Examination of Witnesses (Questions 680-699)
MR KEITH
MUNDAY, MR
PETER BENNELL
AND MR
GRAHAM PAUL
24 JUNE 2008
Q680 Mr Wright: What measures do
you think Ofgem should be taking to bring more competition into
the business market?
Mr Munday: There are issues on
the wholesale market in terms of the availability of product for
people like ourselves to service customers. That is a major barrier.
There are some contracting practices where what I believe is happening
in the market is that the established players are, by and large,
reasonably comfortable with their market share, they are looking
for their bottom-line profits, which is a perfectly natural and
rational thing for them to do, and they are coming through to
the thinking, again which is right, is it better to retain a customer
or win a customer. Clearly it is a no-brainer and the answer is
it is better to retain a customer. The only thing we are questioning
is some of the techniques that have been used to retain customers
over the last—
Q681 Chairman: We will come to that
in more detail in a little while. Just before I bring in Lindsay
Hoyle, one of our submissions, and I cannot find it now, lists
the sorts of things that should be addressed in considering whether
a market is competitive or not. If you are critical of switching
rates, as many people are, as a measure of competition, what measures
of competition do you think Ofgem should be using to assess the
competitiveness of the market?
Mr Munday: I do not think there
is any one single measure which is fit for purpose. I think the
variety of products, the variety of players, the ease and entry
of players are all good monitors to use. What we want from a competitive
market is to know that the customers are getting good value for
money. How can we tell that customers are getting good value for
money in this market? A normal indicator would be customer satisfaction,
and that is great, you can do that, how a customer is feeling.
Clearly in this market customers are not feeling very happy. They
have the impression that they are being overcharged. If you get
that impression, how would you actually test that? In a normal
market you say what sort of returns are the companies making who
are providing this service, and you see if that is proportionate
to the risk and the business that they are conducting. Unfortunately,
in the market structure we have you cannot see from any of the
businesses how much money they are making out of their supply
businesses in electricity and gas or out of their generation businesses.
Without clarity as to how much money is being made in these markets
it is difficult to turn round to a customer and say, yes, you
are getting good value for money and this is why.
Chairman: You are warming to your theme,
Mr Munday. One of my colleagues wants to ask about that particular
issue at some length later. The answer is there is no single measure
of competition, it is a basket of indicators you must look at
and take a value judgment as to what the competition is really
like in the market. Mr Hoyle wants a supplementary I think.
Q682 Mr Hoyle: Just quickly on what
you said because customers believe that the market works against
them and works for the suppliers. Whether we like it or not that
is the general impression. What I would say is the evidence we
did have was that part of the reason Vauxhall moved production
abroad was because energy costs were so high and that the market
did not work for them.
Mr Munday: Sorry, I am missing—
Q683 Mr Hoyle: The point being that
they felt they were being ripped off; this is rip-off Britain,
and you are part of the rip-off. Is that fair or not?
Mr Munday: I do not think we are
part of the rip-off; I think we are part of the solution. What
we want is a level playing field in the market so that we can
access the products—
Q684 Mr Hoyle: So you can make profits.
Mr Munday: —to service customers
in a manner which is better than is being done by the incumbents.
What we want to see in the market is transparency of the accounts
and transparency of the market so that people can actually see,
yes, they are getting good value for money and remove this myth
of rip-off Britain because we think that is in the customers'
and the consumers' best interests.
Mr Hoyle: So the bigger profits is not
a rip-off?
Q685 Chairman: I am going to interrupt
Mr Hoyle here because I ought to put on the record the fact that
you supply between you less than 1% of Britain's energy and the
other 99% comes from the `Big 6', and you aspire to take more
and more of that 99% by offering a better deal?
Mr Munday: Yes.
Q686 Mr Oaten: But you cannot guarantee
that if you had more of the market you would be able to cut prices.
Mr Munday: Presumably customers
will switch to us because there is a better service offering or
lower prices and there will some attraction for them to move,
otherwise we would not grow market share.
Q687 Chairman: Can you give the Committee
an example of the kind of offer that you make that distinguishes
you from the `Big 6's' offer to their customers?
Mr Munday: Certainly from BizzEnergy
we are very keen on smart meters. We were one of the first suppliers
to move into the market in smart meters back in 2004. That is
something that we believe gives the customer not only timely and
accurate bills, which people have a right to, but also information
about their consumption, against which they can make real savings
in their consumption. We have been trying very hard for the last
four years to promote this market and get it off but we feel like
we are all the time being pulled back by the industry not wanting
to change its systems and processes to allow this to happen in
a timely and effective manner.
Q688 Mr Hoyle: The truth of the matter
is you want a share of the market and you are saying "we
are the good guys" but the reality is you have entered this
market because you want to make money.
Mr Munday: I do not think there
is anything wrong with trying to make a reasonable return. It
is whether it is proportionate to what we are doing and the value
that we add to the overall mix.
Q689 Mr Hoyle: So the jury is out?
Mr Munday: Give us the opportunity
to demonstrate and we will be there.
Mr Paul: From Electricity4Business's
point of view we have had a big focus on looking at the operational
costs of running a retail business and we have invested a lot
of time and money in making those processes as efficient as possible
in taking a large chunk of that cost out of our supply side so
that we can then offer cheaper prices to our market.
Q690 Mr Bailey: To a certain extent
I think the answer to some of my questions has at least been hinted
at in what you have said already, but if I can summarise the situation
so far. You are small independent producers who feel you can make
an offer to SMEs which would be competitive in comparison to the
`Big 6' suppliers. However, you are blocked from entering the
market by of a range of practices that they have adopted which
makes it very difficult for would-be customers to switch to you.
Could you give examples of the sorts of practices that you feel
are taking place which are preventing that and perhaps some of
the changes that need to be in place to prevent it?
Mr Paul: I think one of the overall
challenges that you have as an independent supplier is not only
generation but obviously is access to the wholesale market. We
need to buy forward on the market and we therefore need a liquid
and deep wholesale electricity market. Since NETA the wholesale
market has been declining. The aim of NETA was to create a deep
and liquid wholesale market and that has not been achieved. The
shape of the UK electricity supply market has been moving away
from a wholesale market to one of vertical integration.
Chairman: You are anticipating both the
next lines of questioning. We are going to ask you about the wholesale
electricity market next and then vertical integration consequences,
so it more the practices we are interested in.
Q691 Mr Bailey: The working practices
and contractual arrangements that are adopted.
Mr Paul: Obviously I am not here
to complain about competitors' activities—
Chairman: Go on!
Q692 Mr Bailey: You will not have
a better opportunity!
Mr Paul: What would be useful
is to explain some of the barriers that we have had to jump over
as a new market entrant. One example is the practice of "new
customer only" pricing, where there are two prices, a much
higher price for your loyal customer base and a reduced price
for new customers. The one thing that a new market entrant will
not have is a customer base to abuse, so as a new entrant you
do not have the ability to subsidise acquisition by charging higher
prices to your customers. That sets a very high barrier for entry
and requires very, very deep pockets where you may be looking
two or three years out before you can get a return from a customer.
Q693 Mr Bailey: If I could summarise
what you are saying—and you would not put it as crudely
but I will—the `Big 6' can fleece their existing customer
base in order to make loss leader offers to would-be new customers?
Mr Paul: Yes, it is not unique
in this market, we have seen it in the finance sector, we have
seen it in the insurance sector, but where you have dominant players
and you are trying to get a market structure where new entrants
come in, that does become a huge barrier. We are not looking at
small amounts. We are looking at a difference in price of seven
pence a unit for a new customer to maybe 14 pence for an existing
customer.
Mr Bennell: I think as well there
is a regulatory practice (and it has been endorsed by the regulator
and put into a licence) that allows an incumbent supplier when
they receive notification that they have lost a customer, providing
they have got an appropriate contractual provision, to use that
fact of a loss to contact that customer to whom they had probably
offered a high renewal price, to suddenly offer a much lower "save"
price and to encourage those customers to break their contracts
with whoever has taken their supply on. It is a very unusual feature
of the market and I really cannot see how it is in customers'
interests that while that customer may get a better deal, there
are hundreds of thousands of others that do not get that opportunity,
and it is just peculiar really. There is no other business where
your competitors can park their tanks on your front lawn and pick
your customers off as they are coming through the front door.
Mr Munday: Just to follow on the
theme, there are some what we would call disingenuous contracting
practices to customers. For example, at the end of a four-year
contract a customer may have to give notice that he wants to leave
not before 120 days before the end of the contract and not after
90 days before the end of the contract otherwise he is going to
find himself tied in for another period. In a market of shopkeepers
and small offices this seems to be a practice which is not illegal
but it does not quite feel comfortable. Another practice which
is linked to Peter's point is when a customer's fixed price contract
term ends, they will go on to an out-of-contract rate which by
its very nature will be higher than the contract rate. The customer
will sit there probably quite oblivious to what is going on for
several months until suddenly he looks at his accounts and finds,
"I seem to be spending a lot on electricity; why is that?"
and he goes back and he finds, "Blimey, I am paying over
the odds. I will go out and get a competitive quote for my electricity".
So he goes out and gets a quote and finds he can save some money.
He then signs up with a new supplier who then turns round and
says, "Yes, Mr Customer, you can go and take that deal but
if you do I will charge you these higher out-of-contract rates
for the period since your contract ended, but if you happen to
come with me on this now lower contract rate I will waive those
charges". That does not instil a good sense of customer service
into the existing player, does it? He is not strongly incentivised
to look after his customer. At the end of the day, nine times
out of ten that customer does not go to the new supplier; it is
retained by the old supplier. I do not think that is doing the
customer any good at all and it is certainly not encouraging people
like us to act in the market.
Q694 Mr Bailey: You anticipated my
question which was to be on the contractual behaviour of the `Big
6' in retaining their existing customer base and how they could
get away with it. Is there anything that the other two would like
to add in that sort of area?
Mr Paul: I can give you some examples
of some figures to show how prominent this is. We lose up to 36%
of our sales, so sales which we have for which we have incurred
the cost are then won back by the incumbent supplier. It is a
fairly unique market thing, as Peter said, you win a customer
but you have to tell the current supplier that you want to transfer
it.
Mr Bennell: They then physically
block that transfer.
Q695 Mr Bailey: They physically block
it?
Mr Bennell: They prevent that
transfer. That is a practice that is now allowed under defined
conditions by the licence.
Q696 Mr Bailey: Just to finish off,
what can be done about it? What would you recommend being done
about it?
Mr Munday: I think there needs
to be lot tighter regulation on this. We do need to change the
rules governing the objections. Where we can demonstrate these
practices are going on, the regulator needs to take action very
quickly. At the moment it feels like a free option to suppliers
to take, although there is some talk of strengthening the regulatory
powers. That has not happened effectively as yet and it is still
a problem to us.
Mr Bennell: There is a lot of
competition legislation but it is not clear that it is applicable
here. A lot of it refers to dominance. What is dominance? If that
were to be clarified and if some bigger players were found to
be dominant we might see a marked change in behaviour.
Mr Bailey: Do you think the fact that
the `Big 6' are vertically integrated enables them to offer deals
such as lower wholesale prices?
Chairman: I am going to rule that question
out of order because we are going to ask about that at some length
later otherwise Mark will have nothing to ask.
Q697 Mr Oaten: I understand exactly
what you are saying about the existing customer and having the
power to retain it but, presumably, if BizzEnergy were trying
to win some business off Electricity4Business, you would do exactly
the same thing in those circumstances, would you not?
Mr Munday: We need to behave and
we want to behave in a manner which does the customer service
and suits our reputation. We actually let customers go. We decided
a few years ago that we would take the moral high ground on this
and we would not employ those practices.
Q698 Mr Oaten: Is that the same for
the other companies?
Mr Paul: We do not offer any cheaper
prices for a customer to stay with us.
Q699 Chairman: So you value all your
customers equally?
Mr Paul: Yes.
| 
