Business, Innovation and SkillsWritten evidence submitted by Energy UK

1. Introduction

1.1 Energy UK is the trade association for the energy industry. Energy UK has over 70 companies as members that together cover the broad range of energy providers and supplies and include companies of all sizes working in all forms of gas and electricity supply and energy networks. Energy UK members generate more than 90% of UK electricity, provide light and heat to some 26 million homes and last year invested £10 billion in the British economy.

1.2 Energy UK strongly believes in promoting competitive energy markets that produce good outcomes for consumers. In this context, we are committed to working with Government, Parliament, regulators, consumer groups and our members to develop reforms which enhance consumer confidence, trust and effective engagement. At the same time, Energy UK believes in a stable and predictable regulatory regime that fosters innovation, market entry and growth, bringing benefits to consumers and helping provide the certainty that is needed to encourage investment and enhance the competitiveness of the UK economy.

1.3 These high-level principles underpin Energy UK’s response to Business Innovation and Skills (BIS) Select Committee’s inquiry into the Government’s Draft Consumer Rights Bill, which we warmly welcome. This is a high level industry view; our members may have different positions on particular issues. We would be happy to discuss any of the points made in further detail with the Select Committee if this is considered to be beneficial.

2. Executive Summary

2.1 Energy UK supports the aim of the Draft Consumer Rights Bill (“the Bill”). We agree that helping consumers understand their rights when things go wrong will empower them to engage with markets with confidence, driving improvements in price and customer service. We also support the aim of reducing regulatory burdens for businesses, since this will reduce costs, barriers to entry and growth.

2.2 Energy UK considers that, in general, the Bill meets these aims. We welcome the consolidation of the complex architecture of consumer law into a simpler and more accessible framework, and the new incentives to ensure that contract terms are transparent and prominent. For these reasons, we limit our submission to comments by exception, specifically two major policy concerns and two technical points.

2.3 Energy UK believes that, if companies cause consumer harm by breaching their obligations, then they should provide appropriate compensation. For this reason, Energy UK has supported (and still supports):

(a)Government’s proposal to give Ofgem new powers to compel companies to provide redress to consumers, which is part of the current Energy Bill;

(b)Government’s proposal to allow the courts to compel companies to provide redress to consumers, which is part of the Draft Consumer Rights Bill;

(c)Consumers having access to a free Alternative Dispute Resolution (ADR) mechanism, the Energy Ombudsman, whose decisions are binding on energy companies.

2.4 These statutory redress mechanisms either exist already or are expected be in place in the near future. In addition, Energy UK has established a number of voluntary redress mechanisms. For instance under the Energy UK Safety Net, suppliers have voluntarily committed to providing a minimum of £50 compensation to customers who are disconnected in error. Under the EnergySure Code, suppliers have voluntarily agreed to provide £250 compensation to customers for certain breaches that relate to mis-selling.

2.5 Energy UK has a number of concerns concerning the Government’s proposal to introduce an opt-out collective actions regime for competition law, where private “representatives” can take alleged infringements to the Competition Appeals Tribunal on behalf of a group of consumers that are automatically included in the lawsuit unless they actively opt out. We believe that it will have damaging consequences for consumers and make the UK a less attractive place to do business.

2.6 We believe that the provisions for opt-out collective actions regarding the energy sector should be omitted from the Bill specifically because:

(a)They are unnecessary. The energy sector is highly regulated and already has a competition law enforcer in Ofgem.

(b)They are prone to abuse, imposing both direct costs and risk premiums on business, which will ultimately be passed onto consumers.

(c)They will undermine, and not complement, public law enforcement by substituting private financial interests with public interest duties.

(d)They will not empower consumers. They will empower lawyers and funding companies. Improved information on opt-in actions would be a better solution.

(e)They will deter legitimate business activity, potentially constraining innovation and efficiency.

(f)They could be the start of a slippery slope towards the US-style class actions and litigation culture that BIS fears. There will inevitably be pressure from beneficiaries of collective actions to remove safeguards and expand beyond competition law.

(g)It runs counter to the European Commission’s recommendation that “collective redress systems should, as a general rule, be based on the ‘opt-in’ principle”.1

2.7 Energy UK is of the firm view that opt-out collective actions should be excluded from the Bill. However, if they are introduced then we agree with BIS that there should be appropriate safeguards in place to help prevent abuse of the system. We provide views on the kinds of protections that are required in 3.4 below.

2.8 As a separate issue, Energy UK agrees that a specialist competition tribunal should be able to hear stand-alone private competition law cases, as well as follow-on cases, provided that the litigants are single individuals or companies, or a collective action is opt-in.

2.9 Energy UK supports the “redress” and “compliance” categories of the “enhanced consumer measures” that the courts will be able to impose on companies that have breached consumer law. However, we believe that the “choice” category should be removed from the Bill. Whilst we support reforms that enable consumers to choose between providers of goods and services more effectively, we do not think that the courts have the expertise to intervene in markets in this way, risking distortions of competition and unintended consequences. These activities should be left to sectoral regulators.

3. Opt-out Collective Actions

3.1 As stated above, Energy UK supports the principle of redress. Energy companies have shown their willingness to admit responsibility when they make a mistake, and take corrective actions. Energy UK has supported the introduction of several statutory and voluntary redress mechanisms over the past few years. Some examples are listed in 2.3 and 2.4 above. However, Energy UK opposes the Government’s proposal to introduce an opt-out collective actions regime for competition law.

3.2 Opt-out collective actions will have damaging consequences for both energy consumers and businesses without bringing the intended benefits. To provide further detail, Energy UK opposes the introduction of opt-out collective actions for a number of reasons explained below:

(a)They are unnecessary. Ofgem, the sectoral regulator for the energy industry, is an enforcer of competition law and consumers and their representatives are able to notify Ofgem if they are suspicious of illegal activity. Introducing a new private litigation route (in addition to the High Court) seems to imply that there are breaches being left unprosecuted by Ofgem; there is no evidence to suggest that this taking place. It also creates a duplicate enforcement regime for companies which could lead to confusion and uncertainty.

(b)As experiences from the United States and Australia illustrate, opt-out collective actions or “class actions” are prone to abuse, with lawyers and funding companies taking advantage of a company’s potential ruin (via huge aggregated costs) to coerce them into settling unmeritorious cases. This will impose both direct costs and risk premiums on businesses, which will ultimately be passed onto consumers. The US Institute for Legal Reform has specific examples of abuse in the US and Australia.

(c)Ofgem, as the energy sector’s competition law enforcer, is a statutory body with a duty to act in the public (consumers’) interests. Representatives in private opt-out collective actions have no such duty; they are acting to further their own financial interests. This is not necessarily a problem in itself. What is a problem is that those involved in the case “representatives” are often divorced from the majority of the people that they are representing (since they are automatically opted-in). Therefore, not only can opt-out collective actions run counter to the public interest, they can run counter to the interest of the bulk of consumers supposedly represented.

(d)Consumers encompassed by any opt-out collective action are not “empowered”; the exercise of an individual’s rights is transferred to another party without the person’s explicit consent, and in many cases without their knowledge. This does not happen with opt-in collective actions, where a person exercises a positive choice. Energy UK supports a regime where informed consumers decide to opt-in, and in this regard encourages better dissemination of information about opt-in collective actions.

(e)The introduction of opt-out collective actions will make businesses fear expensive lawsuits filed against their legitimate activities. This is likely to make them highly risk averse, which could stifle innovation and efficiency, failing to bring important benefits to consumers that would otherwise be realised.

(f)Currently, BIS is proposing to restrict opt-out collective actions to the field of competition law. However, given how lucrative these lawsuits have proved elsewhere, we would expect those who consider themselves potential “representatives” to lobby the UK Government to extend collective actions to other areas of law. If the Bill was passed in its current form, this extension would become a much easier “sell” owing to the creation of a precedent. We therefore urge the Government not to open the door to unnecessary, coercive, costly and disempowering litigation.

3.3 If the Government does proceed with the introduction of opt-out collective actions for competition law, then Energy UK agrees that safeguards should be put in place to prevent US-style class actions. Those safeguards that BIS has proposed include:

(a)Certification by the CAT that the case is suitable for opt-out;

(b)Proceedings to be initiated only by representatives authorised by the CAT;

(c)Maintaining the loser pays rule;

(d)No treble damages; and

(e)No contingency fees (ie damages based agreements to be unenforceable).

3.4 Energy UK supports all of the above safeguards. However, we believe that additional safeguards are required. We would ask the Select Committee to consider the following suggestions:

(a)The CAT should be obliged to consult before making Tribunal rules in respect of collective proceedings. Clause 31 of Schedule 7 to the Bill allows the Tribunal to make provision for a number of matters including but not limited to: “the factors which the Tribunal must take into account in deciding whether a claim is to be brought in collective proceedings” and “the factors which the Tribunal must take into account in deciding whether to authorise a person to act as a representative in collective proceedings”. Whilst Energy UK has no reason to doubt the competence of the CAT in producing such rules, we note that the Bill provides it with considerable discretion in areas which might normally be deemed policy. We therefore suggest that the CAT is obliged to consult on the rules and/or BIS issues some guidance on the direction it would like the CAT to take, which itself should be subject to consultation (as BIS has done with its draft steer to the Competition and Markets Authority.

(b)Third-party funding of collective actions should be prohibited because they further alienate the supposedly-represented consumers by becoming a collaboration between the funder and the lawyer. The extra resources and ability to subsidise new cases with previous payments (being serial litigants) also allows claims to be pursued regardless of merit. The only protection in the Bill is that actions must be initiated by a proposed representative who must subsequently be authorised by the CAT. The Government should go further and explicitly preclude third-party funding.

(c)Any unclaimed damages should not be provided to the Secretary of State’s charity of choice (as provided within Schedule 7, Clause 6 of the Bill); doing so would provide a windfall to a party that has not suffered harm. Damages may go unclaimed for many reasons, including an overestimate by the Tribunal, claimants having insufficient proof of harm or claimants considering the award insufficiently material to claim. In any of these scenarios, the unclaimed damages should be returned to the company which paid them; Energy UK believes that this should be the default arrangement. Indeed, the possibility of sums going unclaimed is a compelling argument against an opt-out regime, whereby an illusion of compensation disguises a needlessly inefficient deployment of capital.

(d)There should be no restrictive time limits imposed for the resolution of cases. Energy UK would be extremely concerned at the inclusion of any “fast-track” provisions in the Bill. Competition law cases are inherently complex; due process is essential in any system of justice.

3.5 Energy UK understands from BIS’ Impact Assessment that the CAT has previously handled an average of 2.25 cases a year. We are concerned that the provisions for opt-out collective actions could lead to a dramatic increase in its case load, potentially with damaging knock-on effects on its other work including regulatory appeals.

3.6 As a separate issue, Energy UK agrees that a specialist competition tribunal should be able to hear stand-alone private competition law cases, as well as follow-on cases, provided that the litigants are single individuals or companies, or a collective action is opt-in. We are unsure whether the most appropriate body would be the Competition Appeals Tribunal (CAT) or Competition and Markets Authority (CMA), and would urge the Committee to inquire about the Government’s rationale for its choice of the CAT.

4. Consumer Choice Remedies

4.1 Schedule 6 to the Bill provides that the courts will be able to impose new enforcement measures on companies that have breached consumer protection law. These enhanced consumer measures fall into three categories: redress, compliance and choice.

4.2 As stated above, Energy UK supports the redress category of consumer measures. We also believe that the courts should be able to impose orders on companies that are in breach to ensure future compliance, in order to mitigate future harm and help restore confidence in the relevant market.

4.3 However, Energy UK does not support giving the courts the power to impose “consumer choice” remedies upon application from an enforcer.

4.4 Most importantly, the courts are not used to intervening in markets in this way, and Energy UK does not believe that they have the expertise to do so. For example, behavioural economics is increasingly being used to understand how best to use information to help customers to make better decisions in markets. Energy UK would be surprised if the courts had experience in this area of applied psychology.

4.5 Consumer choice remedies could also create unintended consequences such as the distortion of competition, particularly when imposed on one company and not its rivals. For instance, it is extremely difficult, even impossible, to tell in advance whether the remedy is proportionate (eg how many people see the information, how many people respond to it, and what the wider reputational consequences are). As another example, forcing companies to sign up to an established customer review/feedback site risks favouring one site that offers such a service over another.

4.6 As stated in 3.6, Energy UK supports decisions that impact on competition being made by specialist bodies. In the case of “consumer choice” remedies, sectoral regulators are much better placed to impose them than the courts; they should therefore be removed from the bill.

5. Technical Points

5.1 Unintended extension of information-gathering powers

(a)Energy UK believes that Which? (as the Consumers Association) may have inadvertently gained new information gathering powers in relation to its position as an unfair contract terms enforcer under Schedule 5, paragraph 16(3) and Schedule 3, paragraph 8(1).

Under the existing Unfair Terms in Consumer Contracts Regulations 1999, only a body listed in Part 1 of Schedule 1 may exercise a power to require information from a trader. The Consumers Association is not listed within Part 1 of Schedule 1. Instead it is listed separately in Part 2 of Schedule 1.

Energy UK understands from BIS’ stakeholder session on 25 July that it is not the Government’s intention to change any of the existing investigation powers so we believe this may just be an oversight in the drafting. However we would be grateful if the Select Committee could ask for BIS’ confirmation on this point.

5.2 Ensuring that mains electricity and gas supply is not unintentionally defined as a “good”

(a)In Clause 2 of the Bill, “Goods” is defined as “any tangible moveable items, but that includes water, gas and electricity if and only if they are put up for supply in a limited volume or set quantity”.

(b)Having spoken to BIS officials, Energy UK understands that the intention is to include goods like batteries, gas cylinders etc, and not mains supply. However, we would be grateful for clarification that the definition does not unintentionally encompass mains supply via prepayment meters or smart meters with load limiting functionality applied (ie where the customer can use only a set volume of gas or kWh of electricity).

5.3 Ensuring that rights with respect to services can be applicable to electricity and gas supply

(a)Clauses 57 and 58 of the Bill provide for a “Right to repeat performance” and a “Right to price reduction” in certain circumstances. These appear to be inapplicable to mains gas and electricity supply because repeat performance would not be possible and price reduction would need to explicitly refer to compensation. The concern is that, rather than compensation, the “price reduction” could unintentionally capture the unit price of energy, which apart from anything else would not be compatible with Ofgem’s tariff cap coming through the Retail Market Review.

23 August 2013

1 http://europa.eu/rapid/press-release_IP-13-524_en.htm

Prepared 20th December 2013