Select Committee on Public Accounts Eleventh Report


6. Electricity supply competition required a legal and commercial framework for the market, and systems to enable information to be passed between different industry bodies and electricity companies. Each of the 14 electricity distribution businesses had to design and build their own systems. Ofgem took into account the costs of implementing competition in their controls over charges for distribution network services, and the incumbent electricity suppliers' tariffs. Ofgem allowed companies to recover some £850 million from customers over the seven years from 1998-99 to meet the extra costs the companies incurred, an annual rate of some £120 million a year, amounting to about £4 a year or some two per cent on the average household's electricity bill.[2]

7. Our predecessor Committee asked Ofgem why they allowed electricity companies to recover so much from customers, and whether they had thereby favoured shareholders at the expense of customers. Ofgem said that they had been persuaded after looking very carefully at the figures that these were justifiable costs, taking account of their responsibility to ensure that efficient companies were able to finance themselves. Price controls had reduced the prices of the electricity distribution businesses in Britain by an average of 22 per cent in the first year, transferring every year £900 million from the companies to their customers. It had been a tough price control, and the overall balance had been in line with Ofgem's objective of protecting and promoting the interests of customers.[3]

8. The 6.5 million customers who had changed their supplier by June 2000 had seen their bills fall by 15 per cent in real terms, an average of £45 a year. Nearly half of these savings (some £140 million) were attributable to competition.[4] The National Audit Office found that, of 19 million customers who had remained with their existing supplier, four-fifths (15.4 million customers) had not yet made savings on account of supply competition, although they had benefited from Ofgem's caps on supply prices. The bills of the other 4.2 million customers were mostly no more than £2 a year below the price caps.[5]

9. Ofgem said that they were improving competition in the electricity generation market through changes to the structure of the industry and new electricity trading arrangements. For example, British Gas Trading's recent reduction in electricity prices had been made possible by the new electricity trading arrangements.[6]

10. Ofgem will continue to regulate the prices and quality standards of electricity suppliers until they consider that competition is sufficient to meet their principal objective of protecting consumer interests, having regard to other duties including the protection of vulnerable groups.[7] They have announced their intention to end price controls in April 2002, if they consider that competition has continued to develop satisfactorily.[8] Energywatch did not believe that the market was yet working effectively because the former regional electricity companies were still dominant in their regions, and very low numbers of prepayment customers were changing supplier.[9]

11. Our predecessors therefore asked how Ofgem would decide when competition was satisfactory and price caps could be removed. They said they would take a view on the relative strength of regulation and competition. Ofgem believed that there was a prospect of real competition in electricity. They had already removed price controls from direct debit discounts and expected by April 2002 to remove electricity controls across the board although they had yet to take this decision. They had removed price controls in the gas market but had made special arrangements to protect prepayment meter customers, where competition was least strong, by linking prices to direct debit prices where competition was strongest. They expected to make a similar arrangement in the electricity market.[10]


12. The prices that suppliers can charge domestic customers who have not changed supplier are currently capped by Ofgem. Ofgem plan to remove these caps, as they have done in the gas market, once they are convinced that competition has developed satisfactorily. While all customers have benefited from price caps, the majority have gained little from competition. While Ofgem believe there is a prospect of real competition in the market, energywatch do not believe that the market is yet working effectively because of market dominance at regional level and the very low numbers of prepayment customers changing supplier. Before removing price caps Ofgem should demonstrate that the market is working effectively and will protect customers.

13. It is not clear how exactly Ofgem will decide on whether competition is sufficiently robust to permit the removal of price caps without harming customers, including those using prepayment meters. They should set out in advance their criteria for making this decision, having regard to energywatch's concerns expressed by energywatch, and publish an evaluation of progress against these criteria before removing price caps.

2   C&AG's Report, paras 2.18 and 2.22 Back

3   Qs 5, 15, 17 Back

4   C&AG's Report, para 2.5 Back

5   ibid, para 8 Back

6   Q6 Back

7   C&AG's Report, paras 3, 2.18, 2.22 Back

8   ibid, paras 2.23-2.24 Back

9   Evidence, Appendix 1, p13 Back

10   Qs 2, 41 Back

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