Examination of Witnesses (Questions 1-19)
MR PHIL
BENTLEY, MR
MARTIN LAWRENCE,
MR JIM
MACDONALD, MR
GUY JOHNSON,
MR IAN
MARCHANT AND
MR NICK
HORLER
11 FEBRUARY 2009
Q1 Chairman: Good morning. Ladies and
gentlemen, welcome to the Select Committee for Energy and Climate
Change. I am sorry it is a bit of a squeeze in this room, but,
as a new committee, it is not possible for us to have had one
of the larger interview rooms—that will be later on in our
session. Welcome to the Chief Executives and senior managers from
the six big energy companies. We are very glad you have joined
us this morning. Can we start off by giving you a chance to introduce
yourselves and your companies?
Mr Horler: I am Nick Horler; I
am Chief Executive of Scottish Power.
Mr Marchant: I am Ian Marchant,
Chief Executive of Scottish and Southern Energy.
Mr Johnson: I am Guy Johnson,
Director of Regulation at RWE npower.
Mr Macdonald: Jim Macdonald; I
am Commercial Director, E.ON.
Mr Lawrence: Martin Lawrence,
EDF Energy, currently looking after generation and supply.
Mr Bentley: Phil Bentley, Managing
Director of British Gas.
Q2 Chairman: Thank you very much.
Gentlemen, welcome, and thank you for the submissions you have
put forward, which have been circulated to the Committee. If we
can start off on energy prices, which is very pertinent to consumers
and indeed to our economy in our country, I notice that one of
you said in your submissions that there had been "difficult
public relations circumstances" which, given the rise in
prices, is not very surprising! Perhaps as a starter, two of your
companies have announced price cuts, that is Centrica and Scottish
and Southern; and four of you have not. I just wondered whether
the four that have not could explain why that is the case.
Mr Macdonald: Chair, I am happy
to take that, if you are comfortable. I think E.ON was one of
the first, towards the end of last year, to make it clear that
as long as we saw a decrease in the wholesale price going forward,
that we were indeed very optimistic about reducing prices in quarter
one. I think it is fair to say we will still be in that very same
situation, and the optimism from that point of view has increased
as opposed to decreased. However, for very obvious reasons, looking
around this table, I prefer not to go into any more detail than
that but we certainly stand behind our original comment made towards
the end of last year, and we hope to see something soon.
Q3 Chairman: They do say in Yorkshire
that "fine words butter no parsnips" and I wonder if
you could give us some more precise details on when you can expect
prices to come down.
Mr Macdonald: Chairman, I am very
sorry, but, obviously, my competitors here would be delighted
to hear the same news, so if I can ask for your judgment on that
one!
Q4 Chairman: I understand that point
and I wonder if some of your competitors might like to make their
comments!
Mr Johnson: I would make a couple
of points in terms of the work we have done for our vulnerable
customers in 2008, and although obviously there has been a great
focus on absolute pricing, I would remind you that we have, for
example, massively increased, as an industry, our energy efficiency
programme. Our expenditure on that over the next three years is
going to be £3.7 billion. Of that, at least 40 per cent is
for priority group customers, those who are on the main income
benefits or customers who are over seventy. The reality of that
increased investment in energy efficiency is that it has the effect
of reducing energy bills for a typical household by around £300
a year. The second point that I would make linked to that is that
I think all the companies here—and certainly ourselves—have
launched a new social tariff in 2008. That social tariff for us
is specifically directed towards certain households with incomes
of less than £13,500 a year. Again, that has been a major
increase in expenditure and major commitment—not directly,
in terms of prices—but for more than 60,000 of our customers
to move to a reduction of £125 per fuel or £250 if they
are dual fuel customers from the tariffs they would otherwise
pay. Thirdly, we reduced in December our PPM prices by £30,
having reduced—sorry those are our gas PPM prices; and we
reduced our electricity PPM prices to bring them in line with
cash and credit in August. Fourth, we have made a reduction for
our off-gas grid customers. You will be aware from my evidence
of the position in wholesale costs in comparison to pricing levels
over the last two years; but I would comment that there has been
a massive investment in our vulnerable customers as an industry,
and that you will see coming through in 2009—maybe not in
headline pricing cuts, but in the way that I have described.
Q5 Chairman: I think that is a fair
point, Mr Johnson. In terms of your parent company, which is German-based,
how comparable have the prices been in Germany in terms of the
rise and fall?
Mr Johnson: What I have with me—and
I am sure you had as well—is the data from the DECC September
2008 analysis of pricing across Europe. Our average domestic gas
prices in the UK—we rank the lowest; and in terms of average
electricity prices we rank fourth, but we rank, for example, substantially
below Germany.
Q6 Chairman: UK prices you are talking
about!
Mr Johnson: I am talking about
UK in comparison to other countries in the EU.
Q7 Chairman: That is current, is
it?
Mr Johnson: This is December 2008
DECC numbers.
Mr Bentley: Chairman, you referred
to Centrica there, and that is sometimes confusing because British
Gas is the brand that everyone knows here in the UK, and Centrica
is the name of our parent company, but it is a UK-listed parent
company and we were the first to lower prices in 2009; and actually
we were as well, twice in 2007, the first to announce price reductions.
We are the largest buyer of gas here in the UK, and obviously
we all want to see more gas sources brought to the UK to lower
prices further. I just wanted to clarify that Centrica and British
Gas are one and the same.
Mr Horler: Chairman, for completeness,
you asked of the four companies that have yet to move: while I
will not be specific, and therefore maybe not butter your parsnips,
I would say that you are obviously very well aware that two of
our largest competitors have set dates at the point from which
those decreases will take place—and we do not want to lose
any customers and therefore we are likely to move soon.
Mr Lawrence: To complete the circle,
as it were, we are also in the position, and have said publicly,
that we are actively looking at prices and expect to move our
prices soon. Similarly to my colleagues, I do not expect to make
an announcement here because a commercial decision has not been
taken at this point in time, but what I can do is say that we
will move soon.
Q8 Dr Turner: I am particularly prompted
by Jim Macdonald's previous responses. Wholesale prices have been
reduced now for some considerable time, and the lag between wholesale
price reduction and retail price for the customer reduction is
quite considerable, much shorter than the lag between prices going
up. The public is not terribly happy with this; the public has
the perception, rightly or wrongly—and you have the opportunity
to defend yourselves against the perception—that companies
such as yourselves are squirreling away unjustifiable levels of
profit, especially the bonus that you had from Phase 1 of the
European Emissions Trading Scheme, and there was a great deal
of public support for a windfall tax on your companies. Given
that you were so coy about protecting your bottom line and unwilling
to tell us why it is that you cannot reduce your prices now rather
than at some optimistic point in the future, can you give an honest
rebuttal of the call for a windfall tax on your companies?
Mr Macdonald: You have covered
several issues there, and I will try to cover them one at a time,
but if I do miss one, obviously please come back to me. In terms
of the wholesale prices, it is important that we do realise the
increase in wholesale prices that we have seen. If I choose electricity,
gas it would be roughly the same, so if I just choose that! If
we go back to February 2007, which was the last time that prices
came down, it gives us a reasonable pointer to move forward from.
Since February 2007 the wholesale electricity price rose by about
212 per cent to July 2008. During that period of time our prices
rose by 10 per cent, in electricity in that case, and by a further
20 per cent later on—or 16 per cent, should I say—giving
a total of roughly 26 per cent. We protected our residential customers,
and indeed all our customers from that viewpoint, from such a
massive increase to that 212 per cent earlier from that, with
price increases at the time of less than 30 per cent. You are
absolutely correct that we have seen a massive decrease in that
wholesale price; but even to today, if I use the same point of
February 2007, the price of electricity is still 75 per cent ahead
of that point in February 2007, and prices are only 30 per cent
ahead from that point. I do not think anyone is in any way trying
to protect the fact that we have seen a massive decrease in wholesale
price from 212 down to 75; but we have only seen prices rise,
from an E.ON perspective, 30 per cent over that same period. We
have been able to smooth the effect of that wholesale curve in
residential prices. You referred to the fact that Ofgem also looked
at whether prices came down to the same extent after that drop
in wholesale to the same extent that prices go up after a similar
increase. They found that the price movement was very similar
in both cases, from that side; so hopefully that gives some comfort.
I am not trying to be in the least bit coy about prices. The other
point you made that I should refer to—and again we have
given the evidence to Ofgem—is that last year E.ON retail
business within the UK environment made no profit whatsoever from
that; so it is certainly not that we are trying to protect our
bottom line in that context. We do not have a bottom line from
that perspective. However, we did continue, as Mr Johnson said
from an Npower perspective, to increase our social spend. We doubled
that last year. The latest Ofgem review shows that we spent more
per customer than any competitors from that viewpoint; so I do
not think we were in any way coy about trying to protect either
vulnerable customers or indeed the whole of our customer base
when you look at a 212 per cent increase in wholesale price against
the 30 per cent increase in prices. We have seen a dramatic decline.
I was referring back to statements because I was quite rightly
asked by the Chair—two of my competitors have made announcements
regarding pricing; my reference goes back to the fact that we
were actually one of the first to make the announcement that we
were very optimistic that should wholesale prices continue to
come down, we would very much want to reduce our prices for customers.
We do our very best to reduce our prices as soon as we can, but,
gentlemen and ladies, I would ask you—I do not want to give
that information to my competitors today, for very obvious reasons.
Mr Horler: Chairman, you will
have seen that the submission that Scottish Power has put in,
perfectly illustrates this point: it is common practice in the
industry to buy forward, and we buy forward to protect our customers.
Mr Macdonald has perfectly laid out the detail of this; that we
use our buying strength to buy forward. The weighted average cost
of gas is still working through portfolios at the moment—purchase
of gas is still working through a period where in the summer of
last year crude oil was $140 and we were being told by certain
commentators that it might go to $200. We have set purchasing
programmes; we think it is much more important than speculating
the gas market, because our job is to buy gas and protect our
customers to buy gas in that way. The graph we submitted perfectly
illustrates it.
Mr Lawrence: We have seen unprecedented
volatility in the commodity markets over the past periods, and
it is essential that we have been able to protect our customers
from the extreme spikes up and down through the process for this
programme of advanced buying, which is common across the industry.
Q9 Chairman: How long would an advance
contract run for? When you buy in advance, how long do you lock
yourselves in for? How long do you lock yourselves in a price?
Mr Bentley: I think every company
looks at it slightly differently, but if you take it over a one
or two-year period we are all buying forward, especially for this
time of winter where the demand for gas goes up more than four
times. A lot of that gas that we are burning today was bought
in summer when prices were much higher, so you cannot take just
one point in time and then interpolate a pricing decision. If
you take a two-year period, gas prices for example over the two-years'
wholesale markets have gone up by 70 per cent, but prices to the
end customer in British Gas have gone up 11 per cent. When I explain
that to people they do not always get it, but it is all because
of when you buy the gas over a longer period of time. You raised
a different point, Dr Turner, about the windfall taxes. This is
something that is worthy of some discussion around the carbon
allowances and the carbon regime, whereby those companies that
emit the most carbon pollution have indeed been given those permits
free, and they have real value. That has created a very imbalanced
and unusual outcome whereby the more you emit, the more you pollute,
the bigger the windfall; and certainly in British Gas we have
the lowest carbon emissions of any of the companies here; and,
frankly, we are disadvantaged as a consequence of that.
Q10 Chairman: Do you get a share
of that windfall?
Mr Bentley: Well, let me just
give you a number. The emissions of RWE npower across Europe are
150 million tonnes; British Gas is 6 million tonnes; so it is
a fraction of the size. That is the point I am trying to make.
Mr Johnson: Perhaps I can comment
firstly on the specific question—Mr Macdonald talked more
about wholesale electricity prices—if I could talk about
wholesale gas costs. If one starts in January 2007 and looks at
the profile since then, it went up to something like 2.5 times
that level; but it is currently at something like twice that level.
This is in terms of the gas wholesale cost on a pence-per-therm,
one month ahead basis. Over that period we have increased our
prices by 27 per cent; so there is no doubt that over that period,
had we followed wholesale costs we would have more than doubled
our prices and brought them back down again. The reality is that
over that period wholesale gas costs have more than doubled and
are still more than double their January 2007 levels; and over
that period our prices have increased by 27 per cent. One second
point in relation to the question was that Ofgem in its market
report specifically—I looked it up and it was in paragraph
7.17—did not find that prices follow wholesale prices up
quickly but down slowly. I suppose in relation to comments about
investment returns and taxing those returns, I think very much
like Mr Macdonald: our retail business has something like a quarter
of the profitability of two years ago; but in terms of the wider
business, including generation business, we have plans to spend
£1 billion a year each year over the next ten years on investments
in the UK, obviously on investments in renewables, in major offshore
wind farms like Gwnt-y-Mor, which will be 750 megawatts, one of
the largest wind farms in the world, and investments in things
like Staythorpe and Pembroke, very, very efficient new combined
cycle gas turbine plants. The effect of those investments will
obviously help amongst other things to result in a reduction in
our emissions intensity as well as having long-term benefits in
terms of security of supply. Of course, the point about those
investments is that the amount we are investing is vastly more
than we are earning in the UK, and therefore the comments about
windfall tax are perhaps one of the things that is most likely
to cause concern in relation to that kind of level of investment
programme.
Chairman: We will be coming to the question
of investments, Mr Johnson.
Q11 Paddy Tipping: Could I ask Mr
Marchant: I have heard you claim before, last year, that your
tariffs in broad terms were the lowest in the market, and last
week you were able to cut electricity prices by 9 per cent and
gas prices by 4 per cent. Why can you do it and the others cannot?
Mr Marchant: I have frankly got
no idea.
Q12 Paddy Tipping: Neither have consumers—that
is the problem.
Mr Marchant: One of the questions
that occurs to me is why it is the two British quoted companies
have announced first and the four Continental Europeans that have
not. I do not know whether that is significant but it is an interesting
question. To be fair to both Centrica as well as ourselves, we
have a reputation for being first movers in price reductions.
I think our pricing record as a company—I will take any
scrutiny from anybody—I think it stands—I would refute
a number of things in an earlier question, there is no evidence
of lags. Indeed, I can demonstrate objectively that the avoidance
of petrol pump pricing has been in consumers' interests. I can
throw data at you—you know, how long do you want to spend
on it? I have got the data here. The reality is that our pricing
policy as a company will bear any external scrutiny you want to
put on it, and I am sitting here tall. I hope they do not reduce
prices because it means I can win customers, but that is probably
not the right answer for UK plc; so I hope they get off their
backsides and do something in the next few weeks.
Q13 Paddy Tipping: So you have got
off your backside and brought prices down by 9 per cent and 4
per cent.
Mr Marchant: Yes.
Q14 Paddy Tipping: What is the prospect
of further cuts?
Mr Marchant: When I look ahead,
I am concerned that forward wholesale prices are higher, so I
am now talking summer 2010 prices are about 10 per cent higher
than summer 2009 prices; so I am concerned because that does not
feel right, that if the wholesale price continue that we may see
increases. The reality is that I would expect us to see another
round of decreases later this year or early next year—but
at the moment an objective analysis would suggest that is not
possible. That is my best call at the moment. We are seeing the
same in oil: oil prices currently are $46 but if you go out to
2011 you are well over $60; so you are seeing that the short-term
prices are maybe artificially low or being dragged down by the
very negative economic sentiment.
Q15 Anne Main: I would like quite
a brief answer to this question, please, if possible! Basically,
you are all prepared to sit there and justify your pricing structure,
so therefore do you feel the media has got it wrong, because that
is where your consumers are getting their information from; and
whilst you can sit here and give us all the information that you
feel makes what you are doing sound ultimately very reasonable,
it seems that you have not made that argument in the media—so
has the media got it wrong?
Mr Horler: My reflection on this
is that I do not think the industry has done a very good job in
explaining what is a consumer-focused, but potentially quite complicated
subject.
Q16 Anne Main: Have you been asked
to explain?
Mr Horler: I guess you are asking
us to explain. We know ourselves that we need to do more
Q17 Anne Main: It has been raging
in the press. Did you make any attempt to explain?
Mr Horler: Yes. I have worked
in the industry now for twelve years and I worked in retail for
six years before this: I have on a number of times explained things—attempted
to explain that to the media. Many times I have been met with
the response that that is not the story that they want to hear.
Q18 Anne Main: So the media is against
you—
Mr Horler: We know—I know
that we can do better at explaining this because actually it is
a positive story: we are using our size and our strength to buy
forward to protect our customers from a very volatile market.
There are other markets in Europe that do not do that. If you
take the previous two or three months' wholesale price plus a
margin, I would not want to expose my customers to that because
it is a very volatile market.
Q19 Anne Main: Okay, I do not want
all that detail; I just want to know why you have not made your
case. Mr Macdonald, do you feel you could make your case to the
media better, or have you tried to make your case better and the
media is just not wanting to listen?
Mr Macdonald: I think your original
comment that the media has not been carrying the story we are
putting out today says without any shadow of doubt we could have
made our story better. That is something that we need to learn
going forward in that context, and we have to put more effort
behind doing it.
Mr Bentley: There is not a journalist
in the country that has not had this so-called Radiator
Chart from British Gas, which explains exactly what makes up the
£100 bill. I am happy to circulate that. The fact is that
the commodity is £44 out of every £100 of bill; the
metering and transportation costs are going up and up and the
margins—
| 
