Examination of Witnesses (Questions 700-719)
MR KEITH
MUNDAY, MR
PETER BENNELL
AND MR
GRAHAM PAUL
24 JUNE 2008
Q700 Chairman: Unlike the `Big 6'
who value the people who want to change and not the people they
have got as incumbent customers who have not had the wit to seek
an alternative supplier? You are being used as a Trojan horse
to drive down prices for those people who are clever enough to
want to switch?
Mr Paul: Correct.
Mr Munday: Which is not actually
a sustainable business model for a new entrant supplier. I think
we need to go and examine what we are up to.
Q701 Chairman: It is a miracle you
have got 1%!
Mr Paul: There are different prices
depending on which channels it is and so a `Big 6' supplier would
have a different pricing level for its direct channel and then
a different pricing structure for its agent and broker channel
and I think we touched on this earlier where some enticements
are offered for the agent and broker not to act in the best customers'
interests. Some suppliers have a range of ten tariffs, the bottom
tariff, the cheapest one, having a low commission rate; a higher
top-end having maybe ten times the same amount of commission payable
for the same supply period, so those agents and brokers are not
having to declare on what basis they are putting forward this
proposed price quote. They are being encouraged to actually get
the deal that earns them the most commission.
Chairman: We are going to turn now to
the two issues which I think are at the heart of your concerns
about the structure of the market—liquidity and vertical
integration—and the transparency that accompanies those
issues. As we do, can I just remind Welsh Power of their very
striking comment: "We believe that the market is fundamentally
broken and we need a more radical solution than recent Ofgem initiatives".
That is quite a big statement. If you feel we do not in our questions
address the fundamental aspects of that broken nature of the market
please feel free to add to them. Mike Weir?
Q702 Mr Weir: I take it from the
evidence that we have already received that you believe that there
is a lack of liquidity in the electricity market?
Mr Bennell: Yes.
Q703 Mr Weir: How does that impact
upon smaller suppliers?
Mr Bennell: Quite simply we cannot
buy what we need to buy to deliver the power for our customers
when we need to. It does not matter whether you are going out
two years, or at the moment whether you are talking about last
weekend, there is a paucity of power on offer. You would expect
in a liquid market there to be lots of transactions which would
provide a good reference price for future transactions and for
the price that you could expect to pay. There are many days when
the main power products simply do not trade. We looked at a six-month
period and we found that on half of the days roughly the main
power products simply did not trade, so there was no price reference.
Then when you look at the days when it did trade most of the time
there was no deep and liquid trading. There were perhaps one or
two isolated examples, so it is a very marginal thing at the moment,
and to say that it is reflective or economically efficient is
just wrong. From our perspective, it just has not delivered the
objectives that were set out for it when it was introduced first
as NETA and then as BETTA, which was a level playing field and
a deep and liquid market, and it makes it very difficult for us
to run our business.
Q704 Mr Weir: What do you think is
the reason for that? Is it purely down to the activities of the
`Big 6' or it is because how the other independents work as well?
Mr Bennell: If you go back to
the opening of the market, it actually started out somewhat better
than it is at the moment. It was quite promising early on, but
early on there were more participants than there are now, there
were more generator participants and there were more trading participants,
and there was much more flexibility in terms of who was offering
what and the terms on which things were offered. What has happened
is that there has been a consolidation in generation and a lot
of the traders have gone away, some of them for goodreasons, others
for less obvious reasons, and we have now got a market where most
of the power, apparently from our perspective, is not traded through
the wholesale markets so it does not touch the sides of it. I
think that is down to the growth of vertical integration and the
demise of players.
Q705 Mr Weir: But when we asked Ofgem
about this, they reeled off a whole list of new generation being
built, much of it outwith the `Big 6', and I think it quoted your
own company Welsh Power as building a gas-fired station in Wales.
Is there independent generation coming into the market? Will that
make a difference to liquidity?
Mr Bennell: It is very, very tough
to build a new generating plant. We are doing Severn Power because
we meant it. As an independent generator/supplier without an approved
credit rating we have to put our own cash up to do these things
and there are substantial amounts of cash involved. People with
credit ratings do not have to use cash, they can do lots of these
things, ie progress many projects. If you look at the list of
generators there is lots of stuff on there that is not being built
and will not get built, so there are lots of people on there keeping
their options open. That has another knock-on effect in terms
of the transmission capacity. There are some big issues on the
process for building new generation as well. We would really like
to build another two plants but before we can move that on appreciably
I think our experience on the first one shows that there is more
certainty that is needed there. It took us two years to get generation
consent. We are still waiting for an associated pipeline consent
for the Severn Power project. We need the planning—
Q706 Mr Weir: What is causing that
delay? Is it Ofgem giving consent? What is the reason?
Mr Bennell: BERR consent, for
one thing, and it just seems to be driven by the fact there are
no prescribed timetables for dealing with this. There are lots
of people who are interested whose opinions are clearly important
but these processes seem to drag on and on and on, and without
an end stop it is just uncertain. If you want to build a loft
extension there is a prescribed time for response. If you want
to lay a pipeline or build a power station it takes much longer.
Apart from that, one of the projects we would like to build we
have been given a date of 2022 from the National Grid for the
connection of it. That is after most of our parent board have
retired. The strange thing is that there is what we would call
"sterilised capacity" in that area so there is capacity
that is marked for another future project which is unlikely to
start for a considerable number of years which we could use now
and build that plant and be generating. There is a Transmission
Access Group running, but I think we are seriously concerned that
some of the ideas that are being talked about, such as the auctioning
of capacity and the removal of existing rights, would just make
it impossible to get bank finance for independent generators.
I think there is a reasonable list of plant there. Most of that
plant is `Big 6'-inspired. It would be very good to have more
independent generation. For that to happen, more liquidity in
the market would be helpful as far as good price references are
concerned, more certainty on the consents process and the planning,
and something that is practical and sensible on transmission rights.
The National Grid have a licence obligation to provide an effective
and efficient transmission service, and not being able to do something
until 2022 does not seem to be very consistent with that. I cannot
see any urgency behind the steps that are being taken to put that
right.
Q707 Mr Weir: But you will get that
same complaint from some of the `Big 6' who are trying to do,
for example, renewables and wind farms, they cannot get connection
to the Grid either. So is getting connection to the Grid a serious
problem in creating any new sort of generation capacity?
Mr Bennell: Yes, it is.
Q708 Mr Weir: You mentioned auctioning
of generation. Do you think generating companies should be obliged
to trade a proportion of their energy in the open wholesale market?
Mr Bennell: Ideally all the output
from a generator would be traded in the wholesale market. Unless
you have got this steady flow of transactions you are not going
to get liquidity. It is certainly something to which the Welsh
Power Group would be happy to subscribe.
Q709 Mr Weir: So do you think all
generators should be subject to that, not just the `Big 6'?
Mr Bennell: I would be quite happy
for all generators to be subject to that. I think it would help
liquidity and lack of liquidity is the root of many of the problems
that we have got at the moment where the price reference that
we all refer to refers to a very, very small piece of the power
that is actually traded.
Q710 Mr Weir: As a matter of interest,
where do you buy your energy from at the moment? Is it mostly
from the `Big 6'? Is it from independent generators?
Mr Paul: Electricity4Business
buys it from the international bank in an arrangement that we
have. The challenge that we have with that is that they will give
us a forward curve price that we can buy from and buy the futures
for that we require. However, we have nothing to reference that
price against, so we have no way of judging how competitive it
is, and so the requirement in having more players being able to
offer prices to the independents means that then you can start
choosing where you buy your supply from and actually being able
to reference whether it is representing a fair price.
Q711 Mr Weir: Excuse my ignorance
but when you say international bank are you effectively buying
through a broker then?
Mr Paul: No, an international
trading house.
Q712 Mr Weir: What is the difference
between that and a broker?
Mr Paul: It is their job to buy
all of the components in order to make up that trade.
Q713 Mr Weir: It is effectively a
broker if they are buying from the market and selling on to you.
Mr Paul: Yes.
Mr Munday: BizzEnergy buy principally
from a commodity trader, a major up-stream player in coal and
gas. With reference to the `Big 6', what has been very difficult
over the last few years is actually that they are, if I said not
keen that would be a massive understatement, and to try and get
suitable trading terms out of them to trade with us as new entrant
players has been exceedingly difficult. In the seven years that
Bizz has been going we have only managed to extract terms from
one of the `Big 6' players. Some of their offers have been absolutely
laughable in terms of the reasons for not wanting to do it. Some
of them have been very honest and said, "We do not want to
deal with you because all you are going to do is compete against
our supply business".
Q714 Chairman: Hang on, that is quite
big what you said, Mr Munday, there.
Mr Munday: It is indeed.
Q715 Chairman: I think that is a
bang to rights anti-competitive issue?
Mr Munday: It is and if I could
get it in writing or prove it, it would be brilliant, but I cannot.
Q716 Mr Weir: Just going on from
that, you are buying from effectively a broker or trading house,
or whatever, which presumably take commission on what they sell
to you?
Mr Munday: Yes.
Q717 Mr Weir: But presumably they
are buying from the `Big 6' or someone else to sell on to you?
Mr Munday: The nature in which
the product we buy is constructed probably does come from one
of the generators but through a very indirect route, through a
complicated mechanism called the "dark spread" where
effectively it is a mechanism of swapping coal for power. Yes,
ultimately someone will have generated it but it is not in the
guise that you are thinking of it as a direct transaction.
Q718 Mr Weir: If you are getting
energy within the UK, presumably it is generated within the UK,
by and large, so it must be coming from one of the `Big 6'?
Mr Munday: Or one of the traders.
The electrons must flow that way if you want to think of it in
those terms.
Q719 Mr Weir: So effectively what
is happening is you are getting it from the `Big 6' in a rather
round about possibly expensive way?
Mr Munday: Yes.
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