Examination of Witnesses (Questions 1-19)
POSTCOMM, OFCOM
AND OFGEM
Q1 Chairman: Welcome to the Committee
of Public Accounts. Today our hearing is on the Report of the
Comptroller and Auditor General Protecting Consumers? Removing
Retail Price Controls. We have a galaxy of regulatory talent
in front of us in the shape of Alistair Buchanan, Chief Executive
of Ofgem; Ed Richards, Chief Executive of Ofcom; and Sarah Chambers,
Chief Executive of Postcomm. You are all very welcome to our hearing.
Mr Buchan, perhaps I may start by referring you to fig 22 which
you find on page 36. As consumers we really do not need to look
at this figure to know that energy prices have risen very sharply.
Are you ensuring that these companies are not making excess profits
at the expense of all of us?
Mr Buchanan: The overview of that
price increase is, as you know, that we are operating in an environment
where coal prices have doubled from about $60 to $120 per tonne,
oil and gas prices have gone through the roof, energy prices have
been highly volatile and from the beginning of this year prices
have also included European trading emission charges. Therefore,
we have global and environmental pricing pressure. I will go through
the subsidies if you wish. We have an anxiety premium that comes
into the price as well because of the concerns about infrastructure
and we still do not have closure on the problems with Europe which
we highlighted in our probe carried out three years ago into the
upstream energy markets to give customers confidence at that time
that some of the strange things we were then seeing from some
companies were not due to misbehaviour in the market. You may
or may not be aware that at the end of February we announced we
would carry out another probe to report in September.
Q2 Chairman: I knew you would say
that. I just wondered whether you should have acted sooner.
Mr Buchanan: We felt confident
that the price increases, the products on offer and the improvements
in service suggested that the market was working well. What happened
from the middle of January through to the middle of February was
that the companies behaved in a way they had not before in terms
of pricing. They put up their prices such that their national
pricing position was virtually identical and each acted within
a very short period. This was quite unlike any of the previous
pricing strategies when prices were either falling or going up.
That led the board at Ofgem to believe it was very important to
investigate it and to come out with potentially three conclusions
in September. We have looked at it and feel that prices are being
driven by those issues to which I referred earlier. We believe
we can make changes within the licence conditions and perhaps
with regard to the quality of information that is available. If
Ofgem can handle that we will do it. If however we believe there
are structural issues and, to come back to your original question,
that the customer is being short-changed we can recommend that
the sector be sent to the Competition Commission for a full review.
Q3 Chairman: Ms Chambers, why did
you relax price controls when the data about competition was so
weak?
Ms Chambers: We felt that the
data we had about competition was reasonably strong in terms of
market shares and the way the market was going. Since we took
away price controls what has happened has vindicated our decision.
This is a very small area of mail that has been taken away from
price controls and is a product that is available only to business
account users and not something that residential customers or
small businesses use. The product is used only by big businesses
and was opened to competition.
Q4 Chairman: But they are still important
people.
Ms Chambers: Yes, very important
people.
Q5 Chairman: Paragraph 4.2 of the
Report tells us that, "Postcomm did not have access to the
same level or quality of quantitative data as Ofcom or Ofgem,
largely due to the lack of data from suppliers other than Royal
Mail." If you are to make these kinds of changes the first
thing you need is reasonable data, is it not?
Ms Chambers: We had as much data
as was available in the marketplace. This is quite an expensive
product which typically is priced at over £1 where operators
do not even need to have licences to offer it, which is why we
do not have the information and have no powers to get it. But
we felt that there was enough information for us to know that
Royal Mail were not the only people who were offering this product.
They were offering this product to some fairly sophisticated customers
who knew what they were doing and had access to alternative operators.
Q6 Chairman: Mr Richards, I ask you
to look at the international comparison of telephone costs in
fig 10. If competition was working one would expect, would one
not, the UK to be better placed in terms of lower cost?
Mr Richards: You would always
want us to be better placed.
Q7 Chairman: I know that we are nowhere
near the bottom, but one would have thought that after 10 years
of competition we should be near the top in terms of ensuring
lower prices for telecommunications.
Mr Richards: That is where one
would like us to be without any doubt. I think we are reasonably
placed.
Q8 Chairman: Luxembourg, Finland,
Japan, Germany, Norway, Korea, USA, Sweden, Switzerland, Canada,
Denmark and Iceland are all doing better than us.
Mr Richards: And we would definitely
like to do better. Prices have fallen again since we eliminated
price controls. I think our market is very competitive and competition
should drive the prices lower. We would definitely like to be
moving in that direction. There are some geographic and other
reasons why prices vary. Historically, they are much lower.
Q9 Chairman: I understand that the
reason why there are lower prices in all these other countries
is that they are more competitive which rather begs the question
why you have not ensured greater competition. For example, Germany
has a more powerful incumbent and much tighter price controls.
One would have thought that your job would be either to ensure
the consumer was protected with tighter price controls or there
was more competition, but apparently you have not succeeded in
either endeavour.
Mr Richards: It is not an analysis
with which I would agree.
Q10 Chairman: You are the expert.
Tell me I am wrong.
Mr Richards: I do not think it
is true that they have all got more competition than us or that
prices in Germany are lower because it has tighter price controls.
There is a variety of different factors at work, some to do with
the history of the network and the pricing associated with it
and others to do with the geography of different countries. As
to networks, what I have learned in telecommunications is that
something may at face value seem very similar and often has parallels
but when you look at an individual country it also has significant
differences. The States is a very good example where I think competition
in this area is arguably less than ours; it has declined in the
past few years. The US has gone back to a duopoly-type approach.
I argue that we have significantly more competition in this area
and also in broadband than, for example, the US. In Korea there
are other factors including state intervention and public subsidy
which has an effect in these areas. Therefore, the picture varies
significantly from country to country.
Q11 Chairman: I ask a question of
Mr Buchanan or Mr Chambers, perhaps both of them. We now have
a transition from Energywatch and Postwatch to the National Consumer
Council. How can you be sure that consumers do not lose out?
Mr Buchanan: We are working very
carefully on the energy side to make sure that does not happen.
Already to a certain extent some of Energywatch's remit has been
given to us. We have outlined how we will handle complaints going
forward. They are much tighter controls than we have had in the
past. That will start from 1 July. I think that is good news for
consumers. We will have a statutory redress scheme. We have had
an ombudsman before in a voluntary arrangement and effectively
that is now put on a statutory basis. Therefore, if it gets to
the ombudsman there is a sum of £5,000 per complaint available
to consumers who have been let down by their companies. In terms
of the very important area of education and information, which
I suspect we will chat about as we go through this afternoon,
we have very positive and active conversations with New NCC as
that organisation is called. We have put up our hands to be much
more involved in that particularly with regard to accreditation
of switching sites and information on those sites going out to
customers. We are waiting for New NCC to come back to say whether
it would like us to do that or they would do it, but we are saying
that it will be done. We are working hard to make sure that does
not happen.
Q12 Chairman: You are working hard
to make sure consumers do not lose out?
Mr Buchanan: Yes.
Q13 Chairman: Mr Buchanan or perhaps
Ms Chambers, how will you ensure that all consumers benefit from
competition, not just those who have access to the Internet? Many
of the best deals are available only on the Internet and a lot
of more vulnerable people do not or cannot access that facility
for some reason. How will you help everybody?
Ms Chambers: The question of how
we can make sure all consumers including the smallest and most
vulnerable ones benefit from competition is one that has taxed
regulators since they first began. When one liberalises markets
normally companies focus on the most profitable customers and
the ones that are big business. I have to say that in post big
business has been the biggest beneficiaries of postal liberalisation
and the independent review that has just been published has said
precisely that. We believe that already smaller residential customers
have reaped some benefits in terms of increased reliability of
service with much greater mail integrity. The scope of the universal
service in terms of the number of households covered is greater
than it was. Certain pressures that come from competition trickle
down to the smallest customers, but there is no doubt that vigilance
by regulators is needed to make sure that not all the benefits
are captured by the biggest and most enticing customers.
Q14 Chairman: Any of the witnesses
can answer my next question. There is something called "confusopoly"
which is a compound of "monopoly" and a complex pricing
structure. It is very difficult for consumers to get a grip of
this. I want to know why you have made it your business to relax
controls when it is so difficult for the public to find their
way round these different offers and the incumbents have such
a dominant market share, typically close to 50%.
Mr Buchanan: If I may, I should
like to deal with vulnerable customers at the end. This is a very
serious area in terms of understanding. In terms of understanding
how easy it is to switch, all the data we have is that under 5%
of customers find the switching process difficult. That leads
on to the complexity of the tariff that is being offered. In particular,
one has to be very concerned about the fuel poor and vulnerable
customers and whether, if they are on prepayment meters, for example—bear
in mind only 20% of the fuel poor are on prepayment meters—they
are being told that the prepayment meter costs substantially more
than another payment method. Currently, as part of our probe package
we are considering whether one of the requirements we will make
through a licence condition is that companies must make sure that
when they talk to individuals they tell them the cheapest offering
available at the time.
Q15 Chairman: I read in paragraph
3.8 that, "Around 20 to 32% of electricity consumers looking
to save money on their bills may have ended up switching to a
more expensive supplier. . ." Apparently, nearly half have
switched in the past 10 years, so it seems that this is a marketplace
that is not working terribly well. It is very confusing and, frankly,
a lot of people do not find it worthwhile, and when they do switch
perhaps a third of them end up with a worse deal.
Mr Buchanan: I think we can sort
that.
Q16 Chairman: You have had a long
time to sort it already, have you not?
Mr Buchanan: Part of the problem
has become quite extreme in the past year, for example in relation
to the price of prepayment meters. You could argue there should
be a price differential between prepayment and standard credit,
let us say, of about £80. That has stretched out to well
above £100. We are examining why that is. But in terms of
the product offerings it is important to bear in mind that four
million customers are on fixed deals; they like a fixed deal and
feel sure enough to enter into that. That accounts for a large
proportion, just over 15%, of the customer base. Currently, between
1% and 2% of customers would like to pay a bit more and take a
green offering. Therefore, it really depends on what the customer
is after. I accept your points about complexity. Nearly 50% of
customers have switched. Our great concern is particularly about
those who are most vulnerable and may not have been given all
the information. We have to make sure that that information is
clean. For that purpose we are carrying out a review of mis-selling
by RWE Enpower and shall take enforcement action against them
if they have been misleading people.
Q17 Nigel Griffiths: Mr Buchanan,
my constituents are sick and fed up with reviews of mis-selling
and they and the Committee want to know why you have not been
more effective in tackling mis-selling over the past decade. What
is your answer to that?
Mr Buchanan: In terms of the data
we have, customer complaints for erroneous transfers have fallen
from 1.9 per thousand in 2002 to one per thousand. In terms of
erroneous transfers themselves, the percentage of complaints as
a group has fallen from 2% to 1%. We are listening.
Q18 Nigel Griffiths: You are telling
the Committee that you have not quite halved them. You have reduced
them to a level which we still regard as unacceptable. Why is
that?
Mr Buchanan: It is unacceptable
if customers are being misled and not given the full range of
options, which is exactly what we are looking at now.
Q19 Nigel Griffiths: The time for
looking at these things is over. What we want is an assurance
that effective and tough action is taken so that anyone who is
mis-selling faces a strong penalty. What is the biggest penalty
you have ever imposed for mis-selling?
Mr Buchanan: For mis-selling that
was EDF: £2½ million; similarly, we charged British
Gas, but that was in 2003-04. This is the first major case of
what looks like institutional mis-selling brought to us since
then.
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