Examination of Witness (Questions 200-219)
MR ALLAN
ASHER
20 MAY 2008
Q200 Mr Weir: You have mentioned
already the difference in the spread of prices between those on
direct debit and those on prepayment meters. Can you tell us why
in your view there is such a narrow spread in one and a larger
spread in the other?
Mr Asher: The actual spread in
prices is about the business models and for direct debit there
is huge transparency, these things are seen on the internet and
there are lots of very efficient services now which help people
switch between them, and that means that their business model
keeps that tight. Not so for prepayment meters, where that is
far less visible and typically people are going to be in debt.
If you are in debt, you are prohibited from switching if you owe
more than £100, and even if you owe less than that you cannot
switch. Often you are not going to have access to the internet
so you cannot get those good tariffs. The better question is to
ask why it is that prepayment meter customers are paying £200,
£300 up to £400 a year more for the identical commodity
that those on direct debits have. There is no justification for
that gap. There is, of course, a slightly higher cost of service
and Ofgem calculate that as £85 per annum but the difference
is a minimum of £201 up to £361.
Q201 Mr Weir: That does not answer
the question as to why there is such a huge difference. I think
it is £107 as opposed to £26, basically four times that.
Are some companies taking a more reasonable attitude with prepayment
meters? What is the reason?
Mr Asher: I fear I would put it
in a different way. I would say some are not being as exploitative
as others, and I mean that, because a difference existed up until
recently where Npower was charging £452 a year more for its
prepayment meter customers over those with their online tariff.
I think it is close to immoral. Many others have compressed those
rates and I am really pleased to say a couple of companies have
now normalised their prepayment and standard credit rates and
I think with Scottish Power you can get a prepayment meter for
power slightly less than the others. So practices do differ. Some
are good in that respect but none will give you for both gas and
electricity prices equivalent certainly to their online nor even
to their direct debits.
Q202 Mr Weir: In your submission
to Members for the Energy Bill Report Stage you did a piece on
smart meters, and you indicated in that that payment meters were
being installed, I think, from memory, at a rate of 100,000 every
month.
Mr Asher: Yes, that is right.
Q203 Mr Weir: So it would appear
to be a problem that is increasing and likely to increase. Do
you think smart meters is a way to tackle this problem, and in
what way will it tackle it given the nature of a prepayment meter
tends to be to key in the money.
Mr Asher: The best evidence I
can give you is that in Northern Ireland four or five years ago
the regulator there encouraged the suppliers to get rid of the
old prepayment meters and put in what you would call semi-smart
meters, keypad meters, and that so drastically cut the cost of
service that typically in Northern Ireland prepayment meter customers
pay less than standard credit rates, not more. A roll-out of smart
metering would certainly have that benefit across GB. Of course,
it will take some years for that to happen and that is why we
argue that when the roll-out does occur, there should be a priority
for a prepayment meter consumers. That will make the market work
better, it will cut the huge number of billing errors—as
I said, one in three bills are wrong because they are based on
estimated readings—and actually, it will help consumers
know how much they are consuming, and moderate their consumption
for carbon saving purposes.
Q204 Mr Weir: You mentioned that
according to Ofgem a true price or a difference of £85. Do
you think that is reasonable?
Mr Asher: No, I do not, because
I cannot not see why the companies should treat themselves as
being entitled to that premium when there is available technology
which actually makes it cheaper for them to serve than for ordinary
credit accounts. Remember, people are paying in advance. There
is no credit risk, there is no collection risk, and they should
reflect that in their pricing. Instead there is this immoral premium.
Indeed, I do not think we should call them prepayment meters;
we should call them "the poor pay more meters".
Q205 Mr Weir: It seems to me the
only example where you are charged more for paying cash in advance.
Mr Asher: Indeed.
Q206 Mr Weir: Going back to direct
debit, there seems to be a very narrow band. We have all seen
that when prices go up, one company takes the lead and the rest
duly trot along behind fairly shortly, yet everybody says there
is no collusion in the market. It is very difficult to collate
the two because, clearly, if there is a very narrow band and everybody
puts up their prices one after the other, it does seem that there
may not be collusion but at least they are all acting together.
Mr Asher: The economists have
done a lot of work on this and there is a theory called co-ordinated
effects, and the Competition Commission itself in its store card
study—and several others have looked at this—and they
say if you have a market where people can readily see the price,
you can block out competitors so there is no new entry and it
is very hard for consumers to negotiate.
Q207 Chairman: Mr Binley wants to
explore this in detail later.
Mr Asher: However, there is well-developed
literature on this point.
Q208 Mr Binley: In order for me to
understand where you are coming from, can I ask if you have ever
been in the private sector and can I ask, secondly, whether you
understand that there is a difference between theory and the actual
practice and culture of running a business? Can I hear a little
about your thoughts on that?
Mr Asher: Certainly you may. In
fact, for 13 years I was Australia's gas and electricity regulator,
so I have had quite extensive experience in the regulation of
these markets.
Q209 Mr Binley: I did not ask that
question. That is not the question I asked.
Mr Asher: I worked for an international
telecommunications company.
Q210 Mr Binley: How long for and
which one?
Mr Asher: I worked there for three
years. It was an international telecoms company. I worked for
chartered accountants, where I was an auditor for five years,
and I worked for an international credit analyst, Dun and Bradstreet,
for three years.
Q211 Mr Binley: So you feel you truly
do understand the difference between theory and the actual working
culture of business? Because I am hearing an awful lot of theory
and I am hearing little understanding of the working culture of
a business, and I want to clarify that.
Mr Asher: I think you are perfectly
entitled to do that. I thought I said at the beginning we based
our evidence on the experience that we obtained from 50 of the
most senior business practitioners, real people doing real business,
and drawing from our direct experience of 5 million consumers.
In our submission we have dealt only in fact. We have given you
price movements, we have given you concentration ratios, we have
given you entry and exit issues, we have given you lots of examples,
and I have to say that we are not in the business of theorising.
Our problem is the real damage being caused to real people by
our broken markets.
Q212 Mr Binley: Let me move on then
and talk about your view that transfer of prices can be used to
block out competition. You do understand that there is not a business
in the land that is not totally aware of all of its competitors'
price structures. Do you understand that that is a vital part
of ensuring you know the marketplace you are competing in? Do
you understand that?
Mr Asher: If I were in business,
of course I would seek to do very close competitor analysis.
Q213 Mr Binley: That is not what
I asked you. I said do you understand on this particular matter
of prices, that that is vital to the competitive nature of a business?
Mr Asher: If you are talking about
prices, that is one thing, but costs are quite a different thing
and the different costs of capital, the different supply costs
and all of that in this industry are endemic. Let me suggest to
you that the long-term costs of gas purchase are totally opaque
as between all of the suppliers. Seventy per cent of the gas is
currently traded outside open markets and nobody knows from one
company to the next about the contractual terms, the volumes,
discounts, or all of those things, and all of that again adds
up to a conspiracy against an effective forward market. In most
markets of this sort, commodity markets, you would have liquid
forward markets with lots of volume traded, and buyers and sellers
would be contending for customers. Not so in our power market
or gas market, where liquidity more than six months out on power
you just will not see a single transaction. That is an indictment
of the market.
Q214 Mr Binley: How do you free up
the market?
Mr Asher: Most importantly, we
need to force some of the gas sales and power sales from the vertically
integrated bodies back into that forward market. We need to get
rid of some of the insurance rules, the costs of business, we
need to ensure that the rules are not stacked against new entrants
and others, and customers to be given back some buying power;
they have lost it in these markets.
Q215 Mr Binley: So what you are telling
me is that you have failed as a regulator.
Mr Asher: I am telling you we
are not regulators. We are a consumer group.
Q216 Mr Binley: I understand that
but the regulator has failed. You feed a lot into the regulators,
as you know. The regulator has failed. That is what you are saying.
Mr Asher: I think the regulator
is failing, although Alistair Buchanan just last week expressed
alarm at this price behaviour, and he said that he thinks it is
time that there was a reference to the Competition Commission
if structural problems can be found and if consumers are suffering.
We think we can demonstrate both of those, and I think the best
role for the regulator is to refer this sector to the Competition
Commission for a thorough review.
Chairman: We are beginning to tread on
all the other areas of questioning. Understandably, that addresses
Mr Binley's question. I am ruling more questions like that out
of order. That is for a little later in the agenda.
Mr Binley: I am totally happy with the
answer, thank you, Mr Chairman.
Q217 Mr Wright: In regard to retail
switching, you have certainly tried to persuade people to switch
between companies to make significant savings. In 2006 you had
your campaign "Are You Missing Out?" but really you
did not hit the majority of the market, did you? Although there
were significant savings, some up to £600 a year in savings,
yet you only persuaded 50% of people to transfer. Why do you think
that is? Why do you think people did not switch but stayed with
their company?
Mr Asher: I think there are a
couple of reasons, but firstly I can say that we actually actively
encourage people to switch. It is a good thing to do. If people
especially have not switched, there are big savings possible.
We suggest that they switch payment method to direct debit where
they can, dual fuel where they can, for savings from prepayment
to those methods. We also encourage people to do all sorts of
money-saving and energy-saving things, but research, not just
in GB but around the liberalised world, shows that typically only
about half of consumers are going to be active in these markets.
That is true across credit cards and mortgages. Car insurance
is a bit different. There is this large group, around 50% in GB,
who have not and are not likely to switch. We have concentrated
our efforts in recent years on those for whom the burden is worse,
the fuel-poor, those on prepayment meters, and we have actually
had teams helping people through the switching process. Two things:
if for direct debits the difference in price is about £30
a year, that is hardly worth the effort, and sadly, for a group
of people that we helped switch prepayment meters, many of them
actually turned out before long to be worse off because the company
they had switched to increased prices by even more. So sadly,
in a market that is structurally uncompetitive, switching becomes
just meaningless churn.
Q218 Mr Wright: You mentioned earlier
one company that had attracted a lot of customers and then within
90 days increased the price. Is that not a problem with switching?
Is that why people, you would suggest, would not switch companies?
The other side of the coin is, is it more difficult to switch
companies if you are on a prepayment meter?
Mr Asher: Yes. It is almost impossible
to switch if you are on a prepayment meter. You have a look on
the website and you will see a number of very active companies—uSwitch
and many others—who will happily help you to switch but
not if you are a prepayment meter customer. The companies seem
to be discouraging that hugely. I have written to each Chief Executive
demanding to know why they are not allowing prepayment customers
to switch so readily, and there is no good explanation, except
that they are being a market targeted and that the companies make
an extra £0.3 billion a year by charging them that premium.
Sadly, it is an area where all of the regulators and groups like
us have not succeeded in changing that. The debt blocking needs
to go. At the moment, if you owe money to a company, they are
able to prevent you from switching to another, or the ones with
this technology trap, the dynamic telemeter; if you have that,
you simply cannot switch. In rural areas, where you only have
a choice of one energy source, it is even worse.
Q219 Mr Wright: So rural communities
fare worse.
Mr Asher: They certainly do. We
have recently done work in rural Wales and the north of Scotland
and the prices are bad and the service is worse.
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