Energy and Climate Change CommitteeSupplementary written evidence submitted by RWE npower
RWE Commitments to Provide Follow up Answers
1. A breakdown of the costs of our social/environmental (CERT/CESP) costs in relation to the CSS?
Our CERT/CESP costs are as follows:
2009—£149 million.
2010—£104 million.
2011—£139 million.
They are required to be included as part of Other direct costs in the Ofgem Consolidated Segmental Statements rather than Indirect costs, which is where we would treat them internally.
2. A note reiterating/explaining our corporate tax position
Paul Massara’s letter to Tim Yeo of 17th April sets out our corporate tax position. The factsheet we produced on 18th April quantified the three main adjustments in moving from Operating Profit towards taxable profits as described in that letter. For convenience they are both enclosed as attachments.
3. How often you have check listed, as relates to trading activities, the “another part of business” box?
We reviewed very carefully the Business Functions Template, including its Explanatory notes shown on page 9 and 10 of our YE 2011 CSS to ensure that it was prepared in absolute accordance with Annex 2 of the Ofgem Guidelines. The Business Functions Template accurately and fairly represents where business functions are performed and in which segment the profit or losses of these functions are recorded.
Trading is involved in performing certain aspects of the specified business functions, as explained on pages 9 and 10 of our YE 2011 CSS (published on our website at http://www.npower.com/idc/groups/wcms_content/@wcms/@resi/documents/residential/con_seg_statement_2011_pdf.pdf and enclosed as attachment).
In all cases where the functions are performed in “Another part of the business”, the profit or losses are reflected in the appropriate Generation or Supply segment. All these activities are performed under arms-length, commercial arrangements and are at fair value in accordance with all applicable legislation and standards.
4. Clarification of the difference between the profit numbers cited by Ian Lavery and those cited by Paul Massara
There appears to be some confusion as to why there is not just one single measure of profit in circulation. We would like to point out that this is directly because different users of financial information require it to be presented on different bases. The main examples, as they apply to RWE npower, are as follows:
A.
B.
C.
In RWE npower’s follow up letter to Tim Yeo, as Chair of the ECC Select Committee, we quoted our profitability (or lack of it) at the EBIT level per the Ofgem CSS mainly because each of the 6 main energy suppliers are required to file these statements under a comparable basis. The aggregate EBIT for the years 2009–11 was actually £31 million, although I believe I incorrectly rounded this to £40 million in the hearing when presented with the cumulative Operating Profit figure of £766 million.
Although it necessarily exposes some of the complexity around the preparation of the CSS results, for completeness we also enclose a reconciliation between the Operating Profit referenced by Mr Lavery (£766 million) and the EBIT we referenced in our letter earlier last week (£31 million).
See attached Table 1
5. Peter Lilley asked for greater clarity with regard to how much of the [customer] bill is profit and how this is divided between retail and generation
The sum of all the individual bills that householders receive effectively equates to the turnover of our domestic supply business. The profit for the retail business is that turnover less its costs, which importantly includes the cost of buying the power and/or gas and then distributing it.
Our retail business pays distribution costs to the infrastructure/energy companies that own the respective gas/electricity networks. Ofgem regulates these businesses as well as our retail business, but RWE npower does not own any network assets, so there is no profit element in these costs for us.
As regards the cost to the retail business of buying the gas and power, it does not buy it from our generation business. The commodity cost to the retail business cannot be related to any one particular producer of gas or electricity. In other words we do not self-supply, and so the retail business simply uses the wholesale prices it pays as one of the costs after which retail profits are measured.
The question as posed could not be similarly applied to a retail supplier with no generation assets at all. But it is no more applicable to us, not only because we do not self-supply, but also because neither our generation output nor our gas production is matched to our retail supply.
Our profits from generation can be seen separately from the CSS, and reflect the extremely competitive nature of the generation market. Currently very thin margins can be made from generating from gas fired plant. These profits are required to fund the massive investment we have made in our generation portfolio.
In summary:
The profit on the customer bill reflects how much we make from our supply business and so is comparable with other supply companies;
We do not “self-supply” and so use the wholesale prices as a reference from which profit can be measured;
Similarly we have little in the way of upstream gas production and so source our gas for customers almost exclusively from the wholesale market.
6. Should trading be included in the Consolidated Segmental Statements?
RWE Supply & Trading GmbH (“RWEST”) is RWE’s global trading business that is headquartered in Germany with trading desks in Swindon, London, Singapore and New York. Being a global business engaged in almost all aspects of energy trading, the majority of its business areas are not only irrelevant to the UK consumer bill, it is simply not possible (or at all helpful) to allocate a percentage of its profits or losses to a GB energy supply or generation business. Indeed, there is simply no correlation between the relatively volatile profit or loss of a global trading business and the UK customer’s bills and therefore inclusion of its results would make comparison between companies impossible. Furthermore competitors have, for various commercial and operational reasons, significantly different approaches to trading, again making comparisons difficult if trading company results were included.
RWE’s trading business is separately managed and under a different ownership structure from the GB licensed retail and generation businesses. It has no influence over customer pricing decisions nor does its P&L affect the performance of the retail supply company.
Despite this business separation, RWE believes it is important that UK customers benefit from the economic efficiency that wholesale markets provide and also from the economies of scale that derive from having access to RWE’s existing trading facilities. As such, both the retail and generation businesses have Service Level Agreements with RWEST for it to provide certain services at arms-length (cost-based) prices.
For 2011, charges were approximately £2 million for the retail business and £3.4 million for the generation business. These fees cover out-of-hours operations, nominations to central systems, shared IT resources, use of credit and brokerage fees.
All commodity transactions between the companies are entered into at arms-length, fair market prices which are subject to stringent intercompany audits and fair-value checking procedures. There is no transfer of profit or loss between the licensed GB retail and generation businesses and RWE’s global trading business.
7. Dividends paid
The ECC Select Committee asked how much we had paid out in dividends. Please find below a record of the dividends paid out of the UK in the period 2009–12:
2009: £120 million.
2010: £120 million.
2011: £125 million.
2012: £125 million.
This was less than Mr Massara estimated during the hearing. No future dividends from the UK are currently planned.
Follow up Questions from ECC Select Committee
Questions on Trading
These questions are related to electricity only
1. What percentage of your total electricity trades are over-the-counter (OTC) versus trades on the wholesale exchange?
UK Power: In 2011, on a gross basis (ie trades where RWE was either a buyer or a seller) RWE traded 406TWh of power via almost 243,000 trades. Of these trades 203,000 (or 18TWh) were exchange traded and 39,000 (or 389TWh) were non-exchange traded. That is, 84% of trades in terms of number and 4% in terms of volume were exchange traded. The significant difference between the number and volume of trades is that the exchange markets in the UK mainly operate in the short-term.
2. What are your criteria for trading OTC versus on the wholesale exchange?
Our criteria for trading OTC versus on an exchange are a combination of (a) product availability, (b) product price, (c) transaction costs (ie broker charges, exchange and clearing costs), (d) collateral costs and (d) remaining risks (including credit risk). The most important driver of all of these criteria is product price—we will normally transact wherever the price is most attractive (ie the highest if we are selling the product or the lowest if we are buying the product). It is this access to different markets and products through traded markets that ensures that we are able to procure commodities for the most efficient prices for our customers.
3. What is the average difference in price for your OTC versus wholesale exchange trades?
There is no systemic difference between the price of OTC versus exchange trades. The market ensures that any significant difference in price, over and above that due to differences in the product, timing or transaction costs—is removed by arbitrage; traders buy the cheaper product (wherever it was traded) and sell the more expensive product (on the other platform) to ensure that prices return to an equivalent basis. Other than the means of execution, many other aspects of OTC and exchange trades are also increasingly similar. For example, many OTC trades are now given up for clearing and—under REMIT—data on OTC volumes and prices will be reported to regulators and published on a commensurate basis to exchange trades.
4. Does your company deal in long-term contracts? Who has access to the information contained in the contracts?
RWE Group does sometimes enter into longer-term UK power contracts, the details of which are commercially confidential. It should be noted that these agreements are occasional, highly-tailored and bespoke arrangements that would not be expected to affect day-to-day trading and pricing in the wholesale markets. Although not explicitly controlled or restricted, the distribution of contract details is kept to a minimum to protect commercial confidentiality and any information pertaining to those contracts which qualifies as inside information is covered by strict internal REMIT compliance rules and procedures.
These questions are related to gas only
5. What percentage of your total gas trades are over-the-counter (OTC) versus trades on the wholesale exchange?
UK Gas: In 2011, on a gross basis (ie trades where RWE was either a buyer or a seller) RWE traded 50.5 billion therms of gas via almost 49,000 trades. Of these trades 7,900 (or 500 million therms) were exchange traded and 41,000 (or 50 billion therms) were non-exchange traded. That is, 16% of trades in terms of number and 1% in terms of volume were exchange traded.
6. What are your criteria for trading OTC versus on the wholesale exchange?
See answer 2 above.
7. What is the average difference in price for your OTC versus wholesale exchange trades?
See answer 3 above.
8. What announcements have you made in accordance to REMIT? Where is it posted? If you trade gas outside of the UK within the EU, where do you post announcements for other EU markets?
RWE Group complies fully with REMIT regulations. All relevant information relating to the electricity business is published on the RWE transparency website “www.rwe.com/rwetransparency“ which provides all essential information about the individual units of the power stations. This page can easily be found by a simple search in an internet search engine and as a result, any interested user can gain a precise picture of the output of RWE power stations.
RWE’s sole subsidiary company with gas production assets is RWE DEA, which supplies gas from its portfolio of equity gas fields. The production capacity at each of RWE DEA’s fields is significantly lower than the level at which changes in their availability would be likely to significantly affect wholesale gas prices and hence qualify as inside information which is required to be published under REMIT. RWE DEA nevertheless has the facility to publish information on field availabilities here: http://www.rwe.com/web/cms/en/1375240/rwe-dea/at-a-glance/transparency/ in the event that disclosure should be required to meet our obligations under REMIT.
RWE will also fully comply with regulations to report OTC transactions under REMIT and the Regulation on OTC Derivatives, Central Counterparties and Trade Repositories. ACER and ESMA and national regulatory authorities are currently consulting on the definition of the technical standards and protocols to facilitate this.
9. What access to market information do your traders have about any other division of your company? Do they have access to storage levels, upstream information if applicable (geological data), or daily production/consumption data?
RWE Group complies fully with REMIT regulations and therefore our traders only have information that has already been made publicly available under REMIT or which is not classified as inside information under REMIT.
RWE does not own any gas storage assets in the UK and to the extent storage capacity is required it is contracted for with third party providers by each Group subsidiary. RWE Supply and Trading (RWEST) has gas supply contracts with RWE DEA (DEA) which provides DEA with a route to market for their gas production from the UK Continental Shelf, although—as noted in the response to question 8—the level of flows under that agreement would not qualify as inside information under REMIT. RWE Npower procure and hedge the consumption of their gas consumers independently on an arm’s length basis with RWE Supply & Trading and at prices prevailing in the wholesale gas market.
10. Does your company deal in long-term contracts? Who has access to the information contained in the contracts?
See answer 4 above, which is the same for both UK Gas and Electricity.
Additional Questions
11. How many of such “immobile” customers are there?
Based on 2012 data, our best estimate is that approximately 410,000 electricity customers (or 7.2% of our 5.7 million domestic energy base) havd been supplied continually by npower in the same property on our standard (or equivalent) tariff since deregulation. This data is taken from our SAP and legacy billing systems and excludes those customers who have at some point since 1999 taken gas from us, or have selected a non-standard tariff.
Assumptions
Inclusions
1. “Standard” tariff includes both single rate and Economy 7, in addition to legacy complex-metered tariffs, such as SuperTariff or off-peak given that stakeholders and customers would also see these as “standard”
2. Customers who have changed name—such as on death, marriage or divorce—are included where the account name has been amended as opposed to a new account being opened. This is the agreed business process in the majority of cases where an existing family member continues to live in the property
Exclusions
1. Customers who have moved from an npower-supplied into another npower-supplied property are deemed to have engaged. At home move they would have contacted us to provide their details and our business process is to offer gas at that point (which they may or may not have taken)
2. Customers who have requested that their current account be closed and a new one opened on divorce or death are excluded. This typically happens when there are significant legal processes in place that require the customer’s current account to be closed. Note that we are unable to accurately track customers in this scenario
Customers who have at some point selected gas or an alternative electricity tariff from npower.
12. Do you offer all customers all of your tariffs? If not, what are the reasons for not offering the full suite of tariffs?
It is our policy not to distinguish between new and existing customers when we make products available. From time to time, we may incentivise customers to take a tariff through a particular channel such as internet, telesales and, again, these offers would be available to both new and existing customers. However, some customers (whether new or existing) may be excluded from taking a particular tariff due to their choice of payment method, meter type or service channel.
13. What can you do to reduce the cost of customer service yet also improve their quality?
We have already started a number of initiatives to help with the two major contributors to cost.
Firstly the implementation of a new customer management system is specifically designed to take steps out of the process that slowed down the efficiency of activity. This makes it easier for the customer facing teams to process customer requests, reducing time taken and improving accuracy and quality of delivery.
The second element of the strategy in Customer Service is a top to bottom diagnostic review of every process, performance management system and organisational design to make sure that the customer is the first thought for the whole organisation.
By engaging directly with the people who serve customers and stream lining the processes they use, giving them more skills, focusing on the way we treat customers and building the right support organisation, we will deliver more efficiency and reduce cost but also drive a better customer quality. This is about delivering on customer promise, all the time, every time.
In a highly competitive market everyone needs to focus on cost reductions. Over the period 2010–12, we took out over £300 million of costs from the business and have further plans to reduce costs in 2013 and 2014. These cost reduction programs where the main reason that we moved from loss making in retail in 2009, 2010 and 2011 to a small profit in 2012.
14. What proportion of calls/correspondence are caused by billing queries and by how much do you anticipate this will fall after the advent of smart metering?
In 2012, we received 5.2 million inbound contacts relating to billing enquiries. Total inbound enquiries were 9.1 million.
The Smart business case assumes that there will be a substantial decrease in billing enquiries but technical queries will replace most of them. We don’t anticipate any net saving until 2018.
We haven’t split billing calls out specifically from other types of call but have assumed that in 2013 we will get 1.45 calls per Smart customer reducing to 0.95 calls by 2019.
This would equate to 8.2 million calls in 2013 and 5.3 million in 2019.
15. If the billing problems were sorted out, do you think this could encourage new entrants to come into the Supply business, as you might not have the big upfront cost of establishing large customer call centres to cope with the inevitable problems.
Big contact centres are often seen as a cost of failure, but it is also true to say that a significant percentage of customers still like the personal touch of a voice. The real challenge is to get the right balance between access to people who can explain and guide but also giving the customer the choice about how they contact us.
Clearly, today the bill is a key generator for contact but it can’t continue to be the main reason. Building a relationship with customers based on trust and the right expert advice should increasingly be the driver and is clearly the way forward. In order to maintain dialogue and build that trust sometimes a voice can help more than a web site but choice is the key element.
Hence, even if new entrants are able to avoid billing problems, they will still need to communicate with customers. Provided they can do it more efficiently than incumbents, it should not be a barrier to entry.
May 2013
Table 1
RWE NPOWER RESULTS—RECONCILIATION FROM RWE AG ACCOUNTS TO OFGEM STATEMENTS
|
2009 |
2010 |
2011 |
3-year total |
Notes |
|||||
|
Operating result of division in RWE AG group accounts in € |
€M |
247 |
272 |
357 |
|||||
|
“Operating result” is earnings before interest, tax and non-operating amortisation |
£m |
||||||||
|
Operating result in GBP (but still under IAS) |
£m |
220 |
233 |
311 |
764 |
||||
|
Differences between International and UK accounting in 2009–10 |
|||||||||
|
Pensions—mainly deficit payment not in IAS P&L |
(135) |
(43) |
n/a |
||||||
|
Amortisation—“non-operational” so not in IAS operating profit |
(73) |
(73) |
n/a |
||||||
|
Operating result in GBP under UK GAAP (IAS for 2011) |
12 |
117 |
311 |
440 |
|||||
|
Items to be adjusted per OFGEM guidance |
|||||||||
|
Out of scope (non-regulated) activities, mainly Cogen |
(88) |
(18) |
(33) |
||||||
|
One off item—coal station impairment (not tax deductible) |
(249) |
||||||||
|
Other one off items |
(50) |
||||||||
|
Other adjustments |
(5) |
22 |
12 |
||||||
|
|
|
|
|||||||
|
OFGEM Earnings before interest/tax (as per our website) |
(81) |
(128) |
240 |
31 |
|||||
|
Made up of |
|||||||||
|
Generation |
145 |
(38) |
168 |
||||||
|
Domestic Supply |
(238) |
(154) |
(56) |
||||||
|
Non-domestic supply |
12 |
64 |
128 |
||||||
|
(81) |
(128) |
240 |
|||||||