Examination of Witnesses (Question Numbers
75-79)
MR ALISTAIR
BUCHANAN
25 NOVEMBER 2008
Q75 Chairman: Welcome to what will be
this Committee's last ever dedicated inquiry into energy policy
before responsibility will transfer in the New Year to the new
committee. This is not necessarily your last appearance before
us, we are bound to take an interest in the issues of energy policy,
particularly as it affects the business world, but it could well
be, so welcome and thank you for your work with the Committee
over the years I have been in the Chair. Can I just begin by asking
you for clarity on one point in the Chancellor's Statement yesterday;
I rather misheard it in the rush of words yesterday. As I understand
it, he committed you in public to publishing quarterly reports
detailing the link between wholesale and retail prices. He then
went on to say that—which is why I got it wrong yesterday—if
sufficient progress is not made in the next few months, the Government
will use statutory powers to end unjustifiable pricing differentials.
That was a reference to what we will be asking about a little
later on in our questioning: prepayment meters, standard credit
tariffs and, of course, we will also talk about direct debits.
The only promise here is that you will now publish quarterly information,
formalising the name and shame business that we have talked about
in the past.
Mr Buchanan: That is absolutely
right. If I can say for the record, we welcome the Chancellor's
comments, as we have the Secretary of State's. The amount of pressure
we can put on the companies to deliver the appropriate outcome
is very welcome.
Q76 Chairman: Good. Now, unusually,
you would like to make a short statement about how you see the
world, which I do not normally allow, but in the circumstances
today I think it is appropriate to do so.
Mr Buchanan: Yes, that is very
kind; it will be very short and partly it was to thank you for
the introduction and also to thank you for this Committee's input
to both Ofgem's work and more generally on the energy and environmental
issues. Certainly, a lot of the findings that we will be talking
about today, which you made in your report, have had more than
just an echo in our report and I am looking forward to discussing
those and marrying those two reports. Clearly, our report was
an extremely important exercise on behalf of the consumer; the
most thorough and detailed review of the domestic retail market
and broader themes that the organisation has done for some time.
As you know, we found good and bad, and I suppose I liken it to
a train: the competition or markets express is moving quite well
but we left some people at the station; some people wanted a window
ticket and they got an aisle ticket; and some people tried the
food and it looked better than it tasted. We are absolutely determined
to improve the customer experience and to resolve those problems
that we have found. We have demanded, as you know, action from
the companies, in particular, by 1 December on two topics: the
4.3 million customers who were short-changed with regard to being
off gas grid, and also prepayment meter customers. I am very pleased
that British Gas announced this morning—I took a call from
their Chief Executive—that they were reducing their PPM
customer charges by £30. We have put on, as you know, the
regulatory hobnails; you urged us to do that, we feel the timing
is right to do that and frankly, we will tighten those laces unless
they act and the board is quite determined to do that.
Q77 Mr Hoyle: It is good to see you
and we are sorry we will miss you in the future as you are being
transferred to the new Committee. Just to go over some of the
issues, I wonder if you can give us an explanation as to what
lies behind the sharp increase and decreases in the wholesale
gas and electricity, and the effect over the summer in contrast
to the collapse of the price of oil.
Mr Buchanan: As you rightly point
out, we have seen the collapse of oil from $140 to below $50.
We have not seen that exact link come through to the United Kingdom,
and part of that is currency. My markets team told me yesterday
that the currency impact is 37%, which is a problem but, nevertheless,
we have seen gas prices in the last month fall by 14% and they
are 40% off their peak. Electricity prices have been a bit slower
than that and part of the reason they are trading slower is that
the nuclear power stations have not come on as expected, and there
are also some concerns over how the LCPD—Large Combustion
Plant Directive—is working for the plants. Nevertheless,
with these price reductions, we would anticipate—and both
Scottish and Southern and Scottish Power have announced fairly
formally in the last few days—that they would be looking
to drop their prices in the New Year. Candidly, I have been public
for some time on this and Ed Mayo, when he came to see you, pursued
this theme, which is that at the end of 2006 you may remember
we could see prices falling quite sharply in 2007, and British
Gas at that time stepped forward and announced that it would be
dropping prices and by the level that it would be dropping them.
We are putting as much pressure as we can onto the companies to
announce what they plan to do—and I think British Gas announced
this morning, although I have not had confirmation of that—that
they are intending to drop prices in the spring. So, we have this
unfortunate situation for retail customers where there is a lag—typically
companies have bought for their domestic companies ahead of winter
and we are monitoring this very carefully. This comes back to
the Chancellor's request from us because we have now developed
quite a sophisticated model. We have been able to make it quite
sophisticated because we did the probe and we have had a lot of
information and inputs into our model so that we are watching
what the companies are doing with a degree of greater information
than we have had before in terms of when those prices should be
coming down. Clearly, the large industrials have benefited from
the decline in prices, so there is a little bit of good news here.
We would expect those prices to come off early in the New Year.
Clearly, for the 4.3 million consumers who have been short-changed,
and the prepayment meter customers who have been short-changed,
we expect that this side of Christmas. If they do not do that
this side of Christmas, candidly, I think these companies are
going to get themselves into a lot of difficulty.
Q78 Mr Hoyle: So, as a kind of an
apology to those customers, do you think they are going to give
them a rebate or a voucher or something?
Mr Buchanan: That is an interesting
question.
Q79 Chairman: I do not want to get
too much into that now because we will get into more detail later.
Mr Buchanan: Just to answer that
point, the consultation ends in a week's time and I am going to
be interested to see what happens; a lot of people have written
in. But the other thing I have noticed in typical consultations
is that a lot come in just towards the deadline, so I will be
very interested to see what people are saying about that.
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