Memorandum submitted by Utilita
My company, Utilita (www.utilita.co.uk) is a
relatively new entrant in the energy supply market. Unlike most
new entrants we have targeted the residential sector for both
gas and electricity, and do NOT specifically sell a renewable
or "Green" product. We are the 7th largest dual fuel
supplier in Great Britain, basically because there is no one else
after the Big 6 (British Gas, RWE, Eon, Iberdrola, Scottish &
Southern, and EdF). As a small company we seek to exploit our
advantages in technology vis-a"-vis the Big 6, and are currently
launching a new pre-payment product based on smart metering which
we believe is the biggest smart metering project in the residential
sector and the only smart meter project focused on pre-payment.
This product is priced to be competitive with incumbent supplier
direct debit prices, rather than at a significant premium.
We have not been invited to give evidence to
the select committee, and are not particularly looking to give
oral evidence, however, we would like to ensure that the committee
is aware of the evidence that we have submitted to Ofgem as part
of their review of the retail market. In particular the points
we have focused on are:
1. Predatory pricing—whilst pushing
through big increases to their incumbent customer base several
of the Big 6 suppliers have continued to cut the prices they offer
to new customers. Obviously as a new entrant we have to compete
with their discounted prices and believe that these are therefore
preventing competition. Furthermore it should be noted that much
of the cost to serve for utility customers is in winning and losing
customers, both in terms of internal costs of setting up and closing
accounts and external costs of commission payments. These same
companies often apply even higher prices to pre-payment customers.
On the surface it certainly seems that they are cross-subsidizing
their new customers from their inert and/or pre-payment customers.
This is a barrier to entry.
2. Credit cover—Sometime ago, Ofgem
reviewed the credit cover arrangements that were being imposed
by the monopoly electricity distribution businesses and came to
the conclusion that these were a barrier and that there were more
efficient ways to manage bad debt. They subsequently introduced
changes to the standard terms of business that removed the credit
cover requirements, however, they failed to translate the same
principles onto the gas distribution companies, and as a consequence
there are still onerous and unnecessary credit cover arrangements
being imposed by the gas distribution companies. The same applies
to NGC Meters, a company that essentially operates a near monopoly
in the provision of gas meters and that was fined by Ofgem earlier
this year, but there has not changed the onerous credit cover
arrangements that they impose. This is a barrier to entry.
3. Balancing prices—because a supplier
cannot predict exactly how much gas or electricity its customers
will use on a day, but at the same time there is a physical need
to ensure the systems remain in balance, both markets have a "balancing
mechanism". These are markets that come into play after the
event to balance out the differences between what a supplier bought
in advance (based on what he thought his customers would use)
and what his customers actually used whether more or less. Obviously
for these to work there needs to be a mechanism for determining
the price at which these balancing trades are performed, in fact
there are two prices, one that applies if you are short, and a
lower price that applies if you are long and need to sell back
the excess. The differentials in these prices between the two
markets is enormous, in the gas industry typical spreads are around
+/- 2%, but in the electricity industry they can be +100% (or
more when we need to buy) and -50% (when we are selling). This
leads to differential wholesale costs between big and small suppliers
because we both trade in the same markets ahead of time where
there is a minimum granularity in the products we can trade and
smaller suppliers therefore cannot hedge as accurately in percentage
terms as bigger suppliers. This is a barrier to entry.
We did have concerns about smart metering. We
are currently rolling out a fully commercial product that both
delivers smart meters and addresses the fuel poverty issue by
reducing prices to pre-payment customers. We would not wish to
see any measures being imposed on the industry (primarily on the
Big 6) that had the effect of removing a critical element of one
of the few competitive advantages we have over our much larger
competitors.
4 June 2008
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