House of Commons - Business and Enterprise

Select Committee on Business and Enterprise Written Evidence

Memorandum by ScottishPower

SUMMARY

1. ScottishPower is a major participant in the energy market at a retail, networks, wholesale and generation level. We believe that there is strong competition—almost certainly the best in Europe—in both the retail and wholesale markets and that the quality of this competition has been confirmed by studies undertaken at a national and EU level.

2. As a supplier, we have been affected by very large increases in our input costs arising from conditions in the international markets in gas and coal (by 83% and 97% respectively in the year from February 2007 to February 2008), together with increased costs for energy efficiency and renewables programmes. Inevitably, these increases have impacted the amount we need to charge our customers; measured against current wholesale and retail prices, we judge that domestic supply remains a loss-making activity.

3. We believe that similar factors will also have affected our competitors in retail markets and this may explain why they have made similar adjustments to their pricing. Switching remains intense, with some 400,000 electricity and 330,000 gas accounts changing hands every month. The very strength of competition tends to bring prices closer together as any supplier charging significantly more than its competitors is likely to lose a large number of customers to others. Based on the usual indices, the domestic retail market does not give grounds for concern, though this could change adversely in the event of further mergers. The wholesale market is less concentrated and this would remain the case with further consolidation.

4. We remain concerned that European markets, especially in gas, are not as open as they should be and that the market is not clearing efficiently between the UK and the continent. This may be contributing to additional volatility of gas prices in the UK and possible excess profits for upstream hydrocarbon producers. For these reasons, we support the progress being made on liberalisation of EU markets.

5. A huge investment programme is needed over the next decade to ensure security of supply as a number of older fossil fuelled and nuclear generation plants are retired. It will be essential, in bringing forward that investment, that there is confidence in the operation of the market and in the ability of participants to earn a return sufficient to remunerate their capital. At present, wholesale market prices and spreads are not sufficient to support the investments that are needed. We do not consider that suggestions of a windfall to generators from the free ETS allowances are correct; a significant part of the benefit from the allowances—perhaps all of it—will accrue to customers. In these circumstances, a windfall tax would be neither fair nor likely to facilitate the necessary power sector investment. Indeed, serious consideration needs to be given to some form of capacity payments, or free ETS allowances for phase III, in order to ensure that adequate investment is made.

6. Like many market participants, we agree with Ofgem's judgements in some specific areas and are seeking opportunities to persuade them to re-assess their policies in others. For example, we have serious reservations about their approach to the allocation of transmission charges to generators. However, we have a high degree of confidence in the ability of Ofgem to provide the necessary regulatory oversight of competition in the retail market. Competition is clearly the best way to protect consumer interests because it drives the industry to innovate to raise standards and improve efficiency. Accordingly, we are supportive of Ofgem's policy of avoiding detailed intervention in competitive areas where possible, and of promoting self-regulatory solutions where appropriate. Ofgem also acts as a competition regulator and has shown a willingness to be very tough in this sphere, as evidenced by the recent £41.6 million fine imposed on National Grid.

7. ScottishPower is supportive of efforts to address questions of fuel poverty. We support a large and effective trust fund, the ScottishPower Energy People Trust, and have recently introduced a social tariff, Carefree Plus, for our most vulnerable customers. We are holding discussions with the Government with a view to establishing how their aspiration of almost trebling the industry's social programmes to £150 million a year can be made an effective reality. We look forward to participating constructively in Ofgem's Fuel Poverty Summit on 23 April.

INTRODUCTION

8. In April 2007, ScottishPower was acquired by Iberdrola SA, the leading Spanish energy utility. The combined group is one of the top five utilities globally and its renewables business is the clear world leader in the field.

9. ScottishPower is a major participant in the UK energy market. Its activities include generation, where we own 3,456 MW of coal fired plant, 1,915 MW of gas fired stations and various hydro and other plant; networks, where we own the transmission system in South and Central Scotland, as well as the distribution system in that region and the former Manweb area; renewables, where our sister company ScottishPower Renewable Energy Limited is the UK's largest wind power generator; and retail, where we have some 5.25 million customer accounts.

10. We believe that the Committee's Inquiry will provide useful independent investigation of the gas and electricity markets. Since the privatisation of the electricity industry in the early 1990s we have played a full and active role in the promotion of competition in Great Britain's electricity and gas markets, growing our customer base from around 3 million customer accounts in 1998 to its current level today, witnessing first hand the competitive nature of these markets.

COMPETITION IN RETAIL MARKETS FOR GAS AND ELECTRICITY

Current Market Structure

11. It is widely recognised that Great Britain has amongst the most competitive retail energy markets in Europe and indeed globally. Much of the evidence for this is set out in Ofgem's June 2007 Domestic Retail Market Report[354] which provides a wealth of information and analysis. That report indicates that switching is taking place at a rate of about 400,000 electricity and 330,000 gas accounts per month, a much higher rate than for many other products including telephony, broadband, banking and mortgages. This level of competition is emphasised by the changes in market shares as a result of customer switching that have been witnessed in recent years, with at least one supplier significantly increasing its market share over the period from 2002 when the last major structural change through acquisition occurred (this was the purchase of TXU's UK assets by Powergen).

12. The opening of the separate gas and electricity markets to competition has meant that incumbent suppliers in one fuel can now also compete for customers in the other fuel. The market is rapidly evolving from separate electricity and gas markets into a national market in dual fuel supply, though some customers are likely to continue to buy their gas and electricity separately and 20% or so use only electricity. Figures published by Ofgem in April 2007 indicate that almost 80% of customers who switch choose a dual fuel deal,[355] and our own internal research indicates that 99% of all dual fuel customers who switch supplier will switch both fuels.[356]

13. A simple way to assess market shares and the competitive position is to use the Herfindahl-Hirschman Index (HHI). In assessing whether or not a merger should be referred to the Competition Commission the Office of Fair Trading (OFT) uses this index to assess the level of competition in a market. The HHI is defined as the sum of the squares of the market shares of all participants and ranges from around 100 for an almost perfect market (100 participants each with 1%) to 10,000 for a pure monopoly (1 participant with 100%).

14. In previous cases the OFT has referred to guidelines issued by the US competition authorities defining a market with an HHI less than 1,000 as "unconcentrated", between 1,000 and 1,800 as "moderately concentrated", and over 1,800 as "highly concentrated". Any merger resulting in an HHI over 1,800 or producing an increase of over 100 and resulting in an HHI between 1,000 and 1,800 "potentially raises significant competitive concerns".

15. We estimate that the HHI for the domestic retail electricity market is around 1700 (ignoring dual fuel for this purpose), and that it would increase by at least 300 if there was a merger of any of the six major players. Accordingly, the electricity market is presently moderately concentrated, but would become highly concentrated if there was a merger. The retail gas market, again ignoring dual fuel, rates at around 2650, which is considered to be "highly concentrated". This reflects the historic dominance of British Gas, though concentration levels in this market have reduced progressively since the introduction of competition and British Gas's share is now around 45%, meaning that more than half gas customers have switched at least once. Consolidation would however increase the HHI in gas by 130 or more from a high base. Precise data on the dual fuel market is less readily available at present. Indicatively, we consider that the HHI for dual fuel would resemble the position in the retail electricity market.

Competition and switching

16.The best means of protecting customers in terms of price and service quality is by ensuring that the energy markets remain fully competitive. Since the market was opened to full competition, 52% of UK customers have switched their energy supplier. In contrast, in Germany that figure has been about 4.5%. The best country to compare GB with is Spain, which has reached levels of around 20%, well short of the GB level.

17. Ofgem regularly monitor and report publicly on retail market developments to ensure that energy consumers can benefit from competition and to check that the market is operating as effectively as possible. Their most recent review[357] confirms that all customer groups are benefiting from the competitive market and showed:

— vigorous price competition between the big six suppliers for all customers—the spread between prices has shrunk and the most expensive suppliers have been forced to become more competitive to stem customers losses;

— suppliers are innovating to retain and win customers—there has been rapid growth in: fixed and capped price deals that shield customers from rising wholesale prices; cheaper online deals; and green tariffs. They now account for roughly 20% of the market with one in five households signed up to a fixed price deal or other innovative offer;

— customer service is improving: suppliers are investing huge sums to improve their systems and five suppliers have cut the number of unresolved complaints;

— annual customer switching rates are at a very high level of around 400,000 electricity and 330,000 gas each month. Over four million switches took place in 2006, a figure which Ofgem has stated to be the highest in four years.

18. Ofgem has also specifically commissioned Mori to review switching rates for vulnerable customers.[358] The resultant report clearly showed that the key motivation for switching supplier is price, with 76% of gas switchers and 71% of electricity switchers doing so with the aim of saving money. The research highlights that as well as price, service quality is an important consideration for many customers with one in ten customers citing this as the main reason they had switched energy supplier. It also demonstrated that there were very few (2%) customers who thought that the switching process would be too complex, or that they were prevented from switching by an existing debt. Ofgem's study showed that of those customers who had never switched supplier, over 80% said that this was because they were happy with their current suppliers or that they simply "couldn't be bothered".

19. While the competitive market offers all customers the opportunity to switch supplier, the Ofgem report did recognise that switching rates among lower income groups and older people are slightly lower than for the population as a whole. However, it should be noted that (at 24% for electricity and 23% for gas) switching levels in the lowest switching group (customers in Social Group E) are still higher than switching rates across all other major European markets.

20. At ScottishPower, we are anxious to encourage switching to us across all customer groups including those traditionally perceived as vulnerable, such as low-income groups and older customers, and we welcome initiatives to help customers overcome their caution to switch. We believe that Ofgem have sought to do this and have struck an appropriate balance in the work that they propose in this area. In particular, they have committed to a number of initiatives including building their understanding of the different facets of vulnerability and the issues facing vulnerable customers; looking at more direct ways of encouraging customers, that are vulnerable to switch to cheaper deals and continue to publish annual reviews of suppliers' initiatives in this area to help inform debate, promote best practice and aid consumer advisers in helping consumers understand the offers that exist. We support this work and believe that placing greater focus on this customer group will encourage even more customers to engage actively with the competitive supply market.

21. Although price comparison websites have a high profile, many other routes to market continue to be used. Face to face marketing remains an important source of switching that does not depend on the internet. Currently, over 2 million switches take place every year as a result of visits by Energysure Accredited Agents.[359]

Pricing in retail markets

22. Our retail pricing decisions have been made independently at all times. As many parties, including Ofgem, have recognised, energy prices will fluctuate for a number of reasons, particularly in relation to the input costs faced by energy suppliers. All market participants are subject to broadly similar cost structures and common input cost pressures and this can be expected to result in comparable price increases and decreases.

23. Customer behaviour in relation to switching shows that pressure from customers who wish to switch will encourage suppliers to keep prices competitive. Over the last few years, suppliers have had to reposition their prices in order to remain competitive, particularly in their incumbent areas. This has resulted in a narrowing price spread across the suppliers and has meant that those suppliers who are the most expensive have had to re-think their prices in order to compete and retain customers. For example, British Gas was the most expensive dual fuel supplier until falling customer numbers in 2007 forced it to cut prices.

24. Pricing decisions in fully competitive markets reflect a variety of factors, including:

— "end to end" company specific cost structures. It is important that income from customers covers the input costs needed to serve them (for example, coal, gas, ETS permits; energy efficiency and renewables programmes; operational costs etc), plus a return on the substantial capital involved;

— prices in the wholesale market. In the long term, net income from retail sales needs at least to match what we could achieve by selling the energy in the wholesale market, taking account of the capital deployed in retail; and

— our position in relation to competitors, as discussed above.

25. Energy companies tend to buy most of their requirements, whether generation fuels (coal and gas) or wholesale energy, some time in advance. This is because spot markets are highly volatile and because there may be delivery timescales on some items such as coal and LNG. Accordingly, it may be several months between a change in the headline wholesale price of energy and it filtering into suppliers' cost bases. This explains why retail price movements (in either direction) tend to lag movements in the wholesale market.

26. When considering prices, it is important to recognise that these must reflect the costs incurred by suppliers in supplying the customer, and that this will vary across products, regions and payment methods. A flat pricing structure, without variation, would fail to signal the benefits of low cost behaviours to consumers, resulting in higher costs in the industry and eventually raised prices to all customers.

COMPETITION IN WHOLESALE MARKETS FOR GAS AND ELECTRICITY

27. The GB wholesale electricity market is recognised as being the most competitive energy market in the EU and G7 with over 30 major generators competing in a single GB market and the largest individual market share being around 15%. The wholesale market has changed fundamentally since privatisation in the early 1990s from a highly concentrated market with five main generating companies to an unconcentrated market with many diverse generating companies. The change has largely been driven by new gas-fired capacity built by new entrants and plant divestment by incumbent generators. Significant changes to trading arrangements have also increased competition with new bi-lateral trading arrangements introduced in 2001 in England & Wales to replace the Electricity Pool, implemented at privatisation, and the extension of these new arrangements to Scotland in 2005. These arrangements allow all generators to be price setters through forward and futures markets, short term power exchanges and a balancing mechanism.

28. When assessed under the Herfindahl-Hirschman Index, the GB wholesale electricity market scores in the range 840-910. This is categorised as un-concentrated and mergers could still take place in this market between major players without the market being rated as highly concentrated under the index.

29. We do not consider that suggestions of a windfall to generators from the free ETS allowances are correct. The free allowances for phase II have acted as an incentive to investment in generation (both gas fired stations and FGD plants) and a number of significant investments would not in our judgement have gone ahead without them. These investments will ensure that there is more generation plant available in the years to come—a factor which will both increase security of supply and reduce wholesale prices. Additionally, the free ETS allocations have had the effect of causing the postponement of plant closures, with similar positive impacts on security of supply.

30. This issue was studied in a Consultants' report published by BERR alongside the Government's 2007 Energy White Paper.[360] This concluded that, as a result of more investment and fewer closures, some 90% of the benefits of free allocations in phase III would accrue to consumers (through reduced scarcity in the power market) and not to generators. It also concluded that free allowances would eliminate the substantial dip in capacity margins projected for around 2017 and the corresponding peak in unserved energy.

31. In addition to the impact on the wholesale market described above, free allowances granted to integrated companies are likely to reduce the pressure for retail price increases because they contribute toward ensuring that end to end returns on capital are being met. Taking account of both these factors, we believe that it is clear that a significant part of the benefit of the phase II allowances—perhaps all of it—will accrue to customers. In these circumstances, a windfall tax would be neither fair nor likely to facilitate the necessary power sector investment. Indeed, consideration could usefully be given to capacity payments or free ETS allowances for phase III in order to ensure that adequate investment is made.

32. The GB wholesale gas market is also highly competitive with over 20 active shippers with the largest individual market share around 20%. Price information is publicly available for the complete market and standardised contracts are available to all participants. This results in a highly competitive market on whatever basis is used to assess the level of competition. Since international long term gas contracts are indexed to the price of oil, high oil prices—frequently over $100 a barrel—are impacting gas prices. Thus underlying market fundamentals are resulting in high prices at the current time but the market has remained highly competitive throughout this volatile period and without this level of competition, we believe prices would have been even higher.

33. The GB gas storage market is also competitive with six current storage operators and a further seven operators for storage projects under construction or seeking planning approval. Although a single operator is responsible for over 75% of the current storage capacity, this capacity is required to be offered to other market participants to ensure all participants in the gas market have access to storage.

THE IMPLICATIONS OF GROWING CONSOLIDATION IN THE ENERGY MARKET

34. There has been no major consolidation in either the electricity or the gas retail markets since 2002 when E.ON and EdF significantly increased their market shares through acquisition. Since 2002 there have been significant changes in the market shares of some participants achieved through organic customer acquisition. Over the recent difficult period of fuel and wholesale price volatility, the retail market structure of six major vertically integrated competing suppliers has demonstrated its ability to continue to deliver competitive pricing without the failure of any of the major market participants as happened in 2002 and previously.

35. In our view, the market consolidation that has occurred since 1995 has benefited final customers in that it has resulted in a number of strong players competing in the market, who are able to withstand volatility in fuel and wholesale prices. They have been able to shield customers from much of the short and medium term market volatility by using the natural hedge for much of their customers' demand through owning upstream power generation assets. The market is also used by the major suppliers to hedge their positions and thus the volume traded on the market can be many times the volume finally delivered to customers. This volume of trading ensures sufficient market liquidity for the long term and the short term market. In the long term, however, final customers must pay prices reflecting market fundamentals. Analysis of the HHI figures suggests that further horizontal consolidation at the retail level would be undesirable.

36. To date, over 6 million customers have benefited from a smooth transition between suppliers in cases of supplier failure. Without such transfers, the impact on customers could be considerable, leaving a number of customers without a secure supply of energy and many vulnerable customers particularly at risk. The great majority of these transfers took place without invoking the formal Supplier of Last Resort (SoLR) procedures. However, these procedures are necessary when a trade sale is not possible, to ensure continuity and security of supply for consumers and help to prevent increased costs across the market. Appointing a SoLR only for domestic customers would leave other customers without a supplier and at risk of possible disconnection. It could also expose other industry parties to bad debt as customers continued to use electricity or gas for which the failed supplier was not paying.

37. The retail gas market benefits to a lesser extent from vertical integration with the majority of the major competing suppliers having limited ownership of upstream assets. There is benefit, however, in the major suppliers owning gas-fuelled generating plant allowing them to spread gas purchases across both the retail market and the electricity generation market and thus enabling them to reduce the volatility in their gas prices to final customers.

THE RELATIONSHIP BETWEEN THE WHOLESALE AND RETAIL MARKETS FOR ELECTRICITY AND GAS

38. The structure of our energy market has evolved over time, with the business models of the six main energy suppliers reflecting a natural level of vertical integration in the power market (from generation and trading through to electricity supply) and a desire to achieve an increasing level of integration in the gas market. This positioning is understandable and reflects a desire to mitigate commodity sourcing, trading and market price risk in a period of unprecedented volatility in global financial and commodity markets and the need to secure input fuels from new sources around the world. It is our strong belief that this structure provides benefits to retail customers by ensuring security of energy supply, mitigating commodity risk and protecting customers from the extremes of wholesale price movements.

39. We believe that the returns earned in the GB integrated energy market can not be considered excessive and in fact have not been sufficient on a sustained basis considering the inherent level of risk faced in our competitive markets. Since the introduction of competition profitability levels along the various parts of the energy value chain have been highly cyclical, with independent retailers such as Independent Energy facing financial distress and at other times generators such as British Energy experiencing a similar fate.

40. During 2005 and early 2006, retail margins were highly negative at prevailing market prices and these losses were offset by improved industry returns in power generation. The subsequent fall in wholesale prices in late 2006 and early 2007 improved retail economics and coincided with a significant fall in returns available to coal generators. Recent industry wide tariff increases reflect the very strong rebound in global commodity prices (gas increase 83% and coal increase 97% from February 2007 to February 2008) and industry wide costs such as the CERT programme and the Renewables Obligation. We believe that retail energy prices do not currently show a sustainable margin over wholesale prices and we are continuing to monitor the position.

THE INTERACTION BETWEEN THE UK AND EUROPEAN ENERGY MARKETS

41. A fully competitive energy market in Europe is very important for the long term future of the UK energy market. While this is important in electricity it is essential in gas, where a significant part of UK requirements are imported. We remain concerned that European markets, especially in gas, are not as open as they should be and that the market is not clearing efficiently between the UK and the continent. This may be contributing to additional volatility of gas prices in the UK and possible excess profits for upstream hydrocarbon producers. For these reasons, we support the progress being made on liberalisation of EU markets.

42. The domestic retail gas market is significantly larger in GB than in the majority of EU Member States and thus gas price volatility has a more detrimental impact on GB domestic customers. The GB wholesale gas market is closely linked to European prices due to the interconnector pipelines connecting with the continent and the increased volume being sourced through these interconnectors. It is essential that a true European gas market is developed to ensure that GB suppliers have access to gas in Europe on the same terms as other European energy companies and are able to make full use of gas storage.

43. Ofgem continues to play a key role in working with the European Commission and other European regulators with the aim of ensuring that a genuine and open market is developed. Such a market would benefit energy consumers both in Britain and elsewhere in the EU. Significant progress has recently been made in improving transparency in European power and gas markets with key information now available on daily gas flows on major pipelines and on gas storage in all the major European markets. Regional energy markets are being developed towards the eventual goal of a competitive single European energy market.

THE EFFECTIVENESS OF REGULATORY OVERSIGHT OF THE ENERGY MARKET

44. Like many market participants, we agree with Ofgem's judgements in some specific areas and are seeking opportunities to persuade them to re-assess their policies in others. For example, we have serious reservations about their approach to the allocation of transmission charges to generators. However, we have a high degree of confidence in the ability of Ofgem to provide the necessary regulatory oversight of competition in the retail market. Competition is clearly the best way to protect consumer interests because it drives the industry to innovate to raise standards and improve efficiency. Accordingly, we are supportive of Ofgem's policy of avoiding detailed intervention in competitive areas where possible, and of promoting self-regulatory solutions where appropriate. Ofgem also acts as a competition regulator and has shown a willingness to be very tough in this sphere, as evidenced by the recent £41.6 million fine imposed on National Grid.

45. The Government's response to the House of Lords Select Committee Inquiry on Economic Regulators[361] points out that Ofgem's regulation of energy markets is widely regarded as successful and the Government would not want to change its objectives in a way that hampered its ability to continue to regulate effectively. We support the Government's position in this area and believe that Ofgem provides effective and adaptive regulatory oversight within the current market.

46. The highly competitive GB wholesale and retail energy markets were achieved through strong national regulatory oversight. In particular the establishment of a market structure separating monopoly activities from competitive activities has been key to ensuring that owners of monopoly assets do not gain a competitive advantage over other market participants. These markets have, however, been highly competitive for some time and are now able to be governed increasingly by general competition law. Over-regulation can stifle competitive innovation, which in the long term will be detrimental to customers.

47. Overall Ofgem's ability to oversee the GB market relies upon a variety of tools to cater for differing circumstances as a market with both monopoly regulation and robust competition demands flexible, targeted and often innovative approaches to regulation. It is also important to note that Regulators have a duty to take account of the costs that they impose on industry and hence consumers, and to find new and cost effective ways to achieve their objectives. Examples of effective regulatory oversight can be seen in a variety of cases including:

— The sustained success of self-regulatory initiatives in the retail market such as the Association of Energy Suppliers (AES) Selling Code of Practice, recognised by the OFT's Market Study on Doorstep Selling as a significant effort made by the energy suppliers, which has resulted in the number of selling complaints falling by around 90% since 2002.

— Ofgem's review of the gas and electricity supply licences which was aimed at opening the market to new entrants, improving protection for vulnerable customers and creating a path for the development of more innovative products and technologies, including micro-generation.

— The change in the GB market to increase the amount of information available to industrial customers on supplies of gas from offshore sources thus removing unnecessary problems for customers, traders and suppliers and demonstrating Ofgem's desire to see greater transparency in energy markets across Europe.

PROGRESS IN REDUCING FUEL POVERTY AND THE APPROPRIATE POLICY INSTRUMENTS FOR DOING SO

48. In the current climate of increasingly higher energy prices, some customers, including some of the most vulnerable, find it difficult to achieve affordable warmth. ScottishPower is committed to playing its part, with Government, in helping to combat fuel poverty. We have undertaken a number of initiatives in this area, which involve improving the housing stock, implementing social tariffs, providing winter rebates to vulnerable customers and establishing the ScottishPower Energy People Trust (an independent charity established to help combat fuel poverty in the UK).

49. We are holding discussions with the Government with a view to establishing how their aspiration of almost trebling the industry's social programmes to £150 million a year can be made an effective reality. We believe that a voluntary approach on the basis the Government has outlined is achievable and would deliver the best results by allowing suppliers to innovate to find the best solutions. A mandatory social tariff could stifle innovation and prevent the best solutions being found.

Prepayment meters

50. Concern has been raised over the difference in some suppliers' retail prices for prepayment meters compared to other payment methods, particularly direct debit. Nearly 11% of gas customers and 14% of electricity customers pay by prepayment meter (PPM). All PPM systems require customers to pre-purchase electricity or gas at a vendor outlet (eg post office, shop, petrol station etc). The customer needs to bring a card or key to the vendor outlet for the card or key to be "charged", or for a token to be sold so that when the customer inserts the card, key or token into the meter they obtain credit on their meter. The establishment and maintenance of a network of vending outlets, along with the additional costs associated with payment devices such as cards and keys makes PPMs a more expensive payment method when compared to standard credit meters. In addition, some PPMs are more susceptible to fraud, theft and other forms of misuse. They can often require more frequent visits by field staff than traditional credit meters.

51. Ofgem's breakdown of the estimated cost difference between supplying a PPM and a direct debit customer for both gas and electricity shows an additional cost of £85 per annum. ScottishPower currently views the cost differential as being slightly higher—a little above £100 per annum, and prices accordingly. However, this is an area we keep under review, and if we are satisfied that the cost differential is less than the figures in our current tariffs, we would take account of this in future price adjustments. We believe that our cost reflective approach to pricing provides the best deal for customers who pay by PPM, and the minority of PPM customers who are fuel poor[362] are best served by a programme of social assistance directly targeted at reducing fuel poverty.

52. ScottishPower remains the only GB energy company to set standard pre-payment prices for both gas and electricity lower than standard quarterly credit prices. This ensures a good deal for all PPM customers—with an estimated benefit to them of nearly £8.4 million per annum.

53. We welcome Ofgem's announcement of a Fuel Poverty Summit which will be held later this month as this form of co-ordinated action between Government and industry often results in new and innovative solutions being developed to address the many dynamic and complex factors that contribute to the problem of fuel poverty in the UK.

ScottishPower activity

54. ScottishPower has always been committed to providing assistance for vulnerable customers and our current efforts in this area include:

Housing Stock

ScottishPower was the first company to achieve the Government's challenging Energy Efficiency Commitment (EEC) target, which was set in 2005. To deliver the required reduction in energy demand, an extensive programme was implemented to improve the energy efficiency of homes across Great Britain.

Over the three year period, half of the energy savings were targeted at people in receipt of state benefits ensuring that those most in need could also benefit. To achieve their target ScottishPower insulated over 150,000 lofts and 270,000 cavity walls and distributed over 5 million energy efficient light bulbs.

Social Tariffs

Our Carefree Plus Tariff, which was launched on the 1st February 2008, is designed to help our most vulnerable customers save money. The tariff means that eligible customers will save up to £112 (including VAT) on their energy bills each year.

All Carefree Plus customers will also be offered a free Energy Efficiency Survey to help them save on their energy bills and identify whether they qualify for insulation or other energy efficiency measures, and a Benefits Health Check. Our experience of carrying out Benefits Health Checks through the ScottishPower Energy People Trust suggests that for every £1 spent on this work, £20 of unclaimed benefit is recovered for customers. As such we have developed this as a key component of our Social Tariff offering.

Winter Rebates

This Winter, we took mitigating action against the impact of retail price increases on our most vulnerable customers. For customers who were on our Carefree Priority Services Register, ScottishPower provided a rebate of up to £31 to offset the effect of the recent price increase until 31 March 2008.

Trust Fund

The ScottishPower Energy People Trust was established in November 2005 to fund not-for-profit organisations that help vulnerable people including families, young people, the disabled and the elderly who need to spend more than 10% of their income on energy bills. So far, the Trust has awarded £3.6 million to 87 projects across Great Britain, assisting over 215,000 individuals in over 88,000 households.

Proactive Approach to Debt Prevention

Ofgem's 2005 review of energy suppliers' debt and disconnection procedures identified ScottishPower as a market leader in terms of finding innovative ways of helping consumers avoid debt and disconnection. A more recent review part of which was done in collaboration with energywatch, concluded that since Ofgem's last review in 2005 there has been an increased focus by all suppliers on debt and disconnection issues.

Community Liaison Officers (CLOs)

We offer targeted and detailed face-to-face advice to customers through our unique network of CLOs. Thirteen dedicated staff represent ScottishPower within the community, assisting customers and providing training across the business, including on how to identify and deal with vulnerable customers. Last year ScottishPower's CLOs undertook around 7,200 customer visits, the majority of which will have included providing energy efficiency advice.

Clear Information on Savings

ScottishPower has launched a "Savings Challenge" to encourage existing customers to ensure that they are on the company's best deal. Over 80% of ScottishPower customers could pay less by making simple changes to their energy account such as changing payment method.

Home Heat Helpline

ScottishPower currently supports the national Home Heat Helpline, an independent free telephone service that offers help and advice to people struggling to pay their energy bills. We are in discussion with Government about the best method for its continued funding. The helpline can assist vulnerable people in a number of ways, including providing advice on:

— Identifying grants that are available to make homes more energy efficient.

— Alternative payment methods.

— Accessing a priority service team in each supplier to provide specialist advice.

— Linking with other support agencies.

Government activity

55. Given the wider causes of fuel poverty there will inevitably be a limit to the role that the industry and indeed the regulator can play in tackling it. While we will play our part, the primary focus has to be on raising incomes and improving housing, both of which are more the responsibility of Government. We believe that there are a number of helpful tools available to Government that would reinvigorate the focus on fuel poverty at this time. These include:

Winter Fuel Payment

We welcome the Chancellor's recent announcement of a one-off additional Winter Fuel Payment for 2008-09. We would suggest that consideration is given to discontinuing the Winter Fuel Payment for higher rate taxpayers and using the money saved to fund other schemes which would more directly help with fuel poverty, including Warm Front.

Warm Front

Funding should be increased for Warm Front, the Government's main grant funded programme for tackling fuel poverty. The budget for Warm Front was cut before Christmas from £350 million in the current year to around £270 million in each of the next three years. This move was contrary to the recommendations of the Fuel Poverty Advisory Group which stressed it "is essential that Warm Front funding be maintained in 2008 to 2011 at the 2007-08 level of around £350 million".

Benefit take-up

Consumer income should also be maximised through an increased drive from Government to encourage benefit take-up, including automating the take-up of Council Tax benefits and other tax credit. The Government estimates that up to £9.3 billion of benefits went unclaimed in 2005-06.[363]

ScottishPower

1 April 2008