Examination of Witnesses (Questions 200-219)
MS SARAH
HARRISON AND
MR CHARLES
HARGREAVES
10 DECEMBER 2008
Q200 Chairman: In pursuance of your
duty to the customers as a collective group, and the analysis
that you have just told us about and the findings, do you look
company by company before you aggregate your findings on an industry-wide
basis? I am not asking you to name and shame, nor I think would
you, any particular companies but is there a spectrum of performance,
particularly with reference to the energy poor, in terms of the
companies who supply energy to the United Kingdom consumer. There
are some who lay out their stall saying "We are going to
take this very seriously. This is what we are doing", a whole
raft of things, and others might say "Yes, we do what we
have to do, which is CERT, but perhaps we do not do as much as
others might do." Do you form a view? If one said to you
could you produce a league table of the best and the worst and
illustrate some of the characteristics of the differences between
them, is that something your analysis would be able to produce?
Ms Harrison: We would fall short
of producing the league table but I would say we do see it, and
indeed we do, as very important to shine a light on what the companies
are doing in this area. The reason for that is the costs that
support many of the companies' initiatives are borne by customers
and therefore we think it is important that is made transparent.
To give you an example, a couple of years ago we produced our
first social monitoring report which set out the breadth of measures
that companies were pursuing and tried to quantify the value that
that was bringing in monetary terms rather than outcomes. Government
of course took a decision earlier this year to require companies
to step up their spend on social programmes by £225 million
over the next period until 2011 and asked Ofgem to continue that
reporting role under this new scheme.
Q201 Chairman: I want to ask you
something. I do not know whether you were here for the earlier
exchanges but I was trying to establish with Mr Lane from Centrica
how much of their obligations, if you like the costs of doing
things they have to do like CERT, EEC and so on, they actually
got back from the customer. I am afraid he was unable to provide
a clear answer for his company what it cost them and how much
they got back, yet I note from your own evidence you say there
are some Defra figures which show that CERT and the equivalent
adds £38 a year to the average customer's domestic bill.
You could not have invented that figure and it must have come
from an accumulation of data. Do the utilities supply either to
Defra or to you or to the new department what they are actually
spending on doing this in terms of meeting their obligations?
Ms Harrison: £38 pounds is
a figure from Defra. I might ask my colleague to comment on the
genesis of this.
Q202 Chairman: It was in your evidence.
Ms Harrison: It is absolutely
a figure and it is a cost to householders and of course that will
increase with the new enhanced CERT and the new Community Energy
Savings Programme. In terms of the social programmes that suppliers
produce, the social tariffs and various advice services, what
we try to do in the report I was referring to earlier is put a
monetary value on those. I will have to confirm this to the Committee
but from our analysis at the time we thought the value of that,
in our first report, equated to roughly just over £1 per
customer.
Q203 Chairman: The reason I am asking
that question is as part of his attempt to answer my question
Mr Lane drew our attention to the fact that we might see Centrica
as an entity but that he represented the retail part of it and
there is a wholesale part of it. I do not know, and I wish he
was here to answer so I will choose my words carefully, whether
he was trying to say that from the point of view of the profitability
of the retail sector perhaps there was not more to give. Lynne
Jones was asking the question that as a big company could he take
some more strain, could he pay some more in terms of assisting
the process of dealing with fuel poverty and we sadly did not
get to an answer. When you look, as the regulator, at what people
are paying, both in terms of EEC and then subsequently CERT and
other measures, do you assess the potential, in other words are
companies paying what you deem to be a "fair" contribution
towards the promotion of energy saving measures? If we were to
sit here and say that companies ought to be doing more, could
you tell us that they are doing enough, doing more than they should
be or are not doing as much as they could be in monetary terms?
Ms Harrison: I think the answer
to that is no; that is not something we would look at or indeed
judge. What we think is important is they are transparent to customers
and to householders on the elements of the typical energy bill
going towards contributions to these schemes. They bring benefit
in terms of increased enhanced energy efficiency measures, if
we are talking about CERT, into the home but that is one of the
reasons why we also take the view that schemes such as CERT, given
the fact that it is a cost being borne by the customer, ought
to continue to have a priority group element, in other words fuel
poverty and its consideration ought to continue to be a feature
of those schemes.
Q204 Chairman: Part of the public's
concern is we have seen in the energy industry as a whole, at
a time of rising energy raw material prices and rising gas and
oil prices, that by the public's appreciation some of the energy
companies appear to have made very substantial increases in their
overall levels of profitability whilst at the same time the pain
is being taken by customers who are having to pay substantially
more for the product of energy. Therefore people will not unnaturally
ask the question if they are making all this extra money why can
they not help us bear some of the pain. Questions of windfall
taxes and other devices have been discussed as a way of evening
things out. In this context the question would be: is there more
potential within those companies who have complete control over
the supply chain to be doing more to help the customer cope with
higher energy prices by doing more over and above, for example,
their current obligations under CERT in terms of energy efficiency
programmes specifically targeted towards the energy poor?
Ms Harrison: First of all, on
my theme of transparency, it is important that households and
customers are aware of how the costs are attributed and borne
which is why, coming back to our energy supply probe, one of our
recommendations for remedies is that companies should produce
more financial information and do more regular financial reporting
so that it is much clearer how costs are being transferred through
the business. I come back again to my second point which is that
it is not, in our view, for Ofgem to judge what contribution different
businesses should make to meeting these objectives but if there
are costs that are being borne, and indeed they are ultimately
being borne by customers, then it is important that they are,
first of all, as efficiently incurred as possible and, then the
second question that raises, there comes at point at which are
these costs and measures that should be funded through a market
mechanism and therefore through customers or is it more progressive
to look at approaches to funding support through the taxation
process. That is a slightly fundamental debate that sits behind
some of this.
Q205 Chairman: As a proportion of
the energy bill, do you have a measure of reasonableness of the
costs that the consumer should bear meeting programmes for energy
efficiency which is determined by the government?
Ms Harrison: No, we do not have
a view on that figure on that proportion.
Q206 Lynne Jones: You did say a few
moments ago that the Community Energy Saving Programme is going
to add on to the £38, which is the average cost reckoned
by Defra for charging back onto the fuel bills. Are you not tacitly
assuming that it is justifiable for the energy companies to actually
recharge the expenditure under that heading to their customers?
Ms Harrison: That is a judgment
for the energy companies. Coming back on that, certainly our assessment
at the moment is it is about £38 cost on the customer's bill
for the existing schemes.
Q207 Lynne Jones: You said it was
not your assessment but Defra's?
Ms Harrison: It is Defra's analysis
that we have reported in our evidence to you. I am aware certainly
that when the energy suppliers agreed to the CESP and enhanced
CERT arrangements it is a matter for them, and between them and
government, quite what and how any of those additional costs would
be fed back through to customers. If the arrangements as they
exist at the moment of £38, and if there are going to be
further enhancements made to those schemes, then it is a fair
assumption that those additional costs will be passed on to customers.
Whether there is any separate arrangement that exists between
energy suppliers and the government as part of securing those
enhancements, those are questions best put to either businesses
or to government itself.
Q208 Lynne Jones: I am surprised
you say it is a fair assumption. I would have thought you would
know how the £38 is derived. I would like to know from somebody,
either you or Defra, where they got those figures from. Surely
your market analysis should tell you to what extent the energy
companies are making excessive profits and where it would be reasonable,
if they are making excessive profits, to actually fund these kinds
of schemes themselves.
Mr Hargreaves: On the £38
figure itself, as part of the impact assessment for the CERT scheme
Defra put in place some analysis to evaluate the numbers of measures
the major suppliers would be expected to install throughout three
years of the CERT programme, the cost that would be expected to
be borne by those suppliers for those measures. Those measures
that are installed in the priority group were expected to be paid
in full by the suppliers; to those that were able to make a contribution
it would be funded at about the 50% mark. They did the analysis
and came out with a figure of £38 per customer per annum
over the three years of the programme. If I could go back a step
and say that Defra have undertaken a similar analysis for the
EEC1 and EEC2 programme. Following those programmes they have
asked someone to undertake independent research of those programmes,
and their independent review of those programmes have suggested
that suppliers have been able to comply with their obligations
at roughly 20% below the cost estimated by Defra in their impact
assessment for the programmes.
Q209 Lynne Jones: Is anybody assessing
whether it is fair to charge the customers for the cost of the
programmes? Earlier on, Ms Harrison, you said something about
we would like to get more information from the energy companies.
I was really surprised at that because I thought you had the right
to demand all the information that you would need in order to
find out whether the energy companies were acting fairly and in
as competitive a way as possible in terms of the costs that they
charge their customers.
Ms Harrison: On that point we
do have powers that we use in our energy supply probe exactly
to get all the detailed information that we need from companies
so we absolutely have those powers to gather that. My point is
in relation in our probe remedy we think there is scope for more
financial information to be published, to be made publicly available,
and that is what we propose so it is much more transparent and
obvious how costs are actually being borne and shared across the
different aspects of the energy businesses.
Q210 Lynne Jones: This is information
that you have that you want to be made public.
Ms Harrison: What we are doing
now is we are working with companies to look at what additional
information should be put into the public domain in terms of public
reporting on what the different costs are as they flow across
the businesses.
Q211 Lynne Jones: You have all the
information but you blithely said that it is reasonable for them
to pass on the costs of the CESP onto their customers and I am
concerned about that. Are you doing everything you possibly can
to ensure that the energy companies are behaving in a fair way
towards their customers, not just as between different categories
of customers, which is crucial, but also overall?
Ms Harrison: I can absolutely
assure you on that.
Q212 Lynne Jones: Again, you would
say that.
Ms Harrison: Let me explain what
I mean. One of the principles that sit underlying our energy probe
and the recommendations we are making has been to look very forensically
at what the different tariffs are, for example what different
energy suppliers are charging and are we satisfied that they are
reflecting the costs that underlie them. As part of that process
we use powers that are available to us under the Enterprise Act
to gather tremendous amounts of information in order to be able
to get under the skin of this. That is not something using those
powers that we do on a routine basis, although we do routinely
monitor and look at the market. Our judgment in relation to our
energy probe on that is that we think in some respects the prices
that have been charged by the suppliers to some customers are
unfair in the sense that the differences between one set of tariffs
and another is not sufficiently justified by the cost, which is
precisely why we are looking at and have posed the question and
are now taking the responses from consultation in judging what
next steps to take as to whether or not there are additional actions
that need to be taken to make sure those prices are fairly charged.
Q213 Lynne Jones: It has taken a
long time, has it not? The extra costs being charged to pre-payment
meter customers, for example, has been an issue that, certainly
in this place, has been raised for years. Why has it taken Ofgem
so long to get to grips with these issues?
Ms Harrison: There are differences
in the costs to serve different groups of customers. Pre-payment
meter customers cost more to serve. Our concern is whether that
differential has opened up, for example between a direct debit
customer.
Q214 Chairman: The question Ms Jones
asked is why has it taken so long not what is the mechanism of
the tariff.
Ms Harrison: My point is the differential
that has opened up has widened over the course of this last year.
What prompted our probe was seeing a much more widening differential
between those tariffs which prompted us to look at this and ask
is that justified or is that beyond cost. What we found on pre-payment
meters, and what our evidence and our analysis in the probe shows,
is that while on average those differences are broadly reflective
of cost they were not for some suppliers. There I would cite in
particular a couple of suppliers who are outliers, and that was
British Gas and nPower. It has been good to see the very recent
announcements by both those companies to take steps to reduce
those pre-payment charges and bring them back into line. I am
not sitting here and saying that we consider that sort of action
necessarily sufficient. The Authority of Ofgem will have to judge,
on the basis of those actions and the responses to our probe,
what further steps, if any, we think are necessary to ensure that
remains the case going forward.
Q215 Lynne Jones: I have a letter
here from a constituent dated October 2008 informing him that
from August 2008 they will have to raise gas prices by 29.2% and
electricity prices by 19.2% on average. Is that something that
is permissible? Do you allow this kind of retrospective pricing
and is there anything you can do about it?
Ms Harrison: What is important
is that the customer is notified of any price change. What is
also important is they have an opportunity to decide whether or
not they want to accept or remain with that supplier and therefore
accept that price change or to switch to another supplier. There
are specific rules in the licences to make sure that protection
is there for customers.
Q216 Lynne Jones: The only answer
is for this gentleman to switch his supplier. There is nothing
that can be done about increasing prices retrospectively.
Ms Harrison: The point is from
the customer's perspective if he or she has decided to remain
with that supplier then it is only at that point that those charges
would be applied. The customer still has the right to make that
choice before those charges are applied.
Q217 Lynne Jones: It is not a very
happy choice to have to make. What is your view on stepped prices?
There has been a lot of concern about the fact that low energy
users, who are generally people on lower incomes, maybe they should
be using more, are charged less than higher energy users. Also,
in terms of discouraging affluent people from wasting energy,
should there not be a stepped price so that the more you use the
more expensive it becomes?
Ms Harrison: This is an interesting
issue. If I can come back for a moment to pre-paid meters and
then move on. One of the things we have been concerned about in
relation to pre-payment meter charges is the extent to which there
are higher premiums for greater consumption. From a fuel poverty
perspective because it can also be the case that customers who
are paying by pre-payment meters and maybe consuming more could
be living in fuel poor households and be in poorly insulated housing.
We are concerned about the social aspects of that and therefore
want to see whether there is any scope for that to be addressed.
Q218 Lynne Jones: They presumably
could apply to go on a social tariff.
Ms Harrison: Indeed they could.
Any specific case we would always encourage customers to talk
to an energy supplier about whether that is the best tariff for
them. The other aspect of this is the debate around rising block
tariffs which fundamentally would reverse the arrangements as
they exist at the moment. This is a very interesting area and
it is one that Ofgem is actually looking at. We are doing some
work now looking at rising block tariffs, looking also at the
incentives more broadly on energy suppliers to promote energy
efficiency from a tariff perspective and we will be setting out
some of the output of that work in the spring. The only general
comment I would make on that in relation to fuel poverty is the
same point, that it may be that higher consumption is being experienced
in households where perhaps there is under-occupancy or there
is poor insulation which could be contributing to why the consumption
is high so there are some possible unintended consequences that
we need to consider.
Q219 Chairman: To be quite honest
I think I am struggling to understand what a rising block tariff
is. Electricity tariffs are quite complicated to understand if
you have to look at a plethora of information. It is a bit like
mobile phone charges; it is quite difficult to work out what the
best buy is. You have to hope that some website somewhere will
help you. Let me ask, without getting into a detailed discussion,
this inquiry is focusing on those who are fuel poor. By and large
they are people who are at the margins of life in the sense that
their incomes are very strained, they may not always be living
in the best of circumstances, they might, for example, have large
households. There might be all kinds of social and personal characteristics
that make life very difficult for these people. For them to be
expected to carry out the kind of detailed analysis which they
might usefully do but may not be able to do, simply because they
are so busy doing other things, to decide what is the optimum
purchase either of their power supplies or to access, as we discussed
with our earlier witnesses, information on energy efficiency measures,
and I think you alluded to it in your own observations, they well
be missing out on things that could make life easier for them.
Number one, as the regulator have you done any work on the awareness
of those people who are in the category of fuel poor as to how
much they are aware of all the help that is available and, secondly,
what are the barriers to accessing that help?
Ms Harrison: Yes, we have. We
have looked, in terms of the customer research, at the experience
that customers have in making choices in the energy market. There
are real issues there. Perhaps one of the most significant is
the risk, or the fear of risk, in making the wrong decision and
putting the customer in a worse position. Again this is something
we really have looked at in the context of the energy probe. Some
of our proposed remedies are really around trying to make the
customer experience a simpler one in terms of making choices in
the energy market. For example, one of our proposals is to require
an annual statement from a supplier to their customer about the
amount of energy they use and consume and the tariff they are
on so it gives you a very simple way of then subsequently comparing
that with other deals that may be available. The other angle we
are trying to pursue through the probe is to look at the important
role that switching sites now plays in the energy market and other
markets as well. There we are very interested to get a dialogue
going with Consumer Focus, who own the code of practice that governs
the switching providers in this market, to see whether there are
ways in which switching sites can provide simpler and easier information
and also information on switching not just over the internet but
by telephone which is sometimes the only way of making the choice.
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