CORRECTED TRANSCRIPT OF ORAL EVIDENCE
To be published as HC 1046-iii

House of commons

oral EVIDENCE

TAKEN BEFORE THE

Energy and Climate Change Committee

Ofgem’s Retail Market Review

Tuesday 28 June 2011

Ian Peters, Alistair Phillips-Davies, Amparo Moraleda and Rupert Steele

Evidence heard in Public Questions 212 - 351

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 Tuesday 28 June 2011

Members present:

Mr Tim Yeo (Chair)

Barry Gardiner

Dr Phillip Lee

Albert Owen

John Robertson

Laura Sandys

Sir Robert Smith

Dr Alan Whitehead

________________

Examination of Witnesses

Witnesses: Ian Peters, Managing Director, Energy at British Gas, Centrica, Alistair Phillips-Davies, Energy Supply Director, Scottish and Southern Energy, Amparo Moraleda, Chief Operating Officer of Iberdrola and Acting Chief Executive Officer, ScottishPower, and Rupert Steele, Regulation Director, ScottishPower, gave evidence.

Q212 Chair: Good afternoon and thank you for coming in again. I think I may have been asleep during the meeting in May. I do not recall any of you saying that your customers would have price increases on their bills of up to 45% announced just a few days after our last discussion. Did I miss that or has some new factor come into the equation?

Amparo Moraleda: Rupert, do you want to take this one?

Rupert Steele: Thank you very much, Mr Chairman. We obviously monitor the market on a continuing basis. We have been dealing with price increases on our input costs for a long time and I think a number of companies have made public statements to that effect. Clearly we can’t announce a particular price change until we are ready to do so and at the time of the last hearing no decision had been taken by ScottishPower as to its prices. When that decision was taken it was, of course, immediately announced.

Q213 Chair: But the input prices to which you refer and that apparently justify the decision presumably occurred before you were last here.

Rupert Steele: The main increase happened from March as a result of the changes in international markets, the Fukushima accident for example. So those things led to a sharp tightening of the market.

Q214 Chair: It did not cross your mind when you were here to be a bit more straightforward with this Committee?

Rupert Steele: I don’t think that a question arose that encouraged the witnesses to answer that.

Q215 Chair: Really? You do not think that a 45% increase in consumer bills was something that would have concerned any members of this Committee?

Amparo Moraleda: Well, the decision had not been made at the time, Mr Chairman, and we were scrutinising very closely the evolution of the wholesale prices and the evolution of our retail margins. Given this evolution and given the forward curves, we made, as a company, the decision that we needed to move forward into the price increases.

Q216 Chair: So you will sit here with butter melting in your mouth quite aware of the bombshell you are just about to drop on the markets and not saying anything to us about it this afternoon?

Amparo Moraleda: I beg your pardon. I do not understand.

Chair: In speaking this afternoon there may be some other ghastly secret up your sleeves that you intend to keep secret.

Amparo Moraleda: No, this is not the case.

Q217 Chair: The fact was that you knew what the input price increases meant for your future prices, but you chose to keep that from us?

Rupert Steele: We knew what the increase in input prices was because that was public data. We had not, at the time we appeared before the Committee or at the time my colleagues appeared before the Committee, made a decision as to how or when we would respond. When we did make that decision it was announced.

Q218 Chair: Were you surprised at the reaction of the Minister and the public and people like me to what you announced?

Rupert Steele: Well, we knew that-

Chair: I am asking whether you were surprised. Just yes or no will do.

Rupert Steele: We expected that consumers and others would be concerned. Clearly we held off increasing the prices for as long as we could, but we were facing huge increases in our input costs.

Q219 Chair: Forty-five per cent?

Rupert Steele: The 45% number relates to expiring special deals, which is a slightly different situation.

Q220 Chair: So how many of your consumers will face a 45% increase?

Rupert Steele: We will have to get back to you on the precise number of people who are on-

Chair: So you have come here without even being briefed?

Rupert Steele: Twenty-five per cent of our customers are on special fixed-term products, which will expire at particular times. Those will have particular fixed prices attached to them that will relate in different ways to the current prices that are in the market.

Q221 Chair: Are we to assume that one in four of your customers faces an increase of 45%?

Rupert Steele: No, it will be less than that.

Q222 Chair: What is the increase in the wholesale prices that you say justifies the 45% increase for those customers?

Rupert Steele: The customers where the increase is of that sort of order will have had their prices fixed some long time ago.

Chair: I am asking you what the increase in the wholesale price was: 10%, 15%?

Rupert Steele: It would be much larger than that. We would need to look at the specific product, as to when its price was set-

Chair: I am asking about the wholesale prices on which you base this package.

Rupert Steele: The wholesale price between our last price change in November and now increased by of the order of 30%. We gave you written evidence around that. The prices for the fixed-price products that were expiring will have increased by significantly larger percentages depending on when the fixed-price product was taken out. We will have to get back to you with a note setting out the numbers on that.

Q223 Chair: Do you agree with Which? who suggest that your price increases will penalise low energy users?

Rupert Steele: No, the price increases are fair to users at all consumption levels.

Q224 Chair: Is it not the case that low users face a price increase of 20%, medium users of 15% and high users of 11%?

Rupert Steele: One of the things that we did in making these price adjustments was to correctly reflect through to our consumers the fixed costs that we bear.

Chair: So it is true?

Rupert Steele: It is true that we are correctly reflecting the fixed costs.

Q225 Chair: It is true that the rate of increase for a low user is double the rate of increase for a high user?

Rupert Steele: You will be able to find consumption levels where that relationship exists.

Chair: You must know. I cannot believe you have come here without even having that information at your fingertips. Is it true that the increase for a low user is double the increase for a high user?

Rupert Steele: It depends of the definition of "low" and "high". There will be figures of low and high for which that is the case.

Q226 Chair: Those are the figures used by Which?. Are you saying Which? have it wrong? Is to double the increase for low users compared with high users the ScottishPower way to encourage people to use less energy? Is that your contribution to energy efficiency?

Rupert Steele: Our approach is to charge cost-reflective prices.

Q227 Chair: Which means having a double rate of increase for a low user compared with a high user: yes or no?

Rupert Steele: There will be some low users for which the increase is a higher percentage because the prices were not cost-reflective prior to the change.

Q228 Chair: How many ScottishPower customers do you estimate are pushed into fuel poverty by this increase that you kept from the Committee and which you have graded in a way to penalise low users particularly?

Amparo Moraleda: We do not have the precise data and we know these are tough times for our customers. We will keep committed to help the groups of people who are having challenges and difficulty with the new energy prices. We have invested a significant amount of money over the last three years, over £250 million, to help people with those kinds of programmes. We are committed to keep investing over the next four years in the range of £120 million around the Warm Home Discount Scheme and we are advising all our salespeople and all the customer-facing staff to recommend our customers to shift into the tariffs that can be more effective and more efficient given their circumstances.

Q229 Chair: Do you think any of the ScottishPower customers who are facing these enormous increases in their bill were persuaded to take on a particular tariff by a door to door salesperson?

Amparo Moraleda: Regarding the door to door selling, we are currently in the process of informing our customers about the price increase that we are making effective on 1 August. We are giving them more than the 30 days’ notice that has been set by Ofgem as the rule. We are giving more than 50 days’ notice. We have all our sales force and call centres devoted to respond to their questions, to suggest a switch and to give them precise advice so that they can have a proper choice. When it comes to doorstep selling, our focus and our effort is to make sure that the salespeople have accurate data and accurate information to make sure that the customers can make their decision based on factual, accurate and precise data to make a proper choice.

Q230 Sir Robert Smith: I should remind the Committee of my entry in the Register of Member’s Interests as a shareholder in Shell and also as an Honorary Vice President of Energy Action Scotland, a fuel poverty charity.

One of the things the industry has kept doing over the years that we have gone down the market road is to say, "We act in the interests of consumers because we hedge and we manage to smooth out the transitions in the wholesale market. We protect consumers from wild swings". Has something gone wrong with ScottishPower’s hedging that the consumers are suddenly facing this wild swing?

Amparo Moraleda: As you very well know, procurement of wholesale energy is a very sophisticated activity. The trading of energy is a core part of our business but it is a very sophisticated one. We do our best to try to shield and protect our customers from the fluctuations of the market, but there are some elements that cannot be predicted. For instance, we could not predict the unrest that was going to happen around the Arab countries and make the oil price go up. We could not predict the impact of the Fukushima effect and the fact that Japan was going to require sourcing gas to compensate for 10 nuclear power stations. So we make our best effort to predict how these commodity markets are going to evolve, but this is far from being a science and, therefore, we are subject to these kinds of fluctuations.

Q231 Sir Robert Smith: We also heard this morning that there is a glut of gas coming to the world. There is shale gas in America, and America is exporting gas instead of importing it.

Rupert Steele: We are not seeing that in the gas market at the moment. At the moment what we are seeing is substantially higher prices of gas since March. We are not feeding any of that cost-

Q232 Sir Robert Smith: You were not hedged in a way that could protect consumers from this kind of shock?

Rupert Steele: We have been able to protect consumers from then until August and it is costing us quite a lot of money to do that. I have to mention that over the last two years we have made an average of £10 a year on selling electricity and gas on a dual-fuel bill of £1,000, so our retail business has been making hardly any money at all. Since then we have faced a big increase in our costs and it is, I am afraid, inevitable that that is something we had to pass on to our consumers.

Q233 Sir Robert Smith: Just one last thing; did the fixed-term contracts get sold with a warning that they could face a dramatic change at the end of the fix?

Rupert Steele: It was very clear to people on these fixed-term prices that they get a fix for a period and then we have to organise a new price. Clearly a fixed-price contract has a fixed term, when you come to the end of it your new price has to reflect the market circumstances at the time. Clearly that is an essential part of that.

Q234 Sir Robert Smith: But are people warned? Because obviously when there is volatility in the non-fixed market people may think they are buying some sort of security, they are buying a term of security, but at the end of that term they could find it far more difficult to budget for how the market has shifted.

Rupert Steele: Our marketing is clear as to the period for which the price is fixed and how the matter is dealt with afterwards. We are very happy to provide examples to the Committee.

Q235 Albert Owen: Can I just follow the same line of inquiry as the Chairman? I can share with the Committee that I have received from ScottishPower a letter saying that my prices have gone up. I am also a customer of Centrica, British Gas. Can I expect such a letter soon from yourselves?

Ian Peters: We operate in a very competitive market and we have the highest switching rates in Europe. I think it would be wrong for me, in front of two of our competitors, to talk specifically about our pricing intentions.

Q236 Albert Owen: But I must push you on that because we asked similar questions of all six companies-so we are being very even-handed-in the last session. We did not get a response from them and now we have evidence to say that one company has put prices up. So I think it is quite a fair question to ask not just Centrica but Scottish and Southern Energy whether they have any intention-this Committee will be going into recess in a couple of weeks-that we might hear that the prices are to go up?

Ian Peters: I am happy to talk about the general fundamental trends. As Alistair Buchanan, the regulator, himself said last week, the price of winter gas is 30% higher than it was this time last year and across the whole of 2011 it is 40% higher. Those are genuinely considerable increases in our import costs. We watch the market literally on a daily basis. We have made no decisions as we speak and we will try and protect our customers as long as we can from those fundamental forces. But the Committee may have noticed that this morning we announced that year-on-year our profits are down by 50%. So that is something we are clearly very aware of.

Albert Owen: I think the answer was a yes.

Ian Peters: Unless there is a fundamental shift in the way the commodity markets are going to play out over the next few weeks I think, on balance of probability, we will reluctantly put the price up. But I am not going to get drawn into precisely when or how.

Albert Owen: I think you have answered the question.

Alistair Phillips-Davies: We have not taken any decision on timing or quantum of any price increases. We, as ever, remain committed to keeping them down for as long as possible. I think our record stands for itself in terms of being one of the lowest-cost providers of electricity and gas to consumers in the UK over the last several years and the highest levels of service. As other people have noted, there are significant increases in costs. They come in three areas. One would be the wholesale market and Alistair Buchanan’s number of 30% is obviously fairly accurate. We then have increases in costs in networks, which have been pretty considerable in recent times, and you have increases in costs from Government-sponsored schemes. The only advantage of the Government-sponsored schemes is that they have driven significant reductions in demand for users of energy and, therefore, what we have seen is that our consumers have had a significant reduction in their bill because they are not using as much energy as they used to. Over the last two or three years we have seen 10% to 20% reductions in both gas and electricity consumption. We will hold on for as long as we can and when we have an announcement or when the board has taken a decision, we will let the market know promptly.

Q237 Albert Owen: Mr Peters, you have quoted Ofgem and you agreed with them on that, but the industry and your company, I take it, do not agree with Ofgem when they say, "When costs go up then prices go up and when they come down they come down a lot slower"? You do not agree with them on that point, I assume? I will ask other witnesses to respond to this as well, but what evidence do you have as an industry to contradict that statement and that report by Ofgem?

Ian Peters: No, we do not agree with the fundamental assertion made. Interestingly, if you read the detail in Ofgem’s own report it is far from clear. They acknowledge that there are multiple variables at play here and they could not draw any conclusive response. Alistair Buchanan himself was more definitive about the way he portrayed that. Since then NERA, an independent economic consultancy, have done some work on behalf of Energy UK and they have concluded that there is no evidence of lagging or leading in that sense. As we have just said, I think the market shifted from around March off the back of Fukushima and the Middle East instability, and the majority of the suppliers have held off passing those through to the customer as long as we can.

Q238 Albert Owen: Can I just push you on that? You said the report that you received from NERA says that they cannot prove one way or the other, but do you have conclusive evidence that prices have symmetry-that they go up at the same pace as they come down?

Ian Peters: You can look at it over the long term and you will see different-

Albert Owen: With the greatest respect, we are trying to get clarity here. We are getting reports that are contradictory and I do agree with you that it was not very conclusive, the Ofgem report, but do you have firm evidence that prices are asymmetric and they do go up and down at the same pace?

Ian Peters: The NERA report is as conclusive as we have seen. I think that was produced by an independent external and I am sure Members of the Committee have read that, but I think there are different patterns prevailing at different times because of the sheer number of variables at play in the market.

Q239 Albert Owen: Does anybody else want to say anything?

Alistair Phillips-Davies: There is a little graph we shared. You can go into Monte Carlo simulations and decide whether you feel some of these things are accurate or not, or whether there are biases, which is fundamentally what the problem with the Ofgem analysis was. The detailed technical paper, which you seem to have read, indicates that they could not conclude and I think there was a misrepresentation by some sectors of the media who picked up on one or two comments and blew them out of proportion. But there is a simple graph there in the evidence that we submitted beforehand-you should have a copy or we can provide you with another copy-and I think it demonstrates that I don’t think there is a noticeable trend there.

Amparo Moraleda: As far as we are concerned, we are pretty much on the same line. I think that we all agree that we need a bigger sample to make a statistically relevant conclusion, and at this stage we cannot really make any final conclusion as to whether this takes place or not. What we all have, I think, is the track record of what our margins have been over the last two years and, despite how wholesale prices and retail prices have evolved, we have provided evidence that the margin we have made in the typical bill of £1,000 is just £10 per annum and this is a very tight margin.

Q240 Albert Owen: The problem I have and I am sure other Members of this Committee and Members of Parliament will have is they have anecdotal evidence from their constituents that prices go up very suddenly and they do not come down very quickly and we have a duty to pass that on. We can see graphs and we can see reports, but the actual, if you like, coal face does not really bear this out in many cases. So we will, I am sure, come back to this and probe it further. Can I ask one final point with regards to Ofgem’s conclusions and analysis? What they say is basically that there are allegations of mis-selling; there is customer confusion over tariff, and overall-I put it to you all-the picture is that the market is not working very well and customers are not doing very well out of it. How would you respond to that?

Rupert Steele: I think that at a statistical level, and that is quite important, the market is working remarkably well. Britain’s electricity prices for domestic consumers are the fourth lowest in Europe. They are the lowest of the EU15 for gas. So something is working quite well.

Q241 Albert Owen: Sorry, Mr Steele, you raised statistics. Do those statistics include the rates of the 18 different European countries?

Rupert Steele: That is inclusive of tax.

Albert Owen: Inclusive of VAT?

Rupert Steele: Inclusive of tax, yes.

Albert Owen: VAT, yes?

Rupert Steele: Yes. Clearly there is an issue that Ofgem has quite rightly raised about improving the transparency and clarity of communications with customers and I think the industry may well accept that over time some practices have grown up that perhaps are not as clear as they could be. I think everyone has said in their responses to the retail market review that they are very committed to doing something about that and making things much clearer for customers. I think that will be an important advance, certainly to ScottishPower. It is absolutely our intention to improve the way we do our business in this area; to be clearer and more transparent. It is sometimes easier to say that than to do it because what one person writes and thinks is clear another person maybe confused by. We have to work at it, but it is a strong objective that we are now taking on board, precisely to meet the regulator’s concerns.

Q242 Albert Owen: One thing we are not clear about is your response to the Chairman’s earlier question, whether low users were paying considerably more under your new price regime.

Rupert Steele: I think I said that at a particular consumption level there will be the statistic that the Chairman quoted. It depends what you define low and high user as, but what I would say-

Albert Owen: I believe there is some clarity needed there, to be absolutely frank.

Rupert Steele: We can come back with further clarity on that.

Q243 Chair : Mr Peters, in declining, allegedly for commercial reasons, to give a straight answer to Mr Owen’s question about your price increases, you quoted Alistair Buchanan in your aid. Do you agree with him when he said, referring to the Scottish energy price rise, "This price rise has taken a lot of consumers by surprise. It has been one of the most talked about issues I’ve come across in seven years at Ofgem. This is exactly the kind of thing that erodes trust from consumers." Do you agree with him?

Ian Peters: From a timing point of view I think I would acknowledge that did create a degree of surprise from consumers; on that particular point I would accept it. I think the trust piece goes to something much wider and that goes back to the way the industry evolved from around 2005-06 when prices went up. I think that is part of it. The industry, I would acknowledge, as well as Ofgem, has not done as good a job as it could and should have done in educating consumers on how the markets operate.

On the specifics of mis-selling, I would accept that the field sales channel is, regrettably, a significant driver of that level of distrust. Now, the way British Gas responded to that was we have spent £7 million on a new state-of-the-art handheld computer system for our field sales team that will guarantee accurate point-of-sale, real-time comparative quotations against all the other major suppliers in the industry. We are one of only two suppliers not under investigation from Ofgem from that point of view. I think that level of rigour and transparency and openness is what the whole industry should aspire to.

Q244 Chair: Let me give each of you the chance perhaps to make the biggest step this afternoon towards improving the trust of consumers. Will each of you give this Committee an assurance that if any of your companies are found guilty of mis-selling to customers you will recompense those customers in full; yes or no?

Ian Peters: There is a difference, I think, between systemic mis-selling and individual mis-selling.

Chair: That means no, does it, from Centrica? I just want to be clear, that is all.

Ian Peters: No, I am saying it depends on the circumstances, Chair.

Chair: I see; so it means probably no.

Ian Peters: Ofgem are reviewing four of the players at the moment for that and they will-

Chair: If any of your companies are convicted of mis-selling to customers will you or will you not recompense all your customers to whom you have mis-sold in full; yes or no?

Ian Peters: If it was systemic mis-selling I think we would look that, but I see no evidence of that.

Q245 Chair: So if you just happen to be an unfortunate couple of thousand customers who could not say they were systemic they are going to get screwed, are they?

Ian Peters: As we would do anyway, we would look at every case on its merits and if there are examples where we can prove that we have mis-sold-

Chair: That will take quite a long time. How many years will customers have to wait for the compensation?

Ian Peters: Mr Chairman, we will do what is appropriate. We will review all complaints and-

Q246 Chair: Why not do what is right? Why not try and take a big step this afternoon towards restoring the trust of your customers in your industry? Why not?

Ian Peters: Speaking from a British Gas point of view, Mr Chairman, we are not under investigation. Ofgem are looking at this.

Chair: So why can you not give the assurance in that case?

Ian Peters: On a case by case basis I will, but I have no evidence in front of me that we have a systemic issue.

Chair: All right. What about the rest of you?

Rupert Steele: We are currently participating in an investigation. I think that process needs to run its course through its own channels.

Q247 Chair: When it has run its course what are you going to do about compensating the ones that you have misled?

Rupert Steele: That will depend on the outcome of the investigation. I don’t think we can-

Q248 Chair: All right; that is a no from you. What about you, Mr Phillips-Davies?

Alistair Phillips-Davies: If it is finally proved that we have done something wrong and that the consumer suffered some detriment and compensation is appropriate then we will consider that.

Chair: Consider it? That is pretty clear, I think. There are a number who will be interested in that.

Q249 John Robertson: Let me answer your question, Mr Chairman, on how many people will be in fuel poverty. I can speak for Scotland here. If SSE put their prices up the same as ScottishPower it is reckoned there will be 1 million people in Scotland in fuel poverty. That is 20% of the population who will be in fuel poverty. How do you feel about that?

Amparo Moraleda: As we said before, we recognise that those price increases are not really helpful and that it is-

John Robertson: That is an understatement.

Amparo Moraleda: -tough times for our consumers. But on the other side we are trying to do our best to make sure the customers make the right and best decisions to opt for the best and more suitable tariff for them. We also need to highlight that we are making significant investments in other areas in Scotland as an energy company, and in the rest of the United Kingdom, to drive investment, job creation and prosperity. We have invested more than £3 billion in the UK, 70% of it in Scotland, over the last three years since we acquired the company. Our plans are to keep increasing this figure up to an additional £15 billion.

Q250 John Robertson: How much of that is spent on renewables?

Amparo Moraleda: For this previous amount?

John Robertson: Yes, where you get a very nice incentive from the Government.

Amparo Moraleda: Out of the-

Rupert Steele: £3.5 billion; I think it is about 25%.

Amparo Moraleda: 25%, yes.

John Robertson: So 25% of £3.5 billion you get-

Amparo Moraleda: Yes.

John Robertson: -s o you can’t count that, can you?

Amparo Moraleda: Yes, we can.

Q251 John Robertson: So a quarter of your £3.5 billion gets wiped out because the Government give you the money?

Amparo Moraleda: Well, there is-

Q252 John Robertson: Let’s move on. How much profit did you make last year?

Amparo Moraleda: In the retail business?

John Robertson: No, in your company; in ScottishPower. How much did ScottishPower make?

Amparo Moraleda: The ScottishPower total EBIT result accounted for £679 million.

John Robertson: And the year before?

Amparo Moraleda: This was down 15% from the previous year; so just 15% less.

John Robertson: I have for 2009, £1.3 billion, which came from your website.

Amparo Moraleda: It is probably EBITDA-a value of different magnitude.

Q253 John Robertson: I have heard some good phrases already from ladies and gentlemen. "Timing is bad." Is there ever a good time to put a price up? "It is Ofgem’s fault"-this is Mr Peters-"for not educating people on how the market works"; yet Mr Steele has quoted, "The market is working remarkably well". Well, it certainly is, but not for the people in Scotland. So tell me this. Do you have any moral obligation to your customers or are you just in it for the money?

Rupert Steele: We know that these are tough times for customers.

John Robertson: No, that is not what I asked you. I know what tough times are. Tell me, do you have a moral obligation to your customers?

Rupert Steele: We do not have an obligation to sell products to our customers for less than it costs us to acquire them and service the customer accounts.

Q254 John Robertson: So you will take money from the poorest by increasing them the most. You have already said that, without saying the actual words. The medium term ones you are quite happy to leave in a certain position and then the ones that spend the most money on their electricity will get the least increase. Let me ask you about another increase. I also received my letter from ScottishPower just at the weekend when I was home. Daily service charges: why have daily service charges gone up, for me alone, 67%?

Rupert Steele: This is exactly the same issue as the one about the size of customers. Our standing charges or the equivalent to standing charges have been lower than our competitors for some time and lower than our costs. Given the increasing focus on cost reflectivity, we-

Q255 John Robertson: So you are in the business of driving away customers. Is that what you are trying to tell me? Because by putting up prices to that extent you would, of course, you would think, move people into another company’s books, would you not?

Rupert Steele: It is always a risk in a business when you increase prices that some customers would choose to go elsewhere. We think that many of our customers, having seen the media coverage around other companies’ intentions, may wait to see what other companies do first before making a decision. That is a matter for them.

Q256 John Robertson: Why is it that all your prices, other than for the latest ones that have been announced by ScottishPower, from figures that we received last week, you could throw a blanket over all the prices. It was lucky if there was about £5 or £6 a year between every single company. Is that just a coincidence?

Alistair Phillips-Davies: I think one of the things that you will see-

Q257 John Robertson: Do you all buy your stuff at the same time? Do you all buy gas at the same time? Do you all buy oil at the same time? You do not do any hedging; you just say, "Let’s all buy it together so we can split our price", or do you do hedging and you work for your own company? Which?

Alistair Phillips-Davies: All right, I will take the first question.

John Robertson: Whatever you like; take them all.

Alistair Phillips-Davies: Fine. On the first question over prices, it is a clear indication it is a very low-margin business. We pass on the costs the international oil and coal companies charge for the fuel that we put into our power stations to those people. That makes up 50% to 60% of the bill. We then pass on the costs from the networks and we end up with a fairly slim piece at the end that pays for our customer service and collection costs.

Q258 John Robertson: But why are other companies roughly the same price as you?

Alistair Phillips-Davies: Well, I don’t think they are within £5 or £6. I think there are reasonably significant differences.

Q259 John Robertson: Mr Peters says, and I quote, "We are in a competitive market". Where is the competition? You are all charging roughly the same price. I don’t see any competition.

Alistair Phillips-Davies: You have indicated that there are clear differences in our prices and what I have said is those differences represent quite significant amounts of money in relation to the costs that we control because the costs that we do not control are those regulated by Ofgem for the networks and those that we are charged in the international wholesale markets for the fuels that we procure. Therefore, the bulk of the costs essentially are passed through from those two areas and that is why there is relatively little difference or relatively small differences between those costs.

Q260 John Robertson: I always think if one thing is the same or roughly the same, it is a coincidence. When you get six different companies all roughly the same for all their prices it is not a coincidence, is it? You do talk to each other and work out the prices, don’t you?

Alistair Phillips-Davies: I would absolutely deny that.

Amparo Moraleda: We do not, absolutely.

Alistair Phillips-Davies: I would absolutely deny that.

Q261 John Robertson: You would say that, wouldn’t you?

Alistair Phillips-Davies: I would absolutely deny that.

Albert Owen: You got one clear answer.

John Robertson: Nearly. Unfortunately I do not believe that one either.

Q262 Dr Lee: We have been talking about similar gains already. I have a newspaper article here by Rowena Mason in The Daily Telegraph a few days ago. In it she makes statements that there are regional differences in prices to consumers in this country; this is particularly with regards to ScottishPower. Why are there such regional differences? She says, "There are huge discrepancies in regional prices with customers in the East Midlands and the East areas facing the biggest jumps." Why?

Rupert Steele: The prices that are charged by the network companies for delivering energy to people’s homes are set by Ofgem and they depend on the particular characteristics of each network: how much capital is involved, how many miles of pipes and wires and various other factors. Those calculations end up with quite different numbers in different parts of the country, depending on the type of network.

Q263 Dr Lee: Do you think your customers are aware of that?

Rupert Steele: I don’t know whether our customers are all aware of that. It is a detail of the way the electricity and gas industries work. What we do is we reflect on to our customers the prices that we have to pay for the delivery service in the various locations as they are set by Ofgem.

Q264 Dr Lee: So basically your postcode dictates your energy bill?

Rupert Steele: Your postcode dictates the cost to us of delivering the electricity or gas.

Dr Lee: No, specifically the consumer-

Alistair Phillips-Davies: It is a proportion of your energy bill. So, for instance, in Scotland they get slightly lower gas transportation charges than England and Wales. So our Scottish gas prices, in terms of costing models, are going to be lower.

Q265 Dr Lee: I am not so sure that consumers are aware of this.

Ian Peters: It is the 20% that Alistair is alluding to-the network distribution costs.

Q266 Dr Lee: Yes. In the same article it says, "ScottishPower began notifying a number of its online discount customers last week"-two weeks ago-"that their gas bills will rise by almost 60%." Are those customers in those areas?

Rupert Steele: I think that will be expiry of fixed-price tariffs. So that is back to the point that the Chairman raised earlier; that when somebody agrees with us to buy gas at a fixed price for a period of two years, let’s say, and when the two years are up the market could have gone up by 50%, 60%, 70%, 100% in that time. At that point, when we have to reset the price, you can get a big step. Sometimes it is a step down; sometimes it is a step up. It depends on what the price was when the two-year or one-year or three-year, whatever, contract was entered into.

Q267 Dr Lee: I still work as a doctor. If I prescribe something or if I refer somebody or make a medical decision about their care we have something called informed consent, the principle of informed consent. Do you think-this is to all of you-that your customers gave informed consent to sign contracts for the deals they are now coming out of that are resulting in these 60% cases?

Rupert Steele: I don’t think that there is an issue in the sense that when people come out of the deal they are going to be getting the same price as everybody else. So what they have done is take the decision that they wish for a period of time to have a particular price. When that price period comes to an end they get the same price as everyone else. It is not as if there is some kind of trap.

Q268 Dr Lee: But do you think they understood the potential risk that they may see a jump in their bills of 60%? I do not share John’s preoccupation about morality here. Energy is like any other commodity in the world, but 60% is a pretty dramatic increase in anybody’s bills and I am not so sure that the people who have entered into this can have ever envisaged that there would be a 60% increase.

Rupert Steele: It is difficult to know whether they would have envisaged that. What they would have envisaged-

Q269 Dr Lee: I can tell you now if I was taken to the GMC or whatever I would have a professional obligation to prove that there was informed consent. I would have documented it. When you go cold-selling on the doorstep do documents exist so that somebody says, "Yes, we agree that we have been fully informed and we fully expect that if this happens down the line there is a potential for this to happen, such as a 60% increase"? Do those documents exist?

Ian Peters: Yes, they do. I can’t comment on the 60% but where I think we have changed our approach is that fixed-term contracts in the industry, I think largely to this day, are automatically rolled over. In conversations with Consumer Focus at the back end of last year we took a decision that that was an inappropriate way of handling the rollover. So from the start of the year we stopped that practice. Now when a contract expires, we give customers options and if they want to choose to go into an alternative contract that is their option, rather than a default. I think that is much more transparent and a better way of the industry working.

Q270 Dr Lee: Moving on to another regional question. The parent company of ScottishPower, looking at the website, has activities all over the world-a very successful business. Do you envisage, or have they ever occurred, such domestic increases in energy bills in those countries?

Amparo Moraleda: We operate in different countries, as you said, and the regulatory framework in different countries is very different.

Dr Lee: Yes. But, with respect, the gas costs X; the oil costs X; the hydroelectricity, I should imagine, is within a sort of range but will cost X. I recognise that there are different taxation regimes and accept that there may be some difference but have you ever had to be in front of a committee, if such a thing exists, in Spain or in Portugal or anywhere else you work where you have had to defend the potential increase of 60% in domestic bills?

Amparo Moraleda: The reality is that in those countries the prices are much more regulated than they currently are here, so there is not the same kind of market dynamics. So the way the markets are regulated and the way the regulators operate in each country define pretty much how the prices work and, therefore-

Q271 Dr Lee: Is that reflected in your profit margins?

Amparo Moraleda: Absolutely.

Q272 Dr Lee: So you make more profit here or there?

Amparo Moraleda: It varies country by country.

Dr Lee: No, my point is that if you have a heavily regulated country where these price changes are not likely to happen are you making more money as a proportion there or-

Amparo Moraleda: I have to tell you our margins in Spain are higher, which is the country where we have end-user customers because in the rest of the countries where we operate we deal with transmission and distribution activities or with generation activities.

Rupert Steele: The prices are higher in Spain than they are in Britain.

Amparo Moraleda: Than they are in the UK.

Q273 Dr Lee: So your argument is that it is more of a constant price in those regulated situations instead of less regulated where there is a danger of more spikes?

Amparo Moraleda: Well, the fact that there is a heavier regulatory framework gives prices a different kind of shape and stability but, you know, it is the choice of every country and of every Government to go for a more liberalised framework or to just be more deterministic about the how the market needs to operate. As a company, we just operate and abide by the rules of each individual country.

Q274 Dr Lee: Finally, any suggestions in the future how industry, Ofgem and Government might work better to communicate with customers so this type of shock to the system is avoided?

Amparo Moraleda: I honestly believe that keeping customers aware of the components of the electricity bill is very important. There is just a very small part of the final end-user bill that is under our control. We talk about wholesale prices. We talk about regulated prices. We have talked about non-electricity charges. We have talked about all the elements that are out of our control and predetermine a huge proportion of the final customer bill. So I think the current situation has proven that we can all do a better job at communicating with customers.

Dr Lee: Suggestions, how?

Amparo Moraleda: Well, I think it is on our side to make sure that the offerings are more comprehensive; that they are more clear; that the-

Q275 Dr Lee: Mr Laidlaw, your Chief Executive, is saying that the public were totally unprepared for this. Do you take any responsibility for that lack of preparation?

Rupert Steele: I think quite a lot of discussion was going on in the business pages-.

Dr Lee: Yes or no? I am not asking you to say, "We take 22% or 25%". Do you take any responsibility for the lack of preparation?

Amparo Moraleda: We are part of an ecosystem and I think that we can-

Dr Lee: Sorry?

Amparo Moraleda: Ecosystem and its regulators, energy-

Q276 Dr Lee: No. Keep it real, please. In this country the shock is palpable from these bills. I recognised it, because I am a political anorak; I can see the energy prices coming round the corner because I have taken an active interest in it. But the average person in the street doesn’t have the time. You must at least take some responsibility here. In view of the fact that there are six companies that pretty much run domestic energy in this country, you should take some responsibility for preparing your customers for shocks to the system like this in terms of pricing.

Alistair Phillips-Davies: Do you think that the reporting around what the Bank of England said and around what Ofgem say on a quarterly basis, which I saw in the press obviously, was essentially missed by most people? Because the Bank of England were quoting a number around 15% and I suppose if I average out 10 and 19, I get to 15.

Q277 Dr Lee: I would say yes, it was missed because most people are not as sad as me, listening to the Today programme and reading The Economist. I think the reality is-

Alistair Phillips-Davies: I saw that in other pieces of press than those two, I think, in all fairness.

Dr Lee: I just think it should be on your bills. I think you should be putting out correspondence in advance-not coming out with 60% increases. I can support you as businesses and I hope you are successful, but 60% is a big hit to somebody’s budget.

Ian Peters: Can I try and answer that question in a slightly broader context? One of the other things Sam Laidlaw, our CEO, said last week was that we should try and have an honest conversation here between the Government, the suppliers, the consumer groups and the regulator, because we are trying to work our way through three forces all at the same time. We have gone from being wholly self-sufficient on cheap North Sea gas in 2003. Today we are importing 50% of that. It could be 75% in a few years’ time and that is a higher price and more volatile. So that is one driver. We are committed as a country to reducing carbon emissions significantly between now and 2020 and that has a cost to it. Thirdly, we have a responsibility to try and keep bills as low as possible at a time when household expenditure is under challenge. So those are three forces that are quite difficult to reconcile and I think the time is right-Sam Laidlaw said we have a year to do it and that is his timescale-to open this conversation up in a much broader context because those forces are with us for the foreseeable future.

Q278 Chair: Last week the Minister said he didn’t know whether consumers were willing or able to understand the socio-environmental charges on their bills. Whose job is it to explain those charges?

Ian Peters: I said earlier on, Chairman, I think it is a collective responsibility. I think part of that is on the suppliers and I would accept that. I think part of it is on Ofgem and part of it is on the Government itself. I think we can work together in a more effective way to communicate all of that. Those elements of the bill are going up. The social element, which is going to move from the voluntary agreement to the Warm Home discount, will double in terms of its real cost over the next 12 months. So I think that aspect is one that we do need to have a better job of communicating. One of the areas we did agree with Ofgem in terms of transparency of tariffs and bill design is potentially looking at making all of those components much more visible on the bill than they are today.

Q279 Dr Whitehead: You are in a very competitive market, as we have heard, and you do not talk to each other about prices, as we have heard. When consideration of a price rise is in the air I assume, therefore, that you have some kind of algorithm that you operate as to who has the competitive advantage of putting their price up first, as opposed to how many customers they might lose, as opposed to the long-term damage that putting the price up first might cause. The decision as to when to put a price up is, therefore, governed by that algorithm. Is that the sort of thing you do in terms of looking at each other’s position as far as prices are concerned?

Alistair Phillips-Davies: I think putting prices up is always very, very difficult. Nobody wants to go out there and give incredibly bad news to consumers of any variety; our consumers in Anglesey-I read some of the press in the paper-or the ones in Glasgow or elsewhere who saw some very significant rises. I don’t think anybody wants to see that. So we do put the customer very much at the heart of that decision. It is the reason why we always try and hang on as long as we can. But at the end of the day, we operate in a competitive market. We have to compete for capital. We have shareholders. There is an amount of pain that we can bear as a company; at some point we need to be able to alleviate some of that and basically have to put up prices and that is just reflecting what is going on in the wholesale markets. But I think the customer weighs extremely heavily on our decision and always weighs very heavily on our decision in these matters.

Q280 Dr Whitehead: But presumably, although there are some differences, the pressures that we have described in terms of forward prices and movements are similar for all the Big Six-

Alistair Phillips-Davies: But the bulk of the costs-

Dr Whitehead: -and, therefore, presumably ScottishPower have been hung out to dry this time, haven’t they, in terms of price rises?

Alistair Phillips-Davies: Different people can do different things. I don’t know what ScottishPower and Centrica and the other guys do. All I know is that-

Q281 Dr Whitehead: Or do you think, ScottishPower, that it is to your competitive advantage overall to do this, inasmuch as you have some customers that you are putting on to new tariffs who are paying that for a while? What sort of calculation did you go through and would you be willing to share that with the Committee?

Rupert Steele: In broad terms, we look at our income and our expenditure and if they are not in a proper balance then we need to look at adjusting our prices. Clearly consideration has to be given to the market situation; whether we think that the problems are ones that are general or applicable just to us, because if they are applicable just to us we might have to absorb rather more. If it is a wider problem, that is something that eventually will have to be passed on. We look at these factors and we take a judgement.

Q282 Dr Whitehead: So why are these people hanging back? Do they have it wrong?

Rupert Steele: They have to make their own decisions. It may be that they have seen that we have a bit of poor press and they may be thinking that they would like that to run for a bit before they reach a conclusion. That is a matter and a judgment that they have to make.

Q283 Sir Robert Smith: Mr Peters said something about no longer rolling over contracts; does that apply to small business customers as well?

Ian Peters: No, it doesn’t and we are very happy to review the way the small business market operates. There are different dynamics in the small business market and I would draw a distinction between the very small business and a mid-corporate, which is more sophisticated. It is clearly a major topic of review at the moment. We are talking to Consumer Focus about it and I think it is one that, as an industry, we should look at.

Q284 Sir Robert Smith: Because I think the industry do recognise, as you say, the distinction between the micro and small businesses where, in a sense, the consumer is no more informed than a domestic consumer and, therefore, really needs a similar sort of communication and protection and hopefully the industry will be able to-

Ian Peters: That debate has just started in the last few months. Overall we should expect to see a convergence of the micro-business regulation and the domestic regulation over time. It is a question of pace and specifics and I am very happy to engage with the regulator, Consumer Focus, the Federation of Small Businesses and others in that debate.

Alistair Phillips-Davies: Following the last meeting we were asked if we talked to local CBIs and things like that. Since that happened, the trade body that represents the bigger suppliers set up a meeting with a number of constituents to look at what we do for micro-businesses or small businesses. It is something we will clearly look to address and that is happening, I think, in the next couple of weeks.

Rupert Steele: We are also happy to be positive around this. As it happens, many years ago the distinction between business and domestic was based on consumption levels and the micro-businesses would have received the domestic protections automatically. We have drifted away from that as a result of regulatory change and it may be that that was an error.

Sir Robert Smith: Hopefully we can get some positive news on this front at least.

Q285 Barry Gardiner: Do you think that your company would ever transfer supply to yourselves, to your company, from a property when specifically advised not to do so?

Ian Peters: I do not quite understand the question.

Barry Gardiner: If one of your salespeople were speaking to the person of the house and were told, "No, you must not transfer the supply", do you think they would? Do you think your company would do that?

Ian Peters: I wouldn’t think so.

Alistair Phillips-Davies: A range of transfers are made when either people get wrong addresses or there is misunderstanding.

Barry Gardiner: But where there is no misunderstanding about the address or who the supplier is.

Alistair Phillips-Davies: That should not happen. If that does happen and somebody wilfully ignores the wishes of the customer then that person should be disciplined, clearly.

Barry Gardiner: Should be disciplined?

Alistair Phillips-Davies: Correct.

Q286 Barry Gardiner: Do you think your company would ever transfer supply from a property when they knew that they had not spoken to the owner of the property?

Ian Peters: Not wilfully.

Rupert Steele: It depends whether there is a tenant in the property.

Barry Gardiner: Indeed, okay; or even a tenant in the property?

Rupert Steele: We would expect to operate according to the instructions of the person who has the right to determine who supplies the energy to the property.

Q287 Barry Gardiner: Indeed. But if they knew they had not spoken to the person who had the right to determine the supply to the property?

Alistair Phillips-Davies: Well, it should not have happened.

Barry Gardiner: It should not have happened?

Alistair Phillips-Davies: It clearly should not have happened.

Q288 Barry Gardiner: You said, Mr Phillips-Davies, that that person would be disciplined?

Alistair Phillips-Davies: Yes, and potentially-

Q289 Barry Gardiner: I have here a letter from Southern Electric to me, "I am writing in line with our conversation today and the above accounts. Firstly, I am writing to confirm we have accepted your comments and that you raised a valid complaint regarding the transfer of the above supply of gas and electricity to Southern Electric from another supplier." That related to both the points that I have just mentioned. They had not spoken to the person who had any right to determine the supply and they had been specifically advised that they must not make that transfer. It then goes on to say, "I would thank you for bringing this matter to our attention and we have raised it as a training matter with the advisor and their manager to improve our service in the future." So that is all right then?

Alistair Phillips-Davies: Sorry, can I just understand? You said that they had not spoken with somebody, but then they had been specifically told not to do so as well.

Barry Gardiner: Yes. I will give you the exact instance if you like. The instance was as follows. The person was moving house and they were advising Southern Electric of the fact that they were going to move and they wanted their bills terminated and cut off at that particular point. They were asked where they were moving. They told them that they did not know where they were moving. They were asked again, "But are you not moving somewhere?" Well, they might be moving into rented accommodation; they might be moving into a property. Where was the property? They told them the property. They said, "Oh, well, we can transfer the supply". They were specifically told, "No, you can’t transfer the supply because no contracts have yet been exchanged and there has been no"-they don’t know whether they own the property.

Alistair Phillips-Davies: Yes, I understand.

Barry Gardiner: So you understand. I know the case because the person that was talking to you was my wife and you have confirmed that all the details were correct, and that is since we last met. In a situation like that you said that the person should certainly be disciplined; yet your letter here says that it will be treated as a training matter to improve things in future.

Alistair Phillips-Davies: Well, I am happy to take that specific instance outside if you pass me some details.

Q290 Barry Gardiner: It hardly corresponds to what you were talking about earlier today about being proud of the lowest levels of cost and one of the highest levels of service in the market, does it, Mr Phillips-Davies?

Alistair Phillips-Davies: Well, we do have the highest levels of service in the market and we do have the lowest levels of complaint, but clearly it is very regrettable if we have any complaints and that is clearly one of them. It is the case that we do have the highest levels of service and the lowest level of complaints of any of the Big Six, but clearly we have fallen well short of the standards we should have in this case and I would be very happy to take it up and make sure that it is dealt with to our and your satisfaction.

Barry Gardiner: It will be dealt with in that way, but not because of any relationship that we have. We will pursue the proper process.

Alistair Phillips-Davies: Fine.

Q291 Barry Gardiner: We have heard that 70% of prepayment customers are won on the doorstep and those, of course, are often the most vulnerable customers. How do you target those customers?

Ian Peters: Speaking for British Gas, that statistic is not true. Very few of our prepayment customers overall come through the field sales channel. Targeting is to do with the potential value to-

Barry Gardiner: Is that figure wrong for the industry or are you just saying that you are lower than 70%, which means that everybody else must be substantially higher than 70%?

Ian Peters: I can’t give you the precise number, Mr Gardiner, but I will come back and confirm that in writing. But ours would be nothing like it.

Q292 Barry Gardiner: But you accept it as an average for the industry, for the Big Six?

Ian Peters: I am not privy to the figures that the other suppliers have, but I will come back and confirm our own number. As a statement of fact, our sales targeting-I think you are probably talking about field sales here, are you, rather than the general targeting?

Barry Gardiner: Yes, I am talking about targeting for doorstep sales and specifically those customers who are going to be on prepayment meters.

Ian Peters: They are the smallest percentage of households we target. Many of them are tenants and, therefore, turn over very quickly.

Q293 Barry Gardiner: But you do target them? I asked you not if you did but how you did.

Ian Peters: We do it off conventional models. We look at the consumption of the household. There are socio-demographic tools available.

Barry Gardiner: So you would use things like Experian to enable you to-

Ian Peters: And Mosaic and other such tools-

Barry Gardiner: Mosaic, exactly.

Ian Peters: -that are available in the market. They are an element of the customer base we target but a small minority. The majority, by overwhelming number, are owner occupiers and credit customers. I think there is an interesting dilemma here and it goes back to-

Q294 Barry Gardiner: Perhaps we could hear from the other companies as well as to how they target.

Amparo Moraleda: Pretty much as Ian has said; we do not like the word "targeting" because we would use doorstep selling, face-to-face selling, as it is regulated by the rules for the regulation of doorstep selling. So we just look at the broad range of customers who are not on our contracts who live in the areas where we have sales coverage. We believe that by this sales method we give many people the opportunity to participate in the market, because there are many people who do not have access to internet, who do not have access to all the information available to shift between suppliers. We really think that doorstep selling is an effective way to inform customers about their choices, and this kind of "targeted" statement is not something I can recognise.

Q295 Barry Gardiner: Ms Moraleda, you sound very proud of your doorstep selling?

Amparo Moraleda: We really consider it is a powerful sales channel and we are investing-

Barry Gardiner: Sorry, I didn’t catch that. It is a-

Amparo Moraleda: It is a very powerful and effective sales channel.

Barry Gardiner: I have no doubt about that. Is it fair? Are those people vulnerable? That is the question you should be asking, not is it a powerful and effective sales channel.

Amparo Moraleda: What we do is on the one side, as has been previously-

Q296 Barry Gardiner: We on the Committee believe it is a very powerful and effective sales channel. This is why we are so concerned about it.

Amparo Moraleda: But again, we are not targeting vulnerable people and our focus-

Barry Gardiner: We have just heard from Mr Peters that he is. What I asked you was how you did.

Amparo Moraleda: Yes, and pretty much as he said, we will provide you with specific data about the percentages that we have, because I do not recognise the 70% number that you mentioned. We can come back to you with the evidence about that. What we focus on in this activity is to provide accurate data and factual data.

Q297 Barry Gardiner: Let me be clear, it is not that 70% of people who are doorstep sold are prepayment; it is that 70% of prepayment customers have been won on the doorstep through doorstep selling. The figure is that way round, not the other way round.

Amparo Moraleda: Sorry, okay. Anyway-

Rupert Steele: I think that that seems a perfectly credible number. The field sales channel-

Barry Gardiner: What that means is that 70% of your most vulnerable customers had been won on the doorstep.

Rupert Steele: Well, I am not sure that-

Barry Gardiner: They had been persuaded by high-pressure sales techniques, in Ms Moraleda’s words "effective sales channels", to come over to you.

Rupert Steele: What this is about is making sure that that channel of communication is open, straightforward, accurate, fair and transparent. We have invested, like some others, in electronic sales tablets to make absolutely sure that the advice given is accurate and to record the nature of the quotation given. If we can go to the houses of people who are on prepayment meters and offer them cheaper energy, that is good for them. If we go, and do not have a good deal, we should be telling customers that we are unable to help them. If our advisers are not doing that, we need to know.

Q298 Barry Gardiner: Mr Steele, a statistic that might help the Committee-it would be useful to know if you all keep this statistic-is how many of your door to door sales people work out the deal on the doorstep for those vulnerable prepayment customers and then say, "Ah, I’m terribly sorry, according to my tablet I cannot provide you with a better or a cheaper supply and, therefore, I am walking away"? What percentage of your attempted sales-

Ian Peters: If I can take that one, as a start point not all prepayment customers are vulnerable in that sense, but that is a wider debate. The way our technology works is you do get on the screen in real time a comparative quote against all the other suppliers and we show that to the consumer there and then. That is completely overt. Where I do share your reservations, I think, is that if there are inappropriate sales techniques being used in the prepayment market I would be worried. We have invested to make sure we are 100% confident that what the customer sees is a clear and transparent choice based on price. We then phone that customer back on every occasion, usually the same day, to take them through exactly the same process again so they can revalidate and that they have not been pressure sold. There is a double comfort in there and we are very proud of that. A question that was asked, I think, of Phil Bentley at this Committee is would he buy from a door to door energy adviser. In my own case, yes, I would because I am absolutely confident that the technology we use and the scripts that are embedded in it give the best advice and open and transparent comparisons.

Q299 Barry Gardiner: Do you keep records of how many attempted sales have not proceeded because of the-

Ian Peters: Yes, we do.

Q300 Barry Gardiner: Can you provide those to the Committee?

Ian Peters: I can furnish that. I do not have them in front of me.

Q301 Barry Gardiner: In that case, the follow-up question would be how do you incentivise your sales staff?

Ian Peters: As a general point, they are salaried and the salary ranges between about £11,000 and £20,000 to £22, 000 based on experience and expertise. I think like the majority of sales forces there is an element of commission based on the type of sale and the value. Again, I think we have previously submitted how that is done to this Committee as a written response.

Alistair Phillips-Davies: We have a written response to that. I can read it out to you if you want, but we put a written response in following last time. Our salary levels aren’t dissimilar but our lowest basic salary is slightly higher than Centrica’s, it seems, and the top end is slightly lower.

Q302 Barry Gardiner: What percentage of your sales do not proceed? Do you keep that?

Alistair Phillips-Davies: I don’t know. I would be surprised if we were at 70% but you may well be right because our doorstep salespeople earn less commission from selling prepayment than they do from selling other products. I would be slightly surprised if that was the case. Currently, we win a relatively small proportion of customers who are prepayment on the doorstep and our overall door-stepping sales force is less than 50%. I would be surprised but I will go away and look it. I take the point and I think we should go away and look at it, but I would be surprised. We can let you know what the different incentives are.

Q303 Barry Gardiner: In Centrica’s follow-up evidence, you said that you were working to remove all no cold calling zones from all your walk lists. You were working to do that. That means that at the moment, I take it, there may well be representatives walking around areas where they know today that it is a no cold calling zone but that they are going to call nonetheless. Is that the case?

Ian Peters: There are two levels to this. If there is a no cold calling sticker, we will absolutely respect every one of those 100%. We are working as quickly as we possibly can, so it is a matter of weeks before we disengage completely from no cold calling zones. Again, I would be happy to confirm with the Committee the deadline for that.

Q304 Barry Gardiner: Thank you. Ofgem thought that the announcement of one attractive sounding tariff amidst a general tariff increase would cause an erosion of trust. How would you respond to that?

Rupert Steele: We have now closed that particular tariff. It did not particularly capture the imagination of our customers.

Q305 Barry Gardiner: You mean it did not work? It was a trick that did not work?

Rupert Steele: Our customers preferred to go with the fixed price and capped offers that we were running at the time, roughly 25 times more take-up for those than for that particular product. It got a certain amount of criticism. We closed it. Sometimes you launch products that people are not interested in.

Q306 Barry Gardiner: I think what Ofgem was referring to here was the simultaneous launch of a product, which it turned out that people were not interested in but that superficially sounded attractive at a time when there was a general price increase. Therefore, the marketing was very positive and shielded the criticism that you thought you might be getting. That is why they said it causes an erosion of trust. Do you accept that it caused an erosion of trust?

Rupert Steele: I don’t think we had any expectation that that product would be on the front pages as opposed to our price rise.

Q307 Barry Gardiner: I bet you didn’t. That was not what I asked. Do you accept that that sort of strategy, where you lead with something that looks superficially attractive and give that high publicity in order to mask a general increase in your cost, is something that causes an erosion of trust in you as a company?

Rupert Steele: We don’t know how people trust us. That is a matter that we will discover as we continue to work in the market. What we do know is that it was clear to us from the beginning that the announcement of our price increase would attract a lot of attention. There was no attempt to hide.

Q308 Barry Gardiner: Of course it was, that is why you put out something up front that looked superficially attractive to try and deflect the attention. That is precisely the point that Ofgem were making, wasn’t it?

Rupert Steele: We announced that product to give our customers an opportunity to transact with us on a new deal. They were not very interested in it.

Q309 Laura Sandys: From my perspective, looking at the big six and how they engage with customers, how they organise their tariffs, how you structure your whole sales channels, it seems so 1970s. This strikes me as an industry that is still caught up in some mindset of monopolistic sort of relationships with the customer. You do not help and assist customers migrate from fixed tariffs to a sudden 65% hike. You have door to door salesmen. Truthfully, the last thing I ever bought from a door to door salesman was some brushes. You have a commission structure that is extremely high in incentivising. You are penalising low users of energy, not focusing on high users of energy. You have a lack of trust within the whole consumer sector. It strikes me that you need to look at a total review of how you market this business, how you build and develop long-term relationships with your customers, and I would suggest that you should be looking at a very comprehensive review, both separately and collectively, to build trust in this sector because you are going to be absolutely crucial and your relationship with the customer is going to be crucial into the future when it comes to energy efficiency. I wonder whether you are considering reviewing your customer relations fundamentally, looking at ensuring that you have a director who is experienced in a sophisticated industry sector when it comes to customer relationships and customer management, and whether you are looking at the whole trust agenda as being something crucial to in many ways looking at your long-term corporate strategy and certainly Britain’s energy efficiency.

Ian Peters: Can I take that, Chairman? This is one of those comments I think are specific to Scottish Power, but I will take the generality of it.

Laura Sandys: I think it feels like a cultural issue about the whole sector.

Ian Peters: I am happy to take the generality of it. I think there is little doubt, in my opinion, that the biggest issue facing the industry is one of lack of trust so I accept that start point completely. The way we are responding to that, we went out last year and formed a customer panel. We directly have customers now engaged with us. Ann Robinson from uSwitch is here; she has been involved with that. We have now turned that into a permanent customer board on which I sit and Ann chairs. We get regular direct feedback from our customers about what we are doing right-and we do many things well-and what we are doing wrong.

Q310 Laura Sandys: Are you happy to be transparent about the things that come through from that customer panel?

Ian Peters: Yes, indeed. The report, which is a 40-page report, written by the panel and which I did not edit, we published on our website. You can read every word of it. It has the criticism in there and our proposed responses. We are working through it with the board, as they now are, page by page. Right at the heart of that is the key issue around transparency and understanding about tariff structures. On that one, we agree with Ofgem, there is much we can do and should do to simplify tariffs. We have talked a lot about bill design, whether the bills are as clear as they should be, and they are not. We are very pleased with the way Which? have given us top ranking in that and we are working with DECC on signposting different options. Whether that is the cheapest tariff or a signpost to a website or a helpline that can give you advice on better tariffs, all of that is in test as we speak and we will be responding to the Minister in the next two weeks with our proposals to take that forward. It is about direct consumer engagement, I agree with that completely, and it has to be at the heart of building that trust. Channels are part of it and field sales is now less than about 12% of our total channel mix. We are much more now reliant upon the internet and those kind of channels, which, on Mr Gardiner’s point, we cannot completely come out of that at the moment.

Q311 Laura Sandys: But, Mr Peters, you said earlier on that if your company was convicted of any form of mis-selling you would think about whether you would actually reimburse all the customers or, if there were not that many, then you would not worry so much about reimbursing. It needs to be a contract of trust between the individual and the company as well as the collective.

Ian Peters: I accept that completely. I was trying to draw a distinction between systemic mis-selling, as the way you have it, for example, in the banking industry with payment protection insurance, and what goes on with individual cases. Clearly, we would recompense a customer if we are demonstrably in the wrong. In British Gas we have no evidence of that kind of systemic mis-selling. Others are under review by Ofgem. On an individual basis, absolutely I would.

Amparo Moraleda: I really share your concern about the trust and the image that we have in the marketplace. I have to reassure you that we want to do things right and we are trying to invest in doing things better. We want to be a better sales and market organisation and despite the balance that it seems to have in this market, the churns are tremendous. We are going through 20% churns of clients, and for all of us the cost of acquisition and the cost of making the customers more loyal and happier with our brands are really significant. We spend a lot of effort and energy and time in customer focus groups to really try to understand what are their buying behaviours, what are their preferences, and how we can improve our customer relationship with them or provide them with energy services or enhancing our offering so that we become their preferred supplier above and beyond the pure electricity bill.

Having said that, I think there are lots of areas where we need to improve and we are working on this. We are all very concerned about the lack of trust created around mis-selling, and this is why I think collectively we are investing a significant amount of money in providing and enabling the sales force with technology that will allow us really to track and to monitor and to standardise the sales process and to keep really tracking evidence of the full dialogue between the salesperson and the household. We are training all our customer-facing personnel. We are making sure that we are revisiting the code of conduct and the business conduct guidelines with all our suppliers. I have to reassure you that if we do not do things better, it is not because we neglect our responsibility. We just need to try to do it better and enhance and be more effective at doing so, but it is really an area of focus for us.

Q312 Laura Sandys: But a month ago you had people on fixed tariffs who suddenly saw a 45% increase. That is a responsibility from your perspective to look at migrating those customers through the changes that are going on in your wholesale market. That will build trust.

Amparo Moraleda: Yes, but hopefully over time those customers will have seen the previous increases in tariffs that had occurred and that they have not suffered. It is a kind of a way to eventually prevent themselves from suffering more instability and unpredictability in there. It can be right, it can be wrong, they can just go into a downturn of the market and find themselves just paying a bit more than the average price maybe, but they can find themselves in situations where prices keep climbing up and they avoid the heat of the price increase between the time they made the contract and the time this contract expired. I accept what you said about them really understanding what they are subscribing for, what the terms and conditions of the contract are and what are the risks at the end of the period, but above and beyond that if they have saved money over the term of this contract, if prices have experienced a steep change over the duration of their contract, what we can guarantee is that they will get the best possible deal in the market at the moment their contract expires. It is like an insurance for them but once the insurance expires they will have to go to the market and find the best suitable offer for them.

Rupert Steele: The big increases are arising not because the new prices are high but because the old prices are low.

Q313 Laura Sandys: But that is working in partnership with your customer and migrating and ensuring that that is understood, but you have answered my question.

Alistair Phillips-Davies: I think your point is well made about the industry. On SSE’s behalf, I think we are clearly better than the bulk of the other companies out there. We clearly differentiate ourselves and it is a shame for our staff and all the efforts that we put in that we are lumped in with the rest of the big six. It should be us and the other five. We demonstrated better value to people over a long period of time. You are laughing, but I am absolutely serious.

Laura Sandys: It is the funny looks.

Alistair Phillips-Davies: I am absolutely serious. We have not been voted best on service seven years in a row by uSwitch for no reason. We do not have the lowest complaint levels in the industry for no reason. We have been accused of being looked at on sales at the moment by Ofgem, and Ofgem investigate people. Both of these companies have three investigations outstanding against them at the moment by Ofgem; we have only one. I think we are clearly different to the other companies.

Q314 Laura Sandys: You say that with pride.

Alistair Phillips-Davies: Yes. We do care about our customers and while I would absolutely take your point that people like to have a go at all of us and say that we are very, very poor, we operate in a relatively low margin industry, which nobody seems to believe despite the fact that if you look at Ofgem’s graph over a long period of time the margins are very, very thin in our business. We do not have a lot of money to spend on doing some of these things. If you look at the price communications that people have talked about, I think we were the only company that tried to comply with the spirit of where Ofgem are going on their price communication. The last time we did it we actually clearly announced more than 30 days in advance and we clearly told all our customers, sent all the letters out to all of them beforehand. We are the only company, despite pressures, that have not put up our electricity prices since 2008. By the time we do it, it will be over three years since we have done it. Prices in real terms have gone down over 20% for our customers since 2008. I think there is a lot of things that we have done for our customers, a lot of things we still do. If we look in Scotland at CESP, we have Norrie Kerr who sits there and looks at what we spend our money on in CESP money, basically. He comes and sits there and looks and approves our programmes, so we do try and engage with people.

We take away the points you raised on small business, the points that Barry raised last time rightly about doorstep selling. We have a full investigation of our doorstep selling force going on at the moment, we have removed the management team, and we will come back to you shortly once we have done that. But we do take great pride in what we do and I am here trying to represent the 20,000 people who work day in, day out to do something for all our customers. They do a lot of work and they do take great pride in that.

Q315 Chair: Just on the doorstep selling again, I think you said earlier on that your salespeople get different rates of commission for selling different products?

Alistair Phillips-Davies: They do.

Q316 Chair: Does that mean, in effect-I am not saying this is the intention but the effect-that a salesperson might get a bigger commission for selling a customer a product that was not the best product for that customer?

Alistair Phillips-Davies: I would hope that that was not the case and that we try and safeguard that. To be honest, I think at the end of the review that we are doing currently we could say definitely that that was the case, but the incentives that they get are more based towards payment methods, the ability to pay for those people, and also there are some sizebased ones. If they are higher consumers we tend to focus them on that because there are-

Q317 Chair: It does not sound to me as though there is a real duty to act in the customer’s best interest. Duty does not seem to rest on the door to door salesperson.

Alistair Phillips-Davies: I think the tools that we use currently are relatively blunt there and that would be a fair comment and that is something that we are clearly looking at. The commission and everything else about that business is being examined currently.

Q318 Chair: As an ambitious door to door salesperson, a job for which canvassing at elections probably equips me rather well-I have sold more difficult sales than a dud energy policy in my time-I actually might earn more money by selling energy plans that were actually not in the best interests. I see the difficulty from your point of view, but I just want to be absolutely clear about this. There is a danger in the present situation that the ambitious and successful salesman, perhaps a Member of Parliament who lost his seat in 2010, might be out there selling products very effectively and getting a big commission, but actually selling products that were not the best ones for the customers.

Alistair Phillips-Davies: Well, I can say there is a possibility that that might be true for all of us and that is clearly regrettable.

Q319 Dr Lee: It was not really a question, Mr Chairman, it was just an observation that your intervention, Mr Phillips-Davies, is the first exciting intervention I think I have had in any of these big six meetings in that there is a sense that everybody turns up from the big six and it is all a bit, "Well, we are all in this together, aren’t we, boys and girls?" The responses are sometimes a bit benign and suddenly you break ranks and the response of the other three was quite interesting. Can I encourage you, and indeed all companies, to show a bit of independence of position in terms of your business and your business model? Because the presentation so far in the short time I have been in Parliament gives the impression of a cartel and when you get somebody saying, "Well, actually, we are better than this lot," I quite like that because that is the way the market should be.

Ian Peters: I was given a right of reply to Alistair’s earlier point. I think it has been-

Q320 Dr Lee: Argue.

Ian Peters: I am going to, don’t worry. Our turnaround, it is well documented the challenges British Gas had a few years ago. The turnaround has been dramatic. We have almost caught up with SSE on many measures. Consumer Focus have just given us the same star rating as Alistair has and 30,000 people are utterly committed to overtaking them.

Dr Lee: It is just an observation because I think if people watch there is a sense that it is like a bit of a boys club, with respect.

Chair: Well, there has been a happy breakdown of the harmony.

Q321 Sir Robert Smith: Talking of the club, the way the Minister put it to us is that the way this country is going in terms of trying to deliver the best deal for the consumers is that an integral part of it is people should switch if they feel they can get a better deal. Do you think switching is the key part of what makes this or should be making this market work?

Alistair Phillips-Davies: It shouldn’t be everything, but clearly that is the consumer’s choice. You can go to Sainsbury’s, Waitrose or Lidl, take your pick basically as to which you want. Or you can go to O2 or Vodafone; again you can take your pick. I would say O2 have clearly done very well on their customer engagement and-unfortunately Laura has gone-O2 have done very well against Vodafone and some of the others in their customer engagement and things like that in the mobile phone sector. Some of the things they have done––adoption of iPhone and things like that, dealing with the O2 Centre––have given them advantages. Therefore, it is something that consumers can do, particularly if price is what they are worried about. You can hop from one to another. It is just like banks who offer attractive rates of interest but you have to hop fairly regularly in order to get that most attractive rate. I think switching is important but it should not be the be all and end all. Hopefully, for us anyway in particular, we offer long-term value, excellent service, and we continue to evolve that to make sure that we stay ahead of Mr Peters and the marauding hordes from British Gas.

Ian Peters: I would echo that. I think switching is a good measure of a healthy, competitive market. I think, interestingly, in the fourth quarter of last year switching rates were higher than they had been for a very long time indeed, so I think that is good. But I would also support Alistair’s point that it is not all about price. Our Cardiff operation, which has just won the best European call centre, has the lowest churn. Its customers are absolutely loyal to the style of service we give there. It is a blend of price and service in the aggregate rather than just a leading price indicator that drives the market.

Alistair Phillips-Davies: One final point, going back to earlier as well, just on the compensation point, there is an ombudsman scheme out there as well where compensation up to I think it may be £5,000 or something like that can be given to people. There is an ombudsman scheme there, so if complaints are made then they can ultimately go to the ombudsman for compensation. They are reasonably substantial sums of money.

Q322 Sir Robert Smith: Do you recognise the figures from Ofgem or Alistair Buchanan that we had showing that those of us single fuel consumers who are legacy customers probably pay about a 6% margin, whereas non-legacy are in the 1.5% to 2% margin?

Alistair Phillips-Davies: There are some dual fuel discounts where some people offer them. For us, we tend to offer cost reflectivity across the products, and between tier 1 and tier 2-or the legacy customers, as you put it, and non-legacy customers-I think you will find that our prices are very, very level and there is no indication of that. Certainly, when Ofgem looked at us in a probe any small anomalies that were there, we ironed out. I would be very surprised if that was the case for us.

Rupert Steele: Same for us. We are cost reflective between our legacy and nonlegacy areas and any anomalies were ironed out in November 2010.

Q323 Sir Robert Smith: The other rather more startling figure Ofgem told us is that 40% of customers who switch end up switching to a weaker deal.

Ian Peters: This comes back to the earlier conversation about the way field sales operates. I have not seen that 40% substantiated, but if the technology and the sales process is not as robust as it should be, then worryingly, clearly, I think that is a risk. I have talked about what British Gas has done in investing in that and I am as confident as I can be before this Committee that that does not happen.

Q324 Sir Robert Smith: I think the point there was maybe wider: even if you go on the internet or wherever, it is the transparency of the tariffs that is causing a growing concern, not the doorstep as well.

Ian Peters: I accepted earlier on, in response to an earlier question, I think the industry as a whole has work to do on transparency of tariffs and I would accept that it is at the heart of the retail market for-

Sir Robert Smith: I think it has gone up from 180 to almost 400 at the moment.

Ian Peters: Again, those are numbers I do not recognise. From our point of view we have five core tariffs. I think we have the lowest of anybody in the industry. I tried to work out where the 400 came from and I really struggled. We are down to five. We reduced one of them just two weeks ago. Tariff range, though, I think is quite important and where I think we do have issues with where Ofgem are going in the extreme is to go to a single tariff per payment type. I think that is going to stifle innovation and reduce choice. It is about getting the balance right between just one and a small number. We would probably argue five, six, seven is probably the optimum you want to give. If there are genuinely 180 then I would agree with the basic point.

Q325 Sir Robert Smith: Do you share Ofgem’s optimism that it would be logistically quite straightforward to migrate people to a simpler tariff?

Ian Peters: No.

Alistair Phillips-Davis: We have given evidence to that effect. I think Ofgem make a fair point about tariffs but the issues are about clarity for a customer; them understanding it and having comparability and simplicity does not necessarily figure in there. If they have comparability and they understand it then I think that is what you need. Ofgem themselves have now acknowledged that there could be a major problem for heating for off-gas grid people if they are not careful. There could be a whole wasted spend on smart metering if they do not allow us to put tariffs in place that allow different times of day and things of that nature.

We have worked, and are working at the moment, with Ofgem, DECC and some of the consumer bodies, to put in place an APR-type model that I mentioned last time. We have a two-sheet piece of paper we can leave with you; it is just a very simple model that would allow a very simple comparison between everybody’s tariffs. I think Ofgem’s point or their issue is absolutely right about getting clarity and focus. I think we need to tweak what their solution is so that we get the right solution that allows innovation in the market and gives comparability but not just simplicity and dumbing everything down to the lowest level. Throwing away a lot of the competition innovations in the market and the benefits that are available to people are particularly disadvantaging some people who do not remember to do rollovers, because as soon as that happens we will come here, you will sit there and criticise us because we have rolled somebody on to a tariff that is far more expensive for their overnight unit and we will say, "But that is what the regulations told us to do and you did nothing about it."

Q326 Sir Robert Smith: Yours is similar?

Rupert Steele: I think we are in a similar place. It is absolutely important that we work to improve the way in which tariffs are presented to customers to make them easier to understand. I think Ofgem have done consumers a real service in identifying that that is something that needs to be addressed. Where I think we part company with Ofgem is the idea of boiling everything down to a single tariff, and it is not just us who have parted company with Ofgem, it is also Consumer Focus whose response to Ofgem lists two advantages and nine disadvantages in that proposal. So I think there is quite a widespread view that transparency and clarity, openness––absolutely. Boiling everything down to one product––really bad idea.

Q327 John Robertson: If Ian Peters is right and they only have five tariffs, that means the rest of you between the other five companies have round about 395. I would say that it is a deliberate complication of the market to confuse people to make sure that they do not understand exactly what they are getting and why. I will take a really good close look at my gas bill next time it comes in to see if everything you are telling me is true. Anyway, I do not expect you to answer that because I know what you are going to say, so I will move on to something else.

Laura mentioned the comprehensive review of your business. I just wonder if the big six should end up being a big 12 rather than a big six, or maybe a big 18 or a small 18, because I do not see any competition between you all and if we want to introduce competition, as Phillip obviously does, while I want to see the lowest cost for the lowest people I feel that maybe that is a road we want to go down. And that is a comment, Chair. I am not going to ask a question because I know what the answers will be.

Let me ask Scottish Power a question that I have been flummoxed with for some time now. Can you give me examples of any money flowing into the UK-based arms of your company as a result of intra-company lending?

Amparo Moraleda: Would you mind repeating the question please?

Q328 John Robertson: Can you give an example of any money flowing into a UK-based firm, that is you, as a result of an intra-company lending? You have a parent company in Spain and I have been working out how to pronounce your name.

Amparo Moraleda: Iberdrola. Moraleda.

John Robertson: Moraleda. Senora, okay. You have taken money out of Scottish Power; have you put any money into it?

Amparo Moraleda: You are probably referring to a press release that was describing an £800 million intra-company loan. I just want to reassure you that this money is Scottish Power money. It remains Scottish Power money and this £800 million will represent the fact of a formal loan from Scottish Power to Iberdrola, so the way we operate is that Iberdrola acts as a kind of bank and it manages the flow of money across the subsidiary, but, as I said, Scottish Power receives a commercial rate for the money it lends to the group. As you can imagine, the £3.5 billion that we have invested over the last three years and the money that we are going to keep investing, the £15 billion that we are going to invest in Scotland in the future, are going to be funded both through the parent company and through various ways of funding.

Q329 John Robertson: I have a problem with that because we were told by you that the profit you made last year was £679 million.

Amparo Moraleda: That was before interest and tax.

Q330 John Robertson: So you take £800 million off that, that is a negative of £121 million.

Amparo Moraleda: It does not really work this way.

Q331 John Robertson: So you take £800 million out and then you put it immediately back in?

Amparo Moraleda: The £800 million is part of the money that is in the bank and that the company has, so it does not have-it really does not relate exactly to the earnings or the benefits-

Q332 John Robertson: This is how a lot of English football teams get taken over, money was used to pay for their own purchases. Why does this money end up in the United States?

Amparo Moraleda: As I said, there are several parts of the group that need, at different points of time, money, and instead of it just going to the financial markets and to pay higher interest rates or-

Q333 John Robertson: What was the rise in electricity prices in the United States last year?

Amparo Moraleda: I do not have the figure in front of me.

Q334 John Robertson: I have. It is 2% to 8% and you have just put my energy prices, and those of people who use your company, up by 19% for gas and 10% for electricity, yet you can take money and give it to the United States from a company that you are investing in. Excuse me, £800 million disappearing from one account to another account is still £800 million.

Amparo Moraleda: Mr Robertson, we do not have final customers in the US. We do not have any kind of commercial-

Q335 John Robertson: So you are just investing it for a profit then?

Amparo Moraleda: No, we just have a transmission distribution interest. Let me just insist on the fact that this £800 million-

Q336 John Robertson: Do you not pay for these transmission interests? Do you get paid for these transmission interests?

Amparo Moraleda: We receive a return for those transmission investments because at the end of the day those are capital intensive business.

Q337 John Robertson: Do you understand how this looks to the Scottish customer? We think that you are taking money from us to subsidise another company in America and you are putting our prices up. It has been said here that they have gone up 45%. Of course they have not gone up 45% because if you include the daily charge that we get for the domestic tariff it has gone up nearer 67%. Why don’t you tell people the truth? Why don’t you tell them that it is not just 19% and 10%, it is also another 22% that you are putting on to bills as well? In fact it is a lot more than 45% of an increase. Do you see what I mean? We are not getting the truth here. We are getting lots of little stories but we are just not getting the truth. Why don’t you tell the truth?

Amparo Moraleda: Let me just try to be specific on this £800 million loan. Let me just insist once more; this £800 million Scottish Power money remains Scottish Power money. It is an inter-company lending and Scottish Power is receiving a commercial rate of interest for this money. The money is not going anywhere, it remains Scottish Power’s money. It is a way of handling treasury inside of-

Q338 John Robertson: I will accept what you are saying. It is not going anywhere but somebody somewhere is getting £800 million, and I know who does not have it, and it is not the Scottish customer.

Let me go back to this 67% increase. I received a letter as well from a customer who has a sister who lives round the corner from him, and the bills that they received works out that in this case of this gentleman, he gets a bill 89% dearer than his sister who lives round the corner. How is that possible?

Rupert Steele: We would need to look at the individual circumstances.

Q339 John Robertson: Let’s be honest, this will not be just a one-off case now, will it? It is not just, "I was lucky enough to get this information."

Rupert Steele: It will presumably depend on the level of consumption, whether the customer is on a dual rate tariff, if they have electric heating or not. Possibly the kind of tariff they are on. There are any number of factors, how they pay for their energy, that may affect the relationship between the bills between two customers.

Q340 John Robertson: You will excuse me, the difference in the prices and then I look at my own prices that I get charged for-I have to say 400 different tariffs, trying to understand your letter that comes through from your company, and by the way there was a booklet that came with this to tell me all the different rules and regulations governing your company. I tell you, I need a new pair of glasses to be able to read it, the print was that small. I find it insulting that you send this kind of stuff out to people who, in a lot of cases, one, will not understand it and, two, will not be able to even read it.

I know it is not just you that is doing that, it just so happens you are the company who sent it out. I know all the companies will be doing something similar because you feel you are meeting your obligations, but you are only meeting your obligations to a minimum standard. You are not meeting your obligations to the standard that should be met and be expected from your customers, particularly customers who have been with you over a lengthy piece of time. I go back and ask the question again: why do this lady and gentleman who live round the corner from each other have one set of prices and I have another? This is not just about the tariff we are on. This is about the daily charge as well. Why should it be so different and why does it have to be as high as 67% or, in the case of this gentleman, 89%?

Rupert Steele: If you care to send us details of the cases we will give you-

Q341 John Robertson: That is a cop-out. That is just you telling me, "I will send you a bit of paper and you will send me a letter back." I want you to tell this Committee why people are charged that amount of money and why you are not playing fair with them?

Rupert Steele: We cannot really respond to that without knowing the details and investigating it.

Q342 John Robertson: How many complaints do you get a day?

Amparo Moraleda: I do not have that.

John Robertson: I have to say, for companies the size of yours, you are particularly poorly prepared. I have lots of other questions I can ask but I just feel it is a waste of time asking them because I am not going to get any answers. I think we need to get you here again, and make sure you are well prepared before you go any further.

Q343 Dr Whitehead: Are you comfortable as companies with the degree of vertical integration that you have in terms of your operations?

Alistair Phillips-Davis: I do not know about comfortable. It is probably a factor of the market that vertical integration helps reduce risk, and that is probably a benefit to the consumer ultimately that we can pass on to the customer. It probably avoids some of the companies going bankrupt like a lot of the non-vertically integrated companies have done in the past. I think margins, as we have seen, are low. I think there is a lot of competition in the market with the high levels of switching, so I personally think that vertical integration is a good thing because it reduces risk, it reduces cost to capital, and it avoids some of the nasty consequences that we have seen happen to the likes of Drax, British Energy, Independent Energy, Atlantic and all sorts of other businesses in the past where shocks in the market have driven them under. Those companies that have gone under have often resulted in additional costs being put on the industry, and either the rest of us have had to bear those costs or they have been passed on to consumers, which I do not think is helpful. What we do not want is a situation where you are bailing out energy companies similar to the bailout that we have seen in the financial sector where people take too many risks.

Q344 Dr Whitehead: But a suggestion is, and certainly a suggestion made by Ofgem, among others, is that that degree of vertical integration has a very substantial impact on liquidity, and indeed looks like you are selling to yourselves on a number of occasions at the cost of liquidity. Is that a fair comment, do you think, or not?

Alistair Phillips-Davis: I do not think so at all. I think there is substantial liquidity in the market. I think we provided you with the figures but in the last two years we have sold in the market more than three times the total amount of generation that we generate, therefore we churned it at least three times, I think previously some of the other companies have said, so there is a deep liquid market out there. If Ofgem wants to put more things in place to improve the liquidity, market makers, it is fine. Quite happy with that. The industry invested a lot of time and effort to produce N2EX, which is the auctioning platform that can be used. We are happy to put volumes through that.

Q345 Dr Whitehead: But it has not worked, has it?

Alistair Phillips-Davis: In what sense has it not worked?

Dr Whitehead: Only one new entrant into that market.

Alistair Phillips-Davis: Sorry?

Ian Peters: There is a bigger issue than liquidity, like we traded 75% of our generation capacity in 2010. I think liquidity is a factor and I think that some strips for certain hours of the day we would happily make those available. I think the bigger issue is the credit and capital risk that new entrants look at. We are a relatively fine margin business and to go into large scale hedging exposures requires quite a lot of balance sheet capital, particularly in a volatile market. I think that capital risk is the bigger constraint to barriers to entry rather than anything to do with liquidity per se.

Alistair Phillips-Davis: I think there is good liquidity in the market and we offer a lot of substantial wholesale deals. If you come to us, whether you are a large consumer or an independent third party, you want access to the market, we have over 100 deals called flexi-contracts where you can look at the screen of the market and say, "Right, I would like you to buy that." We will buy that on your behalf, and that is what you get charged for it. We will pass that through to you, and we will do a bunch of risk management. If you give us a term sheet and say, "This is what I would like. I am a company that has this many customers or thinks will have this many customers, and this is what I would like from you", we will price that term sheet, and I am sure a number of the other companies in the sector would do likewise.

I think the points that British Gas make are probably the more relevant ones why you struggle in this market. I think the margin one, is the other one. All the companies that come into this market have either gone bankrupt or have looked at the margins and decided it is not for them. It is interesting-I welcome Co-op coming into the market, Co-op have a well respected brand, so you think we would be very fearful but I think it just goes to show, if you look at their prices, they are not very different from the rest of us. It is a low margin business with not a lot of money to be made. Maybe you should get the Co-op in next time.

Q346 Dr Whitehead: Do you think arrangements such as, say, clip size which-

Alistair Phillips-Davis: If people cannot deal with clip size we would be prepared to sell smaller volumes. If somebody gives us a term sheet and says, "Give us a volume"-

Ian Peters: As long as they have an appropriate credit risk.

Q347 Dr Whitehead: You really would be prepared systematically to sell smaller clip sizes?

Ian Peters: As long as the counterparty has an appropriate credit risk.

Alistair Phillips-Davis: Yes. Whether you could do it through the exchange is another matter, but if you say, "I see that price on the screen, can I buy half the volume because I do not need all of it?" to us, and, "Can I do that on the basis of the standard term sheet?" of which we have about 100 with various people at the moment, yes, we would do that. If that is what people ask for, if that is what Ofgem wants us to do, we will do that. We are happy to provide liquidity. Liquidity helps us. We want liquidity in the market because we need to balance our positions which change all the time. So liquidity is absolutely fine with us. I suspect, we will get to the right answer with Ofgem on that.

Q348 Dr Whitehead: I think Ofgem did give you until 1 June-I am asking this question collectively-to come up with various thoughts on how the market or how better liquidity might come up. I do not think anybody met that date, did they?

Ian Peters: We have done, it was formally part of our submission to Ofgem. In fact we supported the auctioning concept in principle. We have been engaged in extensive discussions with Ofgem and are in details of working it through.

Q349 Dr Whitehead: You all told them smaller clip size?

Rupert Steele: We have offered smaller clip sizes to entrants in order to assist them. We have promoted that quite heavily as a product in order to help. We have also responded to Ofgem positively on the various initiatives. Obviously there are details to work out. What, if they are going to auction things, exactly are they going to auction, how is it going to fit in with DECC’s energy market review, which also needs a reference price? Lots of detail to work out. But what you have not seen is us saying, "No, no, no." We are absolutely happy to see this liquidity problem sorted to the extent there is one.

Q350 Sir Robert Smith: If the retail market is working very efficiently in driving out margin, how is it that the vertical integration makes it less risky to be in the generation side?

Alistair Phillips-Davis: I think what you have is a balance between both of them. So at certain times you may need more margin on one side than the other. That is what we find. We run an integrated business where we look to make a margin across the two sides. So, yes, if generation is suffering then the retail market may be benefited from that and vice versa. I would say generally over recent years generation is the one that has probably sat there and tended to provide support for the retail side.

Ian Peters: Where I think there is more to do is in the transparency. We think we have led the industry on separating out the various components of our business between upstream, downstream, retail business and so on. We welcome Ofgem’s intent to make that even more transparent because I think again it is one of these aspects that can drive suspicion as to what is really going on behind the scenes. So we are out there leading this and we would absolutely support greater transparency and segmentation of accounts.

Q351 Sir Robert Smith: Moving back to the earlier question, the reality is for the consumer that we need a massive capital investment, and that is going to have to be paid.

Ian Peters: Yes, which is the honest conversation that Sam Laidlaw has alluded to.

Alistair Phillips-Davis: Yes.

Chair: On that note of absolute agreement and consensus we will end the proceedings. Thank you very much for coming in. I am sure we will meet you again before too long.

Prepared 12th July 2011