Supplementary memorandum submitted by
the Office of Gas and Electricity Markets (Ofgem)
1. On 15 May 2007 Ofgem gave evidence to the
Scottish Affairs Committee. During the course of the evidence
session we offered to provide the Committee with more information
on the use of our enforcement powers; the recalibration of token
pre-payment meters; our review of the supply licence; and extensions
to the gas network.
OFGEM'S
ENFORCEMENT POWERS
2. Ofgem's principal objective is to protect
the interests of consumers, wherever appropriate by promoting
effective competition.[21]
In order to do this, we have the power to investigate and, in
certain circumstances, to impose financial penalties on companies
that we believe are in breach of their obligations.
3. Under the Gas Act 1986 and the Electricity
Act 1989, where Ofgem is satisfied that a licence holder is in
breach of a licence condition, we can issue an order as is necessary
for the purpose of securing compliance.[22]
We can also fine the licence holder up to 10% of its turnover.[23]
Under the Competition Act 1998, we have the power to investigate
anti-competitive agreements between companies, or action by a
single company which amounts to an abuse of a dominant position.
Where an infringement has taken place, Ofgem has the power to
issue directions[24]
to bring an infringement to an end and to impose financial penalties[25]
of up to 10% of an undertaking's worldwide turnover. Under the
Enterprise Act 2002, we can refer the market to the Competition
Commission if we do not believe that competition is working.[26]
Ofgem is also a designated enforcer under the Enterprise Act and
in certain circumstances has the power to seek a court enforcement
order, similar to an injunction, to prevent breaches of specific
consumer protection legislation.[27]
4. Since 2002, Ofgem has imposed six penalties
against licence holders, ranging from £200,000 to £2million.
We have recently conducted a review into our enforcement powers.
We also held a forum with other regulators in March 2007 to discuss
best practice in enforcement and this included the aspect of whether
our powers are sufficient. Ofgem is broadly satisfied that it
has sufficient powers to investigate potential breaches and impose
penalties.
5. In addition to Ofgem's formal enforcement
powers, there are a range of strong incentives for energy suppliers
to improve their customer service. The Energy Supply Ombudsman,
which was set up in July 2006, has the power to resolve customer
issues relating to household bills and switching supplier. The
Ombudsman's decision is binding on the supplier; she also charges
suppliers £300 for every complaint she investigates; and
her findings are published in anonymised form on the Ombudsman
website. The number of investigations initiated by the Ombudsman
has slowly increased since it was established, resulting in 103
investigations initiated by the end of January 2007. In July this
year Ofgem will review the Ombudsman scheme to help us understand
the criteria against which we should be approving redress schemes
and to assess how far the Energy Supply Ombudsman already meets
these criteria.
6. Furthermore, in Britain's competitive domestic
energy market, there is clear evidence of suppliers competing
for business and a high level of consumers exercising choice about
their supplier. Customers can punish suppliers with a poor level
of customer service by switching. The pressure to attract and
retain customers is a powerful incentive for business to act responsibly
and to take complaint handling seriously. For example, Scottish
and Southern Energy (SSE) markets itself on being the cheapest
supplier with excellent customer service and has introduced its
own customer charter that goes beyond the requirements of the
Energy Supply Ombudsman. This strategy appears to work well as
SSE has seen its customer numbers grow from 2 million to 7 million.
RECALIBRATION OF
TOKEN PRE-PAYMENT
METERS (PPMS)
7. The delayed recalibration of token PPMs is
an issue on which there appears to have been no breach of a licence
condition, and therefore no grounds for enforcement action, but
it is still of concern to many customers. We share their concern.
At present, suppliers must visit the home of a token PPM customer
to recalibrate their meter manually. Where there is a delay between
an increase in price and this visit, the customer could start
to build up debt. This is a particular problem because many customers
choose PPMs as a way of avoiding debt, and a proportion of PPM
customers are on low incomes, so debt accrual can cause real difficulties.
8. We will be introducing a new licence condition
on token PPM recalibration as part of our Supply Licence Review
which will be completed this summer. However, we were not prepared
to wait until then so we took action. Ofgem set out publicly the
steps that suppliers must take to ensure that their customers
are treated fairly. Our December 2006 best practice statement,
against which we are tracking suppliers" performance, focused
on:
— speedy recalibration—this is
important so that customers can benefit from new cheaper tariffs
as price cuts are implemented;
— speeding up the replacement of token
PPMs with "smarter" ones which do not suffer this problem;
— clearer communication so customers
are aware of the risk of debt build up and can call their supplier
to arrange an appointment for recalibration;
— handling debt issues sensitively,
including writing off debts in cases of hardship—which will
help vulnerable customers;
— writing off old debts; and
— not preventing customers who have
built up a debt on their meter due to such delays from switching
supplier if they are disappointed with the service they get.
9. The three suppliers who are affected by this
issue (Scottish Power, npower and Powergen) all gave important
commitments to improve performance and we have demanded and published
regular progress reports on their activity. We have urged suppliers
to do all they can to accelerate further their replacement programmes.
The number of token PPMs still accruing debt is now less than
149,000. This is down from 409,000 when Ofgem first took action
in December 2006, and down from 256,000 when we last reported
in March 2007.
10. We have also proposed a new licence condition
such that suppliers must take all reasonable steps to ensure that
a token PPM is reset within a reasonable period of time after
a price change. It will apply to price changes that happened before
the new condition comes into force. We do not intend to force
suppliers to refund customers who have been backcharged in the
past, but we have obtained commitments from suppliers that they
will handle debt issues sensitively, in particular writing off
debt in cases of genuine hardship. We know from our monitoring
that suppliers have met this call.
11. The best solution is for suppliers to remove
token PPMs and replace them with "smarter" PPMs now
on the market which allow for remote recalibration to adjust the
customer's charges as prices rise and fall. Ofgem has encouraged
electricity suppliers to take this action, so that there can be
no risk of PPM customers building up a debt through a failure
to recalibrate the meter. All six of the main suppliers have replacement
programmes in place and we have urged them to do all they can
to accelerate their plans. We continue to monitor suppliers"
progress against our best practice statement and to publish monthly
reports on their performance.
SUPPLY LICENCE
REVIEW
12. Ofgem has published a document setting out
our final proposals to modify the standard conditions of the gas
and electricity supply licences. Our proposals reduce the current
licence by about half and simplify the obligations that remain.
We believe that simplifying the regulatory framework will further
sharpen competition between existing suppliers; lower the barriers
to entry to new suppliers; and ensure protection for consumers,
in particular vulnerable customers. We will also increase regulatory
transparency by publishing guidance documents on the purpose of
each licence condition.
13. We have taken great care during the review
to maintain appropriate licence obligations for the protection
of vulnerable customers. We ran a working group and special consultations
with consumer groups to look solely at these issues.
14. Consumer protection has been strengthened
by, for example, placing an obligation on electricity suppliers
not to disconnect pensioner households during the winter months.
This brings electricity into line with the existing obligation
on gas suppliers. There will also be a requirement on suppliers
to provide information to all customers on the dangers of carbon
monoxide poisoning and the benefits in fitting carbon monoxide
alarms. This is in addition to the existing requirement to provide
free gas safety checks for pensioners.
15. The removal of regulations can also help
consumers by making it easier for new suppliers to enter the market.
For example, our review will remove the "28-day rule"
which many see as preventing suppliers from offering long-term
energy services such as the installation of household-scale generation
or measures to improve energy efficiency. We will also amend the
rules to make it easier for suppliers to install so-called smart
meters that have the potential to help to cut emissions and improve
the accuracy of customer bills.
EXTENSIONS TO
THE GAS
NETWORK
16. As part of Ofgem's gas distribution price
control review, we have been consulting on several options to
encourage gas distribution network operators (GDNs) to undertake
extensions to the gas network. On 29th May we published our initial
proposals.which include measures to help reduce up front connection
charges. In addition, we are proposing a new incentive scheme
that will encourage GDNs to find ways to increase affordability
to these communities by coordinating various sources of government
funding.
17. These measures will be specifically aimed
at fuel poor non-gas communities. Our initial estimates are that
about 10,000 non-gas households may benefit from this proposal.
18. I hope that the Committee finds this information
useful. We would be happy to provide any further details that
the Committee may require.
Alistair Buchanan
Chief Executive
4 June 2007
21 Ofgem supports the Gas and Electricity Markets
Authority, the regulator of the gas and electricity industries
in Britain. In this memorandum, the functions and powers of the
Authority under all relevant legislation are, for simplicity,
described as those of Ofgem. Back
22
Section 28(1) of the Gas Act 1986 and section 25(1) of the Electricity
Act 1989. Back
23
Section 30(A) of the Gas Act 1986, section 27(A) of the Electricity
Act 1989 and the Electricity and Gas (Determination of Penalties)
Order 2002. Back
24
Section 32 and 33, Competition Act 1998. Back
25
Section 36, Competition Act 1998. Back
26
See OFT guidance on Market Investigation References, http://www.oft.gov.uk/shared-oft/business-leaflets/enterprise-act/oft511.pdf. Back
27
Part 8, Enterprise Act 2002. Back
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