Examination of Witnesses (Questions 40-59)
MALCOLM WICKS,
MP, AND DR
NICK PALMER,
MP
31 JANUARY 2008
Q40 Chairman: That is what Shell
have said, I believe, in their statement today, so I think we
will leave it there for that. Before we move on to the next session
of questions, could I check two things. The graph here—which
Dr Berry helpfully pointed out did not entirely justify the claim
made for it—nevertheless does show that British prices have
been consistently below the EU average and fell last year uniquely,
or not necessarily uniquely—I am corrected immediately—but
fell compared to the EU average last year. Nevertheless British
Gas gave us evidence—and we are grateful to the energy companies,
all of which have produced evidence for today, and the regulator
and the watchdogs and so on—in which they said, "Average
UK electricity prices including taxes are the fifth lowest among
the EU 15." So electricity is the fifth lowest. "Britain's
gas bills are also still amongst the cheapest with the UK average
gas price the second lowest in the EU 15." That means we
are the most liberalised market in Europe—and we will come
back to liberalisation issues later—and we still do not
enjoy the lowest prices, if those claims are right from British
Gas.
Malcolm Wicks: We need to compare
and contrast evidence. My evidence shows that compared with the
EU 15 over that long period, domestic customers enjoyed the lowest
prices. It is more mixed when it comes to business customers.
Q41 Chairman: Which is the point
Mr Bailey was making. There is some evidence—and we will
come to this again later—of mis-functioning of the market,
if, given that we are the most liberal market, we do not enjoy
the lowest prices. That may be the European markets. We will come
to that later. As a matter of record, before we move on, Mark
Hunter was asking about climate change costs to consumers not
of their fuel bills. We have had very good evidence from Scottish
and Southern who say—and I would like to know if this order
of magnitude sounds right to you—"The total costs to
customers in delivering network infrastructure and environmental
policies"—both and not just the environment—"have
risen by almost 50% in the last four years and almost £170
on electricity and gas bills in 2004 to almost £250 in 2008."
That is £250 on the average consumer's gas bill for network
infrastructure and climate change considerations. Would that seem
an order of magnitude that is right to you?
Malcolm Wicks: I am not surprised
about the very significant increases. But I do not want to commit
myself to that figure. I have no reason to doubt it.
Q42 Chairman: But the order of magnitude
does not seem intrinsically wrong to you anyhow.
Malcolm Wicks: Not intrinsically
wrong, no, because I mentioned myself earlier that climate change
does not come on the cheap. Part of the investment we are needing
and we are seeing is in terms of the grid infrastructure et
cetera.
Q43 Chairman: We have at least three
factors driving prices: the markets, infrastructure requirements
and climate change.
Malcolm Wicks: Yes.
Q44 Chairman: At least three. Good.
Could I ask you a question about your old boss, now Chancellor.
Malcolm Wicks: I have had several
old bosses. Which one can I tell you about?
Q45 Chairman: In the words of the
old song, "You're still there anyhow," after a brief
interlude somewhere else.
Malcolm Wicks: Okay.
Q46 Chairman: The Chancellor of the
Exchequer was at the DTI—the beloved DTI—and he was
in charge of energy policy. He gave evidence to this committee:
very convincing, very good, very powerful, very competent evidence,
as you would expect from a man of his intellectual abilities.
Why did he need to talk to Ofgem earlier this month about how
markets work? Surely he knew.
Malcolm Wicks: I think it is not
unreasonable, given public and parliamentary concern, as we are
seeing today, about the impact of rising prices on the vulnerable,
in particular, that the Chancellor wanted to reassure himself
that Ofgem were looking at this critically and wanted to hear
Ofgem's own analysis of the relationship between wholesale and
retail prices.
Q47 Chairman: I have the letter here
that he wrote, and it is a pretty harmless letter—I mean,
one can get too excited about it. "I am particularly interested
in your views on the relationship between wholesale price movements
and feed-through to domestic retail prices" and so on. If
he wrote that kind of letter to the Governor of the Bank of England
about interest rates, all hell would break lose in the international
currency markets. Was it an appropriate intervention by the Chancellor
of the Exchequer?
Malcolm Wicks: Yes. For the reasons
I have given, really. It clearly would not be sensible for chancellors
or their ministers of state to somehow write to Ofgem every day,
as it were, but I think this is a critical issue. We are seeing
prices rise at very considerable levels. There is a great deal
of criticism reflected in this Committee understandably about
the relationship between all this stuff, wholesale and retail,
particular worries about the impact on the vulnerable. It is perfectly
proper, in my view, that the Chancellor should want to reassure
himself.
Q48 Chairman: He was only minister
of the issue six months ago at DTI. He would know all this stuff.
What has happened tangibly, as a result of that meeting that flowed
from the letter?
Malcolm Wicks: There has been
a meeting now between the Chancellor and Ofgem where Ofgem put
forward their analysis and sought to reassure the Chancellor—I
think he was reassured—that, regrettable as it is, there
is a proper relationship going on between the different factors,
including wholesale and retail.
Q49 Chairman: What is interesting
about this is that the media, the lobby were very heavily briefed
about the significance of this intervention by the Chancellor.
You tell me he was just doing it for information: a sort of tutorial
in gas prices to satisfy himself. But they were briefed rather
to the contrary. It looked like action the Government was taking.
Surely the only action that is possible is interference with the
independence of the regulator.
Malcolm Wicks: No. I am sorry,
I am now repeating myself. It was the Chancellor wanting to reassure
himself and therefore the Government that Ofgem were satisfied
that there was no wrongdoing going on, that the competitive market
was working, and that there was a reasonable relationship between
wholesale and retail.
Q50 Chairman: I hold you in high
regard, Minister. You know that. That is your job. Were you at
the meeting?
Malcolm Wicks: No.
Q51 Chairman: Should you not have
been? Should you not have been able to provide the Chancellor
that reassurance without giving the appearance that the regulator
was being interfered with?
Malcolm Wicks: I do not think
he was being "interfered with" to use your term.
Q52 Chairman: A slightly unfortunate
turn of phrase, I agree!
Malcolm Wicks: I think it was
perfectly proper that the Chancellor of the Exchequer, among other
things, concerned about inflation and all those issues, should
reassure himself about this vital sector at a time when prices
are rising, and not unreasonable that the public and Parliament
should, as it were, know about that meeting. I think it was perfectly
proper.
Q53 Chairman: But nothing happened
as a result. There was no tangible outcome from that meeting.
Malcolm Wicks: The tangible outcome
is Ofgem having their opportunity to present their analysis to
the Chancellor and, out of that, a reassurance that, despite what
others may say, the market is working as well as it can and at
a time of some difficulty in terms of global demand.
Q54 Chairman: So the Government have
no plans to change the remit of Ofgem or to encourage it to work
in a different way?
Malcolm Wicks: No. I mean, there
is nothing in the Energy Bill about that. It is important, of
course, that alongside Ofgem's primary objective, which is about
competition, that there is also an emphasis on secondary objectives,
which are about sustainability and, if you like, the social policy
around vulnerability. I am very keen that Ofgem should focus on
all three.
Q55 Chairman: Do you understand why
the cynical might regard the whole exercise as more of a publicity
stunt than a serious contribution to the debate about energy prices?
Malcolm Wicks: I cannot understand
that at all.
Chairman: I thought you probably would
not be able to.
Q56 Mr Clapham: Can we go back to
the market. As we have just been talking—
Malcolm Wicks: I think we went
back to the market a few decades ago.
Q57 Mr Clapham: Well, here we are
to examine what we went back to. We have companies that have interests
in the wholesale side of the market, and they also have interests
in the retail side. Do you think that has been a development that
has been helpful to competition in the energy market?
Malcolm Wicks: I think that is
an interesting and good question and one that I have asked colleagues.
I am often told—and there may be an opportunity one day
for the Committee to ask the companies themselves—that quite
often there is little profit on the retail side. The margins are
quite tight from time to time, and without that integration with
the wholesale market it might be difficult to run retail businesses.
That is what I am told.
Q58 Mr Clapham: Nevertheless, given
that there are six companies that virtually dominate the market,
and bearing in mind that it is only a matter of weeks ago that
the Sunday papers were reporting meetings between the six that
were allegedly to ensure that all their prices kept in step, given
that we have this sort of vertical integration, that we have companies
meeting to ensure that they are keeping step on prices, surely
that is not helpful for competition. In fact, it is not a competitive
market, is it?
Malcolm Wicks: Do the companies
meet together? Yes, they do. They discuss a range of matters and
sometimes with me. Indeed, I have a meeting with the CEOs of all
six companies later this afternoon—to which I will refer
later—and they have an association through the Energy Retail
Association, where they meet. I am sure it is just an allegation
that they use those meetings to fix prices. I am assured by the
companies that for reasons of "commercial in confidence"
they do not discuss prices and they never would.
Q59 Mr Clapham: They could never
say they did, could they?
Malcolm Wicks: Actually I believe
them. I believe them. It is easy to write the story or make the
speech but if people have proof they should come forward to Ofgem
with it. I do not believe that happens; I really do not.
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