Select Committee on Business and Enterprise Written Evidence


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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