Examination of Witness (Questions 260-278)
MR ALLAN
ASHER
20 MAY 2008
Q260 Mr Clapham: Looking at what
you say about the wholesale market, in gas we see that there is
a parallel where we have a wholesale market, and then we have
an off-market situation where we have long-term contracts. That
obviously is having an enormous impact on forward markets, as
you said earlier. What is going to be the way in which we could
persuade government to intervene in order to ensure that we have
a proper competitive forward market?
Mr Asher: Most immediately, to
understand what is happening in those secret off-market contracts.
Recently Ofgem were asked—it may have been at the Public
Accounts Committee—about whether they felt that they understood
what was happening in the market, and I think they said they found
it extremely difficult to get this sort of information. I will
go back to an old thing. The Competition Commission has express
information-gathering powers that could gather those sorts of
contracts. I do not mean they should publish people's private
information across the Financial Times but their experts
would be able to look at the relationship between the commodity
costs and the prices to see where these rigidities occur. In other
markets, in the United States for example, and in Australia, my
home country, the biggest reforms to the markets were where these
long-term contracts were renegotiated. They said, "Start
again, do it in a more competitive, open way so that efficiencies
will come."
Q261 Mr Clapham: When we first started
the session, Mark referred to liquid petroleum gas, and many of
our communities are still on liquid petroleum gas. I think in
fact, if you look at the number of households on gas and compare
it with the number on electricity, you get some idea of just how
many homes still do not have a natural gas supply. I have a number
of communities. Given that situation, and bearing in mind just
how much more people—I am on liquid petroleum—pay
compared to somebody who uses natural gas, is there an argument
to say that, given the fact that we have been disadvantaged for
so many years, as we have, and that we are paying extra price,
and it looks as though we are going to be paying extra price into
the future, people on liquid petroleum ought to be receiving some
kind of, shall we say, tax credit, particularly elderly people,
to help in that increased cost and the fact that we are being
kept out of a market that is much more advantageous?
Mr Asher: At the very least they
should not be punished. When the Competition Commission brought
some of its innovative remedies, ensuring that suppliers would
allow transfer of ownership of cylinders and a number of things
that could significantly increase efficiency, that would be the
best result. We have to recognise though that some markets are
always going to be inefficient and that there are various welfare
measures. In relation, say, to prepayment meters and direct debits,
we are not saying that prepayment meter customers should be cross-subsidised
from the rest of the community. All we are saying is they should
no longer be penalised, so that there is not that negative cross-subsidy
from the poor to the better off.
Q262 Mr Clapham: Finally, given that
you are going to be swallowed up by the National Consumer Council,
are we likely to see a robust energy section fighting for the
consumer?
Mr Asher: It would be my fervent
hope that we do.
Q263 Roger Berry: May we turn to
the issue of fuel poverty? We have an interesting situation where
the Government is opposing mandatory social tariffs, and a number
of energy companies are supporting mandatory social tariffs. Why
do you think the Government is reluctant to go down the road of
a mandatory social tariff given the growing problem of fuel poverty,
for obvious reasons, in recent months?
Mr Asher: Double puzzling given
that two or three of the suppliers themselves say unless there
are some standards for social tariffs, unless there is some compulsion
about that, the system will fail and, sadly, without that system,
it is failing. I have had a number of discussions with government
officials and their most common comment is that if we have mandatory
standards for social tariffs, that will be a race to the bottom.
All of the others who are doing more would stop doing more and
do less. I was struck by the absolute distinction between that
view and some powerful statements made by the Prime Minister and
John Hutton, the Secretary of State for Business, Enterprise and
Regulatory Reform in relation to minimum pay. In March this year,
just two months ago, he said in a press release from BERR that
before the minimum wage was introduced workers could expect to
be paid as little as 35p an hour, our legislation has ensured
this could no longer happen and that he was very proud of the
difference that establishing that minimum wage had made to our
whole society. I think the argument is perfectly symmetrical.
By establishing a minimum set of social tariffs, that is, for
the fuel-poor, that are no worse than are available to the rest
of us, who are well able to pay, we will be lifting up to 4.5
million households out of fuel poverty. Of course, you would need
to do a lot more than that. It would be naive to imagine that
that alone would solve it. It is about measures to houses, it
is about incomes, but the thing that nobody has done anything
about is the price of energy. That is the biggest, most direct
reform that we could make and somehow the officials have their
heads in one place, the Prime Minister, the Secretary of State
and the Minister for Energy have theirs in another, and sometimes
I wonder if they need to meet a bit more often.
Q264 Roger Berry: I think the parallel
with the minimum wage is very telling because obviously employers'
organisations opposed the national minimum wage but the last thing
they wanted was to not have a level playing field. The parallel
is very interesting.
Mr Asher: If I could add one other
element, in fact, the Prime Minister in March this year said that
at the start of the minimum wage some complained that it would
cost 3 million jobs and the evidence is, of course, quite the
opposite. What it has done is brought wage justice to a huge part
of those who had no bargaining power and not affected overall
employment. Similarly, these sorts of tariffs for those who are
desperate and for whom it is getting worse, every one% increase
in energy prices tips another 40,000 people into fuel poverty.
That could be fixed at a fraction of the cost of the £225
million that the Government is taking from suppliers.
Q265 Roger Berry: What has the evidence
been so far on voluntary social tariffs, as it were, and why are
companies not doing it?
Mr Asher: I think a number of
companies are doing some excellent things. We have seen some really
good social tariffs developed by EDF and British Gas itself invests
the vast majority of all of the revenues of all the companies
into social tariffs. Some, like Npower, are putting in about the
least, the proportion of the market share that they have as customers
compared with the amount that they are putting in. So there are
some very good and exciting innovations that have occurred but,
as Centrica and EDF said, "If the others are not required
to do something similar to this, why would we continue to?"
and our big concern is, sadly, when we have gone, there is going
to be nobody to point that out and they are going to slip back
to their bad old ways. At least, that is a fear I have.
Q266 Mr Weir: On that point about
the difference between companies, it has been said to us that
the former territorial company, if you like, still concentrate
a large part of the market in their former territories. Does this
mean there is greater concentration of fuel-poor in some of these
territories where the companies are not doing enough to help fuel
poverty?
Mr Asher: The distribution of
fuel poverty follows the standard map of low incomes, areas where
there are a large percentage of people with very poor housing,
hard to heat housing, the big urban centres and in the valleys
and in rural areas. They are distributed across three or so of
the suppliers who have the bulk of those customers.
Q267 Mr Weir: That is to be expected,
but in every area there are pockets of poverty, no matter how
well off the general area is. On your analysis, there must be
some people in fuel poverty who are particularly badly hit because
their local supplier is not taking sufficient action to tackle
fuel poverty. Is that the case?
Mr Asher: I mentioned the example
of Npower in the North, where if you were obtaining your electricity
from them and your gas from another company, perhaps British Gas,
you could be paying £361 a year more as a prepayment meter
customer than if you had their online tariff. I am really pleased
to say that differential has come down by about £100, not
though because the prepayment meter price has been reduced but
because the online tariff has gone up.
Q268 Roger Berry: A number of measures
have been proposed for addressing fuel poverty. There is the Warm
Front scheme, winter fuel payments, extension of those to others
and so on and so forth. Has energywatch considered those alternatives
and their effectiveness in comparison with mandatory social tariffs?
Mr Asher: Yes.
Q269 Roger Berry: Do you have a view
about which of those are likely to be more effective?
Mr Asher: Yes. Over a period of
two years the different Ministers for Energy—we seem to
have one each year—had spelt out that the Government, if
suppliers did not respond adequately, would compel them to, and
on constant probing, indeed, from some members of this Committee,
started to spell out what he meant by social tariffs and he set
out quite a good set of criteria and had asked the regulator to
do a report on that. When the regulator failed to do that, we
commissioned an expert ourselves and we have actually published
a very detailed report that shows for every supplier every part
of their programmes, what is good, what is bad, and how it could
work better. I was very disappointed to see that when we submitted
that to the Government, the response was "Well, if we require
everybody to meet a certain level, the level will fall."
There is no need for people to meet a certain level. There are
a couple of key ingredients about ensuring that people are no
worse off and having proper programmes and looking more carefully
before they are disconnected, offering different methods of payment,
and a whole range of things which are well known and are used
in other countries that work very well. It is to our huge regret
that the Government just has not appeared to want to move on this
yet.
Q270 Roger Berry: Forgive me. You
have not quite answered my question, Mr Asher. Are you saying
social tariffs is the solution or are you supportive of
a mixture?
Mr Asher: It is a different point.
If you think about it, there is really no such thing as a social
tariff. It has become a generic description of a series of measures
by which those in fuel poverty will receive various forms of benefit,
and you could mix in a number of things. After all, most of the
companies now have trust funds and a number of them have equalisation
systems, some offer credit counselling, some offer greater access
to measures such as insulation and draft exclusion and low energy
light bulbs, all of those, which are quite valuable measures to
insulate houses. Where they are directed at the fuel-poor I think
they are all legitimately part of a package, and it is actually
good to see a degree of competition about that. My concern is
that following the Ofgem Fuel Poverty Summit a few weeks ago,
it appears that the suppliers are going to be allowed to just
tip any old thing into that basket instead of them meeting some
objective test. We would like to see at least an objective test
as to what qualifies and what does not.
Roger Berry: Thank you very much indeed.
Finally, the Competition Commission.
Q271 Mr Weir: You have mentioned
the Competition Commission several times in the course of this
morning, and in your submissions to see you have set out a lot
of proposals that could be done through the Competition Commission.
Which, if any, of your recommendations could be enacted by Ofgem
without a reference to the Competition Commission?
Mr Asher: They could do a number
of these things, but the distinction is that Ofgem is a reasonably
small, reasonably efficient sectoral regulator. It is not set
up to do these big studies where they look around the world, that
they dig right into all of the contracts, where they have these
expert panels drawn from business and the community and academia,
and that they just concentrate; this is what they do. That is
why the OFT and some other regulators often give them these industry
studies to do. Theoretically, Ofgem could do it but their staffing,
their level of expertise and their experience really is not up
to it. The sensible thing is to realise that there is this expert
body and get them to do the job. They are ready, willing and able.
I am not getting a commission from the Competition Commission,
by the way; it is just that, having seen them work, some of their
remedies are much wider, their information gathering powers, and
they are an authoritative body of a global scale.
Q272 Mr Weir: How long do you think
such an investigation would take?
Mr Asher: It depends on the terms
of reference and, in any event, you would not want them to leave
everything to the end. You would ask them to say what the immediate
measures are, the transparency measures, perhaps changes to licence
conditions, the barriers to entry that can be readily identified,
and then some longer measures that could come out after a while.
They often take a year or more to do their work, but to that I
would say, if you are concerned that it might take them a year
or two to act on this market, I would just remind you that what
we should be talking about is not what is going to happen next
year or the year after, but having a sector that is fit for our
economy over the next 20 and 30 years. The billions that are going
to be invested in new forms of energy and all of that with the
sustainability agenda desperately require the most efficient,
the most innovative and the best use of scarce capital. I do not
think that a "quicky" by Ofgem while people are doing
their day jobs is going to get very far there. We need the best
minds in the country to focus on it and give us a blueprint which
will restore Britain to having the most innovative, competitive
energy market in the world.
Q273 Mr Weir: You mentioned earlier
new entrants coming into the market and different types of generation,
particularly renewables, and you mentioned wind. What implication
will Competition Commission referral have for the current energy
companies' investment decisions? For example, whether or not you
agree with nuclear, the Government seems to be going down the
line of persuading one or other of the big existing energy companies
to lead on nuclear, perhaps EDF. Is that likely to happen if they
are faced with a Competition Commission investigation?
Mr Asher: I think there are different
considerations. If you are talking about an incumbent, if they
are being offered more or less a secure monopoly for ever, I think
they will quite happily invest in that. Whether the country will
benefit is quite doubtful. If, on the other hand, you are asking
some of those very hungry, efficient generators from anywhere
in the world to come and set up a new competitive investment here,
if they think they are facing a closed sector, a sector that they
cannot get into where they are never likely to be able to compete
fairly, they are not going to come. So, in a way, it could be
a trade-off between investment from a lazy incumbent who is actually
buying a secure revenue stream, just like a government bond, into
perpetuity, or whether you really want a revolution, whether you
want the storms of competition and innovation that can transform
the market and transform industry.
Q274 Mr Weir: In the current sale
of British Energy it seems to be an existing company, EDF and
RWE that are interested in it. It is not the new generators looking
to break into the market by acquiring a generator of their own,
which one would have thought would have been the first step in
setting up in the UK.
Mr Asher: I would not have thought
that for the very reason that I mentioned. We have this vertically
integrated structure and, even if you were a giant corporation
with much experience and many resources, you would look and say
"What is the point of me building new generation in the GB
market where it is all stitched up? If I enter at the generation
level, what they will do is transfer the margins to the retail
level and I will never make any money. I will not have a route
to customers or, if I enter just at the retail level, I will have
to buy my gas and power from the people I'm competing with and
I will be squeezed out as well." That is why we have seen
40 companies, 20 suppliers and 20 generators, exit the market
since 2000 and not one significant new entry that is sustained.
Q275 Mr Weir: By that argument, you
are going to have to break up the vertical integration before
you get new entrants into the market, and that is not going to
be a quick process, as Europe has shown when they have tried to
do it. The other point about that is that in the age of the inter-connector,
where EDF can bring electricity across from France or gas can
come from Holland or whatever, can this be done on a purely GB
basis or are we having to look at it on a European basis?
Mr Asher: Nothing can be done
on a GB basis any more, and that is possibly a good thing. The
more that the market is opened up and that we get cross-border
trading, the better. That is what the competition authorities
in Europe want to do, more inter-connectors and things like that
are useful, but I think resource and energy nationalism is always
going to make us want to be sure that a certain proportion of
our energy is generated|
Q276 Mr Weir: That does not really
address the point, because it seems to me that whatever the competition
authorities want in Europe, they are actually going in the opposite
direction, where some of the large national companies, EDF and
RWE, are trying to consolidate their vertical integration, in
fact increase it by going for companies like Iberdrola, which
are not going to affect the UK market. You are saying that the
Competition Commission needs to break up the vertical integration
within the UK, and you have accepted there has to be a European
dimension to this, but in Europe the process seems to be going
in the opposite direction.
Mr Asher: If I could disagree,
it is true that some of the big German companies are wanting to
acquire in Spain, and the Italian companies and the French companies
are wanting to acquire in Belgium, but what they are wanting to
do is to buy it at a horizontal level. They want to buy businesses
in the same sectors as them, and there is evidence of the vertical
companies being broken up. One of the huge German conglomerates,
as part of a deal with the competition authorities, is saying
that they are happy—not happy, but they would be prepared
to settle an anti-trust investigation by divesting all of their
transmission assets. That is a huge breakthrough, and we are seeing
more and more of that happen. Could I make one more point though
about effects on investment? Even if there was a fair wind to
all of the nuclear investments, we are still talking ten, 12,
some people think even 15 years out. In that context, a Competition
Commission inquiry that might take a year or 18 months is no huge
barrier, and in fact, the upside is that it might give assurance
of a sound, efficient sector, with sensible investment signals,
that will last for 30 years whereas the current situation is quite
unstable, and I think even the incumbents, even EDF and others,
are going to be very nervous about investing a lot of money without
all sorts of government protections and bail-outs if in fact we
do end up with some sort of competition review and they discover
their big monopoly investments are not returning the monopoly
rents that they are used to.
Q277 Mr Clapham: Mr Asher, given
competition authorities' involvement in a study and bearing in
mind that some of the long-term gas contracts that are forcing
gas into the forward market and away from the wholesale market,
legal contracts, how would we break that situation?
Mr Asher: It depends on whether
they are currently in breach of competition rules. If they are
in breach of competition rules, the contracts can be broken, but
in any event, the authorities can serve notice that they require
them to be renegotiated. That is a legal process but it happens.
It has happened in many countries as a way of reforming this sector.
It is only when you get the forensic skills of experts to look
at the costs and benefits, the detriment and gains, that one can
get a picture of which are the worst and which ones are benign.
70% or so of all of the gas coming in is covered by these mysterious
contracts, and we do not know whether there are restrictive clauses.
It is suspected that a number of the big gas contracts still prohibit
buyers, whether in the UK or other European countries, from sending
the gas on to another destination. I would regard those as highly
anti-competitive and needing to be exposed and broken up. Similarly
with power contracts; we just do not know what sort of mysterious
anti-competitive clauses are in there, and some of them might
be in breach of existing laws. If I could make just one final
comment about prices, because I am sure that you will have a stream
of witnesses who will swear that our prices are the lowest in
the world. I just got this from the European Commission for 2007,
where they looked at the prices of gas and electricity to consumers
across the whole of Europe. The red one is Great Britain and in
both cases we are actually pretty expensive, and not very cheap.
Q278 Mr Clapham: Could we have a
copy of that, please?
Mr Asher: Certainly. I will happily
submit all of these tables to you, and background information
on all these other points.
Roger Berry: On that note, Mr Asher,
can I thank you again for the written submissions that you have
made, and thank you very much indeed for this morning's session.
I could tell that the public gallery was finding it as exciting
as we were. It was really thought-provoking and incredibly helpful
to the Committee. Thank you very much again.
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