Examination of Witness (Questions 180-199)
MR ALLAN
ASHER
20 MAY 2008
Q180 Mr Weir: Can I just follow that
up? Obviously, like Mark, I have a similar problem. If it is coming
under the National Consumer Council, has any thought been given
to including that within the energy remit of the National Consumer
Council to make sure it just does not disappear and fall between
two stools?
Mr Asher: We have been invited
by the Chief Executive, Ed Mayo, to put forward to him ideas about
a forward work programme and, as part especially of our responsible
markets work, we have been very active in some of these areas.
Indeed, with the Rural Advocate, we have a very close working
relationship and we have been major information providers. I cannot
say what is going to be in their work programme. What I can say
is that Parliament just three weeks ago stated that the new NCC
needs to come up with a work programme over the next 12 weeks
or so for public consultation and that that will be the work programme
they need to work on from 1 October this year to 31 March 2010.
So I think there is ample opportunity to inject those ideas, and
we certainly will.
Chairman: We certainly welcome your enthusiasm
to encourage the Council to take this on board, though it is a
shame that both you and Postwatch are being abolished at probably
the most sensitive moments for the industries you oversee. It
is going to be quite a burden for the new Council to effect the
transition.
Q181 Mr Wright: Just very quickly
on a similar point, as has been said, many of us have rural constituencies,
which is a major concern in terms of energy supplies. Would you
suggest, for instance, that because the energy by pipe or wire
has been controlled by yourselves since 2000, when you were set
up, companies have taken advantage of the fact that there is no
regulation of liquefied gas?
Mr Asher: Undoubtedly competition
problems have been even worse in off-gas and off-power networks
and the Competition Commission spelt this out in its LPG report.
One of their draft recommendations was that our remit be expanded
to deal with that but at the time I think the Government did not
want to pursue that. Of course, because so many people in rural
areas usually only have access to a single source of energy, it
is usually going to be power, and so the prices are always considerably
higher. Even in Wales and Scotland power prices are considerably
higher than in the rest of GB.
Q182 Mr Wright: Would you consider,
for instance, that had it been regulated, the prices would have
been much lower?
Mr Asher: In bits. For example,
with LPG, what was happening was that the few competitors would
not allow one another to use the same cylinders and things like
that, and that hugely increased the cost, suppressed competition
and, of course, consumers paid the price. That sort of thing happens
all the time, sadly, even in what should be a competitive sector
of the market.
Q183 Chairman: Thank you very much
indeed. Can we move on to some of the issues that we want to talk
to you about, starting with retail market concentration. This
is a difficult inquiry for politicians because we get into very
technical economic areas quite quickly. Both Roger Berry and I
studied economics at university but we are not actually with the
Herfindahl Hirschman Index or how it is composed. We will take
it at face value. I notice that a highly concentrated market is
1,800 on the HHI score. Ofgem say that the index has fallen since
2002 from 4,300 to around 2,830, so despite the fact that 14 suppliers
are out of the market, it is becoming more competitive, though
it is still highly concentrated. Can you explain this conundrum
to me?
Mr Asher: It is very easy to do
if you change the definition of the market. Put in its most simple
form, the HHI is just an indicator of when markets reach a certain
level of concentration. It is based on the square of market share
and a few other technical details but it is used widely around
the world by competition authorities to give themselves the idea
of where to look more closely. It is not conclusive of anything
but it is a sort of smoke signal. All of our markets—and
we can give you very detailed information about this—are
well over the 1,800 level, regardless of whether it has fallen
or increased, but the point that we make is that Ofgem regard
GB as having a GB-wide market whereas our evidence is that in
any particular area, say, in the north of Scotland, 89% of consumers
are going to just deal with one or two competitors, and around
the whole of GB that is the pattern. It is the old RECs, the old
electricity franchises, which form the backbone of markets, and
typically a supplier will be able to charge a lot more in their
old monopoly area and then they will do a bit of discounting in
one or two other markets just to keep their toe in, but the markets
are quite anti-competitive and under any standard competition
test people would say there is alarm. I will happily submit to
you the full tables that we have calculated by area. I think for
MPs in this room, we have looked at most of your electorates and
most of them, or in fact every one of them, should raise competition
concerns.
Q184 Chairman: Am I right in saying
that in the gas market British Gas is the incumbent across the
country, whereas in the electricity markets it is the regional
electricity companies?
Mr Asher: Yes, British Gas of
course had 100% a decade ago and it is down to about half that
now, but in power it is more widely distributed. Market shares
actually do not change all that much from year to year. There
is a lot of pretence of competition and huge amounts of churn
but it does not amount to really good companies winning and really
bad companies losing and, again, we have sad and detailed data
that show the bad do prosper and the good fail.
Q185 Chairman: So the reason for
the stickiness of the consumer in the retail market on electricity
is presumably not because they are loyal to a name of their supplier,
because most of us do not know who supplies us now as the names
change so often. The old names we are familiar with have all gone.
It is just incumbency fact. You do not have anything to do. You
just stay with the supplier.
Mr Asher: There are a range of
factors. One is incumbency and, particularly amongst prepayment
meter customers, it is very hard. There are huge anti-competitive
obstacles to them switching. Often you will not be able to switch
on the websites, access to a bank account, access to the internet,
lower levels of information, being in debt, and the companies
actively ensuring that those people do not switch, mean that of
the 5.9 million PPM consumers, one million are really closed out
of the market. There are another 268,000 with dynamic telemetering,
a form of technology used in Scotland and elsewhere; only one
supplier in each region operates to those. So sadly, we have 20
suppliers 10 years ago shrunk to just six in a comfortable oligopoly
who really do not feel the need to innovate or compete and, sadly,
consumers are the losers.
Q186 Roger Berry: In a comfortable
oligopoly there is usually a leader or two and the rest are followers
in terms of price setting. Have you been able to identify in particular
markets who the leaders are in terms of price setting and who
the followers are?
Mr Asher: Quite clearly, in our
market the first mover is typically British Gas, with a huge market
share and lots of signalling. Already we have seen that at their
last annual meeting, where they scratch their chins and say, "Oh,
it looks like prices will have to go up again in the Spring,"
and then others will respond in similar ways, and sadly, lo and
behold, that will come about. There is a myth that there is vigorous
price competition between them. If I were to tell you that for
the main product, the one that they most actively sell, which
is direct debit for dual fuel, selling both gas and electricity
using direct debit, the price difference between the cheapest
and the most expensive right now is about £16 a year; it
is just a few pence a week.
Q187 Roger Berry: So there is no
evidence of collusion in the unlawful sense.
Mr Asher: Yes.
Q188 Chairman: That is a very important
point. There is no evidence of collusion in the lawful sense.
Mr Asher: I think that in oligopoly
markets you do not need to meet in smoke-filled rooms because
it is called "conscious parallelism" or "combined
effects" or "tacit collusion". There are all sorts
of economic terms for it but the manifestation that we see is
that consumers get it in the neck.
Q189 Roger Berry: That was going
to be my second point, that if you have an oligopoly with a market
leader and followers situation, you actually do not need to meet
in smoke-filled rooms.
Mr Asher: That is right. Can I
just give you one more illustration? People will constantly say
"Ah, yes, but what about that well-known maverick, Scottish
and Southern, who do not behave in that way?" They have a
marvellous marketing department, but if I were to tell you that
the difference between them and the next company is at the moment
something like £3, that will tell you that what they did
was delay their price rise for 90 days, and they have been able
to trade all year on that, but their prices are also in that very
tight batch for direct debit dual fuel.
Q190 Chairman: Is it not possible
that this is a sign of a highly competitive market operating in
a very low margin environment? Tesco's and Sainsbury's are pretty
competitive organisations.
Mr Asher: Yes, that is right,
and the economists will say that perfect competition and price
fixing can look just the same. However, in this sector, when one
looks at company profits and actual high levels of inefficiency—and
it is not necessarily huge profit. It is a mistake to think that
oligopolies always make huge profits. Often they have just bloated
cost structures and they are inefficient and, sadly, that is what
we have: tens of thousands of people to fix up the errors they
make in their billing systems; one in three bills that they send
out are wrong. These anti-competitive dimensions just go right
through this market and it is highly ineffective and consumers
are losing out. It should be manifested in keen pricing, but I
have a number of charts here that, if we get a chance, I will
show you that show that far from all the information you get from
public officials here about how low our prices are, prices in
Great Britain are systematically rising much more quickly than
in Europe, and that our electricity prices are the fourth highest
in Europe and, according to a recent European Commission survey,
our gas prices are the 10th highest.
Chairman: The European market is something
that will concern this Committee greatly, of course, during the
course of this inquiry because of the problems of liquidity there.
Q191 Mr Weir: I was just interested
in what you were saying about going down to the big six. Obviously,
there have been a lot of rumours in the business market recently
about perhaps some of the Continental companies concentrating
in takeovers could lead to a reduction from six to perhaps five
in the UK. Would you consider that to be very bad for competition
in the UK, this further concentration in the market?
Mr Asher: The only relevant test
for that is if after the merger a company can give less and charge
more, it is bad, and on that test I think quite clearly that is
the case. Even Centrica expressed huge alarm at the prospect of
British Energy being snaffled by EDF. That would mean that at
the moment at the generation level, where the independents have
just about 45% of the market, that would fall to 25%. So the six
vertically integrated suppliers would control three-quarters of
that market. Sadly, the only logical consequence of that is worse
service and higher prices.
Q192 Mr Weir: But if we are in an
oligopoly of six, possibly going down, what measures should be
taken to introduce more competition into the market?
Mr Asher: I think the very first
thing is to stop it getting worse, and then to find ways of promoting
new entry. It is not just that there are only six. It is, unfortunately,
that our policy makers have allowed us to go from six retailers
and a competing upstream market to vertically integrated, so that
the six suppliers acquired more than half the generation, so that
they now self-supply and all of that trade has gone from the wholesale
market. We need to find ways of forcing open contestability in
both wholesale and retail markets. It is about removing barriers
to entry, the credit rules, and all sorts of things that have
seen 20 suppliers and 20 generators crushed out of this market
since 2000.
Q193 Chairman: We will look at the
wholesale gas market separately later during the questioning.
The Committee intend to explore some of that in a little more
detail because it is an important point. Can I just ask two last
questions, small points but I think quite important ones, before
we move on to my colleagues. First of all, do you accept that
world energy prices are rising and consumers would have to see
price increases in this market irrespective of the level of competition
that exists in the market here?
Mr Asher: Of course.
Q194 Chairman: And significant increases?
Mr Asher: Energy is a complex
mix and oil prices clearly are sky-rocketing but I would draw
the distinction between some of those commodities which are in
a globally traded market and the natural gas that we consume,
75% of which is still coming from territory under our legislative
and regulatory control, more of it from Norway but some from the
Netherlands, and so the bits that are hotly traded in China do
not include the gas that we burn.
Q195 Chairman: Before we move on
to the question of retail prices specifically, can I just ask
you a question about prepayment meters and standard credit? The
possession of a prepayment meter does not indicate poverty necessarily,
does it? People on standard credit terms can be just as poor as
PPM customers.
Mr Asher: That is right. About
a third of the 5.8 million prepayment meter customers you would
describe as being poor, not necessarily the fuel-poor definition
of more than ten% of income but, sadly, if you are looking for
the people at the bottom of the pile, you are more likely to find
them amongst prepayment meter customers. They are the ones who
are going to have debts, they are the ones who cannot switch,
and they are the ones who have to pay these punitively higher
prices.
Q196 Chairman: But two thirds of
those people with PPMs are not in fuel poverty?
Mr Asher: They are not in fuel
poverty.
Q197 Chairman: Do you have an estimate
of the number of people on standard credit terms as opposed to
direct debit who would be in fuel poverty?
Mr Asher: I guess the other two
thirds spread across various|
Q198 Chairman: Predominantly the
standard credit group—is that right?
Mr Asher: That is right, but there
is still a huge number who just have ordinary credit accounts
where you are billed. That is where most are.
Q199 Chairman: Those people could
be very hard up indeed.
Mr Asher: Indeed. Millions are,
sadly.
Chairman: I think there is a slight laziness
in the debate sometimes that prepayment meters becomes a surrogate
for fuel poverty and that is not acceptable; it is wrong.
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