Memorandum submitted by the Office of
Gas and Electricity Markets (Ofgem)
INTRODUCTION
1. Ofgem is the regulator of the gas and
electricity industries in Britain. Our principal objective is
to protect the interests of gas and electricity consumers, both
present and future. We do this by promoting effective competition
where appropriate and through the effective regulation of the
monopoly network businesses. We also have a range of important
secondary duties including security of supply, contributing to
sustainable development and paying particular regard to the needs
of certain groups of vulnerable energy consumers. We are also
required, through statutory guidance issued by the Secretary of
State, within our sphere of responsibility to help the Government
meet its targets for eradicating fuel poverty. Ofgem's Social
Action Strategy[57]
sets out how we will seek to meet our social responsibilities
and help the Government combat fuel poverty.
2. Ofgem welcomes the opportunity to contribute
to the Committee's inquiry. We have focussed our response on our
area of interest, which is the potential role the Post Office
network can play in helping to promote financial inclusion and
tackle fuel poverty through enabling more people to access direct
debit energy tariffs.
BACKGROUND
3. Fuel poverty is defined as when a household
has to spend 10 per cent or more of its income on energy
to maintain a warm home. The Department for Business have estimated
that in 2006 there were 3.5 million households in fuel
poverty.[58]
Subsequent energy price rises will have increased that number
significantly, making the Government's statutory target to eradicate
fuel poverty by 2016 increasingly difficult to achieve.[59]
4. Fuel poverty has three causes: poor housing,
low incomes and high energy prices. Tackling low incomes and improving
energy efficiency and housing are the most enduring and sustainable
solutions to fuel poverty and these are primarily the responsibility
of Government.
5. There is an important and continuing
role for the regulator and industry, as effective competition
and regulation will help to provide lower prices for all energy
consumers. We at Ofgem are doing what we can to ensure that the
market works well and does not disadvantage fuel poor consumers.
Recent energy price rises have come at a time when household budgets
are under pressure from the rising cost of food, petrol, mortgages
and other essentials. Vulnerable consumers and those in fuel poverty
are particularly affected.
6. In October, we published the initial
findings of our Energy Supply Markets Probe, putting the industry
on notice to end practices that are failing some customers, and
to deliver the full benefits of competition to the entire market.
We are proposing a range of actions to help households including:
measures to ban unfair price differences, including differences
between payment methods; tougher rules on doorstep selling; more
transparency in financial reporting; and, new requirements on
suppliers to provide information to help consumers to get the
best deal. We have now launched a fast-track consultation on our
findings and proposed remedies, including those to address unfair
price differentials.
7. Last April Ofgem convened a Fuel Poverty
Summit chaired by Lord Mogg which brought together Ministers,
government officials, energy suppliers and consumer organisations
and agreed a programme of practical action to improve targeting
of existing help to those in fuel poverty and to help more vulnerable
energy consumers participate more effectively in the energy market.
Through our Social Action Strategy Review Group, chaired by Ofgem
Chairman John Mogg, we have on a number of occasions discussed
with industry and consumer groups the interplay of this agenda
with broader issues of financial inclusion.
8. In addition to our work, in September,
the Government announced the Home Energy Savings Programme—a
£1 billion package of measures jointly funded by government,
suppliers and generators to bolster energy efficiency initiatives
and provide extra support to vulnerable consumers throughout winter.
As part of this package, Government asked the Financial Inclusion
Task Force to work with energy suppliers, Ofgem and other stakeholders
to develop new ways to encourage greater use of direct debits
for bill payment.
9. The Taskforce reported on its recommendations
in December 2008 noting the strong link between initiatives
to promote financial inclusion and those to reduce fuel poverty.
It notes that whilst the availability and take up of bank accounts
has increased, more work is required to increase ongoing accessibility
and active use of transactional facilities in order to maximise
the inclusive benefits of banking. This is of particular importance
where direct debit for bill payment is concerned as the associated
discounts of this method of payment often present a significant
benefit to the consumer.
10. The Taskforce also recognised that Direct
Debit may not be the most suitable payment option for all customers,
particularly those whose pattern of income makes it necessary
or preferable to budget on a weekly or quarterly basis.
THE POST
OFFICE CARD
ACCOUNT AND
ITS POTENTIAL
TO AID
SOCIAL AND
FINANCIAL INCLUSION
11. Our submission focuses on the role of
the Post Office network, in particular the Post Office Card Account
(POCA), in helping to promote financial inclusion and tackle fuel
poverty through enabling more people to access direct debit energy
tariffs
12. The POCA is an account that can only
be used to receive benefits, state pensions and tax credit payments.
No other payments, including wages, can be paid into it. With
the POCA, customers are able to take out cash and request a balance
enquiry, free of charge, at any Post Office using their POCA card
and PIN. It therefore enables benefits claimants to better manage
their cash without the risk of becoming overdrawn or incurring
any charges.
13. The POCA is therefore a helpful tool
for financially excluded consumers who are unable to access basic
bank accounts (no credit checks are carried out when the account
is opened). However, the POCA does not provide transactional facilities,
ie direct debits or standing orders, or allow receipt of any other
funds which means that its benefit as a budgeting and bill payment
product is extremely limited.
14. Building on the existing POCA system
and including additional functionality which would allow for these
types of transactional facilities would enable those POCA consumers
who are content to pay by monthly Direct Debit (but currently
lacking the facility to do so) to access these typically cheaper
tariffs.
15. However, we do recognise that for those
consumers on limited and fixed weekly incomes, monthly Direct
Debit arrangements can be difficult to manage and may not be suitable.
Therefore the ability to accumulate weekly payments into a holding
account for payment on a monthly basis to the supplier would seem
the best way of addressing this. Again, this additional functionality
could be built into POCA or alternatively the Savings From Poverty
(SfP) project,[60]
as an example, shows how this could work—however it would
still require the POCA to have a transactional facility.
16. The SfP scheme proposes a social enterprise
initiative to address the problems faced by consumers who are
unable to use direct debit, while at the same time addressing
the corresponding increase in cost to industry. The proposed scheme
would augment the POCA, allowing other payments to be paid into
it and providing an ATM withdrawal facility as well as a budgeting
sub-account feature with a transactional facility. This facility
would enable bill payment and debt repayment across a range of
public and private sector bills.
17. SfP assert that inability to access
cheaper utilities tariffs and other cost benefits related to direct-debit
results in poorer consumers paying a 'poverty premium' totalling
around £1,000 household, per annum. SfP's research with
a sample of energy and water companies estimates that the cost
to serve vulnerable customers is 2.4 times higher than for
non-poor customers (because of debt write off and the high administrative
costs associated with outstanding debt).
18. SfP argue this scheme addresses the
problem inherent in the inflexibility of monthly bank direct debits
which they claim can undermine effective cash budgeting schemes
and increase the risk of debt accrual.
19. We believe that there is a real opportunity
here, with the decision to award the Post Office Card Account
to Post Office Ltd, to build on and enhance the current POCA to
enable these consumers to have this additional transactional functionality.
This would in turn allow them to access direct debit energy tariffs
and the cost benefits associated with these, typically cheaper
tariffs. This would also contribute to the Government's on-going
financial inclusion agenda and support the work of the Taskforce,
Ofgem, energy suppliers in this area.
20. I hope that this information is useful
to the Committee. If Members have any further questions, my colleagues
and I would be happy to provide more detail.
January 2009
57 http://www.ofgem.gov.uk/Sustainability/SocAction/Documents1/sapstrategbroa4july07.pdf Back
58
The UK Fuel Poverty Strategy 6th Annual Progress Report, October
2008. http://www.berr.gov.uk/files/file48036.pdf Back
59
In England, the Government's target is to eliminate fuel poverty
for vulnerable households (containing children or those who are
elderly, sick or disabled) by 2010 and 2016 for all
households. For the Devolved Administrations the target for overall
elimination is by 2016 in Scotland and 2018 in Wales. Back
60
www.transact.org.uk/core/core_picker/download.asp?id=412 Back
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