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Westminster Hall

Wednesday 10 June 2009

[Bob Russell in the Chair]

Energy Regulation

Motion made, and Question proposed, That the sitting be now adjourned.—(Mr. Watts.)

9.30 am

Mr. John Baron (Billericay) (Con): I welcome you, Mr. Russell, to what I think is your first time in the Chair in Westminster Hall. I was not, by my reasonably late entrance, trying to make it a difficult start for you. I also welcome the Minister to her new duties. She has already set out her stall at the Department of Energy and Climate Change, and it will be interesting to see how she applies herself to the problems of energy. She has our best wishes.

The purpose of the debate is to put the spotlight on energy customers who are simply paying too much for their energy, including many of the 5 million or so households nationwide who live in fuel poverty. My interest in the subject will be familiar to hon. Members. I introduced a ten-minute Bill to require energy companies to offer cheapest-tariff information on their domestic invoices and statements. However, the debate has a wider remit—it is about energy regulation in a wider sense. It is right that we track the progress of our energy markets towards proper liberalisation. Now is an excellent time for such a debate. As we know, Ofgem’s consultation on its recent retail market remedies closed at the end of May, and commentators are waiting to see how the regulator addresses the various problems uncovered by its market probe last year.

One of the biggest problems facing consumers is that tariff structures are notoriously complex and energy bills can be mind-boggling. Those factors are stopping many consumers—not all—engaging in the market and getting better deals. Which? has suggested that there are 15 to 20 different basic tariffs for each supplier. That figure rises to more than 4,000 tariffs across suppliers when factors such as variance payment methods and special offers are taken into account. It is unsurprising that something like 70 per cent. of consumers find the number of tariffs confusing. I suggest that overwhelming choice is no real choice at all. The effect of the confusion on the market speaks for itself. Evidence suggests that a quarter of those who switch, and something like half of those who switch as a result of doorstep selling, actually end up paying more for their energy. That is a clear example of how confusing tariffs and energy bills can be.

The best way of promoting competition and improving the effectiveness of energy markets is to give consumers better information about their energy use, what they are being charged and what else is available. Therefore, we should be requiring energy companies to publish clear information about cheapest tariffs on domestic bills and statements. I am not suggesting for one moment that energy companies should calculate the lowest possible rate for each customer—for one thing, suppliers will not
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always have access to all the relevant information, and no one is proposing to impose such a bureaucratic burden on industry—but we could, at very little cost, improve transparency.

We should therefore require energy companies to include on statements what the cheapest tariff would be taking into account certain basic assumptions. A customer, for example, may have online access and so make a payment by direct debit. The information could take into account the pattern of a customer’s energy use, but it could also reveal how much would be saved if they were to switch and how to go about that. There would be several advantages. It could encourage greater use of internet and direct debit payments, which would be for the benefit of all. It could also help to track changes in tariffs and remind customers of the discounts from which they benefit and when they end.

I suggest those things as a bare minimum. The same criteria could apply to those on social tariffs. The energy company could be obliged to state whether a customer is on the cheapest available tariff. Obviously, the underlying assumptions would change—those on social tariffs may not have access to bank accounts, for example. Even so, the onus, with the appropriate set of assumptions, could be on energy companies to make it easier for those on social tariffs to see whether they are on the cheapest social tariff. We must remember that until fairly recently—until Ofgem’s intervention—some people on social tariffs were paying more than those who had direct access to banks, direct debits and the internet. That cannot be right and, fortunately, Ofgem put it right.

Bob Spink (Castle Point) (Ind): I am pleased to make the first intervention under your chairmanship, Mr. Russell.

I congratulate the hon. Gentleman on his long campaign on this issue, which is on the record in the House. He will be aware that some social tariffs charged more than ordinary tariffs and that I have tabled an early-day motion on the matter. Does he share my disappointment that even though more than 800,000 people are on social tariffs, Ofgem and the Government have not really tackled the problem of getting consistent, simple, easy-to-understand, more accessible and fairer social tariffs for the group of people at the bottom? We need to do more to help the poorest people.

Mr. Baron: I believe that my proposals would go a long way to addressing that issue. Many people on social tariffs could be on an even cheaper tariff. As we know, there are many social tariffs, and they are very different in make-up. As with tariffs that can be paid by direct debit and online, we could simplify social tariffs. One advantage of obliging energy companies to go down that line is that it would result in a great simplification of the tariffs. Making people aware of what tariff they are being charged when they receive their bill would focus the minds of energy companies on the task in hand, which must be to simplify the tariffs. For many customers, the cheapest tariff is the social tariff, which Ofgem now says ought to be no more expensive than any other available. Others are likely to use a direct debit internet account.

Statements could also be used to convey information about a household’s energy use compared with, say, other households of a similar size, in the same street or building, or historically. Through such additional
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information mechanisms, we may be able to nudge customers into making behavioural changes that could help to conserve energy, save the environment and reduce bills. In particular, we need to give customers a clear idea how much energy each kilowatt-hour represents in terms of appliance use. For example, customers are more likely to change their habits if they know how much leaving their TV on standby costs.

It may appear unusual for a Conservative to prescribe in such detail how firms should represent information to customers, but we must remember that energy is not a luxury item or good, and the market is far from truly competitive. Consumers therefore need special help, if they are to be truly empowered, hence my proposal would strike a blow for social responsibility and common sense.

Bob Spink: The hon. Gentleman is being most generous in giving way, but I wish to disabuse him of one small point. It is not at all unusual for a Conservative to want better and clearer information for consumers. Conservatives believe in choice and real choice comes only from proper information.

Mr. Baron: The hon. Gentleman is probably being kind to me, but that is a fair point. How can one make informed choices if there is no clear information on which to base them?

I am grateful to Which? for its support for my proposals, although it has been busy proposing that a summary box in a similar format is put on all bills across all suppliers. Information would include the precise name of the tariff, the amount of energy used and how the overall cost had been calculated, which suggests that customers should also be reminded of any discounts from which they are currently benefiting, when those end and any fees they will be charged for changing tariff or supplier. That is vital information.

In fairness, Ofgem has also made some suggestions on the matter, as we know. The regulator is consulting on the desirability of an annual statement to customers detailing energy consumed and a reminder of the customer’s right to switch. Information might also be included stating how much customers are paying compared with other packages available from that supplier. However, Which? and I agree that it would be a mistake for that information to be conveyed only once a year at an arbitrary time instead of alongside each energy bill. After all, it is when consumers receive their energy bill—perhaps quarterly—that they are most keenly aware of the costs and most likely to try to do something about them.

I believe that we can be ambitious and require companies not just to give a general picture of where customers stand in relation to other users but to identify the cheapest rate for them. That is the difference between my proposals and Ofgem’s. Ofgem talked about stating an average cost when it came to tariffs; I am suggesting that energy companies could go one step further and detail the cheapest tariff for that particular customer, taking basic assumptions given the area pattern of energy use. It is not beyond the wit of man for energy companies, with all the technology available to them, to do that on their customers’ behalf. Ofgem proposes a
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further tranche of useful information, but I contend that it has excluded the single most useful piece of information—which rate is cheapest.

I have put my proposal to the Government on a number of occasions and have been moderately encouraged by the response. In January, during oral questions, the Secretary of State described the idea as ingenious, which was kind of him, and promised to consider it. Only last week, the Minister’s predecessor agreed at oral questions that mine was a very good question, and again promised to look into it. However, I have heard little of substance from DECC, having raised the issue for a reasonable time now, and I would like to take this opportunity to put the Minister on the spot and ask her what is being done about the proposal. Are the Government considering the question, or—I do not wish to be unkind—is Ofgem being used as a shield for inactivity? I would appreciate it if she were to address that point in her reply.

Will the Minister join me in evaluating some of the changes proposed by Ofgem in response to the findings of its market probe? Whether the policies can be implemented will determine whether the Government should take a more interventionist approach. Ofgem is finalising its policies. It is useful for Members of the House to have the opportunity to comment on them, and hopefully to influence the debate. In that spirit, perhaps the Minister will undertake to send a copy of today’s Official Report to the regulator for its consideration.

I shall briefly address some of the specific issues that Ofgem is considering. Ofgem has been consulting on a ban on unjustified price differences. That is important because at present companies can set different prices in different areas in order, for example, to attract new customers. Those prices do not necessarily reflect relative costs. Customers in one region or on one tariff could be subsidising customers in another region. That can lead to a situation in which the people who can least afford it are paying even more because of their method of payment.

A new licence condition will require prices to reflect the cost to companies relative to the payment method used. It is also intended that undue discrimination between customers inside and outside areas where the supplier was once the local incumbent will be ironed out. That bold initiative is welcome, but one naturally questions why a sunset clause is being suggested after three years. Ofgem’s logic appears to be that its package of retail remedies will come into play by that date, but it is difficult to feel confident that enough progress will necessarily have been made. I am minded to agree with Consumer Focus: it might be better to undertake a review of the market in three years’ time and remove the ban only when it has been demonstrated that the desired changes have taken place. At any rate, we need to hear from Ofgem how it will monitor compliance with the new licence condition, which is likely to be a tough job.

Ofgem has also set out new overarching standards of conduct that suppliers should meet. Most of the standards are common sense, and I hope that they are being observed already. They include not selling customers products they do not understand and not preventing them from switching without good reason. However, having said that, I refer to the earlier statistic suggesting that half of those who switch through doorstep selling switch to a more expensive tariff. We know that there are improvements to be made. However, serious questions must be asked about the status of the standards. What
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enforcement mechanism will be provided, and what incentives are there for energy companies to comply with them? Without clear means of enforcement, the standards could prove toothless.

Meanwhile, the threat of exit is what forces firms to stay competitive. Customers in debt have traditionally faced the greatest difficulty when it comes to switching, lending credence to the idea that the blessings of liberalisation have not flowed to those who deserve them most—the least well-off. Ofgem should therefore be congratulated on taking steps to make it easier for customers in debt to switch, giving them the right to switch where debt is the result of supplier error and doubling the threshold below which customers can transfer debt from one supplier to another.

I am doubtful about Ofgem’s proposals on price comparison. The suggestion that a new price scorecard to simplify information on tariffs will make comparison easier between different suppliers is difficult to prove. The usefulness of a price comparison tool will depend ultimately on consumers’ ability to estimate their own levels and patterns of energy use for the purpose of comparison. It sounds complex, and users would need to be guided through the process, but perhaps Ofgem will be able to persuade us otherwise. We shall have to wait and see.

It is right that we, as parliamentarians, should allow Ofgem the space to present its proposals and seek compliance from the industry, but we must also ask whether further, stronger measures might be needed in future. How does the Minister intend to monitor and evaluate the implementation of Ofgem’s measures and their impact on consumers? What failure criteria will she apply? At what point is she prepared to consider whether Ofgem needs stronger powers to shape the market and benefit consumers? In other words, does Ofgem have strong enough teeth? At what point might it be necessary to refer the matter to the Competition Commission or the Office of Fair Trading?

I accept that the issues might be seen by some as dull and technical, but I contend that they are extremely important, particularly for the 5 million people who live in fuel poverty. For evidence, one need look no further than the winter of 2007-08, when 22,000 people over the age of 65 died of cold-related illnesses, far more than the number in countries on the continent with more severe weather conditions. The issue is vital. I look forward to the Minister’s response.

9.49 am

Simon Hughes (North Southwark and Bermondsey) (LD): Mr. Russell, I apologise to you and to colleagues for being slightly late. I am glad that I was able to hear a substantive part of the speech made by the hon. Member for Billericay (Mr. Baron), and I am happy to follow him in this debate. He has again raised a subject in which he has long taken an interest, and I respect him and thank him for doing so. I am one of the signatories to the early-day motion tabled in his name on the subject, and I have read his contributions in previous debates, sometimes together with my hon. Friend the Member for Twickenham (Dr. Cable), who has also been involved.

The debate is also timely because of the work that Ofgem is doing. Like colleagues, I have met Ofgem and discussed its general work and that particular piece of
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work. I agree with the hon. Member for Billericay that it would be helpful if Ofgem shared its preliminary view on a consultative basis before reaching its final view on the way forward.

If I have read the new Government list correctly, I am right to congratulate the Minister on her promotion to Minister of State, Department of Energy and Climate Change. She knows that we have great respect for her work in this area. She is a parliamentary neighbour of mine and we have always enjoyed good, amicable, cross-border relations. We both shared the disappointment when Millwall nearly won the play-off finals against Scunthorpe. We are having to defer our excitement about Millwall’s promotion by another year, but I hope we will both be there supporting them next year.

Bob Spink: Before the hon. Gentleman moves away from Ofgem, does he agree that perhaps its greatest failure has been in not tackling the failure of profiteering companies to pass on wholesale prices? That is not just about spot prices but about the actual prices paid by companies for the energy that they sell on, because they often forward-buy.

Simon Hughes: That is certainly an issue, and I have raised it with all the companies and with Ofgem. On the day that I took over this job, at the beginning of the year, my right hon. Friend the Member for Sheffield, Hallam (Mr. Clegg) and I had a fuel-price summit with all the major suppliers, as well as Ofgem and others, and that was one of the issues we raised, because it has been very much on the agenda.

I am conscious that there is a further, hidden issue in that the way in which someone pays for their supply might leave them disadvantaged when it comes to benefiting from price changes. Whether a customer pays on a daily rate is a big issue, because companies do not necessarily reduce their prices as soon as their costs are reduced. If a customer is built into a system, they might get the benefit much later—or, arguably, not at all if they pay by direct debit.

I should like to pay one more compliment to the consumer association Which? on its report, in relation to which it came to see me. I have always had great respect for Which? and have subscribed to it in the past. It has confirmed what some of us who know about this issue were already very aware of—that there are 4,000 different tariffs available in the UK, and that the confusion they bring is not in anybody’s interests. These things are difficult enough for people like us in the Chamber, by which I mean not only the politicians but the civil servants, the staff of the House and the people who watch and take an interest. I would be interested to know how many times my parliamentary colleagues have changed their supplier in recent years, if any of them is willing to admit it. I own up to not having changed mine, to my knowledge, because it is so low on my list of priorities, when I get home at 12 o’clock at night, to work out which tariff might be better. We know for a fact that 50 per cent. of people do not change their supplier, and, if I may say so, some people are less able to address these issues than other people due to intelligence, time, ability, other responsibilities, language and other reasons.

It is difficult for people to make considered decisions on a regular basis against an ever-changing kaleidoscope of facts. I have had occasion to query a couple of bills,
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such as when my brother and I took over the management of the house in which my mother lived on her death 18 months ago. We discovered all sorts of irregularities when we tried to get regular bills, and tried to go from having estimated bills to bills requiring a reading. For example, one cannot necessarily get the whole benefit immediately of a change in reading, and therefore reduce the cost, when one goes from an estimated bill to an accurate bill because it is spread over a different period and one has to wait until the next quarter. Those are little things, but for people on tight incomes they are important and make a significant difference, so I thank Which? for doing its job.

I see suppliers regularly, as we all do, and I decided to check specifically the three suppliers to whom I have recently had access. The best illustration of the problem is provided by Scottish Power, which paradoxically supplies fuel to some members of my family in Wales. It has sent out a booklet, dated September 2008, entitled, “Prices: Your domestic gas and electricity pricing information”. The booklet does not have page numbers but it has many pages of information describing a “Single Rate”, a “Two Rate”, a “Domestic ‘S’” rate, an “Economy 7” rate and a “White Meter No. 1¥” rate—one has to check what that sign means. As well as those five electricity rates, there is a daily service charge, a price for “All/Day kWh”, a separate night rate, and prices without and with VAT.

The booklet then gives all the different package payment options. One can have a “Premier Plus Package”, paying monthly by direct debit or standing order, a “Standard Package”, paying quarterly by direct debit, cash, cheque or postal order, a “Weekly Payment Package”, paying weekly by payment book or card, or a “Prepayment Package”, paying as one uses a prepayment meter. If that is not enough, one can have a “Premier Plus Package”, paying monthly by direct debit or standing order for gas, or a “Standard Package” for gas with different payment options. There are then standing charge options for gas and some packages that have no standing charges. In the second half of the booklet, there are more categories for standing charge options, including a “ComfortPlus Control” rate, a “ComfortPlus White Meter” rate, a “Domestic & Economy 2000” rate, a “Domestic & Off Peak C” rate, “Domestic & Off Peak 2‡” rate, a “Domestic & Off Peak A‡” rate and a “Domestic & Off Peak D‡” rate. I am only halfway through the booklet, but I think you get the idea, Mr. Russell.

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