paper, suppliers have committed
to increasing the availability of social tariffs. If suppliers
manage to achieve these targets then the commitment of the supply
industry as a whole will increase to 0.25% of its estimated £24.6
billion turnover. The increase will be mirrored at the supplier
level if suppliers fulfil their commitments, but with a gulf remaining
in the proportion of turnover each supplier commits to these initiatives.
If targets are fulfilled British Gas will be committing 0.49%
of its turnover to its Essentials social tariff, while RWE npower
and Scottish and Southern Energy will be committing just 0.07%
of their respective turnover to their tariffs and rebates.
When the "costs" to the company are divided by
all the gas and electricity accounts they supply then British
Gas will be contributing at £2.77 per customer account reducing
to £0.32 for RWE npower and £0.31 for Scottish and Southern
Energy.
In terms of benefit to social tariff recipients (excluding
rebates), the range remains the same, but will include the introduction
of Scottish Power's social tariff at £109.28
The number of recipients of tariffs and rebates expressed
as a proportion of each supplier's customer base increases with
a range running from 4.67% for British Gas to just 0.34% for Scottish
and Southern Energy if and when all commitments are fulfilled.
If the commitment each supplier has demonstrated is measured
against their respective market share the disparity that exists
is further emphasised:
| Current
| | Target |
|
|
Market
Share
| Social
Package
commitment
|
Market
Share | Social
Package
commitment
|
British Gas | 33% | 59%
| 33% | 71% |
EDF Energy | 11% | 13%
| 11% | 6% |
RWE npower | 14% | 0%
| 14% | 4% |
E.ON UK | 16% | 21%
| 16% | 10% |
Scottish and Southern Energy | 16%
| 1% | 16% | 6%
|
Scottish Power | 11% | 5%
| 11% | 4% |
Total | 100% | 100%
| 100% | 100% |
| |
| | |
PERFORMANCE AGAINST
BERR'S MAY
BENCHMARK
BERR have indicated that they will review supplier performance
against the averages in place at May 2007 when the White Paper
was published. The energywatch review shows that on the key measures
analysed, both RWE npower and Scottish and Southern Energy remain
below the benchmark. (NB: since the report was finalised RWE npower
has indicated at its recent price rise that it will increase the
value of its Spreading Warmth rebate, but by the same token British
Gas has recently announced it will offer a new £90 rebate
to c.25k customers).
The report considers what the world would look like if underperforming
suppliers met this benchmark and forecasts that it would result
in an additional commitment of between £3 million and £3.68
million depending on the measure used. It also forecasts that
if the other five suppliers matched British Gas in offering assistance
to 4.67% of their customer base this could result in a doubling
of the number of accounts (not households) eligible for social
tariffsfrom the current combined target of 930k to 2.29
million. If all suppliers at least match the May 2007 average
the number would increase to 1.37 million accounts (energywatch
estimate that 4 million fuel poor households translates as 6.4
million energy accounts, taking account of an estimate of the
number of fuel poor without access to gas).
APPENDIX 4
ENERGYWATCH BRIEFING ON SOCIAL TARIFFS JANUARY 2008
CONTEXT
The accelerating cost of energy since 2003 means that social
tariffs have an urgent and essential role to play in helping address
the impact of high prices on low-income households. Price rises
are solely responsible for the reversal of progress towards the
Government's fuel poverty targets. The limitations and disparities
of the current approach to providing social tariffsreliant
on pressuring suppliers to develop products voluntarily, as part
of their corporate social responsibility activityare now
clear and the government must use the Energy Bill to require suppliers
to offer social tariffs in accordance with minimum standards.
SOCIAL TARIFFS
WOULD BOLSTER
THE UK FUEL
POVERTY STRATEGY
The government's 2001 UK Fuel Poverty Strategy was built
on three pillars, each of which sought to address the three factors
that conspire to cause fuel poverty: energy inefficient homes
with sub-optimal heating systems, the low level of income on which
the fuel poor subside, and the cost of energy to fuel poor consumers.
The pillar reliant on "continuing action to maintain the
downward pressure on fuel bills"[123]
has long since crumbled. As Malcolm Wicks felt it reasonable to
predict in 2007: "the era of cheap energy has gone for
ever".[124]
Price increases have outstripped income growth and outpaced
the rate at which energy efficiency and heating improvements can
be installed. The net effect has been an increase in fuel poverty,
with the 2007 Energy White Paper observing that UK fuel poverty
was back at the 4 million household markdouble the 2004
figure and a return to pre-Strategy levels.
THE PROBLEM(S)
WITH A
VOLUNTARY APPROACH
TO SOCIAL
TARIFF PROVISION
The lack of any framework or guiding principles on what constitutes
a meaningful social tariff has resulted in a situation where,
despite reference to "social tariffs" becoming a staple
in the narrative of stakeholders, suppliers have been free to
appropriate the term as they see fit and apply it to a divergent
range of tariff offers. Research has shown that a number of currently
available products see recipients of "social tariffs"
actually paying more than the open market tariffs available to
other, more affluent consumers with the same supplier in most
cases.
energywatch is concerned that the status quo is riddled with
inconsistency: inconsistency in the nature of assistance offered,
inconsistency in the level and quality of assistance offered,
inconsistency in entitlement, and inconsistency in the length
of time for which the product is available to recipients.
Concerns of this nature are not limited to the "fuel
poverty lobby"both EDFE, British Gas and RWE npower
have expressed similar views:
British Gas will review its Essentials tariff model in
March 2009. In the meantime it will be seeking agreement with
other suppliers and stakeholders for industry-wide introduction
of social tariffs to broadly common standards which would allow
social tariff customers the same choice in the market as other
customers.
British Gas press release, 08.02.07
There should be a common industry approach to offering
assistance to the fuel poor. This would bring benefits such as
clarity to consumers, particularly vulnerable ones, and also to
those assessing the effectiveness of social programmes. In addition,
it would create a level playing field which all suppliers would
compete equally within this market segment.
We believe that after establishing the agreed definition,
scale and structure, all suppliers should be required to participate
in the scheme. Having led the industry in offering a social tariff
we are disappointed that all industry colleagues have not followed
suit, indicating that the competitive market needs adjusting.
Levels of benefit available, and eligibility for benefits
should be defined by Government.
EDFE response to energywatch social tariff consultation,
January 2007
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.
RWE npower response to Ofgem's Five Year Strategy, September
2007
THE ENERGY
WHITE PAPER
AND OFGEM'S
REVIEW OF
SUPPLIERS' INITIATIVES
The Energy White Paper[125]
noted the commitment that certain suppliers had demonstrated in
relation to assisting their fuel poor consumers. Significantly,
it also challenged suppliers who had done little in this respect
to develop adequate programmes of support, with the implication
being that if this did not happen, legislation could be used to
ensure all suppliers offered adequate programmes of support. This
challenge has been effective in driving differing degrees of improvement
from suppliers (most notably ScottishPower's U-turn on social
tariffs). The White Paper also tasked Ofgem with evaluating and
comparing suppliers' voluntary measures.
The subsequent Ofgem review declined to rank the quality
of suppliers' initiatives, to declare which suppliers are offering
proportional assistance, to highlight best practice, or to examine
the effectiveness of each initiative. Also, despite the intention
expressed in the Energy White Paperthat Ofgem would evaluate
each company's Corporate Social Responsibility measures to see
exactly how these compare, drawing attention to the most effective
initiatives and highlighting where improvements are neededthe
Regulator has neither drawn attention to the most effective initiatives
nor highlighted where improvements are needed. This lack of differentiation
has granted it the space to underplay the gulf in performance
and in so doing present the voluntary approach as an effective
response.
Ofgem's review also advocated competition as the best way
to ensure fuel-poor consumers are protected from high prices.
Interestingly, the Sustainable Development Commission's recent
report (Lost in TransmissionThe role of Ofgem in a changing
climate) concluded that switching supplier "is not
a particularly helpful or appropriate method of reducing low-income
household fuel bills and that more proactive steps need to be
taken to protect low income and vulnerable consumers".
The barriers to this consumer segment switchingfrequently
lack of access to direct debit and the internetare well
established.
Reliance on the voluntary approach also carries an inherent
risk of "backsliding", either where suppliers renege
completely on commitmentsespecially if rising wholesale
prices put the bite on voluntary initiatives; or where the best
scale back their activities, causing a levelling down rather than
the desired levelling up.
The frustrations voiced by British Gas and EDFE, both of
whom have declared they will review their own activities, the
disparities in supplier commitment highlighted by energywatch's
own work, and that the status quo hands a competitive advantage
to those who do least, all point to a strong likelihood of backsliding
unless the government intervene to level up the performance of
those suppliers who do least.
THE ENERGYWATCH
VIEW (AND
REVIEW)
Because Ofgem's review failed to bring the disparities between
supplier performance and the resultant lack of proportionality
to the fore, energywatch commissioned Cornwall Energy Associates
to examine the adequacy of each supplier's social tariffs and
whether these were proportional when compared to each other. This
review was undertaken in line with the methodology that BERR is
likely to use. The Cornwall report exposes the pronounced gulf
between what suppliers are committed to offering meaningful assistance
and reinforces the case for the Secretary of State taking powers
in the Energy Bill.
This report has shown that if energy suppliers fulfil the
commitments made to government, the industry will invest 0.25%
of its estimated turnover in social tariffs and rebatesthe
initiatives that offer direct assistance with the cost of energy
to fuel poor households. For individual suppliers this ranges
from British Gas committing 0.49% of its turnover to a mere 0.079%
of turnover for npower and Scottish & Southern Energy. British
Gas is committed to making assistance available to 4.7% of its
consumer base, while for npower and Scottish & Southern this
figure is 0.79% and 0.34% respectively. The commitments made by
British Gas will equate to 71% of the total industry assistance
offered, while its market share represents just 33%; whereas npower
has an 11% market share but has a social package commitment that
will represent 4% of the total.
BERR has indicated that its own assessment will examine whether
suppliers' social package are at or above the average in May 2007
when the White Paper was published. Energywatch's findings are
that npower and Scottish & Southern (who offer a generous
social tariff, but on a very limited scale) remain below even
this level. If all suppliers met at least this average, social
tariffs and rebates would be available to the equivalent of 1
in 5 fuel poor accounts. If suppliers matched the commitment shown
by British Gas this figure would rise to 1 in 3.
A copy of the full analysis is available at:
www.energywatch.org.uk/uploads/Proportionality_o_suppliers_social_tariffs_13_January2008.pdf
ENERGYWATCH RECOMMENDATIONS:
MINIMUM STANDARDS
FOR MAXIMUM
IMPACT
energywatch advocates that the Secretary of State takes powers
in the Energy Bill that will enable him to require suppliers to
offer social tariffs in accordance with minimum standards. This
will preserve the momentum created by the Energy White Paper challenge
and even out the divergence in suppliers' commitments. Social
tariffs represent the clearest way of addressing the Fuel Poverty
Strategy's failure in relation to pressure on prices and, if mandatory,
will ensure that all suppliers make affordable energy available
to a significant number of those consumers for whom the high cost
of energy has presented the greatest challenge.
Valid concerns exist over whether social tariffs can be accurately
targeted and the extent to which they would distort the market.
The accurate targeting of any non-universal welfare mechanism
is difficult, but that does not mean it is impossible. As the
more progressive energy suppliers are demonstrating, there are
ways and means of identifying and reaching households in most
need. The White Paper's commitment to facilitate data sharing
with the DWP will undoubtedly refine this process further.
In relation to market distortion, if the social tariff is
indexed at a set rate against each supplier's open market rates
(Scottish & Southern Energy's 20% against the recipient's
existing tariff, for example) and made available on a scale that
is relative to a supplier's market share this should not be an
issue as the obligation will fall fairly across all suppliers
and reflect their overall competitive position.
The social tariff model that energywatch has recommended
would be built on, but not limited by, minimum standards. Our
proposals go with the grain of competition rather than work against
it, with the use of targets on suppliers forcing them to compete
for a group of consumers that have hitherto been largely excluded
from the market. Targets would also ensure that no supplier is
unduly disadvantaged by such an obligation.
Social tariffs offered in isolation will not eradicate fuel
poverty and neither should they be expected to do so. That is
why the proposals put forth by energywatch would see social tariffs
form an integral part of an Energy Assistance Package, with the
package creating the vehicle for ensuring that the three underlying
causes of fuel poverty are tackled.
A full copy of the energywatch report and recommendations
on social tariffsA Social Responsibility?is
available at:
http://www.energywatch.org.uk/uploads/A_Social_Responsibility_the_energywatch_consultation_on_
the_nature_of_social_tariffs_in_the_energy_market_report_and_recommendations_9_May_20071.pdf
Annex B
MARKET SHARES AND CONCENTRATION
Not printed here.
Annex C
LESSONS FROM CC INVESTIGATIONS AND CASE LAW
PURPOSE
This annex considers:
the findings of two key merger control judgements
by the Court of First Instance relating to collective dominance;
the CC's investigations of coordinated effects
and consumer detriment; and
the application of these cases and investigations
to the GB energy markets.
CASE LAW
ANALYSIS OF
COLLECTIVE DOMINANCE
The Airtours v Commission judgement identified three conditions
necessary to establish collective dominance (see paragraph 62):
Knowledge of others adopting the common strategy:
Each member of the dominant oligopoly must have the ability to
know how the other members are behaving in order to monitor whether
or not they are adopting a common policy. It is not enough for
each member of the dominant oligopoly to be aware that interdependent
market conduct is profitable for all of them but each member must
also have a means of knowing whether the other operators are adopting
the same strategy and whether they are maintaining it. There must
be sufficient market transparency for all members of the dominant
oligopoly to be aware, sufficiently precisely and quickly, of
the way in which the other members' market conduct is evolving.
Incentive to maintain the common strategy:
The situation of tacit coordination must be sustainable over time.
There must be an incentive not to depart from the common policy
on the market. It is only if all the members of the dominant oligopoly
maintain the parallel conduct that all can benefit. For a situation
of collective dominance to be viable, there must be adequate deterrents
to ensure that there is a long term incentive in not departing
from the common policy. Each member of the dominant oligopoly
must be aware that highly competitive action on its part designed
to increase its market share would provoke identical action by
others, so that it would derive no benefit from its initiative.
Inability of competitors to jeopardise the
outcome of the common strategy: The foreseeable reaction of
current and future competitors, as well as of consumers, will
not jeopardise the results from the common policy.
The Impala v Commission (Case T-464/04) judgement appears
to lower the test for proving collective dominance (see paragraphs
251 and 252) by stating that:
Collective dominance may be established indirectly:
In certain circumstances, collective dominance may be established
indirectly on the basis of what may be a very mixed series of
indicia and items of evidence relating to the signs, manifestations
and phenomena inherent in the presence of a collective dominant
position.
Collective dominance may be demonstrated through
pricing data: Close alignment of prices over a long period,
especially if they are above a competitive level, together with
other factors typical of a collective dominant position might,
in the absence of alternative reasonable explanation suffice to
demonstrate the existence of a collective dominant position, even
where there is no firm direct evidence of strong market transparency,
as such transparency may be presumed in such circumstances.
MARKET INVESTIGATION
INFORMATION GATHERING
The Competition Commission procedures[126]
highlight that information gathering, analysis and validation
is a key part of the investigation. The CC requires access to
detailed information regarding the companies and markets in question
to make its statutory decisions on the competition and remedies
questions. The CC collects information in a variety of ways including:
Letters and questionnaires to the main parties
in an investigation and sometime to third parties.
Press notices, advertisements and website requesting
information.
Publicly available sources of information.
Surveys can be commissioned to provide evidence
about a particular market.
Visits to the main parties to gain a first-hand
experience of the workings of the company and industry in question.
Commissioning of expert advice.
Hearings with the parties.
MARKET INVESTIGATION
ANALYSIS OF
COORDINATED EFFECTS
The Competition Commission provisional findings report on
the supply of groceries in the UK considers the three conditions
necessary for coordinated effects to emerge and be sustainable
(see paragraph 33 and Section 7 of the provisional findings and
paragraphs 3.53 to 3.73 of the Competition Commission guidelines
on market investigation references):
Awareness of competitors' behaviour: The
market is sufficiently concentrated for firms to be aware of the
behaviour of their competitors, and for any significant deviation
from the prevailing behaviour of a firm to be observed by other
firms in the market. Where prices are transparent any deviation
from the prevailing behaviour will be clear.
Costly to deviate from prevailing market behaviour:
It must be clear that the consequences of deviating from the prevailing
market behaviour would be costly and the threat of future price
cuts provides a punishment mechanism for a "cheating"
firm. It will be in a firm's interest to go along with the prevailing
market behaviour rather than seek to deviate from it. In many
cases, the mere fact of the interdependence and hence strong likelihood
of a matching price cut may be enough to create a disincentive.
Weak competitive constraints: The competitive
constraints resulting from the actions of non-coordinating firms
are weak and would not jeopardize the expected outcome of coordination.
A low barrier to entry, a strong competitive fringe and countervailing
buyer power might all serve to disrupt coordinated behaviour.
The extent to which fringe firms act as a competitive constraint
will in part depend on the number and size of fringe companies,
their cost and profit margin and their scope to expand output
in relation to their current level and the output of the core
oligipolists.
With respect to possible coordination strategies, the Competition
Commission noted in its provisional findings that (Section 7):
Coordination is more likely to emerge if competitors
have similar views of what actions would make coordination work:
for example, setting prices around a focal point.
Retailers could, in principle, seek to coordinate
on large numbers of the products.
In practice, coordinated action over a vast number
of prices would be difficult to achieve.
A coordination strategy that might potentially
be easier to implement would be to focus coordination on a subset
of products.
With reference to the supply of groceries in the UK, the
Competition Commission notes that (see paragraph 34 to 37 and
Section 8):
There is evidence that suppliers facilitate the
exchange of information on retail prices charged by rival retailers.
Given the presence of the necessary conditions for co-ordination
in grocery retailing, we consider that this exchange of information
on retail prices would assist retailers in establishing terms
of tacit coordination on a small number of products.
There is a trend of consolidation among upstream
intermediaries in milk and other sectors, particularly in fresh
produce. Further consolidation may be a cause for concern if it
means that coordination is more likely to emerge in other product
categories.
While there is no direct evidence of tacit coordination
at present, we are concerned that, given the structure of the
grocery retailing market, such behaviour could occur in the future.
The Competition Commission provisionally found that a combination
of one or more features prevent, restrict or distort competition
in certain local markets for the supply of groceries (see paragraphs
47 to 49 and Sections 5, 6 and 9):
A significant number of local markets have high
levels of concentration and these high levels of concentration
have persisted over a number of years.
The control of land in highly-concentrated local
markets by incumbent retailers acts as a barrier to entry, by
limiting entrants' access to potential sites for new stores.
The Competition Commission also found (see paragraph 50 and
Section 9) that the exercise of buyer power by certain grocery
retailers and symbol groups with respect to their suppliers of
groceries, through the adoption of supply chain practices that
transfer excessive risks and unexpected costs to those suppliers,
is a feature of the markets for the supply of groceries by all
grocery stores, which prevents, restricts or distorts competition
in connection with the acquisition of groceries by those grocery
retailers and symbol groups.
Application to the GB energy markets
Table 1 considers whether the conditions necessary for facilitating
coordinated effects may be present in the GB energy market with
particular reference to the domestic gas and electricity retail
markets.
Table 1
HIGH LEVEL COORDINATED EFFECTS ANALYSIS
Condition | Analysis
|
Awareness of competitors' behaviour | Firms are well aware of their competitors' behaviour.
Products essentially homogenous and there is a high level of interaction.
The domestic gas and electricity retail markets are highly concentrated with six firms supplying more than 99% of the market.
Supply licence condition 22.7 states "If a person requests a copy of any form of Domestic Supply Contract that the licensee may offer under paragraph 22.2, the licensee must send a copy of that form of contract to that person within a reasonable period of time after receiving the request". Supply licence condition 22.4(b)(i) requires a Domestic Supply Contract to identify the charge for the supply of gas or electricity and the charge for any other good or service to be provided.
There are a number of price comparison services that allow users to compare prices across suppliers quickly and easily. There are also a number of firms that provide pricing databases and analysis.
Suppliers issue press releases announcing changes in prices and there is considerable media coverage concerning price.
|
Costly to deviate from prevailing market behaviour
| Suppliers are aware that it is in their interests to act in a similar way.
Five of the main six suppliers increased their prices in January or February 2008. Headline price increases for domestic consumers ranged from 12.9 to 17.2% for gas and 7.9% to 15% for electricity. The remaining supplier increased its prices in April 2008 by up to 15.8% for gas and 14.2% for electricity. Charts 1 and 2 show movements in gas and electricity prices across the last five years.
Price differentials vary across tariffs. There is a £13 annual difference in the dual fuel direct debit offering of five of the main six suppliersthis is equivalent to 25p per week. There is only a £26 annual difference across the six suppliers equivalent to 50p a week.
Energy prices can change quickly so that suppliers not complying with prevailing market behaviour can be punished.
|
Weak competitive constraints | No scale new entryentrants control less than 1% of the domestic supply market.
The domestic gas and electricity markets have been characterised by supplier exit rather than entry so entry does not provide competitive constraint.
Suppliers appear to be seeking to move together within a short period of time of each other and in parallel. This is a kind of "risk minimisation strategy" where they do not seek to be particularly better or worse than their competitors.
There does not appear to be any strong competitive constraint that impacts the strategy adopted by the dominant six suppliers.
|
| |
Chart 1
CUMULATIVE INCREASES IN DOMESTIC GAS PRICES 2003 TO 2008

Source: energywatch analysis of suppliers headline price
increases as reported in the press
Chart 2
CUMULATIVE INCREASES IN DOMESTIC ELECTRICITY PRICES 2003
TO 2008

Source: energywatch analysis of suppliers headline price
increases as reported in the press
energywatch considers that the conditions necessary for coordinated
effects to emerge and be sustainable are present in the domestic
gas and electricity supply market. This means the market is susceptible
to abuse of dominance and consumers will pay more than the competitive
level for their energy. The CC would be able to undertake a more
detailed analysis of coordinated effects in the domestic supply
and wider GB energy market as part of a market investigation.
MARKET INVESTIGATION
ANALYSIS OF
CONSUMER DETRIMENT
Excessive prices
In Store Cards the OFT referred the supply of store card
services to the Competition Commission following its conclusion
that there are features of the sector, both in the supply of store
card credit to consumers and in the supply of store card services
to retailers, that appear to prevent, restrict or distort competition.[127]
In paragraph 1.13 of its report the OFT stated that "there
is insufficient competition to ensure that consumers get good
value from store cards and that such lack of competition may lead
to increased profits for retailers and store card providers".[128]
For the OFT then, the possible harm to consumers resulting from
the perceived lack of competition in this sector revolved around
the concept of value for money. The idea of "good value"
brings to mind the definition of an "unfair price" in
the case United Brands Co. v Commission; it concerns a price that
is "excessive in relation to the economic value of the product
supplied".[129]
In other words, the OFT formulated the possible consumer detriment
in this sector in terms of unfair or excessive prices for consumers.[130]
In its investigation the Competition Commission tried to quantify
this consumer detriment by comparing the prices actually paid
by cardholders who pay interest and insurance charges on store
cards with the prices they would have paid had these reflected
costs, including the cost of capital.[131]
Subsequent market investigation references submitted to the
Competition Commission have also concerned the impact of (weak)
competition on prices paid by consumers; see for example Supply
of Liquefied Petroleum Gas[132]
or Northern Ireland Banking.[133]
In the former case the OFT suspected that "the high switching
costs [between different gas companies in the market for the supply
of domestic bulk liquefied petroleum gas] may form a barrier to
entry, so that competition is restricted and many consumers face
higher prices overall than they would in a similar market without
switching costs".[134]
In the latter case, the OFT held that the conditions for a referral
were met as high levels of concentration, significant entry barriers,
price parallelism and consumer inertia appear together to result
in limited price competition and weak switching competition between
the big four banks in Northern Ireland.[135]
Both investigations are ongoing.
In Home Collected Credit[136]
the Competition Commission actually attempted to quantify the
overcharge suffered by customers in the relevant market; according
to the CC customers suffered from "substantial overcharging":
[overcharging] may have amounted to as much as £100
million a year over the last five years across the whole market,
which would imply that a home credit customer pays over £25
too much for an average loan, or £9 per £100 borrowed,
and that home credit lenders have been able to earn more than
£500 million in profits in excess of the cost of capital
in the last five years.[137]
This case thus highlights that the Competition Commission:
(i) considers overcharging as a form of consumer detriment; and
(ii) is willing to quantify the extent of the overcharge when
possible. Home Collected Credit also demonstrates that the CC
will consider the effects of weak competition on particular categories
of consumers as well as consumers in general. Indeed, on the facts
before it the Competition Commission expressed its belief that
the overcharge may have more of an effect on single mothers under
35:
Home credit customers were more likely than the population
as a whole to be female, to be under 35, to have young families,
to fall into socio-economic groups D and E, to live in a low-income
household and to live in housing rented from a local council or
housing association.[138]
Non-price factors
In Home Collected Credit signalled how the Competition Commission
will also consider different forms of consumer detriment where
relevant:
We shall determine whether any effect on advertisers or
users [ie consumers] in the form of higher prices, lower quality
or less choice of goods and services, or less innovation has resulted
from, or may be expected to result from, any adverse effects on
competition in the relevant market or markets.[139]
Indeed, if the Competition Commission decides that there
is an adverse effect on competition it must "take action
to `remedy, mitigate or prevent' the adverse effect on competition
and to `remedy, mitigate or prevent any detrimental effects on
customers' so far as those effects have resulted from the adverse
effect".[140]
By definition "any detrimental effects" must also include
those detrimental effects which cannot be classed solely as effects
on the prices paid by consumers.
In the provisional findings on the supply of groceries investigation,
the Competition Commission recommends a number of competition
policy solutions, including the introduction of a "competition
test" when local planning authorities are assessing planning
applications for new large grocery stores, and A requirement on
grocery retailers to lift existing exclusivity arrangements that
have been in place for more than five years, where these have
been identified as a barrier to entry by a competing retailer
in areas of high concentration. In addition, however, the Competition
Commission has recommended remedies that go beyond what competition
law itself could do: namely that the Department for Business,
Enterprise and Regulatory Reform amend the Land Agreements Exclusion
Order so that agreements which restrict grocery retailing should
no longer benefit from exclusion from the Competition Act.[141]
Application to the GB energy markets
energywatch considers some of the key features that led the
OFT to make recent market investigations references to the CC
are also evident in the GB energy market. Table 2 provides a high
level analysis of these features and some of the areas of consumer
detriment that the CC has considered in recent market investigations.
energywatch believes that these issues need further investigation
along with a quantification of the associated consumer detriment
as part of a GB energy market investigation by the CC. Although
energywatch has only limited information gathering powers, the
CC would be able to demand access to the all the relevant commercially
sensitive and confidential information held by market participants.
Table 2
HIGH LEVEL ANALYSIS OF CONSUMER DETRIMENT
Feature | Analysis
|
Unfair or excessive pricing | Prepayment meter consumers can pay up to £456 for their energy than a consumer paying by online direct debit. Ofgem has estimated that the additional cost to serve a prepayment meter is estimated to be no more than £85 although this was based on limited information. It is not clear that this estimate is based on efficiently incurred costs ie costs will be higher where is no incentive on the firm to become more efficient if it is confident that it will be able to recoup the cost from a captive consumer.
Firms reference increases in wholesale prices linked to the forward curve when increases retail prices. Forward prices are not a robust indicator of future costs as they are based on limited trading activity and the level of vertical integration means that the dominant firms are not exposed to these prices for significant volumes. There is no transparency of transfer prices.
|
High switching costs | Small business consumers face significant search and switching costs due to the application of complex contractual arrangements by suppliers, a lack of clarity on terms and conditions and a lack of comparative price and service information.
Survey evidence demonstrates that domestic consumers also face high switching costsamongst electricity consumers who had switched suppliers exclusively for price reasons only up to a fifth had switched to the supplier offering the greatest saving and up to one third had switched to deal that had left them worse off.
|
Consumer inertia | Survey evidence found that 55% of domestic consumers are "very unlikely" to change their gas or electricity suppliers in the near future and that 14% consumers stated they would never switch.
|
High level of concentration | 6 firms control over 99% of the domestic gas and electricity markets and 95% of the business electricity market.
The combined gas and electricity domestic supply markets have a national HHI of nearly 2,000. The national domestic gas market has an HHI of 2,800 and the regional electricity markets are estimated to have HHIs of 2,500 to 6,500.
|
Significant barriers to entry | There has been no new scale entry to the GB energy markets.
Entrants advise that there are high barriers to entry including lack of liquidity in the wholesale markets, dominance of vertically integrated players, lack of independent counterparties to trade with, information asymmetry, credit policies of the dominant firms, complex industry codes and cash-out arrangements.
|
Price parallelism | Suppliers tend to change prices within similar ranges and timeframes. Charts 1 and 2 show how headline prices have changed across the last five years.
|
| Conditions for coordinated effects to emerge and be sustainable through time are present in the domestic supply markets.
|
| |
Annex D
TERMS OF REFERENCE FOR A CC MARKET INVESTIGATION
PURPOSE
This annex:
considers the four criteria the OFT considers
need to be met before deciding to make a reference to the Competition
Commission; and
sets out possible terms of reference for a GB
energy market referral to the CC.
APPROPRIATENESS OF
A REFERENCE
To make a CC reference there must be "reasonable grounds
for suspecting that any feature, or combination of features, of
a market in the UK for goods or services prevents, restricts or
distorts competition in connection with the supply or acquisition
of any goods or services in the UK or part of the UK" (Sections
131 or 132 of the Enterprise Act 2002). Where this threshold is
met, the OFT (or the relevant sectoral regulator) has discretion
as to whether to make a reference or not.
The OFT has set out four additional criteria that would normally
have to be met before it would decide to make a reference[142]:
proportionalitythe scale of the
suspected problem, in terms of its adverse effect on competition,
is such that a reference would be an appropriate response to it;
availability of remediesthere is
a reasonable chance that appropriate remedies will be available;
alternative powersit would be more
appropriate to deal with Competition issues identified by applying
the Competition Act 1998 or using other powers available to the
OFT; and
undertakings in lieuit would not
be more appropriate to address the problem identified by means
of undertakings in lieu of a reference.
These four factors are considered below in relation to a
GB energy market referral.
Proportionality
energywatch recognises that a reference to the CC would impose
a substantial burden on the businesses affected, particularly
in terms or management time, and have considerable recourse implications
for the CC itself. However, energy is a necessity product for
domestic and business consumers and represents around 3.5% of
expenditure for the average household and more than 10% of income
for the fuel poorfor some fuel poor households the cost
of warmth can rise to 20, 30 or even 40% of income. The energy
sector represents about 4% of UK GDP but is a required input to
the other 96%. The benefits of remedying any adverse effects which
might be found to exist in the GB energy markets would, therefore,
be expected to outweigh these costs.
Availability of remedies
energywatch believes there is a reasonable chance that appropriate
remedies will be available. Some possible remedies are considered
in Annex E.
The CC has a wide range of discretion and the necessary powers
to adopt a wide range of measures designed to remedy identified
defects in the market. The CC can:
Make a significant and direct change to the structure
of a market (eg through divestment and unbundling).
Change the structure of the market indirectly
(eg through reducing barriers to entry or search and switching
costs).
Direct firms to discontinue certain behaviour
(eg giving adequate notice of price changes and the timeframe
in which a change of supplier can be made) or to adopt certain
behaviour (eg more prominently displaying prices and other terms
and conditions of sale).
Restrain the way in which firms would otherwise
behave (eg the imposition of a price cap).
Monitor (eg requirement to provide the regulator
with information on prices or profits).
Alternative powers
Competition law is more usually applied to vertical agreements
that restrain competition rather than integrated firms. Concerns
about firm conduct relate to the process of competition between
firms across GB as a whole and are not merely isolated local matters.
Undertakings in lieu
energywatch is not aware of specific undertakings that would
remove the need for a market investigation reference.
energywatch considers that a market investigation reference
would be the most appropriate route for addressing the concerns
raised about the features of the GB energy market that appear
to be preventing, restricting or distorting competition in the
market.
TERMS OF
REFERENCE
The Secretary of State for Business, Enterprise and Regulatory
Reform, in exercise of his powers under Section 132 of the Enterprise
Act 2002, hereby makes a reference to the Competition Commission
for an investigation into the supply of gas and electricity in
Great Britain (GB).
The Secretary of State has reasonable grounds for suspecting
that a feature or a combination of features of the GB energy market
or markets prevents, restricts or distorts competition in the
supply of gas and electricity in GB.
For the purpose of this reference the expression "GB
energy market":
Includes the wholesale and retail markets for
gas and electricity in GB.
Excludes the gas and electricity networks in GB.
Issues
The key issues for consideration in a GB energy market investigation
appear to be:
How the level of concentration has changed over
the past few years and how it might be expected to change in the
future.
Whether the level of concentration has an effect
on the conduct of some or all of the firms in the GB energy markets.
Whether the level of concentration might be indicative
of any features of the market that might prevent, distort of restrict
competition.
Whether horizontal concentrations, vertical integration
or contracting strategies has reduced competition or created inefficiencies.
What new entry has there been over the past few
years and what can be expected in the future.
What were the key reasons for firms exiting the
market over the past few years and what can be expected in the
future.
What the barriers are to new entry and expansion.
Whether incumbent firms benefit from economies
of scale or scope and information asymmetries.
Whether firms compete fairly and vigorously.
Whether movements in price are consistent with
effective competition.
Whether firms compete on price and whether other
aspects such as service and quality are also important.
Whether there is any variation between regions
in how products are offered or promoted or in the application
of charges and whether any variation might be due to the extent
of local competition.
Whether service quality as measured by customer
satisfaction, mistakes, complaints or adherence to industry codes
and redress schemes is at a level consistent with active competition.
Whether there is a lack of innovation or choice.
Whether there is sufficient transparency or gaps
in information flows.
Whether there are conditions present that facilitate
coordinated effects.
The CC can determine what action should be taken to
remedy, mitigate or prevent adverse effects on competition or
any detrimental effect on consumers. Consideration may be given
to:
Enhanced reporting and disclosure requirements
to aid price discovery.
Simplifying market rules and entry requirements.
Greater transparency of information on gas flows.
Investment incentives for long term strategic
storage.
Reducing search and switching costs.
Regular market monitoring of the business sector.
Reintroduction of supply price controls for certain
consumer groups if other measures are considered insufficient.
Divestment of plant or function if other measures
are considered insufficient.
Annex E
HIGH LEVEL ANALYSIS OF POSSIBLE REMEDIES*
This annex considers possible remedies that could be put
in place to help ensure there is effective competition in the
GB energy markets and to address concerns about fuel poverty.
Area | Consequence
| Remedy | Vehicle
| Timeframe | Benefits
| Counterarguments |
Fuel poverty | More consumers being thrown into fuel poverty as a result of high prices.
Government fuel poverty targets will not be met.
Breakdown of government strategy to eradicate fuel poverty.
| Mandate social tariffs with minimum standards
| Government: Primary legislation (the Energy Bill was a missed opportunity)
| Short to medium | Fuel poor have access to more affordable tarrifs.
| Some industry and government resistance on innovation groundssuppliers are not doing sufficient to protect the fuel poor at present and the standards only set a minimum against which suppliers can innovate.
|
Gas flows | Wholesale gas prices and in turn wholesale electricity and retail prices will be higher and more volatile than they need to be if prices are driven by market sentiment rather than sound information.
| Enhanced information on gas flows from Europe and the North Sea.
| Government/Ofgem: Secure agreement from other European governments (particularly Norway) and through the European Commission to provide enhanced disclosure of information on gas flows into GB.
| Short to medium | Greater transparency and reduced information asymmetry.
Reduced volatility in wholesale prices.
Wholesale and retail prices should more closely reflect cost.
| Commercially sensitive informationinformation can be published on a suitably aggregated basis where there is evidence that confidential information would be divulged.
|
Small business search and switching costs
| Small businesses face high search and switching costs due to a lack of comparative price information and are unable to make informed decisions.
| Introduce a independently accredited price comparison services for small business consumers
| OFT/Ofgem: Develop independent accreditation for price comparison services for small business consumersthis could be taken forward as part of the wider work recommended by the National Audit Office in "Protecting consumers? Removing Price controls" to reduce potential consumer confusion by formulating and negotiating ownership of a single code to cover price comparison websites
| Short | Reduced search and switching costs for small businesses.
Small businesses consumers more able to make informed switching decisions and access more affordable contracts.
| No obvious counterarguments. |
Small business contractual arrangements
| Small business locked in to higher priced contracts due to complex contractual arrangements.
| Introduce standard terms and conditions for small businesses that are fair and easy to understand.
| Competition Commission: Direct small business suppliers to offer standard terms and conditions and publicise appropriately
| Short | Greater visibility of terms and conditions.
Small businesses consumers more able to make informed switching decisions and access more affordable contracts.
| Industry likely to resist on grounds of innovationsmall businesses are disproportionately disadvantaged in dealing with their energy suppliers because they are neither protected by effective competition, adequate regulation nor general consumer law. Evidence suggests that small businesses operate with a domestic consumer mindset when purchasing energy.
|
Domestic prices | Domestic consumers paying more than they need to for their energy due to high search and switching costs.
| Suppliers to provide additional information to consumers on household bills on alternative offers that may save consumers
| Competition Commission: Direct suppliers to provide information on alternative offers on household bills
| Short to medium | Reduce consumer search and switching costs for domestic consumers.
Domestic consumers more able to access more affordable tariffs.
| Potentially complex interaction between tariffsit will be possible to at least provide some clear messages on alternative offers that could save consumers money. Ofgem play a role in the development of the information to be provided and regularly monitor information provision.
|
Business competition | No clear basis for identifying problems business consumers face so no route to address consumer detriment
| Regular market monitoring of the business market
| Competition Commission: Direct firms to submit regular information to Ofgem on competition in the business market
| Short | Greater understanding and visibility of the problems business consumers face and the detriment this causes.
Provides basis for making positive changes to the benefit of business consumers.
| Potential resistance to new regular reporting requirementsthe frequency and form of reporting can be set so as to minimise any additional regulatory burden.
|
Gas storage | Relative lack of long term strategic storage in GB means we are less able to store low priced gas as an alternative to high priced gas during the winter or periods of unexpectedly high demand and maintain security of supply
| Create incentives to invest in long term strategic storage
| Competition Commission: Direct government to introduce an obligation on firms to hold a defined proportion of gas in long term strategic storage either through a licence condition or underpinned by legislation if required
| Medium | Enhance security of supply.
Reduce dependence on high priced gas during winter and periods of unexpectedly high periods of demand.
Retail prices should more stable.
| Government may be reluctant to revisit the case for long term strategic storage given it considered this as part of the Energy White Paper 2007the environment has changed and there have been further increases in wholesale prices since the case for long term strategic storage was reviewed. It is expected that the benefits of investing in long term strategic storage would outweigh the costs.
|
Trading | Lack of liquidity in the wholesale markets means that prices are higher and more volatile than they need to be.
| Requirement for firms to trade a defined level of output through the over the counter wholesale markets.
| Competition Commission: Direct firms to trade defined level of output to be monitored by the FSA and/or Ofgem
| Medium | Enhanced liquidity.
Reduced volatility in wholesale prices.
Prices should be more stable and competitive.
Reduce barriers to entry.
| Interaction with existing contracts and firms commercial decision making processesthere are clear benefits to enhancing liquidity in the wholesale markets.
|
Market rules | Complex market rules and entry requirements create significant barriers to entry which make it difficult for smaller and low carbon operators to access markets and consumers fairlythis reduces diversity which has a negative impact on innovation, choice and the delivery of the environmental and carbon agenda
| Fundamental make-over of the market rules and entry requirements including the cash-out arrangements and third party access provisions
| Competition Commission: Direct government and Ofgem to reform market rules
| Medium to long term | Reduce barriers to entry and promote new entry.
Increase diversity and improved prospect for delivering the environmental and carbon agenda.
| Difficult and costly exercisethere should be long term benefits arising from simplification of market rules and entry requirements.
|
Disclosure | Consumers pay prices that are higher than the competitive level due to poor price discovery.
| Requirements on firms to disclose and publish trading data including prices and segmented financial and operating data about their electricity and gas production and retailing operations.
| Competition Commission: Direct firms to publish specific data
| Short | Reduce barriers to entry and promote new entry.
Prices more reflective of cost.
| Publication of commercially sensitive datainformation can be provided in a sufficiently aggregated manner.
|
Reporting | Consumers pay prices that are higher than the competitive level as suppliers reference increases in forward wholesale prices that are not reflective of their actual costs
| Requirements for firms to submit data to Ofgem on cost to serve and purchase costs to ensure only efficient cost pass through.
| Competition Commission: Direct firms to regularly report cost to serve and purchase cost information to Ofgem for scrutiny and public reporting of its findings.
| Short | Greater understanding of firms' costs and margins throughout the supply chain.
Prices more reflective of cost.
Increase consumer confidence.
| Potential resistance to new regular reporting requirementsthere used to be regulatory scrutiny of purchase costs and this should be reinstated.
|
* Where other measures are considered to be insufficient the
CC may wish to consider divestment of plant or function and the
reintroduction of supply price controls for certain consumer groups.
The former should help to promote new entry and the latter would
help rebuild consumer confidence in the markets.
79
European Commission, Competition: energy sector inquiry confirms
serious problems and sets out way forward, press release 16 February
2006. Back
80
It is important to note that the threshold for making a reference
to the CC under the Enterprise Act 2002 is based on there being
reasonable grounds for suspecting" competition is not working
effectively (Section 131). The threshold is not based on the provision
of hard and absolute evidence. It is part of the role of the CC
in undertaking an investigation to gather, analyse and validate
information and evidence so that it can answer the questions it
is obliged to determine under statute (Section 134) namely whether
there has been an adverse effect on competition and whether remedial
action should be taken. Back
81
The CC has s special utilities panel, made up of CC members expert
in the energy and related sectors. Most usually the panel deals
with water, electricity, gas and energy code modifications but
these members would clearly be involved in any market investigation
into the energy sector, thus ensuring an expert and thorough review. Back
82
Section 134 of the Enterprise Act 2002 and OFT, The Interface
between Competition and Consumer Policies, OECD Global Forum on
Competition 2008. Back
83
Appendix 2-Why the British markets in gas and electricity require
a competition investigation. Back
84
Ofgem data for January 2008 shows that the six vertically integrated
firms control over 95% of the business electricity supply market.
The corresponding data for gas was not available as Ofgem does
not regularly monitor the business market. Back
85
HHI is a commonly accepted measure of market concentration used
by economists. It is the sum of the square of each firm's market
share and therefore takes account of the relative size and distribution
of the firms in a market. The HHI increases as the number of firms
decreases and the disparity in size between firms increases. As
noted by the OFT, the US Merger Guidelines characterise as "highly
concentrated" a market with an HHI of over 1,800. Back
86
Davies and Price, Does ownership unbundling matter? Evidence from
UK energy markets, November 2007. Back
87
energywatch analysis of supplier's announced headline price changes
between 2003 and 2008. Back
88
This is expected to be a low estimate of an average bill as it
is based on a conservative estimate of electricity consumption. Back
89
On average consumers paying by prepayment meter pay £255
more than consumers paying by online direct debit. It is not clear
that the differential reflects efficient or legitimate additional
cost to supply. Back
90
Forward projections of energy market competitiveness rankings-Prepared
for the Department for Business, Enterprise and Regulatory Reform,
Oxera, 10 December 2007. The Oxera analysis is based on a high
level analysis of structural features and fails to consider key
factors such as liquidity in the wholesale markets or competitiveness
of price. Back
91
Based on analysis of data provided by Energy Advice Limited January
2008. Back
92
Ofgem, Domestic Competitive Market Review, 2004. Back
93
Competition Commission, Market Investigation References: Competition
Commission Guidelines, June 2003. Back
94
Malcom Wicks stated during the fuel poverty adjournment debate
8 January 2008 that "If people are concerned that they are
being charged too much, considering switching is very important,
but I think that I know enough about this subject to recognise
that switching is easier said than done for some of the most vulnerable
people, particularly if there is a record of debt payments"-Hansard
column 23w. Back
95
Accent, energywatch Information and Advice Survey, June 2005-55%
of consumers are "very unlikely" to change their gas
or electricity suppliers in the near future. Back
96
ORB, 2007 Energy Consumers Survey, 2007-14% consumers stated they
would never switch. Back
97
Wilson and Price, Do Consumers Switch to the Best Supplier, July
2007-amongst electricity consumers who had switched suppliers
exclusively for price reasons only up to a fifth had switched
to the supplier offering the greatest saving and up to one third
had switched to a deal that had left them worse off. Back
98
A change in the price level may affect different households differently
as demand increases with income but at a decreasing rate-Price,
Effect of Liberalizing UK Retail Energy Markets on Consumers. Back
99
For example responses to Ofgem proposals to remove the restrictions
on self supply licence condition in 2002 and consultation on a
non-domestic supply competition review in 2006. The Public Accounts
Committee 2003 report on the New Electricity Trading Arrangements
recommended that "Ofgem should take seriously the risk that
vertically integrated companies may exploit their position and
Ofgem should adapt its competition analysis of the wholesale market
and retail markets to reflect the new reality of the market". Back
100
European Commission, Competition: energy sector inquiry confirms
serious problems and sets out way forward, press release 16 February
2006. Back
101
Global Insight, Report for DTI on Ensuring Effective and Efficient
Forwards Gas Markets, March 2005-70% gas landed in Britain subject
to long term contracts. The report characterised the spot markets
as "functionally liquid" but believed the forward market
to "suffer from a lack of liquidity by global standard". Back
102
New entrants are likely to be exposed to a greater extent to imbalance
charges due to forecasting errors arising from lack of historic
consumption data, less mature forecasting processes and less portfolio
diversification-see Ofgem cash-out review meeting presentation
of 26 September 2007. Back
103
Ofgem open letter on BSC modification proposals P211 and P217. Back
104
Ofgem cash-out review meeting presentation of 26 September 2007-Cash-out
prices are estimated to have been detrimentally affected by between
7% and 9%. 9% average increase in system buy price and up to 7%
decrease in the system sell price. Back
105
Storage capacity: UK ¥4% of gas supply and equivalent to
about 14 days of supply-Italy, Germany and France have in excess
of 20% and upwards of 50 days-Netherlands has 11% even though
it has high level of indigenous supply. Back
106
A satisfactory heating regime is defined as 21°C in the living
room and 18°C in other occupied rooms, as recommended by
the World Health Organisation. Back
107
See: http://www.energywatch.org.uk/uploads/How_well_does_the_Priorty_Services_Register_serve_priority_consumers.pdf Back
108
Home Heat Helpline, Single Parents Fell the Strain, July 2006:
http://www.energy-retail.org.uk/media/press/2006/july06_01.html Back
109
1 in 5 older people live in one room of their home to keep warm
and save costs in winter, Help the Aged, November 2007: http://press.helptheaged.org.uk/_press/Releases/_items/_1+in+5+older+people+live+in+one+room+of+their+
home+to+keep+warm+and+save+costs+in+winter.htm Back
110
Government reports fuel poverty figures in two ways: the first
includes housing supplements such as Housing Benefit and Income
Support for Mortgage Interest as income and is referred to as
the full income definition, while the second excludes housing
supplements from discretionary spend and is known as the basic
income definition. Back
111
Ofgem's Review of Suppliers' Voluntary Initiatives to Help Vulnerable
Customers, August 2007: http://www.ofgem.gov.uk/Sustainability/SocAction/Suppliers/CSR/Documents1/Review%20of%20suppliers%
20voluntary%20initiatives.pdf Back
112
Lost in Transmission-The role of Ofgem in a changing climate,
2007, see: http://www.sd-commission.org.uk/publications/downloads/SDC_ofgem_report.pdf Back
113
Malcolm Wicks, Fuel poverty adjournment debate 8 Jan 2008, Hansard,
column 23w. Back
114
Ipsos Mori Switching Rates for Vulnerable Consumers, report for
Ofgem, March 2007, http://www.ofgem.gov.uk/Sustainability/SocAction/Publications/Documents1/Switching
Rates for Vulnerable Customers Report.pdf Back
115
This is expected to be a low estimate of an average bill as it
is based on a conservative estimate of electricity consumption. Back
116
UK Fuel Poverty Strategy: 3rd Annual Progress Report 2005: http://www.berr.gov.uk/files/file10717.pdf Back
117
UK Fuel Poverty Strategy: 5th Annual Progress Report 2007: http://www.berr.gov.uk/files/file42720.pdf Back
118
Energy white paper: meeting the energy challenge, May 2007, para.
2.1.21: http://www.berr.gov.uk/energy/whitepaper/page39534.html Back
119
Budget Report 2008, chapter 4, para. 4.34: http://www.hm-treasury.gov.uk/media/7/2/bud08_chapter4.pdf Back
120
http://www.ofgem.gov.uk/Sustainability/SocAction/Publications/Documents1/Switching
Rates for Vulnerable Customers Report.pdf Back
121
http://www.ofgem.gov.uk/Sustainability/SocAction/Publications/Documents1/Prepayment%20meter%20Customer%20Workshop.pdf Back
122
Do Consumers Switch to the Best Supplier? University of East Anglia
Centre for Competition Policy, July 2007. Back
123
The UK Fuel Poverty Strategy, November 2001: http://www.dti.gov.uk/energy/fuel-poverty/strategy/index.html Back
124
Malcolm Wicks, Hansard, 23 January 2007, column 399WH. Back
125
Energy White Paper 2007, paragraph 2.1.21. Back
126
Competition Commission procedures http://www.competition-commission.org.uk/our_role/how_investigate/procedures.htminformation Back
127
Store Cards, OFT Reference to the Competition Commission, 18 March
2004. Back
128
Emphasis added. Back
129
United Brands Co. v Commission [1978] 1 CMLR 429, at paragraph
235. Back
130
At paragraph 6.1 of the reference, the OFT underlined its suspicions
that excess prices were being paid by some consumers for certain
store cards: "the provision of store card credit may not
be working well for consumers. It is possible . . . that the difference
between the interest charged on store cards and other credit cards
is not fully explained by the offsetting benefits and the differences
in the cost of providing these services". Back
131
See Paragraph 1 of Annex 9.1 of the Competition Commission Report,
available at: http://www.competition-commission.org.uk/rep_pub/reports/2006/509storecards.htm Back
132
Supply of Liquefied Petroleum Gas, Market Investigation Reference,
5 July 2004. Back
133
Northern Ireland Banking, Market Investigation Reference, 26 May
2005. See also: Home Collected Credit, Market Investigation Reference,
20 December 2004. Back
134
At paragraph 3 of the OFT Reference (emphasis added). Back
135
See paragraph 75 of the OFT Report. Back
136
Home Collected Credit, Market Investigation Reference, 20 December
2004. Back
137
Ibid, Competition Commission News Release, 27 April 2006, available
at: http://www.competition-commission.org.uk/inquiries/current/homecredit/index.htm,
at p 1. It should be noted that these findings are only provisional
and that the Competition Commission intends to discuss them further
with home credit companies before making its final conclusions
on the matter: ibid. Back
138
Ibid at p 2. Back
139
Classified Directory Advertising Services, Market Investigation
Reference, 5 April 2005, Competition Commission, Issues Statement,
Paragraph 17 (emphasis added). Back
140
Northern Ireland Banking, Market Investigation Reference, 26 May
2005, at paragraph 83 of the OFT Report (emphasis added). See
also Section 138 of the Enterprise Act 2002. Back
141
Competition Commission, Provisional Decision on Remedies. http://www.competition-commission.org.uk/inquiries/ref2006/grocery/provisional_decision_remedies.htm Back
142
OFT, Market investigation references: Guidance about the making
of references under Part 4 of the Enterprise Act (OFT 511), March
2006. Back
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