Examination of Witnesses (Questions 1-71)
Q1 Chair: Good
morning and welcome to this meeting of the Committee. Thank you
for making the time to come in. You will be aware that there is
a great deal of interest in this session, particularly from consumers.
Could I start by asking all of you whether you accept Ofgem's
statement that it now has evidence that energy prices have tended
to rise in response to wholesale cost increases more quickly than
they have fallen with decreases in wholesale costs?
Sara Vaughan: Shall
I make a start on that? I think if you look at what Ofgem says,
they say that there is "some evidence" that prices move
in that way. It is not a definitive conclusion. I think that whether
they do or not depends on some of the assumptions that you make
around the conditions that you apply when you do your modelling.
For example, they are applying a flat 18-month hedge in doing
their modelling, which is not necessarily the length of hedge
that each of us at this table will apply. I think also that they
suggest that there are some plausible reasons why, if that were
the case, that might be the case and that this does not necessarily
give rise to consumer harm. If you like, there are two halves
of their statement, and they suggest that consumer harm isn't
necessarily resulting as a consequence of this.
Also, I think if you take a step back from itand
I am not an economist, I am a lawyer; forgive me for thatI
think you have to look at the actual end result of all of this
and whether or not prices are going up faster than they are coming
down or going down faster than they are coming up; what the end
result is. If you make it as far as appendix 9 of Ofgem's document
where they actually look at the profitability of the companies,
you will see that they find that, over the period from 2005 to
2010, companies are only making a margin of 1.6%, which is well
below the margin that they are seeing in supermarkets and other
retailers. So it seems to me that those are the points that one
should consider when looking at the suggestion that Ofgem makes.
Could I pick up on that, because this operates at a number of
levels: so firstly, is the analysis accurate? Does it show that
prices are going up more quickly than they are coming down? As
E.ON said, that is not clear cut at all because they have made
a number of assumptions.
Secondly, even if they did, are there valid explanations
for why that might be? The answer is most certainly, yes, because
we all incur significant costs in changing our prices. Supposing
it costs £1 to write to each customer, that is £4 million
possibly in our case. Companies have a motivation to minimise
their costs to the benefit of customers by not changing prices
too quickly. If you are in an environmentand there is evidence
we have had more recentlywhere wholesale prices go up faster
than they come down, then you might expect the retail price movements
to follow that. In addition, if you are in an environment where
there is continuous inflation, which of course we have, that is
also an explanation for why you might find that prices go up more
often than they go down. Because you are generally expecting price
rises, and the cost minimising thing to do, in terms of how often
you write to customers, drives you to that strategy. That is the
second point. The third point is: even if it is true that prices
did go up faster than they come down, which we do not accept,
then that doesn't suggest in any way that the market is not competitive
because for that you would need to look at profits over a sustained
Q2 Chair: Ofgem
did not do that, obviously?
Sara Vaughan: What
they did look at, as I said, in appendix 9 of volume 2 of the
document; the profits that they did look at, their finding was
that the profits were rather below what they would expect.
Yes, that is true. Yes, for the period that they did look at.
Can I come back to the point of the absolute level of profits?
Our retail margin has been between 1% and 2% consistently over
the past two or three years. We don't believe that that is an
unreasonable margin. We believe that is a very tight margin to
be operating at, particularly for a business that has huge investment
in smart metering, and then to deliver the Government's objectives
on energy efficiency and sustainability
Chair: My question was
not whether your margins are sufficient. I said: do you accept
Ofgem's statement. Mr Campbell is answering. Do you accept the
statement or not?
No, I don't believe that the evidence provided would justify the
statement. I think there are some questions about the analysis
and the implications of the finding, even if it was true, about
whether it is a competitive market.
The time analysis: we have gone through and looked at our own
numbersbecause clearly we have access to those and don't
have access to competitors' costs, or whateverand we can
find no evidence in our own numbers. Indeed, as you may be aware,
during the period that Ofgem were making their remarks, we were
holding our prices constant over the winter and had not increased
our prices as a result of our winter price freeze guarantee. So
we don't accept the analysis. I accept that there is a version
of the analysis that Ofgem has carried out, which may lead them
to that conclusion, but it is still very early days to make it
as a sweeping statement of generality.
I think there is another point that is really quite unfortunate,
which is, as E.ON pointed out, the statements in the analysis
document itself that Ofgem produced are very equivocal. It acknowledges
that its conclusions are based on certain assumptions, and it
also acknowledges that there are no clear implications for consumer
harm, whereas the press release that Ofgem put out around that
point very much firmed up the statement and made a very definitive
conclusion that this was evidence that competition was weak. We
don't think that you can jump from the analysis in the document
to the very hard statement that is made in the press release.
It is a great leap that is not justified by the evidence.
We do not accept the statement at all. Ofgem's analysis was heavily
caveated and they said at best it made a suggestion. There are
two very deep flaws in the analysis. One is, they ignored the
significant reductions in consumption over the period of time
and the fact there was significant fixed costs in the business,
which have risen, and that means the analysis is fundamentally
flawed. One of the other key assumptions was, when you go through
the detail of it, they are essentially assuming that these businesses
are loss-making and should continue to be loss-making. People
have mentioned a number of other assumptions that are made in
there. Basically, the analysis is flawed.
Q3 Barry Gardiner:
Scottish and Southern are, of course, the first people so far
this morning to say that. Listening to the structure of your argument,
you haven't done yourselves much good with the public, have you?
Because the structure of your argument was, first of all, it is
very complicated and it depends what statistical modelling you
use. Then, if it were to be the case that Ofgem were right, then
there might be good reasons for it. Then, ultimately, to deflect
from, "There might be good reasons for it" to saying,
"Actually, we are not making very much money and, therefore,
you really ought to feel sorry for us. Even if they were right
in the first place, then it would all be justified by the fact
that we are not making very much money". That might be because
you are not very good businesses. So the whole structure of your
argument is really, really discomfiting for a member of the public.
You have come in and you've said, "Actually,
it is all a load of BS", but why is it that you guys aren't
proving that they are wrong? You haven't come out and shown for
this reason, this reason, this reason and this reason this analysis
was wrong and these are the reasons why they have not gone up
quicker than they have come down.
Phil Bentley: I
am sorry I was late, Chairman, to the Committee. Obviously, Kate
and Will had an easier journey here than I had this morning.
I think we have to step back and understand a few
facts. Firstly, individual companies do not see the returns of
the other companies, so only Ofgem has the data on all six. We
only have the data, for example, on British Gas, so I cannot comment
on anybody else other than British Gas. What I can say, though,
on British Gasand the facts are absolutely proven hereif
we take last year, we lowered prices at the beginning of the year.
Prices only went up to customers at the very end of December.
In that time, our margins halved, so our profits were down. Prior
to that, we have had 18 months of lower prices. We have had 18
months of lower prices such that prices today are still lower
than they were in 2008. We can show all the analysis to Ofgem
for our books. We cannot show them for the rest of the industry,
and I do not think it is right that we should share with the rest
of the industry. The ERA, the spokesbody for the industry, is
doing its own analysis and will try and refute through facts,
but all I can tell you is our margins were 4% in the second half
of last year when wholesale prices were rising, which were half
what they were in the first half. So the facts are
Q4 Barry Gardiner:
Mr Bentley, you are addressing the issue of whether there might
have been consumer harm. You are not answering the Chairman's
question, which is: do you accept that Ofgem is right to say that
they have gone up faster than they have come down?
Phil Bentley: No,
absolutely not, and all the data would show that was the case.
If we take even 2008, we had had a tripling of wholesale prices
through 2008 and it was not until August that prices had to go
up. So there was a cushioning effect before consumers saw the
impact of higher prices. We would absolutely stand by the assertion
that, within our numbers, there is no evidence whatsoever for
the assumption that prices go up faster than they fall. That is
why prices have been falling for the last two years and only went
up at the very end of the year in December last year.
Q5 Dr Lee: Good
morning, everyone. Yesterday during the Energy Bill debate, a
colleague of mine made the assertion that energy prices in this
country were higher on average than in Europe. I notice in the
submission from Scottish and Southern that we are the fifth lowest
in the EU, 15 according to them in terms of domestic electricity
prices. The first question is: who is better than us in terms
of who is cheaper? Secondly, are we more expensive here? I don't
know what the answer to that question is.
Phil Bentley: I
have a chart here that is based on DECC data. This is based on
gas prices. Who is more expensive than the UK? Poland, the Czech
Republic, France, Belgium, Spain, Portugal, Germany, Ireland,
Greece, Austria, Italy, Netherlands, Denmark, Sweden. Who is cheaper
than the UK? Slovakia, Luxembourg, Lithuania, Hungary, Bulgaria,
Estonia, Finland and Romania. Those tend to be countries who are
former Eastern Soviet Bloc countries or behind the Iron Curtain
where energy prices are subsidised by the state. In the free market
EU 15, the UK has the lowest gas prices and has consistently had
the lowest gas prices since competition began. Those are DECC
data, not industry data.
Sara Vaughan: I
think there is another point that we can look at here, which is:
if you look at prices between 1990 and 2005, so after the industry
was privatised, they actually look pretty flat in real terms.
In 2004 there was a shift that happened, which was that we became
a net importer of gas. What that means is that since then we have
been subject to the world market in gas and, effectively, we are
a price taker, not a price maker. We are also subject to world
prices on coal, and gas obviously feeds in also to the price for
electricity through power stations.
To pick up on the point that Mr Gardiner was making
earlier, I think we haven't been as good as we could have been
at explaining that, at explaining the shift that there has been
in the market and explaining the impact that has had on prices.
We are getting bettersorry, we are trying to get betterbut
I don't think we can be complacent about the way that we do it.
Certainly, from an E.ON perspective, we are trying to explain
things further. We are trying to go out and not just do it in
the usual way of, "Here is a press release from Ofgem. Here
is a press release from E.ON. Let's play the battle of the press
releases". What we are trying to do is talk to people, real
people, customers of ours, more on a direct basis, whether we
are doing it online through blogs and that sort of thing, or face-to-face.
One of the things that I did last year was to go
out and do some town hall meetings in schools, in gymnasiums and
in small rooms in football stadia, and talk to our customers and
try to understand what the issues were that were worrying them
and try and give them some answers, both about how things can
be made better for them but also about why they are facing what
they are facing and why prices are going up.
The other point, as well as world markets, is obviously
the targets that we have signed up to. We talked about this in
another inquiry that we had before this Committee around the 2020
renewables target and the increased costs that that imposes on
all of our customers, and also the decarbonisation targets. There
is a lot out there. There is a lot of data to understand about
what the impacts are on prices and we are trying very hard to
get better at it, but I am not complacent about it, and so I take
your comment and I will go back to the office and we will try
Q6 Dr Lee: In
terms of electricity prices, yesterday we had our first session
on the proposed North Sea supergrid. Have you done any analysis
in terms of whether that will lead to a lower electricity price
over a period of time or not?
By the supergrid do you mean the links into Scandinavia, Norway
and things like that?
Dr Lee: Yes, and down to Munich and beyond.
I suspect more interconnection will provide greater security of
supply and potentially lower costs, because you may not need as
much reserve plant. Particularly if in this country we have a
strategy of going for more and more wind, which is more interruptible,
if you can link into economies such as Norway, where they have
a great deal of hydro, you will be able to maybe balance out the
peaks and troughs of the wind with some of their hydro. What the
ultimate costs of building that supergrid, versus building additional
thermal capacity to provide you with security of supply and to
flatten out the load, I don't know. I think it is a very interesting
area to look at and certainly something that we will be looking
at, as part of interconnection to Shetland, and places like that,
that we will be looking at and interconnection into some of the
offshore wind farms that we are planning to build off the north
The other thing that will determine the future cost of electricity,
of course, is what our generation mix looks like. At the moment,
we have fossil plant that is dependent on input costs, the costs
of which are not under our own control. It is world markets in
coal and gas that feed the input costs. We have about 20% of nuclear,
which is a different cost component. So quite what the generation
mix is going to look like is going to also determine what the
costs are going forward as well.
Q7 Dr Lee: Do
you think if we became a net exporter of energypart of
the selling point for the supergrid is that we could export the
wind farm that Mr Phillips-Davies was referring to; the wind energydoes
that lead to lower prices in the same way that in Norway, for
instance, their electricity prices are historically cheaper because
they generate it themselves?
I think the point that Alistair made around trying to manage the
volatilities is what is critical. If we do have a very large wind
portfolio in this country, when the wind is blowing hard and there
is an excess in the UK, then there will be opportunity to export
to other countries to fill up their gaps as well.
Q8 Dr Lee: Would
that lead to lower prices?
Phil Bentley: In
theory, you could be right but I think we have to be realistic
because there is no way we are going to be an exporter, given
the demands that we have in terms of replacing coal that is going
off; the need to build new nuclear; the fact that we have now
taxed UK North Sea gas, one of the highest taxations prevailing
in the world. There is no way we are going to be a net exporter
of energy. We are going to be an importer.
Sara Vaughan: Indeed,
if we look at the Committee on Climate Change, the graphs and
predictions that it is putting forward, if we are to decarbonise
the economy the best way we can do that is by moving to greater
use of electricity. Both they, and the Government's own modelling,
are looking at around a doubling of electricity use by 2050. I
think on that basis you have to support the point that Centrica
is making that the chances of us being able to export must be
I think further integration between the UK and Europe will be
really important as part of the renewables agenda. I think it
will increase competition. I think it will increase trading and
liquidity across European markets rather than the UK, being an
island. I think it ties in very well with the UK's policies on
I think we also need to bear in mind the trends in the extent
to which the energy industry delivers social and environmental
obligations. So, if we look at the growth in expenditure on energy
efficiency measures, for example, it has gone from about 200 million
a year in 2002 to about 1,200 million a year currently. When we
move into the next phase of the energy company obligation, which
of course is part of the Energy Bill, it appears that that level
of spend may go up further. If we look more particularly at the
social tariff support, where, up until April this year, we had
a voluntary agreement around the support of vulnerable customers
through preferential tariffs, the first year of the Warm Homes
Discountthe mandatory obligationis 67% higher than
the last year of the voluntary agreement, and that too goes up
every year. So I think we need to bear in mind that the scale
and scope of these kinds of obligations is increasing all the
time and is set to increase further.
Q9 Ian Lavery:
Getting back to the role of Ofgem, there has been a lot of criticism
focused on Ofgem from industry. In particular, Centrica say that
Ofgem has produced a selective and incomplete analysis of the
evidence on consumer harm. They go on to cite a number of reasons.
What role does Ofgem have to play in helping to build consumer
trust in the market?
Phil Bentley: The
point, for example, we questioned was on switching data. Ofgem
had said that only 40% had switched. Well, we have already lost
60% of the market and actually we probably lost more than 80%
and won some back, so that would be an area where we simply do
not agree with what the data say. I think for us we would rather
work in collaboration with Ofgem and with consumer groups. This
is about the Retail Market Review. We fundamentally welcome things
like transparency, openness, choice and customer innovation. What
we don't welcome is forcing a one-size-fits-all that we think
will have detriment to customers, and I don't think we are the
only ones saying that.
As for what we would say to Ofgem, we have had rhetoric
of the regulator saying, "We have given them a left hook
and a right hook and now we are going to give them a beating".
That to me is not symptomatic of a relationship with industry
that is building trust in the eyes of the consumer. We would much
rather we sit down with the regulator and consumer groups and
say, "Look, what problem are you trying to fix? Is it switching?"
The UK has the highest switching rates of any market in Western
Europe; 740,000 people switched per month in the fourth quarter
of last year. Is it prices? Well, no, because we have addressed
prices and we have said that UK prices are the lowest in the EU
15 for gas. So what is the fundamental issue we are trying to
address? If we can understand that, working with the industry,
I think we can get to a far better result for customers than currently
we look to be headed towards.
Sara Vaughan: I
think there is a great deal of concern around the way that the
probe was presented; some of the rhetoric at the time, the suggestions
in some of the radio interviews, for example, that companies wereand
I have a quote here"making a great deal for themselves".
Then, as I say, if you managed to wade through to the ninth appendix
in the second volume, you would actually find that the truth of
the matter was very far from that. Equally, the figures around
some 60% of customers are disengaged; we do not recognise those
figures either. They are at odds with our own experience. They
are at odds with Ofgem's own figures at the time of the probe
a couple of years ago, when Ofgem was saying at the time that
around 75% of the market had switched suppliers. Certainly, in
our own ex-incumbent regions the facts show that at most 20% to
25% of customers have not switched.
I think there is a real underlying problem here which
is: RWE referred to the Warm Homes Discount. One of the things
that the Government is doing is relying on energy suppliers to
be the agent of government to deliver some of these decarbonisation
measures, and go into people's homes, talk to them and fit the
insulation that people need in order to make their homes warmer
so they are able to spend less on energy. If all we are doing
is building up an increasing climate of distrust around energy
suppliersand I have already said that I don't think we
are good enough ourselves at dealing with this properlyit
is steepening the incline on the curve or the hill that we have
to climb. I really think that we need to change that relationship
to get to one that looks more like the sort of relationship that
we want to have with our customers, which is one of a trusted
partnership so customers know that what we are trying to do is
to help them to deal with some of the unavoidable facts that are
coming down the road towards them. That is where we would like
to move to and I don't think that this latest debate is helping.
Can I build on that because we have an extremely aggressive and
exciting programme ahead of us around smart metering, which is
going to require us to put in 46 million meters into every single
home in the country? That is only going to be done successfully
if we get the level of customer engagement that means that they
want to have this to happen to them so they can take control of
their energy consumption. To use a phrase that is used elsewhere
in this House, we are all in this together. We have to work together
with yourselves, with Ofgem and with the consumer groups, to try
and engage our customers.
You asked about the comments that Ofgem has made.
We don't think it is very helpful that, for example, they are
referring to compliance obligations as evidence of bad behaviour
when actually the investigation is still ongoing. At this stage
no conclusions have been reached yet. So we do think we need to
work together much more effectively and efficiently.
I think Ofgem are in a very powerful position and I guess there
is a danger that their statements become a self-fulfilling prophecy.
I do not need to repeat those comments. We are not afraid of challenge
and ideas, but I think the regulatory framework has to be stable.
It has to encourage participation from us and from customers because
we have a lot of investment in the UK, not just in retail but
across the whole chain. I think the positioning statements that
Ofgem make have to be of that mind; they are a powerful and influential
voice in the market.
That is not to say that there isn't a role for Ofgem. Ofgem's
Consumer Firstsorry, I know they are under review, but
that is not what I meant. Ofgem's Consumer First review fleshed
out some interesting points. So, for example, customers felt there
was a lack of a comparison mechanism for them to compare tariffs
and a lack of a benchmark so they could compare their current
tariff with the suppliers' alternative tariffs. In fact, the proposals
that Ofgem implemented as part of its probe already deal with
those issues. On bills and annual statements we already put the
annual cost of the customer's current tariff. We also provide
a comparison to the direct debit standard tariff in our annual
statements. It was clear from Ofgem Consumer First that customers
were looking for more education from Ofgem to help them understand
the market better, and I think there is a role so that Ofgem could
do more there.
Secondly, there was a great call for Ofgem to run
a switching site as a trusted switching site by customers. Maybe
Ofgem should look at that more seriously. Also, a key theme that
Ofgem's opinion researchers put to it was that it should promote
an understanding by customers now that PPM prices are not more
expensive than standard prices, which was still a common misconception.
I think it is a misconception held more widely as well. So there
is a great role for Ofgem in promoting an understanding of what
already exists for helping customers make comparisons and helping
customers understand the market and get a good deal.
Q10 Ian Lavery:
Ofgem have stated clearly that if there is any industry opposition
then they could refer it to the Competition Commission. Mr Bentley
mentioned before that he would like to work in collaborationI
think those were his wordswith Ofgem. I think it was Mr
Lawrence who said we are all in this together. I am not sure if
that is the case, and I would not subscribe to that view politically
or in this room on this issue. There seems to be a huge problem
in terms of industrial relations or the relationship between the
industry and Ofgem. This Committee was wondering: how can you
work together to take this relationship forward? It is interesting
to hear Mr Mannering telling Ofgem exactly what they should be
doing, but I was wondering whether it would be Ofgem that should
be telling the industry what they should be doing.
Phil Bentley: I
think if you look back, the genesis of this Retail Market Review
was to look at the probe that was done in 2008, and have all those
recommendations been implemented? The truth is, sadly, not all
companies have implemented all the recommendations. That would
have been something that we would welcome Ofgem being pretty robust
about. It is quite interesting and topical that, yesterday in
Guildford Crown Court, it took Trading Standards to actually take
action against mis-selling. There are clear rules on how selling
should be done on the doorstep and Ofgem should be more vocal,
in my view, on how that should be done by the industry, so I think
there are opportunities for Ofgem.
This issue, though, aroundwe talked about
itthe single tariff, is the nub of these new recommendations.
You can have any tariff as long as it is a single tariff. You
can't have a green tariff; you can't have a smart meter tariff.
These are big issues, because if you can't have a smart meter
tariff then the benefits of the Government's case for the rollout
of smart meters and time of use tariffs is at risk. That is an
example where we think they have come up with a clever idea but
it doesn't bear witness to the light of what customers want and
where the Government policy is trying to take the industry. I
think if we work together and say, "What is the problem you're
trying to solve? Let's work together and we will come up with
a better set of recommendations around single tariff, around pass-through
costs, than you get today, in the customers' interests".
Q11 Ian Lavery: Listening
to what has been said, there is a huge gulf, a huge difference
of opinion between Ofgem and yourselves. How can it achieve what
needs to be achieved?
Phil Bentley: We
can sit down and have dialogue. What we received was a 60-page
Retail Market Review that now we need to engage with and say,
"This works and we support it, but here there are going to
be unintended consequences that do not serve the customers well".
We need to work through that. If Ofgem said to us, "Well,
here it is, take it or leave it" then we would say, "I
am not sure this is in the best interests of customers".
Q12 Ian Lavery:
Is that what Ofgem are saying in your viewtake it or leave
We have had our first meeting with Ofgem to discuss this and they
were quite open to some of the ideas, making the point that Phil
was making about some of the non-workability of some of the solutions,
which they realise themselves are relatively high level at this
stage. I think the way forward is to engage in dialogue, as Phil
suggested, to try and work out exactly the problems they are trying
to solve and to come up with solutions that give the customers
what they need.
Looking at the responses, there is quite a lot of similarity.
Even from people like Which? and non-suppliers, there seems to
be quite an agreement around the needs for a common language so
that customers can understand prices and tariffs; understand and
compare between different companies. I think there is something
really strong to work on there. The financial industry has a language
that people tend to understand, whether it is APRs, and perhaps
we need some common currency, and I mean "currency"
in terms of language. We think that is something that can definitely
be built upon, and we can communicate better to customers in a
way that is easily comparable and allows them to make choices.
I think we have work to do within the industry to try and make
that happen. I think the standardised tariff takes us into a completely
different market. In our view, it could undermine competition
and it could undermine the innovation that we need to address
smart metering, to address energy efficiency and sustainability.
One thing that Ofgem is proposing is that we translate all non-standard
tariff products into an equivalent standard tariff format. Now,
you can only do that at one particular consumption level and many
customers will not be consuming that level. So any comparison
they make, between non-standard and the standard tariffs, will
tend to cause them to make misleading choices. That seems less
helpful than where we are now, where currently each customer is
given information about their annual bill based on their own consumption,
so it is not clear that these proposals are better than building
on Ofgem's existing probe remedies.
Phil Bentley: I
disagree. If you look at a billand this is my bill hereyou
have so many units, so many kilowatt hours at such and such tier
1 rate, then you have the tier 2 rate. It is complicated. The
reason why it was done was to cover the standing charge. It is
a bit like line rental in telephoneyou pay a line rental
whether you use the phone or not. There are fixed costs in serving
customers whether you draw down power or gas or not. That is what
tier 1 and tier 2 are designed to do. There is a high unit price
in tier 1 and it covers the fixed cost; then you drop down to
a lower tier 2. It is hugely complicated. Everyone has a different
tier 1/tier 2. Everyone has a different trigger point at
which it falls. I think those are areas where you want to go down
the street and say, "What are you paying for your energy?"
and everyone says, "I know exactly what I am paying for my
energy". Today, people don't. We would welcome that type
of transparency provided there were choices and it is not one-size-fits-all.
That is our issue.
It is for exactly that reason that in my company we got rid of
these two-tier tariff bands. We have a single unit price for electricity
with a standing charge element, going back to what used to be
done in the old days, but actually there is some merit in the
structure. It is a structure we are used to in the telecoms industry,
so I think there is something to work on there.
Sara Vaughan: I
think there is scope to move to some of these things, like a standing
charge and a single unit rate, and also a simplification of terminology.
To come back to the question that you first asked: is there a
point in having this discussion? Is there a discussion that can
be had? Again, I think this comes back to the way that this was
presented when it was first announced and what the facts are.
When the investigation was first announced I think it came out
as, "Here are the proposals; they are on the table. Unless
the companies accept them they are off to the Competition Commission
and that is that". As EDF said, when we went in and talked
to Ofgem they said these are presented as just some first suggestions,
and they are willing to listen to proposals that we had put forward
around both liquidity, around simplicity and around the complexity,
so I hope that there is a dialogue that we can have. What I think
is also important is that we don't end up in a situation either
where there is a sort of salami slicing of what happens in the
market. Because one of the questions we have been looking at is:
how long is it since the probe? Well, Ofgem always go for, "Well,
it is three years since the probe". Some of the remedies
in the probe have only been in placeas at the time this
document came outfor about eight or nine months. What possible
track record can you have of how those are working in the market,
on the basis of eight or nine months? I think that there is a
real opportunity here, if Ofgem are prepared to listen to us,
to work further on this.
Q13 Laura Sandys:
I am interested that Mr Campbell was the first person to mention
the third element of this, and that is the consumer. Because I
think you have been presenting very much sort of an Ofgem versus
industry, but the consumers do find these bills, as you have rightly
explained, extremely difficult. I used to work for the Consumers
Association and this has been an issue for years, not just since
the probe, but long before that. Do you feel that in many ways
responding nowand some of you are a little bit further
ahead in transparency, I understandin some ways it is not
necessarily you working with Ofgem but it is you working for the
consumer groups and working it from their perspective? Because
ultimately otherwise it is very much an industry costing base,
rather than a consumer understanding and comprehension base. Do
you feel that you are doing
We are doing that. Consumer Focus made some helpful comments on
our annual statements, which we have taken on board and we have
improved our annual statements as a result.
Q14 Laura Sandys:
Mr Mannering, you were saying in particular that Ofgem is the
organisation that should come up with the benchmarks and the criteria.
In many ways that is not the right person, and it is really for
the industry and the consumer groups to work this through.
Phil Bentley: We
absolutely agree with that.
Laura Sandys: In
many ways it strikes me that there has been quite a lot of complacency
over many years, even long before this probe was announced.
Phil Bentley: I
think there is a huge amount of consultation with Consumer Focus,
with Which?. They make their opinions clear on clarity of billing.
British Gas happened to come out at the top. Part of the reason
for that is that we have a customer panel of all our customers
who are feeding in all the time what they want to see. They would
like to see us getting rid of tier 1 and tier 2 and we will work
to do that. Now, we want to make sure it is in their interests
and not something that is forced on them that is not what they
want. We are working with Consumer Focus. We asked them the top
10 things they would like us to fix and we will work on it. As
an industry, we might be in slightly different places but the
direction of travel is the same, which is: if we don't give customers
good value and build trust, all of the future exciting opportunities
about the way the energy industry is changing, we run the risk
of losing their support. So we are absolutely putting the customer
at the heart of the business.
Can I give an example if I may? One of the biggest complaints
we get from our customers is around estimated billing and the
fact that, in the absence of smart metering, we don't have regular
records of what people can do. Most of us have invested in systems
now that we can allow our own customersand I would encourage
you to all do the sameto tell us every month what their
meter reading is. They can call us on the 0800 number, which is
free, or go on to the internet and type it in, and we will bill
them against their actual consumption.
Q15 Chair: That
is about consumption; it is not about the tariffs. Is it not the
case that the complexity of the tariffs has led to the situation
where one of you was using sales agents who lied to the customers
about the situation and you were convicted yesterday? That couldn't
have happened if the tariffs were understandable, could it?
I will take that because obviously the very disappointing result
we saw in court yesterday was against SSE. Eight of the 10 charges
were dropped, but disappointingly two of them were upheld. I don't
think it was anything to do with tariffs. What it related to was
specific items in a script, where people had only looked at part
of a sales process, and we will obviously look at our legal options
to appeal against that and all the rest of it. We have obviously
had Ofgem look at us on a number of occasions, around our sales
process. They have never taken any enforcement action against
us over a number of years. As a company we have offered some of
the lowest prices and, indeed, over the period when this action
was taken we offered the lowest or the second lowest price in
the UK. We offer the highest levels of service and we have the
lowest levels of complaints in the UK.
Q16 Chair: If
you are offering the lowest price, why do you have to use agents
who lie to the customers?
Q17 Chair: Answer the
I don't think there was any suggestion that the agent had lied
to the customer. What there was was a ruling where the jury thought
that there had been a misrepresentation in a script.
Q18 Chair: A misrepresentation?
That is Scottish and Southern Energy's word for a lie, is it?
Sara Vaughan: I
think this point about selling on doorsteps is an incredibly important
one. We and British Gas are the only companies who are not being
investigated by Ofgem for mis-selling on doorsteps at the moment.
That doesn't make me complacent. What that makes me do is it makes
me look at the technology that we use, which is pen tablet technology,
which is like a small, handheld computer. People can actually
see the workings out and the tariff in front of them, being worked
out on the computer. They can get a printout and they can take
it away. If our agents cannot find a saving for those customers,
they will walk away, unless a customer wants to switch for reasons
other than price.
Phil Bentley: I
think that is the key because there is absolute transparency on
the doorstep. With the pen tablet you put in the actual consumption,
press the button, it says, "You will save". "Oh,
it is only 20p. I am not going to switch for that." You can't
just walk in, which some companies do, and look around the house
and say, "Oh, you will save £400 here". There is
no basis for that. The Ofgem probe said we should move to clarity
on pricing on the doorstep and that hasn't happened. That is why
four companies out of six have been investigated. That would be
an example where I think Ofgem could have been more assertive
in ensuring the standards are upheld.
Q19 Chair: Let
us ask the other three companies in that case: are you also expecting
to get convicted quite soon of lying to your customers?
No, we are not.
Q20 Chair: Hand-on-heart,
you are quite confident that no conviction will take place of
any of your agents?
We are not expecting to be convicted of lying to our customers.
We have also made the investment, which was described here, in
new computer technology to ensure that we can give the most accurate
reading to customers during doorstep selling as well.
Q21 Chair: You
are completely confident that everyone who goes out trying to
sell on your behalf is not misleading their customers?
Yes, we are in the same position. We have put a lot of effort
into improving the processes, automating the processes, putting
in better supervision, better control, and we are working with
Ofgem on the investigation. I don't know what the outcome will
be, but I am confident that we as a company have taken all the
actions that are appropriate.
Q22 Chair: So
there was some lying in the past, was there, which you have now
I am not saying there was lying in the past.
Q23 Chair: What
are the improvements? What was wrong? What did you find out that
your selling agents were doing that you have had to improve?
For example, the tablets that have been talked about, we were
using tablets but not 100%. We are moving towards that; I think
we are over 90% but we will have 100% use of tablets. That means
that information is controlled rather than using paper-based forms,
and so on. Better supervision, better training and general tighter
management and control of sales agents: we have put a lot of effort
into sorting these issues out. The investigation continues and
what comes out of it will come out of it, but meantime we have
addressed all the issues as best we can.
I would point out that tablets are not the panacea; they are not
the Holy Grail. They help, but in addition you need to be comparing
your offer against the existing tariff that the customer is on.
If you are not comparing against the right tariff, then you will
not get the right comparison. So they are not a complete answer
to giving the customer the exact saving that they will make. I
would point out that npower is the only company that has a complete
validation process, where every aspect of the sale is independently
verified by an independent call centre. We believe that is the
way that we are giving customers the most reassurance that they
are being sold to properly.
Q24 Chair: None
of your agents is lying to your customers or anybody else's customers?
One can never say that there is not the odd rogue agent. I am
not going to pretend to you that there isn't, but we
Q25 Chair: So
you are expecting a conviction soon, are you?
are doing everything in our power to put in place the training,
the processes and the auditing, to make sure that it is rooted
out if and when it ever happens.
Q26 Laura Sandys:
Can I add to that: first of all, Mr Bentley's point that Ofgem
should have been more proactive in controlling your mis-selling,
I think it sounds like the policeman should be there following
the burglars around. It is for them to find whether you have mis-sold,
but it is not for them to anticipate that you are mis-selling.
That is your responsibility.
The second point I would like to ask is: how
much are your salesmen on the door incentivised to make a switch?
Or are they not on incentives or not on sales incentives?
I would imagine most of us here operate some form of commission
structure. I can only speak on behalf of SSE. We offer base salaries
and a commission structure on top of that.
Q27 Laura Sandys:
What percentage is commission? Or would you be able to provide
all of that to the Committee?
I think I would rather come back. I can give you a breakdown of
sales staff that we have and show you. For some of them it might
be 40% or 50% of their wages; for some of them it may be even
higher levels because some of them can earn £10,000 to £20,000.
We then top that up.
Laura Sandys: Very interesting
Q28 Chair: I read
in the papers in the last few days something about Lloyds Bank
having to pay quite a lot of money back for selling products that
customers did not need. Do you think we should be recommending
to the Government that now we need to investigate the energy companies
for the same thing? It sounds a bit like it to us. If you have
guys out there incentivised to lie to customers, to sell them
products that are going to be more expensive than the alternatives,
that sounds to me like quite a serious issue.
Phil Bentley: Why
don't you wait for Ofgem to complete their studies? They are in
the middle of a process and you have Ofgem coming back to this
Committee in a couple of weeks, haven't you? Ask them at that
time where they are and where they think they are going to get
to, and then take action if you don't think they are going far
Q29 Chair: I think
if we have a responsibility to consumers, we ought to try and
put a halt to this rather soon and pay back the money that you
have taken from them, which they should not have paid.
Phil Bentley: I
am not trying to defend mis-selling, but the problem when people
say, "Well, I switched and I did not get the savings I thought",
that is because in that time, subsequent to their switching, the
whole of the industry prices went up.
Q30 Chair: They
switched because one of your agents lied to them about the prices.
That is why they switched. That is the problem. Okay, that seems
to go unchallenged.
Phil Bentley: No,
it is not true.
Sorry, we do not set out to lie to customers or mislead them.
We all compete on price. People can go on the internet and decide
which price they want to take. Equally, we can go to the doorstep.
Some people provide it via tablets. We provide a written confirmation
that we leave with the consumer there and then as to what we believe
the savings to be. If they don't think that is true they can come
back to us on that. We also offer some of the most attractive
prices, plus some consumers decide they don't like the energy
company they are with, because they don't offer the services or
other things that they need, and they decide to switch for a variety
of reasons. Some of us may decide to shop at Sainsbury's or Waitrose
rather than shopping at Lidl. There are all sorts of reasons why
people make decisions, but we do not set out to lie or mislead
consumers in any way. Therefore, if you want to launch an investigation,
well, that is obviously up to you, but we do not set out to lie
and do anything to consumers to try and mislead them.
Chair: The competition between Tesco
and Waitrose is rather clear, isn't it? I don't go into Tesco
and find a little sign saying, "Actually, you could buy this
more expensively in Waitrose".
Q31 Dr Lee: Since
you changed your script, as you have admitted that you have changed
at Scottish & Southern Power yourhow shall we put itscript
incentive you are selling, you have reviewed the actions of the
people on the doorstep and you have been convicted of mis-selling.
Since you have changed those scripts, have you seen a reduction
in switching? Have you seen a reduction in business as a consequence?
I think switching level is as high now as it has ever been. As
a company we like switching. We have obviously gained a considerable
number of customers on the back of the prices, the price promises
and things like that that we have had over a long period of time.
Q32 Dr Lee: You
have seen no increase in commission payments to your chaps on
the doorsteps since the change? Clearly, you have changed your
script in terms of how they sell. Have you noticed any changes
in commission rates?
We have changed our script any number of times over the last 10
or 12 years, as we have moved forward, and you would have to go
through and track those things. I think what we have seen is switching
rates are more dictated to by times when people adjust prices,
and whether you have seen prices going up or down, and how much
awareness there has been in the press. Those sorts of things have
driven volumes, plus whether you have seen significant offers
and discounts offered on the internet, and things of that nature.
I think those things have had a much bigger impact on switching
Q33 Dr Lee: Which
begs the question: why were you using the script in the first
We want to control the people we have out on the doorstep. Unlike
the other companies, we have a script that you can see, which
you will not see with most of the other companies. So if you want
to audit that script you can, and when Ofgem has come forward
and said, "We would like to know how you are training your
people and what you are doing with them when you put them through
the programmes, what you are asking them to say?" we do have
something there. That was one of the safeguards we put in place
to try and ensure that we do root out rogue agents. It doesn't
always happen, but at least you can see what we have said, which
has not been the case for long periods of time with other companies
in the industry.
Q34 Barry Gardiner:
Have any of you, or would any of you ever yourselves, or advise
your children to buy a major product from somebody who came knocking
on your door?
I have bought products from people who have knocked on my door.
Q35 Barry Gardiner:
Of what value, Mr Phillips-Davies?
Barry Gardiner: Maybe somebody coming
round with their local charity tea towel or somethingbrushesbut
I mean do you buy your home insurance on the doorstep? Do you
buy your car insurance on the doorstep? Would you buy your mortgage
on the doorstep? In terms of major purchases, why are you on people's
Phil Bentley: I
think it is a good question. I think the issue is the choice of
energy supplier can often be a low interest category for people.
You don't suddenly wake up one day and think, "I know, I
will change energy supplier".
Barry Gardiner: Just
like home insurance, Mr Bentley, just like your home insurance,
just like your car insurance
Phil Bentley: Let
me answer the question.
Barry Gardiner: you go there,
you do it online and you know you have to do it once a year and
you do it.
Phil Bentley: 17%
now are switching online, so a lot of people are choosing to go
online. Take our sales force, British Gas used to have a doorstep
sales force of around 1,200. Today it is only 300, so it is less
and less an important channel.
Q36 Barry Gardiner:
The answer to my initial question is: not one of you has or would
or would recommend that your children should buy this product
on the doorstep. Think about that and think about disbanding your
Sara Vaughan: I
don't disagree with the point that you are making. If I could
give you a bit of history, we did actually reduce massively our
sales force, our door-to-door sales force, a few years ago.
Q37 Barry Gardiner:
Where have you targeted it now, Ms Vaughan? Have you not now
targeted at the poor and the most ignorant people in society,
the ones you feel are most susceptible to doorstep selling? If
I received a profile from you of where your agents have been going
and I mapped it against the data, would that not show me exactly
what I have just said?
Sara Vaughan: My
CEO is on record before this Committee as saying that he would
love to be able to do away with door-to-door sales.
Q38 Barry Gardiner:
Answer my question, Ms Vaughan. Answer the question. Will you
Sara Vaughan: I
will provide you with that.
one of you, provide us with the areas that your sales force go
into and target? We will then match that against the social data
and then we will see who is right.
Phil Bentley: We
actually do that, so I can tell you now our sales are less than
30% to those people you are indicating, because frankly
Barry Gardiner: It is who you are targeting,
not where your sales are.
Phil Bentley: a
lot of people often switch heavily, so they churn all the time.
A lot of people are living in rented accommodation, and so they
move all the time and leave a final bill and final debt. So it
is not commercially that attractive to target those people that
you say we target, and that is why we don't.
Q39 Sir Robert Smith:
We have touched a lot on this whole tariff thing. I think the
most depressing thing for me is that this doorstep selling thing
has been around for an awful long time as a problem area, and
still seems to be one. I think the other depressing thing was
talking about going back to a tariff of a fixed cost and a unit
cost, which you all broke away from. Do you accept that there
must be suspicion about a market where there are so many tariffs
around but it is not really about finding lots of little niches,
it is about an element of complexity that makes comparison difficult?
We can understand exactly what you say, but in this country we
sought to introduce a market where there was competition, where
people would innovate to try to offer different tariffs. We went
through in the last few days, in the run-up to this, what sort
of tariffs SSE offer. There are a couple of tariffs that we offer
around energy saving or reduction. There are two or three tariffs
that we have offered around green; one of them has been discontinued
now. There are four or five where we offer things around rewards,
such as M&S, AMRs and things of that nature. Then there were
two or three standard tariffs. On top of that there are some historic
heating tariffs as well.
I think one of the key issues about Ofgem's proposal
is that going to a single tariff would remove an awful lot of
competition and innovation from the market. I think it would potentially
confuse consumers because we would have to communicate to them
why we have moved them from the tariffs that they were on, that
they had chosen to be on. We have 3 million-plus customer accounts
for customers who have chosen to be on tariffs that offer them
particular rewards and benefits or where they can give money to
charities, such as the British Heart Foundation. Therefore, moving
to that regime seems odd. On the heating tariffs that we have,
we would also maybe significantly affect customers' bills where
they get switched back to
Q40 Sir Robert Smith:
Are they saying you can't have those tariffs but if you do have
those tariffs they have to be renewed?
Yes, okay. If, let's say, you were a relatively elderly, vulnerable
person in some housing scheme where you have electric heating,
for instance, and you failed to renew that tariff, you would probably
see your bill jump by 50% the following year because it doesn't
take any account of some of the heating tariffs. There are an
awful lot of unintended consequences here andas Scottish
Power said earliersurely what people are looking for is
transparency. When we went into Ofgem yesterday what we said is,
"What you need to do is look at something like an APR model
where you can say, 'There's a price and there's a set of benefits'.
There is a clear unit price there and then there is a set of benefits
on the side". Having that sort of consistency and transparency
we are absolutely happy with, but there are unintended consequences:
the fact that they would suddenly be presiding over a regime where
we have created a competitive market that has been admired throughout
the world for a number of things that it does well and then we
throw all that away, seems very odd.
An additional one would be smart metering. You would
have to look all over again at the whole economics of smart metering,
because forcing us down a single tariff route would probably mean
that we couldn't have tariffs in place that would get people engaged
in smart metering. It is obvious, from the evidence we have seen
in Italy and California, that engagement of customers is critical
if you are going to get the reductions in usage and, therefore,
bills and carbon that people want out of smart metering. Whether
it is worth us spending any money on smart metering I would call
into serious question if you go down
In addition, if Ofgem specifies the fixed charge element, the
standing charge element, there is a significant risk that that
will not match up with companies' own fixed costs, in which case
the unit cost will have to adjust for that. You have the potential
for high consumption customerssome of whom are going to
be vulnerable customers with larger familiescross-subsidising
low consumption customers. Overall, it is not clear that that
is in customers' best interests. It is also putting companies
in a position where if they are not sure they have more risk about
recovering their costs that needs to be reflected in the margin
that they need to earn. That again is not in customers' interests.
So putting tariff structures into a complete straitjacket is not
necessarily in customers' interests.
Phil Bentley: To
be clear, there are two elements of what Ofgem are proposing.
There is a variable tariff, an evergreen tariff, and they are
saying you can only have one. We are saying, "Open that up".
We only have five tariffs anyway, so it is not that big a deal.
Then they are saying, "The only place you can have competition
then beyond the floating tariff is fixed price, fixed term".
It is like saying to somebody, "You have to buy all your
petrol from BP for the next 12 months at this price and that is
what you are going to pay". The reality is: the purchase
of energy, buying it forward you always pay more for the forward
than you do today, generally. So, if you are going to have a fixed
price deal I am going to think, "Well, the price of energy
is going to go up, I am going to charge you more for that fixed
price deal because there is risk. There is a risk you move house,
there is a risk you switch tariffs. I have to buy that energy
forward and the price is higher", so an unintended consequence
again. Ofgem have this view that they want to move 80% of all
customers on to fixed price, fixed term tariffs and that is not
what research tells us customers want. They want choice but they
don't want to be put into one size on the floating or a fixed
price that is likely to be higher for them. I think that is a
Q41 Sir Robert Smith:
What have Ofgem said about those who use off-peak heating?
Sara Vaughan: They
don't actually talk about them. When we went to them and asked
what was the proposal in relation to Economy 7, there was a sort
of, "Oh we haven't thought about that". It is not mentioned
in the document.
We have been talking to consumers about what they
want in focus groups, as we do with all of our products that we
put forward. Before we bring a new product to market we always
talk to consumers about it and get their feedback on it. I think
there is quite high support for a common language, which I think
has been talked about before to reduce the complexity; also potentially
some more clarity around the standing charge, one rate, two rate
piece. There is a very strong dislike of this being forced to
choose the end point, where people are actually required to act
in order to keep something that they might want and be very happy
to have. One commentand it is obviously a purely anecdotal
commentwas that the proposals that Ofgem put forward seem
to be designed to make life uncomfortable for consumers. This
was feedback from a consumer focus group. I think you still have
the complexity that we have talked about, in terms of a number
of different fixed price/fixed-term products. So you are not actually
doing away with that, but what you are doing is you are introducing
this additional step, when people are being forced to make a decision
as to what they want to do. The feedback we have had to date is
that that is not landing well with consumers.
The process of moving the market from the current structure to
this new tariff structure would have big implications. There are
going to be winners and losers from the current tariff set-ups.
There are going to be huge administrative costs. There are going
to be huge data management issues. We would have serious concerns
about a market that has been evolving. We would have serious concerns
about trying to suddenly change its structure in such a material
way. In fact, it is not just us saying this. The response from
Consumer Focus picks up, if you don't mind me quoting a very brief
line, "The difficulties of moving the majority of energy
customers on to new tariffs, when several of the major suppliers
are moving their billing systems, should not be underestimated".
I could go on with a whole range of other points that they make.
In one of Ofgem's documents they cite some research by Ofcom that
concluded that what customers really want to know is their annual
bill and they are not so interested in the individual tariff prices.
Yet Ofgem already has a remedy along those lines and it has not
sought to communicate that to customers or to build on that. It
is moving more to the kind of prescriptive individual tariff approach
that, as its own document acknowledges, Ofcom found was not preferred
Q42 Sir Robert Smith:
What is happening next? You have had an initial meeting?
I think the point is that, as other discussants have made the
point, the Ofgem proposals are currently at a very high level
and they acknowledge that there are some difficult issues that
need to be resolved. I can only speak for npower. We are going
in to see them next week to discuss some of those issues, to try
and understand what their proposals mean in more detail and try
and explain to them some of the difficulties we see with them
to see if they can be made workable and overcome some of the problems.
The process you asked, going forward: we have been through this
first initial meeting. We had a very open and frank discussion.
We pointed out some of the unintended consequences referred to
earlier if these policies are implemented: the issue around, for
example, Economy 7, which isn't adequately covered in the proposal,
let's say, at the moment. We have had a first look at them. Now
we see a more detailed meeting between the subject-matter experts.
Then we are going to go back again in the summer and have another
conversation with them. Presumably, at that point they will meld
and listen to all the participants and come up with a more coherent
Q43 Chair: Let
us move on to the wholesale markets for a bit now. Do you agree
with Ofgem that low liquidity in the wholesale market prevents
new entry into the sector and therefore reduces competition?
I think the issue for new entry is more about contestability than
liquidity. We would like more liquidity. It would improve the
market, for example. The other companies are in a similar position.
We trade four times the energy that we consume. One of the big
issues we have experienced with smaller suppliers and generators
is access to an understanding of the market credit terms, the
administrative issues around managing energy and balances. Our
response to that has been to identify a way of introducing products
and trading arrangements that are much more suitable to small
players: smaller clip sizes of energy, introductory credit terms
and management of some of the complexities on their behalf. I
think what Ofgem are proposing on this front, in terms of market-making
arrangements, can build on that work and we would support that
as the key issue, in terms of making the market more contestable
on the wholesale side.
In terms of liquidity, we do have a concern about
auctions. We have a concern about how that would interact with
electricity market reform and we have a concern from our own company's
experience in other markets that auctions can be detrimental.
We do have a concern there but are very supportive of market-making
arrangements being built upon to encourage all of us to open the
door a bit more to smaller new entrants.
RWE was instrumental in setting up N2EX, which is an exchangeI
don't know if you are familiar with itthat has been going
since the beginning of 2010. We would hope that Ofgem would participate
with the industry in establishing arrangements to build on that
existing exchange arrangement. We think that has the potential
to meet the needs of new entrant participants to have the kind
of access to prompt forward and intra-day trading to change the
hedging profiles that they need.
If one looks at the trading volumes on N2EX they
have been absolutely exploding in recent months. The graph shows
an exponential increase, particularly since about July/August
last year and every month is showing a bigger increase compared
with the previous month. We are very optimistic thatif
Ofgem will work with uswe can develop that into providing
what Ofgem is looking for, rather than Ofgem establishing separate
proposals that will suck liquidity out of the existing market
arrangements that already exist, and compete with and frustrate
the developments that are taking place. There is a meeting of
the Market Council that Ofgem participates inI think it
is either this week or next weekand we are very much hoping
that they will work with us to develop those arrangements.
Sara Vaughan: I
think it is important to build on the arrangements that we already
have in place through N2EX, rather than trying to introduce new
arrangements to fragment liquidity. One of the things that the
Market Council of N2EX looked at, at the previous meeting that
they had, was this point that was raised by Scottish Power about
smaller clip sizes. They are looking to reduce the minimum clip
size in a day-ahead auction from the current size, which is 1
megawatt down to 0.1 megawatts, which will make it easier for
new entrants to come in and to trade on that market. This is an
exchange, it is not something we control but it is something that
we participate in. We were one of the founder members on it. I
do think it is very important to work with that market.
Ofgem is proposing a mandatory auction as one way
in which liquidity in the market can be increased. I think that
if you work with the market, with what is there already, and perhaps
look at putting any mandatory auction arrangements around the
existing day-ahead scheme under N2EX, then that could work quite
well. That could equally work in the context of electricity market
reform where one of the things that is needed, in order to get
a contract for differences in place to support investment in new,
low carbon generation, is a strong and robust reference price.
That could be a double-whammy, where you can get the reference
price through N2EX and you can also help increase liquidity in
order to help new entrants come into the market. So that might
be something that works well together. But what is important is
that we don't end up with lots and lots of different interventions
that then give rise to fragmentation of liquidity, and something
that doesn't either meet the bill for EMR or give small players
what they need in order to get into the market.
The idea that Ofgem can also fix reserve prices or bid/offer spreads,
and so forth, is I think potentially very dangerous, as it could
reduce liquidity rather than increase it. Also their proposal
looks at an obligation on us to auction up to 20% of our generation
capacity, which has nothing to do with our retail business or
the relative size of our retail business. Indeed there are many
generators who are not represented by companies in this room today.
Furthermore the requirement, as postulated, to sell shaped products
forward into the future, we don't have those today and it is very
difficult for us to sell something we don't have and be mandated
to do so.
One of the issues for market participants is the amount of collateral
that they need to put up against the trades that they are doing,
and if you do it all in one place then you can net off the collateral
that you need. So one trade that you have done can be netted against
another trade. If you do it in a completely separate arrangement
then you can't make those nettings off, you can't make those savings,
and in a separate arrangement you would need collateral for that
trade alone. That is another reason for trying to work with the
existing arrangements rather than setting up some competing forum
I also think it is a myth that liquidity in this market is the
single barrier to entry for new entrants. There are many other
very important things out there: access to credit we have talked
about; huge investment in systems required to deliver customer
solutions; the fact that many of us don't make an adequate return
in this business. There are many other barriers to entry other
than purely this liquidity piece.
Phil Bentley: I
think that is the key point to exercise because I think, yes,
the margin: there are probably things that the industry would
work with Ofgem to improve liquidity on, but it will not, in and
of itself, encourage new entrants. What will encourage new entrants
will be margins that are attractive. Even Ofgem admit that retail
margins are not attractive and the huge balance-sheet requirements
small companies simply cannot finance. That is why the industry
is not getting new entrants because of those two fundamental reasons.
The market liquidity will not fix that.
There is financial regulation, both UK and European, like MiFID,
which is driving a very significant requirement across companies
who are trading futures products. I am not suggesting it is wrong,
but for smaller companies it can be quite a significant barrier
because, even for companies like ourselves, it is carrying potentially
very significant administrative and financial implications going
forward. So these things are part of the issue as well, not just
the simple issue of liquidity.
Q44 Chair: Would
N2EX work even better if all six of you were in it?
Can I point out that in our response that was made it was highlighted
that we were not participating. We have participated in that exchange
since July 2010, among a number of other exchanges that are operating
in the UK. N2EX is one of several ways of trading energy and we
do trade on that, just to correct the statement.
Q45 Chair: Would
it work better?
I think if we got more participants trading on there. There are
three large generators in the UK that are not vertically integrated.
They are not represented here today. So that would help. Then
finally, the end-users or the smaller users who claim that they
want access to the liquidity that I think a lot of us providewith
the comments made here from colleagues who provide flexible products
to these individuals, and we deal with a lot of the counter-partiesif
they came in and traded on that market that would give them access
to what they wanted, and it would work with Ofgem to try and improve
access to N2EX for those people. I think it is these smaller players
who suffer the difficulties that have been summed up by the other
companies here, who seem to be the ones who think there isn't
enough liquidity in the market. I think we all trade very significant
volumes of electricity every day and are happy to trade with anybody
who is a credit-worthy counterparty.
Q46 Chair: Would
a ban on self-supply improve liquidity?
Sara Vaughan: Sorry,
could you repeat the question?
Chair: Would a ban on
self-supply improve liquidity?
Sara Vaughan: Again,
I think that picks up on a misunderstanding about the way that
many of us operate our businesses. We have a completely separate
trading business that is based out of Dusseldorf. That trading
business sells all of our generation in the market and buys more
supply business in the market, and it broadly optimises each of
those positions separately. Our generation business is about 29
terawatt hours; our supply business is about 48 terawatt hours,
but our sales of electricity are 108 terawatt hours and our purchase
of electricity is 122 terawatt hours. So we are not matching one
off against the otherwe are optimising each position separately.
There isn't a self-supply going on. We have a trading business
that is trading everything out there.
RWE operates a very similar model.
Chair: What about the
rest of you?
We do as well. We traded 112 terawatt hours last year. Our retail
needs were about 25. Our generation business is not there to meet
our half-hour by half-hour customer needs. There is a big and
quite liquid market in between. We utilise that market and we
trade much more and we provide much more liquidity than we take
We do the same thing with a similar model. That is why we are
very open to any scrutiny of our segmented accounts, which we
published as part of this requirement of Ofgem. We are using actual
market prices to manage the relative interfaces between the companies,
so I suspect it is a similar situation elsewhere.
I think if you look at the statistics, most of us trade significant
multiples of what we generate. In the first four months of this
year, we traded nearly 120 terawatt hours of power. Over the period
of the next two to three years on an annual basis our total generation
is between 40 and 50 terawatt hours, so in four months alone we
probably traded that generation three times over.
Q47 Barry Gardiner:
Now that you are providing separate supply and generation information
to Ofgemthey are demanding thatsome of you excluded
significant profit elements from your 2009 segmental results.
Could those of you who did exclude that profit element from the
segmental results firstly, own up to it, and secondly say why
you did so?
Sara Vaughan: I
am very happy to go first on that. I think we were attributed
with an amount of £81 million, which it was suggested had
not been properly allocated. We talked to Ofgem about this over
the telephone recently. They agreed with us that it could all
have been cleared up by a phone callif they had made one
to usbefore they published their document, because £56
million of that related to profit on the sale of a power station
in Turkey, which should hardly be put down to supply or generation
in the UK. Equally, the remaining £25 million was neither
attributable to generation nor to supply, which they agreed with
I think it is unfortunate the way that that document
came out. I think it was unfortunate that it appeared in The
Telegraph before it appeared on Ofgem's list of documents.
I think it was unfortunate that they didn't pick up the phone
and speak to us about it. We are completely confident that we
properly allocated between generation and supply and that we didn't
hide any profits that should have appeared there.
Phil Bentley: British
Gas is the only company that produces its statutory accounts and
its external accounts and Ofgem accounts, and they are all the
same number. So all we would say is: we encourage everyone to
do the same thing. Then there is absolute transparency and you
start to build some trust again.
Our numbers are totally aligned with corporate accounts and statutory
accounts. The one-line item that we highlighted at the time was
Barry Gardiner: Sorry,
the one-line item that
That we highlighted at the time was an International Accounting
Standard IS39, which tells you how you treat derivatives. So that
is something that Scottish and Southern and British Gas do in
their accounts as well. That is the only item that was misrepresented
as being an attempt to conceal numbers, which was not the case.
We sent Ofgem a complete reconciliation between RWE group number
and the UK Gap numbers
Q48 Barry Gardiner:
When was that taken?
This is after
Barry Gardiner: This is
after you had supplied the initial information, yes?
I think this was before we published our results on the web, but
after we had had an initial discussion with Ofgem about what we
were going to publish, and we explained the difference, absolutely.
Most of it was due to a different pension treatment that we put
in our public statement. Another element was to do with one number
including amortisation and another number not, which we included
in our public statement. Almost all of the rest was due to the
fact that some of the numbers in the legal entities are not related
to generation or supply at all, and therefore ought not to be
included in the segmental statements that we put on our website.
Q49 Barry Gardiner:
Ofgem have agreed to all of that?
Yes, Ofgem fully understands all of those points. So, as far as
we are concerned, we are very puzzled if there was any suggestion
that we were trying to understate our profits because that is
absolutely not the case.
First of all, the statements we put out are fully reconciled to
our statutory UK accounts. I think there was a suggestion again
in some papers that because some of the companies are not UK Plcs
that somehow UK accounting rules do not apply. That is not the
case. We have statutory accounts. What we submitted was fully
reconciled to those and it represents the profits that are related
to the generation and retail businesses. The things that I think
you might be referring to would be commodity trading-related issues,
which could be losses or profits and are not driven by the activities
of retail or generation. There are market-based proper trading
arrangements, proper market-driven price relationships that apply
to those businesses that we think are fair and we are very happy
to discuss with Ofgem.
We are a UK-quoted Plc. We have statutory accounts. When we produced
the set for the generation of supply accounts they were fully
reconciled in the statements that we put out in our statutory
accounts. I am not aware of any ambiguity, but I am happy to deal
with anything afterwards if somebody thinks there was something.
Q50 Barry Gardiner:
In the previous question that the Chair was asking, many of you
said that you have a separate trading entity. It is the quote
that you have given us before, Ms Vaughan, about how you have
this intermediary. You have this intermediary, does that mean
that you would be equally comfortable to move into more of a pool
arrangement where the intermediary is a third-party intermediary,
or the system operator provides that pooling function so that
the trade goes into there? Why do you have to control that intermediary?
Is that not just another place to be able to hide your profits?
Sara Vaughan: It
is a European trading business.
Q51 Barry Gardiner:
Sure, but you own it.
Sara Vaughan: We
performed a strategy reviewI can't remember exactly when
it was, three or five years agoand looked at the market,
and the market looked to us as though it was going to a European
integrated market with trading occurring across Europe as a whole.
Q52 Barry Gardiner:
You are controlling that trading platform.
Phil Bentley: Of
course you would, because you would hope you do a better job than
your competitors; that you buy low and you are selling high. You
are providing liquidity into the market. It is a key activity
and any commodity-based company: BP trade, Shell trade, banks
trade, you know, it is trading the flow of your requirements of
production and supply.
Sara Vaughan: And
managing that risk.
Q53 Barry Gardiner:
Why could you not do that in her method: you could buy lower,
Phil Bentley: Because
we are competitors and we think we are better traders.
Sara Vaughan: And
It is also the activity that is driving the LNG supplies and the
investment that is required; it is also the activity that is enabling
the huge investment in LNG; it is the activity that is enabling
the physical delivery of coal to the UK; it is the activity that
is helping build the business case for them to connect us with
Europe. The commodity trading market is a global market, it is
a European market and it is the lifeblood of the industry.
Q54 Ian Lavery:
On transparency, Ofgem have readily accepted that a lot of progress
has been made in terms of transparency since the 2008 probe. They
are seeking more clarity and more transparency now. I think looking
at what we have there has been an adverse response from industry.
How do the levels of transparency in the UK compare with the requirements
from international competitors, particularly those in Europe?
Which particular transparency are you referring to?
Ian Lavery: What I am
asking is: there are obviously levels of transparency required.
Ofgem have been particularly happy with the progress made since
the 2008 probe but, comparing the levels of transparency in the
UK to the levels of transparency with the competitors in Europe,
what is the difference?
Phil Bentley: I
think the question is: is the transparency now required from Ofgem
higher than the transparency in the rest of Europe? The answer
is: absolutely, yes. There isn't anything like the transparency
reporting generally in Europe. That is because you don't have
competitive markets there; you don't have the same requirements
to disclose; you don't have the same regulatory scrutiny. It is
a very different market. The UK iscoming back to the pointthe
most competitive market; it is the most open market and it is
delivering the lowest prices for customers and we should be thankful
Q55 Dr Lee: If
we go back to your relationship with your customers, the memo
to this Committee from Consumer Focus states its own research
in February this year that only 46% of consumers remembered receiving
an annual statement; of those who remembered 79% found it easy
or fairly easy to understand, but only 25% of these consumers
took any further action, such as comparing the price or switching
supplier. How do you test the clarity of your statements and other
communications with your customers?
We call it "voice of customer". I am sure other companies
have a similar approach, but we use extensive customer surveys
and customer interaction to design all these bills. They are completely
driven by what customers want to see and based on live, real customer
research, face-to-face, not by mail. It is a balance of that,
plus the requirements. There are complexities: all the different
unit rates, calorific values and bits and pieces that have to
go on a bill. Speaking personally, I can understand, looking at
a bill, why customers would find it awkward. It is difficult and
complicated, and if the message isn't on the first page then the
chances are the customer will not see it. So, as an industry,
I think we have a bit of work to do to improve on that and we
are quite happy to take views from Ofgem or others on that. What
I would not like to see is a specification from Ofgem saying,
"This is what a bill will look like". I think companies
should engage with customers. Everybody has a slightly different
mix and different focus and we should adapt our communications
to what our customers want. We should try and manage the complexity
for them but we shouldn't be straight-jacketed on it.
I think at SSE we do do consumer research. As we mentioned earlier,
it is interesting not only to talk to Ofgem, where they maybe
have technical matters they want to see on there, but to talk
to consumer groups who have the consumers at heart, and get a
lot of feedback as well directly from consumers and take on board
what they are saying. We put out an annual statement, as we mentioned
earlier. It hasn't been around for a full year yet. We are going
through a process of updating that, in conjunction with consumer
groups and customer groups that we're talking to. So, more work
needs to be done but I think it is ongoing.
We work together with consumer groups. We also had somebody come
and look and make sure that the language we use is easily understandable
on our bills, and so forth. We would love to have a much simpler
bill if it is possible. A lot of the stuff we have on there is
mandated on us as a requirement and, as we go forward and the
world of Green Deal comes, the bill is going to get even more
complicated, so we need to find a way of better engaging with
the customer there.
At npower we have Crystal Marked our bills and our terms and conditions.
We have launched a jargon-buster on the back of our bills to explain
some of the more complicated energy industry terms. Following
this discussion, perhaps there is scope for the industry to agree
with Ofgem on a standardisation of terminology across the industry.
Again at the beginning of this year we launched straightforward,
simple tariff guides to all of our products, as part of our mission
to help customers understand the industry, which admittedly some
of the issues are not that easy.
Phil Bentley: I
think the process is working. British Gas have beenboth
by Which? and Consumer Focussingled out as having the clearest
annual statements. What that means is that hopefully next year
competitors will mirror that and we will keep raising the standard.
So it is working as it is intended.
Sara Vaughan: I
am only smiling because we came joint first with British Gas on
the Which? study on bills, but it is all about consumers.
Q56 Dr Lee: Is
there information you would like to see removed? You say some
of it is mandatory.
Phil Bentley: Calorific
value. Nobody understands it. If you look at a bill, the problem
is the meter is not metering in the units at which you are charging,
because you would like it to say, "I have used 100 units
and that is 100 kilowatt hours and it is 5p, so it is £5",
but it isn't, because there is a conversion that converts a meter
unit into a kilowatt hour using a calorific conversion factor
and a temperature factor. It is hugely complicated. I don't understand
itI don't know anyone who really doesand why it
is needed. The simple answer is to say, "When you put in
smart meters let's make sure the units that are clocking over
on the smart meter are the same units that we are pricing and
billing, which is a kilowatt hour. The kilowatt hour: you run
ten 100 watt bulbs for an hour and that is a kilowatt hour. That
is 5p or 6p. Then they can get their head around it. Running a
cycle on a washing machine; that is a kilowatt hour. Then people
start to get used to the unit. At the moment, the unit on the
meter is nothing like the unit on the bill, and that is where
all the confusion comes from.
Sara Vaughan: Absolutely
right. We have talked to consumers about it and their response
absolutely echoes what British Gas just said. The other thing
that consumers apparently don't like is the electricity fuel mix
that you have to put on the bill, but that is an EU requirement;
the EU requires that we have to put that on. So we do it in as
user-friendly fashion as we possibly can but legally we are constrained.
Q57 Dr Lee: Moving
on to Ofgem standards of conduct, which are a response to a provisional
programme. There was no clear process of enforcement of the standards
and no clear incentive for why energy suppliers would comply with
the standards, and they state, "The behaviour of suppliers
since has done nothing to change our view". Do you think
it is practical to incorporate those in new or existing licensing
I think it would be quite unhelpful, in that a licence condition
hazard; it requires you to do very particular things and it is
helpful that you know what those are and you know what you have
to do to comply, and the penalties for non-compliance are very
serious. So the difficulty with incorporating standards of conduct
into a licence condition is that they are quite vague, and it
puts companies in an awkward position of not understanding what
it is to comply with that standard of conduct. Ofgem will then
be in the difficult position of interpreting what that means and
possibly making judgements. They have been helpful as a guide
to the kind of thing that we should be doing and, indeed, we were
all doing; certainly, at npower we were doing anyway. Frankly,
it creates legal uncertainty. If we are going to have licence
requirements let's be clear about what they are.
We have a rules-based regulatory framework and it is possible
to move to a principles-based framework, but it would require
a very different governance structure and it would be quite a
major change. I am not convincedand I don't think that
we are convincedthat that is a right step for now. It is
possible, but it is a major regulatory compliance type change.
I think there is a lot more we and Ofgem can do to monitor and
highlight performance against these issues and be challenged on
them, rather than try to force it into some very difficult licence
obligation that would create a huge administrative effort.
Q58 Laura Sandys: Yes,
we talk a lot about the domestic consumer but there is also the
small business consumer. Consumer Focus has called for more protections
for small businesses, for example, to prevent the instant deep
disconnection when you are retrospecting bills, and also support
with greater information to small businesses who are less equipped
to deal with complex tariffs. In many small businesses, certainly
in my constituency, one needs the same relationship as one would
with the domestic customer. How do you respond to your relationships
with small businesses and how you feel that you service them effectively?
Phil Bentley: British
Gas has 850,000 small business customers, so we think we have
a fairly good handle on what they need. More and more are looking
around and shopping around, and we would encourage that, and I
think they would say they benefit from a very competitive market
out there. The point, though, about some of the blocking of transfers,
a lot of that relates to debt. You would be amazed at the end
of a 12-month contract how often the 12th-month bill isn't paid,
and in British Gas business alone that adds up to £100 million
of bad debt.
You might say, "Well, let the small business
off" but someone else is paying for that £100 million
because it is being borne by those customers who are paying the
bills. The idea that small businesses leave behind debt or shouldn't
be stopped from breaking contracts with penalties, I think all
those are things that don't make good commercial sense, from a
supplier's point of view. When it comes to things like long back
bills, then maybe we can do what we did in domestic that says
that you can't back-bill longer than 12 months and, therefore,
it puts the onus on the energy company to bill up-to-date; I think
that may be an improvement there.
Q59 Laura Sandys: Why
is it necessary to investigate the role of the third party intermediaries
in relation to small businesses?
Alistair Phillips-Davies: Third
party intermediaries in the business market clearly provide services
to some of their customers, but they do take a lot of the margin
out of the business as well. So therefore, with some of them,
I think there are some questions over their practices and their
relationships and I suppose, just like Ofgem wants to look at
us, they probably want to have a look at them.
Martin Lawrence: The issue is
to achieve transparency, making sure that the businesses understand
what the cost elements are for the services that are being provided
and that is a bit opaque at the moment.
Phil Bentley: The broker isn't
transparent with what margin they make out of the deal. So they'll
say to a small business, "I can get you a better deal",
but they may be trousering quite a lot of margin, and there is
no transparency there and that is what we would welcome.
Sara Vaughan: We proposed a code
of practice for third party intermediaries, which we hope they
will be able to sign up to. I think across the industry there
is quite a lot of support for that. We have mentioned it to Ofgem
who are also quite enthused by the idea, so it may be that we
can move forward with something on that basis.
David Mannering: I think the issue
with third party intermediaries is that it is quite similar to
the financial intermediary situation we had in the financial sector
in the mid-1980s, where it was unclear where they were being paid
from and how much they were being paid, and there is scope for
more transparency there. We need to think about what is the best
way to resolve the situation. There is a danger that it is done
vicariously through regulation on energy suppliers, which is not
the best way to tackle any perceived problems.
It would be preferable for Ofgem to be given
direct powers or for the OFT, which is the existing regulatory
body, to look at the area more directly, rather than do it second-hand
through giving a licence obligation on us and to turn us into
quasi-regulators. There is a dangerbecause there is already
a regulatory opportunity on usthat that route is taken
and it wouldn't be the best way to deal with this.
Q60 Laura Sandys: Similar
to your commitments to work with Consumer Focus and Which? from
the domestic consumer, are you in regular conversations with the
Federation of Small Businesses and the Chamber of Commerce, because
they certainly feedback that they don't believe that they are
getting as good a deal, or as clear a relationship, for their
energy supply as possibly where there is more regulation in the
Martin Lawrence: Absolutely, we
talk to our customers about it, yes.
Alistair Phillips-Davies: I don't
know if we talk to the CBI and the Chamber of Commerce, particularly
on the issue of small businesses, so we will if you think that
is something that we should do.
John Campbell: Yes, we are the
same; that is not something we were aware of.
Q61 Sir Robert Smith: One
of the things that has been raised, which could affect consumers
especially on the gas side, is the supplemental charge in UK offshore
oil and gas profits. I should first of all declare my interest
as a shareholder in Shell. Centrica has been very vocal in its
concerns, and I wondered what dialogue you were having with the
Government in taking those concerns to them?
Phil Bentley: As you know, just
stepping back, the issue isn't a Centrica issue, it affects the
whole of the North Sea gas producers. There is a supplementary
tax on the oil industry, but the price of gas in energy equivalent
of gas to oil todaywhereas oil was about $120 a barrelthe
price equivalent of gas is about $57 a barrel, but gas production
is being captured by the same rules applying to the oil industry.
Of course, the problem with that is that whereas you could argue
it is appropriate in the oil industry, who are benefiting from
$120 oil, in the gas the prices are much lower but they're being
caught. It is not a Centrica issue15 of the largest producers,
representing 65% of the gas production in the UK, have all said
it makes the UK gas production tax one of the highest in the world;
only Indonesia and one other country are higher than the UK. Even
Mozambique and Libya have a lower tax rate now than the UK for
production. The consequencesback to unintended consequencesare:
less investment in fields; less investment in jobs, and we are
therefore not going to extract those last few pockets of those
gas fields, those orphan gas fields, which if we don't develop
them now there won't be the infrastructure in a few years time
to do so.
The consequence then is that we are going to
have to buy more gas from international markets. The difference
between the UK market and international markets is that international
markets for gas are linked to the price of oil. If you want to
buy gas from Russia you would pay an oil-linked price. If you
want to buy from Algeria you pay an oil-linked price. Suddenly
in the UK, instead of paying local prices for our gas from the
North Sea, we are going to be buying and importing oil-linked
gas prices that are higher. The consequence is that prices will
go up to the end consumer; so not only no investment and no jobs,
higher prices. All around we think this is legislation that could
have recognised the fact that the gas industry in the UK is different
from the oil industry and, therefore, should have been treated
Q62 Sir Robert Smith: How
do you respond to the Treasury's argument: gas may not be as high
a price as oil, but it has gone up since you made the investment
Phil Bentley: Gas bills today
are lower than they were two years ago.
Q63 Sir Robert Smith: The
gas that you are receiving as a gas producer?
Phil Bentley: Again, all I would
say is the thinking was it was triggered on the back of $120 oil,
but the gas equivalent is about $60.
Q64 Sir Robert Smith: Are
you able to give an actual figure of the likely impact on consumers?
Phil Bentley: It is too early
to say at the moment, because we import 50% of our gas anyway
from international markets; those prices have been going up. Because
of the link to the price of oil it has been going up. I think
we are not alone in recognising that wholesale prices of gas since
the beginning of the year have gone up 25% to 30% and prices haven't
been set at equilibrium in terms of retail prices. So, who knows
how much and whenI don't think anyone would want to commentbut
the direction of travel is up, I am afraid.
Q65 Sir Robert Smith: What
is the decision time for Morecambe Bay?
Phil Bentley: Morecambe Bay is
the largest gas field in the UK, and it has been shut in at the
moment. It is taxed at 81%, but it has been shut in for regular
scheduled maintenance and when it comes out of that we will have
to see whether it is producing at an economic rate to justify
continuing. I suspect we will. We would want it to continue. I
don't think Morecambe Bay is the issue.
The issue is: some of these other fields that
we were looking to exploit and produce but nowand I tell
youwe are looking at investing in Norway, which has a similar
tax rate but much more generous capital allowances, as we used
to have in the UK: low taxes and low capital allowances. Now we
have gone to high taxes we haven't moved the capital allowances
up at the same level, which is a real problem. So Norway and Holland
are far more attractive. If we have a field we could develop in
the North Sea, in Holland or in Norway we will choose to do that.
Q66 Dan Byles: We have
heard from the Treasuryand I am sure you have seen the
evidence that they gave to usand from DECC. They are pretty
adamant that this move is not going to have a significant impact
on investment in the North Sea. I think the expression used was,
"No material impact on investment across the totality of
the North Sea", was the interesting Civil Service speak they
used. Why do you think there is such a divergence in view here
between DECC and the Treasury on one hand and industry on the
other? Are they deluding themselves or are you screaming too loudly?
Alistair Phillips-Davies: I think
we are only a very small player. We have very recently bought
some small fields in the North Sea. I think it adds to the uncertainty.
At the end of the day, people like to see certainty and consistency
if they are coming into markets basically; they don't want to
see people meddling in them and changing the rules. The purchase
that we made relatively recently has clearly gone down in value
because we are paying more tax on that, so it is probably going
to make it more difficult if I went back to the board and my company
and said, "I'd like to buy some more assets" and they're
going to say, "Well hold on, you just had 15% to 20% of the
value wiped off those assets by the Government, by the policy
change. How do you know that something else isn't going to change
that is going to do that?"
Q67 Dan Byles: So you
are saying it is not necessarily the actual level of the charges,
it is the principle of the charge?
Alistair Phillips-Davies: I am
saying the principle of the charges I think is quite an important
point as well. We have always argued whether it is some renewable
policy, similarly with things like N2EX where you are trying to
encourage banks into providing liquidity in the market. What you
need is consistency and not uncertainty around undue investigation
on those markets. I think consistency gives certainty and lowers
the cost of capital for people to come in. Phil would know more
about this because he probably spends more money investing in
these fields, but I think the fact the tax rate has gone up will
affect our ability to put the investors in the outlying fields
where we have small stakes as well, so there are two elements
there as we would see it.
Sara Vaughan: We are also, again,
a much smaller player in the North Sea through E.ON Ruhrgas exploration
and production. I think there are two principles around this:
one is the impact perhaps on the more marginal investments that
you may or may not have made, and this could clearly swing it
one way where it otherwise would have gone the other. I think
the other principle is the one that has been made around the stability
of tax regime when there is a choice of investment. We are not
talking today about the carbon price support, but carbon price
support has clearly been one whammy that energy companies have
had. This is another one, and I think that when European players
are looking at where they put their investment then all of these
things are going to make a difference.
Phil Bentley: This is a letter
to the Prime Minister, so it is signed by Shell, Total, Gaz de
France, Dom, ConocoPhillips, BG Greer, ourselves, and many others.
So this isn't a Centrica, British Gas issue; this is an industry.
It concludes, "We believe that the UK natural gas cannot
bear the burden of the increased taxation. The consequence of
this would be disproportionately damaging relative to the modest
increase in tax revenues". That is our view; clearly the
Treasury have a different view but all I would say is the industry
is probably closer to this than anyone else.
I want to also pick up that other point about
sovereign risk. I think it is something that the Committee should
reflect on, because all companies have investment choices and
you look at the political sovereign risk of investing in a particular
country. As you know, we have had the supplementary charge on
tax, making the UK one of the highest taxed hydrocarbon producers;
we have the Energy Market Review; we have the Retail Market Review;
we have the threat of the Competition Commission. We have had
17 inquiries into this industry since 2001. Each time that happens,
the sovereign risk that you look at in the UK goes up. We have
to make sure that all these policies come together to deliver
a stable environment for investment; good for the country; low
prices; choice for customers and growing the economy. My concern
is: all of these disparate activities serve to have unintended
consequences that do not deliver that.
David Mannering: In our submission
to the Committee we listed the regulatory changes that had taken
place since the beginning of January 2009. I think it ran to about
five pages which, I think, tells its own story.
Phil Bentley: There is a final
point. The other consequenceagain, unintended consequences,
it is a bit like the RMRif gas becomes more expensive then
coal generation is more attractive. What is happening at the moment
is that gas generation has been shut in, everyone is trying to
produce more from coal and of course that runs counter to the
carbon emissions target set by the Government. So again, you have
to think through: what are the consequences?
Q68 Barry Gardiner: You
have made a very strong case for the fact that the introduction
of the supplementary charge, and the manner of its introduction
without consultation, has meant that you regard the UK as an unstable
fiscal regime and, therefore, less attractive from an investment
point of view. What is the single most important thing that the
Chancellor could now do to address that lack of confidence by
the investment community? Is it the capital allowances that you
spoke of or is there some other thing that the Chancellor could
do or say that would begin to restore that position that the UK
had as, broadly, a good place to do business?
John Campbell: Sorry, you are
talking beyond gas production?
Barry Gardiner: This is
an example within the industry and we are focused on the industry
but from the point of view of somebody investing in the UK's energy
industry, and energy future, and looking at the UK as a good place
to invest that money, as we all want it to.
John Campbell: The electricity
market reform is going to be absolutely key. I know you have been
looking into that separately, but there are issues around the
feed-in tariffs for low carbon generation and capacity payments.
Those present an opportunity to create and deliver the massive
investment that the UK requires, and to do it in a stable framework
that offers fair return, clarity and durability of trading arrangements.
Martin Lawrence: I have the same
point; we have some very large investment plans in this country,
not in upstream gas but in generation and getting clarity about
those key metrics that we need around electricity market reform,
planning permission, and so forth, are the key things for us.
David Mannering: I think it is
about stable, predictable and timely regulation across the piece,
whether it is financial regulation of the tax regime, whether
it is economic regulation, statutory obligation such as CESP,
Warm Homes Discount, licence conditions, or whether it is environmental
regulation about the timeliness of permits being made available
and permissions to build and develop power stations.
Phil Bentley: What you need is
an energy policy that is strategic and coherent for the aims of
the country. We have aims around low carbon; let's make sure our
policies deliver that. We also want low prices, so let's make
sure it is coherent around that; putting up tax in the UK runs
counter to that and encouraging coal generation runs counter to
that. So we have bits of policy and somebody needs to step back
and say, "Let's make sure, for the next five yearsor
even 10, in an ideal worldwe know what all these policies
are going to give us in terms of an overarching strategic endgame",
and we don't have that today. We have lots of different policies
and none of them are joined up together.
Q69 Barry Gardiner: The
energy policy, you are saying, is currently incoherent?
Phil Bentley: That wasn't the
word I used.
Q70 Barry Gardiner: You
said we need it to be coherent and then you said we have lots
of little bits to do, that they're not very well joined up. So
I am trying to go with the logic of what you said, Mr Bentley.
Would you use the word "incoherent"?
Phil Bentley: I would use the
words, "It could be better joined up".
Q71 Dr Lee: Along those
lines: as an industry, if there is going to be tax, would you
rather see it on production or on consumption?
Phil Bentley: Did you say "tax"?
Dr Lee: Yes. One could
put an argument, for instance, with regards to reducing tax on
petrol but increasing tax on getting oil out of the ground. The
decision was made to go one way during the Budget. As an industry,
and in terms of meeting these low carbon targets, fulfilling security
of energy supply concerns, strategies of vision for the country
as a whole, do you think the tax should be on production or is
Phil Bentley: I have a view; others
may disagree. I would be taxing more on consumption because it
is those nudge behavioural changes on the consumer that has the
biggest impact. We know; we have seen customers can save 30% off
their bill through insulation, efficient lighting and heating,
and so forth, and higher efficiency boilers. I don't think it
is either/or, but if you were shifting I would shift to consumers
because ultimately that is where the behavioural change will have
the biggest impact.
Sara Vaughan: I completely agree
with that, but I would be very reluctant to answer your question
in a vacuum, because I think this plays to the point that we get
measures that are introduced that are not joined up with other
measures. So if we say "yes" to consumption without
seeing the context in which it is being presented or "yes"
to production, again, without seeing the context, I think it is
really important to get the full picture and the roadmap of how
that fits in to the destination we want to get to.
David Mannering: If I could answer
your question in terms of the balance between levies on electricity
as opposed to levies on gas, I think that is an illustration of
where policies are not necessarily aligned. So we know that, in
order to move to the low carbon economy, we need to use much more
electricity for a much wider range of thingsincluding transport
and heatingbut that electricity needs to be low carbon.
It is difficult to see how we are incentivising customers to use
more electricity if, as is the case at the moment, many of the
levies apply just to electricity and not to gas. So, for example,
we have the feed-in tariff scheme, levies on electricity; the
RO levies on electricity, the Green Deal will be applied to electricity
customers, the carbon tax bears on electricity, EU ETS bears on
So there are a wide range of taxes and levies
that put up the price of electricity and encourage people to use
the fossil fuel of gas, when we want to encourage people to use
more power. I think that is something that, going forward, if
there is an example of where we could get policies more aligned
some thought could be put into that.
Phil Bentley: The only other one
is speed of decision making, because how much delay will we have
on nuclear new build now; there is a review, but how long will
it take? How long has it taken to get smart meters and we still
aren't really rolling them out in volume? Three years of consultation?
It is the speed of decision making. I think this Committee can
really emphasise the need; we need some big decisions in this
industry in the next couple of years and we don't have long to
Sir Robert Smith: One
thing back on the supplemental charge. We got conflicting evidence
last week from the industry showing a drop in capital investment
after the previous Government's supplemental charge in 2006, and
then the Treasury and DECC claiming that it was all rosy and there
was no blip because of 2006. They may well have been measuring
something different from each other, but maybe the industry could
write to us with more detail about that discrepancy, because obviously
the history of what went wrong last time is quite important in
judging how bad it is this time.
Chair: All right, is everyone happy?
Okay. Thank you very much for your time, a very interesting session
and we look forward to seeing you again soon.