Select Committee on Constitution Minutes of Evidence


Memorandum by energywatch

EXECUTIVE SUMMARY

Consumer protection

  energywatch welcomes the reform of consumer protection enforcement across all markets through the Enterprise Act. We now need to ensure that the new powers including Stop Now Orders and supercomplaints, are used efficiently and effectively to prevent ongoing consumer abuses. The responsibilities of the sectoral and cross sectoral regulator continue to overlap. We believe there needs to be absolute clarity over how the OFT and Ofgem will work seamlessly together to ensure consumers' rights are protected.

Regulatory decisions

  There are limited circumstances in which parties can appeal regulatory decisions. We believe a holistic approach needs to be taken in considering the potential and appropriateness of widening the scope of appeals against regulatory decisions.

The relationships between the regulator and the consumer body

  energywatch strongly believes in the importance of having a consumer body independent from the regulator. We believe that this can deliver real benefits to consumers and facilitates regulatory accountability. As the statutory indpendent consumer body, we have a key role to play in keeping Ofgem informed of the views and concerns of all gas and electricity consumers and in pressing the regulator to take effective action to stem evinced abuses. We use the evidence we have of the consumer experience in the market to influence and guide regulatory practice.

  energywatch also believes that by working closely together the regulator and the consumer body can effect change in the market to promote the interests of gas and electricity consumers.

Effectivness of public consultation by the regulator

  energywatch considers that there is considerable scope for improving the Ofgem consultation process through the provision of cost benefit analysis and consumer impact assessments.

  We strongly believe that regulatory accountability would be enhanced if Ofgem provided more detailed information about the rationale for its decisions.

SECTION 1: THE BIGGER PICTURE

Introduction

  1.1  energywatch welcomes this opportunity to contribute to the Constitution Committee's inquiry into the accountability of regulators to citizens and Parliament and we look forward to giving oral evidence to the Committee. Our detailed comments focus on the questions posed by the Committee concerning the relationship between the regulator and the associated consumer watchdog (Question 8) and the effectiveness of public consultation by the regulator (Question 9). We also provide some more general comments about the energy market and the role of the energy regulator.

Consumer protection

  1.2  energywatch welcomes the reform of consumer protection enforcement across all markets through the Enterprise Act. We now need to ensure that the new powers, including Stop Now Orders and supercomplaints, are used efficiently and effectively to the benefit of consumers. Those bodies with the power to enforce Stop Now Orders must act promptly to prevent ongoing abuse.

  1.3  The sectoral and the cross sectoral regulators continue to have overlapping responsibilties, for example, in respect of supercomplaints. We need absolutely clarity over how the sectoral and cross sectoral regulators will work together where they have overlapping responsibilities. We recently sought for the OFT to consider a debt blocking supercomplaint. The OFT were opposed to consider debt blocking as a supercomplaint as Ofgem had initiated a piece of work looking to address debt blocking for a very limited number of consumers who were affected by debt blocking.

  1.4  energywatch also welcomes the new market investigations regime with the OFT and the Competition Commission taking the lead in deciding what action to take in respect of markets that are not working. We believe that these bodies should be looking to set the parameters of what constitutes effective competition including markets regulated by sectoral regulators.

Energy supply

  1.5  The gas supply market was fully opened in 1998 and the electricity supply market in 1999. Recent trends indicate that switching rates in the energy market are slowing down and that the market shares of the incumbent suppliers are stabilising at around two thirds.

  1.6  Over the past couple of years, there has been increasing consolidation of the energy supply market and increased dominance of vertically integrated players. energywatch is increasingly concerned about the impact this may have on the prices paid by all consumers. energywatch believes that there needs to be a comprehensive review of the energy market assessing the impact of consolidation and vertical integration on consumers.

  1.7  The pricing structure in the energy market is complex and can be difficult for consumers to understand. The market is characterised by a two tier pricing structure. The prices suppliers offer to their loyal consumers are markedly different to the prices they offer to new customers. The regulator has a key role to play in ensuring the energy supply market delivers real benefits to all customers.

  1.8  energywatch currently handles around 120,000 consumer complaints per year. We believe that this represents only a small portion of all gas and electricity consumer complaints that consumers raise with the energy companies directly. We believe that there is considerable scope for supplies to improve their performance and provide a better service to consumers. The sectoral regulator has a key role to play in licence enforcement and working to improve company performance.

Sectoral regulation

  1.9  The energy market is complex and we believe regulation and the promotion of competition in this market requires the expertise of a dedicated sectoral regulatory. Energy is essential to consumers' everyday living and to business. Therefore, the interests of gas and electricity consumers, and in particular vulnerable consumers, must be protected. There are a specific set of consumer rights that are unique to the energy market, which only a sectoral regulator could properly enforce. However, we recognise that there are energy issues that are covered by consumer protection legislation (such as servicing of gas boilers) that do not fall within the statutory remit of Ofgem.

  1.10  Evern with the introduction of competition in the retail and wholesale markets, there still remains the question of how to regulate the gas and electricity networks. Traditionally, the regulator has had to balance increasing efficiency on the networks, usually in the form of reducing costs, with investing in the networks. There are now new pressures on the regulation of monopoly networks as a result of key changes in energy policy and including potential rewiring of the electricity network to accomodate local, small-scale renewable generation and security of supply issues in the context of importing energy from outside the UK or as a result of storms.

  1.11  There are limited circumstances in which the parties can appeal against regulatory decisions (for example licence modifications). There has been considerable debate at recent evidence sessions on the draft Electricity (Trading and Transmission) Bill by the Trade and Industry Select Committee as to whether it would be appropriate for there to be an appeals process against Ofgem decisions on modifications to industry codes. It is our view that it would be inappropriate to take a piecemeal approach to reforming the regulatory regime. We believe a holistic approach needs to be taken in considering the potential and appropriateness of widening the scope of appeals against regulatory decisions.

SECTION 2: HOW DO REGULATORY BODIES RELATE TO THEIR ASSOCIATED CONSUMER WATCHDOGS (INQUIRY QUESTION 8)?

Establishing energywatch and Ofgem

  2.1  The Utilities Act 2000 ("the Act") established the Gas and Electricity Consumer Council ("energwatch") and the Gas and Electricity Markets Authority ("Ofgem") as separate and independent bodies. Ofgem's principal objective is to protect the interests of gas and elecricity consumers by promoting competition or by regulation where necessary. energywatch was established to protect the interests of gas and electricity consumers by:

    —  providing advice and information to all consumers, public authorities and other persons;

    —  investigating consumer complaints and negotiation on behalf of the consumer. energywatch has the power to report the outcome of an investigation to Ofgem;

    —  obtaining and keeping under review information about consumer matters and the views of consumers on such matters. energywatch keeps Ofgem, the DTI and the OFT informed about consumer matters; and

    —  publishing information to promote the interests of consumers including consumer complaints and company standards of performance.

  2.2  energywatch and Ofgem both have a responsibilty to existing and future consumers and are to have special regard to the interests of consumers who are disabled or chronically sick, of pensionable age, on low incomes or reside in rural areas.

  2.3  energywatch receives a grant (£10.8 million for the year ending 31 March 2002) from the DTI which is derived from the licence fee that energy companies pay to the Government. We have 183 Consumer Advisors working directly with consumers. We are accountable to the DTI for the work we do and the money we spend on behalf of gas and electricity consumers.

The benefits of an independent consumer body

  2.4  energywatch operates as an independent consumer champion, separate from the regulator. Both bodies share a similar statutory duty to protect the interests of consumers and, in particular, vulnerable consumers, meaning that many goals are shared by energywatch and Ofgem. However, experience to date has shown that often the method of achieving the goals, or the relative importance of these goals, differs.

  2.5  This difference exists, in part, because the regulator has responsibilities towards a more diverse stakeholder base, including consumers, energy suppliers, distributors and generators, who often have conflicting interests. In protecting the interests of consumers, the regulator has to balance any conflicting interests. Additionally, the twin pressures of developing competition and withdrawing from retail price regulation have left potential gaps in consumer protection (such as consumers with dynamic teleswitching in Scotland) that we feel need to be filled.

  2.6  Through complaint handling activity, enegywatch has the finger on the pulse of the consumer experience of the market and acts as an advocate for gas and elctricity consumers. The operation of the market does not always function as the economic model might indicate. The regulator needs to be made aware of the realities of the consumer experience and this is one of the key roles of an independent consumer body.

  2.7  An independent consumer organisation is able to prioritise wider goals (for example social goals) over purely economic goals, and can galvanise support from other interested consumer groups. It also acts as a counterblance to suppliers' needs to increase profits, and the general push towards cost reflectivity that can harm vulnerable consumers.

Influencing regulatory practice

  2.8  An independent consumer body can influence regulatory decision making to bring about real benefits to consumers. An example of this is the work that energywatch (and our predecessor organisations) undertook to protect consumers from misselling.

  2.9  Following liberalisation of the energy supply market, it quickly became apparent that suppliers were employing unscrupulous sales techniques to secure new customers. Consumer representatives campaigned for the creation of a marketing licence condition to protect consumers from misselling. Initially there were concerns from the regulator that such a condition would impinge on the development of the competition. However, a growing body of evidence and continued pressure from consumers led to the introduction of a marketing licence condition. The condition was due to lapse in April 2002. However, in 2001, energywatch intelligence continued to uncover widespread misselling. The statistical and anecdotal evidence energywatch presented to Ofgem was instrumental firstly in persuading Ofgem to undertake a consultation on misselling and secondly in the retention of the condition.

  2.10  In May 2002, energywatch called a Marketing Summit and working with the Energy Minister delivered an ultimatum to suppliers to clean up their act. We have continued to work closely with Government, Ofgem and industry to develop a marketing Code of Practice, training scheme and sales agent registration database for all sales agents. These measures offer extra consumer protection and guaranteed compensation for a number of offences.

Working together to effect change

  2.11  energywatch and Ofgem are independent from each other but it is recognised that our responsibilities and functions overlap in certain areas. Close working between the regulator and the consumer body has effected real change in the energy market and promoted the interests of consumers. Two examples of collaborative work between energywatch and Ofgem can be found in the successful Erroneous Transfer Customer Charter and the Debt Prevention Project.

  2.12  In 2001 and in response to the Ofgem consultation "Improving the Customer Transfer Process", energywatch developed with the regulator the idea of a consumer charter that would define a process for returning consumers to their chosen supplier after they had been transferred against their will or without their knowledge. Industry did not initially welcome the concept of a charter, but through a joint approach were eventually persuaded and the Charter came into effect in January 2002. Ofgem did not support the energywatch view that consumers should be automatically compensated where a supplier fails to abide by the terms of the Charter but did agree that it should be paid where consumers requested it and dependent upon the circumstances. Joint monitoring of suppliers' practices of the Charter has culminated in a formal review of the Charter by Ofgem and through ongoing dialogue between the two organisations, acceptance of the concept that breaches by suppliers should lead to automatic compensation being paid to consumers.

  2.13  In 2002, the Debt Prevention Project, aimed at highlighting and promoting good debt prevention and management practices, demonstrated how the different role of regulator and consumer body could complement one another. energywatch hosted several consumer-representative workshops across Britain to gauge the opinions and hands-on experience of those involved in debt counselling as well as drawing upon statistical and anecdotal evidence from the complaints consumers asked energywatch to investigate. Ofgem provided statistical evidence from the data they receive from suppliers. A working group made up of suppliers and consumer representatives was set up and both organisations actively participated in the broader research and fashioning of the good practice guidelines. These were published early in 2003 and we are currently awaiting receipt of individual suppliers' stategies that demonstrate adoption of these practices.

Conclusions

  2.14  energywatch strongly believes in the importance of having a consumer body independent from the regulator. We believe that this can deliver real benefits to consumers and facilitate regulatory accountability. As the statutory independent consumer body, we have a key role to play in keeping Ofgem informed of the views and concerns of all gas and electricity consumers and in pressing the regulator to take effective action to stem evinced abuses. We use the evidence we have of the consumer experience in the market to influence and guide regulatory practice.

  2.15  energywatch also believes that by working closely together the regulator and the consumer body can effect change in the market to promote the interests of gas and electricity consumers.

SECTION 3: HOW EFFECTIVE IS PUBLIC CONSULTATION BY REGULATORS (INQUIRY QUESTION 9)?

Developing a more interactive approach to consultation

  3.1  Stakeholders in the energy industry devote considerable time and resources responding to Ofgem consultations. The consultation documents, in part due to the issues they are considering, tend to be lengthy documents. It is important for industry and consumers to be able to actively participate in the consultation process. To this end, the regulator should develop a more innovative approach to its consultations. For example on-line consultation or interactive seminars.

Adequate period for consultation

  3.2  Stakeholders in the energy industry often feel they are not given sufficient time to respond to Ofgem consultations. The Cabinet recommends a standard minimum 12 week period to respond to consultations. In November 2002, Ofgem gave stakeholders effectively two working days to respond to its consultation on Powergen's acquisition of the UK assets of TXU Europe Limited. Whilst we recognise that Ofgem was working to a tight timetable for providing guidance on the acquisition to the OFT, we believe Ofgem should have taken measures to ensure parties had sufficient time to consider the consultation and respond. Where the regulator is not bound by such tight timetables, consultation periods can still be short. In July 2002, Ofgem consulted on the separation of Transco's distribution price controls and gave stakeholders around five weeks to respond. This was in our view, a significant issue for consumers and warranted a longer period for all stakeholders to respond to.

Responding to the consumer body

  3.3  We recognise that the decisions taken by the regulator will not always be in accordance with the views presented by energywatch. To aid transparency in regulatory decision-making and to help us understand how the regulator takes account of the views of consumers, we consider that Ofgem should provide energywatch, as the statutory consumer body, with a formal written reply to observations we make in response to Ofgem consultations. In 2002, Ofgem consultated on proposals to remove the supply price controls. energywatch responded with a number of concerns about the potential impact on consumers. The Ofgem decision document failed to address each of the issues we raised. We feel that a dedicated response to energywatch would have assisted us in responding to consumer enquiries about the removal of the controls.

  3.4  energywatch also believes that Ofgem should consult with energywatch on matters of common interest and concern prior to undertaking any public consultation or making decisions on any major policy changes.

Assessing responses and providing the rationale for regulatory decisions

  3.5  Given the resources stakeholders in the energy industry employ in responding to consultations by the regulator, it is important for all stakeholders to be confident that the regulator has considered the views they have presented and addressed any issues raised. Experience suggests that stakeholders do not always consider this to be the case.

  3.6  energywatch believes that it would aid regulatory accountability if the regulator provided robust analysis and responded to the views expressed in consultation responses and detailed the rationale for it taking its decisions. It is particularly important for the regulator to provide transparent reasoning behind its decisions where there are polarised views on the proposals or where the proposal would have a significant impact on industry and consumers. A recent example of where we think such work would have been helpful concerns the introduction of zonal transmission losses for England and Wales through BSC modification P82. We feel that the Ofgem decision letter on P82 failed to provide sufficient information to support the regulators decision and did not address the concerns that consumers had expressed about P82.

Cost benefit analysis

  3.7  The Better Regulation Taskforce recommends that economic regulators should produce an assessment of costs and benefits for proposals with a significant impact on business. This recommendation was endorsed by the Government in February 2002. Experience shows that Ofgem rarely produces costs benefit analysis of its proposals or to support its decision-making even where the potential impact on business and consumers is significant, for example, liberalisation of metering services or the introduction of zonal transmission losses.

Consumer impact assessment

  3.8  The NCC developed a methodology for assessing the impact of proposals on consumers. Despite NCC highlighting the merits of consumer impact assessments, they are not widely employed by regulators. energywatch considers this to be a failing of current regulatory practice. We will continue to press Ofgem to undertake consumer, social and rural impact assessments wherever appropriate, for example under proposals to separate Transco's distribution price controls. The provision of consumer impact assessment in Ofgem consultations, we feel would enhance accountability of the regulator to consumers and allow stakeholders in the energy industry to provide more informed responses to the regulator.

Conclusions

  3.9  energywatch considers that there is considerable scope for improving the Ofgem consultation process through the provision of cost benefit analysis and consumer impact assessments.

  3.10  We strongly believe that the regulatory accountability would be enhanced if Ofgem provided more detailed information about the rationale for its decisions.

energywatch

31 March 2003


 
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