Domestic Gas and Electricity (Tariff Cap) Bill

Written evidence submitted by Utilita Energy Ltd (DGEB13)

Written Evidence to the Public Bill Committee on the Domestic Gas and Electricity (Tariff Cap) Bill



Background on Utilita

1. Utilita Energy Ltd (Utilita) is an energy supplier who has been specialising in Smart Prepayment services to customers since 2008. Over 96% of our customers are prepayment customers, of whom over 88% have SMETS compliant smart meters installed operating in smart mode. All our customers sign up for a smart service.

2. Utilita operates a simple and fair pricing policy. We do not offer acquisition tariffs, and do not lock customers into fixed term contracts with termination fees. We also do not differentiate the prices customers pay by payment method, offering the same competitive prices whether the customer pays by direct debit, prepayment or on receipt of bill. All our tariffs are therefore SVTs but fairly priced, typically around £165 [1] per annum below SVTs of Big Six suppliers.

3. We operate two main tariffs –

3.1. Smart Energy/Smart E7, which is a smart variable tariff for our customers who have smart meters or are awaiting installation, and

3.2. Premium Energy/Premium E7, which is a marginally more expensive variable tariff for those customers who later reject smart meters, having accepted a smart meter as part of the contract.

4. Since the imposition of the Prepayment Charge Restriction (PPM Cap) by the CMA, Utilita has operated these tariffs in compliance with the PPM Cap as prices are not differentiated by payment method.

General comments on the Domestic Gas and Electricity (Tariff Cap) Bill

5. In this section we make general observations on the Domestic Gas and Electricity (Tariff Cap) Bill, (the Bill), followed by a section on more specific points.

6. Utilita does not support the introduction of the Bill. The proposed price cap is quite simply the wrong answer, and is symptomatic of a political and regulatory framework that is not only failing energy consumers but has far wider implications.

7. What the CMA found is that there is a wide range of energy prices, with some customers getting really good deals and others clearly overpaying.  However, what the CMA failed to say was that it was not generally the new entrant or challenger companies that were guilty of charging the higher prices, but the Big Six incumbents.  It was clear from the evidence that the dominant players in the market were systematically charging higher prices to a large proportion of their customers while at the same time pricing below cost to others - thereby inhibiting the growth of competition.  The approach of offering loss leading deals to some consumers and recovering the associated costs by charging higher prices to other customers, shows clearly that a specific and targeted solution is required to address the failure rather than a scattergun approach.

8. What the CMA should have proposed, and (in the absence of the specialist energy regulator Ofgem taking any effective action) what the government should now do, is to take action targeted specifically at the companies that are doing wrong, and treating customers unfairly. 

9. The proposed price cap does not do that. Firstly, it is across the entire market, and secondly, it is intended as an absolute cap rather than cap on price differentials.  It is also only a cap on standard variable tariffs (SVTs), which is the most obvious sign that the government has completely missed the point, and risks repeating the CMA failure. 

10. It is true that the Big Six have been exploiting their position through SVTs, but the SVTs themselves (whether high priced or not) are not the problem, merely a symptom.  The problem is the exploitation of market power.  A cap that prevents market power being exploited through SVTs, will not stop the exploitation of market power through some other route. 

11. What is needed is a cap on price differentials.  This would prevent the Big Six from the type of cross subsidy of acquisition tariffs seen to date, which has been grossly unfair to some of their most loyal customers, while at the same time preventing new entrants from growing by offering deals below cost. 

12. A cap on price differentials would also avoid the trap that the proposed cap will now fall into, and that is setting it at a level that both has some effect and at the same time allows sufficient headroom to allow competition to work.  An even bigger problem is that it will also need to move in line with the highly dynamic cost base of the energy industry, while reflecting appropriately all policy changes brought forward by the Government.  

Specific comments on the Domestic Gas and Electricity (Tariff Cap) Bill

13. While we do not support the Bill, Utilita believes that if it is to be implemented broadly as drafted there are a number of deficiencies which need to be addressed prior to implementation.

The Authority’s Duties

14. The Bill sets out, in S.1(6), the matters to which the Authority must have regard when exercising its functions under the Bill.

15. These matters differ from the Authority’s current duties under the Gas and Electricity Acts, and it is essential that differences do not overlap with existing provisions, contribute to regulatory uncertainty or give rise to regulatory conflicts.

16. S.1(6)(d) in particular notes the Authority must have regard to "the need to ensure that the holders of supply licences who operate efficiently are able to finance activities authorised by the licence". In order for this to be a robust approach, the Bill should also make provision for how the benchmark for an efficient supplier will be set. This will be a key challenge for Ofgem in developing any cap, and may also be considered to overlap with S.1(6)(a) which explicitly requires the Authority to "create incentives for holder of supply licences to improve their efficiency".

Definition of Standard Variable Tariff

17. The definition of Standard Variable Tariff (S.1(4)(a)) is flawed. The current drafting is very broad, and we believe would not act in the best interests of consumers.

18. The intent of the Bill is to address those SVTs and Default Tariffs which act to the detriment of large numbers of customers of the largest suppliers, as set out above. The definition should be amended to reflect that it excludes tariffs which are either:

18.1. a supplier’s core tariff – for example where a supplier only operates one or two tariffs, and hence unintentionally could be caught by the ‘SVT definition’; or

18.2. where the tariff includes conditionality or an additional benefit, namely is not ‘standard’, but is not a fixed term contract.

19. This revision would prevent flexible, innovative offerings being inadvertently capped, due to the fact the supplier has not chosen to ‘lock-in’ the customer for a fixed period. Where the supplier’s tariffs are variable and very minimal in number, it is reasonable to assume that competition will offer sufficient protection.

Consequential Modifications

20. The drafting of the section on consequential modifications (S.1(5)) is extremely broad. While we accept that the powers need to include provisions for limited consequential and transitional modifications. Utilita is concerned that the proposed powers are very broad and could be used more widely by Ofgem than originally intended over their lifetime. It is important Ofgem follow standard process should they look to make any modifications which are not directly and specifically necessitated by the implementation of the cap. We also consider that where the ‘incidental’ or ‘supplemental’ provision is used, there should be a test of reasonableness. The same is true of the removal powers expressed under S.9(1).

Changes to the Cap

21. The drafting on development of the Cap is not clear. The explanatory notes state that S.1 (2) provides for Ofgem to change the way in which the Cap is calculated, though the Bill text provides only that the Authority may modify the cap conditions from time to time. However, S.6 addresses only six-monthly review of the level of the Cap, and the relevant explanatory note states this six-monthly review does not place a duty on Ofgem to review the methodology.

22. This approach is not sufficient. While clearly Ofgem may carry out change, they are not required to. Utilita believes that Ofgem must be required to review the methodology as well as the level of the Cap to ensure that there have been no changes, for example in policy, which would impact the Cap since the last review. This would address scenarios where such changes are not automatically reflected in the methodology. We believe it would also be reasonable to include provision for affected suppliers to request a Cap review should exogenous events occur beyond the control of suppliers.

23. In addition to the above, we consider that S.2(3) should be amended to require that the Authority must consult in all cases of change to the methodology, or indeed, where a change is requested (as per the paragraph above). At present, the obligation on the Authority is reduced to ‘may’ after the initial implementation.

24. The provisions under S.4 should also require that the Authority must identify its rationale for making both the initial and any subsequent modifications. While this could be considered to be included by virtue of S.4(2)(b), we believe it should be stated on the face of the Bill.

Exemptions from the Tariff Cap

25. In considering exemptions from the Cap, Utilita believes that greater clarity is needed. S.3(1)(a) and S.3(2)(a) both make provision for customers benefitting from the PPM Cap or a cap benefitting vulnerable customers to be excluded from the Tariff Cap. It should be made clear that this applies to all customers who can be shown to benefit from a tariff which is compliant with the relevant cap. For example, if a prepayment customer moves to credit mode, but the supplier has continued to supply the customer on a PPM Cap compliant tariff, this customer should also be exempt.

Appeal Process

26. Utilita is also concerned over the lack of an Appeal or Update process. The function of an Appeal process and a Judicial Review process are not the same. The provision of an Appeal route to the CMA for the Tariff Cap would add robustness and confidence to the process.

27. As set out above, we also believe that there needs to be a properly defined route for those affected by the Tariff Cap to apply for a review as a result of change of circumstances. The operation of the PPM Cap has shown that circumstances and costs do change, including in areas where suppliers cannot influence the costs. It is essential that where a Cap is to be set, provision is made for suppliers to request a re-opener for such changes.

March 2018


[1] A simple average across all regions, based on Ofgem medium consumption for a dual fuel customer.

 

Prepared 13th March 2018