Pre-legislative scrutiny of the draft Domestic Gas and Electricity (Tariff Cap) Bill Contents

Conclusions and recommendations

The cost of inaction

1.We accept the evidence from Ofgem, consumer bodies and the Minister that vulnerable customers will benefit most from the Tariff Cap Bill and will, in all likelihood, need some form of price protection for the foreseeable future, including after the Government’s price cap is lifted. We recommend that the Government provides details on its plans to protect vulnerable customers from overcharging when Ofgem’s safeguard tariff and the Government’s price cap are lifted. (Paragraph 11)

2.We agree with Ofgem that legislative obstacles to data-sharing of vulnerable customer data held by government with energy suppliers need to be removed so as to give vulnerable customers better protection. We recommend that the Government commits to removing these obstacles by seeking to amend section 36(3) of the Digital Economy Act 2015 in time for winter 2018. (Paragraph 13)

3.We conclude that Ofgem have failed customers, especially vulnerable customers, by being overly cautious and reactive on the issue of poor-value standard variable and default tariffs. They should have removed the obligation to move customers at the end of their fixed-term contracts on default tariffs sooner and set mandatory targets for suppliers to take customers off standard variable tariffs when it was still appropriate to do so. We urge Ofgem to be faster and more proactive in using their extensive powers to protect customers from overcharging in the future. (Paragraph 20)

4.We recommend that Ofgem continues to look for creative ways to encourage customer engagement and switching, especially by working with housing associations, consumer bodies, suppliers and comparison websites to find new ways of reaching out to those who are least engaged. (Paragraph 23)

5.Pricing practices through which some suppliers ensure that customers at the end of their fixed-term contracts do not benefit from the best available deals are fundamentally incompatible with the principle of fairness. (Paragraph 29)

6.In the absence of any appeal against the Competition and Markets Authority’s findings and after review of the Authority’s methodology, we were unconvinced by criticisms of the £1.4 billion annual customer detriment figure. We found no valid reason to question this figure. (Paragraph 30)

7.We share the Government’s view that the energy market “is not working for all consumers” and is yet to demonstrate effective competition and fairness. We agree with Ofgem’s view that in a truly competitive market that works for all consumers and is fair, the differential between the highest and lowest comparable tariffs should be smaller. (Paragraph 32)

8.We assessed the suppliers’ announcements about the steps they intended to take to reduce the number of customers on poor-value tariffs and concluded that they were insufficient to address the scale of the problem. We also noted the lack of any announcements on the part of the other three Big Six suppliers (ScottishPower, EDF Energy, npower) who still have large numbers of customers on poor-value tariffs. We believe the feebleness of these announcements shows a clear lack of will on the part of the Big Six to take the necessary steps towards redressing existing customer detriment. (Paragraph 35)

9.We conclude that the Big Six have brought this policy intervention upon themselves by raising their prices in 2017 and by failing to take effective action against the overcharging of their customers on default and standard variable tariffs.   (Paragraph 36)

10.The Committee agrees with the Secretary of State’s view that customers who are not able to shop for better deals should not be overcharged unfairly and that even customers who are able to switch tariffs but fail to do so should not be penalised disproportionately. (Paragraph 39)

11.Energy is “special”: consumers should not be expected to constantly defend themselves from excessive prices. We conclude that government intervention is justified when markets fail to deliver fair outcomes for consumers and have a disproportionate impact on consumers who are the least able to protect themselves from overcharging. (Paragraph 40)

12.There is a strong case for the Government’s Bill and the policy of introducing an intelligent, effective price control policy that will have the immediate impact of lowering the highest prices for millions of consumers and improve fairness in the delivery of an essential good. (Paragraph 41)

The case for an absolute price cap

13.We believe an absolute cap is the best price control to achieve the specific goal of removing overcharging for 12 million customers immediately and achieving greater fairness. It is right that the Bill does not allow for a relative cap to be implemented. (Paragraph 49)

14.We conclude from the Northern Ireland experience that “regulation and competition can usefully co-exist” under an absolute price cap and maintain incentives to compete on prices. (Paragraph 51)

15.We support the Competition and Markets Authority’s Energy Market Investigation remedies and we acknowledge Ofgem’s role in referring the domestic energy market to the Authority for investigation. However, we conclude from the evidence that the market will only deliver fairer outcomes for all consumers once it combines both stronger engagement and reduced overcharging. Thus, in our view, alternatives to price controls and the Competition and Markets Authority remedies are positive for engagement but they do not go far enough to remove the customer detriment quickly and effectively, especially for non-prepayment vulnerable customers. (Paragraph 55)

16.The Government should provide protection to customers in time for winter 2018 by seeking to ensure that the Bill receives Royal Assent before parliamentary summer recess 2018. (Paragraph 56)

17.We conclude that suppliers do not need appeal rights to the Competition and Markets Authority for this Bill. This could unnecessarily delay further the successful implementation of the cap. (Paragraph 57)

Recommended changes to the Bill - How the cap is set

18.We believe the Northern Ireland experience and the evidence show that it will be possible, if challenging, for Ofgem to set a cap that meets subsections 1(6)(a), 1(6)(b) and 1(6)(e). Some suppliers may struggle to adapt or challenge with judicial review how Ofgem will measure the costs of an “efficient supplier”. (Paragraph 60)

19.We support the Government’s view that the determination of “the conditions for effective competition” in subsection 1(6)(c) should be left with Ofgem. (Paragraph 61)

20.The Government should work with Ofgem to amend the wording of the Bill to make it as resistant as possible to successful legal challenge to subsection 1(6)(d). (Paragraph 62)

21.We recommend that the Bill be amended to include a requirement that Ofgem review the level at which the cap is set at least every six months to keep up with changes in suppliers’ costs and consumer engagement. (Paragraph 64)

22.We were unconvinced by the argument that the five goals in subsection 1(6) are incompatible. We acknowledge that they are challenging and may not all be achievable at once but we believe that the current wording of the Bill, with slight amendment, allows Ofgem to prioritise and weigh them carefully when setting the cap. (Paragraph 65)

23.To deter legal challenges that would delay unnecessarily the implementation of the cap, we recommend that the Government clarify in the Bill that Ofgem will not be required to set a cap that will meet all five subsections simultaneously, though it may eventually do so. This would be consistent with the main aim of the Bill of reducing overcharging, not increasing switching. (Paragraph 66)

Recommended changes to the Bill - The green tariff loophole

24.We accept the argument that customers should be allowed to pay more for renewable electricity if they actively decide to do so and if the tariffs in question truly encourage renewable generation. We support the exemption of green electricity tariffs from the cap. (Paragraph 67)

25.We share stakeholders’ view that the Bill as currently drafted allows for unscrupulous suppliers to game the system and avoid the cap by moving customers on poor-value tariffs onto loosely-defined green tariffs. The Government should work with Ofgem to strengthen the definition, standards and checks for electricity tariffs with environmental claims so the system cannot be gamed in this fashion and undermine the success of the cap. (Paragraph 70)

26.We recommend that the Bill be amended to make clear that attempts to circumvent the cap by offering tariffs that do not provide substantial environmental benefits and were not actively chosen by customers will be in breach of the legislation. Ofgem should be alert to and be prepared to stop any form of pricing that is designed to circumvent the cap. (Paragraph 71)

27.The Government should explain its rationale for not exempting green gas tariffs under clause 3. (Paragraph 72)

28.The Government should respond to the concerns expressed by stakeholders in evidence to us on the detriment to investment in renewable generation and green gas tariff customers of not exempting these tariffs. (Paragraph 73)

29.The Government should work with Ofgem to create the necessary accreditations to include green dual-fuel and green gas tariffs within the price cap exemption. This should be done without repeating the gaming risks of the green electricity tariff exemption. (Paragraph 74)

Measuring success and removing the cap

30.We support the Government’s view that the price cap should only be a temporary measure. As a result, we believe that removing the sunset clause would make removing the cap too challenging and would put the Government unduly in charge of setting energy prices for the foreseeable future. We favour a return to unbridled competition once the customer detriment is removed. (Paragraph 77)

31.We believe that setting a definition of “the conditions for effective competition” before setting the cap could create incentives for suppliers to game the system or treat the cap as a box-checking exercise rather than going above and beyond their obligations. It would also risk creating unnecessary opportunities for legal challenges. (Paragraph 79)

32.It is right that the decision to keep or remove the cap is left to the Secretary of State, based on Ofgem’s assessment, as the Government is responsible for introducing the legislation and setting its objectives. We believe that Ofgem have the required expertise to set and measure indicators of effective competition and make the appropriate recommendation to the Secretary of State. (Paragraph 80)

33.We recommend that the Secretary of State base the decision to keep or lift the cap on the minimum requirements that overcharging and the differential are substantially reduced, fairness is improved, and vulnerable customers are protected. (Paragraph 81)

34.Given the slim evidence that smart meters have any substantial impact on customer switching rates, we conclude that it would be unwise to rely solely on the smart meter rollout once the cap is lifted to maintain effective competition in the market. (Paragraph 84)

35.Once the cap is lifted, the Government and Ofgem should take any necessary measures to ensure that the elimination of overcharging remains in place in the long term and that suppliers are not able to go back to their overcharging and cross-subsidising practices. Engagement measures currently rolled out should also be maintained to keep encouraging customers to switch suppliers. (Paragraph 85)

9 February 2018