House of Commons - Public Accounts

Select Committee on Public Accounts Fifty-Second Report

1 Regulating for effective markets

1. Ofcom, Ofgem and Postcomm act as the regulators for the communications, energy and postal industries, respectively. All are subject to statutory objectives requiring them to protect consumers through the introduction of competition, where appropriate. Between 2002 and 2006, Ofcom, Ofgem and Postcomm removed retail price controls from fixed line telephone provision, gas and electricity supply, and Special Delivery (Next Day) postal services for business account users. The removal of retail price controls does not bring an end to the role of a regulator.[4] Regulators continue to monitor the market to assess whether consumers are being protected adequately by competition, and whether companies are operating within the limits imposed by their licences and general competition law.[5]

2. Since the removal of retail price controls, prices have risen by some 60% cent in energy, while falling in communications (Figure 1).

Figure 1: Nominal price increases in energy and communications

Source: C&AG's Report, Figure 22

3. The rise in energy prices has been especially sharp since 2006, and prices have more than doubled in the last decade (Figure 1). The causes include a doubling of coal prices from $60 to $120 a tonne, very large increases in oil and gas prices, highly volatile energy prices and the introduction of European emissions trading charges. There was also an anxiety premium because of concerns about infrastructure and unresolved issues in the energy generation market highlighted in Ofgem's probe into that market three years ago.[6]

4. Ofgem launched a probe into the energy market at the end of February 2008, and was due to report its initial findings in September. The probe had been prompted because, in January and February, companies had behaved in a new manner, putting up their prices such that their national pricing position was virtually identical, and had each acted within a very short period.[7]

5. The probe might lead to three possible outcomes—confirmation that the increases are due to factors such as rising international fuel prices; identification of the need for changes that Ofgem can implement, for example through changes in licence conditions; or structural issues prompting a referral of the sector to the Competition Commission.[8] Ofgem could not at this stage say what conclusion the probe would reach, but there had been a lot of interest in the industry in improving the quality and transparency of information, and Ofgem's experience had been that whenever it improved information, market participants had felt much more confident.[9]

6. Before it launched its probe, Ofgem did not monitor either a company's purchasing strategy or its gross margins.[10] Ofgem did not have access to such information unless it was carrying out a probe or a Competition Act review, although some information did come to Ofgem from its observation of the markets.[11] Now that a probe was underway, Ofgem expected to get the information it required from companies. Companies would face sanctions, including, ultimately, criminal sanctions, if they did not provide it.[12] Ofgem would be using these powers to examine the impact of vertical integration, and whether suppliers' apparently low retail margins were being offset by higher margins elsewhere.[13]

7. Although telecoms prices have fallen, they remain higher than in several European nations (Figure 2). Ofcom would like prices to be lower but considered that there were some geographic and historic reasons why they varied.[14] Competition in the USA was arguably less than in the United Kingdom, whilst in Korea state intervention and subsidy had an effect on prices.[15]

Figure 2: International comparison using OECD-defined residential low-use basket

Source: C&AG's Report, Figure 10

8. In 2000 and 2002, we drew attention to the problem of mis-selling in the gas and electricity markets respectively, and recommended that Ofgem take action against it, including fining companies that did not correct selling malpractice.[16] The number of complaints for erroneous transfers had fallen from 1.9 per thousand to one per thousand, but mis-selling has remained a problem.[17] The largest fine imposed by Ofgem to date was £2.5 million against EDF, and, in 2003-04, Ofgem also charged British Gas £200,000.[18] Since then, there had been a four year lull without a similar case, but in January 2008, a case had arisen with RWE Enpower.[19] Ofgem was now carrying out a review of mis-selling by RWE Enpower, and would take enforcement action if they found that the company had been misleading people.[20]

9. The fine of £2.5 million imposed on EDF for mis-selling had been less than 1% of EDF's profits, but was felt by the Ofgem Board at the time to be a measured response to the issue.[21] Ofgem claimed that it would not shy away from imposing severe punishment if that was appropriate.[22] For example, in February 2008, it imposed a fine of £41.6 million on National Grid for a Competition Act transgression.[23]

10. When removing price controls, regulators need to evaluate the potential for effective competition to develop, for which they need to collect and analyse suitable evidence.[24] Ofcom and Ofgem both gathered substantial bodies of quantitative data for this purpose. In contrast, Postcomm did not have access to the same level or quality of data, due to lack of data from suppliers other than Royal Mail.[25] The product concerned, Special Delivery (Next Day) postal services for business account users, was typically priced at over £1, at which point operators did not need a licence to offer it. This meant that Postcomm had no powers to obtain information from them. Nonetheless, Postcomm felt there was enough information to establish that Royal Mail faced competition, and that the customers for this product were fairly sophisticated, and knew what they were doing and had access to alternative operators.[26]

4 C&AG's Report, para 1.6 Back

5 C&AG's Report, paras 1.5, 1.6 Back

6 Q 1 Back

7 Qq 1-2 Back

8 Q 2 Back

9 Q 28 Back

10 Q 29; C&AG's Report, para 2.6 Back

11 Qq 32-34 Back

12 Qq 35-36 Back

13 Q 35 Back

14 Qq 6, 8 Back

15 Q 10 Back