Examination of Witnesses (Questions 220-239)
CALLUM MCCARTHY, JOHN NEILSON AND VIRGINIA GRAHAM
THURSDAY 23 MAY 2002
220. You say you are following progress in Warm Zone pilots. Are there any conclusions thus far?
(Ms Graham) They are being evaluated by the Centre for Sustainable Energy and the Energy Saving Trust. We are interested in the outcomes of that.
221. You have no inside information at this moment.
(Ms Graham) Only anecdotal.
Mr Berry: We are not here for anecdotes.
222. Some of the research you produce seems to suggest that you do not consider-self-disconnection a major problem. I am thinking of prepayment meters here. Nevertheless it is also suggested that around 25 per cent of households which have prepayment meters do end up self-disconnecting. Surely it must be unacceptable that households which are vulnerable and fuel poor can be self-disconnecting over the winter months even if it is for a short period.
(Mr McCarthy) May I just make one thing clear? The research we did was to establish the facts. It was not, as I think you imply, to establish whether it is a good thing or not for people who have prepayment meters to be without electricityto which the answer is quite evident. The data we collected on self-disconnection which is a problem only for prepayment meter customers shows that about three quarters of them never self-disconnect. It shows that for the people who do self-disconnect, it is normally for short periods and it is normally when they either lose the key or temporarily run out of money and go and top up the key again. There is a very important small core for whom self-disconnection is a huge problem. It is something like one or two per cent, depending on whether you take electricity or gas, who self-disconnect about 20 times a year. That is a real problem and for those we have been very keen to do two approaches. One is an approach to encourage the companies to manage the process of debt accumulation by particular groups much better than they have done in the past. We promoted various pieces of work on that. The second piece of work, which we have been pressing Government hard on, is in relation to Fuel Direct, because even though it runs in some ways contrary to many of the principles behind the Government's policies for welfare, it is a terribly important weapon for a very small number of people who have very real problems. One of the things we have been trying to do is to reverse the decline which has gone on over the last decade in the use of Fuel Direct and to encourage the Government to keep it as a weapon until there is a change in the process of delivery of welfare, to make sure that when that happens and it becomes much more automated, it will be possible to incorporate the sort of principles behind Fuel Direct. Those are the ways of dealing with what is a small number but a very real and important problem.
223. I guess there may be different views about how many of those who self-disconnect face a real problem. In relation to gas, I think I am right in thinking that about 70 per cent of households who went onto a prepayment meter did so as a result of debt recovery proceedings. With electricity it is a lot less than that, it is 35 per cent. We are still dealing with very substantial numbers of people who appear to end up on prepayment meters because they have debt problems with the energy suppliers. The kind of argument you are advancing and the discussion we are having bears a lot of similarity to what happened in the water industry a few years ago, where it was said that prepayment meters were an aid to budgeting and that it was not feasible to get rid of them, indeed it was said that it was not feasible to get rid of disconnections. It happened in water. Why can it not happen in gas and electricity?
(Mr McCarthy) I think the question you are really asking is whether prepayment meters should be ended because disconnections only occur with prepayment meters and if you have a system of prepayment meters, by definition you have some possibility of that. In one way we should love to see the end of prepayment meters because that would mean there were no people who had such limited resources that they attached such importance to the ability to budget and control that budget that a prepayment meter gives them that there is no longer an issue. That would clearly be a great position for the country to be in. I think the reality at the moment is more complex. If you look at prepayment meters, the evidence is absolutely clear that most people who have prepayment meters also have a bank account. Most people who have prepayment meters know it is an expensive way of purchasing electricity or gas and most people prefer it. That is an awkward reality to have to deal with.
224. Most people in relation to gas have gone onto a prepayment meter because they have effectively been told to, whether or not they prefer it.
(Mr McCarthy) In gas there are about 1.8 million prepayment meter customers and about 1.2 million are on debt recovery. On gas there is an interaction which does not occur with electricity, the question of safety because of the explosive nature of gas, which makes that a more difficult problem. In electricity the figures are very much smaller, about half a million out of 3.8 million electricity prepayment meter customers use the prepayment meters for debt recovery.
225. Exactly those or very similar arguments were advanced in the water industry. Yet it still proved possible to get rid of prepayment meters and therefore solve the problem of self-disconnection. There was still the issue of budgeting to be addressed, mechanisms had to be found to assist people to do that. The problem of self-disconnection was solved. I still do not understand why that cannot be done in relation to gas and electricity.
(Mr McCarthy) It would be possible to have a system in which there was a provision that everybody, including those people who are either unable to pay or refuse to pay or choose not to pay, still had gas and electricity supplied and that would have a cost for the rest of the community. I would say that one of the things which has to be recognised is that the identity which is often asserted or assumed between prepayment customers and those most in need is an assumption which has to be looked at carefully because prepayment meter customers are not actually a very good proxy for those who are most in need.
226. If one did not go as far as outlawing prepayment meters and effectively outlawing self- disconnection, there is still the issue of the price differential because it is more expensive to have a prepayment meter. Do you think anything can be done about that? Even though you say a prepayment meter is not an easy proxy definition of poverty, there is still quite a big overlap between the poor and those on prepayment meters. Surely the price differential aggravates their problems. Is there any way that could be addressed?
(Mr McCarthy) There are some things which could be done. For example, in terms of the Transco price control we have a limit on the amount that can be charged by Transco in relation to their metering services for prepayment meters, so we tackle it at that end. One of the things which is interesting and encouraging at the moment is that the differential between prepayment meter charges and other forms of charging has actually diminished since the elimination of end price controls on 1 April.
227. Could more be done and if so what?
(Mr McCarthy) There is a wide range of things which could be done. The Government could choose to subsidise more prepayment meter customers if they chose to. I personally would not believe that is a good way of tackling fuel poverty but that is clearly an option Government could choose.
228. Do you feel that reducing the price differential would be desirable?
(Mr McCarthy) It is important that there is a variety of offerings so that there are some people at least who choose to do that and the evidence is that that is happening.
229. Do you think it would be desirable to reduce the numbers of people on prepayment?
(Mr McCarthy) I should very much like to see the number of people on prepayment meters coming down. One of the things we have looked at very carefully is to see what are effective ways of getting people onto other forms of payment. It is something which has to be done rather carefully because if you find that you encourage somebody to transfer, they then say they do not like it, they prefer to go back to having the control of their budget which prepayment meters give. You have incurred very considerable costs in taking one meter out, putting a different one in, taking it out and putting the first one back. It is an area where the reality of how to do it is quite a difficult set of problems and where we have been encouraging companies to tackle that question.
230. May I move on to Fuel Direct which has been very, very useful? I would have thought there would have been a major uptake by people on benefits in having direct payments made to the energy companies. I know that you are overhauling the scheme and actually looking at how the whole thing operates. What I am bothered about is why the number of customers continued to fall. Has Ofgem reached any conclusions about why this should be and how it can be addressed?
(Mr McCarthy) Yes and we have been talking to the DWP about it extensively. The present scheme is extremely expensive. It is one which for a number of years the DWP was very clearly running down. We have been doing a number of things to try to establish with DWP rules for the administration of it on a consistent basis across the country and the critical problem about it in the past has been that the administrative rules have been that you could get Fuel Direct if you were in debt but as soon as you came out of debt you were no longer eligible. If you were on the edge, you had the terrible position that yes, you could get it for three months until your head came out of the water and then it was immediately withdrawn from you. There are several things like that where we are trying to get the administration changed.
231. Do you think you can win the argument?
(Mr McCarthy) I very much hope so, but it is important to recognise that the decision is not with Ofgem. We have been pressing and we have been greatly helped by Peter Lehmann whom we enlisted on this before he got his present responsibilities. We are trying to make as concerted attack on this as we can.
232. It is important and maybe the energy companies can pay some contribution towards it because that at the end of the day they end up trying to collect the money in a different way when there is an obvious way of trying to help people here. Can I move you on to that great wonderful scheme, the Universal Bank that we are all still waiting for? What opportunities and challenges would be presented by the Universal Bank? What are the ups and downs basically?
(Mr McCarthy) The problem for the Universal Bankand perhaps we could talk in a moment about a scheme called Factor 4 which is an approach we have encouragedis that there is a grave suspicion on the part of a lot of people towards using banks and using banks for direct debit because they do not trust the banks to do it properly, particularly when they have small amounts of cash available. The opportunity is to have a provider of financial services who is less threatening and more reliable than the traditional banks.
(Ms Graham) We are going to be looking at an era when people receive their benefits by automatic credit transfer which is obviously a different scenario than the current one which is cash based. We do have to see that there will probably be a bigger role for bank accounts. Certainly Ofgem, in the same stream of work as looking at Fuel Direct, looked at whether there could be a role for a direct payment scheme in the Universal Bank scenario. We should be very, very keen to set something up with that and we have talked with the water industry, we have support from gas and electricity suppliers and the only issue has been the lack of certainty as to the Universal Bank. If we could get a little bit further down that road to understand what is going to be happening, we think there could be a chance of setting up something which would be important and useful for a group of customers who will still probably need something like that in the future and possibly more so.
(Mr Neilson) If customers get more used to using the banking services, there is a greater chance they will be able to access the cheaper tariffs like the direct debit which are also connected with bank accounts. That is potentially quite a valuable opportunity.
233. In what timescale do you feel we shall see this coming on board?
(Ms Graham) When we were first looking at this it was 2003; now that is next year so we are probably realistically looking at a couple of years more.
234. In 2005 or 2006.
(Mr McCarthy) You can believe that Ofgem would like it to come in as soon as possible.
Mr Hoyle: Yes, I recognise that.
Sir Robert Smith
235. On the issue of customers who are in debt trying to transfer where up until now the companies have been able to block their transfer, Ofgem has been working with suppliers on schemes and I just wondered whether you have had chance yet to evaluate the trial, particularly the efficiency of the new process.
(Mr McCarthy) Yes, we have done this. Debt blocking is something we should very much like to get a greater degree of control over. It is not within our gift to do that and it requires a licence amendment which has to be accepted by 80 per cent of licensees. Because of that we have been determined to try to develop a system where we can demonstrate that it works and get a good prospect of 80 per cent when we put forward a licence amendment. We are on track for doing that later this year. The principal problem of the trial, which started on 1 December last year, has been a problem of data transfer and the Data Protection Act because there have been some problems about getting the information that somebody is in debt transferred to a supplier and from one supplier to another. We are thinking of ways of doing this and we believe that there is a basis which will enable us to have a licence amendment which we hope will be accepted to deal with debt blocking for prepayment meter customers.
236. Once you reach the 80 per cent then 100 per cent have to accept it.
(Mr McCarthy) Yes.
(Mr Neilson) We are still awaiting the DTI's implementation of those particular rules. That is one of the last bits of the Utilities Act which needs to be implemented.
237. Until the DTI implement the rules, you are working towards the anticipation of those rules.
(Mr McCarthy) Yes. We have not given up hope that the DTI will implement this part of the Utilities Act.
238. But until they do you cannot go the final step.
(Mr Neilson) We cannot go for the collective licence vote which is the best hope of getting it through.
239. On a related issue, what will be done by suppliers to prevent customers falling into debt in the first place?
(Mr McCarthy) Essentially it involves them in knowing their customers much better. One of the pieces of research under the Social Action Plan was looking at debt management. There is work which is going on at the moment jointly with energywatch on the whole of debt management which is essentially how to prevent people falling into debt in an uncontrolled way, how to encourage them to do something which none of us is particularly comfortable with, to explain to the supplier that we are in debt or likely to go into debt. A whole range of things like that. It is typical of a series of problems which are all about delivery and rather detailed practical things which make a huge difference.