Examination of Witnesses (Question Numbers
80-99)
MR ALISTAIR
BUCHANAN
25 NOVEMBER 2008
Q80 Mr Hoyle: There is deep concern
that people like yourself are very sceptical about how the energy
companies operated. There is a perception that they operate as
a cartel. It was interesting that E.ON and SSE both announced
their summer price hikes on the same day, while Scottish Power
and Npower did the same eight days later, all of them during the
height of the holiday season. I just wonder what you can do about
that and are you not suspicious when the general perception of
the public—either business or domestic customers—is
that this is a cartel, they work together and they just ride roughshod
over all their customers?
Mr Buchanan: That is a very fair
question. Funnily enough, if there was more concern—which
is one of the reasons we triggered the probe—it was over
the almost simultaneous announcement of price increases back in
January/February. Interestingly, if you break it down there was
a bit more of a differential in pricing and product in the summer.
As far as the cartel is concerned—and this is where we marry
with the findings that you made, and you made very clearly in
your report, and what a wide-ranging report it was—you had
found no clear evidence; nobody had brought you evidence. Clearly,
we have the benefit of working under the Enterprise Act and we
found no evidence; we had crate loads of information, as you can
imagine—board papers, letters, all their strategy documents—we
found no evidence of cartel. I instructed my lawyers to go over
this extremely closely and they came back with a view that there
was not enough evidence; there was not a hurdle that we could
get over with regard to the Competition Act to deliver a view
that they are acting as a cartel. But I can assure you that I
asked both our external lawyers and our external QC to have a
look at this particularly closely.
Q81 Mr Hoyle: So what we can say
is that they are better lawyers than you. Nobody is convinced
by that answer but at least you have tried to investigate it.
The problem is that you just cannot find the evidence that must
be hidden somewhere.
Mr Buchanan: My legal advisers
tell me that the hurdle under the Competition Act is a substantial
one, so I take what I am given on this.
Q82 Mr Hoyle: Do we need stronger
laws; the strengthening of competition law?
Mr Buchanan: I certainly welcome
something you said to me in the summer, and it may come back later
on, but one of our findings is that we sought, about five or six
years ago, a market abuse power because my concern is that the
Enterprise Act or the Competition Act is quite often a very clumsy
tool—using a sledgehammer to crack what may be a big or
a small nut—but the mechanics of it are quite clumsy. We
have raised publicly and with Government the idea that maybe now
is the time for us to have a market abuse clause so that we can
act more swiftly if we see a potential breakdown in the market,
so I welcome your comments.
Q83 Mr Hoyle: But it is funny that
within eight days the four major players all announced a price
increase.
Mr Buchanan: Indeed.
Q84 Mr Hoyle: Surprise, surprise,
and then they wonder why they get the accusations. Can I just
take you on because I think one of the big concerns is Ofgem:
great ambitions; wanting to do a lot; but the truth is that you
are the toothless tiger. You have no claws, no teeth and nothing
really to get stuck into. You can write reports all day long but
there is nothing much coming from you without the power. Do you
feel you would benefit if you were treated like Ofwat that can
restrict price increases?
Mr Buchanan: I have to, and you
would expect me to, stop you on the toothless tiger.
Q85 Mr Hoyle: You have got to defend
your position.
Mr Buchanan: Of course I have
to and that is very important.
Q86 Chairman: I will give you a hint
that we will be coming back to this at the end of the evidence.
Mr Buchanan: Right. It is important
to do that.
Q87 Mr Hoyle: A dragon without fire
if you prefer that.
Mr Buchanan: Well, let us stay
with the tiger, because we are an organisation that knows how
to use both the claw and the paw. The other issue about a tiger
is that it knows about timing. I would say, in terms of our delivery,
we are an effective policeman; we will use our Competition Act
powers; we delivered the highest ever utility fine to National
Grid earlier this year; we used our powers under the Enterprise
Act to instigate two major probes—one upstream, one downstream;
we are conducting mis-selling cases at the moment, so we are quite
comfortable with our policing powers and we are quite comfortable
giving the industry a good kicking. There is also the harassment
power that we have, which is name and shame. That means we can
go and have a look at how well they are running their businesses—such
as mystery shopping—for their energy efficiency work. A
very important part of our role is to inform and to help the information
for the consumer. A good example of that recently is the introduction
by Ofgem of a much higher level of standard with regard to consumer
complaints. We have an important education role, which is something
that does not get much attention but is incredibly important for
us in terms of a route to market for the regulator. Energywatch
and Consumer Focus primarily have that interface, but we want
that interface also to give confidence about the regulatory body,
and our Energy Smart and Energy Best Deal campaigns have been
very important. My final point, and I am sorry if it sounds slightly
prosaic, but it is quite important, Ofgem's direct responsibility
is for the 20-25% of the bill that is the monopoly. I believe
that in the four price reviews that we have delivered in the past
five years, we have delivered an outstanding deal for consumers:
quality is up, prices have been kept under control and we have
delivered for these network companies the lowest cost of capital,
both by contrast to United Kingdom utilities and European utilities.
That is incredibly important for the consumer because every 1%
you save off their rate of return literally converts into hundreds
of millions of pounds of saving for the consumer. I am sorry to
have taken a bit longer on this, but it is very important for
consumers to have confidence that we are competent and capable
of delivering across this range of issues.
Q88 Mr Hoyle: You missed the question
I asked and I will put that back in a moment. I suggest you try
some smelling salts because the problem you have is that your
customers out there, that we represent, do not feel that. They
feel that you did not do enough; that you were dragged to the
table to do an inquiry when everybody else was shouting and screaming.
The big question I have is: those prices have gone up and we understand
that, my concern is that you feel that you have done a lot, the
public impression is and my impression is, that shareholders'
dividends went up to £1.64 billion—a huge increase—so
I do not quite understand how the two match. The second part is,
we have seen some of the biggest salary increases in the industry
where we know that one way and another perks over the year led
to £4.4 million being paid to a chief executive. You feel
that you have done a good job, the customers out there feel that
if those wages can be paid, and those excessive profits can be
gained, you are a toothless tiger. I come back to the question
that you did not answer: do you feel that it would be beneficial
if you could act like Ofwat in restricting the price increases
on water for the rest of us, where you could restrict the price
of electricity and gas in the same way? That way, to me, you would
be a real regulator working on behalf of the customers, instead
of trying to name and shame, which, I am sorry to tell you, they
do not seem to suffer shame very easily.
Mr Buchanan: I hear your points
on dividend and salary and maybe these are issues that the companies
should come and talk to you about. No doubt the credit crisis
is causing its own issues there for them to really look at that.
Let me come back to your question on Ofwat. The bit of Ofwat that
is directly comparable to Ofgem is networks, their business is
equivalent to our 20-25% of the bill. That is where we restrict
prices, that is where we control, so I would say we do very much
the same as Ofwat. In fact, we have felt, because Ofwat are at
a different stage of the cycle, they have different issues, that
we could pursue a lower cost of capital on behalf of consumers
than Ofwat has. That is by no way a criticism of Ofwat; they are
on a different stage of their cycle.
Q89 Chairman: We are going to have
to move on but we might return to these questions at the end of
the time.
Mr Buchanan: I think they are
really useful.
Q90 Chairman: There is one thing
I wanted to clarify. I started by asking about the Chancellor's
Statement yesterday; you are going to publish quarterly figures;
what I do not quite understand is that if evidence emerges that
there is an unjustifiable gap between changes in wholesale prices
and retail prices, what can you do about it, apart from name and
shame, which really follows on from Mr Hoyle's point?
Mr Buchanan: That takes us towards
the whole issue of cost reflectivity and price discrimination.
Obviously we are looking at putting licence condition clauses
into Ofgem so that we have powers with regard to that. I am nervous
because my board has not discussed this so I do not want to fetter
where we are going to go, but it is something that we have put
in our probe document.
Q91 Chairman: But if your monthly
quartering produces evidence that there was a tendency for prices
to go up quickly when prices rose and to come down slowly when
they fell, if you could produce evidence you could put licence
conditions in to deal with some of those things?
Mr Buchanan: If it was clear that
was being done with a view to ensure that there was discrimination,
which arguably that is what it is signalling, then action would
need to be reviewed, yes.
Q92 Chairman: We can now move on
to some questions about the underlying wholesale market because,
as you know, one of our principal points of difference with you
was that our concern was the underlying function, the market,
was poor, although there were issues about retail customers as
well, where your probe focused, and we welcomed a lot of what
you said about your intentions in the underlying wholesale markets.
So we will begin with a series of questions on wholesale gas and
electricity markets.
Mr Buchanan: Yes.
Q93 Miss Kirkbride: It is quite timely
that you are here today because in my constituency this weekend
there were two businesses that are now fearful of going out of
business because they have just received their new energy supply
contracts, which have gone up by 300% in both cases. I know we
have had price rises and I see the need for some of those price
rises, given what is happening internationally, but how can that
possibly be justified? Have you had other examples of that? A
300% increase!
Mr Buchanan: That is concerning
me. Obviously, it is a statement of the obvious, it is concerning
and as I signalled earlier, in our discussions with the Large
User Group and also I met the strangely named SMUG group—Small
User Group—a couple of weeks ago, many of them were seeing
the benefits of falling prices. So my worry for the businesses
that you mentioned is that probably they are very small businesses
and therefore are locked into contracts. One of the things that
we have signalled within the probe is that much of what I call
normal business relationship between supplier and small business
has been very poor; the conduct of business has been very poor,
and we intend to change that. Perhaps we can take it off line,
but I am genuinely concerned by the scale of increase at a time
when we are seeing prices fall.
Q94 Chairman: What does a small business
do? Who does a small business complain to? Consumers are okay,
they have places to complain if they know where to go. Where does
a small business go to complain if the company does not provide
satisfaction?
Mr Buchanan: Consumer Focus, I
am sure, has taken that on because Energywatch built quite a strong
platform with the small/medium user. We have our own links into
the Small User Group, but the primary customer relationship is
there. I would like to come back on that if I may, Chairman, and
just check with Ed Mayo that is the case. I would like to take
it offline.
Q95 Miss Kirkbride: As you rightly
said, these people have contracts and they feel that they are
completely locked into them—one is a nursing home and the
other is a farm shop that needs cold storage, so energy is something
they have to have, but at those prices they do not see how they
can keep going. Are you saying that you will come back to us on
that?
Mr Buchanan: I would like to.
I would like to get some more information, if I may.
Q96 Mr Binley: The Chairman raises
a vital point, which is that the plight of small businesses over
the next two years adds to its importance big time. Do you have
regular conversations with organisations like the FSB and British
Chamber of Commerce? And, do you take note of what they are saying,
Mr Buchanan? You are going to need to take much more note over
the next two years if we are going to be left with a small business
infrastructure that can face the challenges that we need them
to face with regard to global competition.
Mr Buchanan: I can give you some
comfort there. I personally, and also as an organisation, as I
mentioned earlier, have our own regular forums with the large
users and the small users. I am a member of the Business Energy
Forum, which brings large and small businesses together; we have
regular meetings with the CBI and regular meetings with the MEUC,
so we are in regular contact.
Q97 Mr Binley: I asked you about
two specific organisations, the Federation of Small Business and
British Chambers of Commerce, which mostly deal with this sector,
rather than the CBI.
Mr Buchanan: And they are members
of those groups that I mentioned, particularly Business Energy
Forum, so I do get access, I do hear what they are saying.
Q98 Mr Binley: And you do take note
of them big time?
Mr Buchanan: We do, they are some
of the most important meetings we have. As has been raised by
your colleague, we are very interested in these incidents which
seem so bizarre, so we will follow that up.
Q99 Mr Bailey: May I just reinforce
this particular point because certainly the rise in energy prices
to small businesses, particularly the manufacturing businesses
in my constituency, are really very significant indeed and we
have to be quite clear that it could actually drive some businesses
out of business. Should your organisation not be looking at a
process by which those contracts could be reviewed in the light
of falling energy wholesale prices in order to take some of the
pressure off small businesses? Because, at the end of the day,
it is in nobody's interest, including the energy suppliers, if
those small businesses are actually driven out of business.
Mr Buchanan: One of the key findings
from the probe focused on a range of remedies including fairness
of contract and contract structure. One of the significant findings
from this was the degree to which the suppliers have dismally
let down the small businesses in terms of explaining to them what
they have got; even giving them a written contract; a degree of
abuse at the end of a contract cycle; and that is very clear and
we are going to deal with that and are dealing with that in our
remedies to the probe.
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