Examination of Witnesses (Questions 20-39)
POSTCOMM, OFCOM
AND OFGEM
Q20 Nigel Griffiths: If you are not
a multi-millionaire £2.5 million sounds like a big sum, but
how much is it compared with the profits they have been making
out of this?
Mr Buchanan: I understand what
you are saying. Clearly, the board will have to think very carefully
if a finding is made against Enpower.
Q21 Nigel Griffiths: I am asking
you about £2½ million compared with the profits it made.
Mr Buchanan: That would be below
1%; it is very low indeed.
Q22 Nigel Griffiths: Why is it so
low? Do you not have powers to make it higher?
Mr Buchanan: That was the decision
taken back in 2003.
Q23 Nigel Griffiths: By whom?
Mr Buchanan: The board.
Q24 Nigel Griffiths: Why did the
board let them off so lightly?
Mr Buchanan: At the time the board
felt that was a measured response to the issue before it.
Q25 Nigel Griffiths: Why is it necessary
a number of years later to have a review to tell people the obvious
that it is certainly not effective enough?
Mr Buchanan: It had been effective
until the Enpower case arose at the beginning of January, so we
had a four-year run during which we did not have a case like this.
If I may give you a sense of how seriously the board takes these
issues, you will have noticed that we lodged a very large fine
on National Grid for what we believed was a Competition Act mistake
in February. The board will not shy away from lodging major fines
on companies if it feels that that is the appropriate response.
The message I would want you to give to your constituents is that
we will not shy away from imposing severe punishment if companies
have not behaved themselves.
Q26 Nigel Griffiths: I was one of
the authors of the Competition Act 10 years ago. I thought we
had given you and your colleagues enough powers. It seems to me
that you have used a light touch regulation that is unacceptable
both to Parliament but, more importantly, to consumers.
Mr Buchanan: Certainly, through
its actions this year the board already in one case has signalled
that it takes these issues extremely seriously. If there is a
case proven against Enpower the board will have to think very
carefully about it. I am sure that it will listen to a wide range
of opinions before it comes to its decision.
Q27 Nigel Griffiths: In answer to
the Chairman's questions I thought you made a couple of very telling
responses. You accepted that price movements had been virtually
identical and that all of the companies had put them up at the
same time. Do you not find that highly suspicious?
Mr Buchanan: I am very happy to
talk to you individually or as a group once we have announced
our probe. I feel a little uncomfortable giving an answer to that
right now. I am not trying to duck it.
Q28 Nigel Griffiths: But you told
the Chairman that you had three solutions. Which of those do you
think will be most effective?
Mr Buchanan: Clearly, I cannot
give the board's answer before it has the case work in front of
it in September. What I can say at this stage is that a lot of
interested parties within the industry—independent supply
companies and generators—seem to be focusing their attention
on the quality and transparency of information. The one thing
we have found over the past five years is that wherever we improve
information market participants—you—feel much more
confident. As to the actions that Ofgem have taken, we got the
Norwegians to agree to give real time information under what was
called MOD006; we forced use it or lose it information on LNG
providers; and we have caused a real noise in Brussels in the
hope that we get through the third directive on bringing transparency
to gas and electricity flows and storage on the gas side from
Europe. I do not want to stonewall you on your question but to
give a sense of the kinds of things being said to me when I talk
to companies.
Q29 Nigel Griffiths: I am surprised
to read in paragraph 2.6 on page 15 that, "Ofgem does not
currently monitor either a company's purchasing strategy, or its
gross margins." Why is that?
Mr Buchanan: What we do analyse
in terms of the—-
Q30 Nigel Griffiths: I understand
what you do undertake; you rely on other metrics?
Mr Buchanan: Yes, we do.
Q31 Nigel Griffiths: Are they better
than monitoring a company's purchasing strategy or gross margins?
Mr Buchanan: It is extremely difficult
to monitor within a competitive market a company's purchasing
strategy.
Q32 Nigel Griffiths: Do you not have
access to commercially sensitive information?
Mr Buchanan: Not unless we are
carrying out a probe or Competition Act review in which case we
will get that information.
Q33 Nigel Griffiths: So, if you request
it they will refuse it unless it is a probe?
Mr Buchanan: They might do.
Q34 Nigel Griffiths: Have you tested
them?
Mr Buchanan: Quite often information
about trading strategies comes to our market and trading team
because it is watching the markets carefully. It became fairly
common knowledge last year that the trading strategy of one company
last year had backfired on it. It led that company to announce
a decline in earnings in the autumn of last year when there was
clear evidence that profits in the sector were going in the opposite
direction. I think that is a good example of what happens when
a trading strategy goes wrong.
Q35 Nigel Griffiths: I am concerned
that oil prices have gone from about $30 to about $120 per barrel
in a decade which does not reflect any particular shortage of
oil or, surprisingly, any greater use of it but because there
are lots of speculators bidding on it. The victims of that are
consumers. I am interested to know what you can do as an organisation
to intervene to bring some commonsense to that market.
Mr Buchanan: Those may be some
of the issues we want to address given that we are looking at
vertical integration within the probe. I am sure that one of the
questions either you or a colleague will ask is: to what extent
is the retail margin which companies present as being highly volatile
and low—certainly, if you look at British Gas's retail margin
over the past eight and a half years it is highly volatile and
low in contrast to, say, supermarket margins—being taken
elsewhere within the organisation? That is something at which
we will be looking.
Q36 Nigel Griffiths: Is there any
information that companies refuse to give which you would like
to obtain and therefore you would advise the Committee that perhaps
tougher legislation should be provided to give you such powers?
Mr Buchanan: I am very grateful
for the offer. If a company goes down that route the directors
face some pretty serious remedies against them, ultimately criminal
ones, if they deny us information. Therefore, both the Competition
Act and the probe give us enough powers to enable us to force
any company to give us information. To take that a step forward,
when we did the upstream probe on the gas companies they were
enraged that a downstream regulator was looking at Exxon Mobil,
Shell and BP. However, they gave us the information because they
did not want to go down the route that we might otherwise have
taken.
Q37 Nigel Griffiths: This Report
makes clear that the National Audit Office believes you should
be demanding more information, and I think that next time you
come before the Committee we will want a better informed level
of information. You can communicate that to the companies. If
you want to advise us how we might strengthen your powers you
can do so.
Mr Buchanan: I very much appreciate
that.
Q38 Dr Pugh: There are two aspects
to the electricity business: the provision of electricity that
runs down the wires and the infrastructure that enables that electricity
to run down the wires. I think that those who provide the infrastructure
are called core utilities. Are you in a position to say how competitive
the core utility market is? In other words, if you want to start
a new factory or housing estate and need to talk to an electricity
company in order to provide facilities at a reasonable price,
how competitive is that market?
Mr Buchanan: Is this the wires
or connections business?
Q39 Dr Pugh: I am referring to connection
and supply—putting in cabling and that sort of stuff. We
have been talking largely about whether cabling is there and electricity
is being provided along it. I am talking about its provision for
industrial development and so on.
Mr Buchanan: Connections and meters
are related to that. Referring to the National Grid case that
I mentioned earlier, when discussing with them competition and
markets they would say there is active competition in the new
metering market which is linked to the housing market. That was
not what we were looking at within that case, but there appears
to be a degree of competition there.
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