Select Committee on Scottish Affairs Minutes of Evidence


Examination of Witnesses (Questions 580 - 599)

TUESDAY 15 MAY 2007

MR ALISTAIR BUCHANAN, MS SARAH HARRISON AND MR CHARLES GALLACHER

  Q580  Chairman: Welcome this afternoon. I am pleased to say that we have with us Charles Gallacher, who was not supposed to be here so thank you very much for your attendance. It would have made our job easy if you had been listening to the first evidence because I am sure Committee members would like to raise a lot of questions. Can I ask you to introduce yourselves for the record?

  Mr Buchanan: If I can introduce the Ofgem team, my name is Alistair Buchanan, Chief Executive at Ofgem; and I am joined today by Sarah Harrison, who is Managing Director of Corporate Affairs under which social policy sits, and Charles Gallacher, who is our newly-appointed director for Scotland and corporate affairs. Corporate Affairs covers both England, Wales and Scotland.

  Q581  Chairman: Despite all the initiatives to tackle fuel poverty, why is it getting worse? How many of the 600,000 households estimated to be in fuel poverty at the end of 2006 were in severe fuel poverty?

  Mr Buchanan: It is a great concern and in a way we are looking at a "U" curve in terms of numbers in fuel poverty. There were about 800,000 in 1996/1997, and you now have the figures from the Scottish housing data down to the bottom at 286,000; and I agree with you that, very sadly, we are up at around 600,000 at the moment. Clearly, our aim is to minimise the effect of the prices. As you will be aware from the data that you have received, when you look at the impact of fuel poverty it appears to be 50% income, 35% fuel prices and 15% energy efficiency. Quite clearly, Ofgem's focus is on the 35% prices and 15% energy efficiency, and the extent to which, through our actions, we can alleviate those who are in fuel poverty. Clearly, there are primary responsibilities here upon the Government and also very onerous responsibilities upon the companies. I am very happy to go into all of those areas, if you wish.

  Q582  Chairman: How many people are in severe fuel poverty?

  Mr Buchanan: From the data that I have seen, of that 286,000 who were in fuel poverty it would suggest it is around 70,000.

  Q583  Chairman: But that was in 2002.

  Mr Buchanan: Yes. We have obviously spoken about that increase. It is a little bit concerning that we have no firm data at the moment, and obviously EAS is very helpful in giving us guidance on the data but I would assume that those in severe fuel poverty are broadly in the same ratio.

  Q584  Chairman: Will higher oil prices and growing global demand for energy, which are like to push up prices, constrain our ability to meet the 2016 targets? Can the targets be met by action on incomes and on energy efficiency alone?

  Mr Buchanan: I think a lot is going to have to be done here with the effectiveness of institutional focus, and I would have particular regard to ensuring that the benefits that are available—again you will have seen from the EAS submission that they have a figure of £7.3 billion that is not being claimed—upon those that clearly need them. We seek to get information to those who are not aware of the benefits, for example, that a competitive market provides, which is that of switching. At the moment that provides over £125 differential, if you look in Glasgow at the moment, between the Scottish and Southern offering and the Scottish Power offering. Quite clearly, one of the responsibilities on us—and I believe you have had Energywatch in this afternoon as well—is to ensure that we seek to get that information to consumers so that they can take advantage of that. In addition to that, I am sure we are going to come on to talk about pre-payment meters, and I would be just amazed if we did not—but the advantage if you change your payment methodology is that you could potentially save if you were both switching and moving to a direct debit approach. I am sure we will also get on to bank accounts and whether people have bank accounts, but the potential saving there is £200. On the average bill at the moment from Scottish and Southern in Glasgow, which is around £825, you are looking at quite a substantial saving. We take this target very seriously. That is one of the reasons why Ofgem has continued to run the Energy Smart Campaign. We believe, certainly from the evidence we had, that there is active switching in the market place. Switching is not for those in a non-vulnerable category either. You may have seen the reports that we have published. The vulnerable categories are split up into sub-categories and there are some categories, for example disabled people, which appear to switch more than the average across Gt. Britain. Sadly, those on low incomes are switching at about 44%, whereas the average in the UK is 50%. We have to target both those on low incomes and another category that is falling below that 50%, which is the over 65s. We have to target them to make sure that they understand the benefits that they could get from changing their supplier.

  Q585  Chairman: Obviously this is a universal problem in the country; that people are able to take benefits from the Government or the companies but some do not know the benefits available to them and some cannot be bothered filling out the applications and going from department to department. How do you think we can have an awareness campaign so that people know what benefits are available to them?

  Mr Buchanan: We currently carry that out. We work with Energywatch and we will effectively blitz through a media campaign. Two of the three Scottish companies have also launched focused campaigns, using charity groups to help them target the fuel poor. For example, the Essentials tariff campaign launched by Scottish Gas and British Gas relatively recently offers effectively a price cut of £285 off the Scottish Gas/British Gas bill. They are working with Help the Aged and various charities to ensure that they get the benefits of that package, which is not available to everybody else. Everybody else is being offered £170 off, so they get the benefits of that package targeted to them. Companies are carrying out part of the process; we are carrying out part of the process; but the final element to this is that there has got to be a degree of joined-up government here, and this was one of the recommendations from the EAS, which we would endorse and brought out in our energy review. One of the roles we find ourselves in is as a facilitator amongst government. We find that we are having to pull DWP, Defra, DTI and a number of the interested parties together to try and find a way through. Sarah, do you want to talk about last winter, when we did just this?

  Ms Harrison: One of the biggest challenges in respect of fuel poverty is that of identifying those households most in need of help, and effectively targeting a package of measures, which is not just about helping with tariffs. As we know, fuel poverty is a symptom of a wider problem of poverty where the household will probably have experience of debt problems generally or getting access to financial services. It is a whole household approach that is needed. Building on that, in our energy review response we basically made the case for a renewed programme of what we called "find-and-fix"—a better drive to identify customers who are most in need, and then get a package of measures targeted at those customers. The Government responded to that by basically calling for a winter initiative, which took place over the last winter, and which Ofgem's Chairman, Sir John Mogg led. That was an exercise to bring together the Department for Work and Pensions, the companies, agencies such as EAGA, in order to get together an initiative to target help into pensioners who are in receipt of pension credit. It was a pilot project and a relatively unambitious one for a number of reasons, and it targeted 100,000 customers, but nonetheless the response to it, in terms of the initial response from householders who received the package of help, was very positive. That sets the kind of model for the future in pooling together initiatives and suppliers, help from DWP, in particular the pension service, with access to benefits, and ultimately other financial help to get much better targeting to households that are most in need.

  Q586  Danny Alexander: What I would like to get a handle on are the powers of Ofgem in relation to the issue of fuel poverty that you are describing. It is clear from the evidence we have heard that there is a significant problem with rapidly rising fuel poverty. The points you made earlier have generally been on either an enabling role or encouraging people to get the best deals that are currently available within the market. However, I think that anyone looking at the market currently as it is for these customers at this end would have to conclude that there is a degree of market failure here. For example, you opened the door to social tariffs, and when the research was done to look at social tariffs that companies were bringing forward, it was clear that those tariffs were less good than some of the open-market tariffs they were offering. What powers do you have, as the regulator, to force companies to address the situation more directly, and suppliers, and how are you using those powers at the moment?

  Mr Buchanan: It is a very good question. Perhaps I can take a step back by way of answering it. Formally, our primary power sits in the Utilities Act, and there we are empowered to promote and protect consumers' interests through markets and competition, but with some very important provisos. One of those is to be minded towards vulnerable customers. If you roll on three years from when the Utilities Act was struck, which was 2000, we were then given social guidance by the Secretaries of State of DTI and Defra. There, what was said to the board at Ofgem, was they should be minded to social issues, but if there is a significant financial impact from a decision, they have to send it back to the Secretary of State to sort out.

  Q587  Danny Alexander: Can I interrupt for a second? That is a very clear explanation. Are you required to follow that guidance or does the law empower you to take your own path?

  Mr Buchanan: We are required there, but in addition the following year we were given the Sustainable Energy Act, and quite clearly social is very much part of that sustainability duty. So within the template of Ofgem the requirements on us have changed quite substantially. In terms of dealing with what are policing roles and what are punching roles, and what are encouraging roles, I would highlight the policing role as being two sets. We have a formal enforcement route. We can effectively go down a route of saying to the companies, "You will do something or we will put a condition on you and you will get into trouble if you do not do that." For example, last year we announced that back billing was going to be a thing of the past, that the industry had to sort out an ombudsman and that they had a year to do it. They did it. In a couple of weeks we are going to put some very attractive licence conditions to protect consumers over standards within the current price review that we are doing on the gas network. That is effectively where we can enforce. We will come on to talk about pre-payment meters in a minute. That is an area where the industry will see that we are going to put terms in place in the supply licence review this summer which effectively prohibit the extremely uncomfortable practices that three of the companies have decided to pursue on recalibration. That is the formal route.

  Q588  Danny Alexander: On the formal front then licence conditions are clearly a major part of the way in which you interact with energy suppliers. What steps have you taken within licence conditions—and it sounds as though that is something that is under review at the moment—to place greater obligations on any suppliers to tackle fuel poverty, for example introducing social tariffs or any other methods that are out there? It sounds like you have the power to use licensing to drive through quite radical change in this area but you are slightly hanging back because you think that you want to try the less formal route first.

  Mr Buchanan: Yes. As a generalisation, I suspect as you would want to encourage we are trying to simplify what we do, and the Better Regulation Commission has beaten us, like it does everybody else, to try and make the terms and conditions within the supply market more simple. We will be announcing this summer a substantial reduction of the terms, the rules and regulations in the market, except for the vulnerable customer. When you look at the social tariffs, to a certain extent our reaction to that is to say: "Is the market profoundly failing to deliver here?" If we look into Scotland, two of the three players have substantial propositions on the table. One is the Essentials offering from Scottish Gas/British Gas, which was announced a few weeks ago and is a substantial reduction—£285 off the bill for 750,000 fuel poor. Clearly, they want to target them and that is why they are working with Help the Aged in particular. It is £170 off for everybody else. It is a quite substantial offering. The Energy Plus scheme from Scottish and Southern, which is aimed at, from memory, 30,000 customers, gives them a 20% cut. To a certain extent therefore two out of the three companies in Scotland are already doing that. Scottish Power has gone down a slightly different route, and in terms of their social offering they have gone down a trust-based route, particularly with regard to children, which is quite interesting. Equally, they have taken a strategic decision in their boardroom to play the pre-payment meter card, so currently Scottish Power uniquely has a pre-payment charge lower than the standard credit charge. We are looking at the industry, and saying: "Do we need to act here?"

  Q589  Danny Alexander: You think there is not a market failure in relation to the fuel poor.

  Mr Buchanan: I think the companies are very alive to the danger of the fact that if they do not take, sadly, this large proportion of the population seriously, action will be taken against them, almost certainly coming from Government. I am very interested to see what the White Paper carries on fuel poverty next week. That is extremely bad news for the companies and their shareholders if that happens.

  Q590  Chairman: You are telling us that companies are very generous and meeting their obligations. My constituents come to me, elderly people, who were paying £30 a month on direct debit, and have received letters from the companies saying "from next month you have to pay £55" which is almost a 100% increase.

  Mr Buchanan: To answer your question, and I do mean this quite seriously—I have been in the industry since 1987 and a lot of the people who work in these companies really do care about social tariffs. One of the reasons they chose to work in a utility rather than another kind of company is because they do care. It is worth saying that. Then you can stand back and say, "Yes, but ultimately they are answerable to their shareholders." However much they might care, they have to deliver a dividend and a profit figure to keep their shareholders off their back. One of the naked self-interest aspects of fuel poverty to them is that should they fail in that, then the shareholder is fully alive to the fact that almost certainly the Government will take action against the companies, and that ultimately will be far worse for the shareholder than if the company had taken the initiative.

  Q591  Chairman: There were 286,000 living with fuel poverty in Scotland, and that figure has increased to 600,000. One of the main reasons that we have found has been the increase in oil and gas prices. The Scottish Executive has more initiatives and the Government has more initiatives to help eliminate fuel poverty, but just one single issue, the increase in oil and gas prices, has increased the number of people in fuel poverty to 600,000.

  Mr Buchanan: Yes, indeed. We have been through a very tumultuous period. You can see from the submission we gave you that wholesale prices from the middle of 2003 to the middle of 2006 rose by 190% and retail prices rose by just short of 50%. It has been a very uncomfortable period. For the ten years before that UK prices were amongst the lowest in Europe. In fact, even through the last three years the UK domestic gas price has been amongst the lowest of the EU countries. Frankly, that is fat all good to somebody who is in fuel poverty. They do not care what the UK relative position is with another EU country, but it is worth putting an element of background on to the canvas there. We have this problem. How do we try and help the lot of the fuel poor? We will go down the route of promoting the opportunity to get a substantial amount off their bill, which effectively the market has provided. We will go down the route of providing moneys for research—and Sarah will talk more about the research we have carried out with the University of Bristol on targeting. There are two elements we have not discussed yet, which we are very responsible for. One is low usage, and that brings into play where we might go on smart metering; and the other is on barriers that Ofgem might help to knock down. This is with particular regard to the rural communities. Some of the rules and regulations with regard to local microgen were, frankly, absurd. Maybe we came to that too late, but last year we started to sort that out. I think there are a number of things that Ofgem can do, but I was very taken by the EAS submission to yourselves and their recent report because the first four issues that EAS focused on were all things that the Government could do. I am not advocating that Ofgem should not continue to do what it is doing, and also to give consumers confidence that we will use both our formal policing powers and our informal name-and-shame powers, which we have done in the last couple of years; but it should pick the right moment to use those powers. We will do our very best to try and alleviate it.

  Q592  Chairman: Do you think the gas and oil companies have to do more to tackle fuel poverty, and that, as a regulator, Ofgem has to do more to deal with fuel poverty?

  Mr Buchanan: Yes. I think any relaxation in the effort that we place on the programmes that I have outlined to you—we would be failing the consumer profoundly.

  Q593  Danny Alexander: It sounded like, from your comment on the Energy Action Scotland submission that you were implying that there is more that the Government could do to strengthen your hand in making more progress on this issue. Are there specific things that you would have in mind that Government could do to enable you to press the energy companies to deliver more?

  Mr Buchanan: That is very interesting. I will let Sarah answer that, but can I clarify something in case there is a misunderstanding? From my memory of the EAS submission to yourselves, the top four recommendations were about ensuring that the winter allowance was properly slanted. Has the Government looked at VAT from the increase in prices and tried to utilise that? It was all very much focused on fiscal measures or how you handle the benefits rather than, "if you do this it will help Ofgem's lot".

  Ms Harrison: Can I make one comment on the fuel poverty target and the way we are measuring fuel poverty, and then I would like to come back on social tariffs in answer to your question? Do not misunderstand my remarks. Ofgem does not want any attention taken away from the need to get action to help customers who are finding it difficult to keep themselves warm and comfortable in the winter; but the present measurement of fuel poverty is based around the relationship to the energy bill. What it does not allow, for example, is income from the winter fuel allowance to be taken into account in considering the householder's position. One of the points we made in our energy review response was that for the longer term it might be worth taking a wider look at whether this is the right way to measure this issue, or whether a measurement that ought to get more an assessment of incomes, an assessment of housing condition, as well as energy efficiency, might be a better way to get a stronger view on how we are going about the business of helping households where it is most needed. My second point on the social tariffs, which is your point that Ofgem had taken a step to give clarity to suppliers on how they could develop social tariffs in a competitive market; and that saw an upsurge in the number of initiatives and measures that suppliers produced, and we very much welcomed that. Your point was whether those are real, or whether is some question over the quality of some of those measures. That is very much the area where Ofgem does have a role, to keep the companies in check and call them to account and make sure that the measures that are operating under the banner of social tariffs are indeed such. In 2005 we did substantial research on all the different measures that the companies employed and evaluated those, and will do so again. We will look at all the measures and develop a reporting framework so that customers have more visibility of the value of some of these measures, and whether they really are going to help, or whether customers might be better to switch to a different provider or to switch to a different tariff. The other benefit of shining a bright light on what the suppliers are producing and the value of that is that it engenders stronger competition between them, which is more advantageous to customers, and it helps consumer advisors, those on the front line. Even within your own constituency office you might be trying to give advice to customers on what might be best for them, but it gives more visibility and more transparency on these matters and whether they are going to be of benefit to customers. That is the way we very much see a role for ourselves, keeping the companies in check and shining a bright light on what is happening, in order to promote further improvements for households.

  Q594  Danny Alexander: I share your agenda of shining a bright light to try and understand the reasons behind some of these things. The comparison was made with continental consumers. As I understand it, in some continental countries social tariffs are available that allow, for example, a rising tariff where the first proportion of units would be entirely free and the tariffs would rise thereafter. In other places standing charges are not payable and the entire thing is done through the tariff. Are you saying that companies in this country would be entirely free to develop products of that nature?

  Mr Buchanan: They are, and it is not quite the product that you mentioned because there have been fixed deals on offer; indeed 4 million odd, 16% of all consumers, have missed the last three years' price horrors because they were locked into those deals, so companies have offered them. Coming back to development of, frankly, more sophisticated tariffs, I am aware of one of the three Scottish companies—and it would be improper for me to say which one—is very close to launching quite an exciting tariff in this area.

  Q595  Danny Alexander: I think I know the one you mean, but I will not mention it either. Looking specifically at the Scottish context, the evidence we have seen suggests that consumers in Scotland pay more for their energy than consumers in the rest of the UK. Why do you think that is?

  Mr Buchanan: At the moment the information I will give you obviously is that that is not the case. The very latest figures I was given on my way here is that the wholesale price comparison is 855 plays 858, so it is extremely close on dual fuel between an English and a Scottish customer. However, back in 2003/2004, the Scottish consumer was paying £40 more, so there does appear to have been an equalisation.

  Q596  Danny Alexander: We have heard evidence about smarter metering and initiatives like micro generation, which might have an impact in rural areas where you are off the mains gas network, and you have electricity and might be relying on heating oil, which is even more expensive than gas and a major cause of fuel poverty, where houses are old-fashioned stone houses which are much harder to put the energy efficiency measures into. On those two things, what needs to happen to encourage those to take off so that customers in rural areas can benefit from some of the measures that urban customers have?

  Mr Gallacher: These are two initiatives that we are extremely keen to explore. We have been working with others in Scotland, in particular the Scottish Executive, on micro generation. Clearly, if micro generation devices can be fitted to the off-gas network in rural areas, there is a strong possibility that it could alleviate fuel poverty. At the moment there is a trial on the go sponsored by the Scottish Executive through their central heating programme with the Energy Savings Trust in Edinburgh, where they are looking at 170 rural fuel poor households and trialling different devices over last and next winter to see if they can make a difference. That is something we are extremely interested in, and the Ofgem role there would be, as Alistair said before, to make sure there are not any barriers to allowing that to happen. That is where smart metering comes into play. Clearly, if you are in the fortunate position of being able to sell power back to the network, it is important that you are able to measure that power to make sure you are getting a reasonable deal, and that would be one aspect of smart metering. Probably a more important aspect would be the provision of information and one that is understandable to normal householders to enable them to adjust their consumption perhaps for different time of day tariffs, or perhaps to save overall on their consumption by being able to understand the data from the meter.

  Mr Buchanan: It is very much linked to Ofgem, but not in our regulatory role, in our auditing role. One of the real benefits that came out of the Lazarowitz Bill, which came out last year, was the aggregation for individuals of the renewable obligation certificate. This is not a fun figure: 80,000 people in the country have local microgen or CHP units in the home: only 185—because the administration had been so nightmarish to get through—have been seeking to get the benefits of that. There will be aggregation, and this means that this subsidy will be made available to those who have these local individual units, which is very good news indeed.

  Q597  Danny Alexander: In relation to the energy efficiency commitment, which is another way of getting measures in to help people improve their homes through the energy companies, I am concerned that the way the energy efficiency commitment operates at the moment mitigates against improvements being made to homes in rural areas, because crudely speaking if you are an energy company with a customer base in, for example, the north of Scotland and the south of England, then in terms of the number of houses that you can improve for the money, you are much better advised to invest in the low-hanging fruit of relatively easy-to-improve homes in the south of England than, for example, the rather more difficult and expensive homes to improve in the north of Scotland—old-fashioned stone-built houses being one example. Are you looking again at the way the energy efficiency commitment operates to try and ensure the benefits are spread more to the houses that might need them most where the benefit would be greatest in terms of fuel poverty?

  Mr Buchanan: We have been active supporters when the EEC goes to its next phase in 2008 of keeping the priority group at 50%. As you know, there have been some pressures to try and bring that down. One of the things we did in the last couple of years was to effectively carry out a review of how many people knew they were in the priority group. This comes back to information we were talking about on switching. Seventy-five per cent did not know they were in the group so you have got this opportunity, and again this falls back on Government and falls on us to seek to have involvement in getting much better information across. There are concerns, looking at the next phase of EEC. It looks as though microgen will be in the next phase, and one of the concerns we have, for example, is to what extent it could gobble up all the EEC and therefore leave nothing for anything else. These are issues that we are presenting. We are not the decision-maker here—Defra is. We are just one of many voices into Defra's decision.

  Ms Harrison: I do not have much to add to that apart from the fact that we welcome very much the scale, which is substantially greater than its predecessors. We want to ensure there is fair treatment between measures and effects on priority and non-priority groups. We also welcome broadening the EEC, especially in respect of micro generation and smart metering. We also welcome the potential for more flexibility to allow suppliers, provided they have met certain obligations in respect the priority group, to flex some of their obligation out into a non-priority group if that is the most efficient way to meet those targets—but a limited degree of flexibility to ensure focus still remains on those who are most in need.

  Mr Buchanan: Coming back to rural communities, I cannot say too much because we are waiting for the White Paper, but my board has not seen our recommendations for the price review for the local gas network, but they will do in two weeks' time and then they will be publishing that shortly thereafter, but they will be very pleased to write to you, Chair, or to any of your members individually about what we are proposing. It is a step forward in terms of the rural network and where you might be able to take that.

  Q598  Mr Davidson: I apologising for arriving late for your evidence. Can I pick up the point about dialogue between yourselves and other bodies? I particularly want to clarify the level of discussion and dialogue between yourselves and Government here, the Scottish Executive and other voluntary and charitable groups in the area. One of the things that struck us on a number of occasions was that there seemed to be a large number of players in this field and a substantial degree of duplication and confusion about who exactly is doing what. I am not quite sure whether or not you see yourselves as playing a role in coordinating all that, or whether you are trying to keep yourselves as distant from it as possible.

  Mr Buchanan: I think you do put a finger on a very uncomfortable aspect of this issue. We raised it in response to the energy review. EAS raises it again in its submission to you. Getting a focus on to this issue would be extremely good news. We are actively involved, both here—and we are also a member of the Scottish Executive's Fuel Poverty Forum. Charles and his team are actively involved in Scotland. I spoke at the EAS conference. I know you are regularly working on this. We are as involved as we can be, but in terms of particularly benefits, we try to say, "here is the issue". If you look at Fuel Direct, in the mid-nineties it had 230,000 people, very much helping them. That withered to about 43,000 in 2004 and it is now down to about 24,000. I went up to see Scottish Gas on one of my walks around the companies, which I like to do fairly regularly, and wanted to know about this. One of the answers they gave—but it might not be the answer—was that only a little time back DWP seconded somebody into the utility companies. There was a DWP secondee in Scottish Gas, and they went with the Scottish Gas employees to those who are fuel poor and therefore they could work it through in a fairly holistic way. What now happens is that the company has to say to the individual, "You have to approach DWP; we cannot, you have to do it". You can immediately see a barrier that is created to ensure that that kind of route can be created. To me this is just a classic example of the kind of thing we have to try and break.

  Q599  Mr Davidson: I can see how that possibly is the fault of both the DWP and the individual companies.

  Mr Buchanan: I am not trying to lay fault.


 
previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2007
Prepared 20 December 2007