UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 1207-ii

House of COMMONS

MINUTES OF EVIDENCE

TAKEN BEFORE

Business & Enterprise Committee

 

 

Energy prices follow-up

 

 

Tuesday 25 November 2008

MR ALISTAIR BUCHANAN

Evidence heard in Public Questions 75-196

 

 

USE OF THE TRANSCRIPT

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Oral Evidence

Taken before the Business & Enterprise Committee

on Tuesday 25 November 2008

Members present

Peter Luff, in the Chair

Mr Adrian Bailey

Mr Brian Binley

Mr Lindsay Hoyle

Miss Julie Kirkbride

Mr Mike Weir

Mr Anthony Wright

________________

Witness: Mr Alistair Buchanan, Chief Executive of Ofgem, gave evidence.

Q75 Chairman: Welcome to what will be this Committee's last ever dedicated inquiry into energy policy before responsibility will transfer in the New Year to the new Committee. This is not necessarily your last appearance before us, we are bound to take an interest in the issues of energy policy, particularly as it affects the business world, but it could well be, so welcome and thank you for your work with the Committee over the years I have been in the Chair. Can I just begin by asking you for clarity on one point in the Chancellor's Statement yesterday; I rather misheard it in the rush of words yesterday. As I understand it, he committed you in public to publishing quarterly reports detailing the link between wholesale and retail prices. He then went on to say that - which is why I got it wrong yesterday - if sufficient progress is not made in the next few months, the Government will use statutory powers to end unjustifiable pricing differentials. That was a reference to what we will be asking about a little later on in our questioning: prepayment meters, standard credit tariffs and, of course, we will also talk about direct debits. The only promise here is that you will now publish quarterly information, formalising the name and shame business that we have talked about in the past.

Mr Buchanan: That is absolutely right. If I can say for the record, we welcome the Chancellor's comments, as we have the Secretary of States'. The amount of pressure we can put on the companies to deliver the appropriate outcome is very welcome.

Q76 Chairman: Good. Now, unusually, you would like to make a short statement about how you see the world, which I do not normally allow, but in the circumstances today I think it is appropriate to do so.

Mr Buchanan: Yes, that is very kind; it will be very short and partly it was to thank you for the introduction and also to thank you for this Committee's input to both Ofgem's work and more generally on the energy and environmental issues. Certainly, a lot of the findings that we will be talking about today, which you made in your report, have had more than just an echo in our report and I am looking forward to discussing those and marrying those two reports. Clearly, our report was an extremely important exercise on behalf of the consumer; the most thorough and detailed review of the domestic retail market and broader themes that the organisation has done for some time. As you know, we found good and bad, and I suppose I liken it to a train: the competition or markets express is moving quite well but we left some people at the station; some people wanted a window ticket and they got an aisle ticket; and some people tried the food and it looked better than it tasted. We are absolutely determined to improve the customer experience and to resolve those problems that we have found. We have demanded, as you know, action from the companies, in particular, by 1 December on two topics: the 4.3 million customers who were short-changed with regard to being off gas grid, and also prepayment meter customers. I am very pleased that British Gas announced this morning - I took a call from their Chief Executive - that they were reducing their PPM customer charges by £30. We have put on, as you know, the regulatory hobnails; you urged us to do that, we feel the timing is right to do that and frankly, we will tighten those laces unless they act and the board is quite determined to do that.

Q77 Mr Hoyle: It is good to see you and we are sorry we will miss you in the future as you are being transferred to the new Committee. Just to go over some of the issues, I wonder if you can give us an explanation as to what lies behind the sharp increase and decreases in the wholesale gas and electricity, and the effect over the summer in contrast to the collapse of the price of oil.

Mr Buchanan: As you rightly point out, we have seen the collapse of oil from $140 to below $50. We have not seen that exact link come through to the United Kingdom, and part of that is currency. My markets team told me yesterday that the currency impact is 37%, which is a problem but, nevertheless, we have seen gas prices in the last month fall by 14% and they are 40% off their peak. Electricity prices have been a bit slower than that and part of the reason they are trading slower is that the nuclear power stations have not come on as expected, and there are also some concerns over how the LCPD - Large Combustion Plant Directive - is working for the plants. Nevertheless, with these price reductions, we would anticipate - and both Scottish and Southern and Scottish Power have announced fairly formally in the last few days - that they would be looking to drop their prices in the New Year. Candidly, I have been public for some time on this and Ed Mayo, when he came to see you, pursued this theme, which is that at the end of 2006 you may remember we could see prices falling quite sharply in 2007, and British Gas at that time stepped forward and announced that it would be dropping prices and by the level that it would be dropping them. We are putting as much pressure as we can onto the companies to announce what they plan to do - and I think British Gas announced this morning, although I have not had confirmation of that - that they are intending to drop prices in the spring. So, we have this unfortunate situation for retail customers where there is a lag - typically companies have bought for their domestic companies ahead of winter and we are monitoring this very carefully. This comes back to the Chancellor's request from us because we have now developed quite a sophisticated model. We have been able to make it quite sophisticated because we did the probe and we have had a lot of information and inputs into our model so that we are watching what the companies are doing with a degree of greater information than we have had before in terms of when those prices should be coming down. Clearly, the large industrials have benefited from the decline in prices, so there is a little bit of good news here. We would expect those prices to come off early in the New Year. Clearly, for the 4.3 million consumers who have been short‑changed, and the prepayment meter customers who have been short‑changed, we expect that this side of Christmas. If they do not do that this side of Christmas, candidly, I think these companies are going to get themselves into a lot of difficulty.

Q78 Mr Hoyle: So, as a kind of an apology to those customers, do you think they are going to give them a rebate or a voucher or something?

Mr Buchanan: That is an interesting question.

Q79 Chairman: I do not want to get too much into that now because we will get into more detail later.

Mr Buchanan: Just to answer that point, the consultation ends in a week's time and I am going to be interested to see what happens; a lot of people have written in. But the other thing I have noticed in typical consultations is that a lot come in just towards the deadline, so I will be very interested to see what people are saying about that.

Q80 Mr Hoyle: There is deep concern that people like yourself are very sceptical about how the energy companies operated. There is a perception that they operate as a cartel. It was interesting that E.ON and SSE both announced their summer price hikes on the same day, while Scottish Power and Npower did the same eight days later, all of them during the height of the holiday season. I just wonder what you can do about that and are you not suspicious when the general perception of the public - either business or domestic customers - is that this is a cartel, they work together and they just ride roughshod over all their customers?

Mr Buchanan: That is a very fair question. Funnily enough, if there was more concern - which is one of the reasons we triggered the probe - it was over the almost simultaneous announcement of price increases back in January/February. Interestingly, if you break it down there was a bit more of a differential in pricing and product in the summer. As far as the cartel is concerned - and this is where we marry with the findings that you made, and you made very clearly in your report, and what a wide-ranging report it was - you had found no clear evidence; nobody had brought you evidence. Clearly, we have the benefit of working under the Enterprise Act and we found no evidence; we had crate loads of information, as you can imagine - board papers, letters, all their strategy documents - we found no evidence of cartel. I instructed my lawyers to go over this extremely closely and they came back with a view that there was not enough evidence; there was not a hurdle that we could get over with regard to the Competition Act to deliver a view that they are acting as a cartel. But I can assure you that I asked both our external lawyers and our external QC to have a look at this particularly closely.

Q81 Mr Hoyle: So what we can say is that they are better lawyers than you. Nobody is convinced by that answer but at least you have tried to investigate it. The problem is that you just cannot find the evidence that must be hidden somewhere.

Mr Buchanan: My legal advisers tell me that the hurdle under the Competition Act is a substantial one, so I take what I am given on this.

Q82 Mr Hoyle: Do we need stronger laws; the strengthening of competition law?

Mr Buchanan: I certainly welcome something you said to me in the summer, and it may come back later on, but one of our findings is that we sought, about five or six years ago, a market abuse power because my concern is that the Enterprise Act or the Competition Act is quite often a very clumsy tool - using a sledgehammer to crack what may be a big or a small nut - but the mechanics of it are quite clumsy. We have raised publicly and with Government the idea that maybe now is the time for us to have a market abuse clause so that we can act more swiftly if we see a potential breakdown in the market, so I welcome your comments.

Q83 Mr Hoyle: But it is funny that within eight days the four major players all announced a price increase.

Mr Buchanan: Indeed.

Q84 Mr Hoyle: Surprise, surprise, and then they wonder why they get the accusations. Can I just take you on because I think one of the big concerns is Ofgem: great ambitions; wanting to do a lot; but the truth is that you are the toothless tiger. You have no claws, no teeth and nothing really to get stuck into. You can write reports all day long but there is nothing much coming from you without the power. Do you feel you would benefit if you were treated like Ofwat that can restrict price increases?

Mr Buchanan: I have to, and you would expect me to, stop you on the toothless tiger.

Q85 Mr Hoyle: You have got to defend your position.

Mr Buchanan: Of course I have to and that is very important.

Q86 Chairman: I will give you a hint that we will be coming back to this at the end of the evidence.

Mr Buchanan: Right. It is important to do that.

Q87 Mr Hoyle: A dragon without fire if you prefer that.

Mr Buchanan: Well, let us stay with the tiger, because we are an organisation that knows how to use both the claw and the paw. The other issue about a tiger is that it knows about timing. I would say, in terms of our delivery, we are an effective policeman; we will use our Competition Act powers; we delivered the highest ever utility fine to National Grid earlier this year; we used our powers under the Enterprise Act to instigate two major probes - one upstream, one downstream; we are conducting mis-selling cases at the moment, so we are quite comfortable with our policing powers and we are quite comfortable giving the industry a good kicking. There is also the harassment power that we have, which is name and shame. That means we can go and have a look at how well they are running their businesses - such as mystery shopping - for their energy efficiency work. A very important part of our role is to inform and to help the information for the consumer. A good example of that recently is the introduction by Ofgem of a much higher level of standard with regard to consumer complaints. We have an important education role, which is something that does not get much attention but is incredibly important for us in terms of a route to market for the regulator. Energy Watch and Consumer Focus primarily have that interface, but we want that interface also to give confidence about the regulatory body, and our Energy Smart and Energy Best Deal campaigns have been very important. My final point, and I am sorry if it sounds slightly prosaic, but it is quite important, Ofgem's direct responsibility is for the 20-25% of the bill that is the monopoly. I believe that in the four price reviews that we have delivered in the past five years, we have delivered an outstanding deal for consumers: quality is up, prices have been kept under control and we have delivered for these network companies the lowest cost of capital, both by contrast to United Kingdom utilities and European utilities. That is incredibly important for the consumer because every 1% you save off their rate of return literally converts into hundreds of millions of pounds of saving for the consumer. I am sorry to have taken a bit longer on this, but it is very important for consumers to have confidence that we are competent and capable of delivering across this range of issues.

Q88 Mr Hoyle: You missed the question I asked and I will put that back in a moment. I suggest you try some smelling salts because the problem you have is that your customers out there, that we represent, do not feel that. They feel that you did not do enough; that you were dragged to the table to do an inquiry when everybody else was shouting and screaming. The big question I have is: those prices have gone up and we understand that, my concern is that you feel that you have done a lot, the public impression is and my impression is, that shareholders' dividends went up to £1.64 billion - a huge increase - so I do not quite understand how the two match. The second part is, we have seen some of the biggest salary increases in the industry where we know that one way and another perks over the year led to £4.4 million being paid to a chief executive. You feel that you have done a good job, the customers out there feel that if those wages can be paid, and those excessive profits can be gained, you are a toothless tiger. I come back to the question that you did not answer: do you feel that it would be beneficial if you could act like Ofwat in restricting the price increases on water for the rest of us, where you could restrict the price of electricity and gas in the same way? That way, to me, you would be a real regulator working on behalf of the customers, instead of trying to name and shame, which, I am sorry to tell you, they do not seem to suffer shame very easily.

Mr Buchanan: I hear your points on dividend and salary and maybe these are issues that the companies should come and talk to you about. No doubt the credit crisis is causing its own issues there for them to really look at that. Let me come back to your question on Ofwat. The bit of Ofwat that is directly comparable to Ofgem is networks, their business is equivalent to our 20-25% of the bill. That is where we restrict prices, that is where we control, so I would say we do very much the same as Ofwat. In fact, we have felt, because Ofwat are at a different stage of the cycle, they have different issues, that we could pursue a lower cost of capital on behalf of consumers than Ofwat has. That is by no way a criticism of Ofwat; they are on a different stage of their cycle.

Q89 Chairman: We are going to have to move on but we might return to these questions at the end of the time.

Mr Buchanan: I think they are really useful.

Q90 Chairman: There is one thing I wanted to clarify. I started by asking about the Chancellor's Statement yesterday; you are going to publish quarterly figures; what I do not quite understand is that if evidence emerges that there is an unjustifiable gap between changes in wholesale prices and retail prices, what can you do about it, apart from name and shame, which really follows on from Mr Hoyle's point?

Mr Buchanan: That takes us towards the whole issue of cost reflectivity and price discrimination. Obviously we are looking at putting licence condition clauses into Ofgem so that we have powers with regard to that. I am nervous because my board has not discussed this so I do not want to fetter where we are going to go, but it is something that we have put in our probe document.

Q91 Chairman: But if your monthly quartering produces evidence that there was a tendency for prices to go up quickly when prices rose and to come down slowly when they fell, if you could produce evidence you could put licence conditions in to deal with some of those things?

Mr Buchanan: If it was clear that was being done with a view to ensure that there was discrimination, which arguably that is what it is signalling, then action would need to be reviewed, yes.

Q92 Chairman: We can now move on to some questions about the underlying wholesale market because, as you know, one of our principal points of difference with you was that our concern was the underlying function, the market, was poor, although there were issues about retail customers as well, where your probe focused, and we welcomed a lot of what you said about your intentions in the underlying wholesale markets. So we will begin with a series of questions on wholesale gas and electricity markets.

Mr Buchanan: Yes.

Q93 Miss Kirkbride: It is quite timely that you are here today because in my constituency this weekend there were two businesses that are now fearful of going out of business because they have just received their new energy supply contracts, which have gone up by 300% in both cases. I know we have had price rises and I see the need for some of those price rises, given what is happening internationally, but how can that possibly be justified? Have you had other examples of that? A 300% increase!

Mr Buchanan: That is concerning me. Obviously, it is a statement of the obvious, it is concerning and as I signalled earlier, in our discussions with the Large User Group and also I met the strangely named SMUG group - Small User Group - a couple of weeks ago, many of them were seeing the benefits of falling prices. So my worry for the businesses that you mentioned is that probably they are very small businesses and therefore are locked into contracts. One of the things that we have signalled within the probe is that much of what I call normal business relationship between supplier and small business has been very poor; the conduct of business has been very poor, and we intend to change that. Perhaps we can take it off line, but I am genuinely concerned by the scale of increase at a time when we are seeing prices fall.

Q94 Chairman: What does a small business do? Who does a small business complain to? Consumers are okay, they have places to complain if they know where to go. Where does a small business go to complain if the company does not provide satisfaction?

Mr Buchanan: Consumer Focus, I am sure, has taken that on because Energy Watch built quite a strong platform with the small/medium user. We have our own links into the Small User Group, but the primary customer relationship is there. I would like to come back on that if I may, Chairman, and just check with Ed Mayo that is the case. I would like to take it offline.

Q95 Miss Kirkbride: As you rightly said, these people have contracts and they feel that they are completely locked into them - one is a nursing home and the other is a farm shop that needs cold storage, so energy is something they have to have, but at those prices they do not see how they can keep going. Are you saying that you will come back to us on that?

Mr Buchanan: I would like to. I would like to get some more information, if I may.

Q96 Mr Binley: The Chairman raises a vital point, which is that the plight of small businesses over the next two years adds to its importance big time. Do you have regular conversations with organisations like the FSB and British Chamber of Commerce? And, do you take note of what they are saying, Mr Buchanan? You are going to need to take much more note over the next two years if we are going to be left with a small business infrastructure that can face the challenges that we need them to face with regard to global competition.

Mr Buchanan: I can give you some comfort there. I personally, and also as an organisation, as I mentioned earlier, have our own regular forums with the large users and the small users. I am a member of the Business Energy Forum, which brings large and small businesses together; we have regular meetings with the CBI and regular meetings with the MEUC, so we are in regular contact.

Q97 Mr Binley: I asked you about two specific organisations, the Federation of Small Business and British Chambers of Commerce, which mostly deal with this sector, rather than the CBI.

Mr Buchanan: And they are members of those groups that I mentioned, particularly Business Energy Forum, so I do get access, I do hear what they are saying.

Q98 Mr Binley: And you do take note of them big time?

Mr Buchanan: We do, they are some of the most important meetings we have. As has been raised by your colleague, we are very interested in these incidents which seem so bizarre, so we will follow that up.

Q99 Mr Bailey: May I just reinforce this particular point because certainly the rise in energy prices to small businesses, particularly the manufacturing businesses in my constituency, are really very significant indeed and we have to be quite clear that it could actually drive some businesses out of business. Should your organisation not be looking at a process by which those contracts could be reviewed in the light of falling energy wholesale prices in order to take some of the pressure off small businesses? Because, at the end of the day, it is in nobody's interest, including the energy suppliers, if those small businesses are actually driven out of business.

Mr Buchanan: One of the key findings from the probe focused on a range of remedies including fairness of contract and contract structure. One of the significant findings from this was the degree to which the suppliers have dismally let down the small businesses in terms of explaining to them what they have got; even giving them a written contract; a degree of abuse at the end of a contract cycle; and that is very clear and we are going to deal with that and are dealing with that in our remedies to the probe.

Q100 Mr Bailey: I would stress urgency because some of these businesses are really up against it now and may not survive.

Mr Buchanan: I will take that away.

Q101 Chairman: I have just had a constituency experience: the collapse of E4B has meant the transfer of the book to another supplier and I have had a complaint from a farm business that there has been very sharp practice from the organisation that is on the book in terms of what new contracts she had signed up to, unbeknowingly, with the new outfit. Again, it is this point, where does someone like that, who thinks they have been treated harshly, go for redress?

Mr Buchanan: I followed that up, too, because I had a similar example raised directly. The information is provided, in that case, in fact, in both cases, E4B and British Gas, the information is provided about their rights to move, etc., but one of the concerns - and we are doing a "lessons learned" on this, as you would expect, on a whole range of issues - is how do we make sure that the customers really do understand what their rights are at that moment and do they need a particular piece of information from us - a flyer to them immediately from the administrator? How do they make sure that they know that they have a right to move at that moment of administration? I welcome your observations; I have had it as well, and our team is looking at that.

Q102 Miss Kirkbride: I will send you details of my two companies so that you can have a look and see what the problem is. Going on to the gas wholesale market, the particular problem seems to be - please tell us how you see it -where the supply is more than a year in advance because there is not sufficient market liquidity. What are your observations on that?

Mr Buchanan: As far as gas is concerned, you have covered the ground and got a lot of very useful feedback within your own survey. As far as we can see at the moment, the churn is at quite a healthy level, there is a market that goes out to 54 months, I was looking at the chart again this morning, in terms of forward gas trading. It is not a huge market, but there is regular churn and visibility in the market. I know Shell and ExxonMobil came to talk to you and said that the market is not stitched up in unfair or restrictive long-term contracts, which was a real concern of this Committee. It seems to me that the gas wholesale market is working quite well. The electricity market, I am afraid, is a completely different kettle of fish and I am happy to go onto that. With the gas market, from what we can see, the dynamics of it are working quite well.

Q103 Miss Kirkbride: But there seems to be a problem when people want a supply that goes over a year. That market does not seem to be working very well, if the feedback we get is correct. So, how can you say it is working well when, if you want a longer-term contract and for big energy users that might be appropriate, that is not working?

Mr Buchanan: One of the concerns that I have - and this may lead to it not working so well - is that one of the outcomes from the credit crunch is that apparently the suppliers - if you are seeking more than a one-year deal - are saying that life is so uncertain that they are going to require a degree of premium for that supply two or three years out. Now, is that a short-term phenomenon, or are the companies taking advantage of the credit crunch? Is it real? Those are the things we are having to think about at the moment. There is a whole range of credit crunch-related issues for the sector but this is just one of them. I am not hearing the same kind of messages as you are about the gas wholesale market per se, but I am hearing this very worrying message about the premium that industrial consumers are having to pay because of the credit crunch if you are looking for a two or three-year deal, and that is a concern; prices are going up.

Q104 Miss Kirkbride: We have a chart here - it is probably better if I come and show it to you.

Mr Buchanan: Yes, do.

Chairman: Basically, you have a market, if I remember, of about 3% of trading in a year. With the chart from the Energy Intensive Users' Group, which shows significant premiums for British industrial consumers over European and United States consumers, at a time of economic challenge, those price differentials could be very serious.

Q105 Mr Binley: It could be 50% even next year.

Mr Buchanan: They could be. Sorry, I thought you were talking about the liquidity of the market. This will come down to how the market dynamic works and I would need to have a bit more information on what is built into the European line, because Europe differs quite significantly. For example, if you are using Italy, their prices are quite high and quite similar to ours. If you are using Germany, which is indexed off a different index, because they have their contracts with Norway and Germany, then there would be a different price. When I look at this, what do I say? I look at America. America, at the moment, and for some time, has been significantly below us, as it is within this chart. That may give you some comfort. It is small and it is cold comfort that if the United States came into the marketplace at the moment, it does not appear that it needs to because the LNG market is very high indeed. So, we do not appear to be having competition there from the United States for global LNG. The United Kingdom price is a combination of the fact that we take European index to gas on the margin and we are exposed to the global LNG market, which is a higher price. That is why you have the higher price over the European line.

Q106 Miss Kirkbride: Is that because we do not have enough energy gas storage?

Mr Buchanan: I am afraid that is one of the issues, yes.

Q107 Chairman: Which we examined extensively with the Minister yesterday.

Mr Buchanan: Yes. It is one of the issues, we cannot get round that.

Q108 Miss Kirkbride: What were you saying earlier, then, about we cannot be sure why higher gas prices for a period longer than a year is to do with the credit crunch, is that mirrored in what you see happening in Europe; perhaps not from those figures there, they still seem to be having an easier deal?

Mr Buchanan: These would be market prices. I would anticipate if we are seeing two, three, four-year contracts having some kind of extra premium put into them by the suppliers for uncertainty. I suspect you would get that if you were in mainland Europe as much as in the United Kingdom. These are the underlying prices upon which a contract would be structured. The message this sends to me is, first of all, the point that you have raised: can we get some storage? How fast can we get the storage available? Can we at last try and break the German/Norwegian contracts because this is really important. DG Competition has done very well in attacking, unbundling, and the structure of the electricity industry; it has gone after some pipelines, like the Miguel pipeline, which is Gaz de France and RWE, but what really is so important for the United Kingdom customer is that relationship and the contract which has very rich terms in it between Norway and Ruhrgas. The concern that we have is until the first Directive goes through next year, and even then you are going to need to get progress at what is called the North West European Transparency Group, we do not know how much gas is going down to Slightner in the North Sea, then going into Germany, sitting in German storage or line pack and then coming to the United Kingdom at the times we most need it. In other words, that is the charge that we have to take. In terms of the tick-sheet that we need to go for, we need to have a look at storage and try and push that on, although it does not directly relate to Ofgem but we, like you, can urge action. We can, part of our job as part of the European regulators, keep the pressure on Brussels to try and open up those contracts, to try and break them, to ensure that we get the Third Directive passed next year under the Czech presidency and that we then pursue that through the regulatory bodies to open up the European market to transparency. When we look at this chart, I do not think that Ofgem should sit back and say that there is nothing we can do; I think we can and we have to.

Q109 Miss Kirkbride: Is enough gas storage being planned?

Mr Buchanan: Gas storage at the moment - I am not happy to talk about this - but those of you who were here four or five years ago, we were talking about 4 bcms in 2004 and we were hoping it would be 10 by 2009, and we have barely moved.

Q110 Chairman: I do not want to do gas storage, as we did that at length previously and we are short of time, but I am glad you enforced this Committee's concerns about gas storage.

Mr Buchanan: Yes.

Q111 Mr Weir: You have said a lot about things to be done in the future to deal with this, but looking at this graph, it shows massive increases above European prices in the tail end of next year and in the winter of 2010. The Chancellor told us yesterday that the economy would start to recover at the tail end of next year. Is this not going to strangle any sense of recovery and is there anything being done in the short term to ameliorate these huge price rises that will be hitting our businesses in the tail end of next year?

Mr Buchanan: I understand your observations and it is a very great concern. I probably bring you small comfort here because what I am hearing is that the suppliers are saying - and they are running businesses as well - that the uncertainty that we now have in the marketplace: liquidity has dried up; spreads have widened; some of our largest utilities have been struggling to refinance debt and these are companies that are generating - as we have already talked about -substantial cash flow. There are tremendous pressures into this sector and that is in the short term, that is not even talking about whether the gas is going to arrive in time at the end of the next decade, or whether companies will be building power stations quick enough - that is the medium-term issue. The short-term issue is really concerning and therefore businesses- and I have got this directly from the Large Users Group - are seeing additional premiums being asked by the supply and generation companies because of that degree of uncertainty that they as businesses are having to endure. I wish I could be more optimistic.

Q112 Mr Weir: Basically, what you are saying is that businesses in this country will be at a considerable disadvantage coming out of a recession because of the differential on prices between Europe and the United Kingdom.

Mr Buchanan: Yes.

Q113 Mr Binley: I want to make a similar point because the Chancellor is gambling big time with the future of this country and he tells us we are going to come out of recession in the third quarter of 2009. He is also telling us that much of that pressure is going to be on small and medium-sized businesses. That is the information we are getting. This graph tells us something different, quite frankly. This is of vital importance, particularly to those small businesses that are being kicked in the butt again and again; they are the real victims of this situation. What else can we do to ensure that we relook at this as a matter of extreme urgency?

Mr Buchanan: I take your point entirely. In order to get that top dark line down to the middle European line, which would be a success in itself, we have got to do at least two things. One is to push forward on storage and the other is absolutely to keep the foot down on the floor of the European car because we have got to get under these contracts, we have got to get transparency to work out what is happening within north-west Europe. It is absolutely vital. The Third Directive will help; the Commission has come quite a way, but I still think there is a big, big win for us there otherwise we are going to get this compare and contrast. I should also say this, and I said it to the Large Users two weeks ago when I saw them, we have to be very careful because in France, the large users are given a substantial subsidy, as they are in Germany. Therefore we have to make sure we are comparing apples with apples.

Q114 Chairman: What subsidy is that?

Mr Buchanan: There are local tax subsidies to many businesses in Germany. Very interestingly, the Commission was so agitated by the French tariff structure that the Commission in France very much put pressure on the French Government to put up prices to industrial and commercial customers but, arguably, they did not go up by the level that they should have done. We have to be very careful about comparing and contrasting: if someone says they are taking their business to the Ruhr, well, ok, but let us just work out what it is that you are getting in the Ruhr and whether certain taxes are being waived. I would urge some caution; it is not a straightforward switch of moving a business to Rotterdam or Düsseldorf.

Q115 Chairman: We would like to pursue that at much greater length and will rely on a written note from you.

Mr Buchanan: I would be happy to do that.

Q116 Mr Binley: Bearing in mind the rather horrifying picture that graph produces for us, you would have thought that liquid natural gas was one of the answers. But we know that the Isle of Grain import terminal has seen little use this year and there is a suggestion that particular under usage will continue, even though we are talking about improving the amount of resource we have to accept the stuff in the country. Can I ask what assessment you have made of why the Isle of Grain LNG terminal has continued to see relatively little third party use in 2008?

Mr Buchanan: The issue for the current usage is simply one of price. Typically, I looked at these prices a month ago for a speech I was making then. At that time - and it has not changed the dynamic but it is a price point that I can use - British prices were trading 90/95 pence a therm. The price that was being paid for global LNG was 120 pence a therm. It would not arrive here because the market is not the right price, it is going to Korea and Japan.

Q117 Mr Binley: The Government makes a slightly different point. In answer to us, it made the point that there are currently a limited number of LNG tanker cargoes that are free to sail to any destination in response to price signals because many of them are locked up in contracts. Is your answer the correct answer?

Mr Buchanan: I believe it is. I believe it is price driven.

Q118 Mr Binley: This is what the Government's response to us tells us, quite frankly. Can we look into that and can you come back to us?

Mr Buchanan: I am happy to look into it.

Q119 Mr Binley: There is an important difference here, Chairman, that we need to be aware of because it impacts upon those two peaks that we have just been talking about.

Mr Buchanan: Indeed.

Q120 Mr Binley: Can I go on to say whether you have conducted a comparison of the access arrangements for rival terminals, such as that at Zeebrugge?

Mr Buchanan: We are doing that currently; we have got a workshop awayday coming up in the next month. Jeremy Nicholson of the Large Users has been keen for us to do that and I think it is timely to do that. We did it last year, incidentally. Nothing has changed in terms of the Zeebrugge versus Grain contract structure. One is regulated - Belgium - one is not. One is much bigger than Grain, one is at 40 mcms a day, one is at 12; one has long-term contracts, the other plays into the competitive market. Zeebrugge is very important to the overall Belgian market; Grain is a very small part of our market, so you might say they are apples and pears, but I still think it is worth us looking at. We had an equivalent opportunity a year ago and the Large Users at that time did not feel that it was worth looking at, but if they want to look at it now, I think it is a good idea, I think we should.

Q121 Mr Binley: The Large Users might not think it is worth looking at but the small businesses in this country certainly will think it is worth looking at. This, again, comes back to the urgency of the autumn/winter periods 2009 and 2010. It is a vital issue that we have to deal with, Chairman.

Mr Buchanan: We are going to review that. My concern at the moment is that it might be that we look at it as apples and pears, but let us do that, we are doing the work.

Q122 Mr Hoyle: Mr Binley has absolutely touched on the problems but the other part of the problem is that it is no good just having an LNG terminal. What you have to have is an LNG terminal with the back-up of storage capacity because what we want is for those LNG ships to come when there is a surplus of gas in summer when there is not a great demand, so it is cheaply bought, stored and put into the market when it is peak demand in order to keep the prices down. That is the way that companies are artificially keeping prices high, not just to businesses but to domestic customers as well. I wonder how you feel about the new proposed terminal - well, there is a terminal, I believe, already in existence in the Isle of Anglesey and there is a huge storage capacity where it goes into a direct pipeline at Thornton. What will that do and what are you doing to ensure that these schemes are brought on quickly in order to try to get the price of gas down, but giving us that extra capacity in storage so that LNG ships will come when there is a glut in the market and that we can see the benefits, rather than trying to buy at the spike in the price where, of course, we are in competition with Japan with no other energy. Have you got a quick answer for that?

Mr Buchanan: I do not know if you will like my answer but I will give it anyway. We will try and do what we can.

Q123 Mr Hoyle: You have no powers, I know your problem.

Mr Buchanan: The comment you made which, if true, would be very profoundly worrying, which is that companies are artificially not wanting to do anything. The evidence that came to your Committee when I read it, E.ON and Scottish and Southern made it very clear that they were very keen to develop; Canatxx has become almost a folklore example. I agree with you, the quicker we can get this on the better. Another worry I have - I sound a bit pessimistic today - you may have noticed that the Portland storage, a big storage facility, 1 bcm - has been delayed by one or two years because of financing.

Q124 Chairman: Now we move to an area where I would have liked to have pushed a little harder but I understand that because the European Union are currently considering the matter, it would be inappropriate. So, these questions will be a little less probing than I would have liked. Turning to the question of market concentration: electricity. This Committee, as you know, expressed serious concerns about the consequences for the takeover of British Energy by EDF for liquidity in the market. I must emphasise that the Committee is not against the deal, that is not the point we are making, but there are implications for liquidity and transparency in the market. We welcome what the Secretary of State said about some transparency issues - and we will come to that later - but the liquidity question is very serious. By our calculations, assuming Centrica takes a 25% stake in the new company, EDF will now control 22.5% of all electricity output. That is really quite significant, to say the least. There are other players, of course, independents as well, but can I ask you what role Ofgem will have in the regulatory process, or is having, for the takeover proposals? What are you doing, what is your role?

Mr Buchanan: As far as our role at this stage, and thank you, Chairman, for outlining how far we can speak on this. We have made a submission, as you would have expected us to. The Commission will show its hand on 8 December, unless there are remedies being discussed, and I believe then the date is 22 December. We are party to that role. Our role in a more proactive form, which we have outlined in the probe, is that we are very keen that we open up the liquidity issue for detailed review and examination. We have also put in our probe that if we feel we cannot get anywhere, then we will go down the CC route.

Q125 Chairman: So there is quite a robust remedy for the whole market, should that be necessary in the early part of next year?

Mr Buchanan: Indeed.

Chairman: Well, I think that probably answers my second question as well.

Q126 Mr Bailey: Before I go on to questions concerning vertical integration and the wholesale market, I wanted to pick up the point that was made earlier about the perceived and, I think, actual real subsidies that seem to take place in France, in particular. I have constant complaints from companies that their energy prices are higher than in France, which is partly a result of the way the market is operated, but would also appear to be a result of government or local government policies taking place in countries. To me, that would appear to be against European competition rules. What is being done by organisations like Ofgem to combat that and do you have links with comparable organisations in other countries on this particular issue? I would like some more information on that. I believe you said you were going to provide some written information so I will not labour the point now and take the time of the Committee. In terms of the vertically integrated generation and supply, in your own report, you said that you will require the Big 6 suppliers to publish separate regulatory accounts for their supply and generation businesses in order to improve transparency and make it easier for potential entrants to access market opportunities at each point along the value chain. Given the demise of companies like BizzEnergy, that does not seem to be working. Can you tell me what sort of response you had and how much progress you are making on it?

Mr Buchanan: This will be part of the package that we will release in the early part of the New Year. We are obviously out to consultation to hear what it is people want to see in terms of the information, but we are committed that we will have a much greater degree of transparency with regard to the companies. We have to discuss the level of detail and the timeliness of those reports to come out from the players but rest assured this is very much one of the clear improvements and wins that we can get out of this process.

Q127 Mr Bailey: For some, this might be too little too late.

Mr Buchanan: I am sorry, obviously, if Bizz was relying on this kind of information in order to maintain itself, but I am afraid that in so far as the company is in trouble now and this would have helped them, then, yes is the answer to your question.

Q128 Mr Bailey: You have partly answered by next question about when you expect this to take place; is it going to be this current financial year? If I heard you correctly you are going to publish the information in January, is that correct?

Mr Buchanan: It will be January/February, yes, so it will be the beginning of next year.

Q129 Mr Bailey: Having received the information, when would you envisage any changes being implemented by the companies or will you be pressing?

Mr Buchanan: We will certainly be pressing. I am only showing a hesitation because we have not finished the consultation. I have not taken any papers to either my own executive or to the board, but if I can leave you with the commitment, this is something that we are very focused on and will deliver on.

Chairman: It is fair to say that the Committee was very grateful to the Secretary of State, John Hutton, at the time, for his very speedy response to this recommendation. It is rightly put on record our public appreciation of what I regard as a very major response to a very important recommendation of this Committee. We are grateful for that and we do attach great importance to it and will be saying so in our report after this evidence session, I am sure. It is a really important matter and the information that the marketplace provides is crucial.

Q130 Mr Weir: Could I just get clarification. One of the problems with the profits and finances of a company as many of them are now part of multinational conglomerates - Scottish Power is now controlled by Iberdrola. Just for clarity, I take it these accounts showing the difference between the generation and supply arms will be for all companies operating within the United Kingdom, whether they are United Kingdom based or part of international companies.

Mr Buchanan: Absolutely, you will have heard it direct from Scottish and Southern or Centrica British Gas, they feel that they are having to provide a level of information - and they are - that an EDF or an E.ON Ag is just not. So, at its very basic one would anticipate that we will force the companies who are giving one or two lines in group accounts to open up to the level that we get from a British company. But we may want to take it further than that, which is why I do not want to fetter the board's decision on that. I want to see what the feedback is in terms of how much information players think that they should be getting.

Q131 Mr Weir: But is your aim, then, to show the profit made in these arms of the United Kingdom operation so that you can get a true comparison between Centric and SSE and those that are part of the multinational companies?

Mr Buchanan: It is interesting, if you look at British Energy, as is now, British Gas Centrica, Drax, they are all showing what their sell price is, their buy price, their forward contract curve, the forward purchases, and the price; all that kind of information is available. That is something that certainly four of the Big 6 are not having to do.

Q132 Chairman: I will just say the obvious, you and your staff will be aware of this, the ability to hide information in accounts of this nature, the capacity for creative accounting is absolutely huge. For this information to be genuinely valuable to the market you have to make sure the companies are playing ball with you and giving you the information you are really seeking. It will not be a straightforward exercise in my opinion.

Mr Buchanan: I appreciate that comment, Chairman. To give you some comfort there, we have upgraded internally with a new finance function within our business and also a relatively new city watch function as well, so we are going to be in a much better position than we were to be able to read into accounts to see if they are trying to do that.

Q133 Mr Bailey: Are you satisfied that you have the capacity to do the detailed examination necessary to expose any malpractice in this area?

Mr Buchanan: At this stage, yes I am, although I should say that as an accountant, creative accounting can be an art form and what we need to be able to do is both to understand them and also to gain an intuition onto them; not only to read the accounts but to say intuitively, is there something else going on here. I think we have got that skill at Ofgem now. It is a very good question because you can read accounts and not have that intuition, and I think it is very important to have it.

Q134 Mr Bailey: Can we move on to market liquidity, which is in part - or lack of it - a consequence of the problems with vertical integration. You have acknowledged that the electricity market is incredibly illiquid and certainly all the statistics showing the over‑the‑counter trading and the open market trading there is a huge disparity between them. Again, your probe finding says that you will begin urgently a programme of work to identify the underlying causes of low wholesale market liquidity and explore with the Big 6 suppliers how best to achieve a significant increase in liquidity. I would not disagree for one moment with the point that you make. I would perhaps be apprehensive about the phraseology "explore with the Big 6". Do you not think it needs a rather heavier hand?

Mr Buchanan: It might well need a heavier hand if the Big 6 do not come up to the stump on this and they know that we have signalled to them that either we will push on with our own review and changes and/or we can use the CC to do this. Clearly, competition authorities may have quite an important role to play here, going back to the Chairman's previous comment with regard to BEDF and then BEDF Centrica, so there will be a lot of focus on this. If anything, liquidity - you could say how could it be even more important - has become even more important through the credit crises because what was even there has dried up further. I was looking at one of the markets that has been quite successful, the German OTC market has lost two-thirds of its liquidity in the past two months, which is a real worry. It was a major issue and it really is a major issue now going forward.

Q135 Mr Bailey: You have anticipated my next question in part. I will ask you to develop that slightly further and then come back to the other one. Just how is the credit crunch affecting the market; can you explain in greater detail? You have just mentioned the German experience; I am not altogether clear from what you have said exactly how it is operating or not operating.

Mr Buchanan: The credit crisis could almost be put into two categories - stop me if I start to go on too long because this is an area that I am concerned about. If we look at the short term and then the medium term: as far as the short-term is concerned, there is a raft of issues. On the market side, we are seeing liquidity dry up; spreads increase; collateral being required in substantial terms both to trade and even to raise debt - if you can raise debt, because the debt markets have been closed for significant parts of the past two months, as have the commercial paper markets. So, where does that take us? In the short term - and we can discuss Bizz and E4B a little bit - having the credit crisis with those parameters affecting companies that were already having to deal with the energy markets, and there may have been internal issues for them as well, various contract structures, etc., has caused tremendous pressure on the independent supply sector - what little independent supply sector we had. By and large, the independent generation sector - and funnily enough, it is quite active - has very large national players, so Dohn of Denmark has just announced that it is going to make a play for a large power station in Scotland; the largest power station trade in the past two years was Gaz de France Suez buying at Teesside. These are big players. The independent sector on generation are of a scale that perhaps can weather some of the storm a bit better. Even still, when I look at the implications of what we have, both short and medium term - and if I may, I will come on to the medium term in a minute - what we are seeing from the markets at the moment is that if you can get a deal, in terms of your debt funding, primarily, either to build a new power station or as a network company to refinance your debt, in order to maintain your business structure, you are potentially looking at 4% or 5% above LIBL. I was talking to an American who came by yesterday; Illinois Power did a vital debt deal at 7% above American base last week. Why is this important? It is important because consumers will have to look at this, regulators will have to look at this, and say how much of should be pushed through on the network side, how much should be pushed through to consumers? This is very frightening. On the power station side, all the messages I am getting, both from the capital markets and from the deliverers of power stations and the utilities, is that the required return on equity has gone up from 10% to 15%. Therefore, a number of projects are not making the hurdle any more; therefore, you are starting to see a slowdown. Again, there are implications for consumers because if power stations are potentially going to get built, are they going to require a higher return? It is a worrying picture in the short term. Our utilities, if they are coming up for a refinancing package - I can send you a very good report by J P Morgan, it is pretty sobering - a number of our British utilities have got significant refinancing to achieve within the next 18 months. These are basically very healthy companies, but you have to be able to refinance your debt. If we go to the longer term, what one is starting to look medium term - and your Committee is very focused on this, Chairman - what are we going to do in 2015/2016 when the coal and the oil-fired plant comes off and some of the nuclear power stations literally, probably, just fall down. When we look at that, what I have said to my team and they are doing it as a priority job now, is that I want to go back and refocus on 2015-2025, in terms of security of supply, because what we are hearing from analysts' reports and newspaper reports, direct quotes from Putin himself, is that GazProm, understandably, it is a major business, is revisiting its investment programme. The South Stream pipeline, which is the umbilical chord being built through the south of Europe, has already been delayed by three years. So, there is an implication on gas; there is an implication on whether power stations will get the funding in order to be ready in time. And then there is nuclear, because one of the things we know about nuclear at the moment is that the finished project is now running at least three years behind time. Why I am pulling all that together is that what I have asked my team to do is to go back and, in the light of the credit crunch, have a look at 2015 and beyond, because we have to make absolutely sure that some of the working assumptions we had for 2015 and beyond are still right. It is quite a sobering exercise but one that needs to be done.

Q136 Mr Bailey: I was going to ask you about whether the situation was exacerbated by the takeover of British Energy. What is the British Energy dimension?

Mr Buchanan: I have to be very careful here. To a certain extent, the way I have approached this issue is to say, how comfortable can we be that new nuclear will get built on time; if they are already running three years late in Finland, does that give us comfort that all the mistakes that they are going to make, they are going to make in Finland, or should my economists be building in to new nuclear an extra three to five years. That is what we have to start thinking about for gas, for nuclear, for traditional power.

Q137 Mr Bailey: Can I just go back to the question I was about to ask before we digressed on the credit crunch, but very important obviously. In terms of the more immediate situation in liquidity, what is the sort of timetable that you are looking for, for action on this?

Mr Buchanan: This is imminent on liquidity; the companies have got to come up with some good ideas and they have basically got the best part of seven days to do it. If they do not, then we will take it forward ourselves, and if we do not think we can take it forward because we feel that either we do not have enough powers or the wherewithal, we will go to the CC.

Q138 Mr Bailey: Sorry, you said "seven days to do it"?

Mr Buchanan: Yes, because the consultation ends in seven days' time. I am waiting to see what they deliver to us by way of ideas.

Q139 Mr Bailey: That is very interesting indeed. In terms of the European dimension, really the Commission should be very proactive on this. I know there have been some strong pressures to mitigate the pressure that is coming from the Commission. What is your reading of this?

Mr Buchanan: I am pretty sure that DG Comp is very focused on liquidity as an issue at the moment, and that is not just entirely because of the BEDF deal, it is because liquidity is such an issue within the credit crunch problem.

Q140 Chairman: Your picture of the future of security of supply for electricity generation in particular makes a good deal more sense to me than the - and I hope this does not sound partisan - rather optimistic picture we got from the Minister yesterday. He talked about the capitalisation, the businesses being sound and secure, and seemed to think that there was not a problem at all. I particularly remember this Committee's report on nuclear power, what came out of that very clearly is the single determinate of the cost of nuclear is the cost of capital, and that is just the political risk attaching to it. But if you are talking about the kind of situation that we now face, those companies are doing serious rethinking. There was the interview with the German Chief Executive of E.ON about the future of Kingsnorth in the Sunday Times on the Sunday before last, saying they are rethinking their commitment to that project, the timescale. The implications are tremendously serious. We started off looking at energy prices in July, but if our successor Committee in six or seven years' time are looking at why the lights have gone off, it will be much more serious.

Mr Buchanan: The Minister may be right. My message to you today is that we can see, at Ofgem, significant potential shifts in the assumptions that we have made. We need to go back and really shake those models down to see whether they stand up to the new world that we are living in. If they do, that is great, but not to carry that out, we would not be doing our job properly. It is not for me to come and defend a Minister, but if we look at the short-term news, we have plants coming on line: Marchwood, Langeled, Glendoe. Behind that, there is a whole string of plants; just in the last couple of weeks we have seen Drax announce three eco‑friendly power stations.

Q141 Chairman: If they can get the biomass fuel to support it.

Mr Buchanan: If they get permission to build it, we have the Irish company ESB buying into Carrington; we have the Danish company, Dong, looking to build a big station at Hunterston. There is a whole range of conventional plant that potentially is being built, so I do not want to be the prophet of doom, but beyond 2015, we have to think very carefully about our assumptions.

Q142 Chairman: The wholesale electricity market peaked very sharply last month because of fears of security of supplies this winter; I think the fears have receded now. But this is exceptionally serious stuff and may call for radical public policy measures if there is a serious fear of a shortfall.

Mr Buchanan: The credit crises - you will have a better feel for this than I do - across every business sector everybody must be reeling back from it - I liken it to a punch to the stomach -and saying, what does it mean? It does not mean that I am not confident that markets will not deliver in the future; it does not mean that our assumptions for the future are wrong; it just means that we have to go back and shake them down.

Q143 Chairman: There is capacity, of course, from the changing decisions about larger plants that were coming off stream if they can be retro-fitted or improved in some way as well so there are other options.

Mr Buchanan: Indeed, that is a very good point.

Q144 Mr Weir: You were saying about the need for companies to refinance and the difficulties they are facing in this, is there a contradiction between this and trying to drive down fuel prices, because the companies will argue that they need good prices to be able finance the development they have been asked to do, both for new generation and to meet climate change targets. How do we square that circle?

Mr Buchanan: It is a very good question. We are seeing some fairly profound falls in oil, gas and coal prices and therefore one would expect, irrespective of a margin coming in, for possibly a medium-term contract between a supplier and an industrial company. That would be marginal to the overall swings that we are seeing on prices here. But you raise a fair point and it is one that my colleagues and I need to watch very carefully.

Q145 Mr Weir: Presumably, the market capitalisation of the companies will be the determining factor as to whether they can actually borrow the money required for investment.

Mr Buchanan: Indeed.

Q146 Chairman: After that slightly sobering section, we will move on to another sobering section, straddling the issues between wholesale and retail, because I want to talk to you about new entrants to the gas and electricity markets, particularly the demise of two significant businesses, one in my constituency, BizzEnergy, with 160 jobs gone, and Electricity4Business. If this Committee had a serious criticism of Ofgem, it may be - and I think you have heard it in some of the questions up to now - about the perhaps lack of attention on the SME sector in general. Here were two companies that were supplying the small business sector and offering them better deals, better prices and better service than the Big 6 could offer. They have both gone out of the market, taking a small but significant share - 4.6% - with them, leaving behind just one big player, Opus Energy with 1.4%, and seven small suppliers, holding 1.3% between them. So there was 7.3% of the market in the independent sector and now there is 2.7%, which is vanishingly small and is probably vanishing, quite literally. So, what lessons will you learn from the experience from Electricity4Business and BizzEnergy?

Mr Buchanan: There are lessons with regard to the structure of the industry, and there are some micro lessons with regard to administration which you may or may not be interested in. I have confidential information, so I will try and give you a flavour as best I can. My observation would be that the combinations that brought Bizz and E4B into administration were a combination of their contract structure, the difficult energy market and the credit crunch. I do not say the latter point lightly because I spent a very enjoyable and quite exciting day - I know you feel the same way - with Bizz in Worcester in the summer and the company was healthy and successful. Therefore, the extent to which it is the credit issues, or the energy market issues, I am not entirely sure and probably should not say.

Q147 Chairman: It is possible that there may have been bad commercial judgments by the company as well.

Mr Buchanan: To me, I like Bizz, I like their model. I spent a day with them in the summer and it appeared their model was working well. They were even planning to enter into the domestic market at that point. The macro lessons are - as we have discussed already - liquidity, financial information and trying to reduce the barriers further for small players - get rid of regulatory red tape if it is there potentially causing them trouble. Interestingly, and I am going to pursue this because it is very interesting for me, we have had two players coming out of the SME market and a company called MA Energy that has just opened up into that marketplace, saying that it intends to open into that marketplace in the first quarter of next year. They used to be Midlands Energy; I have tried to locate where they are based as it may well be in your constituency or near it. On the micro level, we have learnt some very interesting issues. First of all, on rock payments and the importance of whether we need to have rock payments made, not just on an annual basis, but whether we have that on an on‑going basis. The other more interesting issue, because it also links to how well the marketplace is working, is that when a company gets into trouble and it is running up to administration, the cash out regime - you might be short of power and therefore you might be buying power in a cash out position, which is very expensive - can really hurt a company, just as it is going into administration. We have to look at that to see whether there is something we can do with the rules there.

Q148 Chairman: I am encouraged by those answers. I welcome this new entrant and wish him or her every joy.

Mr Buchanan: It is a "her".

Q149 Chairman: We had evidence from BizzEnergy as part of our inquiry in the summer. As a result of that, publicly, one of the Big 6 - I cannot remember which it was now so I will not name them in case I get it wrong - said, "Oh of course we'll supply BizzEnergy", in public, to this Committee. So BizzEnergy entered into negotiations with the company and, of course, they just would not supply them. There was just a refusal to supply, which is a big issue. It is something to do with some burnt fingers experiences earlier in the market, understandably, a couple of years ago. My other concern was that it was quite clear that the Big 6 were using the smaller companies - well, reluctantly being used by them - to reduce their own prices. What would happen is: if you were with British Gas, BizzEnergy would come and offer a lower price, then British Gas would say, oh, we can match that. So, you were seeing BizzEnergy not able to capture business because the incumbents were bidding back to get the price. Those who did not have the wit to strike a switch ended up on higher prices; once you tried to switch and you were on lower prices, with the original supplier. There were huge problems with the market here. On the whole, I have quite a high regard for Centrica British Gas, it may surprise you to know, but I was a bit surprised to get a letter from one of their senior executives earlier this week, saying that the departure of BizzEnergy from the market proves that competition is working. That is not the conclusion I draw. Would you say that the departure of the two significant competitors to the Big 6 proves that competition is working?

Mr Buchanan: I think it is quite an interesting statement.

Q150 Chairman: Thank you, Minister, Sir Humphrey! You have implicitly answered the question I wanted to ask you next, which is that there is a need for reforms to the way the wholesale electricity market works to enable new entrants to emerge. We cannot be left with six big suppliers in perpetuity.

Mr Buchanan: I agree, and I would hope that the package we are going to put in place makes that a more attractive proposition for the NA energies of this world to come to the market.

Q151 Chairman: I understand that BizzEnergy's directors are anxious to try and get back into the marketplace themselves so we will see if they succeed in that ambition or not.

Mr Buchanan: Well, that is great.

Q152 Mr Binley: A spin-off from this is that pricing policy is a vital part of this whole ability to enter into the market. Yet your own probe found that switching rates among small business customers have been lower than in the domestic sector and that, furthermore, a growing number of consumers are engaging actively with the market, however, a significant proportion of small businesses are not. You then went on to say that there is evidence that suppliers may be using SME customers' lack of knowledge about their terms and conditions to behave in a way that does not facilitate the smooth functioning of the market. You then demanded some action and I have got those actions listed. Can I ask whether you have done any work to have an understanding of how those actions are working? Are they having the effect you wanted and if not, what more can you do?

Mr Buchanan: What I would be happy to do, because we are in this consultation phase, we have outlined our remedies that will go into a package and depending on what people bring to us, it will be a much upgraded package than we have even announced so far. I would be very happy to send a report to your successor Committee - whatever that Committee is - on this area. We probably need to give it three to six months into next year.

Q153 Mr Binley: But you have already told the people the sorts of things you wanted, you have repeated that on a number of occasions, and you must have done some work to know whether the sorts of things you are proposing are going to bite, or whether you need additional powers, or whether the Government needs to take action..

Mr Buchanan: Indeed.

Q154 Chairman: Just help me understand the answer to your question. The actions you have outlined about information, codes of practice, accreditation, at what stage are they? I cannot remember exactly where we are in the timetable.

Mr Buchanan: We are moving through the process.

Q155 Chairman: Are they all finalised? Is the code of practice finalised?

Mr Buchanan: No, we have to wait for the consultation to end and then we will take it to a board in early January, maybe early February, then we are off with our new package.

Q156 Mr Binley: The point I am making is that you demanded these sorts of actions of the industry in the past - demand is perhaps too strong a word - you have suggested that they ought to act in these areas. What accounting have you done in respect to their ability and willingness to act, because it will have a major impact upon the way you formulate your report and the recommendations you make in respect to whether you need, or the Government needs, to take action.

Mr Buchanan: The honest answer here is that the Big 6 have simply behaved so badly to this group - and that comes across very clearly in our report - that I would be very disappointed if the range of remedies that we have put down does not have a substantial improvement in energy life for small users. If it does not, it means that something is going very wrong and we will have to use powers that could include going to a CC.

Q157 Mr Wright: In regard to the price differentials, it has been publicised in the past few days and for a period of time, quite clearly the focus has been on prepayment meters in terms of the significant cost that people have to pay for those prepayment meters. It is a fact that most fuel poor customers are on the standard credit and it is quite clear that there is a differential between direct debit and the standard credit customers. Indeed, one of the investigations that you carried out was that the cost differential should be around £37, whereas the companies would charge a premium of £8. One of the companies regarded it as an incentive to encourage greater take-up of direct debit. It is daylight robbery to suggest that you are going to charge your customers an extra £40 or so over what your costs are. It would be like a traffic warden saying to every motorist, we are going to give you a £40 fine, just in case you decide to park on double yellow lines. To me, it is something that Ofgem should have taken up quite strongly, because in any other sphere, nobody would be allowed to get away with charging more than the actual costs. So, what is being done about it?

Mr Buchanan: One of the big issues within the probe- again, I cannot say that this is what the board will do, but the board has clearly signalled that it is minded to think about this very seriously - is that we go for a licence condition clause that stops that price not being reflective of cost and therefore SC customers, as well as PPM customers get protected by that clause.

Q158 Mr Wright: How confident are you that the gap is going to close?

Mr Buchanan: If there is a clause in place, the companies would be breaking a licence condition.

Q159 Mr Wright: Are you prepared to enforce the licence condition?

Mr Buchanan: The licence conditions are there to be enforced and to be obeyed and if companies do not do that, then we go after them.

Q160 Mr Wright: What is the timescale for this to happen?

Mr Buchanan: It comes back to the timescale for the previous debate. The board will be signing off the package early in the New Year.

Q161 Mr Wright: Can you be more specific? You say early in the New Year, these dates sometimes slip.

Mr Buchanan: I would be disappointed if we have not taken everything to the board, which is in the middle of February, for final sign-off. It may be January; it may be February, but certainly in the first two months of next year.

Q162 Mr Wright: So, therefore, you would be in a position to suggest that to the new Committee when they call you before them, which I am sure they will, that everything is all above board and the Big 6 have conformed to what your requirements are. Is there any issue about giving rebates to customers that have been overcharged in the past?

Mr Buchanan: I am waiting to see what the consultation feedback is, maybe a number of the consumer groups have put in some interesting thoughts there, so I do not want to prejudge that. I am going to wait to see what we get next week.

Mr Wright: I know there is a big issue about customers being overcharged with direct debit and I know the Chairman wants to ask questions on that particular issue. There are a number of issues about overcharging that customers have had for many years, with quite significant differences in terms of prepayment meters, standard credit, and differences in on‑line charges.

Q163 Mr Weir: We all welcomed the report and the action on prepayment meters, which is long overdue, but some groups have voiced concerns under the cost reflective policy that some who are fuel poor - and we appreciate that by all means not all prepayment meters are used by fuel poor people - but there is a significant number and some companies have used prepayment meters specifically for fuel poor customers who have got into arrears with their bills. The National Housing Federation, for example, gave us a report that many of these fuel poor customers will still be paying £51 a year more for using a prepayment meter than under the cost reflective model. Is there any prospect of looking at a way of eliminating this for fuel poor customers, if not for all prepayment meter customers, to ensure that those who have found themselves in this position, because of fuel poverty, do not end up paying more than they would if they were not fuel poor?

Mr Buchanan: This is where we go into that interesting world between Ofgem and the Government. One of the riders of this report is the importance of cost reflectivity and for us, as a regulatory body, that obviously is very important. Whether the Government picks up your challenge and says that they will take action in this area, I do not know.

Q164 Mr Wright: We did ask the Minister yesterday.

Mr Buchanan: That is where it probably rests.

Q165 Chairman: Before I get on to direct debits, briefly, can I seek your clarification on one thing; I am a bit puzzled. You have indicated to this Committee, helpfully, that this issue of differentials between prepayment meters, standard credit and direct debit terms can be dealt with by a licence condition. Is that correct?

Mr Buchanan: Yes.

Q166 Chairman: The Chancellor said yesterday that if sufficient progress was not made in the next few months in closing gaps in pricing between payment methods, the Government would use statutory powers to end unjustifiable pricing differential. My understanding is that Ofgem already has those statutory powers and it is Ofgem that will use them. There is no criticism here, I just want to clarify that he is not suggesting that new legislation is required, he is saying the existing power that you have are sufficient to deal with the problem.

Mr Buchanan: I cannot clarify that for you, I am afraid, Chairman. It seems to me that we are either going to get there by the companies volunteering this, or we are going to put licence conditions in place, and/or the Government will either legislate for licence conditions or legislate itself. Therefore, I am hesitating to answer that question.

Q167 Chairman: I do not want to draw you into criticism of the Chancellor, I just want to understand the framework: you can do this, your board in mid-February can say, licence conditions.

Mr Buchanan: If that is what we see as the appropriate way ahead, and the companies, if they disagree with us, can take us to a CC and challenge that.

Q168 Chairman: So, legislation might avoid a Competition Commission challenge?

Mr Buchanan: That may be what the decision is, politically, yes.

Q169 Chairman: That is helpful, thank you very much. Now, direct debits: this is one of the issues that has taken me a bit by surprise. This Committee has worked on the basis that direct debits are terribly good news although all of us, privately, are having problems with our own suppliers about our own direct debit terms. The BBC breakfast television asked me to give a clip to them for their Saturday programme, since when all hell broke loose - here is my file of e‑mails, which I will give to you now, because you said you had not got the evidence, well there it is. To be fair, some of those e-mails are from people who just do not understand how much electricity and gas prices have gone up, they have not had the problems that other people are facing. But there are a number of systemic problems there also. I am not going to name the companies now - they did on the television this morning - but there seem to be two companies particularly prone to complaint. That may be the small sample that we have there, a self-selecting sample. One of those companies may have a profile of customer that lends it to complaint on this issue; it may be the customer profile and nature of the customers they have. There are some underlying difficulties. The trouble is that the articulate people, whose e‑mails I have there, ring up and get a reduction. Each and every one of them rings up and gets a reduction; that is the underlying theme. Some of them get more marginal reductions, some of get huge reductions, as you will see from there. It does look as if the complicated models that the companies use to do this process, wherever the benefit of the doubt exists, give the benefit of the doubt to the company rather than the consumer. We are all lending some £100, £200, £300 to these companies, interest free.

Mr Buchanan: I hear your concern, you have given us your concerns, we have asked the Daily Mail for their equivalent folder and we will investigate that. One of the interesting knock-ons from it for me is that the Financial Inclusion Taskforce is looking at how to promote direct debits to society more broadly, and that it is a good thing. Therefore, this is extremely important, I would have thought, to them. I have not spoken to them since this has broken, but they were looking to make a report in December, I believe, and I will certainly want to get in contact with them and say that this may affect their report.

Q170 Chairman: There are quite a lot of e-mails in there from people acting on behalf of elderly relatives who are on direct debit. There are one or two quite dramatic ones: one from a Financial Times journalist who talks about the experience of her own mother. It is quite clear that there is a real problem out there for people who are at the edges of fuel poverty, if not actually in fuel poverty, as well as for people like ourselves who can take the hit of an extra £20 or £30 a month that is not justified, even if we resent it. There is a bit issue there for fuel poverty people.

Mr Buchanan: There certainly is. Something that may come out of it is that we flush out who are good and who are bad. My supplier rang me up and said, you are over here, you are under here, what would you like to do.

Q171 Mr Wright: I guess he knows who you are.

Mr Buchanan: That was quick. I cannot answer that one.

Q172 Chairman: My supplier has not done that to me and, sitting in an equivalent seat yesterday, the Minister for Energy admitted that he had exactly the same problem with his supplier. The reason that the BBC Today programme and the BBC breakfast programme were so interested in this is that their editorial teams also said that they had the same problem. A senior civil servant for the Department yesterday said that he had the same problem. It seems to be extraordinarily widespread and something rather concerning is going on.

Mr Buchanan: We will certainly have a look at it.

Q173 Chairman: Looking at the other complaints you get: the averaging of consumption, miraculously, many people think they are averaging over 18 months, including two winters, which enables the average bill to be increased. It may depend on when the company reassesses your bill, there are issues there. Issues about estimated bills, of course, are a matter of great concern also; producing new bills, the time when estimated bills are used for the calculation, particularly when many of us - myself included - have taken radical steps to reduce our consumption because of rising prices, so it is all the more difficult.

Mr Buchanan: Yes.

Q174 Mr Wright: That is another point with regard to meter readings, the times that the companies miss out the meter readings and do the estimates increases substantially the cost for people on standard credit at the time. They are giving in excess of perhaps 5% or 10% of their total bill on average over a period of time, paying well in advance and invariably at times when people can least afford it. Again, it is the majority of people on standard credit who are in fuel poverty or are fuel poor, who can least afford these exorbitant bills when in fact they are paying for energy that they have not even used.

Mr Buchanan: Right.

Q175 Chairman: Obviously, what I would like to be able to do is to treat my fuel bill in the same way as I treat my credit card bill and repay it in full every month. The trouble is that we have a quarterly billing system at present and I do understand, to be fair to the companies, that they would not really want to lend me their fuel for three months either, that would be working the other way around. The option of repaying in full every quarter does not exist. The answer is, of course, smart meters, is it not? Then we could have accurate monthly bills, which we could pay in full every month, and the problem would just go away.

Mr Buchanan: Yes. Ofgem has been an advocate for three or four years for smart meters - I am sure I bore for Britain on this - and we are very hopeful that the Government will push on with this in the next couple of months.

Q176 Chairman: Smart meters have been talked about in the past as an environmental measure to discourage consumption, but more and more it is apparently to help the market work better generally. The Government has now announced a programme, has it not, which took us all a bit by surprise - pleasantly so, in some senses - but it is two years of consultation on how to do it, followed by a ten-year rolling programme. I understand that it is a complex programme, like converting to natural gas from town gas, but 12 years hence is quite a long time. Is it your view that they need 12 years?

Mr Buchanan: The Government has not yet shown its hand on the method it would like to use. They have a number of choices: they can use the franchise method, whereby you compete to win a franchise and you have it for a period of time; a regulated method; or a market method. If it is a market method, you basically use quite a lot of stick and a bit of carrot because you say, you will do it, or you will be penalised under a licence condition. Therefore, that decision has to be made first of all and then work out how quickly it will roll out. There has been a sense that if you go down the market route and you have got quite a severe stick hanging over the companies, the companies will go quicker because they will want to get some form of advantage with their customer base by rolling out faster than that. It really does depend on where your starting point is going to be, and we are still waiting for that starting point.

Q177 Chairman: Twelve years, for me, is the outside acceptable figure; it must be shortened if humanly possible, it makes a big difference. Can I just be clear what you promised - me and the Committee - on the direct debit issue. You said that you will look at it. What form will that "looking at it" take at this stage? An initial assessment is what you are going to promise initially?

Mr Buchanan: Indeed, our corporate affairs team will take it on and have a look at it and see where we go from there, whether it triggers an enforcement case.

Q178 Chairman: People are a bit puzzled about the market in which they operate and how they complain. What many e‑mails have been criticising me for saying that I will raise it with Ofgem. They say that Ofgem does not do complains. It is a bit of a muddle out there at present because you have Consumer Direct, Consumer Focus, the energy companies themselves, the Energy Ombudsman and Ofgem. Although I am beginning, dimly - as Chairman of a Committee that scrutinises both Consumer Focus and Consumer Direct for the Office of Fair Trading, and, temporarily at least, Ofgem - to understand that it is very confusing for people out there as to how they can get through this. What I am trying to establish from you is how you, Ofgem, in future - it is a fortuitous occurrence today that I have had the direct debit complaints and presented them to you - be made aware of systemic failures in the energy market coming through from consumer complaints, particularly consumer complaints from articulate middle-class people who do not resort to the Energy Ombudsman but sort it out themselves. How do you know there is a problem that needs fixing?

Mr Buchanan: If we are the market, there is a number of routes to our market to bring that to our attention. The first will be, and Ed Mayo was very clear in saying that he really believes that the Consumer Direct first port of call will work and that complaints will flow through to Consumer Focus, and they have - I forget the name of it but it sounds like a very good idea - a kind of "zap team" that will work on major problems - the Extra Help Unit, I think it is called, which I think is a great idea and which will work on the acute problems. Obviously, they will interface with the companies and the companies then have to interface with the statutory body from 1 October, which is the Ombudsman. Where we will interface with that, obviously, we will have regular contact with Ed Mayo and Larry Whitty but, equally, we formally monitor the Ombudsman and audit them once a year, so I hope that we would get information from that. We are also going to audit, it is currently ongoing and we will have the results early in the New Year, the new customer complaint process. One of the findings from that is that we need to audit that on a regular basis, but I cannot prejudge what that finding will be. Our role is as an auditor regulator role, and the other bodies are doing that interface with the consumer.

Q179 Chairman: If a Member of Parliament forms a view that there is a failing in the energy market, like this issue of direct debits, for example, what should he or she do? Should they write to you and say, here is the evidence I have received?

Mr Buchanan: Where we come in on issues like that is that we have the enforcement powers, so if it is clear that something is going very wrong - mis-selling, say - if this is something that is effectively an action by a company, then we can pursue that through our powers. It is another route to market; it is a very powerful route to market. It is from yourselves, or from Holyrood, or wherever.

Q180 Chairman: It is quite confusing for people who do not understand it. It is not easy; the Energy Ombudsman is a brand new idea. Energy Watch was a strong brand and personally I regret its departure.

Mr Buchanan: Yes.

Q181 Mr Weir: Just a quick comment more than a question on direct debits. One of the problems is that so many of us now get estimated bills because we are working and the meter is not read very often and the direct debit is taken on the estimated bill. The companies will say that you can phone in or go on line with the correct reading. I have experience of doing that and of being totally ignored by the company, and there is a problem with that also, although that is a matter of customer service, I suppose. Moving on to the question of switching, we had evidence that 48% of gas customers and 42% of electricity customers who switched as a result of direct selling, ended up paying more for their energy. I know that Ofgem have taken some action in this area, but I wonder if it is time to ban the practice of direct selling, rather than simply trying to regulate it.

Mr Buchanan: I do not think we are at that stage. This was a finding that was deeply disturbing from the probe, there is no question about that, particularly for prepayment meter customers. Our belief is that we need a package that will provide what is a very strong competitive weapon for the companies - the direct sales - but we want a substantial upgrade in terms of information; possibly we will move to best offer in market, whether it is yours or not; we want the concept that there is possibly an annual statement going to every customer once they have signed on, a bit like your car insurance so that you know where you are; clearly, a code of practice that is going to have to be adhered to more; written contract and follow-up. So, I think a range of issues that we are keen to try and if that does not take, then the kind of question you are asking might well come back into play.

Q182 Mr Weir: When we raised this with the Minister yesterday, he made the point that direct selling was a good way of perhaps getting to the low paid, fuel poor who were not necessarily internet literate. The difficulty with this is that if you are trying to get someone to switch, perhaps on a social tariff, that there is such a difference in the social tariffs between companies. Is part of the answer to try and have a standardised tariff that would be much easier for someone in that situation to be able to compare what is being offered to what he or she has at present?

Mr Buchanan: Where we are on this is that, as you know, the enforcement that we say is that the companies have to offer the best deal available, and that the customer therefore still has the right to switch if they think there is a better deal. Are we kidding ourselves on that? I do not know, but if you are starting to move towards social mandated tariffs, I think that is a question to the Minister and to Government.

Q183 Mr Weir: What I am trying to get from you and I appreciate what you are saying but you talk about sending more information but the problem is information overload and it is very difficult to extract the bit of information they really want to know, am I better off with this or not. How do we get to that stage?

Mr Buchanan: I have given you a window on some of the things we are discussing. There is an interesting advertisement on television at the moment from Norwich Union, saying that they will tell you the best deal in the market, even if it is not theirs. That is the kind of thing we are looking at.

Q184 Mr Binley: They do not say the best deal, they say the best price, there is a difference.

Mr Buchanan: There is. We have to think very carefully about whether we can go down that route.

Q185 Mr Weir: Something else that we touched on earlier: you found in your report that there is a 6% price premium for those electricity customers still with their incumbent suppliers. Why are you not proposing the same tough measures as the price differential between prepayment meters and standard credit customers for these customers? I should declare an interest here as I am still with Scottish and Southern.

Mr Buchanan: The two groups that we felt we needed to get urgent action on were the PPM and the 4.3 million - there is a crossover there, some of those 4.3 million are PPM also. That is why we felt a degree of urgency, front running even the consultation package, needed to be made there. As I answered to Mr Bailey earlier, we are going to look at licence conditions for ensuring cost reflectivity.

Q186 Mr Weir: What sort of timescale are you looking at?

Mr Buchanan: That would be part of the package in the early New Year.

Q187 Mr Weir: Again, where there are dual suppliers and there are higher margins on electricity than on gas, are you looking at that as part of the package also?

Mr Buchanan: Indeed, we are.

Q188 Mr Wright: Turning the clock back to the beginning when Mr Hoyle said that you are the toothless tiger, questioning the effectiveness of Ofgem, we have discussed many of the issues about PPM and standard credit customer switching and competition in the SME market. Why has it taken political pressure from Government and this Committee before you started to address these issues?

Mr Buchanan: I will not go back into the history of why we announced the review that we did. It is worth stepping back behind that and asking what Ofgem was doing before that, since effectively competition opened onto the marketplace in 2003. From our reports, and we did a significant report in the middle of 2006 on the retail market, although on that point - and I will come back to this - we were very focused on wholesale issues as well, we saw a number of issues - and funnily enough, we have not talked about them at all today - that have continued. There was a very high level of switching; that market shares of companies were dramatically changing, so British Gas in the last six or seven years has gone from 67% to 47% market share; Scottish and Southern has gone from 4 million to 8 million customers. When we were looking at the market dynamic, there was a sense that at the time - in 2007, you were looking at 350,000 to 400,000 customers switching every month - the competitive processes were working. We also noted that margins in that period from 2005‑2006, in both gas and electricity on the retail side, had fallen, and we were putting in place during that period attempts to make the market work better, particularly in our supply licence review, we tried to get further independent suppliers into the marketplace by cutting red tape. We tried to improve the consumer experience by introducing the Ombudsman, getting rid of back billing, getting rid of the 28-day rule, so a whole range of issues. What this report has thrown up to us and it is a powerful learning lesson for us because of the "search and get" powers of the Enterprise Act, we have been able to find things in this report that, candidly, I have not heard anybody mention; no consumer group had been mentioning many of these issues, up until this report was released. Did we think the market was working well? Yes, we did. Did we think we could judge why prices were moving in the way that they were? Yes. What we did not understand was some of the guts of the report and some of the issues that we are very keen now to resolve. At the same time, over the last couple of years, we have been very active on the wholesale side of the market, be it putting in new rules on back-up power, transparency rules, working with the EU, our wholesale gas probe. I think we have got the balance right in terms of the work that we are doing. Am I glad that we have done this review? Yes, I am.

Q189 Mr Wright: Whilst I can accept that the work that has been done in the past has highlighted particular issues within the industry. It has certainly taken over the past six to nine months perhaps and maybe a little beyond that, for suddenly the political impetus to be put in place to say, look you are a consumer body, you are a consumer watchdog, we do not just want you to tell us where the problems are, we want you to sort those problems out. It has now taken the political will to say, from the Secretary of State, from this Committee, we have serious problems here, what are you going to do about it. The question is, why has it taken until now? Why did you not ask for more powers, if you have not got those powers? Why did you not do that at an earlier stage? I think it is incomprehensible that any watchdog and consumer body would sit back and allow people to be overcharged, for the competition to be there, for them to squeeze other companies out of business, perhaps, and all the other issues we have been raising today.

Mr Buchanan: Much of the mechanics of a competitive and working market were there and were observable in that report that we did in the middle of 2006. Particularly with regard to the gaps on PPM and SC, many of them grew out in 2007 and the price increases that they put through that triggered this review extenuated those gaps that you, rightly, and many of your colleagues have been focusing on and saying that does not look fair and realistic. When I look at the workload, we have reacted; it is very important for us to evaluate and balance and get that right. The other important issue, and I take your point on this, is that it is very important that you as an organisation, Consumer Focus, us, Citizens' Advice, work on the Energy Best Deal, that we have a commonality of the consumer purpose.

Q190 Mr Wright: The bottom line is, would you rather have more powers?

Mr Buchanan: I welcome that request. It was either you or someone else made it in the summer. The one power that we are serious in pursuing is the market abuse power, which comes back to the wholesale side - we have sought this before and it was rejected. The Competition Commission said let competition work.

Q191 Mr Wright: How long ago was that?

Mr Buchanan: That was in 2001-2; then we had a flirtation with it again in 2003. That was the run-up to competition. We have no issue with the CC, I can see why they said, look, you have got to let things run.

Q192 Mr Wright: Has it changed now?

Mr Buchanan: It has. More concerning, which comes back to part of the debate we had earlier, looking forward onto the generation market, I am observing the National Grid - a very strong organisation - having to handle a much more complex grid structure. With each wind farm that comes into the system, with new generation coming onto the system, the ability for an opportunist within the marketplace is much higher than it has been before. What I mean by that is that you have the potential to start playing your power station in the mechanics of a marketplace, you can create a constraint, you can hide behind a constraint. The question that we are asking is, and possibly seeking an affirmative answer, if you give us additional powers here, we can act much more quickly than having to go down the formal probe route, or the Competition Act route, which is a very slow route. I know the Competition Act case against National Grid has been running three or four years; it is just a very slow route march to sort out a problem.

Q193 Mr Weir: Are you serious in making application for those extra powers now?

Mr Buchanan: We have made that very clear that is something that we are keen to see.

Q194 Mr Weir: What would be the implications for Ofgem to the changes to its remit on sustainable development and when the Government put amendments forward in the third reading of the Energy Bill for consideration of existing and future customers?

Mr Buchanan: It is a very good question. We have a paper coming to the December board, both focused on the sustainability issue, but also the slight change in the wording of our primary duty, which is to have future customers very much flagged up there. We are asking all our directors at the moment what they think the policy changes might be by having a look at that. I cannot pre-empt what that paper will say, but we are definitely taking it very seriously and looking at that, because we will be asked some time in the New Year how these new duties affect our decision-making, what policy item got changed and how.

Q195 Mr Weir: So the new Committee will get the information from that early in the New Year?

Mr Buchanan: Yes, but we are looking at that, just to give you comfort on that.

Q196 Chairman: I have a concern sometimes that we politicians tend to expect too much of you regulators and perhaps not enough of ourselves. In other words, we delegate social policy decisions to you, which are policy decisions that we should be taking; issues about social tariffs, for example; issues about sustainability. I am personally - I do not know what the Committee's view will be - sympathetic to your request for additional power in relation to market abuse, but I feel sometimes that you are asked to get involved in political issues that are above your pay scale, and should be taken on by Ministers and Parliament, rather than by the regulators.

Mr Buchanan: I find your observation very interesting, Chairman. We are a creature of statute and we understand where we sit within our role.

Chairman: I think that was remarkably unevasive. I will conclude there. We are very grateful to you. It is our intention to publish a report around the turn of the year, which will hope to guide our successor Committee and comment on your own probe and what you and the Minister have said to us. Thank you very much for your work with the Committee and Happy Christmas.