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UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE
To be published as HC 1744-i
HOUSE OF COMMONS
TAKEN BEFORE THE
Energy and Climate Change Committee
Fuel poverty in the private rented and off-grid sectors
Wednesday 11 January 2012
Mary Starks, James MacBeth, Mark Askew, David Todd, Paul Blacklock and Rob Shuttleworth
Lauren Langton and Mike Murray
Ron Campbell and William Baker
Evidence heard in Public Questions 1 - 127
USE OF THE TRANSCRIPT
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Taken before the Energy and Climate Change Committee
on Wednesday 11 January 2012
Mr Tim Yeo (Chair)
Dr Phillip Lee
Sir Robert Smith
Dr Alan Whitehead
Examination of Witnesses
Witnesses: Mary Starks, Office of Fair Trading, James MacBeth, Office of Fair Trading, Mark Askew, Federation of Petroleum Suppliers, David Todd, Federation of Petroleum Suppliers, Paul Blacklock, Calor Gas, and Rob Shuttleworth, UKLPG, gave evidence.
Q1 Chair: Good morning, and welcome. Thank you for coming in. You will appreciate we are trying to get through quite a lot in one evidence session this morning because of the pressure of other inquiries. Can I ask people to have their phones-that is probably me. Sorry about that. I will make it silent. Well, can I ask other people to have their phones off? It will require a certain amount of discipline on our part in asking questions but I am afraid on your part as well in answering. I appreciate that we have one panel with three separate groups of witnesses and the OFT, in particular, have asked to emphasise their independence from any commercial groupings. That is understood and normal practice for this Committee. So don’t feel that all of you have to answer every single question unless you particularly want to or unless we have particularly asked you to. So, off we go.
The OFT’s findings were that there was no evidence of competition problems in the heating oil market, but we get continued evidence-and certainly I and other Members get a lot of anecdotal evidence-that there are, and I think the OFT continues to get complaints. Why do you think that people perceive a lack of competition in this market?
James MacBeth: Some people perceive a lack of competition in this market. The consumer research we have done suggests that 70% of people understand that they have a wide choice of suppliers, so to put it in context I think we are talking about the remainder. There might be a number of reasons for that. I think principally it partly stems from the way in which people interpret price as being indicative of the underlying competition in the market and that high prices for product, per se, mean that there is a lack of competition, which as we have explained in our written submission is not necessarily the case. To some extent, it may also reflect the way in which a proliferation of brands owned by some suppliers gives the impression that there are fewer businesses than there actually are in the marketplace.
Q2 Chair: Do you think the market is sufficiently transparent?
James MacBeth: I think partly because of the work we have done it is. It is certainly the case that if you want to find out who operates a particular brand you should be able to do so.
Chair: Do you want to comment on this?
David Todd: I think one of the things since the OFT started looking at it last December is that the actual price of oil, and especially kerosene, has continued to rise. Therefore, even though the effect of the report has come in, people are seeing a continued increase in price and a lot of that is down to the base oil cost.
Q3 Chair: Did the study consider affordability?
Mary Starks: We certainly looked at the relationship between the off-grid population and fuel poverty and we did some mapping of that relationship. We would think of affordability as having three elements: the cost of fuel, the amount of fuel needed to heat a home adequately and the income of the home owner. We focused very much on the first one of those limbs and really only on a part of that limb. So we focused on whether there were competition or consumer problems leading to higher prices, but our conclusion was that much of the price is driven by the international oil price.
Q4 Chair: Is it perhaps the case that, even if there is a reasonable element of competition across the market generally, there are still some pockets of consumers who don’t seem to be able to benefit from that?
Mary Starks: Still pockets of consumers who-
Chair: There may be a reasonable element of competition across this market generally but there may be some consumers, whether it is for geographic or other reasons, who don’t seem to benefit from the fact that competition exists.
Mary Starks: It is certainly the case that there are some pockets where there is a small number of suppliers, but we also looked at barriers to entry in those areas and I think, even where the population density will only support a small number of suppliers, we were not too worried that there were such high barriers to entry that there was no competitive constraint on those suppliers.
Q5 Chair: So you don’t see particular groups who may be vulnerable for some reason or other being blocked from taking advantage of competition?
Mary Starks: I don’t think we have identified any problems of that nature that are specific to the heating oil market. Consumers in remote areas face problems accessing a range of services but I don’t think there is anything particular about the heating oil market that gave us that kind of concern.
Q6 Dr Lee: What percentage share of a market can a business have that is acceptable to the OFT?
Mary Starks: That is not an easy question to answer with a single figure.
Q7 Dr Lee: Yes, but it is the only question worth asking, isn’t it, to be honest? If the eastern region was served by Tesco and Tesco alone do you think their prices would stay the same?
Mary Starks: We obviously look at market shares when we are doing merger control, and in the heating oil sector there have been small areas of the country in recent mergers where we have required divestments to keep competition at their pre-existing level.
Q8 Dr Lee: Yes, but at what point do you require that, and what proportion of the marketplace can one heating oil supplier have that is acceptable to the OFT?
Mary Starks: We don’t have a strict limit on how much of the market one single supplier can have. Once they get above a certain threshold, it depends how they behave, so abuse of dominance restrictions-
Q9 Dr Lee: What is that threshold?
Mary Starks: It is not a hard number. It might be of the order of 40% but it depends on the specific characteristics of the industry.
Q10 Dr Lee: When you investigate other industries, not necessarily energy, do you apply exactly the same threshold in other industries?
Mary Starks: No, it depends very much on the nature of the industry and the barriers to entry.
Q11 Dr Lee: Who makes that decision?
Mary Starks: We make the decision on what the competitive constraints are, so not just considering market share but also considering-
Q12 Dr Lee: But in view of the fact that energy is one of the biggest single expenditures for a family, you tolerate a higher percentage share of the companies in those industries, but in areas where there is transparently more competition you get slightly jumpy if it goes above 25% or above 30%. I don’t quite follow why you accept a greater monopoly in an area that is so important to the annual family budget.
Mary Starks: The first thing I would say is, overall, we don’t think the share of the largest company in the sector is anything approaching 40%.
Q13 Dr Lee: But in regional terms it is, isn’t it?
Mary Starks: In regional terms in places it is.
Dr Lee: So practically it is.
Mary Starks: But the position of competition law in that situation is that, if there is consolidation through mergers, then we seek to not allow that to result in a significant lessening of competition. We require divestments, so that is how merger control works. In other areas, companies that have a large market share but do not abuse that market share are within the law.
Q14 Dr Lee: Just one final question. What you are saying is there is a business opportunity for everybody to enter the market and compete with these people who have more than a 40% share. Is that what you are saying?
Mary Starks: Yes.
Q15 Albert Owen: You have acknowledged that there are small pockets where there is not the access to the market that others have. What size is that pocket and how much more are they paying on average? That is the crux of the matter really. When you look at the petrol forecourts, where there isn’t the competition, those areas, particularly on the periphery areas or rural, are paying more for their petrol at the pump. Is that the same with heating oil and with LPG?
Mary Starks: I think the evidence is that 97% of areas had a reasonable choice of suppliers, so in terms of number of postcodes we are talking about quite a small number.
Q16 Albert Owen: By postcode? Okay. So 3% of the postcodes don’t have-
Mary Starks: No, sorry, 3% of the off–grid population.
James MacBeth: No, it is 3% of the population but analysed using postcode data.
Mary Starks: Yes.
Q17 Albert Owen: What was the trend there? They were predominantly rural areas or periphery areas?
James MacBeth: Predominantly, yes.
Q18 Albert Owen: So they are getting a raw deal?
James MacBeth: There are two factors at work, aren’t there: one is if there is less competition you might expect the price to be slightly higher. The other one is if there are higher costs of supplying that area. You would normally expect those two effects to overlap. It is very difficult to identify what proportion of any difference in price that you see can be attributed to the differences between the two, which is why we did an analysis of barriers.
Q19 Albert Owen: No, I understand that, but I am concerned about your figures. When you say it is as low as 3% that is not the anecdotal evidence that constituency MPs are receiving. Almost the whole of my area is in that 3%, and I am sure many other MPs will say the same, so I am surprised that you are saying that. You haven’t answered the second part; how much more are they paying. Could you identify that?
James MacBeth: Not on a case-by-case basis.
Albert Owen: What are the 3% paying more than the 97% on average?
James MacBeth: Some of them might not be paying much more at all, of course. It will vary from case to case, but we have no figure for how much more on average they are paying, if anything.
Q20 Albert Owen: Do you think it is worth having a detailed inquiry into that?
Mary Starks: One of the tests for whether a further detailed inquiry is merited is what you might do about it if you found that. As James has said, the main difficulty with this question is unpicking how much it is about higher supply costs and how much it is about a lack of competition. From the evidence we had, it was not clear there was a case for further work.
Q21 Sir Robert Smith: I had better declare my interest as a shareholder in Shell and also as honorary vice-president of Energy Action Scotland, a fuel poverty charity. On that last point, how detailed was your investigation of the pricing?
Mary Starks: The pricing?
Sir Robert Smith: Yes.
Mary Starks: The investigation we carried out was a market study, which is a first phase investigation under the Enterprise Act. The kind of data that we have access to is data that people give us. So we had quite good data on locations of off-grid households, largely by knowing where the grid was and where the households were from the Government data. We don’t have powers to request companies to provide us with information, so we weren’t able to write to every single oil company in the country and require them to tell us how much they were charging customers.
Q22 Sir Robert Smith: So you don’t have an actual picture of the experience of customers on the ground?
Mary Starks: No, sorry, we do. We also commissioned an extensive bit of consumer research, which was a combination of quantitative and qualitative research in all four nations on the experiences of customers and their perception of prices and quality of service. So, yes, we do have that. We have it from the consumer’s side; we just don’t have a vast bank of price data.
Q23 Sir Robert Smith: One of the issues I have come across is consumers on top-up schemes being charged possibly more than a consumer that phones up and asks, "Can I have a delivery today?" Did you have any evidence as to how the market is operating for people who have locked themselves into top-up schemes, especially because this will more likely be vulnerable, elderly people worried about losing supply?
Mary Starks: Bits and pieces.
James MacBeth: Yes. We do have some evidence about how that market is operating. The work we are doing with the industry on how it might operate going forward is something that is still the subject of negotiations between us and them. I would rather not say any more on that at this point in time, for the reasons set out at the beginning of the meeting. We might be able to write to you with a little bit more detail on that topic, if that might help.
Q24 Sir Robert Smith: In your view, do you think consumers get sufficient protection under existing consumer law?
Mary Starks: Our view was that on the major problems that came through in the evidence there is existing protection available under existing consumer law.
Q25 Sir Robert Smith: How is that law enforced?
Mary Starks: It is enforced through a combination of local authority trading standards and the OFT.
Q26 Sir Robert Smith: Are the trading standards up to resources to deal with the issues?
Mary Starks: I would say that trading standards have taken cases on these issues in this sector.
Q27 Sir Robert Smith: Is the industry doing much to get a standard of compliance with consumer law?
Mark Askew: Speaking for all the trade association, the FPS members, we have a code of conduct in place, which requires them to act lawfully, and we have taken steps since the OFT report started to make sure that all of our members understand what those responsibilities are. My feeling is that they do but, just to underline the fact, the OFT produce a very useful website explaining all of the consumer law and how it applies in this case, so that is something we are promulgating. There are still areas of uncertainty. For example, spot buying is covered by the distance selling regulations and that is very clear. Things like top-ups and contracts are not as clear, so we are trying to find out what the legal position is in order that we can come out with a standard way that the industry deals with the consumers, so everybody knows how it works.
Q28 Sir Robert Smith: A code of conduct that says you should obey the law is a fairly minimalist code of conduct. Surely a code of conduct is one that tries to take it beyond just-
Mark Askew: But the point is that if anyone in our membership is found not to be doing that then, as a trade association, we can take the action that we can take against them, expulsion or whatever we need to do. We take a very serious view of people behaving in an irresponsible way and we hope to go beyond that with the-
Q29 Sir Robert Smith: On-grid customers get protection against disconnection if they are having problems paying bills and so on. Is there any read-across, so that customers off the grid for their heating fuel should have some of the same protections?
James MacBeth: You are quite right to identify that there is something of an anomaly between the protections that are afforded to on-grid customers and those that are off-grid. I think the point I would make is there is not necessarily a similar supply arrangement that makes the distinction meaningful as you move into the off-grid space, perhaps a little bit more so for LPG customers who may be in long-term contracts. But, for example, for spot purchases of heating oil, if a customer has used several different suppliers for their last few deliveries, a question would arise as to on whom the obligation to continue to supply was placed. So you are quite right, but I think there are challenges in terms of thinking about how something similar could be applied in the off-grid arena.
Q30 Sir Robert Smith: Finally, what was the problem with the mis-selling of microgeneration?
James MacBeth: There are a number of issues in the microgeneration space, which we are doing work on at the moment and we are keeping under review. Typically on the mis-selling side it has been around the provision of information and the accuracy of that information. Again, we can write with more detail if you would like that.
Q31 Christopher Pincher: Can I pick up on a point that Mr Askew made? You said that the FPS can expel recidivist members. Have you ever done that?
Mark Askew: I have been there for eight months so my knowledge is limited, but I am not aware of any in recent history that have been taken out of the association. Of course, not everyone is in the association but, of those members that we have, I am not aware of anyone being thrown out for misbehaving.
Q32 Christopher Pincher: Have there been any threats to throw anybody out, if you haven’t thrown anybody out?
Mark Askew: I would have to check. I have been there a short time.
Q33 Christopher Pincher: It is a rather toothless threat if you don’t expel anybody at all, isn’t it?
Mark Askew: It is but, nevertheless, the threat is there and if the council so thought that people were behaving-
Christopher Pincher: The Queen can veto Acts of Parliament but it hasn’t been done since 1713, and it is not likely to be done, so it is not a real threat, is it?
Chair: Perhaps you could write to us and let us know how often members have been expelled, not just in the last eight months but maybe the last 10 years. It would give us an idea of what sanction this actually implies.
Mark Askew: Certainly.
Q34 Chair: Going back to Mr Owen’s point about whether the OFT could look more closely at the disadvantaged 3%, who I am sure are heavily represented in rural areas. I was a bit puzzled by the answer saying it was difficult to disentangle the effects of a rising market price worldwide and the extra costs, presumably, of delivering to people in rural areas. I would have thought that is the kind of information that anyone running a business would keep very accurately indeed. They would want to know precisely what their extra costs are. If you have a scattered population in a seat like mine-villages with houses that are not next to each other-it must be mostly a matter of the extra time taken by the driver of the tanker, presumably. Isn’t that a pretty easy bit of data to find out?
Mary Starks: One of the difficulties we had was disentangling the commercial and the domestic operations. You drive your tanker up and then you fill some commercial orders and some domestic orders, so the return on the cost of capital of the tanker is split between those two halves of the business. It was very difficult, with the information that we had, to come up with a reliable estimate.
Chair: I would have thought that was exactly the sort of information that a well run business would have at their fingertips, so if there is obfuscation taking place, saying "It is difficult to disentangle this", I think that is a pretty weak argument.
Mary Starks: Perhaps I can leave it to the businesses to respond as to whether they have that information at their fingertips.
Chair: We might cover that in a moment, but my concern was that the OFT are saying, "We don’t really want to do this because we can’t actually find the answer out".
Mary Starks: Sorry, your concern is that-
Chair: You said that one reason why you might not undertake this work was because you didn’t know what action you would take. Then you said one of the reasons you don’t know what action you can take is because you can’t get at the cost figures. I am suggesting with a bit more pressure you could get the cost figures. We might have a go ourselves at getting them but I think the OFT should also have a go.
Mary Starks: I think the cost of supplying to remote areas is something we are intending to do some more work on across a range of different sectors, so it is something we are planning to come back to.
Q35 Chair: When will that work start?
James MacBeth: It has begun-
Mary Starks: It has begun.
James MacBeth: -to all intents and purposes.
Mary Starks: Yes, it is underway.
Q36 Chair: Underway now. When will it be finished in that case?
James MacBeth: May.
James MacBeth: May.
Q37 Albert Owen: So just on that, there is a further inquiry that you are looking at the greater detail; is that right?
Sir Robert Smith: Is that across more than just this sector?
James MacBeth: Yes, it will be.
Q38 Albert Owen: Can I move on to recommending price regulation, in that the report found no grounds for recommending price regulation to the off-grid sector. Why is price regulation inappropriate in this context?
Mary Starks: The classic case for price regulation-the textbook case-is where you have a natural monopoly and there is no possibility of competition to constrain prices, which is the situation you have with the electricity and gas networks. That is simply not the situation in heating oil, so from that very first-principles basis that was-
Q39 Albert Owen: What impact do you think price regulation would have on the supply industry if it was to be brought in? Forget the textbook thing; if it was brought in, what would the impact be?
Mary Starks: If you think about the costs of the industry being mostly the crude oil price, then on top of that a bit of refining margin and then the gross margin that the heating oil distribution industry itself makes, and out of that comes the cost of delivery, billing and the rest of it, so this is the profit margin. You can only price regulate down to cost, so there is not much to squeeze relative to the total price. Also you would have to think about the impact on the industry itself, because the other difference between the heating oil industry and the big utilities is that it is a much more fragmented industry. There are a lot of small businesses.
Q40 Albert Owen: We will come on to the profit margins in a minute. In written evidence from Calor Gas, customers experienced only a small rise in prices in the winter of 2010-2011. How is this possible with the international prices and what lessons can be learned from Calor Gas that can be applied to other fuels?
Mary Starks: Is that a question for me or for Calor Gas?
Albert Owen: Anyone.
Paul Blacklock: The way we operate-and this is off the back of a lot of history in the marketplace and a lot of consumer research-consumers are obviously concerned about the absolute level of price but the thing that really disturbs them is when there are many price changes. Particularly where they are trying to budget for a winter period, they hate that uncertainty. So what we do, as a business, is we buy a good proportion of our gas forward so that we are able to offer the most stable price possible to consumers. The December you are talking about, it was the highest cost of gas we had ever seen in sterling terms. Not only was the cost of gas high in dollar terms, because all gas is bought in dollars at some stage, but the exchange rate was against us. We are contracted to supply our customers at a price and we cannot move that price without giving them prior notice, and so our customers-certainly during that December period and through that winter period-were able to benefit from stable pricing.
Q41 Albert Owen: On oil and heating why is there a different model? Why did customers see a bigger peak in their price?
David Todd: I think there are two reasons: firstly, oil price moves in a different way than the gas price. In our business, our gas price moves monthly, our oil price moves daily. I think the second thing is most distributors in the oil distribution side are relatively small companies and, with the exception of two members of the FPS, private companies. Therefore, unlike a company the size of Calor that can have the resources to look forward and buy forward in international markets, most of the small oil distributors, including ourselves, just do not have that capability. So we pick up oil basically on a daily price and sell it on in that daily price.
Q42 Albert Owen: There is no forward buying by some of the larger companies?
David Todd: I can’t talk about larger companies. We are certainly not a small company; we are not the largest, but we certainly don’t buy forward. We don’t have the experience to do that.
Q43 Albert Owen: Going back to the OFT, do you think there is lessons to be learned here? Do you think there could be a more level playing field between oil prices and gas prices and that forward pricing can work?
Mary Starks: I certainly understand the comments made about consumer preferences for stable pricing. I think it is a matter for the industry and customers to work out what the right supply arrangements are. There is nothing preventing an oil company in this sector getting big enough to buy forward if the increase in price that that would require was something its customers were willing to pay to secure a price for six months, but as yet we are not seeing that.
Q44 Albert Owen: Comparing the winter of 2010-11 with this winter, what we found, again anecdotally, is that many people have bought throughout the year and kept the price of oil down. That has been the case, hasn’t it? Would you agree with that?
David Todd: Yes.
Q45 Albert Owen: So if you are buying on a day-to-day basis, why are you able to sell it cheaper in summer months?
David Todd: It is twofold. Firstly, the price of oil always rises towards the end of the year. I think kerosene was up about 17% between January 2010 to January 2011. There is a demand thing and there is also the ability to keep your vehicles busy, and it comes back to supply and demand to a degree. This winter there has not been a demand and prices will tend to be flatter than when there is a demand and the resources for the industry are stretched.
Q46 Albert Owen: So it is not all to do with the external oil pricing?
David Todd: The majority of it is to do with the external oil pricing, yes.
Q47 Albert Owen: One final question I have. What is the average profit margin of LPG and heating oil? You mentioned tight margins. Could you tell us what the margins are?
Mark Askew: For the oil industry the typical profit return on turnover is about 2%.
Q48 Albert Owen: All right, and LPG?
Paul Blacklock: From Calor’s point of view our profit is 10%, but I think that is after tax.
Q49 Barry Gardiner: Morning, gentlemen, and I am saying "gentlemen" because I am only going to ask those four at the end-sorry, Ms Starks. Can I just ask you a very simple question to start? Do you believe that your customers are any less deserving of fair treatment than mains gas or electricity customers? Mr Shuttleworth?
Rob Shuttleworth: I think our customers are deserving of fair treatment and I believe the member companies try and endeavour to do that.
Barry Gardiner: Thank you. Mr Blacklock?
Paul Blacklock: Of course, yes.
Barry Gardiner: Mr Askew?
Mark Askew: I would agree.
Barry Gardiner: Mr Todd?
David Todd: We wouldn’t stay in business if we didn’t treat our customers fairly.
Q50 Barry Gardiner: That is excellent. So, why is it then, given that you believe that they deserve the same fair treatment that mains gas supply and electricity customers have, that you are under no obligation to provide assistance or protection from disconnection to low income or vulnerable customers, nor are you obliged to take into account ability to pay when recovering debts, which of course are some of the very serious protections that are in place for mains gas supply and electricity customers? Why don’t you offer those same protections to your customers, given that you have just told this Committee you believe your customers are no less deserving?
Paul Blacklock: I don’t know that there is any evidence that we don’t provide some protections and consideration for vulnerable customers. One of the difficulties we have is there is obviously a very specific definition for "vulnerable", and one of the problems we have as a business is accessing that information so that we can determine whether these customers are vulnerable in the terms that you are using.
Q51 Barry Gardiner: But these are supply licence conditions for mains gas companies and electricity providers, aren’t they? You don’t have those. Are you telling me that you would be happy to take them on?
Paul Blacklock: No, what I am saying is that at the moment we work very sensitively in terms of handling customer debt.
Q52 Barry Gardiner: With respect, you are saying, "We try and do these things" but you are not saying that you have these obligations. You don’t have a responsibility to do that. Your customers may get it or they may not get it. That is the point, isn’t it? What I am asking you is: are you happy to take that on?
Paul Blacklock: Without knowing the full details of it-
Q53 Barry Gardiner: You know what the supply licence conditions are for the mains gas. You don’t know what those are?
Paul Blacklock: No.
Q54 Barry Gardiner: Is that not something that they should be talking about with you, Ms Starks and Mr MacBeth, the OFT?
Mary Starks: In terms of the evidence that was presented to us about problems with things like disconnections, there was not a high volume of complaints of that nature and so-
Q55 Barry Gardiner: So why is it that the FPS have said that they are working with the OFT towards developing self-regulation on this? Are you aware of that?
Mary Starks: Yes, absolutely.
Q56 Barry Gardiner: But that self-regulation doesn’t cover this area, does it? It only covers clarifying the existing law.
Mary Starks: The majority of complaints that we received related to a different set of issues, quite a lot around transparency of pricing and the conditions under which prices can move and that is the area-
Barry Gardiner: But it is not about those safeguards that I was talking about, is it?
Mary Starks: No, but then neither were the complaints, so that is why.
Q57 Barry Gardiner: Yes. So, Mr Askew and Mr Todd, why has the FPS refused to sign up to the CAB charter on this? Why did you say, as the excuse for not signing up to the CAB charter on this, that you were already in negotiations with the OFT about self-regulation here when you knew perfectly well that those discussions didn’t go to the heart of what I have just been talking about and that you have just agreed-that you should be providing equal benefit to mains suppliers?
Mark Askew: The reason we didn’t sign up to the CAB charter is because we were in the process of rewriting our own revised code of conduct or regulatory framework.
Q58 Barry Gardiner: That code of conduct doesn’t relate to the issues, does it?
Mark Askew: It is an area that we are looking to address in it. Yes, absolutely it is. But the reasons-
Q59 Barry Gardiner: Let me be absolutely clear on this then. You are looking to take on the very sort of protections that we have just discussed, protections to provide assistance or protection from disconnection to low income or vulnerable consumers, and the obligation to take into account ability to pay when recovering debts. Those specific areas are ones that you are currently considering in looking at your revised code of practice?
Mark Askew: Yes, because in my experience all of the distributors with which I discuss this matter do this anyway. From my understanding, the amount of people who are not given oil when they need it is remarkably low. The industry tries very hard. It has always had a large vulnerable customer base being predominantly in rural areas. It is an area of society with which we are used to dealing and we try to deal with sensitively.
Q60 Barry Gardiner: It is surprising then that you were not willing to sign up to the CAB charter given that you say you were already doing it. Why was that?
Mark Askew: Because essentially we didn’t want two bits of paper to try and work to. What we wanted to do was try to incorporate, where we could, the important facts into a single document for our members. We can only do that through discussion and consultation with them.
Q61 Barry Gardiner: When will that be produced? When is that code of practice going to be coming in?
Mark Askew: We are working on it now, so I would think-
Barry Gardiner: What is your timescale?
Mark Askew: We hope to get a final version to our membership by the end of this year.
Q62 Barry Gardiner: That then will be self-regulation, and we have heard about the self-regulation before from Mr Pincher. Let me just ask you, if you don’t manage to do that and you don’t manage to get the agreement of your members, would you agree that it is about time that you are brought into line and forced to do that by Government intervention?
Mark Askew: If it was felt this was a real improvement for the end user and it was imposed on us, of course the industry would apply it. I would argue whether-
Barry Gardiner: Good. You just told me that you wanted to be as fair to your customers as other people were to theirs, so presumably that is a yes?
Mark Askew: If it becomes a licence or a register requirement of course we would apply it. The only question I would ask is whether the end user would really benefit from it, given that it is a cost that would have to be passed on to all of the customers.
Q63 Barry Gardiner: What is the cost?
Mark Askew: The cost of providing oil to people who can’t pay for it and the cost of covering maybe additional groups for extended payment periods, and all the rest, would have to be taken on somewhere. As an industry, we don’t have the profit margin to absorb that sort of additional cost.
Q64 Barry Gardiner: 10% profit is not good enough?
Mark Askew: It is not 10% profit. It is 10% retail profit. It is 2% profit.
Q65 Barry Gardiner: These are obligations that mains suppliers have. They already do that and they have to do it in the same way, don’t they?
Mark Askew: I suspect they are not working on a 2% profit margin.
Q66 Barry Gardiner: Actually, I think we have heard in this Committee that they were; we have been told at various stages.
Mark Askew: It is an area we are looking at and it is an area we have great sympathy for.
Q67 Barry Gardiner: When you have completed your code, would you be so kind as to send a copy to the Committee, and then we can look at that and see if it needs strengthening further?
Mark Askew: Of course, yes. We are consulting with the CAB and other consumer groups during the drafting of it.
Rob Shuttleworth: I think we should say for LPG that our customers are dealt with under contract from their suppliers and it is a different situation from oil. We have already been subject to a Competition Commission investigation. I have spoken to all the major companies before this session, and companies make every effort to deal with their vulnerable customers and they have the same issues as Paul Blacklock from Calor here, so it is actually finding out who those vulnerable customers are. One of the areas we should try and explore fruitfully is to see how we can work more closely with local authorities to ensure that the vulnerable customers can be identified locally. But we have separate contracts for each of our customers and we haven’t gone down the same route of a code of conduct nor were we asked by Citizens Advice to do that.
Q68 Barry Gardiner: I note that one of the proposals is that you would then refer them to local authorities, as long as that doesn’t become a shunting off of those customers to somebody else’s care. It is all very well to work together, as long as that doesn’t just become a referral process that pushes them away.
Rob Shuttleworth: No, not at all. I don’t know if the Committee are aware of the Scottish Government’s protocol for vulnerable customers, which they produced for this winter. I believe FPS have been working with them as well to try and implement that. It places responsibilities on both suppliers and on statutory authorities to deal with known customers, and also how to address those who they don’t know about who say they are and then how do you deal with them. We think that is worthy of widening beyond the Scottish system into England and Wales.
Paul Blacklock: We had a meeting with DECC about a month ago to raise those issues and see if we couldn’t have that extended, certainly across England, and we have raised the same issues within the Welsh Assembly as well to try to get that intelligence flow happening so that we can all work and deal with these issues.
Q69 Sir Robert Smith: Can I just clarify that. When the data sharing came about for mains suppliers you weren’t included in that?
Rob Shuttleworth: No.
Q70 Sir Robert Smith: So that is maybe something to pursue with DECC. On the OFT, on the role of Ofgem, you talk about different markets but of course Ofgem puts conditions on retailers of electricity and gas, which is an unregulated price where there is competition. So, okay, the distribution and the transmission are natural monopolies and have to have regulated price control, but in the sense that Ofgem deals with energy users is there not still a logic for Ofgem to be looking at all energy suppliers?
Mary Starks: Ofgem’s price control activity is restricted to the network’s business, so it doesn’t directly control the prices that the retailers can charge. It does issue those retailers with licences, and there are conditions in the licence around the sorts of things that have just been discussed about disconnection, but there is no actual price control for retail customers.
Q71 Sir Robert Smith: Given your argument that Ofgem should not have a role because this is the market operating-
Mary Starks: I think that is why I was arguing it should not have a role in classic price control, RPI minus X kind of price control. In terms of whether its remit gets extended to cover the sorts of things being talked about, our evidence base does not suggest that there is an overwhelming amount of detriment arising in this area, so I think the case for regulation would need to balance quite carefully the costs and the benefits of extending it.
Sir Robert Smith: It is not a complete no?
Mary Starks: It is not a complete no. I don’t think it is a daft question; I just don’t think that the evidence presented to us made a clear case for that extension.
Q72 John Robertson: Could I ask you about this Scottish slant on dealing with vulnerable people. Could you explain a wee bit further on how the link between the companies and local government works?
Rob Shuttleworth: Yes. They have produced a protocol; it is a flowchart. I can send you a copy. I am sure they would be happy for me to do so, but you could speak directly to them. It identifies citizens known to the statutory authorities who might be vulnerable, customers of suppliers who are already known to be vulnerable through past experience, and then those who at a moment of shortage say they are vulnerable and in urgent need. I believe it was developed during the summer following last winter’s issues, to make sure that those vulnerable customers can be addressed as a priority and sympathetically by the supply companies. It is a flowchart involving discourse between the various authorities to make sure that there is an action at the bottom of it.
Q73 John Robertson: At the end of the day somebody has to take ownership. Who takes the ownership?
Rob Shuttleworth: It is run by the Scottish-they have resilience forums around the country. There are eight of them, strategic co-ordinating groups, and they take responsibility for the operation in each of their areas, but it does identify at the bottom of the flowchart to say that will be a supplier responsibility or a local authority statutory authority responsibility.
Q74 John Robertson: How often is it used?
Rob Shuttleworth: I don’t know how often it has been used this winter. It was developed for this winter and it has been a pretty mild winter so far.
David Todd: As Robert said, the flowchart has been developed to identify the three different areas of vulnerable people. The information is there. It hasn’t been put into practice to this degree yet, from the point of view that it has just recently been published. The one I have in front of me is dated November 2011 and it is not yet a finished document from that point of view. The majority of oil distributors in the UK work very much on a regional basis and, with one or two notable exceptions, there are no national oil distributors. Therefore, in general they tend to be relatively small companies working in a local area, which is totally different from the large energy suppliers. Therefore, they have a far better knowledge of who is likely to be vulnerable in their own customer base because of the years of history of trading with people. But there is always the instance where people are vulnerable but would be the last to actually tell their oil supplier, or whoever, that they are vulnerable. Through this framework it is hoped that this group of people, who are probably the suffering silent, are brought in via the local authorities or the strategic groupings in Scotland.
Q75 John Robertson: My problem with that is the ownership at the end of the day and who helps the vulnerable person. We don’t have any evidence otherwise to show that it works or doesn’t work. The ownership then is questionable as to who has it. Therefore the person-and this happens in a lot of other areas-goes to somebody, asks for help and they say, "Oh it’s not my problem, it’s somebody else’s problem", and the somebody else says the same thing, and this person is getting taken back and forwards with nothing happening, which strikes me as being most advantageous to the companies and not the person. How does it work in the rest of the UK?
Paul Blacklock: There is nothing equivalent in the rest of the UK.
Q76 John Robertson: So a vulnerable person is highlighted to a company. What do they do about it, or do they highlight the person?
Paul Blacklock: I think it is worth going back to explaining why this initiative came about. In December 2010 we had gas, we had drivers, we had vehicles; we didn’t have roads. That was the simple truth, but we had people that were claiming they were vulnerable and it was then a case that there was clearly no structure in terms of trying to help, work with local authorities to direct snowploughs, gritting crews, whatever, but also to get some verification that all this work was going to be done to help somebody that was in real need. The protocol we are talking about has been established to deal with that, but this-
Q77 John Robertson: Hang on a sec, are you telling me that this vulnerable person, whether it has been proven or not, doesn’t get any help because nobody can prove there is no backup?
Paul Blacklock: No. It is a case of if we were in a situation-especially that December-where we had to make choices in terms of deliveries, we wanted to make sure that where we were prioritising we were prioritising for the right reasons.
Q78 John Robertson: You wanted somebody to tell you?
Paul Blacklock: To help, yes. We wanted someone-
John Robertson: In other words, you wanted somebody else to have the ownership and you are quite happy to do the work?
Paul Blacklock: No, this was about intelligence.
Chair: John, we need one more group of questions.
John Robertson: Sorry, I am not being very disciplined, Chairman.
Q79 Ian Lavery: I think most of the questions I was looking to ask have basically been covered. But I would like to ask how do the companies actually engage with the consumers to help try and keep the costs down, and if there is anything more that could be done?
Paul Blacklock: There are two strands of work that we have done. We have done one big piece of work, which we do ourselves, where we actively support our customers. We have been looking at how much energy our customers have been using for heat over the past 10 years. I think it is interesting to see that the average customer is using 18% less heat now than they were 10 years ago. This is coming about from a mixture of better equipment, better insulation and probably with the higher energy prices people are more careful in terms of their use of energy, and we are certainly seeing a significant decline in our volumes. We have looked at natural gas as well and I think you will see that trend happening across the piece.
One of the things that we became aware of about three years ago was that there was a dearth of anything happening in this off-grid area, in terms of trying to help rural consumers in terms of energy efficiency. When you looked at schemes like CERT and CESP they bypassed off-grid rural areas almost completely. With CERT, the economies of scale were possibly not necessarily there for the big six companies to actively go into these areas and try to get work done. In the case of CESP, the rules of the CESP scheme make it almost impossible for projects to qualify under CESP in off-grid areas. So we established an alliance between ourselves, National Energy Action, and Action with Communities in Rural England because we wanted to get much more inside the problem to try and understand it in more depth.
We are almost at the end of the second year and the thing we are finding is that a lot of consumers have not been approached or addressed properly in terms of communication campaigns. If you look at simple things, like people changing electricity supplier, a lot of people in rural areas have never changed their electricity supplier because, whereas in London you are probably sick and tired of people knocking on your door and asking whether or not you would like to change, that has never happened in rural areas. So we have been finding a reasonable number of people who have never changed supplier.
We are also going through a number of village audits at the moment, where we take a whole village and we do a mixture of detailed energy audit assessments for six houses that are typical of the village. We then do a walk through the village to try and identify measures, because we want to take these away to a CERT or CESP provider for them to get these measures done. We worked through the rural community council because they are seen as a trusted independent. They issued questionnaires to everyone in the village and got them to fill out some detailed information in terms of income, what type of heating system they had, what benefits they were on and all the rest of it. Some of the early findings are that over 50% of the people responding fall into what are the priority and super priority groups under CERT and CESP and no one has ever been near them.
So we believe there is certainly more to be done and we are continuing to work with the likes of National Energy Action. We are working with Energy Action Scotland. There we are working in terms of housing associations, and that is where we have funded housing associations to do some audits. They have come up with a range of measures that need doing, but they can’t qualify under CESP because the CESP rules don’t allow. With the submissions that we are going to make for the Green Deal, we are making it absolutely clear that, obviously with the Green Deal and ECO coming along, it is critical that the design of those schemes is a bit more intelligent, in that they don’t unwittingly exclude rural areas in terms of the help they can get.
Q80 Ian Lavery: I am not sure if that actually answered the question. It didn’t address the question at all. I will ask another one. There seems to be a reluctance from the oil companies to co-operate with a lot of community groups, community groups in villages like you mention for example. In Humshaugh in Northumberland, not far from where I live-although not in my constituency-they have set up a community ventures company, whereby on a Monday morning they were phoning 10 oil suppliers asking them what the price was at that point in time and then they were highlighting that to the villagers, which was very helpful. It ranged from 50 pence per litre to 65 pence per litre. There was a reluctance then from the oil suppliers to respond to that. After a short while, only two suppliers out of 10 were prepared to give them any details whatsoever that would have helped these people. Why would there be a reluctance from the oil suppliers to give information that would help vulnerable people and would help the costs of the oil?
Mark Askew: David is an operator and he may be able to give you an operator’s perspective. I think that there is a feeling in the industry that buying groups, which is the sort of thing you are talking about, are a bit of a mixed blessing for both the industry and the end users. An oil-buying group will have to benefit the company and the end user for it to work, and in many cases this just is not possible. The companies don’t get-
Q81 Chair: Why does it have to benefit the company as well as the customers?
Mark Askew: Essentially, if people are buying oil in bulk, which is what a buying group does, then there will be a price reduction because most companies offer a reduction on larger volumes. This is okay. But, for example, if that buying group is widely dispersed geographically then the savings in costs for just the transport is nil, so the actual savings the buying group can make are quite small. If a buying group is six people in a cul-de-sac, say, then that is more advantageous to the oil distributor because he can send his truck to one place-
Q82 Ian Lavery: Who is it more advantageous to, the customer or the company?
Mark Askew: Both. If the company can save money on its transport cost, then the cost of the delivered oil is lower. If the company is saving no money on its transport costs, then they can’t share that saving.
Q83 Ian Lavery: That is not the regular case, though, is it?
Mark Askew: Sorry?
Ian Lavery: It is not the case in the normal run of things. If you have a cul-de-sac of six people, it is not normally the case that that oil will then be cheaper because there are six customers there where the other ones might be widespread?
Mark Askew: Generally it would be.
Q84 Ian Lavery: You mentioned that these new buying groups are a mixed blessing. The one in Humshaugh has 70 members now and it was set up in November 2011. One member of the buying group used the price comparison, which I mentioned before, to have a look at how much he would have saved on his last delivery and it would have been more than £100. So to say it is a mixed blessing is strange, to say the least.
Mark Askew: There are savings to be made in buying groups, there is no doubt about that, and some of our members actively support them and some don’t. But there is this assumption, I think, that if people join a buying group they can save loads of money and in many cases they can’t. In some cases they can. It depends very particularly on the buying group and the supplier and lots of other factors, but a buying group will work best where both parties will derive some benefit from it, clearly.
Q85 Ian Lavery: Sorry to dwell on this point. Why is there a reluctance from oil companies to supply price comparisons, for example on a Monday morning, in one location? Why is there that reluctance?
Mark Askew: I don’t know. Most of the distributors that I speak to have people phone up all the time and ask what the price is.
Q86 Ian Lavery: But a buying group like a consumer group, rather than individuals. They will deal with individuals but they might not deal with somebody who was trying to get a comparison for the whole of the village. That is the difference.
Mark Askew: It is probably because they don’t feel that there is sufficient advantage in them supplying a group.
Q87 Chair: What they feel is their profits might be reduced by an element of greater buying power.
Mark Askew: No, not necessarily. It is because the margins they operate on are very tight and so they need to be very careful about how they-
Q88 Chair: Well, we will dispense with the handkerchief. The fact is here we have a market, which probably doesn’t have perfect competition in some areas. Buying groups are slightly redressing the balance of power in favour of the consumer away from the supplier.
Mark Askew: That presupposes suppliers are making money hand over fist, and they aren’t. As the OFT has said, the actual profit on the retail margin is very small and there is not a great deal that can be done about that with a lot of companies who are buying on the day they are distributing.
Barry Gardiner: It is not forcing people out of the market, though, because we have heard there is no problem with competition.
Q89 Albert Owen: One brief point that Mr Blacklock made, and I was very interested in, was about community surveys and what customers want in rural areas. The feedback that I get from my constituents in the rural areas is that they want gas mains and they want that choice. I know that is a difficult one for all of you to answer, but is that coming up in your surveys? I believe that more should be done to extend the gas mains.
Paul Blacklock: We wouldn’t exist, or the vast majority of our business wouldn’t exist, if the gas main was universal. There is probably only one country in Europe where you do have almost universality.
Q90 Albert Owen: But you do acknowledge that people are raising it?
Paul Blacklock: Oh no, customers want it, but essentially the gas mains expansion stopped with the privatisation of the gas industry. Before that you had a Government-owned utility whose investment strategy was they were almost investing for their grandchildren and there was a social aspect in terms of expanding, but that has disappeared.
Chair: I think we are going to have to end it there. Thank you very much for coming in. It has been very illuminating from our point of view and we are very grateful for your time.
Examination of Witnesses
Witnesses: Lauren Langton, Co-ordinator, Allen Valleys Oil Buying Co-operative, and Mike Murray, Co-ordinator, North Tyne Valley Oil Buying Group, gave evidence.
Q91 Chair: Good morning, thank you very much for coming in. We appreciate you coming in at short notice. Mr Murray, I gather you have come back from your holiday early for this purpose so we are very grateful for that. As you know, we are severely time limited. We have 20 minutes for your session. We are a few minutes late but we will preserve the 20 minutes.
You have heard the previous evidence. Can you tell me, is it your impression that a buying group should exist to help companies as well as customers?
Mike Murray: We are a mixed blessing. We don’t exist to help the supply companies. We exist to help people in remote, very sparsely populated rural areas where the oil companies have made a lot of money over the last decades by charging inordinately high prices.
Q92 Chair: So the motive for setting up the buying group was simply to try and redress that balance, to get a better deal for your customers?
Mike Murray: Absolutely, in a village of 200 people.
Chair: I think that was our impression as well.
Mike Murray: I have given the gentleman my card and I am happy to discuss buying groups with him.
Q93 Chair: Could you tell us what reaction you have had from the companies when you do this? Have you encountered some obstacles?
Mike Murray: We started off by trying to deal with the company we had bought from as individuals. They were reluctant to deal with us because we were only three or four people. We then dealt for, I guess, two years with a company that is now part of the big Irish conglomerate. For the last 15 months we have dealt with an independently based company and they are very happy to deal with us. From their quotes over 15 months, they seem to be keen to keep our business because the groups have expanded. We are now several groups in Northumberland and we can place orders for 50,000 litres a month in the heating season. If you are an oil supply company, you would like to be able to supply a regular volume from September to April, and they can. They have told us that they are happy to deal with us because, in a sense, we reduce the administration for them. We alert our members to the orders, we collate the orders and we give a single order to the delivery company, which will then contact the individual companies, take payment and arrange delivery.
Q94 Chair: So from that point of view there is a benefit to the supplier?
Mike Murray: Absolutely. One particular company has had our business for 15 months. We see from their quotes that they are keen to keep that business. They have taken new customers on at the expense of their competitors.
Q95 Chair: Have you been able to analyse what savings you have achieved for your members, compared with what would have been if you had gone on under the old system?
Mike Murray: We see a range of quotes. Since September last year we have seen a range of quotes for heating oil, and the difference between the high quote and the low quote can be as much as 5 pence per litre. We know that the people who pay the most are those who pay for 500 litres of heating oil at a time. We think anyone buying 500 litres as a member of a group will pay up to 10 pence a litre less than if they buy themselves. I can’t give you hard figures, but that is way it looks from the quotations we have had for several years.
Q96 Chair: Has there been any difficulty in getting information from the oil companies in order to be able to compare prices?
Mike Murray: We have not had any difficulty getting prices. I know what has happened in Humshaugh and I know why some of the oil companies have declined to supply a price to the price comparison site. That was because they never received any orders from it. Once a month we ask five or six companies for a quote for heating oil, red diesel and white diesel and we have a price quote the next day.
Lauren Langton: Can I just say that I started ordering for my group in September. When I rang round the different companies it was very clear that they were not interested in dealing with me. To begin with, I asked for a price as an individual, "Can you give me a price for 500 litres of kerosene? Okay, thank you. Now, if I was ordering a group order and I was going to order 15,000 litres can you give me a price?" Some of them were very, "There is no difference. We could knock 0.02 p off or something like that" and I found this incredible. It got a little bit better because I became a bit more confident at being quite blunt. But it became apparent very quickly that we only had a few real competitors, and that has stayed the same. Although I conducted the exercise this week on Monday, and on the morning I wanted to place the order two oil suppliers rang me for the first time saying, "Please can we quote for your order? We’d be very pleased to quote for your order". I had delight in telling one particular lady that she had been quoting for my order since September and it didn’t seem to make any difference.
Q97 Dr Lee: I wandered into your village shop, which I think is why you are here today, because I was up in Hexham and I noticed this sign and what you had done. So thank you for coming down. At what size did you find that they started listening? How big did you have to become? In my own constituency in Berkshire, I have an area that has heating oil usage. Hopefully they are listening to this and they will say, "Well, how big do you have to be to be able to do what you’ve done, in terms of volume?"
Mike Murray: We started off as three families buying together, not in Humshaugh but further west at the far end of the North Tyne valley. We were three families and I guess we bought 2,000 litres. Now in our group we are 75 members. We can order up to 50,000 litres a month. I guess that if an oil supply company thinks it can sell a tanker of fuel it is happy. What the oil supply companies want to do is have a tanker leave the depot in the morning full and come back in the evening empty. They don’t want to carry fuel back to the depot. If they can plan their delivery route so that they can load a tanker, drop off to 10, 15 people and go back empty, then they are happy, then they will do business with us.
Dr Lee: So how much is that? Sorry I don’t know.
Mike Murray: It depends.
Lauren Langton: It is surprising-the tankers are quite small. Some are only 10,000 litres and it is a full tanker. So quite quickly it can become advantageous for the oil suppliers. I did put in my evidence that quote that one of the oil suppliers gave me. This was in the early days and I don’t think they would get away with it if they said it to me now, but they did specifically say, "The trouble with dealing with an oil group is that it ties up a tanker all day"-[Laughter.] I am sorry, that is quoted word-for-word what that person said to me.
Mike Murray: I have had exactly the same. The-
Lauren Langton: Then-sorry, Mike-I didn’t have an answer, I was so astounded. But it was very early on in my experience and I just took the comment. If someone had said that to me this week I would have delighted in giving them a proper answer. Isn’t that ridiculous? Who do they think they are dealing with? I know I am an ordinary member of the public, but that is a ridiculous comment to make.
Mike Murray: The tankers vary in size from 9,500 to 10,000 up to 16,000 or 18,000. They are not the sort of tankers that deliver fuel to urban supermarkets. You get four-wheel tankers, you get six-wheel tankers, but generally in our area you don’t get anything carrying more than 16,000 or 18,000 litres.
Q98 Chair: Sorry to ask such a basic question. When you see a tanker full of petrol at a petrol station, how many litres would that carry?
Mike Murray: You don’t. You don’t see a tanker full of petrol. The tankers normally have three or four compartments and a tanker can load with different fuels. In our area the tankers that we most usually see are 16,000 to 18,000 litres.
Q99 Chair: But what is the capacity? We have all been behind some damn great tanker in a country lane. How many litres would that have on it, the biggest ones?
Mike Murray: The biggest ones you see on a country lane are 16,000 to 18,000 litres.
Chair: Okay, on a motorway; sorry, I should have said?
Mike Murray: On a motorway, double or treble, I guess.
Chair: It sounds an incredibly small amount to me. When I consider you put about 60 litres in an ordinary car every time you fill it up.
Mike Murray: Yes.
Q100 Sir Robert Smith: I just wondered in your experience whether you had come across any evidence that there are local monopolies where vulnerable customers would have difficulty getting a good quote?
Mike Murray: In our area several supply companies belong to an Irish conglomerate. We haven’t bought from them for the past 15 months because they haven’t been competitive on price. We know of people who have hard choices, who can either buy heating oil at a particular time in the winter or have a summer holiday. I know of a family that wanted to join the North Tyne group and they couldn’t because they couldn’t afford to order 500 litres. In a sense, we are the wrong people to tell you about vulnerable customers. The people who know most about vulnerable customers are likely to be, in our case, the West Northumberland Citizens Advice Bureau. They have done a different type of work to what we do. They have looked at fuel poverty. We look at fuel supply: they look at fuel poverty.
Lauren Langton: The National Energy Action are looking at it as well.
Mike Murray: I am a member of a new leader group in the North of England, in West Northumberland and the Northumberland Uplands, and we are likely to look at fuel poverty. But it is tough for us because we will have to try to work out who the players are, who we work with, what we can do with them.
Q101 Chair: Nevertheless, if the effect of your work is to reduce the price that many customers are paying, that potentially helps fuel poverty.
Lauren Langton: Yes, absolutely.
Mike Murray: Potentially.
Lauren Langton: It does, and the pattern with the ordering in my group-I have about 130 members now in the Allen Valleys’ one-what I have seen is that people will order around that bottom minimum level of 500 litres, because they know they are still getting a good price, and so they can spread their orders out, maybe two or three. I have many old people in my group so it does definitely help.
Q102 Sir Robert Smith: Do you have any view on the debate about whether there is a role for Ofgem as it looks at the consumer from electricity and mains gas?
Lauren Langton: What, you mean whether the oil supplies-
Sir Robert Smith: Yes, the supply market would-
Lauren Langton: Yes, definitely. I can’t see why there isn’t an equivalent of Ofgem or Ofwat. They all have one. Why doesn’t the oil have one? I can’t believe some of the comments earlier around things like the code of practice. Personally, I am struggling with the concept of taking a year to revamp a code of practice. Maybe I could help? I am looking for a job. I was made redundant earlier on in the year. But I find that a little bit odd.
Q103 Albert Owen: What do you think of the OFT report and its outcomes? We have just heard evidence from those in the audience there behind, but what do you think of the OFT’s report and the comments that they made today?
Mike Murray: I thought I would like to tap them on the shoulder and say they would be welcome to come to our area. I haven’t read any of their work, I will be perfectly frank. I haven’t read their reports. We are volunteers, we run oil groups-
Q104 Albert Owen: But do you interpret their conclusions to be that everything is hunky dory in rural areas?
Lauren Langton: It does appear to sound like that, the fact that there is this top–up scheme business. Again, in my evidence that is why I have said those are the people that are paying the most. The people that have this signal thing and it tells one oil company that they are running low on oil, so when the oil company’s supply is ready they will deliver with no telling of the price, nothing like that. Those people are paying a lot more. There is a 13 pence to 14 pence difference to what you can get with us. That is ridiculous. This business about paying a direct debit to that company, in the old days with electric you used to build up lots of credit with them and then they used to send you a cheque back when you asked for it. I think it is slightly better nowadays. With the oil direct debit scheme, I had one person saying that they tried to increase their direct debit because they knew they were hundreds of pounds in debt and the company didn’t do it, kept forgetting to do it, something kept happening. So when they wanted to join my group they said, "I’m going to have to pay several hundred pounds off that before I can start your group". That is ridiculous, isn’t it? Surely that has to be monitored.
Q105 Albert Owen: Mr Murray, you said that you were responsible for supply and coming together. You said the CAB is looking at fuel poverty. Do you think the local authority should have a role in looking at this because social deprivation, vulnerability, is something that they have responsibility for? Have you worked with them? Have you had any dialogue with them?
Mike Murray: I have worked a little bit with CAB in West Northumberland. I am in touch with Community Action Northumberland. Our local ward councillor knows perfectly well what we are doing. All our parish councils know what we are doing. I haven’t spoken to Northumberland County Council.
Q106 Albert Owen: My question is: should Government, at whatever level, be doing more to help the people that you are now helping?
Mike Murray: You could make a good case.
Albert Owen: No, I am asking you.
Lauren Langton: It seems to me a bit odd that you have people in the community like us that are volunteering to do this sort of thing. When I started doing this exercise earlier on last year, to see whether it was worthwhile doing it in Allendale, I rang CAB, I rang Community Action Northumberland, and everyone was like, "Oh that sounds a good idea. Let us know how it goes". I was way ahead of the-
Dan Byles: Can I just say if Government became involved and was doing what you are doing they wouldn’t do as good a job.
Mike Murray: Sorry.
Dan Byles: I think if Government was involved doing what you are doing you would probably find it would take twice as long, be twice as bureaucratic and they wouldn’t do as good a job.
Lauren Langton: Yes, but they surely must have muscle somewhere. I just think for me to be doing it as a volunteer-
Q107 Albert Owen: My point is, you have no confidence in the OFT’s reports so do you think that Government should take some direct action?
Lauren Langton: Yes, I do.
Q108 Sir Robert Smith: What sort of time commitment is it to make this work?
Mike Murray: I guess I can spend two or three days a month doing it.
Lauren Langton: It was the order day on Monday and I spent basically all day doing it. You are dealing with new members coming on board, registering them, making phone calls to the people who don’t have email, which I am very keen to do because obviously that is probably a very big vulnerable group, dealing with the oil suppliers, waiting for prices to come back. It is quite a big thing, and that is doing it without any publicity.
Q109 Sir Robert Smith: Do you have any logistical problems? If someone says they want an order, is there an obligation on them to make sure that when the delivery turns up they don’t ring up and say, "I’ve changed my mind" or anything?
Lauren Langton: I haven’t had any experience of people changing their mind. It is such a serious thing for people. I have had no issues with people paying, with that sort of thing. It is a huge thing having heating oil.
Mike Murray: I haven’t had any problems like that of the type you refer to. What you have to remember is that the oil company is paid in advance. It may be paid a day or two, it may be paid a week ahead of delivery. So they have every incentive to deliver and if you have paid for your oil you have every incentive to accept the delivery.
Q110 Ian Lavery: Just a very brief point and I think you do a fantastic job, by the way. In terms of price comparisons, you mentioned 15 months ago and I forget the literage you mentioned. What price per litre do you think you saved over the last 15 months compared to what people were paying before that? Just a ballpark figure.
Mike Murray: I think on any order group members can save 10 pence a litre on heating oil by buying in the group. We order heating oil for village halls and we order heating oil for small business. We order red diesel for farmers. So these are also savings in-
Ian Lavery: So it is significant?
Lauren Langton: It is significant, yes.
Mike Murray: I can save myself 10 pence a litre buying as a member of the group I co-ordinate.
Chair: It is a very refreshing set of answers from you both and very interesting. I am sure this is something that we might try and give wider visibility to, because it seems to me that a lot of parts of the country might benefit from exactly what you have been doing. So thank you very much for coming in. Sorry we have no more time, but you will have made a difference to our conclusions I am sure.
Examination of Witnesses
Witnesses: Ron Campbell, NEA, and William Baker, Consumer Focus, gave evidence.
Q111 Chair: Good morning, you will have heard the previous evidence and will be aware we are under a severe time constraint. We have about 20 minutes or so to try and get through some issues with you. Thank you for coming in.
Could I begin by asking what you think of the OFT finding that there are no competition problems in this market?
William Baker: Consumer Focus did also look into off-grid markets. Obviously our expertise has been very much in gas and electricity, and we commissioned some consultants to investigate some of the issues to get an independent opinion. In terms of price regulation, we didn’t think there was-and certainly this is the research through the Commission-going to be a very strong case. Prices did pretty closely reflect wholesale oil prices. Certainly there is potential through things like buying co-operatives, and I certainly agree a lot more could be done to promote those. But in terms of formal price regulation we agreed with OFT on that score.
We did feel perhaps there could have been some stronger recommendations around vulnerable consumers and the sort of self-regulatory type of initiatives that have been discussed. Obviously we work quite closely with CAB, and the CAB charter was something that we felt would have been very worthwhile supporting. Our understanding is that certainly some suppliers have very good practices and do quite a lot to support their consumers, but there is no guarantee that that is uniform across the industry. So that is what we would have liked to have seen strengthened a bit.
I have a couple of other comments, though. We shouldn’t see it entirely as a negative comparison. There are some aspects of the oil and LPG industries that are more positive than gas and electricity. For instance, with gas and electricity you almost pay a penalty if you are a loyal consumer-if you don’t know what the best prices are for those who switch, and so on. So I think there is more of a culture of looking after loyal oil and LPG consumers and there isn’t the same variation in prices according to how you pay. We see these massive differences in prices for gas and electricity if you are able to pay by online and direct debit. You don’t see that quite substantial variation within LPG and oil.
Q112 Sir Robert Smith: Can you clarify that because there is a perception that if you are in a top–up scheme you are taken for granted a bit and pay quite a high price for your oil, as opposed to someone who phones up and says, "What is the price today and can I have a delivery?"
William Baker: Yes, our understanding was a lot of people did compare. There is one thing I forgot to mention as well. In Northern Ireland there is quite a different sort of market, and there were some pretty awful stories about people who are dependent on having to buy litre cans and so on, and I think that was one part of the market. A lot of the OFT study probably focused on the mainland.
Ron Campbell: In fairness, the OFT didn’t conclude that there wasn’t a problem with the market. They did conclude on the other hand that it wasn’t the market structure itself that was the problem. They did also insist that targeted assistance to the most vulnerable households is more appropriate than measures addressed at the markets more widely, as the markets appear to be working well in many respects. So obviously they are cognisant of the fact that there is a big problem of fuel poverty and financial disadvantage, and all sorts of associated areas of disadvantage among rural consumers.
This was something that Mr Gardiner touched on, the subject of consumer protection, if I could just say a few words about that. We have regulation in the mains gas and electricity industries because of the perfectly correct perception that services that are essential for the health and welfare of individuals are too important to be left entirely to markets. That is our general take on any such service-that, where possible, there should be some form of regulatory oversight. We do concur with the OFT conclusion that this kind of fragmented, disparate and rather complicated market may not be amenable to regulation in the same way, but nevertheless we would wish to see some form of intervention and oversight in these markets too. Again, this probably comes back to the point that Mr Gardiner was making about providing similar levels of service to those required under licence conditions for mains gas and electricity suppliers. I think they probably should be subject to a much more stringent code of practice and it should be a code of practice that all the suppliers are signed up to, and that is agreed and endorsed by a range of agencies, including Consumer Focus, the Office of Fair Trading and Citizens Advice.
Q113 Sir Robert Smith: Ofgem is expert in the consumer experience of buying energy in the vast bulk of the country. Could there not be a role for them in ensuring that the consumers’ interests are properly protected when it comes to off-grid supplies of heating fuel? Not as a regulator, because they don’t regulate the price of electricity and gas, apart from in the distribution and transmission side, but the generation and the retail is all unregulated price, and the consumer protection and the role-
Ron Campbell: Yes. I think the experience and advice and guidance of Ofgem would be invaluable. I am sure you are right-there is no reason why they shouldn’t, except they are so closely associated with the electricity and gas industries. Ofgem have revised and refined all sorts of areas of customer protection over the years and they could certainly have a role. As you say it wouldn’t be regulatory, per se.
Q114 Barry Gardiner: Fuel Poverty Action Group have suggested that it makes little sense to only have 25% of the resources of the Energy Company Obligation devoted to the alleviation of fuel poverty and to have 75% of it, in their words, "used to subsidise expensive measures on behalf of able to pay households". Do you agree with that?
Ron Campbell: No. NEA is in total disagreement with that. We are in agreement with the Fuel Poverty Advisory Group and any number of likeminded or campaigning organisations that, for a number of reasons, this is unacceptable. We were regularly reassured during the year preceding the Energy Act, that the resources available for fuel poverty programmes would be significantly increased as a consequence of the Energy Company Obligation. Despite these assurances it transpires that available resources will be much, much lower than has been the case in recent years-
Q115 Barry Gardiner: Sorry, Mr Campbell, I don’t wish to interrupt you. But when I actually asked you, "Do you agree with that?", I was asking whether you agree with Fuel Poverty Advisory Group, and you said "No", but from what you are now saying it seems that you were disagreeing with the actual position of ECO. Can I just ask you to clarify?
Ron Campbell: To clarify, NEA takes the view that 100% of ECO resources should be expended on fuel poverty programmes.
Barry Gardiner: That is a very clear clarification. Thank you.
William Baker: Consumer Focus has the same position as well.
Q116 Barry Gardiner: Exactly the same position. Let me ask you this then, you think the affordable warmth target should be increased. Do you accept that by focusing ECO entirely on tackling fuel poverty that that would have an impact on the carbon reduction target, which is the other part of the Energy Company Obligation here?
William Baker: The basic problem is that too much is being asked of ECO. It is being seen as a programme to tackle fuel poverty and to replace Warm Front. It is also very much expected to kick start the solid wall insulation industry, and it is also expected to underpin Green Deal finance for measures that don’t meet the golden rule. I don’t think it is sufficient to meet all of those three policy objectives. Having said that, we do have ideas about how you could release more resources. For instance, if the carbon part of ECO is entirely devoted to lower income consumers-if it were to focus, say, on social housing through area-based type approaches and, for instance, low income private sector housing in adjacent areas, which would make it amenable for that area-based approach, given that social housing is in a very good position to achieve economies of scale to gear up to install solid wall insulation on a large scale-I think you would still see quite significant carbon savings. There are plenty of fuel-poor houses-I think it is about 1.9 million in England alone who live in solid wall homes-which would enable it to achieve both fuel poverty and carbon objectives.
We should always remember that Warm Front, when it was at its height, was estimated to be the third most effective programme at reducing carbon, even though that wasn’t its primary objective.
Q117 Barry Gardiner: Thank you, Mr Baker. That is very helpful. I just want to try and restate it for absolute clarity. You are suggesting to the Committee that, as presently configured, the Energy Company Obligation is not doing enough to address fuel poverty, but that it could do considerably more to address fuel poverty and also, at the same time, go a very long way to meeting the carbon reduction commitments if it focused on such things as solid wall installation in those 1.9 million homes that are fuel poor and poorly insulated, and therefore achieve a much better outcome for the fuel poor but also observe the carbon reduction commitments. Is that correct?
William Baker: Yes.
Barry Gardiner: Thank you very much.
Ron Campbell: Could I just make a point on that?
Barry Gardiner: Please, I was just going to ask you if you wanted to add something.
Ron Campbell: Yes. We are not absolutely certain about the ratio, the 3:1 ratio, the split between affordable warmth and the carbon reduction aspiration. We are entirely committed to the view that all of these resources should be expended on fuel poverty. This is a view that is endorsed by a wide range of organisations, including the Committee on Energy and Climate Change, which recognise in the first instance that, for better or worse, levies on energy bills are regressive, that fuel-poor households would be paying for extremely expensive measures from which they didn’t benefit, and that a rational and coherent way of galvanising the solid wall insulation market, which is a big element of this part of ECO, would be to carry out such works on behalf of fuel-poor households.
Barry Gardiner: Thank you very much, that is extremely helpful.
Q118 Ian Lavery: Just touching on the Green Deal and the ECO in off-grid areas, Consumer Focus have suggested that the households in urban areas rather than rural areas will benefit more from the ECO, can you explain why you believe that to be the case?
William Baker: Yes, basically the way DECC envisages ECO running is that it is seen as a market-based mechanism, it wants the restrictions that are placed on suppliers kept to a minimum as to how they meet their markets. So, in effect, suppliers are incentivised to try and meet their carbon targets as cost effectively as possible and as cheaply as possible. With that sort of context, it is much cheaper for companies to install large numbers of installations in urban areas. It is trying to deliver ECO in rural areas, in more dispersed settlement patterns with higher travel costs and so on. The only way to try and overcome the tendency for it to mainly go into urban areas is either through Government direction, through some sort of restrictions, or through mechanisms like putting extra uplifts on measures that were installed in rural areas or remote rural areas.
Q119 Ian Lavery: You think that redesigning the ECO proposals, at this point in time, could benefit both the rural and urban communities?
William Baker: Since all consumers are paying for it, it seems only fair that there should be a reasonable equitable distribution between the urban area and across the different countries.
Q120 Ian Lavery: I think Consumer Focus have suggested that, in addition to the Green Deal and the ECO, there should be another scheme introduced to combat the problems that we have just been discussing. How do you think that would work and where do you see the funding coming from for like a third sort of scheme?
William Baker: I think what we would very much like to see happen is a scheme that complements Green Deal and ECO. We don’t want to see something that is trying to achieve the same sort of objectives, so it would work with Green Deal and ECO. What we are proposing is ETS is going to start, and the auctions of ETS are going to be ramped up quite considerably in 2013. We are also seeing the carbon floor price come in, which in effect will mean you will have a fairly predictable and stable income stream because of the carbon floor price coming through the Emissions Trading Scheme. However, what we understand it is going to mean for consumers is it will add about £50 to the average electricity bill, which of course will mean upward pressure on fuel poverty in itself. So we are proposing that the funds that will start coming through the ETS are recycled into the national energy efficiency scheme that we would like to see take place.
What would seem to make sense-and evidence from all over Europe shows-is that supplier obligation schemes work quite well for low cost, large scale volume installations, but they don’t work well for the more expensive, more innovative type technical solutions and those are the sort of things a complementary scheme should focus on. So it would be on renewable heat type initiatives, solid wall insulation in off-gas areas, and for the households that Green Deal or ECO won’t be able to help.
In effect, you can see a parallel in Scotland with something like the Energy Assistance Package where they have brought together a publicly funded scheme with the CERT scheme. So the CERT does all the easy bit, the low-cost lofts and cavities, and the public funds pay for the more expensive stuff, and that does include things like heat pumps.
Q121 Chair: I have to leave the meeting so Sir Robert is going to take over the chair for the final few minutes.
Sir Robert Smith: If we could follow up on the integration of Green Deal finance and feed-in tariff for renewable heat, whether there is a way of bringing the packages together that could advantage people off-grid.
William Baker: Yes. Obviously people can take out a Green Deal for renewable heat. There is nothing within proposals that prevent that. That is where you might be able to see where RHI kicks in. In a sense, it is using that future revenue stream that one might expect to get from renewable heat. It is a big issue for lower income consumers, and what has prevented a lot of lower income consumers taking advantage of the feed-in tariff system is obviously paying those upfront installation costs. That is obviously where the Green Deal and ECO could come into play. But it needs to be thought through in terms of what the implications for the subsidy level are. In effect, you are having two types of subsidy going into a home. So it could mean that you would have a predictable income stream from the RHI and the tariff that is provided, and if it is used to accompany an ECO contribution towards paying the cost, together it could make that viable for the low-income consumer.
Ron Campbell: My understanding is that measures that are funded through Green Deal won’t be able to benefit from the feed-in tariff or the RHI. In fact, householders installing these measures and using Green Deal will, in effect, surrender entitlement to either of these subsidies. We have spent a long time making the case-a fairly in-depth case-of how the Green Deal is not relevant to our client group to a great extent anyway. The Government recognised and accepted these arguments that the Green Deal was not an appropriate mechanism or system for fuel-poor households. In our priorities, everything comes down to how the ECO is structured and what level of resources are available through ECO and how these are implemented. So, for better or worse, we feel that the Green Deal is certainly marginal to our client group.
Q122 Sir Robert Smith: What is your view on the real potential of heat pumps in off-grid?
Ron Campbell: I am not a technocrat but I know quite a few. NEA has done a considerable amount of work on examining this particular technology and we certainly wouldn’t like to give the impression-by the way, this is specifically air source heat pumps we are talking about as the viable version of that technology-that this is some kind of technological panacea for fuel poverty, or for any particular energyrelated problem. We do have very strong positive findings from a whole range of evaluation work that has been carried out. The technical people tell me that their findings are, yes, the technology is extremely beneficial in properties with small heat loads. They can achieve low running costs; there can be significant reductions in carbon emissions; installation and maintenance are both straightforward; and of course there are subsidiary benefits because these measures can be implemented in properties that lack access to gas, you don’t need a flue and you don’t need ventilation. So in very general terms, but without an official seal of approval, yes, heat pumps are a strong possibility.
William Baker: As Ron said, it is very dependent on the energy efficiency of your building and the ability to keep the heat in. They only make sense if they are installed alongside some fairly extensive insulation measures. There have been horror stories where they have been installed in leaky buildings and have cost an absolute fortune to run. There have also been problems in terms of people knowing how to control them. They are a very different type of heating system to your standard gas boiler or whatever.
Consumer Focus Scotland is just about to publish some research on heat pumps in housing associations in Scotland. In the initial stages there were a lot of problems, but they have started to redress those now and, providing those caveats are met-it might mean solid wall insulation for instance, and a lot of tenant education about how to use them-they can provide a very effective solution. You have to think, basically, what are the fundamental problems with oil and LPG? They are very expensive fuels and so we had to look at what other potential alternatives there are to oil and LPG in off-grid areas. So heat pumps certainly could potentially be one of those, as could biomass boilers as well. With respect to low income off-grid, it does suggest that you are going to need some form of additional support to make them viable. I think DECC is suggesting that they don’t in fact favour that and we would probably disagree.
Q123 Dan Byles: Just very briefly because I think we all have to get away, don’t we, but anyway I have to go in a few moments. There are currently 1.3 million homes in gas postcodes but not connected. What is the problem? Are they all potentially connectable or are there practical reasons why some of these are not connected?
William Baker: Yes, for instance high rise is a classic example where it would not be realistic. That is what we were able to glean from the English House Condition Survey where it is more difficult, and you can get much better data in Scotland where they actually provide you with exactly what the distance is from the gas network and so on, but certainly a significant number of those could be connected.
Q124 Dan Byles: Do you have a feel for what proportion of those are potentially connectable?
William Baker: No, not at the moment. But what I thought was even more startling was the fact that there are 500,000 households who have a gas supply going to their homes and don’t have gas heating. You would have thought that those are some very easy low hanging fruit that you could-
Q125 Dan Byles: Do you have a feel for why that is and, again, what the problem is there?
William Baker: I think there are certain issues with, for example, private landlords who don’t want to pay the annual gas inspection costs. That could be one factor, and also the expense of putting units in. It would certainly seem if you were able to identify those households-and there is also an issue of finding out where they are-they would be a group that we could do in a fairly quick window.
Q126 Dan Byles: Who pays for a home to be connected to the grid?
William Baker: I think there is a certain formula. It is seen as viable up to a certain amount. I can’t remember the exact amount. Ofgem does have a scheme, through the price control system with the large gas distribution networks, to connect deprived communities, and so on. Part of the way they work is obviously not just connecting to the network, it is also being able to install a heating system and put in energy efficiency measures. So it is basically putting together those packages. For instance, Warm Front was quite an important element of that scheme and the cut to Warm Front does actually undermine that scheme to quite an extent. So that is partly how it is done. In effect, it is the consumer who pays the actual connection costs under that particular scheme but it is only the schemes that are seen as viable anyway.
Q127 Dan Byles: Finally, Consumer Focus has argued for Government-facilitated community partnerships, could you just very briefly because we are short of time-
William Baker: It is just building on what exists at the moment and providing more help with doing the legal and financial aspects. In effect, that is how the Ofgem scheme works and we are just proposing that is built and expanded.
Sir Robert Smith: Thanks very much, and thank you for your evidence. It has been most helpful. We will certainly be pondering what is a very difficult situation for those not on the gas grid.