Examination of Witnesses (Questions 580-599)
MR ALISTAIR
BUCHANAN AND
DR ANDREW
WRIGHT
17 JUNE 2008
Q580 Mr Bailey: I am just puzzled
why you did not do that before given that this was public information.
Dr Wright: It may simply be a
matter of some liquidity being a good thing and more liquidity
may be a better thing.
Mr Buchanan: Let us square the
circle and give you a written answer to that.
Q581 Mr Bailey: I turn to relative
pricing. I suppose that there are two issues: first, why is there
such a difference in the annual cost to somebody who has a prepayment
meter and somebody who pays by standing order, particularly prepayment?
Dr Wright: The analysis we have
made suggests that on average the difference between somebody
paying by prepayment and somebody who pays by direct debit is
about £125. Our work also suggests that the difference in
cost is about £85. We are doing further work on those cost
differences and trying to establish that. On average it appears
that the price differential is greater than the cost differential.
Within that there is quite significant variation between suppliers,
so for some that gap is significantly greater and for others it
is close to or even below £85. Therefore, there is a different
picture with different suppliers. The differences in the differentials
between suppliers may reflect differences in costs. That is not
necessarily an excuse. One would expect in a competitive market
for cost differences of that size to be competed away. We would
be concerned if such cost differences were sustained and those
increased costs were passed through to customers in a competitive
environment. I believe that is an issue regardless of whether
that is cost reflective. You would expect us to say that this
is right at the heart of what we are looking at in our probe.
Obviously, if there is evidence of discriminatory pricing particularly
for groups of vulnerable customers that is something we are concerned
about.
Q582 Mr Bailey: The data we have
shows that the average is £145, not £125.
Dr Wright: One can cut the data
in various ways. It depends on how you average it, whether you
extend it beyond the `Big 6' and how many kilowatt hours or therms
of usage one is looking at. Some suppliers argue that to use the
standard consumption of 3,500 kilowatt hours is wrong because
these consumers tend to use less electricity, for example. There
are methodological differences and I am not surprised that it
is possible to come up with different numbers of that order.
Q583 Mr Bailey: Is it fair to summarise
what you say on that issue that there is a price differential
that cannot be accounted for by the increase in cost and therefore
there is a prima facie case for investigating what appears
to be an imperfectly working market?
Dr Wright: We are yet to get to
the very bottom of that. We are doing a lot of work on the cost
structure of companies and how they allocate costs between different
tariff groups and checking whether that cost allocation is appropriate.
We shall get to the bottom of the issue. I think there are some
bits and pieces of evidence that give us concern. One is that
a number of companies charge a significantly higher premium in
some areas than others and it is hard to see why the cost in Newcastle
should be different in Birmingham, for example. That does make
us concerned.
Q584 Mr Bailey: When will you be
publishing the results?
Dr Wright: That will be part of
the initial findings we publish in late September.
Q585 Mr Bailey: If you look at the
prepayment market as being separate from the other, there is a
very wide price differential in what people pay in different parts
of the country with different deals.
Dr Wright: Yes.
Q586 Mr Bailey: On the surface that
seems to indicate there is not much competition even within this
particular market let alone the direct debit market. Would you
comment on that?
Dr Wright: That goes back to my
previous point. Even if these are cost-reflective differentials
we would expect that difference to be competed away. Prepayment
customers do participate in the competitive market in quite large
numbers, in some areas more frequently than the average customer,
but we have some concern that switching decisions are not always
good. There is evidence that some prepayment customers move onto
higher tariffs. We have written an open letter to try to seek
out ways in which we may be able to improve the quality of information
provided to prepayment customers at the point of sale to reduce
the incidence of prepayment customers moving to more expensive
tariffs. We are concerned about the quality, not quantity, of
competition and switching in that prepayment market.
Q587 Mr Bailey: I think that your
approach should be a little stronger than "some concern".
Given the way prices are rising, the big differential and the
fact that a lot of people on prepayment meters are lower income
consumers there ought to be huge concern. Do you accept that it
was a mistake to remove price controls for prepayment meters?
Mr Buchanan: If I may, perhaps
I may hold judgment on that until we have carried out the probe.
The question is fair and the areas in which you have sought to
interrogate us are all valid and are ones we are picking up. This
Committee will be our first port of call once we have carried
out the probe.
Q588 Chairman: You have talked about
prepayment meters a lot but standard credit customers are also
incredibly important and are often overlooked in this debate.
A good number of them are also in fuel poverty; a lot are on fixed
incomes.
Mr Buchanan: More are on standard
credit. Only 20% of the fuel poverty lie within PPM, and one of
the areas we are investigating is why the standard credit gap
has risen from about £40 to £60. Therefore, that is
within our review.
Q589 Anne Moffat: I should like to
move to switching which we are very concerned about. There is
a major con going on. How can a market where half of the consumers
have never switched be described as competitive?
Mr Buchanan: Perhaps I may start
with the macro approach. I think it depends on one's starting
point. In relative terms the switching that we have seen in the
energy market is quite successful. We see nearly 50% switching
in energy. Fixed telecom is about 37%. If you start to get down
to mortgages at 20%, pensions at 10% and bank accounts at 2% the
switching rate is high relative to other sectors, and it is very
high in relation to other markets that have sought to open. In
the half of the United States market that has been opened only
1.5% of consumers have switched; in Germany it has been about
4%. In the Nordic countries it has been 10% to 15%. When you look
at the contrast, the UK consumer sees price going up and so does
not really care about that. What benefit is there? I will ask
my colleague to speak about that. The question is whether the
switching proposition is working or whether one is being encouraged
to switch to the wrong tariff. When one looks at how well the
concept of choice and switching has worked by contrast to other
UK sectors and internationally where markets have been introduced,
this has worked quite well. Also bear in mind that, based on the
various surveys that have been done—again, it may be small
comfort—of the 50% who have not switched 15% have self-selected
that basically they never will because they just do not want to,
or they are lucky enough to have too much money or whatever it
is.
Q590 Anne Moffat: When you say "lucky
enough to have too much money" it makes me think about the
fact that a third of switchers end up paying a higher tariff without
realising that is the result.
Dr Wright: If I may make one clarification
of what my colleague said, the proportion of people or households
who have never switched is more like 20% than 50% because a lot
of people have switched gas but not electricity, so in terms of
the households that have switched one or other of their suppliers
it is closer to 20%. There is a very high level of participation.
As I suggested on prepayment tariffs in our probe we are very
concerned to look particularly at quality as well as the quantity
of switching. A high level of switching is good; it shows that
the market is working, there is participation and that consumers
are engaged in the market, but it could be because of consumer
dissatisfaction and not all those switching decisions necessarily
lead to consumers having a better deal. One thing we have noted
is that a high proportion of switching is in response to outbound
selling as opposed to consumers actively choosing in a proactive
way. One thing we are looking at is the quality of switching as
a result of outbound selling—doorstep and telephone selling—which
may be a concern. It may simply be that consumers are making a
choice between two alternatives rather than looking at the whole
market, but that is something that is within the scope of the
review we are conducting.
Q591 Anne Moffat: Do you think there
is fairness among consumers about whether or not it would be a
good idea to switch and whether or not they can receive the full
information, that is, those who are computer literate and those
who have a better standard of living and some who may not? I acted
as a daft lassie once when someone came to the door. The con was
unbelievable. I was asked who my electricity supplier was. I said
I did not know. Immediately they knew they had someone of interest
to them. They came into the house and looked at the meter; I let
them go through the whole process because I wanted to see it for
myself. I am worried about the more vulnerable people who will
be conned by switching. Should there be stronger regulations by
you particularly about doorstep and phone marketing?
Dr Wright: There is a question
about individual fairness in that respect but there is also a
question mark about the market working well. Does consumer choice
and switching provide adequate price discipline on suppliers?
We are looking at it in both directions. There are really two
issues. One is to ensure that consumers have good information
on which to make choices; the other is to ensure that the benefits
of competition are available to all consumers, not just those
who are engaging in the market. One feature one would also expect
from a well-functioning competitive market is that the benefit
is not available just to those who switch.
Mr Buchanan: We will not shy away
from using our enforcement powers. Currently, we are inspecting
the Npower case which has been compiled by a number of parties
including energywatch.
Q592 Anne Moffat: Even if there were
some guidelines that people could access very easily that would
be an improvement on what we have at the moment.
Mr Buchanan: As to prepayment
meters, there are certain licence conditions whereby companies
are meant to provide the advantages and disadvantages. Do they,
and how do they do it? Is it so difficult to get to? Is it slanted?
Those are the things that we are looking at and particularly in
this area we would be happy to come back to the Committee to talk
about it.
Q593 Chairman: I just want to make
clear how your investigation of the doorstep selling scandal interacts
with the fuel price inquiry. Is it entirely separate and carried
out in different compartments?
Mr Buchanan: It will run along
its own enforcement track.
Q594 Chairman: Doorstep selling is
hugely important to switching given the proportion of switching
that it has achieved. In terms of getting people to change supplier
it is important but it must be done very well.
Mr Buchanan: Indeed.
Dr Wright: There is a large grey
area between a perfectly functioning market and mis-selling which
is in breach of licence. We are potentially also concerned about
where the market is not working well but it falls short of something
that we can enforce, so we are not just looking at things that
are currently a breach of the licence; we are looking at how well
the market is working for consumers and how well it is working
as a price discipline for the companies.
Q595 Chairman: I think you agree
with everyone else that the big gain from the switching is your
first switch. When you move away from the incumbent monopoly of
the CEGB days to the new competitive world for the first time
that is when the big savings come; after that the savings are
more marginal?
Dr Wright: Not necessarily. You
are right that there is often a big saving to be made when moving
away from incumbent suppliers, particularly if you move from standard
credit to direct debit at the same time and get the benefit of
a dual fuel discount, but there are still significant savings.
If you compare dual fuel direct debit you can make significant
savings at the moment by moving from a standard billing approach
to online billing. There are still substantial savings to be made
from participating even if you have switched once. We would encourage
people to continue to look around for the best deal because what
was the best deal yesterday may not be the best deal today.
Mr Buchanan: The majority of it
is on price, but it may be you want to switch to a green supplier
like Good Energy or a supplier like First Utility which now offers
smart meters within its package. You may be very distressed by
service you get from a company and go to JD Power; it may be published
in the newspapers and right at the top of the service league you
see "I'm getting lousy service."
Q596 Chairman: It may be rational
to switch to a higher price?
Mr Buchanan: It may be that you
choose to do that. Perhaps a green product is offered at a premium
price.
Dr Wright: Some companies have
a record of being at or about the bottom of the price range, if
they are not absolutely the cheapest at every moment in time.
You may choose someone who is on average in the cheaper half of
the tariffs.
Q597 Chairman: So, switch is not
a surrogate measure of competition because it may be logical to
stay with the current supplier because you know that he will become
cheaper in due course?
Dr Wright: I think that is right.
Switching may be a one-dimensional measure of competition. It
is important because it shows participation in the market; it
shows that consumers can switch. If switching rates were very
low it would be a concern to us, but there are other factors that
influence the quality of competition.
Q598 Roger Berry: energywatch say
that there is "a huge amount of fraud going on". Are
they right?
Dr Wright: "Fraud" would
be a very strong word.
Q599 Roger Berry: "Fraud"
was what they actually said.
Dr Wright: We are currently engaged
in a process to establish some guidelines for green tariffs and
central to that those guidelines will be that any green tariff
must demonstrate an additional benefit to the environment.
| 
