Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses (Questions 1 - 19)




  1. Today the Committee will be considering the Comptroller and Auditor General's Report on the Office of Gas and Electricity Markets (Ofgem): giving domestic customers a choice of electricity supplier. We have as witnesses Mr Callum McCarthy, the Chairman of the Office of Gas and Electricity Markets, and Mr Stephen Reid, Chief Executive of the Gas and Electricity Consumer Council. You have somebody else with you, Mr McCarthy, would you introduce him.

  (Mr McCarthy) John Neilson, who is the Managing Director for Customers and Supply in Ofgem.

  2. Welcome. Mr McCarthy, you have been with us before so you are used to the procedure. I will try to give you some indication as to where in this Report I am referring before I give a question. I will start with Mr McCarthy since he is an old hand now with paragraphs 2.23 and 2.24. 2.23 notes Ofgem's intention to end the remaining caps on supply prices from 2002 if competition is satisfactory, but the next paragraph indicates that the incumbent suppliers have yet to reduce their prices significantly in response to competition. How will you decide when competition is satisfactory and price caps can be removed?
  (Mr McCarthy) Chairman, I think this question goes to the very centre of what Ofgem does because everything we do is aimed towards improving the position of customers, and we do that wherever we can by promoting competition, and where we cannot by regulation, and this decision is a view on the relative strength of regulation and of competition. If I look at it in terms of regulation of electricity, you have to understand that about half the end cost that we all pay for our electricity is the cost of generation, about 40 per cent is cost of transmission and distribution (which we price control by RPI minus X) and about ten per cent is the actual supply cost. We are able within that to particularly control the transportation and transmission element. We are able to cap the supply costs, and the generation cost is a very difficult variable which can only be attacked by ensuring that competition works, and we are working on that. So regulation is to some extent at this level a blunt instrument both in gas and electricity. The other thing we have to look at is do we believe that competition is really working, which is fundamental to this Report and our consideration of it. If we look at it we look at it in terms of awareness of competition. 95 per cent of people are aware that there is a competitive offering, and that figure is growing. We know that there is good knowledge of the process. We know that people find it easy to switch. Indeed, those who switch find it easier than those who are contemplating switching think they will. We know there is quite good information, although that is an area which we are working on, in terms of knowledge of the price offering. We believe that for a variety of reasons there is a prospect of real competition in electricity. Ending electricity supply price controls is not a decision that we have finally taken. We have already taken direct debit out of price controls and we expect by April next year to be able to do the same thing for electricity across the board, as we have done just now for gas, and as for gas we expect to make special arrangements to make sure that where competition is least strong, which is in a particular form of payment, that is linked to where competition is strongest, which is direct debit.

  3. A key test of competition is prices and prices have not come down particularly in any of those areas, have they?
  (Mr McCarthy) Overall the prices have come down in the period 1995 to 2000, in electricity (depending on method of payment) between 24 and 27 per cent and in gas by comparable figures, marginally smaller.

  4. Particularly in direct debit?
  (Mr McCarthy) No, the figures for electricity are that credit came down by 25 per cent, direct debit by 27 per cent and pre-payment meters by 24 per cent. All of those are in real terms not money of the day.

  5. Paragraph 2.22 of the Report tells us that you are allowing companies to recover £850 million for customers to cover the costs involved in modifying their computer systems. Why are you allowing them to charge so much?
  (Mr McCarthy) Because we were persuaded after looking very carefully at the figures that those were justifiable costs.

  6. They seem very high to me but no doubt others will come back to that. We are quite used to seeing IT project costs in Whitehall. Given you have got customers paying £4 a year for the introduction of competition, that is the same number divided out, I see from paragraphs 2.24 and 2.26 that most of the customers who have yet to change supplier have not seen significantly lower prices due to competition. That is at odds with what you have just been saying. When do you expect the customers to benefit from the process they are paying for?
  (Mr McCarthy) We believe that they are already benefiting though not from the direct results of switching because, by definition, they have not switched. If you look at all that we are doing, we are getting competition in generation through changes in the structure at the industry level, we are getting changes in competition by introducing new electricity trading arrangements, and critical for that to work through is a competitive market because if there were not a competitive market and the prospect of competition suppliers would be indifferent as to whether they pay expensively or cheaply for their electricity, and this is therefore a critical component. This is not just a theoretical argument. It is interesting that when BGT two weeks ago announced their reduced electricity and gas prices, the reason they were able to reduce electricity prices (and therefore bring competition on all electricity suppliers) was the changes that were taking place in the electricity trading arrangements, so you have to look at the whole chain and if you do that I think that everybody has benefited.

  7. Others may want to come back on that. Perhaps I can turn to Mr Reid for a little while and give him something more than a spectator role. I want to talk about paragraph 3.8 which tells us that many customers find it difficult to compare prices and very few customers shop around for the best deal. What are you doing to help domestic customers find the best deal for their circumstances?
  (Mr Reid) That strikes at the very core, the raison d'etre of energywatch and we see our role as being precisely to develop information available to consumers to enable them to become what we call confident and assertive. This means that our whole set of activities planned for forthcoming years is to reach out to consumers who do not know about the offerings, to help clarify what those offerings might be, and to encourage them and companies to be clear about what is in the market. We see our role as exploring new and unusual ways of getting to these consumers. This may mean through community gatherings, through outreach work, through making friends with organisations like NACAB, Trading Standards and the like, so through them we can get to potential consumers.

  8. One side effect of all this is in paragraphs 2.12 and 2.15, another aspect of competition, which tell us that the number of complaints from customers who changed supplier are about six times greater than those who have not changed. What are you doing about that?
  (Mr Reid) Firstly, I would like to express my view that that is of deep concern to energywatch. It seems to us that that is an indication that although the competitive market may be helping many consumers, there are clearly groups of consumers who are not deriving benefits as quickly and as openly as they should. We therefore want to work with companies and with Ofgem to improve things like the transfer process, to ensure that any evidence of mis-selling is remedied by contacting companies and exploring with them how to remedy problems of rogue salespeople or inadequate billing techniques. Our whole purpose is to work on behalf of consumers as their champion in face-to-face dealings that we have with the companies.

  9. Again others will want to come back. It is an interesting area that you have and what you do. Can I come back to Mr McCarthy on paragraph 3.21 which sets out the steps you have taken to prevent high pressure or misleading selling techniques appearing in the electricity market as they did when the domestic gas market developed competition. It is clear, however, that the number of complaints in the first year of electricity competition was just as high as in the first year of gas competition. This is disappointing, I am sure you would agree. What are you doing to tackle that?
  (Mr McCarthy) We have approached this by three particular steps. First of all, we tried to apply the lessons that we had learned from gas to electricity from the very beginning. In gas it had taken some time in the opening up of the market.

  10. That does not appear to have worked, does it?
  (Mr McCarthy) With respect, the figures that we have for complaints of direct selling are now down as of December 2000 to 0.5 per cent per thousand transfers[1], which is exactly the same level as it is in gas and that is after gas has been going for two extra years. So complaint levels have actually come down very markedly indeed.

  11. They started at the same level but came down very fast?
  (Mr McCarthy) They came down very fast. The second thing that we did, as the report recognises, was to introduce a whole raft of specific additional constraints and licence requirements on direct marketing. The third thing that we did was to take action against specific companies whose performance we thought was inadequate. We took action in December 1999 against London and we have just taken action this year against Npower. There are three lines of approach.

  12. Others will no doubt want to come in on that. I want to move on to the issue which aggrieves me most in this. The reference is page four, paragraph 13(b), figure 2. When we looked at gas competition we found that people on low incomes who use the prepayment meter were not benefiting from competition as much as others, they were unable to switch for example. Exactly the same problem appears to be apparent in the electricity market and such customers are now paying up to £15 a year more than other customers who have not switched. When can we expect to see people on low incomes benefiting as much from competition as the rest of society because, after all, they are the ones who feel it most?
  (Mr McCarthy) I think I have to reply in two ways. One is specifically about prepayment meter customers and, secondly, about what has happened to those who are on low incomes, because the two groups are not exactly the same.

  13. There is a large overlap.
  (Mr McCarthy) There is a large overlap but it is important to recognise that most low income customers are not prepayment customers. If you look at what we have done in relation to prepayment meter customers in electricity, first of all we capped the amount that could be charged additionally for prepayment meter customers at £15. We looked at that very carefully. We have worked very hard to try to identify why prepayment meter customers do not move to other means of payment. It is, in fact, really a complex area. Most of them have access to bank accounts, three-quarters of them have bank accounts. Most of them profess to be content and actually like prepayment meters as a way of paying and do so because it gives them a means of controlling their budget. As part of the Social Action Plan we have initiated a whole series of actions by companies to try to find ways of getting prepayment meter customers to have access to different and better means of payment. We can describe what those are.

  14. One area where you have so far failed anyway is to get the issue of debt blocking resolved, is that not the case? That does strike me as a really rather serious concern. Can you talk us through that?
  (Mr McCarthy) First of all, can I say, Chairman, that we share your concern. It is important to recognise that debt blocking is a complicated issue on which there is no simple and agreed view as to what the right answer is because it is correct that there should be means for stopping people skipping round the system and leaving bad debts. The question is how to prevent that in an effective way. Our means of doing it essentially depend on persuasion. We have come forward with proposals which, if they are to be implemented, need 90 per cent both by volume and number of licensees to agree to them. It is a source of great regret that we have not actually yet got agreement on that. We came forward with proposals last year, we have had meetings, and one of the reasons why we did not withdraw the price controls from BGT on gas was because we did not believe that enough progress had been made on this, so we have kept this. Mr Neilson is in the lead in leading the companies involved in a series of experiments to see what is the best way of dealing with it. The simple answer is we have not made the progress that we wanted, we regard it as a continuing problem and we do not have the legal powers to compel and impose an answer on the industry.

  Chairman: Perhaps we will broaden things out and I may come back to some questions later.

Mr Steinberg

  15. I would just like to pursue one of the points the Chairman touched on. That was on page three, paragraph nine, which tells us "All customers are paying an extra £4 each year on average to meet the costs companies incurred in introducing competition . . ." which is a total of something like £850 million over a period of seven years. When the Chairman asked you why you had allowed this to happen you said that you were persuaded but you did not tell us why you were persuaded. Why should the customer pay for that? These companies earn huge profits, why should they not pay for it? I thought you were supposed to be there to defend the customer, not the companies.
  (Mr McCarthy) The responsibilities that we have include the responsibility to ensure that efficient companies have enough finance to finance themselves. The figure of £850 million, which were costs allowed to the distribution companies, whose costs are capped by a price control[2]. In the last price control we increased the allowable cost by £136 million to account for this. It was part of a price control which had the effect of transferring every year 900 million sterling from the companies to their customers and a price control which was described, I believe incorrectly at the time, as harsh. It was a price control which I think is correctly described as a tough price control. I believe that the overall balance of that price control was absolutely in line with Ofgem's objective of protecting and promoting the interests of customers.

  16. What do you reckon would be the profits of these companies over the same period of time?
  (Mr McCarthy) I am sorry, I do not carry that figure in my head. It would be undoubtedly substantial but you would also expect it to be substantial given the amount of capital invested by those companies. I would say that from the beginning of my tenure in this job I have made it quite clear that we believe that distribution companies, which is what we are talking about here in relation to this money, are a very low risk business and that they should expect a return on capital that is commensurate with that low level of risk. The price controls that we introduced were widely seen to achieve that.

  17. I always find it quite amazing that privatised industries whose investors put their money into the industry on a risk basis—always state that their main consideration is: "it's the investors might not like this" or "what about our investors?". It is never a case of the customer, it always comes back to the investors rather than the customers.
  (Mr McCarthy) With respect, we did a price control that has had the effect of reducing prices in the first instance in one year at a stroke by an average of 27 per cent[3]. It has had the effect of transferring every year 900 million sterling. It incidentally had the effect of very severely knocking all the share prices of all the distribution companies. With respect, I do not think there is any evidence from that that we erred in the direction of the shareholders.

  Mr Steinberg: All right. I want to be very personal now. Not to you, I would not dream of being, but can I give you an example. This is to do with the issue of transfer. I have been dying to get at you now for about six or seven months and when I saw your name on the agenda I was delighted because I was told to speak to you because you were responsible and you can put it right. Over the last six months, both at home in Durham and in London in my flat, at different times I have suddenly out of the blue received a letter from British Gas telling me to pay my final bill because I had been transferred to another gas supplier without my knowledge, without my knowing anything about it whatsoever, and coming out of the blue. When you ring up and try to find out what is going on you are told "it is nothing to do with us, it is not our responsibility". You ring up British Gas and they say "I am very sorry, we cannot give you any information, all we are told is you are no longer a customer of ours. Why do you not contact Transco because they will be able to let you know?" So you ring Transco and they say "I am very sorry, we cannot give you that information because of the Data Protection Act. What we can tell you is the company you have been taken over by is so and so". So you ring them up and they say "yes, you are a customer of ours now, did you not know?" and I certainly did not know. It takes about an hour on the telephone to try to sort this out, to sort out something which you are not at all responsible for in any way whatsoever. You are pushed from pillar to post, you cannot get a satisfactory response, you are held on the phone until somebody tries to find out who is responsible. They say they will ring you back but never do and you have then got to ring again to find out and eventually after about an hour, an hour and a half, you put it right. When you complain they say, "It is nothing to do with us, you had better contact Ofgem." Are you aware that this is going on?

  Chairman: We can take this as a metaphorical question about electricity even though it is gas.

Mr Steinberg

  18. The point is if it is happening with gas presumably it is happening with electricity as well. They have not taken my electricity off me yet but no doubt the day will come.
  (Mr McCarthy) It is clearly a great concern to anybody who wants to make the competitive market work properly that there should be a whole series of problems with the transfer process. The level of erroneous transfers, if you measure it by complaints, has come down this year, it has halved in electricity and is running at 1.5 per 1,000 transfers, and in gas it has come down to 2.8 per 1,000 transfers. I am not for a moment claiming that that is an adequate figure, but there are a number of reasons for erroneous transfers, some of them are clerical mistakes, some of them are meter numbering mistakes, some of them are address mistakes, and some of them are clearly bad selling techniques. Our concern has been to do a number of things, first of all, to clarify and simplify as much as possible the transfer process. It is an inherently complicated process, not least to make sure that the customer has the right to check on the transfer that is taking place. In the example that you have given of your own experience clearly that did not happen, but we have been trying to clarify the transfer process. We have been taking steps against people who are not meeting the necessary standards and one of the other things that we are doing is putting up on an Ofgem website information about the complaints that customers make so that people can understand which companies are doing well and which companies are doing badly.

  19. That does not give me any sort of satisfaction whatsoever because I do not know whether it was an unscrupulous agent who did it or whether it was a slip of pen. I did not give my permission for it to be changed and therefore it should not be changed. It is no good saying you are looking into it. The fact of the matter is that there should be a completely fundamental change on how you transfer to a different provider. The customer should in all instances be able to either sign something or agree by contract, and not be told that they have been changed without their knowledge. If there were to be a signature requested, a letter coming through to you saying "we understand you wish to change, please sign a new contract before we disconnect you from one company and put you to another", that would stop it. Why does that not happen? Because it would cost the companies too much money?
  (Mr McCarthy) No, that is not the Ofgem concern about that. The concern that we have is, for example, we are keen that it should be possible for there to be well-conducted telephone sales. We are keen that there should be Internet sales. We have put in place a requirement for people to check up but we would not favour preventing people doing telephone sales in this instance as in other markets.

1   Note by Witness: The figure for complaints direct selling is down to 0.5 per thousand transfers, not 0.5 per cent per thousand transfers. Back

2   Note by Witness: The £850 million included some costs attributable to supply companies, the Pool and Scottish settlement. Back

3   Note by Witness: The average price reduction was 24 per cent for distribution businesses in England and Wales, and 22 per cent across Great Britain. Back

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