Energy and Climate Change CommitteeSupplementary written evidence submitted by ScottishPower
ENERGY PRICES, PROFITS AND POVERTY—FURTHER INFORMATION
I am writing in response to your email of 24 April in which you requested further information on a number of topics, some of which came up in Neil Clitheroe’s oral evidence to the Committee on 16 April.
The questions asked were as follows:
(a)
(b)
(c)
(d)
I attach an annex which addresses each of these areas. Do please get in touch if you would like any further information.
Annex
A. Reclassification of Free Carbon Allowances
Generation companies in the UK have an obligation to procure carbon allowance certificates in relation to the volume of carbon emitted by their power stations. Up to December 2012, a number of certificates were allocated free in such cases by the Government.
In its 2010 segmental statements, ScottishPower allocated the £119 million value of the free carbon permits (which in its statutory accounts accrued to the generation business) to the trading business and disclosed the adjustment clearly in a footnote.
There was limited guidance from Ofgem in relation to the 2009 and 2010 segmental accounts as to the preferred approach to the free carbon allowances. We were aware that there were a number of different models within the industry as to how generation plant should be accounted for, ranging from tolling agreements (where the economics of the power generation were taken totally into trading businesses) to arrangements where the economics were fully within the generation business.
In order to assist with comparability, our chosen approach for the 2010 statements was to exclude the free allowances, which had no impact on the operation of the power stations, but to show the adjustment clearly so that a permit-inclusive figure could be easily calculated.
BDO’s report for Ofgem on the industry’s 2010 segmental statements1 discussed the merits of the various possible approaches to this issue, commenting that our approach would give greatest uniformity and would also allow most consistency with reporting from 2013 when free allowances cease (and with new generators in the market who did not receive free allowances). However, they observed that such an approach would involve more work in producing the segmental accounts and that it might be more practical to adopt another approach.
Ofgem considered these recommendations and for the 2011 segmental statements issued guidance that all companies should account for the free allowances in the generation segment. ScottishPower prepared its 2011 segmental accounts accordingly.
B. Check list in 2011 Segmental Statements
Ofgem introduced the check list for the 2011 segmental statements. This was designed to show where both the economic impact and decision taking in relation to various functions reside.
Our check list (attached as annex 2) confirms that the profit and loss implications of all the identified functions resides in the Generation and/or Supply business as appropriate and in no case is allocated to “another part of the business”.
However, a lot of decisions are made by the trading business on behalf of the Generation or Supply business, and so in 15 cases the identified functions are shown as being undertaken in “another part of the business”. The financial implications nevertheless remain within the generation and/or supply businesses and are therefore fully reported upon in the segmental statements.
C. Energy Trading Questions
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?
In 2012, OTC trades represented 84.9% of total power traded, exchange trades 14.6% and bilateral Power Purchase Agreements with third parties 0.6%.
2. What are your criteria for trading OTC versus on the wholesale exchange?
We select the trading platform for each individual trade based on it representing the most economic route to market available to us at that point in time. Market liquidity, or availability of trade bids/offers, is a key factor.
The choice of OTC or exchange platforms is increasingly affected by regulatory constraints. We anticipate that the introduction of the new European Market Infrastructure Regulation (EMIR) regulations will incentivise market participants to increasingly use exchanges rather than OTC platforms.
3. What is the average difference in price for your OTC versus wholesale exchange trades?
There is no clear pattern in the difference in bid/offer prices between the two options, as prices may be cheaper on one platform on any given day, or during any moment within that day, but more expensive the following day.
However, there are different fee and collateral implications across the two options. For OTC trades, we need to have negotiated bilateral master agreements with sufficiently creditworthy counterparties and have sufficient remaining credit capacity in order to trade. We incur a transaction fee, payable to the OTC broker, each time we execute an OTC trade.
For exchange trades, we need to have negotiated membership of the exchange (or a bilateral master agreement with a member of the exchange through whom we can subsequently trade). We also need to post collateral known as initial margin each time we trade to cover the risk of default. We also subsequently need to post/receive variation margin on a daily basis until expiration of each trade which reflects the difference between the price of the trade and its subsequent market value. We incur a transaction fee which is payable to the exchange, and a clearing fee which is payable to the clearing house, each time we execute an exchange trade. Furthermore, we may incur credit costs with a broker clearer.
4. Does your company deal in long-term contracts? Who has access to the information contained in the contracts?
We purchase a relatively small portion of our wholesale electricity via Power Purchase Agreements (PPAs) as part of our approach to meeting the Renewable Obligation (RO) commitments of our supply business. The counterparties to our PPAs are 11 independent renewable generators who operate windfarms in the UK and our own renewable generation business, ScottishPower Renewables. As these contracts are bilaterally negotiated, only ScottishPower and the counterparty have access to the information in these contracts.
We do not currently have any other long term electricity contracts, except for normal forward trades. We trade the vast majority of our wholesale electricity on a forward basis via a combination of OTC and exchange trades. Details of each individual OTC and exchange trade are immediately disclosed to all market participants by the relevant exchange or OTC broker upon the trade being executed. These details include the size, period, shape and price of the trade, and a time/date stamp, ensuring transparency of this trading activity.
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?
In 2012, 89.5% of gas volumes traded by ScottishPower were OTC trades, while exchange trades represented 10.5%.
6. What are your criteria for trading OTC versus on the wholesale exchange?
We select the trading platform based on it being the most economic route to market. Market liquidity, or availability of trade bids/offers, is a key factor.
The choice of OTC or exchange platforms is increasingly affected by regulatory constraints. We anticipate that the introduction of the new European Market Infrastructure Regulation (EMIR) regulations will incentivise market participants to increasingly use exchanges rather than OTC platforms.
7. What is the average difference in price for your OTC versus wholesale exchange trades?
There is no clear pattern in the difference in bid/offer prices between the two options, as prices may be cheaper on one platform on any given day, or during any moment within that day, but more expensive the following day.
However, there are different fee and collateral implications across the two options. For OTC trades, we need to have negotiated a bilateral master agreement with a sufficiently creditworthy counterparty and have sufficient remaining credit capacity in order to trade.
For exchange trades, we need to have negotiated membership of the exchange (or a bilateral master agreement with a member of the exchange through whom we can subsequently trade). We also need to post collateral known as initial margin each time we trade to cover the risk of default. We also subsequently need to post/receive variation margin on a daily basis until expiration of each trade which reflects the difference between the price of the trade and its subsequent market value. Furthermore, we may incur credit costs with a broker clearer.
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?
Since REMIT entered into force in December 2011, ScottishPower has publicly disclosed inside information in respect of its generation and gas storage facilities in compliance with those requirements. We do not own or operate any upstream gas production assets.
We have robust procedures in place and have deployed staff training for impacted employees in order to ensure that we comply with REMIT obligations.
The information reported includes our planned outage dates, real-time asset availabilities and return to service dates during periods of unplanned outages. Furthermore, in relation to our relatively small gas storage facility at Hatfield Moor, we disclose opening and closing stock levels and total injections and withdrawals on a daily basis. In addition to disclosing information which was already reported on behalf of the industry by Elexon and National Grid, we maintain reports on our gas storage and generation assets via our Asset Status Update1 and Planned Outage2 reports.
For activities undertaken by the Iberdrola group outside of the UK but within EU states, a similar approach is taken. These reports can be viewed on the Iberdrola website3. It should be noted that Iberdrola does not own or operate any gas production or storage assets outside of the UK but within the EU.
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?
ScottishPower neither owns nor operates any gas production assets so our traders have no access to such production information, although they do have access to market information about our gas storage facility at Hatfield Moor. Inside information in relation to that facility is disclosed to the market in accordance with REMIT’s requirements to ensure that we comply with our REMIT obligations on transparency—see our response to Q8. Our traders also comply with the prohibition on insider trading in respect of any such inside information.
Our traders have access to production4, storage5, interconnector flow, and national demand data published on behalf of competitors by National Grid via their public access website.
10. Does your company deal in long-term contracts? Who has access to the information contained in the contracts?
Yes. We purchase wholesale gas via Gas Sales Agreements (GSAs). The majority of gas purchased under these GSAs is delivered to Scottish Power at the UK’s virtual trading hub, the NBP, and in this case no information on how this gas is supplied is provided to Scottish Power by the counterparties.
We also have two GSAs linked to specific gas fields in the UK Continental Shelf (UKCS) which were executed in the 1990s. The gas volume from these two contracts is relatively low in comparison to our annual demand (the percentage varies from year to year but is less than 5%). The information that we receive is in relation to the expected volume of gas produced from these fields and is not publicly available unless via the REMIT submission of the producer. We do not receive any other information from the counterparties who operate in the North Sea that is not in the public domain.
As all of the contracts described above were bilaterally negotiated, only Scottish Power and the counterparty have access to the information in these contracts.
Additionally, we trade wholesale gas on a forward basis via a combination of OTC and exchange trades. In this case details of each individual OTC and exchange trade are immediately disclosed to all market participants by the relevant exchange or OTC broker upon the trade being executed. These details include the size, period, shape and price of the trade, and a time/date stamp, ensuring transparency of this trading activity.
D. Energy Retail Questions
11. How many of such “immobile” customers do you have?
We do not consider any of our customers as being “immobile”. Although some customers engage with the market less often than others, we would be very ill advised to take their loyalty for granted and a strategy around giving poor value for money in the areas where our brand is strongest would be self defeating. We do not charge higher margins in our traditional supply areas.
12. Do you offer all customers all of your tariffs? If not, what are the reasons for not offering the full suite of tariffs?
All of our products are available to all customers, though some products require online or direct debit facilities.
The only exception to this is where a customer has a meter in his or her home which requires a particular kind of tariff. This is the case for prepayment customers. Another example is that we have specific tariffs for customers with electric heating that would only be available to customers with a suitable multi-rate meter.
13. What can you do to reduce the cost of customer service yet also improve your quality?
We operate within a competitive market and are subject to competitive pressures which encourages efficiency in our operations. Within a typical ScottishPower dual fuel bill, customer support costs (consisting of billing, account and data management and service support costs) currently account for 7% of the overall charge.
We work hard to deliver the best service we can to our customers and we constantly challenge ourselves to improve the quality of our service, within the context of keeping prices as low as possible. In 2012 we were awarded a 5 star rating by Which? for our Billing and Account Management, and experienced an increase of 10% in the overall Satisfaction score in the uSwitch customer survey. Between 2010 and 2012 we have also experienced a significant reduction in complaints referred from Citizen’s Advice and Consumer Focus, of 80% and 40% respectively. We also continuously monitor and publish a set of customer service metrics and in 2013, 90% of our customers rated their customer experience as giving “Full Satisfaction”.
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, around 27% of our inbound customer contacts related to billing queries. In the long term, we expect the installation of smart meters to reduce this considerably as customers experience the benefits of increased accuracy of billing and greater visibility, understanding and control of their energy consumption via In-Home Displays, web-pages or Smartphone applications. However, we would also expect that, as smart meters are rolled out, we may see a shorter term increase in the number of customers contacting their supplier to support them through the changes that smart meters may bring.
May 2013
References
1 http://www.spenergywholesale.com/documents/asset_status_update.pdf
2 http://www.spenergywholesale.com/documents/planned_outages.pdf
3 http://www.iberdrola.es/webibd/corporativa/iberdrola?IDPAG=ENWEBCONLINNEGRMT
4 http://www.nationalgrid.com/uk/Gas/Data/EFD/
5 http://www.nationalgrid.com/uk/Gas/Data/storage/
1 Completed 16 January 2012 and published by Ofgem on 31 January 2012