CORRECTED TRANSCRIPT OF ORAL EVIDENCE
To be published as HC 1046

house of commons

oral evidence

taken before the

Energy and Climate Change Committee

Ofgem's Retail Market Review

Wednesday 11 May 2011

Phil Bentley, Martin Lawrence, Sara Vaughan, David Mannering, Alistair Phillips-Davies and John Campbell

Evidence heard in Public Questions 1 - 71

USE OF THE TRANSCRIPT

1.

This is a corrected transcript of evidence taken in public and reported to the House. The transcript has been placed on the internet on the authority of the Committee, and copies have been made available by the Vote Office for the use of Members and others.

2.

The transcript is an approved formal record of these proceedings. It will be printed in due course.

Oral Evidence

Taken before the Energy and Climate Change Committee

on Wednesday 11 May 2011

Members present:

Mr Tim Yeo (Chair)

Dan Byles

Barry Gardiner

Ian Lavery

Dr Phillip Lee

Laura Sandys

Sir Robert Smith

________________

Examination of Witnesses

Witnesses: Phil Bentley, (Centrica) Managing Director, British Gas, Martin Lawrence, EDF Energy, Managing Director, Energy Sourcing and Customer Supply, Sara Vaughan, E.ON UK, Director of Regulation and Energy Policy, David Mannering, RWE npower, Director of Economic Regulation, Alistair Phillips-Davies, Scottish and Southern Energy, Energy Supply Director, and John Campbell, Scottish Power, CEO of Scottish Power Generation, gave evidence.

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 it-and I am not an economist, I am a lawyer; forgive me for that-I 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.

David Mannering: 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 environment-and there is evidence we have had more recently-where 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 period.

Q2 Chair: Ofgem did not do that, obviously?

David Mannering: No.

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.

David Mannering: Yes, that is true. Yes, for the period that they did look at.

John Campbell: 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?

John Campbell: 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.

Martin Lawrence: The time analysis: we have gone through and looked at our own numbers-because clearly we have access to those and don’t have access to competitors’ costs, or whatever-and 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.

David Mannering: 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.

Alistair Phillips-Davies: 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 Gas-and the facts are absolutely proven here-if 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 better-sorry, we are trying to get better-but 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 harder.

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?

Alistair Phillips-Davies: By the supergrid do you mean the links into Scandinavia, Norway and things like that?

Dr Lee: Yes, and down to Munich and beyond.

Alistair Phillips-Davies: 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 of Scotland.

Martin Lawrence: 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 energy-part of the selling point for the supergrid is that we could export the wind farm that Mr Phillips-Davies was referring to; the wind energy-does 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?

Martin Lawrence: 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 slim.

John Campbell: 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 renewables.

David Mannering: 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 Discount-the mandatory obligation-is 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 were-and 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 suppliers-and I have already said that I don’t think we are good enough ourselves at dealing with this properly-it 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.

Martin Lawrence: 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.

John Campbell: 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.

David Mannering: That is not to say that there isn’t a role for Ofgem. Ofgem’s Consumer First-sorry, 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 collaboration-I think those were his words-with 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, around-we talked about it-the 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 view-take it or leave it?

Martin Lawrence: 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.

John Campbell: 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.

David Mannering: 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 bill-and this is my bill here-you 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 telephone-you 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.

Martin Lawrence: 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 place-as at the time this document came out-for 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 now-and some of you are a little bit further ahead in transparency, I understand-in 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-

David Mannering: 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.

Martin Lawrence: 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 customers-and I would encourage you to all do the same-to 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?

Alistair Phillips-Davies: 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?

Alistair Phillips-Davies: Well, sorry-

Q17 Chair: Answer the question.

Alistair Phillips-Davies: 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?

Martin Lawrence: No, we are not.

Q20 Chair: Hand-on-heart, you are quite confident that no conviction will take place of any of your agents?

Martin Lawrence: 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?

Martin Lawrence: Absolutely.

John Campbell: 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 put right?

John Campbell: 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?

John Campbell: 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.

David Mannering: 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?

David Mannering: 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?

David Mannering: -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?

Alistair Phillips-Davies: 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?

Alistair Phillips-Davies: 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 information.

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 enough.

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.

Alistair Phillips-Davies: 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 your-how shall we put it-script 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?

Alistair Phillips-Davies: 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?

Alistair Phillips-Davies: 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 levels.

Q33 Dr Lee: Which begs the question: why were you using the script in the first place then?

Alistair Phillips-Davies: 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?

Alistair Phillips-Davies: I have bought products from people who have knocked on my door.

Q35 Barry Gardiner: Of what value, Mr Phillips-Davies?

Alistair Phillips-Davies: What value?

Barry Gardiner: Maybe somebody coming round with their local charity tea towel or something-brushes-but 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 doorsteps?

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 sales forces.

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 provide me-

Sara Vaughan: I will provide you with that.

Barry Gardiner:-every 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?

Alistair Phillips-Davies: 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?

Alistair Phillips-Davies: 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 and-as Scottish Power said earlier-surely 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-

David Mannering: 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 customers-some of whom are going to be vulnerable customers with larger families-cross-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 big mistake.

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 comment-and it is obviously a purely anecdotal comment-was 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.

John Campbell: 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.

David Mannering: 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 by customers.

Q42 Sir Robert Smith: What is happening next? You have had an initial meeting?

David Mannering: 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.

Martin Lawrence: 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 solution.

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?

John Campbell: 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.

David Mannering: RWE was instrumental in setting up N2EX, which is an exchange-I don’t know if you are familiar with it-that 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 that-if Ofgem will work with us-we 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 in-I think it is either this week or next week-and 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.

Martin Lawrence: 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.

David Mannering: 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

Martin Lawrence: 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.

John Campbell: 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?

John Campbell: 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?

Alistair Phillips-Davies: 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 provide-with the comments made here from colleagues who provide flexible products to these individuals, and we deal with a lot of the counter-parties-if 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 other-we are optimising each position separately. There isn’t a self-supply going on. We have a trading business that is trading everything out there.

David Mannering: RWE operates a very similar model.

Chair: What about the rest of you?

John Campbell: 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 out.

Martin Lawrence: 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.

Alistair Phillips-Davies: 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 Ofgem-they are demanding that-some 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 call-if they had made one to us-before 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 us.

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.

Martin Lawrence: Our numbers are totally aligned with corporate accounts and statutory accounts. The one-line item that we highlighted at the time was accounting-

Barry Gardiner: Sorry, the one-line item that-

Martin Lawrence: 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.

David Mannering: We sent Ofgem a complete reconciliation between RWE group number and the UK Gap numbers-

Q48 Barry Gardiner: When was that taken?

David Mannering: This is after-

Barry Gardiner: This is after you had supplied the initial information, yes?

David Mannering: 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?

David Mannering: 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.

John Campbell: 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.

Alistair Phillips-Davies: 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 review-I can’t remember exactly when it was, three or five years ago-and 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, sell high-

Phil Bentley: Because we are competitors and we think we are better traders.

Sara Vaughan: And we disagree.

John Campbell: 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?

Martin Lawrence: 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 is-coming back to the point-the most competitive market; it is the most open market and it is delivering the lowest prices for customers and we should be thankful for that.

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?

John Campbell: 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.

Alistair Phillips-Davies: 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.

Martin Lawrence: 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.

David Mannering: 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 been-both by Which? and Consumer Focus-singled 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 it-I don’t know anyone who really does-and 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 conditions?

David Mannering: 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.

John Campbell: 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 convinced-and I don’t think that we are convinced-that 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 danger-because there is already a regulatory opportunity on us-that 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 domestic market?

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 today-whereas oil was about $120 a barrel-the 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 issue-15 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 consequences-back to unintended consequences-are: 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 differently.

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 decisions?

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 when-I don’t think anyone would want to comment-but 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 now-and I tell you-we 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 Treasury-and I am sure you have seen the evidence that they gave to us-and 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 consequence-again, unintended consequences, it is a bit like the RMR-if 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 years-or even 10, in an ideal world-we 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 there-

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 things-including transport and heating-but 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 electricity.

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 wait.

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.

Prepared 29th June 2011