Examination of Witnesses (Questions 800-819)
MR SAM
LAIDLAW, MR
IAN MARCHANT
AND MR
RUPERT STEELE
24 JUNE 2008
Q800 Mr Oaten: So it can be done?
If you take the political decision to do it, it can be achieved?
Mr Marchant: It can be. We took
the view two years ago, there as a great outcry about prepayment
meter surcharges; we all received letters from a number of charities
and a number of MPs; we took the view then that that was what
was required to help to make our contribution to fuel poverty.
The sad thing is that in Ofgem's current view that abolition of
prepayment meter surcharges will not count as our action towards
social tariffs; therefore you might find that the three of us
who have done something move in the opposite direction.
Q801 Mr Oaten: We are going to come
on to social tariffs in a minute. Mr Laidlaw, would you say you
have got a little bit of catching-up to do compared with some
of your competitors?
Mr Laidlaw: We are the only one
that has the essentials tariff; and we do also have the most comprehensive
network; and we have the largest number of prepayment customers.
We have different demographics in a broader network so it is higher
cost. What I have said to you, and I repeat, is that we are committed
to reducing this differential.
Q802 Mr Oaten: In what kind of timescale
do you think we are looking at? If we were to look at this figures
in a year's time—
Mr Laidlaw:— they will look
better.
Q803 Mr Oaten: They will definitely
look better?
Mr Laidlaw: Yes. Just to give
you context here, we have taken 25% of the cost out of our residential
supply business over the last two years, so we are on a very clear
mission to reduce costs wherever we can but continue to provide
service and provide value for money to our customers.
Q804 Mr Oaten: Just on the costs,
presumably with prepaid there is no real credit risk involved;
there is no real collection risk involved on prepayments. I am
still not 100% clear why it costs so much to manage it; because
I would have thought it would have almost been cheaper given those
factors?
Mr Laidlaw: The meters themselves
cost more to rent as well. You have actually got a piece of technology
that is more expensive to rent and to service.
Mr Marchant: You would be surprised
at the level of transactions, the degree of care of maintenance
with these customers, the number of phone calls per account, the
number of call-out visits; and actually there still are credit
issues.
Q805 Mr Oaten: If it is not effective
for you and it is not being particularly effective for them, why
is it so difficult for some of these customers to actually get
away from meters and to switch to direct debit; because the barriers
are in place for doing that?
Mr Laidlaw: No, the switching
rates amongst prepayment customers are amongst the highest in
the industry. If you look at different channels of trade, whether
it is direct debit, whether it is cash and credit, or whether
it is prepayment, the switching rates on prepayment are some 30%
higher than general switching rates. Contrary to a general perception
that they are locked into prepayment meters, all the evidence
and history (and I am happy to share a paper with you on this
point) is that actually the prepayment customers have switched
more than the average customer.
Q806 Chairman: The evidence you have
given as a supplementary shows that is more of a problem for those
on standard credit terms?
Mr Laidlaw: Correct.
Chairman: Where the fuel poverty is actually
concentrated we do not spend enough time talking about. I know
I am going to frustrate Mark, but I am going to move on to Tony
because he is asking about switching particularly, and this is
the time to pick up extra issues.
Q807 Mr Wright: It is recognised
that probably 50% of customers in the market regularly switch
between companies. What are you actually doing as companies to
be more proactive in pursuing the other 50% and encouraging them
to switch?
Mr Steele: We would love to find
them and get them to switch to Scottish Power. We have every opportunity
to find these customers—the difficulty is finding them and
getting then to take our products.
Q808 Mr Wright: Surely a lot of the
products are sold on the doorstep, by telephone, on the internet,
and indeed energywatch have got a specific site which will tell
people in a particular area which company will sell the best electricity.
On that basis surely some people come to you; and you would also
go out into the market to find them?
Mr Marchant: Absolutely. You have
identified the three key routes to market: doorstep; telephone;
and internet. There are other ways through to market affinity
arrangements. For instance, we have a deal with the British Heart
Foundation where, if people who support that charity sign up to
us, we make a donation, which has already totalled three-quarters
of a million pounds which we have given. It is a competitive market
and we are all trying different things to reach those customers
who have not switched. You have to recognise that there are a
significant number of customers who have made a conscious decision
not to switch. I would like to feel that the customers who have
not switched from me think that the package of service, product
and price that I offer them is sufficiently attractive that it
is not worth them switching. That is not to say I am not being
competitive. We are trying everything we can. I think our results
show that we are being pretty successful at that.
Q809 Mr Wright: Is not one of the
problems though when it comes down to some of the selling techniques,
when you sell on the price, that in reality the majority of customers
do not really understand how much they are actually going to save
by switching companies? The evidence suggests that a third of
those who switch actually switch unknowingly to a higher tariff
in any case. What would you do in that particular case? How do
you sell your product and prove to your customer it is cheaper?
Mr Marchant: Generally, because
we have typically been the cheapest supplier—certainly on
the doorstep we have been the cheapest supplier—we have
had the least of those sorts of problems. In fact we worry about
our losses on the same basis; because unless someone is signing
up for a particular internet tariff or special deal most of our
losses are probably going to end up paying more. I share your
concern. What we do is we have an independent verification system
where the salesmen will call our office and they will speak to
someone who has no incentive whatsoever on sales to check that
the customer has understood what the process is doing, and that
they are comfortable that the package of price, service and product
they have selected is right for them. If those people identify
particularly a vulnerable customer who was paying more they will
tell them. They would make sure that that was clear. That is our
position.
Mr Laidlaw: We have a similar
process. We actually launched the industry code on this to ensure
best practice, and to ensure that there was an independent audit.
I think you have to put this in contest, in that there are currently
around 100,000 customers switching a week; this is one of the
highest churn rates in the energy business, certainly in the world
the highest rate. It is a higher rate of switching than you see
in telephony, than you see in financial services, insurances and
a whole lot of other products. There is switching. I think I have
seen numbers that suggest up to 70% of people have switched, rather
than 50%, on a single fuel. Some people are just switching on
one fuel, rather than switching on both, and it is probably 55%
on dual fuel; but we still need to try and catch the remaining
30% or 45%, whatever the number is. We are doing our best to do
that through similar channels of sale. I think everybody here
is seeing the advertising that we all do to make everybody aware
that this is a competitive market, and we will continue to do
that and capture customers off other people.
Mr Steele: As far as our practices
are concerned, our doorstep sales agents are provided with sales
aids that show the comparison in pricing between suppliers and
identify the cases where people would not make a saving. We expect
our sales agents to provide customers with a fair overview of
the situation, and we take disciplinary action against those who
do not.
Q810 Mr Wright: One of the evidence
sessions we have had before suggests, for instance, that Scottish
and Southern have cornered the market because they delay the increase
in the price of the fuel but after, say, five or six months they
catch up, so the saving is only a six-month basis, on a short-term.
Is that policy specifically on the basis of trying to capture
the customer base, on the basis of something cheaper?
Mr Marchant: We have what we call
a "responsible pricing policy" which says that we will
be one of the last to increase prices if we have to, and one of
the first to reduce them if we can. Over the last four years we
have scored very well against that policy. Yes, that is part of
our deliberate policy to grow our business. We are trying to strike
a balance between customers and shareholders; that is what underpins
our responsible pricing policy. We have grown by 90% over six
years; 10% over the last year. A typical customer joining us would
have saved £400 over the last four years; but that is not
equally the same over every month—some months you save more
and some months you save less, depending upon the particular profile
of prices. What we are aiming to do is to offer customers a long-term
branded price promise that means that they will over time see
good value out of the being an SSE customer.
Q811 Mr Wright: In reality, over
a period of time, the savings now are minimal. It may well be
up to £30 unless, of course, you switch on a duel fuel basis
and go to direct debit. Really the margins are very, very minimal
now, are they not?
Mr Marchant: You can save between
£30 and £60. Assuming you have already switched fuels,
you could save between £30 and £60, but that has been
over £100 on an annualised basis. It just depends upon the
period which you are looking at. We tend to take an annual view
of this, because people tend to regard their power, their gas
bills, on an annual basis. Going back over the last years, those
savings have averaged £100 a year for the last four years:
us versus a sort of market leader.
Chairman: I want to move on to the social
tariff questions and will try and come back if there is time,
because they are all related issues.
Q812 Roger Berry: The Government
recently announced an agreement with the Big 6 companies to increase
spending on social tariffs, social assistance. I think the figure
for this year is an extra £50 million. As I understand it,
all that has been said about the use of that money is that it
will be targeted at the poorest pensioners. Has it yet been decided
how that £50 million is in fact to be spent?
Mr Marchant: Each company makes
its own decisions. From our point, we have pledged to quadruple
the number of people on our energyplus care social tariff, which
is 20% below market price. We are busy working on targeting for
those. That is the principal vehicle that we are using. Others
will have to tell you what they are doing with their share of
the money.
Mr Steele: We are very supportive
of the approach that the Government discussed with us, and we
all agree we think it provides a really effective way for social
action to work in the market, working with the grain of the market.
We are still actually developing the precise package of arrangements
that we will be doing. It will involve the rollout of our Carefree
Plus social tariff; almost certainly a great deal of activity
through the ScottishPower Energy People Trust which has already
helped 221,000 people in 91,000 households. We will be putting
together a package of measures within this framework.
Mr Laidlaw: We were the first
company to launch a social tariff last year. We currently have
about 350,000 customers on that social tariff. It costs us £32
million. We want to do more; we were very clear about that. Last
year we had a target of getting to over three-quarters of a million
customers by 2011 on that. One of the issues has been actually
working with the DWP on getting good data; because the eligibility
for social tariffs is those who are on various different forms
of Income Support. What we have been keen to do with DWP is match
our computer systems with their computer systems, to ensure that
we really have good targeting. One of the concerns has been that
actually there are some £4.5 billion of unclaimed benefits
at the moment because we do not have adequate targeting. One of
the things we have been very keen to ensure is that the targeting
is good and really goes to the most vulnerable customers. In addition
to our social tariff we also spend £21 million on our Energy
Trust which helps those who are really having difficulties with
their fuel bill. We are also of course doing a lot through the
Carbon Efficiency Reduction programme, the CERT programme, to
actually ensure that our vulnerable customers and the fuel poor
achieve energy efficiency measures, loft insulation and energy
savings.
Q813 Roger Berry: I absolutely appreciate
that in the medium and longer term those kinds of measures are
more effective rather than simply increasing benefits. In relation
to this £50 million, Age Concern and Help the Aged have said
there is a very simple way of helping the poorest pensioners,
which is what the Government has said this money is for, and that
is simply to give a £50 fuel voucher, effectively a rebate,
to pensioners over 70 on Pension Credit. With the winter fuel
allowance the Government knows exactly who these people, over
70 on Pension Credit, are. A £50 rebate would spend the £50
million; it would be targeted at some of the poorest pensioners.
Why not do something as simple as that? Why are we still waiting
to know how this money will in fact be spent?
Mr Marchant: In the discussions
with the Government we have talked about those sorts of ideas.
The Government knows who the people who most need this help are—we
do not. We know a fraction of them and we generally know by accident,
maybe because they have written to an MP, an MSP or a local councillor
we have become aware of them. The Government knows that, and we
have said the Government will be best able to target the help.
Q814 Roger Berry: Earlier you said
each company was doing their own thing?
Mr Marchant: That is the agreement
that was reached.
Q815 Roger Berry: How confusing for
people. How thoroughly confusing for customers.
Mr Steele: It is beneficial I
think that there is scope for innovation. For example, we have
a programme about benefit entitlement checks where, for every
pound we spend on that programme, some £20 of additional
benefits are found for the customers concerned. That programme
is a valuable programme that might be giving better value for
money than the programme you suggest. The programme you suggest
may be the right programme. We are certainly going to consider
the proposal from Help the Aged; but we have to remember that
pensioners are not the only people having difficulty with their
fuel bills; there are families and lots of other people as well.
That is why we are trying to have a balanced programme, rather
than necessarily spend all the funds available on one group.
Q816 Roger Berry: I agree with you.
There are disabled people under 60; there are 750,000 children
who live in fuel poverty, you are absolutely right; but the Minister's
statement said specifically that the extra £50 million was
to help the poorest pensioners. I would have thought in these
circumstances this £50 million is not a lot of money—whatever
one thinks about the windfall profits or not, £50 million
is not a vast sum of money—but we were told it was to go
to the poorest pensioners. Surely Help the Aged and Age Concern
are right in saying a very simple way of doing it, and telling
people now what is going to happen rather than the continuing
uncertainty, is to do something like this: to say to people, "Over
70 on Pension Credit, you get £50 a year each". Is that
not the simplest way of doing it? Why spend more time debating
an issue like that? Yes, I would like to ask in a moment about
non-pensioners.
Mr Marchant: I do not believe
we are the right people to be asking that question of.
Q817 Roger Berry: Why did you agree
that it would be left to you? Why did you not just say to the
Government, "Look, £50 million we can afford it. No
problem. You tell us how to spend it"? Why did you not say
that?
Mr Marchant: We said, and each
company is different, "We can support a voucher scheme".
We said, "We're not just going to write Government a cheque,
but we can support a voucher scheme". We said that. It is
not easy to do. It is easier to say to do; but we said we felt
a voucher scheme could have been ready for this coming winter.
You are talking about a mass mail-out. Things like fraud and all
sorts of things need to be dealt with. It is easy to say—less
easy to do. We said back in February that it could be done for
the winter. For various reasons a different route was chosen.
Therefore, we will play our part in that.
Q818 Roger Berry: The route was that
it would be left to each of the six, was it?
Mr Marchant: Yes.
Mr Steele: We said we would support
a voucher scheme as well in the discussions with the Government;
but, again, they eventually decided to go for a route of leaving
it to us to use our initiative. In many ways that is a good result
because it will set lots of other ideas free; but we would have
supported the voucher scheme if that is what they had chosen.
I think it is quite tight to change horses at this stage and do
it in a way that is resistant to fraud and works properly.
Q819 Roger Berry: Given the time,
I think that is a very simple, straightforward thing to do. I
am amazed it is still unclear what is going to happen, apart from
anything else. One final question because I know we are pressed
for time. Mr Laidlaw mentioned that Centrica had 350,000 customers
benefiting from social tariffs, with plans to increase. Could
each of you quickly tell me how many of your customers are currently
fuel poor and what proportion of those currently receive social
tariffs?
Mr Marchant: The answer to the
first question is that we have absolutely no idea, because we
do not know our customers' income, we do not know our customers'
housing situation or family circumstances. We do not know how
many of our customers are fuel poor. All we can do is the same
statistical analysis that the Government does. That is the first
point. The second point—how many people do we help? Absolutely
a fundamental question is: what is a social tariff? This is where
I fundamentally disagree with Centrica's position. We believe
passionately that a social tariff should be the lowest tariff
you offer. British Gas's Essentials tariff on that score would
not count. We have, on our energyplus, 30,000 customers where
we are charging 20% less than the standard rate, so it is significantly
below any internet or special offer that we see. We think it makes
a genuine difference. If I take British Gas's definition of a
social tariff, 667,000 of my customers I am deliberately cross-subsidising.
For three months this year every single one of my customers was
on a social tariff, because they were paying less than British
Gas's Essentials tariff. Fundamentally we are completely at odds
on what a social tariff is. For those members of the Committee
who have not signed the Early Day Motion on this, I would encourage
them to go and think about it! As you can tell, I passionately
believe if we are going to help people who are fuel poor we should
be helping them properly.
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