CORRECTED TRANSCRIPT OF ORAL EVIDENCE
To be published as HC 554-i

House of commons

oral EVIDENCE

TAKEN BEFORE THE

Energy and Climate Change Committee

Consumer engagemenT with energy markets

Tuesday 4 September 2012

Phil Bentley, Guy Esnouf, Stephen Fitzpatrick and Alistair Phillips-Davies

Neil Clitheroe, Ed Gill, Martin Lawrence and David Mannering

Evidence heard in Public Questions 1 - 138

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 4 September 2012

Members present:

Mr Tim Yeo (Chair)

Dan Byles

Barry Gardiner

Ian Lavery

Dr Phillip Lee

Albert Owen

Christopher Pincher

John Robertson

Laura Sandys

Sir Robert Smith

Dr Alan Whitehead

________________

Examination of Witnesses

Witnesses: Phil Bentley, Managing Director, British Gas, Centrica, Guy Esnouf, Head, Corporate and Internal Communications, E.ON UK, Stephen Fitzpatrick, Managing Director, Ovo Energy, and Alistair Phillips-Davies, Generation and Supply Director, SSE, gave evidence.

Q1 Chair: Good morning, and welcome to this session of the Committee. Thank you very much for coming in. We have quite a lot of ground we want to cover and we need to try and cover it fairly swiftly. We have just under an hour, so I will try and get my colleagues to gauge their questions with that in mind and if you could also gauge your answers in the same way that would be very helpful. Can I begin by asking you how you answer the charge that the Big Six are functioning as "an oligopoly, which ultimately produces negative outcomes for consumers by restricting competition"?

Alistair Phillips-Davies: I will start. We clearly do not have a prepared answer, so we clearly do not operate in that fashion. I think there is healthy competition in the market. That is why we see different behaviours from people. That is why we see people move prices at different times. That is why we see people submit completely different offers to companies, and it is also why you see different companies with different behaviours. There will be one company in front of you later, I suspect, who have a particular agenda around nuclear who are therefore pushing very, very heavily on the consumer side. You will also probably see that the companies that turn up later have done very little on consumer engagement compared to the companies that are sat in front of you here. I do not know whether that was a deliberate policy. So, in terms of the look and feel of what we do, how we act, we all act very differently. You also have the fact that we, at SSE, have particularly encouraged measures for smaller suppliers to come in. We have done a lot in the wholesale market. We have offered free credit to people at our own cost. We have done a lot of work in order to make sure that they can trade in those markets.

Also, I notice Government policy is now providing benefits to smaller companies-potentially unfairly I think-of up to £100 differential between customers of smaller companies versus bigger companies, on the back of Government schemes and things of that nature. You have a lot of reasons why smaller companies or other companies would come in to the market, and there are a lot of reasons to believe why large companies are not acting as an oligopoly.

Phil Bentley: Just adding to that, the UK has the lowest gas prices for end consumers in the whole of Europe. Recognising this is an international market now that North Sea gas is running out, we are having to buy from the international market. We are giving customers choice and we do have a large degree of switching. In many European markets you do not have any choice at all and you have to buy from the Government-owned incumbent. So, given that we have innovation in smart meters, innovation in fixed products and green products, floating and new entrants-there are probably 1.5 million switches every quarter in the UK, and that is a huge amount of switching; only motor insurance has more-I think we are up there with a very competitive market.

The final measure I would look at is: what does our regulator say? In its last report our regulator said that, over the previous five year period, profit margins for the "Big Six", as you call it, were 1.5%, so that certainly does not feel like anything other than a very competitive market.

Guy Esnouf: I would echo that. If you look at the price activities over the last few months with one company putting prices up, we said we would not put them up. That is clearly not moving together. We have doubled the amounts that we have trading through the N2Ex exchange. Again, that is something that makes the market much more liquid. We have the lowest gas prices across Europe-very low comparative energy prices-so I do not think the charge stands at all.

Stephen Fitzpatrick: It may come as no surprise-

Q2 Chair: Yes, you probably take a slightly different view.

Stephen Fitzpatrick: Yes, I take a different view. I represent Ovo Energy, an independent supplier, and I would say that the Big Six try very hard to sound different but they are all fundamentally the same. They have all come from ex-monopoly situations. They all have incumbent customer bases, and we feel that they squeeze all of the charges, all of the environmental costs and social costs, and a lot of the regulatory costs, on to those legacy customers and have an unfair advantage in winning new customers at a loss. If you look at the market over the last 14 years-if we had a truly competitive market-it is a £30 billion a year market for domestic energy and there has not been a single new entrant that has taken more than 1% of the market. We are the current leading independent supplier with about 100,000 customers. It is a £30 billion a year market, and that is the true measure of competition-that nobody wants to enter it.

Phil Bentley: Just to add to that. One of the reasons why we do not have new entrants is the complexity of billing and procuring energy, and that is one point to reflect upon. I totally disagree with what Stephen said there. It is not surprising I would say that, but one thing just to make clear is the social costs-and we will come on to this-and certainly the environmental costs, which are going up and up every year. Small suppliers do not have to bear their share of that, and that is becoming quite a big issue as the costs go up and up. That is something to reflect on, whether we really have a market that is equal for all entrants. From our point of view, if you have a big cost advantage by not having to bear that social and environmental cost, that does not feel the right position to take.

Q3 Albert Owen: You said you fundamentally disagree. I know you are coming from a different angle, but you cannot disagree that there used to be a monopoly there, that British Gas took over incumbents and had these millions of customers. That is a fact. You cannot dispute that. It put you in a very privileged position, and there are still 99% of customers held by six companies. So there is something wrong with the system, a decade on into privatisation, when so few companies can enter.

Alistair Phillips-Davies: I think Stephen made two points-

Albert Owen: It is that point I am asking Mr Bentley first, please.

Phil Bentley: That is clearly the way you look at it, from the outside looking in.

Albert Owen: That is how the customers see it. It is factual.

Phil Bentley: But the point is we have so much switching and choice. In British Gas alone we probably have 25% of our customers switch within British Gas because they are choosing a better rate, and that is a positive. Overall, we think from the start probably 80% of customers have engaged in one switching activity or another, at least 80% and probably more. People are making choices, and we would argue the fact that they are with British Gas and have made the choice to be with us because they like the service that we provide.

Q4 Albert Owen: I am a customer of yours-and I have said this before-and I made a choice to stay with you because I am too lazy to switch, and that is the honest situation with most people. You said a lot of people do not switch electricity, and motor insurance is the only one. You are forced to change motor insurance on an annual basis and a lot of people switch when they move home. A lot of people are comfortable in their own home and they do not do this as a priority. I do not see this switching as a big deal, to be absolutely frank-that people are making these choices. The same people do the switching, less lazy people than me.

Phil Bentley: You will probably find you are in the minority, and we do write to our-

Q5 Albert Owen: How many millions of households in this country?

Phil Bentley: Twenty-four million.

Albert Owen: I am not in a minority. I am in the majority of people that do not switch.

Phil Bentley: They are switching.

Albert Owen: Well, prove the figures and prove me wrong.

Q6 John Robertson: I would be interested to know, how many of your customers are multiple switchers, who switch more than once? Therefore, if you say there are 20 million people switching, it is only 10 million because they have switched twice. They go from company to company to company. If I am right-and that would obviously back up my colleague-that means the majority of customers do not switch or cannot switch or do not have the facilities to switch. What do you actually give to a customer who is loyal? How many of your customers, the actual percentage of the numbers you have, have actually been loyal to you for a number of years, let us say over 10 years? I think that is fairly loyal. How many of your customers have been with you for more than 10 years?

Phil Bentley: I can certainly give you our view; we do give loyalty rewards.

Q7 John Robertson: Sorry, who are you again?

Phil Bentley: British Gas.

Q8 John Robertson: When have you given me a reward? I must have missed it. I have been with you 30, 40 years and I have never had a reward from you, so who gets the rewards then?

Phil Bentley: We do because you get Nectar points from British Gas. That is something we reward loyalty on.

Q9 John Robertson: What happens if you do not have a Nectar card?

Phil Bentley: The question you asked is: what is the percentage of those that have not switched in 10 years? In British Gas it is probably about 10%, so most have switched in that period of time, the vast majority.

Q10 John Robertson: Can I go back to my previous question about multiple switches. How many of the 90% have switched more than once? Do you know? No. Therefore, you cannot come in and tell me that only 10% have not switched. You only know the number of people who have switched. The fact they may have switched five or six times does not marry up to the figure of 10% that have not switched, does it?

Phil Bentley: I think you will find it will, because once a customer has switched away from one supplier, what happens to their history after that we cannot track clearly, but we know, of the customers we started with, how many are still with us.

Q11 John Robertson: You can give me two cases and give me the input, the one that comes to you from another company, and you can tell me the one that goes away to another company, can’t you?

Phil Bentley: Yes.

John Robertson: So that is two switches.

Guy Esnouf: The figure that I have is 69% of our customers have either switched tariff or supplier in the last three years. I do not have the breakdown between tariff and supplier. No doubt we can get that.

Q12 John Robertson: Tariff is a separate issue and we are going to go into that later. I know one of my other colleagues is going to ask you questions on that. But I am interested in the cost of switches, how much they can save and how people can do that. Can I ask you a question: what do you do about vulnerable customers? How do you ascertain what a vulnerable customer is?

Alistair Phillips-Davies: There are various means of figuring out what vulnerable customers are. We used to operate a scheme that offered the biggest discounts in the industry to people who were on various types of benefit and/or were nominated by local help groups, and things of that nature. There is now a Government scheme in place, Warm Home Discount, where we have a certain number of customers we know are entitled to get benefits. This year we have managed to identify something like 15 times the number for the wider group that we are supposed to, because we have undertaken direct training of all our frontline staff to try and identify people. Over the last year or so we have had something like 400,000 people with a variety of energy efficiency measures, Warm Home Discounts and things of that nature.

Q13 John Robertson: Sorry, what company are you with?

Alistair Phillips-Davies: Scottish and Southern Energy or SSE.

Q14 John Robertson: So you are talking for SSE, you are not talking for everybody else?

Alistair Phillips-Davies: No, I am just talking for SSE.

Q15 John Robertson: This is the last question from me on this. You both talked about how gas prices are cheap. That suggests to me that the reason you are putting your gas price up is that it is cheap and you can get more money for it. Is that the case or is it costing you? At no time has anybody ever talked about gas price increases due to the fact that you need more money. It is always down to, "The cost is cheap" and they always keep telling us how cheap it is. I could not care less whether I am the cheapest or not. I want it as cheap as I can get it. I do object to people putting prices up just because it is cheap, and that would appear to be the case.

Alistair Phillips-Davies: We provide our energy at the cheapest prices we believe we can on a sustainable basis. We clearly set out in our customer communication, which we published just under two weeks ago, three principal reasons why we increase prices, and I think the comment earlier about gas prices was just on a comparative basis across Europe. The energy prices that we have seen in this country, for both gas and electricity, have been among some of the lowest. Therefore, to answer the charge about whether we, as companies, are serving the market or not, I think that is clearly a critical factor in whether we are serving the market or the consumer in this country; we do offer cheap prices.

Q16 John Robertson: What do you think, Mr Fitzpatrick?

Stephen Fitzpatrick: It is a complicated issue. But I agree with you, I do not think UK consumers particularly care what the Belgians or their French counterparts pay. We have had access to some of the cheapest gas in Europe, historically, because we have had it on our doorstep. Now that we have had to import more the price is going up more quickly than it would if it was from a higher starting point on the continent, so I think that is why it feels like prices go up very quickly. However, the idea that we have six very large, efficient energy companies that are running their business as efficiently as anybody could, that are realising all the savings that they could and passing those on to customers, is not correct. I think that, in a competitive market, prices could be lower although they still would have risen over the past 10 years.

Q17 John Robertson: If I was to offer you SSE’s business, do you think you would run it cheaper?

Stephen Fitzpatrick: I think so.

John Robertson: That is good enough for me.

Q18 Sir Robert Smith: I want to ask on the switching, how many people when they switch do you think find themselves actually on a higher tariff, or end up paying more for their energy than if they had not switched?

Alistair Phillips-Davies: I would have thought that was relatively few people these days, but I am sure there are some because we know-

Q19 Barry Gardiner: Not at all, because in fact at the moment what is happening is that many of the tariffs that you are offering are being withdrawn and people are now seeing that, with SSE bumping up its prices and the expectation of further rises, people who are at the end of the life on their existing tariff, with only a month or so to run, are now switching to higher prices. You know that very well.

Alistair Phillips-Davies: Which tariffs are we withdrawing, sorry?

Q20 Barry Gardiner: I cannot tell you which tariffs you as a company are withdrawing. But at the moment, if you go on uSwitch, many of the companies are withdrawing tariffs that have been in existence, and people are going to higher tariffs because they fear going on to a standard variable rate when their existing tariff expires.

Phil Bentley: The point there with the tariffs, when they entered into those two or three years ago, for example, the wholesale price of gas was much lower so they benefited from a fixed price deal. But if you look at the wholesale gas price over the last three or four years I am afraid it has been going up. So eventually, when you come off those deals, you have to pay the going rate and that is exactly what is happening, as difficult as it is to deal with it.

Q21 Barry Gardiner: So you are agreeing with my point that they are switching to higher tariffs; thank you, Mr Bentley.

Phil Bentley: The only point I would say, Mr Gardiner-

Barry Gardiner: You have just confirmed what I said.

Phil Bentley: No, but I think your interpretation is that people are, in some way, being misled on to a different tariff. My point is that old tariffs and old prices, when they come to an end you have to pay the going rate. That is the point I am trying to make.

Q22 Barry Gardiner: I was saying they were being misled by your colleague who was suggesting, in fact, that switching to a higher tariff is not happening.

Alistair Phillips-Davies: We do not have a lot of fixed price tariffs in our company, with the greatest respect, and therefore we are different companies, which is the point that we were discussing earlier.

Q23 Dr Lee: Building on the conclusion we all have reached that, generally speaking, people do not switch, be it because they are lazy or because they do not know how or whatever, in view of the fact that you have a captive audience of customers, my concern is that, going forward, I suspect you are generally betting on gas in terms of where you are going to get your generation from. That being the case, that is not necessarily in the consumers’ best interest because you are betting on a form of energy that is labile by definition. Do you think your pre-eminence in the market, as a Big Six with a large percentage of the share of the market, is in the consumers’ best interest, in terms of long-term capacity, in view of the fact that consumers if they are not switching would prefer more stable prices instead of labile prices? Or rather, do you think it would be in the best interests of the consumer that you lot were all broken up, in terms of capacity going forward?

Phil Bentley: I think your question is around if you are producing gas in the upstream environment should you cross-subsidise the price of that gas into the downstream; is that the point you were asking about?

Q24 Dr Lee: I suppose the point I am making is: at the moment I am presuming that you have five and 10 year plans-so Chinese-style within your companies-and you will be looking at this thinking, "God, I am not going to be investing in your business, you are only making 1.5%", if that is the case. In which case, you will probably be thinking, "How can we maximise our profits?" Well, I would suggest a labile energy form is more likely to make you money than one that is stable and consistent, because you can ride the wave up and perhaps be slightly slower in coming back down.

Phil Bentley: There have been a number of surveys done by Ofgem, and the regulatory scrutiny, and there is no evidence whatsoever that prices go up faster than they come down. The other point I would make is, I do not think it is right to say that people do not switch, I really don’t. If that is the Committee’s takeaway, the evidence is that is not the case.

Q25 Dan Byles: That is what Ofgem say. Ofgem say 60% of people have never switched.

Phil Bentley: That is certainly not our information.

Q26 Dr Lee: I guess my central point is that, in view of the fact that most customers, say, the majority, do not switch-okay, they are looking for price stability. I am not convinced that the Big Six arrangement will deliver the energy mix in the future that provides that stability, because it will have a tendency towards going with gas. That is my point. Do you agree or am I completely wrong on that?

Stephen Fitzpatrick: My personal view is that consumers would like stable lower prices, which may not be possible.

Q27 Dr Lee: It is less likely with gas, is my assertion.

Stephen Fitzpatrick: The experience in the US is very much the opposite. US prices are a quarter of what the-

Dr Lee: At the moment.

Stephen Fitzpatrick: At the moment; I mean, it has been a five-year trend.

Q28 Dr Lee: Yes. But in 10 or 20 years’ time-as this gentleman has just said, he has been with the same company 30 years. At the moment, that is being driven by shale gas. We all know that. But geopolitically things can change quite significantly. Most of the gas reserves in the world are in unstable places.

Phil Bentley: But we have to buy gas now, 60% of our gas is not from the North Sea and we have to compete for the gas to come to the UK. If it does not come to the UK it will go to Germany and France and everywhere else. We are paying the international going rate, and that international going rate, along with old prices, has been going up.

Q29 Dr Lee: You agree with me that you do not drive secure capacity for the future for the customer?

Guy Esnouf: Our view is very much that what we have to look at now is the environmental impact for whatever fuel we use, we need to look at the price and we need to look at the security. We need to hold those three things in balance. Some years ago we talked about the trilemma of how that is balanced. That is very much the way we would look at this, so it is not just gas.

Q30 Dr Lee: You are saying you have a social conscience as part of your 10-year business plan?

Guy Esnouf: Pricing, future pricing and security of supply are key to what we do. We are here to do business, to deliver.

Q31 Chair: Mr Fitzpatrick, what do you think are the changes that would make it easier for smaller companies to enter into this market?

Stephen Fitzpatrick: Our experience was that entering the market was challenging but not impossible. When Ovo Energy launched we had five employees, so we were not a huge organisation. We only had one member of the team that had any energy experience at all. Regardless of what you might hear, the complexities around billing, trading and procurement are manageable, albeit difficult, so the challenges in entering the market I would not say are the biggest barrier to competition.

We have been in operation now for three years, and I would say that the competitive environment has never been so poor for small energy companies. We find it increasingly difficult to operate in the current environment. We made two proposals to Ofgem under the Retail Market Review, one based around providing better information for customers to make it more transparent. We think the complexity, and in some cases intentional confusion around energy pricing and energy bills, has made it difficult for customers to engage in the market.

We proposed that Ofgem move to a measure quite similar to the way the finance industry works, which is to have a multitude of very complex products but a very easy to use comparator-which is the APR, for example, in the mortgage world-so that people can very easily identify value for them.

We proposed using a pence per kWh measure-although, if you ask them, most customers will tell you that they are not sure what a kWh is-which is the easiest way to define how much you pay per unit of energy. I would say that the move from pence per gallon to pence per litre in the petrol world was painful at the time, and a lot of people did not understand the conversion, but it works. There needs to be education on that. So we proposed a pence per kWh measure to help most people understand when they are paying more than they could otherwise pay.

The second thing we thought was absolutely crucial was that we are seeing an increase in the Big Six. I say "the Big Six", there are differences among them but the majority of the Big Six are selling products to new customers at a loss in order to squeeze out competition. You take all of your indirect costs, such as social, environmental and regulatory costs, and you put them on your sticky customers, because you know that you can charge them more than customers that switch, and then you offer really good deals to attract new business or to attract customers that are leaving.

To come back to the point about loyalty, it works against loyal customers or customers who are unable to switch. Perhaps they think they are getting the best deal because they hear that their energy company is now at the top of the price table. What they do not necessarily realise is that is not what they are paying. That is only what they pay if they threaten to move away. So we said very, very plainly: we do not want any special help for small suppliers; we do not want any advantage on environmental costs or social costs; we just want a level playing field, and that means every energy company has to state what their cost base is. We already do that through segmental accounting, so that we can analyse energy companies’ profits. We said, if that is the cost base, you are simply not allowed to sell below that cost to anybody.

If you have those two proposals, one about transparency, one about price consistency, then you create an environment where small suppliers and large potential entrants will flood the market, because they will see that they can compete against legacy costs that the Big Six have on a level playing field, on a customer by customer basis. Those are two simple measures and the regulation for the second measure is already in place. It is called price reflexivity: the price of everybody’s energy should reflect the cost of energy. But Ofgem are not implementing it and that is what we ask the Committee to urge Ofgem to do.

Q32 Sir Robert Smith: On the pence per kWh, that sounds attractive to have, but does that not condition the behaviour of the market in the sense of: would that pence per kWh be calculated on standing charges rolled in, and how would it work for Total Heating-type customers where you are getting a discounted rate overnight?

Stephen Fitzpatrick: Yes. I think the proposal that Ofgem is working towards is to have a standardised view of consumption for the purposes of comparison only. We have also heard some proposals around standardisation of tariffs, which I do not think is necessarily a good idea as it could limit competition and then choice, but simply for the purposes of comparison you take the same metric for every different tariff and you say, "This is how much it is going to cost you per unit" and you assume-

Sir Robert Smith: If you were a typical-

Stephen Fitzpatrick: Yes, but if you look at it, by and large, the pence per kWh does not change very much at either end of the spectrum. You have to use a very large amount of energy before you start to see the pence per kWh beat them significantly, and that affects a very small percentage of customers.

Phil Bentley: A number of companies are already-I am aware of one of them-offering single unit rates, so it does make it easier to compare. The APR is something that we absolutely support. On top of that we write to all our customers every six months telling them if they could be on a better deal, so this idea that there is some sweetheart deal that we are not telling our customers about we certainly do not recognise. In the past that was definitely something that could be thrown at the doors of the energy companies but today there is much more transparency. There is much more simplification of tariffs and customers do not have to search around to find the best deal, we are actually writing to customers. That is why in the last year, 25% of our existing customers have switched deals within British Gas because we have told them where they can save money.

Q33 Sir Robert Smith: As a company that wants to make a profit, what motivates you to write to tell someone to get a better deal from you?

Phil Bentley: The simple answer is we think it is good for customer service and customers welcome that. That is certainly borne out by the fact that, overall, our level of switching away from British Gas has been falling because our service and value for money has been increasing.

Q34 John Robertson: Could I have some clarification on the switching again, coming back to my previous questions? Are you saying then that most of your switchers are not switchers to other companies but are switchers within the tariff?

Phil Bentley: There are two lots-I understand the question-on average, switching away from British Gas is around 10% a year and switching within British Gas is probably around 25%, so more customers are actually choosing better tariffs within British Gas.

Q35 John Robertson: The switching away is a lot less than 90%?

Phil Bentley: Yes. We would say that is because we are trying to give good service and good value for money.

Guy Esnouf: To answer the question there, it goes back to the earlier question about loyal customers. We took a look at this earlier on in the year, as part of the review across the business-the Reset Review-and concluded that it was time that we focused more on what we deliver for the loyal customers, to focus our business in that direction and so make it simpler and easier. A lot of the things you were talking about, that is exactly the direction. We too will be writing to our customers to ensure they are on the best deal for them, moving away from the idea of loss leading because it just does not seem fair for the existing customer if you do that. That is probably the main reason that is motivating our change.

Phil Bentley: Just to build on that, we are all agreed that loss-making tariffs should not be permitted and Ofgem have a number of inquiries into a number of companies that have been putting out loss-leading tariffs. It is not something that we do and nor would we support it.

Alistair Phillips-Davies: Finally, I would just say, on behalf of SSE, that the two main points Stephen raised I would agree with. We have already done them and implemented them. We will only have three tariffs available from this October, down from the four we truncated to earlier in the year -predatory pricing. We have the lowest differentials between our standard tariff and whatever our lowest tariff is. They are entirely cost reflective, based on things like paper billing, direct debit and things of that nature. It is completely beyond us why apparently some companies are able to offer discounts, of £200 or £300, off their standard price in the market to some customers but are obviously not offering them to all. As part of our latest tariff changes, all our customers will be moving to the same tariffs. We make all tariffs available to all customers. I absolutely support what they are saying. Equally with EPR, with our latest set of tariffs, you will clearly have that there. It is just a single rate for that. On the economy seven point that Mr Smith raised, we would just say that there are two rates for heating, and you will see that for Total Heating Total Control in the north of Scotland.

Stephen Fitzpatrick: Just finally-we talked about the Big Six-I would like to say there are six large energy companies but they are not all the same. My colleagues here today are probably at the front end of the pack, in terms of transforming their business. The loss-leading activity, which is hurting our company so much and suppressing our growth so much-you are probably going to be speaking to them afterwards.

Q36 Chair: You can be sure this Committee is well aware of that, all the same.

Mr Bentley, just one point for clarification. You say that British Gas writes every six months to its customers to ensure they are on the best deal, and helpfully you sent us a copy of your new simplified bill, which has information about alternative tariffs. Is the comparison based on an analysis of the customer’s own personalised usage?

Phil Bentley: Yes. I think it is a great point about consumption, because a bill is a combination of the tariff you are on and how many units you are using, obviously. Back to the point about loyalty: we insulate a lot of our customers’ homes for free; we give them energy efficiency advice; and we are installing hundreds and thousands of energy efficient boilers. That is all part of-and I know we are going to come on to this-the way to reduce bills because, even if the tariff is the unit price, consumption is the key to controlling bills. That is why things like smart meters-and we may talk a little bit about that-is all about giving customers more information to help them take control of their energy bill. To me consumption is a bigger issue than the differentials of tariff.

Q37 Dan Byles: Mr Phillips-Davies has already answered this question but do the rest of you know how many tariffs each of your companies offer?

Stephen Fitzpatrick: We have always offered two tariffs.

Guy Esnouf: Today we have 11, shortly we will have five.

Phil Bentley: We have tariff fixed and floating, and then you can decide if you want to pay with direct debit, cash/cheque quarterly, and if you want to serve yourself online or go through a call centre, so you can take-

Q38 Dan Byles: What is the total number of choices roughly?

Phil Bentley: At the moment it is probably about six or seven.

Q39 Dan Byles: I still really do not have a feel for whether you all believe that more tariffs are good because they provide choice and competition among tariffs, or whether fewer tariffs are better because it is less complex. Mr Fitzpatrick alluded to a point that has been made to me by a number of small companies: that the danger of simplifying tariffs is you actually hit the smaller companies, because it is harder for them to be innovative, in terms of using innovative tariff pricing rather than the brute force of pricing, which the bigger guys might find it easier to do. What is your view on that? Are more tariffs good because it is competition or is it more complex?

Stephen Fitzpatrick: I go back to the point I made earlier. If you look at the insurance market, the mortgage market, the credit card market, other service markets, choice is not a problem. You have to have something that is very transparent, an easy comparator. At the moment I would say the market is set up so that-historically at least-energy companies have, inadvertently or deliberately, been able to confuse customers as to what they are paying for. I think it is changing but not quickly enough. I do not think limiting the number of tariffs or the availability of choice is the thing to do. Potentially there are too many tariffs, but it would not matter if you could tell the difference between them.

Phil Bentley: I think as long as there is transparency and understanding-with ours, if you click on the button there you say, "Okay, if I go direct debit that will save me £67". It is a bit like, how many bags are you going to check in at the airline? You click on that and it tells you exactly what it is costing. As Stephen says, as long as there is transparency there I think that is the key to it.

Q40 John Robertson: Where is the transparency for people who cannot press the button and do not go in the aircraft? Where is the transparency for them?

Phil Bentley: That is right, and we would agree with that. There are a lot of customers like that, elderly customers, and that is why we write to them as well.

Guy Esnouf: You cannot choose to solve all problems all of the time. Our analysis certainly is that in the past we favoured choice, and inadvertently that has led to complexity, so now what we will do is favour simplicity because we think that is what the market needs now. Maybe you cannot have everything, but that is very definitely the direction we want to go towards. It is simpler, clearer, so it is easy to understand.

Q41 Dan Byles: Do any of you have a view on what the average price difference is for sticky customers versus switching customers? If a customer is trying to make the best choice themselves, do they go for being loyal or do they go for looking round? Because you have all said you reward loyalty and you have all said that switching is good and people switch because they can find better deals. Which should I be? Should I be loyal or should I be a switcher? They cannot both be the right choice.

Alistair Phillips-Davies: For us, our current tariff structure is the same for everybody.

Q42 Dan Byles: So for you there is no difference?

Alistair Phillips-Davies: There is no difference because we are migrating everybody to exactly the same tariffs.

Phil Bentley: I know you focus on switching, and I think that is a good point, but if you take doorstep selling, which is a practice that the whole of the industry stopped doing-and Scottish and Southern and British Gas were the first to stop that voluntarily-that was driving a huge amount of switching. But it was not good switching because people would switch and then switch again and switch again, and in the end they lost complete trust. Our most valuable customers are the ones who join us and then stay with us, and we want to reward that loyalty through energy efficiency, smart meters and all the rest; those are the things we would rather do.

Q43 Dan Byles: I am not talking about what you guys want. I am talking about the customer. A British Gas customer is better off being loyal rather than going and looking on a price comparison website and taking control of their-

Phil Bentley: Particularly now that we tell them where they can save money within the British Gas tariffs, exactly.

Q44 Sir Robert Smith: Is that bespoke to their bill? So it is targeted at them?

Phil Bentley: Correct, yes.

Q45 Dan Byles: What is the best measure of whether or not we actually have a competitive market? Is the best measure of a competitive market a large number of tariffs and choice? Is it a high number of switches? How do we measure whether we are getting it right in terms of increasing competitiveness?

Stephen Fitzpatrick: I will suggest the earlier point I made, that, in 14 years, we have not had any significant new entrants nor have we had any significant, large failures. In a competitive market it is surprising to me that everybody makes roughly the same profit margins; everybody talks about profitability being 1.5%. I think that is understating profitability in the retail sector. But in a competitive market you do not see that level of stability.

Q46 Dan Byles: Are we barking up the wrong tree looking at stickiness, looking at tariff choices?

Phil Bentley: You have to look at profitability. Those were Ofgem numbers. I think you have to understand the structures of what is in your bill because half of your bill is the commodity, and we are all trying to buy it at the cheapest we possibly can but it is an international market. A lot of our costs are given to us. Getting delivery to your home, that is a regulated charge. We all pay the same. Then most of us have the burden of the social costs and the environmental costs that, as I explained, some of the small suppliers do not have.

The real cost where we are trying to compete is profit margins and our own operating costs, and certainly in British Gas I can tell you that our operating costs have been coming down. For example, British Gas staff did not take a pay rise last year, and we worked hard to keep those costs down and we are incredibly competitive. I think the measure is the margins in the industry. We are not having many new entrants-it is not true to say we have not had them-they have come in and some of them have gone bust. The reason they have gone bust is that they start getting larger. They then have to buy all the commodity on the market and suddenly the market is very volatile. They buy it at the wrong time and they go out of business. It is great that we have new entrants like Ovo coming in but, in essence, you are buying for towns-the sort of St Albans. We are trying to buy the gas for Britain over the next five to 10 years and it is a different scale of activity.

Q47 Dan Byles: I am keen to explore that-why we are not getting new entrants. You are saying you can operate as a very small company, you can operate as a very large company, but there is a cliff edge somewhere, which is hard to get over. Is that what you are saying?

Phil Bentley: I am saying it is a market that is incredibly competitive and has a lot of risk in it the bigger you get.

Q48 Dan Byles: Why is it that the bigger ones are the ones who seem to be okay then? If the risk gets bigger when you get bigger why have none of the Big Six gone bankrupt, only the small guys?

Phil Bentley: We have had a number of consolidations, a number of people have left the industry for that very reason-TF2. A lot of American companies left the industry.

Alistair Phillips-Davies: TXU went bankrupt, in all fairness, and you have had some of the other companies that did get to a reasonable size, like Atlantic. They were more than 1% of the market. They had over 340,000 customers. They unfortunately went bankrupt as well.

An awful lot of companies have come into the market. If they do not have other assets or other things and they sell relatively cheaply-you are offered fixed price offerings-you have normally found at some point the market has done something unusual, they have failed to hedge their risk appropriately and they have gone bankrupt. That is why you tend to get the structure of the market: larger companies who can afford to take the hits when things are poor, when there are not negative margins. A number of the companies round this table over the last several years have reported negative margins in their supply businesses. You need to be able to absorb some of that at times.

Phil Bentley: You have EDF coming in. They have told Ofgem for the last three years they have lost nearly £400 million retailing energy. You have to be a big company to be able to have deep pockets. You have the French Government behind that, and you might say, "That’s great, the French Government are helping subsidise British energy bills" but at the end of the day the companies with big pockets can only afford to do that.

Stephen Fitzpatrick: I was going to offer an analogy. It will not take very long. If you look at the airline industry that is one where commodity costs is a big proportion of the value chain. There are a lot of regulatory costs through the airport, fees, and landing structures. There is a huge amount of regulation as well, and if you look at that marketplace you get small airlines, you get medium-sized airlines and you get large airlines. At all scales you see businesses surviving and thriving and some fail. It is not the case in the energy sector and, regardless of what I hear about energy companies losing money year after year, I just do not believe it. I do not know at what price EDF-I do not want to pick one company out-are transferring energy from their wholesale units to their retail units in order to recognise a loss, but if you shift that by 1% or 2% you can have a huge profit in your retail division. I do not think it is particularly useful to talk about profitability. In a competitive market, I simply would say that it is unlikely you are going to have six very large companies having such stable profits over time.

Q49 Laura Sandys: You talk about this competitive market, and in some ways one of the real problems is that we do not have an active consumer who really understands what on earth is going on. In many ways it creates a big sales market and the regulator and yourselves are doing the push. But there is absolutely no pull from the consumer end, unless it is in some ways forced. Mr Bentley, as you say, you have to write to people to get them to change. We have all these compare websites that are trying to facilitate some form of consumer engagement. I am pleased to be an E.ON customer-one of my energy suppliers-and I received a very nice bill, a very impressive bill that said how many cups of coffee for the bill and how many light bulb hours and all these things. That is starting to go some way to actually giving consumers some power.

I appreciate your pence per kWh, but we are still not getting to a place where the consumer can start to interact with this marketplace. As a sector, you still strike me as being an old-fashioned business that comes from the nationalised mentality. How do you see a way of engaging the consumer not just in consumption but-quite rightly, as Mr Bentley says-in the reduction of consumption? Just to add to this, what can the regulator, what can Government, also do to start to create a market where a consumer can have a voice rather than be a bit player in some sort of website game?

Guy Esnouf: I am glad that you like the work we have been doing on kWh. You will shortly be getting a letter from us saying whether you can save more by being on a different tariff but that is another matter.

Laura Sandys: I have that as well or something like that.

Guy Esnouf: I think we need to move away from some of the blame tennis, which is easy to play about energy, towards an approach to say, "Look, let us together try and solve a problem". Other industries have done this. If you think of smoking, where it is clear that needs to be reduced or stopped; alcohol, food.

John Robertson: That is all through Government legislation of course.

Guy Esnouf: But I think what we should do-sorry.

Q50 Laura Sandys: I would just like to clarify. In some ways I am not saying this is all your responsibility, but we have a failed market until the consumer can access this market, make clear and clean decisions that puts them in the driving seat. Currently they are merely a recipient of information and have to journey through absolutely impenetrable information.

Guy Esnouf: We would agree that an engaged customer is very much better for them and very much better for us. We can then try and avoid the clarity and complexity problem we talked about. I think we should do three things. We should clarify whether we want to use the units we are talking about. Is it kWh or something else? If you look to alcohol, the great move there was to go to units. Now we understand how much we might be drinking; or in terms of Weight Watchers where they talk about points. That is very much easier than calories.

So one is units, the second is to find what the target is. Unless there is a target it is hard to know if you have reached it. The fact that it is 2,000 calories a day or X units of alcohol, is very helpful. Then maybe we can work together, as is now done with some of those other industries, to try and reach those targets. For me it is a three-step process, but it can only be done by us working together and perhaps the regulator taking the lead. I think we would welcome that.

Phil Bentley: I can understand why you may say it is a failed market, but a lot of customers are engaging with energy efficiency. Even in the last four years we have seen consumption of gas in the home fall by 20%. That is because people are taking the lead in getting insulation, getting energy efficient boilers. That is an average number. Behind that we find some customers who have saved 40% who are really engaged, and then there are others who have done nothing. I think we have to think about how we get through to them as well.

One thing that we are trying to ensure people better understand is how much appliances cost to run, so in our bills we will say, "How much does a fridge cost to run?" You can keep your food cold in a fridge for 70p a week. Not many people know that. An iPad, to charge it up for a year is £1.60. But a Sky box is £3.60 a month. Of that, £2.20 is when it is on standby. We have calculated that £1.3 billion could be saved off the bill for things like Sky boxes that are left on overnight.

So it is all about education and engagement. I think we get to the same point, which is: once customers start to understand what is in their bill, what makes it up, and if it has gone up and gone down, why, and what the profits of the industry are-and we are very transparent about that-then what we need to do is say, "What can you do to control your consumption?" That is what smart meters are about. When we fit them we find that customers are more conscious of how much they are spending. It is what insulation and all these other things are about. It is wrong to say they are not having an impact. They absolutely are. There is still more to be done.

Britain’s housing stock is not where it needs to be but it would be wrong to say the direction of travel is anything other than improving the housing stock, improving engagement and understanding how we can reduce energy consumption.

Q51 Laura Sandys: I do not dispute that on one level, but it is taking quite a long time and this is meant to be a consumer market with a different dynamic. I can see the industry taking much more of a lead and looking a little bit more like the mobile phone sector, more like a commodity sector, sectors that have consumerised their marketplace rather than have it as the world of the geeks.

Alistair Phillips-Davies: We are on a journey, and I think the companies here have all done something. We started off last year with our consumer engagement programme. We thought one of the things was about simplifying tariffs, making it easier for people to understand what was going on. The next stage of that will be simplifying bills.

If you go to a call centre and talk to a representative who speaks to customers, generally-although you said you are very interested in all the different bits and pieces on the bill-they want to know how much, when to pay and whether it is justified that they should pay that or not; not a lot else. If you look at the bills-I have not seen Mr Bentley’s bill but I certainly have ours-the amount of information we are asked to put on the bills is very onerous and potentially confusing for people. Whether it is the media, whether it is politicians, whether it is regulators, everybody comes up with another idea and we end up confusing and driving customers away from engagement, so I think bill simplification after tariff simplification is important.

In terms of how we engage with customers, putting people in front of them or talking to them on the phones is critical. We have introduced an annual energy review. We found up to 50% of people are taking up the opportunity to either change a tariff or take an energy efficiency measure, but you have to talk to them about it. We employed 200 extra staff to start doing that. We focused on the vulnerable or the most needy of our customer base, essentially, to do that. Energy efficiency is critical. As Mr Bentley said earlier, there have been substantial reductions. At today’s prices you are talking about something like a £400 reduction in people’s bills since 2005, in terms of units they have consumed, and as we move forward into ECO and Green Deal it is critical that we engage those people.

The final piece I would say is on smart metering. When we get around to rolling out smart meters we will be putting people in everybody’s home, up and down the country, to have a sensible engagement with those people at that time, making them aware of what that smart meter can do for them and what they may be able to do for themselves. To save money is also critical.

So we are on a journey. There are things that we have done. We can demonstrate that we have clearly reduced consumption and reduced cost to people, and there are number of things coming, around ECO, Green Deal and smart metering, where we need to work together with Government and regulators to build trust and to get the consumer engaged.

Q52 Albert Owen: You say you are on a journey, and I have listened carefully to what you have been saying for a while. But that journey only started 12 months ago, and I put it to you that it was embarrassment that got you started on that journey, because we were having inquiries like this some time ago. Mr Bentley and others would attend and say, "The structure is not complicated, there are no issues there". When we talk about loyalty, you did not have any loyalty bonuses for people at that time. The customer has got wise, to be honest with you, which has put you in this position.

There is a statement, which I can back up with the evidence, that your companies made less than two years ago. You were in denial. You were saying, "It isn’t complicated. The market is working. It is transparent and open". There was a tipping point when the media, the consumer groups and politicians exposed you, basically, and you have learnt those lessons. With respect, you are learning very quickly but what else do you think you need to do as companies? You just mentioned, Mr Phillips-Davies, how you engage with your customers. I am interested to see whether people are genuinely doing this now and will continue to do it. We have heard the number of tariffs come down from colossal amounts to five or six. Are we going to get to the position where there are two or three, and are they uniform so that people can understand the market? I put that to you, Mr Bentley.

Phil Bentley: I think you are right. Over the last couple of years the industry has come a long way, and even-

Q53 Albert Owen: What I said is you were caught out by the public.

Phil Bentley: You want me to comment on that. If you read from Alistair Buchanan, he has talked about the energy industry stepping up to the plate and, frankly, I think we needed to. I agree with that point. But I do think that this discussion-

Q54 Albert Owen: He was not saying that two years ago, was he, with respect? That is an important point because I think we have liberated the customer in many ways; the media, politicians and consumer groups have liberated-

Phil Bentley: But I think the background was rising prices and that was the thing. There is a lot more engagement because the commodity cost is going up-the cost of all the social support we put in and the environmental cost. They are all going up, so customers rightly are asking, "What is in my bill?" I think we had to respond and I agree with that.

On this point about energy efficiency in the home, we have done a lot in that area. But the big area now-and maybe this is something the Committee could think about-is private landlords, private rented properties, because there is a huge amount that is being done in social housing and in local authority housing to improve the housing stock. But where we do not have the engagement is in the low-income, often short tenancy, multiple occupancy, private rented sector, and if you think about it there is no incentive-

Q55 Albert Owen: That was not my point. But on that point, since you raised it, in my part of the world we were doing that long before the energy companies were involved. Local authorities were doing it. I did not have to be a British Gas customer to have somebody knock on my day to say I wanted-

Phil Bentley: I think the point I was making-

Albert Owen: You are playing catch-up all the time. You are reacting, you are not proactive.

Phil Bentley: The point I was trying to make was that the local authorities are there, and I agree with that. But private landlords-there is not the incentive to do that, and it will not be until 2018 that they will have to have done an energy survey in their property before they are allowed to rent out. You have to have an annual survey of your gas appliances. That is what you have to do as a private landlord, but as a private landlord you do not have to do anything on energy efficiency until 2018, and we would urge you to think about-

Q56 Albert Owen: I am talking to you, not to the private landlords, and I am just saying, basically, you have been caught out, you are playing catch-up. Are you going to be more proactive in the future?

Phil Bentley: We are being more proactive and we are happy to do that.

Q57 Albert Owen: What are you going to do that is new?

Phil Bentley: Do you want to answer some of those points?

Guy Esnouf: I think we should acknowledge the role of the consumer groups in calling us to account, and I think that needs to be done clearly. We have started-and with us it was the Reset Review early in the year-just to say what are in our customers’ best interests. We stopped the doorstep selling because they did not want that. We found out that many of our customers spend less than a minute reading the bill, so we designed a one-page bill that takes less than a minute to read. We are getting energy efficiency training for our 4,000 frontline staff. So, whenever you ring up and ring on a local rate number, not an 0845 number, it is a cheap number to call, and they will all be externally qualified to deal with that. We said when we get to smart, we are getting 125,000 smart meters installed this year. That is 125,000 discussions with customers and 1 million by 2014. Then we get on to the Green Deal and making solid wall insulation attractive because that is really what I think the Green Deal is about. Where do we want to go? The place where people are saying, "Yes please", to solid wall insulation.

Stephen Fitzpatrick: I would just like to say a few things about both of the previous questions. The work that the media, consumer groups and regulators have been doing over the past couple of years has been very welcome. We launched Ovo Energy three years ago and a shortlist of what we stood for at the time; it was simplicity, transparency and fairness. We set up without any regulatory input at all to have two tariffs, a simple £5 a month standing charge and then you pay the same amount for energy no matter how much you use. Easy to understand bills, crystal marked terms and conditions and core communications-so that is approved by the Campaign for Plain English. We automatically offer every one of our customers the same offer as we give to our new customers, so everybody gets the same price.

I am pleased that we have played our part in helping to lead the way in showing how the market can be more consumer-friendly. But the point that I heard earlier, about the industry feeling like the remnants of an old nationalised industry, is absolutely what I see. I see that it is either competition or more regulation that will drive consumer improvements.

When you look at the mobile phone industry, as the example you gave, the one big difference between the mobile phone industry and the energy sector-everybody uses mobile phones, everybody uses energy; it is a long running contract where there is a service-is that there were no legacy mobile phone companies, so every single mobile phone customer made a choice and continues to make choices about their mobile phone provider. It is simply not the case with energy. So long as we exist with a regulator that seems quite content with some very big number that comes from the industry about how good competition is, how high switching rates are and how low profits are, we are not going to see that drive for consumer engagement.

Q58 Sir Robert Smith: Do you think the mobile phone companies really are an example of clarity and transparency?

Phil Bentley: There is less switching of mobile phone tariffs than there is of energy tariffs. There is some research done recently that showed that some customers in mobile phone companies are often on higher tariffs, and there is not the transparency that we now provide in the energy industry. I think we have moved beyond the mobile phone companies.

Stephen Fitzpatrick: Yet, if you look at all the statistics you give us, you would assume that mobile companies are the most hated companies in the UK and energy companies are the favoured companies in the UK, and it is simply not the case. All I can tell you is that what the customers say is that they do not trust their energy companies and they trust their mobile companies a good deal more.

Sir Robert Smith: Not when they were roaming in Europe, until the European Commission-

Stephen Fitzpatrick: A good impact of regulation.

Chair: Let us leave the mobile phone companies for another Committee.

Q59 John Robertson: You were talking about switching and how easy it is. Fortunately we have these bits of equipment now. Can you tell me, Mr Esnouf, why is it I have to have a computer if I want to switch to you?

Guy Esnouf: You do not.

Q60 John Robertson: According to this, I do. I put in my standard tariff for my account for my home and it gave me 24 different places I can switch, and your company have three. On every single one of them it says, "Mandatory online account management". How can I do that if I do not have a computer?

Guy Esnouf: What you should do, you can call us using a local rate number.

Q61 John Robertson: How do I know that?

Guy Esnouf: I am not sure where you are going to. Is that our website or is that somewhere else?

Q62 John Robertson: This is uSwitch that have told me this. I do not regularly advertise them, but they have told me this. The other thing that comes to mind, every single one of you-including Ovo-have a tariff if I do not last out the year on my agreement. Why should I have to pay if I know there is another company who are giving me cheaper? In the case of Ovo, you are the dearest at £60, and for all the other companies it is £30. If I find a company who can undercut you, why should I not be able to move?

Phil Bentley: The answer there is that we are guaranteeing a fixed price for you, so that even if the commodity prices go up in the future you will not pay that. If the social and environmental costs go up or the transmission cost to your home goes up, you will not pay that and we have to lock those contracts in for the customer to be able to guarantee it, and there is a cost of doing that. But that customer enjoys that because they have that certainty, but there is a cost to that in breaking that contract and mobile phone companies-I know we do not want to go back to them-are exactly the same.

Q63 John Robertson: Do you know what surprised me the most about the 24 different categories? There is only £100 between the top one and the bottom one. You are all quoting me almost the same price. What a surprise! If I took 100 supermarkets and I wanted to buy something, do you think they would all be within a stone’s throw of the same price?

Stephen Fitzpatrick: I would like to address that one because I think we do a reasonably good job of being price competitive. I am sure everybody wants to see competition. In a very competitive market, you would see very similar pricing for what amounts to a commodity. Some 85% of the makeup of the household bill is already fixed, through regulatory and environmental costs or network costs or commodity costs. So the last 15% is what we can move up and down and the 15% accounts for £150. I guess, while I think there are too many, if you look at those 24 different options and find how many standard terms there are-and I am sure there will not be very many-standard terms tend to be more expensive.

Q64 John Robertson: These are all based on standard, I have to say. That is what I put in: "standard". E.ON have guaranteed me 2% lower on E.ON standard prices for 12 months, so it is based on a standard price. I am not saying they are all standard. But that is the basic one that each of you were offering and it is almost the same price, every single one.

Phil Bentley: That is the point we are making. We are all buying the same commodity on the same international markets and paying broadly the same prices up to about 85% of our cost base. So what we can compete on is our own operating costs and our own operating markets.

Q65 John Robertson: Who do you get your electricity and gas from?

Phil Bentley: We buy it from the market like everyone else does, just as Ovo do. There is no-

Q66 John Robertson: How do Ovo guarantee 15% in your bills then?

Stephen Fitzpatrick: We buy directly from renewable generators.

Q67 John Robertson: Does that make it more expensive?

Stephen Fitzpatrick: It makes it a little bit more expensive. We absorb the cost of that, and we think most customers want to be seen to be doing their bit, so it is about twice the national average in our tariff.

Going back to your previous point about price and all prices being within £100, the average price in the UK last year was given around £1,250 to £1,300. That is before this year’s round of price increases.

John Robertson: If only mine was that.

Stephen Fitzpatrick: I guess I would ask what price you have seen on the computer then.

John Robertson: I will not give you any more; you have had enough.

Stephen Fitzpatrick: We have to compete with heavily subsidised prices whereas most of the-

John Robertson: No, I see that.

Chair: Just three minutes on your subject, Chris.

Q68 Christopher Pincher: I will be very quick. We have spent the better part of an hour discussing largely switching and the likelihood of customer switching, and the ease with which they can switch. You have also mentioned that by 2014 there will be millions of customers using smart meters, but they will not be fully operable until 2014, which means that if you want to switch you are probably going to have to get your smart meter switched as well. How is that going to aid engagement of any customers who wish to switch and use it?

Phil Bentley: We have installed 600,000 smart meters and by the beginning of 2013 they will be fully interoperable, so I am not sure where that information is coming from. But in 2013 there will be protocol set up by DECC to deal with that exact point that you are making. Having a smart meter should not be a reason why you cannot switch, and in fact it will not be.

Q69 Christopher Pincher: We will not see a situation where smart meters are being ripped out of homes as customers try to switch between providers?

Phil Bentley: Provided they meet what is called SMETS compliance-which is a standard protocol set by DECC; they are now out and we are installing them-then it will be fine.

Q70 Christopher Pincher: The caveat is going to amount to, what number of people do you think might have to have their smart meters switched?

Phil Bentley: Less than 0.1% overall.

Q71 Christopher Pincher: The cost of roll-out is some £11 billion, but there are some £18 billion of savings-or it is million? Anyway, there is about £7 billion, or million, of savings, which seems pretty good, as a result of smart meter roll-out, and about two thirds of that is going to benefit the suppliers and about one third will benefit customers. How much of the saving that suppliers are making, as a result of smart meter roll-out, is going to be passed on to customers?

Phil Bentley: The answer is all of it because it reduces our operating costs and allows us to compete with our competitors.

Q72 Christopher Pincher: The bill will come down as a result of smart metering, as a result of the savings that you make-

Phil Bentley: The savings that are related to our operating costs will get passed through to our customers, which is exactly what happens today. If we do a better job at collecting-if it is a direct debit we can collect the money better than we do in terms of quarterly cash cheque. That is why you get a discount if you are on direct debit, because you have the savings passed back directly to the customer.

Guy Esnouf: There is of course the other benefit: that it gives you accurate bills rather than estimated bills and when you start getting accuracy throughout the system you can then increase engagement. One of the reasons people tend not to look at their bills is they think it is all a mess anyway. That will just take that away, and I think it will get back to helping engagement enormously.

Phil Bentley: I think you will see consumption starting to fall, which you have seen in other countries, when you have in the kitchen that display telling you how much energy you are using. It has certainly had a positive effect on reducing consumption and increasing awareness.

Q73 Barry Gardiner: Mr Phillips-Davies, when you made your price rise recently-your 9%, wasn’t it?-you used as part of your justification the cost of mandatory environmental and social initiatives that suppliers are required to fund and pass on to customers. In other words, you blamed CERT and the Warm Homes Discount and so on. That came under quite some criticism from DECC, and there is now real confusion in the public’s mind. Do you not think it would be better to educate the public about the real costs of energy saving, at a time other than when you are trying to justify your price rises, particularly given that your performance record on CERT and achieving those targets is one of the poorer ones in the industry?

Alistair Phillips-Davies: I do not think it is on CERT.

Barry Gardiner: That is certainly what DECC claim it is.

Alistair Phillips-Davies: Okay. We submitted evidence to the Committee that said that we were slightly above or ahead of the target, compared to the average in the industry, on the insulation objective and on CERT as well. The evidence is there, and we are happy to back it up on the latest set of statistics that we saw out of Ofgem.

Q74 Barry Gardiner: What about my fundamental question about educating the public on these things at other times, rather than trying to deflect from your own 9% price rise?

Alistair Phillips-Davies: It is something that we clearly put in the bill. If you look at our breakdown of costs that we publish on our bills now, there is a little pie chart for the mathematicians where we show what the breakdown of those costs are, and I think what we are flagging up is that because of the way some of the targets have been set on CERT, and the way in which we have created a big bubble at the end of CERT, we have had a massive increase in the costs in the delivery of the last few months of CERT. This year, compared to last year, we are expecting to see, for us, almost a doubling of our CERT and CESP costs, basically from £100 million to probably in excess of £200 million.

Q75 Barry Gardiner: In fact, I was wrong, it was not DECC that said it; it was Ofgem. The latest data published by Ofgem suggest that SSE are still some way short of delivering their obligations on CERT and CESP. Is that inaccurate? Is Ofgem just wrong on that-that you are not short of your obligation?

Alistair Phillips-Davies: We have not delivered the obligations to the end of the year. In respect to CERT and CESP, we expect fully to deliver all of our obligations by the end of the year.

Q76 Barry Gardiner: Now that you are beginning to deliver, that is why your costs in that area are rising in the way that you are suggesting?

Alistair Phillips-Davies: We have delivered over 90% of our CERT obligation already. On the CESP obligation delivery, as with the rest of the industry, all of us are struggling. That comes down to the fact that it took almost two years after the announcement of the legislation for people to pin down what some of the measures were and what some of the scores were for the obligations. Ofgem had been incredibly slow at approving schemes. It has been widely reported what the issues are around the delivery of CESP, and all the companies have struggled to deliver CESP because of issues within the definition of what we are supposed to do, and also getting approval for schemes, but we intend to fulfil our obligation. We have a clear plan in place to do that. I do not think we are significantly behind anybody else, or behind any industry average, and we made a clear statement on that to the Committee over the last week or two.

Q77 Barry Gardiner: Does that mean that you expect your competitors to be raising their prices for the same reasons?

Alistair Phillips-Davies: I have no idea what my competitors are going to do on prices.

Q78 Barry Gardiner: If you are using it as a justification for you increasing your prices, and you say they are going to have to make up similar progress in CERT and experience the same problems, surely the logic of that position is that they will have to raise their prices as well.

Alistair Phillips-Davies: Right. I am not going to comment on price rises or changes of any of my competitors. But if you follow your logic, I would expect our competitors-but not Mr Fitzpatrick because he obviously does not bear these costs-to see similar increases in costs, and we have seen a number of other people in the market paying significantly more for CERT measures in order to try and finish off what we have to do on the insulation obligation this year.

Phil Bentley: This is the key point, Mr Gardiner. It gets more of an issue in the following year, when we move from what is called CERT and CESP to ECO. By most industry estimates, that ECO cost is going to be double what the industry had to spend before. Let me just give you a couple of points, if I may. In 2008, it was costing £11 per tonne of carbon to do treatments to reduce carbon. Today it is £22. A year ago, an insulation job was costing us £280. This year it is costing us £460. That is not because labour costs have gone up. It is not because the insulation material has gone up. It is because everybody is chasing to get these jobs done, and it is ramping up the price of the jobs. What is happening now is the insulation installers are the people who are making the money, and that is probably something you want to reflect on.

The third point I would make is-I have already raised this with Ofgem and I think they are minded to do this; I know you have Ofgem coming in later-just as they scrutinise the hedging costs of the industry, and it is not right to say it is transfer pricing because BBDO International Accountants scrutinise all our hedging costs, and these are the costs that Ofgem report back, let’s have Ofgem report back exactly what it is costing for the CERT and CESP costs. We are open to doing that, and I think it would help politicians understand what the true cost is. When we offer free insulation, which we do, there is a cost to that, I am afraid, and the cost is on the bill.

Q79 Barry Gardiner: I understand the charge that you are making against the suppliers, and what you are saying is that there is a classic shortage of people able to make those amendments to people’s insulation.

Phil Bentley: Largely because DECC set sub-targets. They set targets for carbon, then they set targets for insulation of the carbon, then of the insulation low-income, and then, of the low-income, very, very low-income. It was the same issue that the Government had with giving away free boilers. As you know, they only gave away a third of their budget and these were free boilers. So you can understand why it is difficult to locate all these customers. We took the data DWP shared with us for those customer targets. We wrote to all of them and we got hardly any response at all. It just illustrates that some of the sub-sub-sub-targets are quite dangerous, in terms of thinking through where we are actually deliver it.

Q80 Sir Robert Smith: There is also the fact of consumer engagement again, because there is obviously no point in having a good deal if people cannot access it because they do not have the information or the-

Phil Bentley: That is why I go back to private landlords, because I think there is something more we can do to put the onus on private landlords to bring the quality of their housing stock up to the standard that social landlords have done, and I think we would support that.

Chair: We are going to have to move on. Thank you very much for your time. We have run slightly over, but we are very grateful to you for the evidence you have given.

Examination of Witnesses

Witnesses: Neil Clitheroe, Chief Executive for Energy Retail and Generation, Scottish Power, Ed Gill, Head of External Affairs, Good Energy, Martin Lawrence, Managing Director for Energy Sourcing and Customer Supply, EDF Energy, and David Mannering, Director of Economic Regulation, RWE npower, gave evidence.

Q81 Chair: Good morning. Thank you very much for coming in. I am sorry we are slightly behind time. I think most of you have heard a lot of the previous evidence, and obviously we are going to cover the same ground with you. I think we have the same balance among the witnesses.

I will start by saying, particularly to those who represent the big companies, how do you respond to the charge that the Big Six function as "an oligopoly, which ultimately produces negative outcomes for consumers by restricting competition"?

David Mannering: If I could start on that, I think recently, certainly since the start of this year, our intelligence is that there has been a high level of traffic through switching sites, that there has been a high level of interest in fixed price products. As previous colleagues have alluded to, there was the article that suggested that EDF made £120 million loss in 2011. SSE referred to the fact that they had a reduction in their profits last year, and my colleagues, who are currently working on our own segmental statement, tell me that 2011 continued to be a challenging year for us. If you add to that the fact that Ofgem’s own very detailed and frequent analyses of the margins on standard variable products show that we are currently making, on average, £35 on a dual fuel bill of £1,300, all of those indicators show that competition-and competition should be measured in terms of price, quality and performance; it is not measured just in terms of the number of competitors-in this market is in fact very intense.

Neil Clitheroe: In terms of looking back over the last 10 to 15 years, Scottish Power, going back to where we started, had 3.1 million customers with the Scottish Power and Manweb areas. Of those 3.1 million, we have around about 1.4 million remaining, and we currently have over 5 million customers today, so to suggest that we have had a consistent customer base over the last 10 to 15 years, that we have not had movement in that customer base over the last 10 to 15 years, is incorrect. There have been switching rates of between 15% and 20%, between all the different companies, that have caused a huge flux in our customer base over that time.

Secondly, where you are vertically integrated, it is important that people have access to generation and that smaller suppliers have access to the generation that we produce. Therefore, we have done a huge amount of work over the last two years to facilitate entry into the market for that generation. We now trade all the way down to a 0.25 MW clip size, which is a tiny, tiny size for any small supplier to use. We have written to 56 small suppliers who operate in the market, and we are working with 20 of them in terms of facilitating that generation. That is enabling them to enter the market.

As we see it, the market is still very competitive. There are huge fluxes in the base and there are new entrants coming in in all sectors all the time. We do focus a lot on the residential sector. But looking at competition in the SME market, it is very heavy with new suppliers. Looking at competition in the large business market, it has a whole host of different suppliers within there, so that competition is happening across the board.

Ed Gill: I think we would say there is some competition. If you are working on the basis of what the market should look like, in terms of what an ideal retail market should look like, we are quite some way off that. Neil’s point about the link between the wholesale market and the retail market is absolutely key here. At the end of the day, the ability to provide a competitive retail product is inextricably linked to being able to access the wholesale products to do so. We would say that competition is very much focused on price at the moment, but actually you think in terms of looking for different types of products. We are a renewable supplier. Our core product is a green product, at the end of the day, and we have seen a growth in numbers in recent years. In some ways I think we would say there is competition, but it is far from perfect, and far from perhaps where it should be.

Martin Lawrence: Sitting in the market, it feels like there is very intense competition, particularly around the retail segment. We are the only company that has published our accounts for 2011 so far, our segmented accounts. You can go on to our website and see them. You will see for another year we have made a loss, less of a loss than previously, so we are going in the right direction, and yet we are still struggling to make money in this market.

I think you have seen some great examples of innovation in the past year. For example, we have brought out a tariff this year that allows customers to come and join us, to fix their price for two winters. If they want to leave at any point, they can leave with no fee at all.

Q82 John Robertson: Sorry, what company are you?

Martin Lawrence: EDF Energy. You can leave that tariff with no fee at all, if you want to go to another supplier. Furthermore, we have promised to write to all our customers, if they can save more than £52 a year-so any price offered by any other company. I will just repeat that. If you sign up for our new tariff, if you can save more than £52 a year from any of these companies or the ones you saw earlier, we will write and tell you every month when that is possible. If you want to transfer to that company, you may leave us with no penalty to pay at all. It is a good example of competition in the market driving new ideas and improving things for customers.

Q83 Albert Owen: What are you going to do to keep those customers? If you are encouraging them to go away if the prices are cheaper elsewhere, what are you doing to keep them? It is a serious question.

Martin Lawrence: We want those customers to stay with us. At the moment, our variable tariff is the cheapest one in the market and has been for 48 of the last 52 weeks, and the tariff we have offered at the time, fixed date, is also the cheapest.

Q84 Albert Owen: If somebody else is cheaper, and I am one of your customers, are you going to encourage me to stay or go?

Martin Lawrence: If somebody else can offer a cheaper price, when that time comes-at the moment, the prices are going up, rather than down, so the situation is certainly unlikely-if that is possible in the future, we will have to decide what we do at that point in time.

Q85 Albert Owen: You do not have a plan of how to keep me as your customer?

Martin Lawrence: Clearly, we want to keep our customers. We are trying to grow our business. We will perhaps talk about customer loyalty. We are competing very hard for customers and we need to grow our business, so absolutely we want to keep you.

Q86 Albert Owen: So what are you going to do? If, next month, I am one of your customers and everybody else is cheaper than you, you are going to put your price down and you are going to say to me, "Stay with me"?

Martin Lawrence: What I am going to do is what nobody else does. First, I am going to write and tell you that other prices are cheaper-

Q87 Albert Owen: Yes. I have the letter. What are you going to do?

Martin Lawrence: Secondly, if you want to go, if you choose to go, you can go, and there is no lock-in price. There is no penalty to-

Q88 Albert Owen: Okay, but I want to stay.

Martin Lawrence: I anticipate that, if that happens, we will have a competitive price to try and persuade you to stay as well.

Q89 Sir Robert Smith: You have made the offer on the idea of giving the consumer confidence but, on your own analysis, expecting not to have to actually send that letter.

Martin Lawrence: We have promised we will send the letter.

Q90 Sir Robert Smith: Oh yes, you have promised, but your assumption is that the way the market is going it is unlikely that others will-

Martin Lawrence: When we launched this price a number of months ago, we did not know at that time what the general sense of travel was.

Q91 Barry Gardiner: I thought your Blue package had been withdrawn?

Martin Lawrence: No. It is available through our website still. I beg your pardon: it is not available through the switching websites. It is available if you come to edfenergy.com; you can still sign up for it. The reason for that is-

Q92 Barry Gardiner: Why has it been withdrawn from the switching websites?

Martin Lawrence: Because we purchased a certain amount of energy in advance and, because of the extraordinary excitement around this project, we have sold lots of it very quickly. We have had to recalibrate our position to make sure we do not disappoint customers and offer them something we cannot sell, so we still sell it directly, and we-

Q93 Barry Gardiner: So, John cannot find your Blue package on his iPad at the moment on uSwitch because it is not there, but on your EDF it would be?

Martin Lawrence: On www.edfenergy.com. You will find it there.

Q94 Chair: You referred to your website, and I think you mentioned a loss of, was it, £120 million?

Martin Lawrence: That is what my customer-

Q95 Chair: If you go to the shareholder section of the website, rather than the customer section, the headline is, "United Kingdom, organic growth of EBITDA"- earnings before interest, taxes, depreciation and so on-"driven by improved nuclear performance", and the result for 2011 shows an EBITDA of €1.9 billion, up from €1.8 billion. How does that reconcile with your statement about the losses?

Martin Lawrence: We are mandated by Ofgem to publish segmented accounts, which separate the amount of money we make in our generation business from that which we make in our supply business. The price at which we transfer is public prices-market prices-that has been double-checked and vetted by separate accountants. We have a hardwired interface between the two. In fact, from our nuclear fleet, because Centrica is also a shareholder in ours, we sold exactly the same price: 20% Centrica. We sold 80% into our own business. It has to be exactly the same. The profitability of the generation business is determined by looking at the cost of that business and the market price for electricity, and the profitability for the supply business is on exactly the same business. All the acquisition costs of gas, electricity in the market, natural and energy resources-we see that as entirely consistent. In the same way as you would look at Shell’s accounts or BP’s accounts, you would see your refining profitability, you would see an upstream profitability and you would see a marketing profitability.

Q96 Chair: You could understand, nevertheless, how perhaps a simple-minded customer might not have time to master the details of your answer and just see the headlines that you put on your website. For what it is worth, there are two bullet points under this headline. The second one says, "Positive price effects from higher market prices". That is the reassuring post you give to your shareholders, and perhaps not many of your customers go to the shareholder section of your website.

Martin Lawrence: It is the market price for electricity. When the market goes up clearly the profitability of generation will improve, and that is what that is reflecting. That is the same for anybody else who operates in the sector, whether they have supply businesses or not.

Q97 Dr Lee: You may have heard my question about capacity before, in passing-securing capacity to stay the prices for customers. Within EDF do you have accounts saying, "We make this sort of margin on nuclear, this sort of margin on wind-I do not know if you have wind-and this margin on gas"? If so, does that make a difference to your investment going forward in capacity? If it is nuclear, why is it the Government seems to be able to throw lots of money at EDF to get them to build at Hinkley Point?

Martin Lawrence: Lots of questions in there. I will try and-

Dr Lee: Yes. The point I am trying to get to is that I am not convinced, given the way in which the sector is structured, with the Big Six and so on, that it is going to deliver the capacity that the country needs. I would be interested to know whether EDF-in terms of going forward, its capacity and where it gets its electricity from-sees nuclear as providing a bigger return to its shareholders and, if so, why do we have to offer so much subsidy?

Martin Lawrence: I am talking primarily on behalf of the supply business. I am not a nuclear expert, but I will try and address the question.

Q98 Dr Lee: It has an impact upon the customer, because the price that you are going to charge the customer is going to be determined by the cost of the electricity that you generate.

Martin Lawrence: No, because the price we charge the customer is based on the market price for electricity.

Q99 Dr Lee: Yes. But the reality is that there is not a huge amount of competition in generation, is there?

David Mannering: We are straying into areas of energy or electricity market reform here, rather than dealing with the retail business, but if I might just say this-

Q100 Dr Lee: No, my point is-

David Mannering: My point would be that EMR would allow huge numbers of new entrants to come in.

Q101 Dr Lee: I would appreciate it if, when I am speaking, you did not. My point is about stability of prices to customers and, if you are controlling where the capacity is going to be in the future, then that will have an impact upon prices to customers, so it is specifically within the terms of this. I am not talking about electricity market reform. What I am trying to work out is, with companies going forward, where you see them making profit, because that will determine where the capacity is.

Martin Lawrence: We believe that to go forward you clearly need a balanced energy mix. We firmly believe-and you will not be surprised to hear this-that nuclear is part of that solution. We think having an appreciable amount of nuclear in the portfolio will provide more stable prices over the longer term, because you will not be exposed to the same ups and downs of the fossil price variations and so forth. But how we run the business is still based on the profitability around the generation assets and the profitability around the supply business. There is a hardwired market price interface between the two of them.

Ed Gill: If I could just come in on that from a renewables point of view, just on the point about creating infrastructure that helps insulate ourselves from fluctuating international gas prices in particular. We have had a stable electricity price for our customers now for around three years. Part of the reason why we have been able to do that is we have proven our ability to trade renewables, but also because we are buying renewable power and that is helping insulate ourselves from fluctuating fossil fuel prices. There is no actual argument that, if you are investing in generation where, in the case of renewables, the fuel resource is nonexistent, but also not determining the power price in the same way as conventional plans, that helps retailers deliver more stable prices at the end of the day.

David Mannering: If I could just respond to the point, I think we would all agree that what the country needs going forward, for secure, affordable and low carbon energy, is a diversification of fuels, and EMR will establish the balance between the different types of fuel-renewable, low carbon, nuclear and fossil-depending on the way that that measure is set out in detail in the different CFDs that are available to different technologies. What it does not do is give any advantage to the vertically integrated suppliers. Indeed, it is recognised-both by the Government and outsiders-that we would expect new participants to come into that market, simply because of the very large amount of capital investment that is required for it.

Q102 John Robertson: Obviously, the customer wants cheap energy. To be perfectly honest, I think that is what the country really wants when it comes right down to it at this point in time. Scottish Power, did I mishear you? Did you say 50% of people switched? Is that what you said?

Neil Clitheroe: Yes. Over the last 10 years there have been various switching rates, but it has averaged between 15% and 20%.

Q103 John Robertson: Which is a completely different figure from the figure we got previously. They were talking about a 90% switch.

Neil Clitheroe: Yes. In terms of switching between-

John Robertson: Why so?

Neil Clitheroe: In terms of switching between different companies, between 15% and 20% of people switch per annum. In terms of our own data on switching tariffs within Scottish Power, that is between 20% and 25%, just moving between different tariffs.

Q104 John Robertson: Okay. To be fair I will ask you the question. Obviously that means there is roughly 85% that do not switch; what do they get for being loyal?

Neil Clitheroe: It depends on the different customers. We look at the customers in two or three different groups. We offer seven tariffs at the moment. We offer our standard tariffs, direct debit, prepayment and quarterly credit, and the customers that tend to take those tariffs are the ones that really want no hassle. They just want a simple tariff with a simple direct debit, backed up by good service, so we offer that tariff to them. We offer two fixed term tariffs of one year and a two-year tariff. That is really designed for people that are uncertain about the future. They want to hedge against maybe prices moving in the future, and therefore they are prepared to lock themselves in for a two-year period. We also have two what I call special interest tariffs. We have a green tariff, which contributes to a green fund and people pay that. We also have a cancer research tariff, which gives a discount and gives a contribution to cancer research. That is one of our most popular tariffs. It all depends on the actual segment of the actual customer.

If you are within the customers that do not switch, we write to them every year, especially customers like the quarterly credit customer base. We write to them every single year, trying to persuade them to switch to direct debit, because that is generally one of the more expensive tariffs. We have the lowest number of quarterly credit customers in the country because we have moved most of them on to direct debit, which tends to be a lower tariff. Those are the types of market segments we have, and that is what we try to do to address them.

Q105 John Robertson: I am one of your electricity company customers, and you are the only person here that does not tell me anything about switching and how much that would save. Why is that? British Gas could tell me when they appeared, but you do not.

Neil Clitheroe: If you are a direct debit customer with Scottish Power, then you are on a standard tariff, which is a good-priced product at the moment. If you want to lock yourself in-

Q106 John Robertson: But I am not. According to this I am not. According to this I can save anywhere between £350 and £250 by switching. As somebody who has been a customer for 30 years, you are not encouraging me to stay with you, are you? Where is the loyalty there for a customer such as myself, and there will be millions of us? That applies to all your companies, by the way. That is not just about Scottish Power.

Neil Clitheroe: Customers stay with a company because they perceive that they get good value, which-

Q107 John Robertson: But therein lies the problem. The perception about you guys at the moment is you are all a bunch of money-grabbing so-and-so’s, and that all you do is rip us off. That is the perception of electricity companies at the moment. I want you to do the opposite. I want you to prove to me that you are not money-grabbers, that you are willing to get the prices down as cheap as possible. I do not have a problem with you making a profit, but do your bit for the customers. Particularly, I want you to do your bit for the customers who do not have computers, who are hardest up and do not have the facilities in their properties for efficiency but need the most help, and I want you guys at EDF to do that.

Ed Gill: Can I just come in there with a quick point from the smallest suppliers’ or independent suppliers’ point of view. I think what you have seen from the small suppliers-and the research I have seen bears this out, particularly from Which?-is that levels of consumer satisfaction do tend to be higher within independent smaller suppliers, because they have to find ways to differentiate other than purely on price.

Q108 John Robertson: Why do you think that is? Are you more personable, or are they are fed up with the Big Six and they have gone to you and, therefore, they are happier?

Ed Gill: I think it is a degree of both. In the case of Good Energy, we take a lot of pride in our customer service. We invest a lot of time and effort in it. As you suggest, we try to take a very personal approach with our customers. For example, all our call centre staff are Energy Saving Trust accredited, so they can give advice on things like energy efficiency. We take a more rounded approach to what we do. Taking a step back and looking at the bigger picture, it is just a way of finding other ways for a supplier to differentiate from other operators in the market by investing in things like customer service, and using it as a way of distinguishing yourself.

Neil Clitheroe: Obviously, Scottish Power also do the same. We have invested massively in customer service in the last couple of years. That has emerged in some of the statistics that have come out recently, where we came top of the Ofgem complaints handling satisfaction surveys; came top of the Which? best tariff surveys, where customers rang our call centre and asked for our cheapest tariff and got that answer 100% of the time; came top of the account and billing survey with Which?; came top of the complaints survey with Which?, and have delivered that service.

Q109 John Robertson: To be fair, the thought of being top of Ofgem’s books for complaints does not fill me with much enthusiasm. That is still not much better than you guys.

Martin Lawrence: Can I respond to the question you have raised? We have dropped 20 million leaflets describing our tariffs to houses across the UK, recognising that many people do not have access to the computer and do not have the ability to go online. Furthermore, as part of our commitment to try to be a fair, transparent and good company, we have committed that for all our vulnerable customers-the ones that the Department for Work and Pensions advises us are vulnerable customers-we will ensure that, whatever tariff they happen to be on, we will charge them our very cheapest tariff.

Q110 Albert Owen: Mr Lawrence, when did you discover this? When did you wake up as a company and say, "We are going to do this" and why didn’t you do it years ago?

Martin Lawrence: To repeat the conversation earlier, I think your analysis is correct. I think the industry has woken up. We got into a cycle of trying to be too clever, too innovative, and over-confused customers.

Q111 Albert Owen: Or comfortable and making good profits.

Martin Lawrence: In our case, unfortunately, we have not made good profits in this segment.

Q112 Albert Owen: No, but the shareholders are not complaining, are they?

Martin Lawrence: I understand that. But just to come back to your initial point-

Q113 Albert Owen: With respect, it is an important point because you have two sets of accounts. You say to your shareholders, "We are making a profit"; and you say, "It is really tough. We are making very little profit out of the customers". That is an important one. Are you going to-

Martin Lawrence: If I may correct you-

Q114 Albert Owen: No. I will ask the questions, sorry. You are here to represent the company. I am asking you as a company representative, not as a member of some section on this or retail. As a company, EDF, you are boasting about your low tariffs here, and the question was: when did you discover it? You quite honestly said "recently", yes?

Martin Lawrence: One point, if I may. We do not have two sets of accounts. We have segmented accounts.

Q115 Albert Owen: No. On your website you have two headlines. One is that you are losing. On your retail section you tell your customers how tough it is, and you tell your shareholders how rosy it is and how much money you are making as a company. That is a fair assessment, is it not?

Martin Lawrence: We have invested £12 billion in the UK. We acquired British Energy here and we need to achieve a return on that, which I am sure you will appreciate.

Q116 Albert Owen: No, I understand that. But I have not said anything incorrect, have I?

Martin Lawrence: The fact that we make money on the generation side and not on the supply side is 100% correct. That is right.

If I may just go back to your earlier point about where we have woken up and smelt the coffee, or whatever it is, I think you are right.

David Mannering: If I could just build on that. It is certainly true that the industry, and npower in particular, has been going on a journey, and privatisation was all about increasing competition and breaking up the duopoly of National Power and PowerGen and so on. I was recently reading a kind of State of the Nation letter by the then Head of Ofgem-I think it was in 2003-which was applauding and endorsing the extension of choice, and I think we all focused very much on that. I think, with hindsight, and especially bearing in mind the changed circumstances of the economic climate and the imperative to move to low carbon, we probably spent too much on that agenda and there was too much complexity creeping in.

We in npower-and certainly, I think, generally-have appreciated that there needs to be a new compact with our customers, and we are working towards tariff simplification in npower. We have made some simplifications and further are on their way as we fully implement our new SAP billing system. So yes, we have work in progress to improve the customer experience throughout the journey, throughout the ways in which they interact with us, so certainly we do recognise that the conditions have changed and the emphasis is not so much on the very broad range of choice, but on doing the best for all our customers.

Q117 Dr Whitehead: Just a brief question on switching. The Secretary of State-assuming he is Secretary of State this afternoon-has endorsed the idea of collective switching, which is to see this promoted. You do not seem very keen on this, all of you. Why is that?

Martin Lawrence: That is not correct, sir. When Which? launched their first exercise, we put our price into that competition, and some customers came to us as part of that switching exercise. What we were not prepared to do was to put a differential price in there that was only available to those who had self-selected themselves as part of this competition. We wanted to make sure that our prices are available to all our customers. The idea is fine, but the idea that we will then give special prices to people who only do that is something that we do not accept, because we want to offer everybody the chance for the same good price.

Neil Clitheroe: We did exactly the same. We entered a price into the auction at the time. It was one of our existing tariffs, because we did not want to discriminate against other customers, and we played a full part in that process. We think it is quite an innovative way of encouraging switching in the marketplace, and there are a couple of others that have gone on just recently, smaller ones, which we have also taken part in.

David Mannering: We would have participated in it, but due, as I said, to the constraints of being in the process of implementing a new billing system, the complexities were difficult for us at the time. I would also add that we are constrained in what we can do by the undue discrimination licence condition between different customer groups, so we have to be mindful of that. I think that may underpin some of the other comments that were made.

Ed Gill: Our decision to not participate was taken on the basis that we are a green energy supplier, renewable energy supplier, and that we felt the focus of the Big Switch or the focus of collective switching, should be on things other than just price, and it should also be on things like provision of energy as well. On that basis we decided not to participate, and we had serious conversations with Which? about that, which were all very constructive, and we are hoping they might do a green Big Switch in the future.

Q118 Dr Whitehead: If there is, as EDF suggested, a burgeoning of the combination of national-local switching and collective switching arrangements, you, in principle, would wish to participate?

Ed Gill: Absolutely. Yes.

Martin Lawrence: The good thing about these exercises is they encourage engagement with the consumer in the cost of energy, and everything that moves in that direction must be positive for the consumer and for the whole industry.

Ed Gill: I think we would second that view. For us, it is about engagement, not just purely the price, once again. But it is about where the energy comes from or where the electricity comes from as well. As a concept with collective switching, yes, absolutely, we think it is a great idea but in this case we just said it was not for us, perhaps.

Q119 Sir Robert Smith: I just want to ask about EDF’s answer to Mr Owen’s question. What motivates EDF to be in the supply business if, as a business unit, it loses money?

Martin Lawrence: The Chairman asked me the same question a while back. Clearly, our aim is to make this business profitable. We are not there to lose money. We want to turn this business into one that is profitable, and we are making some progress in that area. We need to drive costs out. We have invested in new systems to allow us to make savings on costs. We need to get bigger. Unashamedly, we need to grow so we can spread the costs wider across the business, and we need to find ways of engaging with our customers, so that they can save energy for themselves but also trust us more, going forward, so that we can get a better dialogue with the customer.

Q120 Chair: Just for clarification on your earlier answer, the losses you referred to are on your domestic customers. You are making a profit out of your non-domestic customers?

Martin Lawrence: That is correct, yes.

Q121 Barry Gardiner: Sticking with EDF just for a moment. Surely, one of the great virtues of being a vertically integrated company-given that you are not subject to the vagaries of the market gas price in the same way as your competitors, when, as you said, the price of electricity is now high because of that high gas price-is that you do not have that same cost to bear. As part of your integration, why could you not transfer through your supply at a lower cost, because you have generated from nuclear, through into your retail business and, instead of offering those dividends to your shareholders in the one business, offer a reduction in prices and real competition in the supply sector of the market? The justification for keeping vertical integration there, which all of your companies have given this Committee before, is precisely that it enables you to be more competitive in the supply market, but precisely what you have informed the Committee about today shows that that is not happening.

Martin Lawrence: If we were to cross-subsidise one part of the business into the other, we would be faced with problems from all sides: from the regulator, from the Competition Commission, and all the gentlemen here would immediately cry foul if we subsidised our business in that way. Earlier you have heard Ovo describing the challenges they face in this business. If we were to subsidise our supply business by transferring profits out of one sector into the other, we would be faced with all sorts of problems.

Ed Gill: To offer some additional points on that, you touched on some of the problems of the vertically integrated model. We are not a vertically integrated utility. We get about 60% to 70% of our power from independent generators. As I mentioned earlier, we have had a stable price now for-I can’t remember the exact time frame-around three years. We have seen what is a premium product changed, on average, to be around 2% cheaper than your standard Big Six tariff. That is part of the reasons that we talked about in terms of the way that we source our generation, but also in terms of improving our trading capacity. Those things point to the fact that, with a different approach, perhaps you can take the approach you propose.

Q122 Barry Gardiner: Moving to consumer trust, and you have all spoken about the importance of it, in the recent survey 84% of those surveyed agreed that energy suppliers maximise profits at the expense of customers, and 59% agreed with the statement, "Energy suppliers treat people with contempt". What strikes me as strange here is that from most big companies, their determination to try to have a good market brand is so strong; look at the efforts that Waitrose or Marks & Spencer go to, or any of those companies go to, to try and make sure that their brand is a healthy one. Then you guys, faced with that sort of distaste and disapprobation from the consumer, really have not prioritised this.

Yes, Mr Owen is quite right; in the last year, prompted in part by this Committee, in part by the consumer organisations, you have begun to try to do what I would say are cosmetic changes to your industry. You will tell them what different tariff you can be on within British Gas, and British Gas is no longer with us on the panel, but you are making these cosmetic changes that try to give the customer a little bit of a sense that you are on their side. But on the real changes in openness and transparency regarding where your profits are coming from, we still have the statements, such as earlier on: we had 2%; we had 1.5%; we had 5% on profitability as the public statement out of Mr Bentley from British Gas. But if you look at the breakdown of a typical dual fuel bill, according to Ofgem, the estimated supplier profit margin is 9%. Whom is the customer supposed to trust? You guys? Ofgem? You have a dreadful name in the market.

David Mannering: Can I ask you where you get that number from?

Barry Gardiner: Yes, I am very happy-BBC News Business, 11 January 2012, "Energy bills explained".

David Mannering: But very, very recently, literally a few days ago, Ofgem produced some updates to its analysis that were showing a £35 profit on a £1,300 energy bill. My maths is pretty poor and I cannot do mental arithmetic, but that is more like 2.5%, isn’t it?

Barry Gardiner: It is certainly closer to 3%, yes.

Neil Clitheroe: I think, coming back to the transparency-

Q123 Barry Gardiner: Sorry, if I can just take Mr Mannering head-on here, what you are doing, Mr Mannering, is you are coming back and you are saying, "Look, we have other figures, okay?" You and I can sit here and we can trade figures. We can use the British Gas figure of 5%. We can use the figure I have quoted of 9%. We can use the figures of 1.5% or 2.5% that you have quoted. The point is we are not getting over the problem of your customers not trusting you by trading those figures. The real problem is that none of us seem to have any clarity or real certainty about it. You do not seem to be doing enough to give that clarity and certainty to the public.

David Mannering: We will be publishing our segmental statements in line with Ofgem’s requirements at the end of next month. Those will show what margins we are making, and I would have thought those are the most definitive statements of what has happened historically. As I mentioned, Ofgem produces this forward-looking average approach for standard variable tariff profits, so there is already a very great deal of information in the public domain, and-

Q124 Barry Gardiner: So there is no reason for consumers not to trust you? They are just wrong on this?

David Mannering: I think we are all going on a journey, and we are trying-

Q125 Barry Gardiner: Listen, let’s drop the journey stuff, okay? We have been trying for the past 12 months to do something.

David Mannering: Customers should trust us. Our difficulty is that, whenever a price rise is announced, there are pundits who will say, "This price rise isn’t justified; they are profiteering". It is extremely hard to see how those pundits can make those pronouncements when we have teams of people working on: where are wholesale prices going? Where are network charges going? Where are our obligation costs going? Therefore, what are the implications for what we have to do to prices? For individuals that have none of that knowledge to make very quick and judgmental statements about whether a price rise is justified is very wrong, because they-

Q126 Barry Gardiner: Okay, everybody else is wrong because they do not have the same information you have, but you are not prepared to share the same information transparently with the rest of the public. Therefore, you are not empowering them actually to understand why you are right and the consumer is wrong. Let us assume that you are right, Mr Mannering-

David Mannering: Let me respond to that.

Barry Gardiner: Hang on. Let us assume that you are right. How are you going to persuade the public, your customers, about trusting you?

David Mannering: I think part of the answer to that is that Ofgem-and I think this plays to one of your earlier questions-has demanded that the companies explain to customers the underlying reasons for price rises every time they change prices, and that would appear to be what Scottish and Southern tried to do in its latest announcement. In addition, Ofgem, as one of its RMR proposals, is seeking to require companies, as a licence condition, to explain the underlying justifications for price rises. As a customer, I absolutely agree with that, because when petrol prices go up I want to know why that is. Is it because oil prices have gone up? Is it because taxes have gone up, or is it because the companies are making more money? I think it absolutely helps improve trust if we explain to customers the underlying reasons for price changes. That presumably is the reason that SSE made that statement when it made the price change rather than, as you suggested, at some other time.

Q127 Barry Gardiner: On greater transparency, Morgan Stanley analysis says that, "The average UK family will have £200 less in disposable income next year owing to the escalating cost of essentials such as gas and electricity". Do you agree with that and if so, how transparent, how public and how up-front are you being with your customers to make sure that they understand the scale of the price rises that are facing them at the year’s end?

David Mannering: I have not looked in detail at the Morgan Stanley assessment. I think it covers issues other than just energy, but in future we will aim to be extremely transparent about the underlying reasons for any change in our prices.

Q128 Barry Gardiner: I am not talking about retrospectively justifying changes. What I am talking about is preparing your customers, educating your customers, about the scale of cost increases that you expect to come through, if you look at it through to 2020 or to 2030. I am just trying to source the figures here, but the price rises going through to 2020 and 2030 are really quite substantial in accordance with that. The effect on gas bills-sorry, just looking through my figures, I do not have them in front of me-you and I both know that by 2020 the bills will be substantially increased, and by 2030 still more. What now are you doing to have an informed debate with your customers to prepare them for what is coming down the line?

David Mannering: I think you have got to the absolute nub of the question that this session is about on consumer engagement. The risk is we get caught in a catch-22, because the Government approach tends to be to say, "Yes, there are all these changes but, because of energy efficiency and reducing your consumption, your bill will only change by a very small amount". In fact, some of the DECC numbers show that the bill will go down. The trouble is that leaves out a very important step, which is that, yes, you are right prices are going to go up. We in npower are looking at a communications message that makes that very clear that, "If you do nothing, your prices, and hence your bill, are going to go up to this. That is why it is so very important that if you are eligible for ECO you take advantage of that, or if you are eligible for the Green Deal you take advantage of that". What we would like to see is for the Government to work with us and with the rest of the industry very proactively on putting across those messages.

Martin Lawrence: Could I just support the thesis you made about transparency? I do not accept that that is only cosmetic, because we really are trying to be different. We have put on to our website-and I appreciate that is difficult for those who do not have access to the web, but it the most efficient way of getting it across-all our costs historically, and we are trying to show trends, when they are present, so we can show some arrows in which direction costs are going. We publish our service levels on the web. We are trying to be much more transparent about all the build-up of our business to what you are trying to talk about, which is trying to engage with the customer more. Any suggestions you have as to how we could improve, we would be delighted to try to grasp them. It is not cosmetic.

Neil Clitheroe: There is a need to increase transparency, but there has also been an escalation in complexity. When I started in the industry, there were three components to a bill: there was the energy cost; there was the delivery cost; and there was the cost to send bills and meter-readers and so on, and those are still there. Added into that mix now, you have CERT and CESP costs, feed-in tariff costs, Warm Home Discounts, Renewables Obligations Certificates, carbon taxes coming and so on, so there is an increase in complexity. One thing that I think that we at Scottish Power are starting to do-we have not done enough yet-is to bring that complexity out and explain it to people.

Q129 Barry Gardiner: But you are not telling your customers, "Your energy cost will rise but your bill could stay the same or even go down if you take advantage of the CERT and the CESP, and all the other things for energy saving to offset that". The debate that you are having with your customers is like SSE were doing, "Oh, we are having to put the price up, but it is all the Government’s fault because of CERT and CESP, and it is all these ECO things we are having to do. Blame the Green". That is not the way to get transparency. That is not the way to get a well educated customer who understands what you as an industry are supposed to be doing.

Neil Clitheroe: You are absolutely right. There are two sides to the debate. There is the cost side in terms of the components of the bill, and there is the consumption side in terms of the energy efficiency. On the consumption side, our offers are generally focused at the moment on insulation, generally focused on improved efficiency of heating systems, generally focused on improving customer behaviours around standby buttons and so on, and that tends to be the communication. Grabbing customers to take on those measures when they are free is difficult. We mailed 1.3 million customers with a free insulation offer and got 929 responses to that, so it is something that we at Scottish Power are working on and need to work more on. Obviously, when Green Deal comes and you have to pay for part of that, there is an additional problem that we are addressing. You are absolutely right, greater transparency on the cost makeup of the bill is needed in the industry but also greater education and insight into how you can save money on your consumption is something that we are working on, but obviously that needs to continue to increase. There are a whole host of different measures that households can install in their homes.

Ed Gill: I think there is a question here about what the role is of a supplier/retailer in the current market set-up. Is the retailer/supplier there basically to provide the cheapest possible electricity, or at the end of the day is it there to provide the energy consumer with a range of goods, products and services that allow them to manage their energy use? At the moment, the current market set-up is based on the former. The question is: how do you move to a system where you have more of the latter, and you have a situation where suppliers are sufficiently incentivised to provide those additional services and to provide that information?

As a small supplier, we feel an incentive to supply our customers with information about how to better manage their energy use. But at the end of the day, it is a good way of differentiating us and making us different from the bigger guys. The question is: how do you get the market to do that as a whole? With the issue of transparency, there can be greater transparency on wholesale costs. What we have put in our written submission is how you could have quite a simple, straightforward reporting mechanism for wholesale power costs, and that is obviously important in terms of how you then communicate that to the customer.

Martin Lawrence: One of the things Ofgem has done is imposed an annual statement obligation on us. We think that is a great mechanism for engaging with the customer. It is not a bill, so it does not have all the pain and challenges around that, but it is a chance once a year for the customer to see their consumption, to compare it to similar houses, to see what opportunities there are for saving against the tariffs, and also to look at opportunities for engaging with us around saving. It is a great opportunity.

Barry Gardiner: Mr Lawrence, with respect, I am in the business of sticking newsletters through people’s doors, and I know what time-life they have. If it is not a bill, my suspicion is that it gets at the most 20 seconds and then it is in the bin, but you do spend substantial amounts of money on TV advertising or other forms of advertising, and that is where you will have much more effect.

Chair: We are running out of time. I want to move on very briefly.

Q130 Dan Byles: I will be very brief, because I know we are very short of time. I just want very briefly to explore some of the issues I explored with the first panel, again around whether we are focusing on the wrong things when we focus on switching, for example, or complexity of tariffs. Mr Clitheroe, you have seven tariffs, you said. Very briefly, how many tariffs do each of the rest of you guys have?

Ed Gill: We have one main tariff.

Martin Lawrence: We have a standard variable tariff and our Blue tariff, and then various payment options under those two tariffs.

Q131 Dan Byles: Total options, numbers?

Martin Lawrence: There are two tariffs.

Q132 Dan Byles: Okay, but it is more complicated than that because of different payment options giving you different-

Martin Lawrence: You get discounts if you pay direct debit.

David Mannering: I think we have about 11 total tariffs, and some of them are available across more than one payment method, so direct debit, receipt of bill, PPM.

Martin Lawrence: One point, if I may. One of the reasons it looks complex on the website is that we currently have many different regions in the UK, and different costs of distribution and transmission in those regions. Therefore, it will look like a multitude of tariffs. In our submission to RMR to Ofgem, we have suggested that Ofgem could play a role here and act as an aggregator of costs, so we have the more postage stamp-type solutions and we could offer the same tariff to the whole country, and that would be a big benefit. It would greatly simplify-

Q133 Dan Byles: Wouldn’t that hugely restrict the ability of a small regional company coming in and helping break up the monopoly and helping increase competition? It would be very expensive for you to provide any power to Wales; you want everybody else to subsidise so that-

Martin Lawrence: Ofgem could be a clearing house to make sure that gets allocated properly.

Ed Gill: I think we would be very cautious about Ofgem or DECC coming in and playing a part.

David Mannering: Networks are very different across the country. It would be a quite dangerous thing to do.

Q134 Dan Byles: One of the points I made earlier was the question about whether focusing on reducing tariff complexity might actually be counterproductive. I have had a number of small companies speak to me outside of the Committee, saying they are concerned that it is very hard for them to go head to head just on price with the big boys, but innovative and clever tariffs or offerings are a way of differentiating. What is your view on that-in particular, Mr Gill, as a smaller company?

Ed Gill: I think there is a need to distinguish between transparency and simplicity, if you see what I mean. It is transparency of information that is required to make sure a consumer can get the best possible deal. What is the vehicle that delivers that, at the end of the day? We would argue it is a simple standing charge arrangement. The capability of having smart meters in the future is hugely exciting in that area. But there is innovation that is arguably bad and arguably good. Innovation around tariffs, for example loss-leading tariffs, I think most people would argue is a bad type of innovation. A good type of innovation is a tariff that is customised to a customer’s supply need, at the end of the day, and they are able to reap a benefit there in terms of what we can offer them. As we see new to the market, smart metering and smart grid, microgeneration as well and more different types of generation, there are a whole different range of opportunities there that open up all this to have customised tariffs. The danger is that a too heavy-handed approach from Ofgem in particular-

Q135 Dan Byles: On standardising them?

Ed Gill: -on standardising, on saying, in particular, our concern is that under existing proposals you would have one variable tariff and an infinite number of fixed tariffs, that that could play against that innovation, and against all the things that the Government is doing elsewhere to help improve the consumer experience in the energy market if they get missed out as a result.

Neil Clitheroe: We agree with that position. We think that customers need choice, and customers do want different things. Some customers do want to fix, some customers want green tariffs and so on, so we believe in choice, but that has to be managed in a framework of transparency and easy comparability. We do not believe that limiting tariff design and limiting the way that you structure tariffs is helpful for an innovative market, but we do believe in that comparability between tariffs, because a lot of customers are different. There are 25 million households and, therefore, why standardise to a very narrow set of tariffs?

Q136 Dan Byles: I am conscious that time is really pressing. I just have one more question. Are we focusing on the wrong things, in all this discussion about percentage rates of churn and stickiness? What is the best measure? What is the best simple measure of the competitiveness within the industry, do you think? We heard it might be people going bankrupt in the last session.

Ed Gill: We have had feedback on what our customers like, and what seemed to work for us is a simple standing charge, unit charge arrangement.

Q137 Dan Byles: When we look at the whole industry and we are saying, "Is the industry getting more competitive or less competitive?", what are the measures we should look at, rather than saying, "Not enough customers are switching"? A lot of people are saying more customers are switching, so that is an example of greater competitiveness. Is that the right measure?

Ed Gill: I think I would turn to my opening remarks, which are, if you want more operators in the retail market and you want the benefits that brings, aside from price, in terms of innovation and in terms of competing on different grounds other than just price, then you have to improve the situation in the wholesale market at the end of the day. It is like any other market; the retailer needs to be able to access the wholesale market in a way that is good for them, no matter what their size. Just as a smaller grocery store is going to offer access to the wholesale grocery market that is different from the local Tesco, small energy suppliers need to do that in the same way. They need to be able to access a range of different products in order for them to trade energy and hedge effectively, in the same way the bigger guys do but in smaller quantities, which comes back to Neil’s point about the importance of being able to supply 0.5 MW clips of power. It is about having greater liquidity, and for us it is about having greater liquidity in the wholesale market. Things are moving that way, but there is still a long way to go.

Martin Lawrence: I will turn it around the other way, from the customer’s perspective. I think you should ask the customer what they think. One of the key measures of customer satisfaction is called Net Promoter Score, NPS. We certainly have seen some of the tariffs, with the increase, dramatically shift the Net Promoter Score feedback we get from customers, so we should be looking at things like that to-

Dan Byles: Customer satisfaction, rather than-

Q138 John Robertson: How do you ask them?

Martin Lawrence: How do we ask them? In different ways: at the end of a call we give them the opportunity for an independent person to come and score what they thought, and we also do surveys as part of the industry as well.

Chair: We are running out of time. Thank you very much indeed for your contributions this morning. It is much appreciated.

Prepared 6th November 2012