Electricity and Gas (Internal Markets) Regulations 2011
Lord Dixon-Smith
My Lords, I am grateful to the Minister for his explanation, which means that I now understand a very small part of these regulations a bit better than I did. I found it infinitely depressing when I went to the Printed Paper Office and suddenly found myself presented with 197 pages of regulation and 184 pages of Explanatory Notes. If anybody in this Room is familiar with the content of all of them, I would be very surprised. I do not doubt that there are plenty of people who know how to reference every little last word, but do not think that it is possible for anybody to put their hand on their heart and say that they are familiar with it all.
I am really interested only in part 9. I will admit that I had representations made to me by one of the electricity companies, which was concerned about it for two or three reasons. First, although some might argue that the previous arrangements were a bit cosy, the licensees have to work very closely with Ofgem in forming any regulation. The result is that on the whole there is a great degree of agreement between the two when the regulations come out. Of course, the right to appeal to the Competition Commission is always there in the background.
Part 9 introduces this new body, the European Agency for the Cooperation of Energy Regulators. I really wonder how that was written into the European treaty. I assume that it must be a treaty matter; otherwise, how do we come to have a European body that can tell national Governments what to do? However, the Northern Irish can apparently get away with it, because they are only a devolved authority, but they have the power to say that this provision does not apply to them, as I understand it. The Minister may be able to explain that.
What concerns me is that we still have the appeals process to the Competition Commission, which is fine—but what is the relationship between the commission and ACER? If there is an appeal, which is upheld and is against what might be described as a binding decision of the new regulatory body, what happens? Do we have a power over it? I find a bit of confusion in the first paragraph, where it says why DECC is proposing these regulations, stating:
“The Third Package requires Member States to ensure that national regulatory authorities are able to take autonomous decisions”—
that is fine—
“and implement any binding decisions”.
Okay, but binding decisions are certainly not autonomous. Then we have an appeal mechanism, which can set the whole lot aside. I would be very grateful if the Minister could explain to me rather better how that relationship will actually work in practice. At the moment it looks a bit like a recipe for finishing up in the divorce courts.
Lord Berkeley
My Lords, I apologise to the Committee for not getting here at the start of these proceedings. It is a terrible thing to say, but I went to the wrong room and got lost.
My interest in this issue stems from talking to many ports and airports around the country. I recall having correspondence with Ministers a few years ago on one issue in particular. Ports and airports which already had a network might have tendered out the supply of electricity to get the best deal for their various tenants, but if one tenant decided to go to another supplier then, in order to comply with the directive and the Citiworks judgment, the port could not stop them. This may be fair enough but the port might then be saddled with the very high cost of upgrading its internal electricity network to grid standards. I know that Ministers at the time—I think it was before the election—understood the problem, but it has not gone away. It seems that there is something of a rush about getting this through, which I cannot believe is happening in any other member state. Can the noble Lord tell me whether any other member states are implementing these regulations at the same speed as we are?
The costs of doing this, whether capital cost or anything else, and the pricing methodology for assessing the charges, worry me and this needs further discussion. It is good that, at the seminar on 9 May, Ofgem announced a helpful concession to allow a higher capital cost figure to be taken into account in assessing the charges. However, these additional costs cannot be taken into account in the case of the input of the opt-out on existing bulk purchase contracts, where the local network provider has committed to a minimum threshold. This seems rather unfair. If a port has put in a network and negotiated a bulk electricity deal, then half its tenants decide to go somewhere else—which they can do—it is left holding the baby with quite a big loss. One port told me that if all this went ahead and it was forced to implement it, it could lose in the region of £10 million a year. That seems a very high figure. There is clearly no way to stop this and it is probably right that tenants should be able to choose to buy power where they want. However, the cost of such a change should be borne by the tenant who wants to make the change, rather than by the landlord losing out.
Ports and the port businesses are also being hit by the carbon reduction commitment, which, as we know, is a tax on energy used by businesses. CRC is currently payable in respect of all business electricity users on port estates, even when they are below the minimum usage threshold for paying it. This may encourage more tenants to opt for third-party suppliers, which also puts more pressure on the port. Could the Minister see whether these effects can be mitigated, either through further discussion with Ofgem or further meetings with airports and port operators, to try to redress some of the adverse effects that are perceived at the moment?
Lord Whitty
My Lords, I broadly support the second package and the transposition of it. However, it leaves a few loose ends, and I want to raise three points, one of which relates very much to what my noble friend Lord Berkeley just mentioned: inclusion in the need to provide access for consumers and businesses those who are licensed for local networks.
I am in a dilemma here—no doubt, so are the Government—in that if you are locked into a local network and there is no alternative supplier, choice does not apply. On the other hand, if you open it up to choice, as the noble Lord explained in relation to ports, the economics of the local network change. There is a real problem here. I ask whether that would apply, for example, to a relatively small CHP system on an industrial estate where all the other units on the estate had agreed to sign up and the economics had been worked out on that basis; or indeed a residential district heating system—I am very much in favour of both such developments of localised and decentralised energy. Opening that up to competition or to the secondary user's choice of supplier makes the economics much more difficult. That is a dilemma. Two principles clash here: one of encouraging decentralised energy and the other of consumer choice. Simply including them under the same obligation as the big network suppliers does not resolve that. I am no closer than the regulations—or, probably, the department—to supplying a solution, but it is not supplied by the regulations.
My second point relates to the reference to consumer protection and Consumer Focus. I declare my past allegiance as former chair of Consumer Focus and—although this applies more to my third point—as currently undertaking some work for the Consumer Council for Northern Ireland. The requirement for Consumer Focus in part 2 to provide a consumer checklist is an extension to what is provided in the Consumers, Estate Agents and Redress Act 2007. It is a more prescriptive requirement on Consumer Focus—the National Consumer Council, in legal terms—than exists under that Act. Even in its current form, one could say that it is an incursion on its independence. The organisation already supplies significant guidance and information available to consumers. However, on balance, I do not object to the current setup.
As the Minister will be aware, under the Public Bodies Bill it is intended to move the role of Consumer Focus on energy either to a third-sector organisation, Citizens Advice or—another proposition currently in play—to Which?, which is, for these purposes, a private sector non-profit-making organisation. Is not the requirement for it to do the job in a certain way an even greater imposition on an independent organisation than it is on a quango? Is the Minister clear that such a requirement would survive a transfer of those functions to organisations that have not been in this game before and that have their own charitable and, in the case of Which?, slightly different structure of obligations and priorities?
Clearly, it is a bit of a problem to get the current powers of what was Energywatch and then Consumer Focus into a completely non-governmental organisation in the first place, but the more prescriptive that that becomes the more difficult it is to ensure that the provision in these regulations survives such a transfer.
My final point relates to Northern Ireland, to which the noble Lord, Lord Dixon-Smith, already referred. He seems to think that this lets Northern Ireland and the separate system of regulation off the hook. I am sure that in Northern Ireland he would be relatively happy for that to be the case, but my understanding is that there is concern about this over there because Northern Ireland organisations are not party to the ACER set-up. There can be only one regulator there, and the energy market there is very different to ours. The gas side is on an all-Ireland basis or is pretty much moving towards that. The Irish regulator would be there but not the Northern Ireland regulator. There are different structures of competition and supply. The regulations are not necessarily appropriate to a very different sort of market with a different sort of fuel supply. I should like the situation on Northern Ireland to be clarified—if not today, then at some point in the near future—because there seems to be a bit of a lacuna in the set-up.
Lord Teverson
My Lords, I should like to raise a couple of points—again, primarily on the consumer side, which I suppose is appropriate, given that it is a topical subject in government. I hope that the Official Opposition Front Bench do not take half an hour on the various provisions relating to competition and energy. However, that is entirely up to them.
The only issue that I wanted to raise was that a lot of this relates to competition and openness of markets. I want to understand where the Government are in terms of their recent announcements and the particular Ofgem proposal that 20 per cent of energy production be auctioned, which would at least start to open up the market.
The niche area that interested me is the one that the noble Lord, Lord Whitty, mentioned at some length—the energy consumer checklist. On page 19 of the annexe to the Explanatory Memorandum it is stated that the European legislation,
“Requires Member States to ensure consumers are provided with the Energy Consumer Checklist and that it is made publicly available”.
I understand how that started to work from reading the third column on that page. However, I draw the Minister’s attention to the fact that I tried to find out from a European Commission website and the DECC website what the energy consumer checklist was—particularly as the proposal is to have it printed on all bills. There nothing definitive whatever on the European Commission’s website. It was completely vague and the Commission had obviously decided that this was a good idea, had delegated and had then done not a lot else. On the DECC website there was a copy of a letter from the Directorate-General Energy and Transport to Kim Darroch, the UK’s permanent representative. Some 78 questions were listed on all the things that consumers ought to be able to ask about. My understanding from this—I am sure that the noble Lord, Lord Whitty, already knows the answers, but forgive me if I pursue the issue—is that the National Consumer Council boils those down and makes them work. I am interested in how we make that obligation relate in a useful way to consumers, so that they can actually make real decisions. That is obviously tied up with all the issues around the swapping of accounts and everything else that has been high on the agenda in recent times. However, I should like to understand how the energy consumer checklist will be effective.
Perhaps the Minister can give us an insight into how other European member states are approaching this. I am particularly interested in the auctioning activity and whether the Government feel that other EU member states are starting to move out of the ice age and into global warming in terms of making sure that some of this deregulation and more market competition in terms of unbundling, or whatever, actually happens as regards those other European markets where, historically, we have been well ahead of the rest of the pack.
Baroness Smith of Basildon
My Lords, I agree—perhaps unusually—with the noble Lord, Lord Dixon-Smith. When I first picked up the package of papers I saw that it was, as he said, nearly 200 pages on the order itself, and the Explanatory Memorandum. If we look further to the impact assessment and the implementation and consultation, it is quite a hefty range of documents, and I am not sure that this Committee could do justice to those documents if we stayed here until tomorrow.
It is long, detailed and fairly complex. I am grateful to the Minister for trying to bring some order to it in the comments he made, and I think there is much in here with which we are quite happy. There are some errors and disappointments, and the noble Lord, Lord Berkeley, expressed some concerns, as has the noble Lord, Lord Whitty. I was struck by one comment he made when he said that on licensing the Government felt able to go further than was in the directives, which I understand and am not unhappy about.
However, it seems to me that the area in which the Government might have wanted to go further is consumer protection and the issue around switching and information for customers. I cannot see why, or how, switching can be effective for the consumer or the customer unless they have the information and are able to understand it and make use of it. The noble Lord will recall the noble Baroness, Lady Oppenheim-Barnes, who spoke for many of us last week when her frustrations boiled over into anger as she spoke of her experience in trying to switch energy companies.
Certainly, what is here today can make it easier. But, again, at the summit today at Downing Street, Chris Huhne made a comment about making switching easier. If we are going to put so much emphasis on the ability of the consumer to save money by switching energy companies, there is far more we need to do than what is in singular. Therefore, I welcome it, as far it it goes.
I have some questions that might help me assuage my disappointment and help me understand some of the issues. I am sure the noble Lord shares my disappointment at the response to the consultation from the energy industry. I would have liked it to be a bit more positive.
We have heard comments from the energy industry that it wants to help people reduce their bills, but its response to the consultation was a bit disappointing. On the issue of switching within three weeks—which is exactly the right thing to do in that area—while their IT companies were saying it could be done, the companies themselves were expressing concern and were, I think it is fair to say, less than enthusiastic.
I would like to ask the noble Lord a few questions on consumer protection, as I am not entirely clear about the effects of implementation. Is the three-week period from the end of the cooling-off period for the customer, or from when the customer first signs the documentation required to say that they want to switch? We have had two conflicting responses on that, so it would be helpful if the noble Lord could clarify that.
Also, I noted in the consultation document that the energy companies raised concerns about making it a legal right for customers to expect their supplier to be changed within three weeks. What was the outcome of that? I have been through the Explanatory Memorandum and the order itself. I may be missing something, but if an energy company fails to meet the 21 days for switching the customer, what action can the customer or the regulator take? What are the practical implications of it?
If the only action open to the consumer is to take action against the supplier then the company will have nothing to fear. I am also unsure as to how the customer will know which is at fault: the company they are switching to or the one they are switching from. Could the Minister outline the consequences of a company failing to meet the 21 days, particularly if it is a regular failure, rather than an occasional mistake?
The ability to switch depends on having the time, the capacity, ability and information to do so. The Select Committee in the other place has drawn attention to this issue. I have seen the new regulations and I take the point made by the noble Lord, Lord Teverson, about the checklist. What will be in it and will it be in a format that is clear, understandable and concise? A list of 58 questions and answers will not be satisfactory for any consumer. The Explanatory Memorandum states that the information will be put on the internet. If consumers have to go to the internet and wade through 58 questions and answers, it might be a week or so before they decide that they want to switch. Are the Government satisfied that the information available to the consumer will allow them to make an informed decision about their bills and supplier?
In a recent survey, Which? called the six major energy suppliers 12 times in a week and asked about the cheapest deal for the consumer. In most cases, the energy company got it wrong and failed to offer the cheapest deal. I think that EDF performed best, offering the cheapest deal in five of the 12 calls. One company said that the cheapest tariffs were available only online. Exit fees were not mentioned in a third of all cases. If the energy companies themselves are unable to give to the customer correct and accurate information about the cheapest deal, how can the consumer, who is not an expert, be expected to find them out for themselves?
It would also be helpful if the consumer was advised not to switch on the doorstep. Forty per cent of those who switch as a result of doorstep selling find that they have got not a better deal but something that is worse or no better than they have already. I would like energy companies to offer every customer the best deal available—I have never understood why there are so many different tariffs anyway.
Annex 1 to the Explanatory Memorandum outlines directive 2—the electricity directive. I am not sure why directive 1 is not there. It sets out the articles of the directive and what has to be done to comply with them. Why under Article 3(7), which requires member states to introduce a number of measures to protect vulnerable customers, is Warm Front listed as something that the Government are doing, when that programme is being phased out, indeed abolished? I am unclear why that is still in the transposition notes on action being taken by the Government. It seems unusual to refer to something that is being phased out. I appreciate that, when the consultation was undertaken, there was no intention on the part of the previous Government to get rid of Warm Front, but now that it has gone, I do not understand why it is still in the document. Since that programme is being phased out, do we have to go back to the EU and say what else we are doing?
The document also mentions the Green Deal as helping vulnerable customers. It does not say that it is a very limited measure that does not help those in the private rented sector as Warm Front did. There is a gap, because that help will take some time to come in. Can the Minister explain why that information is being given?
A further issue brings us back to Consumer Focus. Consumer Focus is going; the Government are getting rid of it. The legislation, the Explanatory Memorandum and the accompanying documents refer to the successor body. Which successor body will that be? Will it be Citizens Advice, which was mentioned during the passage of the Public Bodies Bill, or will responsibility come back to the department? I am not clear who will undertake that role and what funding will be available to ensure that it is properly undertaken.
The Minister mentioned networks, access and storage facilities. All those are referred to in the impact assessment as ensuring greater competition and falling bills. Does the Minister understand a slight scepticism being felt about that? Very few customers see their bills coming down; they may see a smaller increase. Can he give us more information on how this will impact on the consumer and assure us that the cost savings will return to the customer and not just mean larger profits for the energy companies?
The final part is on the regulatory framework. There has been a reprieve for Ofgem in the Public Bodies Bill. Is the Minister satisfied that it has the resources to undertake the additional regulatory functions it is taking on? I endorse the comments made by my noble friends, Lord Berkeley and Lord Whitty. The local estate heating system is a bit of a minefield. There are estates in my former constituency where people feel their bills are too high and want the opportunity to switch companies, but this would have the effect of increasing bills for others. This is a dilemma and more work is required.
In relation to the comments made by the noble Lord, Lord Berkeley, the impact assessment does not refer to the impact this would have on airports or ports. It talked instead about the costs to Ofgem. If there are associated costs that are not referred to in the impact assessment, or that I have missed, then there is an issue. We need to find a way of not imposing costs that would make businesses unprofitable and put them in jeopardy, particularly in times of recession. The impact assessment states that further legislation would be required. Does that mean we will have another opportunity to look at this before it is implemented? I hope that the Minister can address some of the points and concerns that have been raised.
Lord Marland
My Lords, it is, as always, a great opportunity to look at the contents of the Bill. I am afraid that I agree with the noble Lord, Lord Dixon-Smith, about its size. Let us not forget that this regulation was agreed by the previous Government in 2009, at a negotiation in Europe. So I share the noble Lord’s complaint: I have inherited this vast document of noble exchanges at a very high level—beyond my pay grade—in Europe. The net result is that we have a broad regulation which we have attempted to modify and improve, taking on board what a number of noble Lords have said. We have largely accepted everything that is here, because it has been imposed upon us by the EU, through previous negotiation. We have taken four issues which we have tried to mitigate and improve on. Those are: loosening the private network owners’ situation—about which the noble Lord, Lord Berkeley, is concerned—small generation interests, gas storage, which we have tried to find a more transparent way of managing, and switching licences. These are four areas which we, as a department, have decided it would not be in the best interests of the consumer to adopt wholeheartedly.
It comes as no surprise that the noble Lord, Lord Dixon-Smith, has heard from one or two of the major energy companies, because they, quite naturally, do not like everything that is going on. We in Government—and I think that we would all in this Room agree about this—want, largely, to protect the consumer, not the provider. It therefore comes as no huge surprise that, in this particular instance, one or two of the companies are disappointed. That does not mean that we do not have to work with these big six, because they are fundamental to delivering supply and we must congratulate them on much of their work.
The noble Lord asked me a specific question in relation to ACER. The point about ACER is that it deals with cross-border issues, whereas Ofgem deals with issues in relation to the UK. ACER has, of course, a broader remit than Ofgem. My noble friend, Lord Teverson, asked about the views of the other European states. I am afraid that is way above my pay grade. Who would be able to navigate the minefield of the views of some of the European states? My concern is what goes on in this country and I know that is his primary concern despite his great knowledge of Europe.
Baroness Smith of Basildon
That is really helpful, but just for clarification could he tell me how that would fall into place and whether it would be the consumer who had to take action to ensure that happened, or whether it would be a matter for the regulator to deal with?
Lord Marland
I guess that it would be both, because the consumer will apply to the regulator, which would be the normal way for the regulator to impose that on the supplier.
I dealt with the question on checklists. Warm Front still exists, of course, and will do so for another year, so it is reasonable to use it. Of course, we brought in a whole load of other measures, which the noble Baroness knows. For the sake of clarity, from December 2011, 4 million of the most vulnerable energy customers in Britain will receive letters to tell them that they are eligible for free or heavily discounted insulation of their loft or cavity walls, which is the Green Deal that we were talking about earlier.
Lord Marland
Yes, they will get the ECO through the Green Deal. A whole amount of measures was issued at the energy summit today, with which I will be very happy to furnish the noble Baroness. As for the issue of PRS and Green Deal, I think that we have debated that quite extensively and I really do not want to go over the old ground. We share a significant problem and concern, and in the end I think that we were all singing off the same hymn sheet in that debate.
Lastly, on the question of whether Ofgem has the right resources, it is important that it has. It has a task to manage this enormous amount of legislation in front of us, and we will watch very carefully to ensure that it is up to the task. The noble Baroness was quite right to raise that issue now, because it is important that customers at all levels are protected. I believe that the legislation goes a long way to doing that. As I said earlier, it is legislation that we have inherited, but there is a lot of good stuff in it. Would we have done everything to the letter of the word? Perhaps not. Are you pleased with everything that we have done to the letter of the word? Perhaps not. But it is legislation, and good legislation with the consumer in mind, and I think that we would all applaud that.
Lord Berkeley
I am very grateful to the noble Lord for the answers that he gave me on ports, airports and the bulk tariffs. My question applies equally to some of the examples from my noble friend Lord Whitty on the bulk suppliers of power to tenants, as we could call them, who opt to go to another supplier. As a result, the bulk supplier may lose the level of discount that he would have got if he had been selling to the whole lot. My impression from the Minister’s answer was: “Well, tough on the bulk supplier”. It could be a not-for-profit organisation; it does not have to be a commercial port. Is my interpretation of that correct and, if so, is there anything that Ofgem could do to mitigate the effect with a little bit more discussion? I would be grateful for his response.
Lord Marland
I am concerned to give the right answer about not-for-profit organisations, so I shall write to the noble Lord on that rather than ask him to whisper more in my ear. I do not know the answer, and it is an important question.
I should clarify one point about the switch to Citizens Advice. The detail is being worked out and no decision has therefore been made, but that is the likely intention of the transfer. With that in mind, I commend the regulations to the Committee.