Examination of Witnesses (Questions 440-459)
JENNY SAUNDERS
AND LESLEY
DAVIES
5 JUNE 2008
Q440 Mr Bailey: I am anxious to avoid
getting into too great a detail and then the whole thing becomes
incomprehensible. There is, however, one point that I must make,
and far be it from me to defend the energy companies but I have
to play the devil's advocate in this. 2003 was a year when wholesale
and retail prices were very low. Is it really a fair comparator
between 2003 and 2006 to make these observations on?
Lesley Davies: We chose 2003 because
it was when energy prices were going up and it was also the point
at which fuel poverty numbers were at the lowest, so that was
really our starting point. It was not a malicious starting point
so that we would get a bigger profit number at the end by making
the comparison, because had we only taken 2006 and looked only
at the profit levels there, I think the fact that the energy industry
can make profit levels of just over £2.3 billion at a time
when their costs are going up but their prices are going up even
more than their costs and there are now four and a half million
consumers in fuel poverty, I think is really quite a telling thing.
It seems to me that a market that is able to do that is not a
market that is working particularly effectively. Even if you discount
and ignore 2003, and you ignore the profit comparison, the levels
of profit in 2006 are too high to my mind and not fair.
Q441 Mr Bailey: It is obvious that
the research that you initiated only goes up to 2006 and there
has been quite a dramatic increase in oil and other prices since
then. How would you assess the situation has changed since the
publication of these statistics in the 2006 timeline?
Lesley Davies: It is difficult
to say without referring back to the data because it is difficult
to assess how much expenditure by consumers has gone up and what
the profit levels of the generating stations that we use to make
this has been declared at, but I do know that when some of the
price increases were happening at the beginning of the year all
the people that we were talking to were saying that there had
not been any particular constraints on capacity, for example,
that might generate those price increases.
Jenny Saunders: It might be something
that you could ask Ofgem to report on if they are doing the energy
probe. That is something that they will perhaps have more information
on.
Q442 Mr Bailey: I ask you quite deliberately
because if action is to be taken by the Government, it must be
based on the up-to-date situation rather than the situation that
arose in 2006, bearing in mind that things have changed quite
dramatically.
Lesley Davies: Ofgem do have access
to far better and far more detailed and far more accurate information
than we do. We only used publicly available data for this report.
Q443 Mr Bailey: I come now to my
final issue and perhaps the crunch issue. Do you feel that on
the basis of the evidence in this particular assessment and your
assessment of what has happened since that there is a case for
a windfall tax and, if so, at what sort of level should it be
levied?
Lesley Davies: I personally think
there is a case for a windfall tax, looking backwards between
2003 and 2006. It certainly would not be all of the profit that
had been made. That would not be sensible. I really do not have
a figure in my head but my starting point would be to think about
what is the shortfall that is needed to supplement the fuel poverty
programmes like Warm Front and so on, and if a windfall tax was
not palatable or was not appropriate, I also think that the Government
has taken rather a lot in additional revenues from VAT. I think
we have estimated that between 2003 and 2004 at around £400
million. There is also petroleum revenue tax that has added to
the Government purse as well which I really have no idea about
because that is based on profit levels of gas producers and that
is a really difficult place from which to get any information.
There is an awful lot of additional money going around here that
is really on the back of the most vulnerable people in society.
It seems to me that it is fair that some of that should come back
and help them deal with the consequences of what is happening
in the energy market at the moment.
Q444 Mr Bailey: What you are saying,
in essence, is that it should be driven by consumer need rather
than the balance sheet or future investment plans of the energy
companies.
Lesley Davies: I am not saying
it should necessarily be driven but that would be my starting
point for working out how much you would want to take from the
taxation revenue.
Jenny Saunders: The problem with
a windfall tax is with hypothecation because, having called previously
for a tax on the upstream producers, it did not necessarily result
in the programmes that we had advocated. Once the Treasury has
that funding it does not always go where we want, but we do think
that government should prioritise additional funding as a matter
of urgency and, as Lesley pointed out, having the additional revenue
from VAT on fuel receipts is a way in which it could fund some
of this work.
Lesley Davies: I agree completely
with Jenny on that one about you would only want a windfall tax
if you could hypothecate it properly otherwise it is not very
effective.
Q445 Chairman: What you are saying
is that the Government has had its own windfall tax anyhow which
could be used for this purpose.
Lesley Davies: Quite.
Q446 Chairman: How do you estimate
the fuel costs? I thought these were commercially confidential?
I would love to know what Centrica is paying and British Gas is
paying for their gas. In a malfunctioning market we do not even
know what the actual price is.
Lesley Davies: Some of the information
in for electricity is company specific, so we do need to bear
in mind just how little information there is available, as you
are saying. For gas we used the declared revenue for gas production
so of course there is an element of profit included in that and
that was for an indigenous supplier. I think we used the month
ahead market for imported supply and again that was revenue. There
is an awful lot of hypothecation that we have done ourselves in
arriving at this. We were the first to put information like this
into the public domain and it is a starting point for Ofgem to
actually do a much better job with and they can do better.
Mr Binley: I am slightly worried about
what looks to me like a sizeably narrow snapshot of a very big
issue.
Chairman: We do have the full report
that this is based on, so I think we all ought to look at it quite
carefully.
Q447 Mr Binley: I understand that
but there is a concern there and I think you would share that
concern too.
Lesley Davies: Absolutely.
Q448 Mr Binley: I am particularly
concerned about what "estimated other costs" are as
well because that covers a very big area of activity.
Lesley Davies: This goes again
to the way in which we try to get the data to fit together in
some respects because there were some things that we could not
explain with the numbers. We have been as transparent as we can
with the report. We did not really want to use it to make any
claims that could not be substantiated by the report itself because
that would be irresponsible. We have put it out to the industry,
to Ofgem and to government and, frankly, the only criticism that
has come back to us has been about whether or not the £2
billion profit was reasonable or not, not really that there is
any fundamental inaccuracy in the way in which we have constructed
this, given the data that we have used.
Q449 Mr Binley: You have still not
told me what "estimated other costs" covers?
Lesley Davies: It is all there
in the report but it will include distribution, metering costs,
suppliers' costs to send billing systems, debt recovery, transmission,
transportation costs.
Q450 Mr Binley: Does it cover investment?
Lesley Davies: Not necessarily.
Q451 Mr Binley: Why?
Lesley Davies: Just because of
the way in which we were able to extract the data but the point
that you make is completely fair and had we had access to more
data and as well in terms of the organisation if we had had more
resources to do a more extensive piece of work we would have done.
Q452 Chairman: You are really offering
this as a best guess on Ofgem and the `Big 6' can challenge this
if they want to. The `Big 6' are all coming in to give evidence
later on in this inquiry and I think we will want to push them
quite hard on what they make of these figures.
Lesley Davies: I think that will
be a really useful thing to do.
Jenny Saunders: When energy prices
were going up so dramatically at the same time company profit
levels were being reported at record levels. We just wanted to
test out exactly how these things fitted together.
Q453 Mr Wright: We have taken evidence
in the past regarding the ability or inability of some people
to switch from company to company and quite clearly we have your
views on that. The NEA says "incumbent suppliers treat their
legacy customers like a cash cow" and obviously there are
a number of people tied into the companies from your own table
up to December 2005. Do you think that the companies should be
allowed to get away with charging different rates and also to
encourage new customers in knowing that there is going to be a
significant number of customers that will not switch?
Jenny Saunders: When the price
controls for supply were abolished we did fear at that point that
there would be difficulties in this area. The ways in which the
tariff structures have been constructed do reward those people
who will switch away and onto the cheapest way in which the companies
will be able to service them. That is how markets will work. That
is how they will want to be cost-efficient, but there are people
who for no fault of their own cannot switch because offerings
are not put to them; the companies are not giving them incentives.
If they are on particular payment methods such as prepayment they
may not be able to switch because they are being blocked. Despite
a debt assignment protocol, nobody with debt has been able to
switch supplier. People who see the companies just keeping track
with each other are fearful that if they do switch they might
switch to a worse deal. The information put before them is complex
and I think we have to recognise that after this length of time
with competition there is a sector of society, principally older
people and social categories D and E, that are less inclined to
switch and will not. We would like to see some kind of either
loyalty scheme or some review so that they are offered a discount
for remaining loyal to that company.
Lesley Davies: I see this in more
competition terms and I cannot really understand the justification
for charging in the former payers area consumers who have not
switched higher prices than people who have switched away and
then switched back because it seems to me that people who have
stayed still and not moved and not done anything to incur costs
for the company are actually a lower cost to the company. It seems
obvious to me that the people who are moving away incur the cost
of switching away, having a final bill, being chased to pay that
bill and then switching back have incurred marketing costs to
the company. It seems a little odd to me and I think an indication
of the sluggishness of the competitive market that in an area
consumers pay more than they should.
Q454 Mr Wright: Jenny, you have mentioned
the fact that there could be this loyalty scheme. Have you had
discussions with the energy companies? Has that been put forward
to the energy companies perhaps that they should have a loyalty
scheme because quite clearly looking at the groups according to
this table again it is the over 65s, it is the people on prepayment
meters, those that are on fixed incomes that are going to be less
likely to switch are those groups who need more help and quite
clearly they are not getting that. Presumably the over 65s because
they get the winter fuel allowance and perhaps companies see that
as a little bonus that they are going to get additional to the
other income.
Jenny Saunders: We did raise it
at the fuel poverty summit that Ofgem convened and the chief executives
of all of the six companies were there and it is for them to think
about and to come forward with their offerings under the new social
action plan. Some companies are reviewing and one did say that
they would go back to all their customers and check that they
are on the best tariff for them, but we think it has taken them
a long time to think about this and a real push needs to happen
now from Ofgem to get behind this to encourage that action.
Q455 Mr Wright: In terms of the figures
that you have published there they are three years old now. The
message coming back to us was that there is probably less difference
between the prices in the companies now than there was three,
four or five years ago. Has there been a change in the figures
for people switching significantly in those areas since 2005?
Jenny Saunders: There has been
an increase in the number of people switching who were on prepayment
meters, yes, but that has been driven by publicity campaigns by
trying to encourage trusted third parties and charities and local
CABs and there is more work to be done on that. Having done some
of that work ourselves, working with advice agencies, we recognise
how difficult it is. It is time-consuming. People will not necessarily
respond just to a leaflet. They need to be taken through the process.
There is not capacity in the existing advice sector to help and
adequately support people as they go through that switching process.
I also do not think that switching is necessarily the be all and
end all. Why not have something that rewards loyalty and links
it to an energy efficiency package. Some companies are trying
to think their way through this, but not on the scale that is
needed. We have 4.5 million people really in desperate need at
the moment.
Q456 Mr Weir: We were told by energywatch
that the average customer saving is something like £30 a
year. Is switching really worth it for your average customer?
I can see that from a prepayment meter onto direct debit a lot
of saving would be made, but for the average customer is it worthwhile,
especially now that the companies are raising their prices one
after another very quickly?
Jenny Saunders: £30 is for
the direct debit customer now, although going on you could save
a bit more, but for prepayment meter customers if you think that
the average differential is £200—
Mr Weir: I appreciate that, but everybody
is told that they should switch but in fact it seems to me that
only those who are on prepayment meters and can get onto a better
tariff make any real benefit by switching.
Chairman: It is prepayment meter to prepayment
meter is what you are saying. We all know that if you switch from
prepayment to direct debit you get a big saving.
Q457 Mr Weir: If you are on your
average direct debit tariff, as many of us are, is there much
point in actually switching?
Lesley Davies: The other issue
to take into account is whether or not you have ever switched
before because I think there are probably larger savings to be
made if you have never switched before, which goes back to Jenny's
point about the loyalty issue. The issue of having switched once
and whether you switch again for £30 is more the answer to
your point.
Q458 Mr Clapham: My questions are
on payment types and they are more directed to the NEA but, Lesley,
if you want to come in, please do so. One of the things that you
say in your submission is that differentials between prepayment
and other payment methods have now increased to an unacceptable
level. Could you tell us about why you believe that customers
on prepayment level are now having a charge that is at an unacceptable
level?
Jenny Saunders: I think the differential
has been increasing over the past few years as these new online
tariffs have come on stream. There are a number of factors. Traditionally
the meters are more expensive; the cost of servicing a prepayment
meter customer we recognise may be more. However, we do not know
exactly what those costs would be. It has been estimated to be
in the region of £85 by Ofgem. We would like to see some
analysis as to how we can get some more efficiencies into that
bit of the market. Overall, energywatch have estimated that prepayment
users are being overcharged in the region of £300-£400
million a year. For the individual household if you are on a low
fixed income and there is a differential of £300, £6
a week can go quite a long way if you are surviving on £80-£90
a week. We do not think that that is acceptable. A thousand prepayment
meters are going in every day to recover debt. The companies use
it as a debt recovery vehicle. Customers quite like the idea of
using the meters as a budgeting tool but they are being penalised
for that and that is the problem. We do not think that the sensible
approach that customers are taking to help manage their household
budgets should result in such a high differential, but again we
expect in September there to be some action. Scottish Power reduced
its prepayment meter level down below direct debits and some of
the other companies are having to look very seriously at their
differentials now. If it does not happen voluntarily, we would
want the Government to step in on this issue.
Q459 Mr Clapham: The figure given
by energywatch is enormous, is it not? £401 million excess
charges for prepayment meters.
Jenny Saunders: Yes, it is unacceptable.
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