Memorandum submitted by GMB
THE STRUCTURE OF THE UK ENERGY MARKET
EXECUTIVE SUMMARY
1. GMB is the United Kingdom's third largest
trade union with 600,000 members employed in virtually every sector
of the economy, and is the largest and most influential trade
union in the energy sector. Regardless of who they are employed
by, our members are also all energy consumers. Many GMB members
are low-paid workers, and have been amongst those who have suffered
financially as a result of the failure of the liberalised UK energy
market to supply gas and electricity at affordable prices.
2. GMB believes that there is a wealth of
evidence to sustain our view that the energy market is failing,
and we are confident that the figures on gas and electricity costs
and the rise in fuel poverty, which we anticipate will be submitted
by others to the Committee, will speak for themselves. Our submission
therefore predominantly focuses on a single one of the seven aspects
of the energy market that the Committee announced as the focus
of its review, namely the effectiveness of regulatory oversight
of the energy market. Central to our argument about how and why
the energy market is failing consumers is that the regulatory
mechanism for protecting their interests by keeping the energy
market under close and effective scrutiny is failing.
3. GMB therefore urges the Committee to
take a detailed and critical look at the performance of the energy
regulator, Ofgem. It is our belief that this body has comprehensively
failed to regulate the energy market effectively, and has, by
its failings, been a major contributor towards the uncompetitive
and dysfunctional market for energy that now prevails. The behaviour
of the major energy companies that operate within this oligoply
is a reflection of the regulator's complacency. Ofgem's inability
or unwillingness to consistently safeguard the interests of consumers
stems from its slavish adherence to a set of dogmatic economic
"principles" that have little to do with the real world
in which the energy market operates. Inevitably, this seriously
impacts upon consumers, who suffer the consequences of Ofgem's
inadequacy in the form of rising prices for gas and electricity.
INTRODUCTION
4. GMB is the largest and most influential
trade union in the energy sector with over thirty thousand members
employed throughout the UK in the Electricity, Gas, Nuclear, Coal,
Oil and Renewables industries, undertaking activities ranging
from production and distribution to retail and service. GMB's
long history of representing members employed in the energy sector,
which has been on-going since the Union began as the Gas Workers
and General Union in March 1889, has given us vast experience
and a clear insight into the workings of the energy sector. This
has helped GMB to develop a comprehensive understanding of the
importance of the energy market and its influence over the economic
well-being and daily lives of the UK's citizens.
5. GMB warmly welcomes the investigation
by the Business, Enterprise and Regulatory Reform Committee into
the structure of the UK energy market. We believe that this decision
to put the market under such an independent scrutiny by conducting
a full scale inquiry into the structure of the energy market is
a very important one which is long overdue.
6. In considering whether the current market
structure encourages effective competition in the retail markets
for gas and electricity, the Committee will undoubtedly need to
carefully consider a wide range of factors in order to form a
view. GMB fully recognises the need for the Committee to examine
the wholesale markets for gas and electricity, growing consolidation
in the energy market, the relationship between the wholesale and
retail markets for electricity and gas, the interaction between
the UK and European energy markets and progress in reducing fuel
poverty.
7. All of these are undoubtedly crucial
to the effectiveness of the current market, and, if called to
give oral evidence to the Committee, GMB would be pleased to elaborate
our views about how these factors impact upon the energy market.
However, GMB is focusing our written submission upon the lack
of any effective regulatory oversight of the market. We believe
that the poor performance and inertia of the regulator directly
contributes towards the market failing consumers, and that the
lack of progress in reducing fuel poverty and the shortcomings
of the regulator are inextricably linked.
THE EFFECTIVENESS
OF REGULATORY
OVERSIGHT OF
THE ENERGY
MARKET
8. GMB is aware that the regulator for the
gas and electricity industries in Great Britain is the Gas and
Electricity Markets Authority and that Ofgem's role is to support
the Authority. However, for reasons of simplicity, this memorandum
refers to Ofgem as "the regulator" and/or "the
energy regulator".
9. Central to the whole of the Government's
energy policy approach is the promotion of competitive energy
markets. The underlying assumption is that the market provides
the most effective and efficient mechanism for ensuring the supply
of energy and protecting the interests of energy consumers. The
extent to which the "competitive energy market" (which
is in reality not a free and fair market, but an oligopoly, dominated
by a few sellers who can greatly influence price and other market
factors) operates fairly is determined by the strength and effectiveness
of the regulatory regime. A robust regulator is absolutely essential
to prevent a small number of powerful energy providers acting
against the interests of consumers by exploiting their position
in order to maximise profits.
10. Given the crucially important role of
the regulator in the UK's energy market, it is impossible for
GMB to comment upon the efficacy of the market without reference
to the shortcomings of the regulator. In our view, Ofgem, the
regulator for the gas and electricity markets, has been an abject
failure. GMB firmly believes that the lack of robust and effective
regulation of the market for gas and electricity is of crucial
importance to this investigation. Although our view is that the
private market is not the most effective mechanism for ensuring
that gas and electricity is available at affordable prices to
all, if such a market is to prevail, then it simply cannot do
so without the regulator doing its job properly.
11. In short, left to its own devices, the
UK energy market will not operate fairly because the barriers
to entry are such that only a few suppliers actually operate within
the market. However, the only price control mechanism that Ofgem
appears to recognise, advocate and rely upon—the notion
that within such a limited market consumers will keep prices down
by switching suppliers—does not work in practice. Nevertheless,
Ofgem adheres rigidly to this doctrine, despite the evidence to
the contrary, and its inertia in the face of rising prices and
a real increase in the number of UK citizens in fuel poverty is
staggering.
12. In our view, Ofgem is arrogant and out
of touch with the industries that it regulates, and repeatedly
fails to understand and take account of the concerns expressed
by stakeholders (consumer groups, and the unions representing
employees working in the gas and electricity industries, for example)
about issues of major concern to the companies, workers and consumers
who are affected by its decisions. Ofgem's failings have an impact
that reaches far beyond the GMB members who work in the energy
sector—all our members are energy consumers, and all of
our members are affected in some way by Ofgem's inability to see
beyond its narrow economic dogma and provide effective regulation.
13. Our contention that the regulator is
complacent, arrogant and out-of-touch is strongly re-inforced
by reference to a number of Ofgem's most recent actions and announcements.
What is distinctive about the three examples that follow is the
way that this recent flurry of activity by Ofgem contrasts so
sharply with its previous inactivity. This provides a powerful
illustration of how the regulator operates, in effect doing little
or nothing to protect the consumer with any consistency, then
rushing to react once the price hikes are announced and the storm
breaks as a result.
14. A prime example of the energy regulators'
weak, inconsistent and unconvincing performance was Ofgem's surprise
announcement, made on 21 February 2008, that it was launching
a probe into the energy supply market.
15. To announce this probe, which was in
effect a complete u-turn by the regulator, smacks of opportunism
and desperation. Less than five weeks beforehand, Ofgem had insisted
the market was sound. In a press release dated 16th January 2008,
following a meeting between the Chancellor and Ofgem's most senior
executives (Chairman Sir John Mogg and Chief Executive Alistair
Buchanan), Ofgem "confirmed that Britain's competitive market
in energy is working". To make such an unequivocal statement,
when the real-world experience of consumers was that the market
was clearly not working—huge prices rises had just been
announced almost across the board—beggars belief. The announcement
of an investigation a few weeks later begs the question: why make
such a bold and confident assertion and then shortly afterwards
announce that Ofgem will take "a more detailed look at the
retail market"?
16. The tone of the announcement of the
enquiry was also somewhat grudging, whilst also hinting that its
outcome was already foreseen and its intention was to reassure
the public that competition was working. Ofgem thus appeared to
be "going through the motions"—either reacting
to events, or responding to some "behind the scenes"
arm-twisting by Ministers. In belatedly making this announcement,
and thereby "being seen to be doing something", did
Ofgem jump or was it pushed? Whichever of these it was, and it
could conceivably have been a combination of both, Ofgem demonstrated
its inability to act independently and reliably. It does not inspire
any confidence, and provides no lead whatsoever in scrutinising
and monitoring the companies operating in the market.
17. This came as no surprise to GMB, which
for several years has been urging Ofgem, without success, to launch
just such an investigation. Yet Ofgem only stirred from its slumber
once the Business, Enterprise and Regulatory Reform Committee
had announced its investigation, thus putting a political and
public focus on the energy market and Ofgem's failure to regulate
it effectively. We see the Ofgem investigation less as evidence
of its concern about the behaviour of the energy companies, and
more about its concern over Ofgem being open to criticism if it
doesn't appear to be putting the market under the microscope.
We urge the Committee to examine why Ofgem announced its own investigation
so quickly after declaring the market to be sound.
18. A second example of Ofgem's inconsistency
was its decision, announced on 25th February 2008, to fine National
Grid £41.6 million, for a breach of competition law that
it claims restricted the development of competition in the domestic
gas meter market. After an investigation lasting almost three
years, what motivated Ofgem to act in the manner that it did,
when it did? The scale of this fine was totally disproportionate
to the offence that National Grid allegedly committed, as the
cost of any such anti-competitive behaviour related to gas metering
is paltry. Even if the company's actions did cause a 40% increase
in the costs of gas meters to domestic gas consumers, (which amount
to £12 per year per customer) that represents less than £5
per year per customer.
19. In our view, what this fine represented
was Ofgem once again behaving in an opportunistic and ineffectual
manner. Ofgem baring its teeth and taking inappropriate action
over this issue is simply no substitute for consistent and meaningful
regulation of the type of company behaviour that imposes the really
painful costs upon gas and electricity customers. Consumers need
a regulator that has real teeth and takes action on their behalf
over issues of mainstream importance—ie the cost of gas
and electricity, not on matters that have only a peripheral effect
on prices. It is difficult to escape the conclusion that the timing
and nature of Ofgem's sanctions reflected its desire to appear
tough, because of the energy market being in the political and
media spotlight.
20. The third example of a recent announcement
by Ofgem was that of 6 March 2008, when the regulator announced
a review of the regulatory regime for energy networks. This two-year
internal review of a regime that has been in place for 20 years,
and which Ofgem described in its press release announcing the
review as a success, is also consistent with the "flavour
of the month" approach that Ofgem now seems to favour, following
the recent increase in public and political interest in the energy
market. Is this review prompted merely by the possibility that
the regulator is aware that it is not perceived as being consumer-friendly
enough? At a length of two years, this appears to be a major and
very comprehensive investigation into a regulatory regime which
until now has enjoyed Ofgem's unshaken faith. On the other hand,
two years is also more than sufficient to allow the grass to grow
and for this review to disappear from view. GMB is unconvinced,
especially in view of the comments in the Ofgem press release
celebrating the achievements of the regime, that Ofgem is doing
anything more than posturing.
21. We offer the examples in paragraphs
14-20 above to illustrate the manner in which the regulator fails
to address the real issues affecting consumers. Contrast the action
taken against National Grid over gas meters with the total lack
of action against those companies that exacerbate the problem
of fuel poverty by charging prepayment meter users—often
poorer households—an average of £255 a year more than
online customers. This is a very real problem with serious effects
upon low-income households, and the £5 per year that National
Grid's actions apparently cost is chickenfeed by comparison. We
would urge the Committte to question Ofgem about its lack of action
in support of those households "trapped" into paying
higher bills.
22. Ofgem complacently responds to claims
of unfairness about the prices charged by the "big six"
suppliers by saying that consumers should switch. Of course, many
consumers do—in 2007 four million out of 36 million energy
account holders did so. However, just under half of consumers
have never switched supplier and market research suggests they
are unlikely to. Amongst pensioners, only around a third have
ever switched, while the six million consumers with prepayment
meters are unlikely to be able to switch using the convenient
online switching services. The two million consumers in debt are
prohibited from switching by the suppliers, and hundreds of thousands
more in Scotland are prevented from switching through technical
restrictions on their accounts. The reality is that switching
is just not working for the most vulnerable.
23. Ofgem's job is, apparently, to make
sure it sets the framework for healthy and fair competition. If
the ability of consumers to switch is central to its strategy,
and this clearly isn't working, shouldn't Ofgem have a plan B?
The public perception is that the existing big six suppliers are
making excessive profits. People should not be expected to accept
big price rises, by every supplier in the market, on products
and services that they have no option but to buy. Whatever the
regulator says about its role and how it isn't Ofgem's responsibility
to interfere with the market, some four million households (and
growing) meet the Government's official definition of "energy
poverty", in that 10% or more of their disposable income
is spent on energy bills. In our view, this is clearly an issue
for the regulator, which isn't doing it's job properly if it persistently
ignores the reality of the situation that exists, in favour of
its belief in the purity of some theoretical construct known as
"the market".
24. The real-world effect upon lower-income
households of excessively high prices for gas and electricity
should not be under-estimated. Fuel is a basic human need, and
one of the first duties of any Government is to ensure the provision
of a safe and secure supply of affordable energy to its citizens.
For these reasons, the failure of the regulator to exercise any
form of consistent oversight of the energy market, and put consumers
at the heart of what it does, represents a very serious failing
that directly contributes towards the rising levels of fuel poverty
that now prevail. GMB urges the Committee to put the lack of any
effective regulatory oversight of the market at the heart of its
investigation, and take these failings up with Ofgem.
March 2008
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