Domestic Gas and Electricity (Tariff Cap) Bill

Report stage (Hansard): House of Lords
Wednesday 27th June 2018 Lords Chamber

Report

16:34

Clause 1: Cap on standard variable and default rates

Amendments 1 and 2 not moved.

Amendment 3

Moved by

[Lord Mackay of Clashfern]

3: Clause 1, page 2, line 20, at end insert—
“(8) Subject to subsections (9) to (12), sections 11C to 11H of the Electricity Act 1989 and sections 23B to 23G of the Gas Act 1986 apply to modifications of the standard supply licence conditions made under this section.(9) Any appeal against modifications to the standard supply licence conditions made pursuant to this section—(a) may not challenge the decision to impose a price control in principle; but(b) subject to paragraph (a), may relate to—(i) the principles applied in setting the tariff cap conditions in question,(ii) the methods applied or calculations used or data used in setting the tariff cap conditions, or (iii) what the provisions contained in the tariff cap conditions should or should not be (including at what level the tariff cap control should or should not be set).(10) The decision of the Authority to modify the standard supply licence conditions to include tariff cap conditions is to have full effect pending the determination by the Competition and Markets Authority (CMA) of any appeal.(11) Paragraph 2 of Schedule 5A to the Electricity Act 1989 and paragraph 2 of Schedule 4A to the Gas Act 1986 do not apply to modifications of the standard supply licence conditions made under this section.(12) Notwithstanding section 11G(1) of the Electricity Act 1989 and section 23F(1) of the Gas Act 1986, the CMA must determine an appeal against modifications of the standard supply licence conditions made under this section within the period of 4 months beginning with the day on which it accepts the appeal.”

[Lord Mackay of Clashfern (Con)]

My Lords, we considered this amendment in Committee. My noble friend Lord Hunt of Wirral will be here in a moment, I think, but the noble Lord, Lord Carlile of Berriew, has let me know that he cannot be here because he is appearing in court in Birmingham. He thinks it is probably his last appearance in court, so it is an occasion for congratulating him on a long life of very great success in the courts.

I move this amendment, which is, as I say, the same as was moved at the previous stage. I want, first, to deal with a technical matter that my noble friend raised when he said that we needed 11 or so new clauses in the Bill. My understanding is that the cap will apply to electricity and gas and therefore that it is right that the electricity appeal provisions and gas appeal provisions are referred to and incorporated in relation to this matter in the Bill and that the appropriate procedures will apply in relation to that.

Your Lordships will recall the argument that I presented along with my colleagues last time on the relative suitability of the two possibilities for appeal against the decision of the authority to put the cap at a certain level. We were very much of the view that the technical nature of the appeal was such that it would be much better as an appeal to the CMA rather than a judicial review. One reason for that was that we were able in the amendment to control the form and timing of that appeal in a way that you cannot do for judicial review, at least not very easily—and some would say not at all. At any rate, it is much easier to do it through the CMA.

We dealt with all the main objections that the Government had to the CMA appeals. However, my noble friend undertook to write to the CMA to see what it thought about this. I am not absolutely clear to what extent the CMA considered our amendment in detail, but it returned a pretty negative answer to the question of whether it would be appropriate for it. It thought that, on the whole, judicial review was more appropriate. The motivation is not entirely clear to me; the letter is not one of the most lucid that I have ever read, but the decision that the CMA has taken is lucid enough: it does not want anything to do with this particular process, if at all possible.

In that situation, my colleagues and I had a meeting with the Minister—my noble friend Lord Henley—and the Minister in charge of this Bill in the House of Commons. We had a very full meeting and they have persuaded me that the chances of this amendment being accepted by the House of Commons are such that we should not press it here, because it would just be a waste of time to press it here if we were sure that it would come back. All that would happen is that we waste time and money. We have therefore decided together that we will not press this amendment to a Division.

However, we emphasise that, although we have departed from our suggestion for a CMA appeal, there is still the possibility of judicial review, which is particularly important with regard to the procedures that are used. It is therefore very important that the authority, in conducting the consultation and the decision-making with regard to its task, does so in a procedure which properly takes account of the various matters that are put to it. Therefore, although we are sorry that the CMA appeal is not to go ahead, we believe that an effective appeal on matters that are important exists in the shape of judicial review. I beg to move the amendment and, as I say, I will withdraw it in due course.

Amendment 4 (to Amendment 3) not moved.

[Lord Stevenson of Balmacara (Lab)]

My Lords, I will briefly address the substantive motion and explain why we are not moving Amendment 4. It is not from any wish to exculpate us from the needs that should apply to bodies which represent consumers in relation to appeals; it is simply that, given the news that the noble and learned Lord wishes to withdraw his amendment, there seems little point in moving an amendment that will have to be withdrawn in turn.

I congratulate the noble and learned Lord again on introducing his amendment with considerable skill and clarity. He made his case comprehensively. Like him, I am completely bemused by the Government’s response to this, which seems to be more to do with protecting Ofgem than with the merits of the case he made. We are in a situation where the only appeal that will be available in this area is JR. We understand the defects in that and we think that it is probably wrong, not just because of the case that was well made by the noble and learned Lord but because it is an open invitation to seeing a greater amount of judge-made law rather than statutory law, which is a wrong thing. Nevertheless, we respect the decisions being taken by the movers of the amendment, and look forward to hearing a response from the Government.

[Lord Mackay of Clashfern]

My Lords—

[The Parliamentary Under-Secretary of State, Department for Business, Energy and Industrial Strategy (Lord Henley) (Con)]

I think my noble and learned friend would like me at least to respond before he seeks to withdraw his amendment. I echo his congratulations to the noble Lord, Lord Carlile, on his last appearance in the courts after many years. I hope that as a result we will see him in this House—but perhaps speaking to amendments where he might want to support the Government.

I hope that I can set out the Government’s arguments in responding to my noble and learned friend and that in doing so it will be useful to the House to get our views on the record. As we discussed in Committee, Amendment 3 would insert a right of appeal regarding the price cap to the Competition and Markets Authority. As I said in Committee, we believe—as did the BEIS Select Committee when it looked at this, and others—that judicial review provides a sufficient means of challenge to ensure the provision of a fair and public hearing within a reasonable time by an independent and impartial body established by law. As I understand it, the belief is that the decision of Ofgem when it puts the cap in place should be reviewed by another body of experts—specifically the CMA—because Ofgem could get something wrong.

As my noble and learned friend made clear, in Committee I undertook to write to the CMA to seek its views on his amendment. I felt that it would be prudent to see what the CMA had to say about creating what would be a new right of appeal to that body relating to a decision taken in exercise of Ofgem’s powers under the Bill.

The CMA’s chief executive has been kind enough to respond with a letter, which I have already shared with some noble Lords, and I would be more than happy to make it available to your Lordships more widely if necessary. The letter makes three things clear. First, the CMA shares the Government’s view that judicial review is an appropriate means of holding Ofgem to account and providing parties with a right to challenge. Secondly, the CMA shares the Government’s view that judicial review is the appropriate means of holding Ofgem to account and providing parties with a right to challenge. Thirdly, the CMA makes it clear that it does not consider itself best placed to conduct such a review and questions whether doing so would benefit consumers.

16:45

I have the greatest respect for the views expressed by my noble and learned friend and note that on the first point—that judicial review is an appropriate route of challenge in this context—there is no argument between us. However, where we differ is on the second point: whether judicial review is the appropriate route of challenge. The Government’s view, shared by the CMA, is that judicial review is the most appropriate form of judicial scrutiny in these circumstances. The price cap under the Bill is not the same as the existing long-term price controls, to which it is often compared. The price cap will be a temporary measure that stems from a government decision—a manifesto commitment —and not from the regulator’s assessment. That is what distinguishes it from the price controls on regulated monopolies.

That subtlety is highlighted by the CMA when it says that the price cap Bill reflects,

“a policy intervention by the Government … to protect consumers, where there is no statutory or regulatory monopoly, and where the decision does not result directly from a market power assessment”.

The CMA notes that,

“this distinguishes the Price Cap Bill from the existing price control regimes where the CMA is the appeal body”.

As such, this price cap is very similar to the Government’s intervention via the FCA in the payday loan market, which does not provide for an appeal to the CMA. My noble and learned friend’s amendment would therefore make this price cap the exception, not the rule. Following on from that point, the CMA’s letter makes it clear that, as a government intervention, it would be inappropriate for the CMA to reassess any issues already considered by the Government in developing the price cap policy.

Let us not forget that many of the key issues to which Ofgem should have regard under Clause 1(6) have already been reviewed and approved both here and in another place. Ultimately, it will be for Ofgem to consider those factors, bringing to bear the full weight of its experience as the regulator in this field. The courts will be able to assess whether Ofgem has got it so seriously wrong that it should reconsider its decision. It would not be right for the CMA to be introduced into the process to second-guess or fine-tune Ofgem’s decision. That, ultimately, is what the suppliers who strongly advocate this approach would want. I cannot imagine that the suppliers who support the approach set out in the amendment would advocate that if they thought it would make it more difficult for them to challenge Ofgem’s decision.

The Government note that Ofgem has a complaints procedure in place for suppliers to make representations to the regulator to address concerns or errors. The regulator, in turn, has the powers under the Bill to change the licence conditions, should such change be necessary. All this may take place without recourse to legal means.

The third point in the CMA’s letter concerns the expertise of the CMA. The letter states:

“While … the CMA agrees that the Judicial Review route is the most appropriate form of judicial scrutiny for any interim price cap decisions made by Ofgem, it does not consider itself to be any better placed than the courts or specialist tribunals to conduct such a judicial review”.

The letter goes on to declare:

“The CMA does not consider that a review role for it in this regard would benefit energy consumers”.

Although presented with a series of complex legal issues—on which, I am sure your Lordships are not surprised to hear, there is obviously room for lawyers to disagree—this boils down to a relatively straightforward question of policy: what is the preferred standard of review and who should conduct that review? I have made clear the Government’s position, with which the CMA agrees.

I am grateful to my noble and learned friend for moving the amendment—on which we have had useful discussions—and to the CMA for writing in response to my request and making its views clear. My noble and learned friend brought forward his amendment to hear again for the record what the Government’s position was, and I am grateful to him for making it clear that he does not intend to press it.

[Lord Mackay of Clashfern]

My Lords, I wish to withdraw my amendment.

Amendment 3 withdrawn.

Clause 2: Tariff cap conditions

Amendments 5 and 6 not moved.

Clause 7: Review of competition for domestic supply contracts

Amendment 7

Moved by

[Baroness Neville-Rolfe]

7: Clause 7, page 5, line 3, leave out paragraphs (b) and (c)

[Baroness Neville-Rolfe (Con)]

My Lords, our concern is to ensure as far as possible that the cap ends in 2020. Many people are unconvinced of the value of price caps, which are against most economic theory and can have unintended consequences. There is also a strong consensus that the cap should be temporary, as we discussed in Committee and as the Energy Minister, Claire Perry, noted in the Commons. Moreover, a price cap where the case is strongest already exists. This covers prepayment meters in 4 million house- holds and 1 million vulnerable consumers following action by Ofgem. This in turn followed recommendations by the CMA, which did not favour an overall price cap.

A number of us are also concerned that the tariff cap could have an adverse effect on competition. Its existence might prevent or deter Ofgem or the Secretary of State from finding that the conditions for effective competition are in place and so the cap would have to be extended in 2020, frustrating the purpose of the discretion in the Bill. BEIS officials have helpfully suggested that this is not a risk. They know that the cap might in practice damage competition and say that the judgment to be made is that the Secretary of State considers that the conditions are in place for effective competition for domestic supply contracts—not that effective competition is in place.

Has the Minister been able to think further about these matters and how to respond to my amendment, which I am retabling following the helpful discussion in Committee and his helpful comments about the direction of travel on the cap? Can he agree that the cap will end in 2020, all being well; and, given the concerns expressed by many distinguished industry experts, which I have sought to summarise, can he also confirm on the parliamentary record the BEIS interpretation of the conditions for any extension? I beg to move.

[Baroness Featherstone (LD)]

My Lords, I support the amendment, to which I have added my name. The first basis on which I do so is that, like the noble Baroness, Lady Neville-Rolfe, I regard the cap as an unfortunate necessity. The ambition and the emphasis must be to end the cap as soon as possible. Therefore we need to focus minds on the creation of that effective marketplace.

[Baroness Vere of Norbiton (Con)]

My Lords, the amendments in this group tabled by my noble friend Lady Neville-Rolfe would ensure that the price cap comes to an end in 2020 with no provision to extend it. The Bill allows a temporary and targeted price cap on poor value, standard variable and default tariffs. Fixed tariffs that are not default tariffs will not be affected by the cap as these are where the most competitive rates can be found. The price cap is only necessary to protect consumers on poor value tariffs until the conditions for effective competition are in place.

The Bill has a sunset clause at 2023 and the cap would fall at the end of 2020 if, at that point, the conditions for effective competition are in place; I think that my noble friend wanted a response on that issue. The Bill is constructed in this way because the Government do not want an open-ended intervention, which would not be good for competition and, therefore, consumers.

At this point, I want to address the communication received by many noble Lords about the way the Bill is drafted, potentially preventing the cap from being removed, as the cap itself may have an impact on competition. That point was not lost on the Government when the Bill was drafted, which is why the judgment on removing the price cap, as set out in Clause 7(5), depends on whether,

“the Secretary of State considers that conditions are in place for effective competition for domestic supply contracts”.

In its recent consultation, Ofgem stated:

“We interpret ‘conditions for effective competition’ as meaning that the right market framework is in place for competition to be effective for currently disengaged consumers once the cap is removed”.


In assessing whether the conditions for competition are in place, Ofgem said that it would expect to analyse both the demand side and the supply side of the market, consider whether the market structure will promote good outcomes for disengaged consumers and consider whether there are remaining barriers to engagement. It refers to market conditions, not current market outcomes, for example on the rate of switching.

Coming back to the amendment, it is clear that the Government want the cap to be in place for as short a time as necessary. Ofgem will report on the conditions for effective competition and make a recommendation. Ofgem’s recent consultation points towards a number of factors that might indicate that the conditions for effective competition are in place. On the supply side, these include more innovative business models and the rollout of smart meters. On the demand side, they include making it easier for customers to share their data securely with third parties—meaning that they do not have to look up and enter lots of data on websites when they want to switch—and promoting engagement to help customers identify the best deal. These measures will need time to be established but it is right that we ensure protections are in place until the conditions for effective competition are in place. That is why the Bill enables the price cap to be extended, one year at a time, up to the end of 2023 at the latest.

I am grateful to my noble friend for her amendments. I can confirm that, all being well, the price cap will fall away in 2020—but as we have noted, if all is not well, it will not. With that, I hope that my noble friend is assured and will withdraw her amendment.

[Lord Mackay of Clashfern]

It seems that the Secretary of State has to make a decision before the end of 2019, in respect of 2020. At that stage, it must be assumed that the price cap will not continue because, unless the Secretary of State continues it, it will stop at the end of that year. There is an extra argument, as it were, to the argument about the cap stopping then: the cap will not be in contemplation in examination of the situation because we will have to assume that it has stopped. Therefore, any effect that it has on reducing competition is out of the equation at that juncture. I hope that noble Lords follow me.

[Baroness Vere of Norbiton]

My Lords, I was doing really well until the last sentence. I tried to follow my noble and learned friend. Of course, there will be a period leading up to the point at which the Secretary of State has to make the decision on whether to keep the cap. At that time, he will look at the information that is available to him and make a judgment on whether the conditions for effective competition are in place.

[Baroness Neville-Rolfe]

My Lords, I thank my noble friend for her full and helpful answer. I was very clear when she sought to sit down that all was well. I will need to read my noble and learned friend Lord Mackay’s intervention before we come back at Third Reading. My expectation is that we can find a way through this to meet my concern that, conditions permitting, the cap can end in 2020, and to meet the concerns that have been expressed by a number of learned experts from the industry on the correct discretion on the extension of the cap. I beg leave to withdraw my amendment.

Amendment 7 withdrawn.

Amendment 8 not moved.

Clause 8: Extension and termination of tariff cap conditions

Amendments 9 and 10 not moved.

17:00

Amendment 11

Moved by

[Lord Grantchester]

11: After Clause 8, insert the following new Clause—
“Ongoing relative tariff differential
(1) The Authority must, during the term of the tariff cap conditions being in place, develop, ready for implementation, a relative tariff differential.(2) A relative tariff differential is a requirement on supply licence holders that the difference between the cheapest advertised rate and the most expensive standard variable or default rate shall be no more than a specified proportion of the cheapest advertised rate.(3) The Authority is responsible for setting the proportion referred to in subsection (2). (4) The relative tariff differential takes effect on the termination of the tariff cap conditions.”

[Lord Grantchester (Lab)]

My Lords, Amendment 11was previously moved in Committee. It may be the last but it is certainly not the least of those being debated today. Perhaps it is the most crucial, because it proposes an on-going condition in the energy market that the electricity and gas suppliers will always operate fairly and proportionately between customers and tariffs.

Labour is in favour of the Bill. The energy market has been broken for some time. My right honourable friend in the other place, Ed Miliband, first proposed that price caps should be in place to protect consumers from excessive gas and electricity prices. Customers have been paying on average up to £300 more than they would have paid if the market operated more competitively. The excess weighs more heavily on more vulnerable households—those less able to bear it.

While it is flattering to see our policies recognised and implemented by the Government, they have to be implemented right, and preferably right first time. While accepting and applauding what the Bill achieves, it is nevertheless not quite there. It does not tackle the scourge of “tease and squeeze” by the utility companies. This amendment calls out the behaviour of energy suppliers where they tease customers to nominate a cheaper, more attractive tariff in the first instance, only to move them slowly over time to a higher tariff when the customer will be squeezed again.

This feature of the market has been operating for some time. The effect is that those customers who do not ceaselessly monitor and challenge what is happening, once again move back to being in a more disadvantaged position vis-à-vis the more nimble and fleet of hand and foot customers. Those whom the Government call disengaged are protected by the price cap mechanism on the standard variable tariff and default tariffs of the Bill, while it is in operation. Once these mechanisms are withdrawn, ultimately no later than 2023, this protection will fall away. The loyalty penalty is a self-perpetuating dynamic of the market. This is perverse.

The Bill is only a short-term measure. It professes that whatever happens, however competitive the market may or may not be, the price cap will cease in 2023. Clause 8 provides for this to happen at an even earlier date should the Secretary of State be advised that effective competition has returned to the market. However, the default mechanism of 2023 does not mean that competitive conditions will be operating at that date. Indeed, under amendments proposed by the noble Baroness, Lady Neville-Rolfe, the default date would be sooner.

It would be risky and optimistic to expect competition to return. We do not know whether the Bill will be enough. Notwithstanding that, Labour wants to outlaw tease and squeeze from the market, which could generate a more competitive market altogether hereafter. Under Ofgem’s determination of a relative tariff cap operating in relation to the lowest price tariff, this behaviour can be removed from the market.

This measure does not indicate that Ofgem must look both ways. By this I mean it cannot be claimed, if it is determined that the market is operating competitively and therefore that the cap may be removed in 2020, 2021 or 2022, that the amendment is contradictory—that the market is operating competitively. There is no contradiction as the competitive market would be operating within a relative price differential: the more competitive, the narrower the differential would be. It would be up to Ofgem to determine that differential.

The market could look very different by 2023. The House has just passed the Smart Meters Act, in which the Government gave strong assurances that the UK’s infrastructure will have been transformed by that date. The Government are on notice to make those changes. Here, we have the means to outlaw tease and squeeze for all time without the need for new legislation at some later date. It is a priority now and we cannot be sure that it will remain a priority under whatever market conditions might pertain at a later date, or even should the market move away again and back towards a less competitive environment where this kind of behaviour thrives. Not only must it be clarified that Ofgem will have the power through the amendment; Ofgem must act to underline that tease and squeeze behaviour will not be tolerated. It is an open goal for the Government to score. I beg to move.

[Lord Redesdale (LD)]

My Lords, while I understand where the amendment is coming from, it is not one I can support. The problem is that while we are asking the authority, Ofgem, to set a maximum price, we are now also specifying that there must be a minimum price. It would then be almost impossible for the authority to have a competitive marketplace to operate with.

The second problem inherent in this—a problem with the whole Bill—is that, while I understand the problems the bigger companies have because they do not have some of the obligations of the small companies, it will be an issue for Ofgem to try to work out where the cap will be in the first place. That will cause problems. We are also in a period where wholesale prices are rising. Therefore, there might be a slight problem if the companies, for different financial reasons, have to raise their prices. Would Ofgem then have to set a date at which all the companies raise their prices at the same time so that they do not break the cap? At that date, would it also then say that the minimum price has to be raised at the same rate?

I understand the idea that vulnerable customers should be protected. However, we are ending up with a marketplace in which there will be one default tariff that every single supplier will have to put forward. If there is a vote, I will vote against this, which is very much against my views—obviously my Front Bench will have a different view on this. This, however, is an area where what we want to happen and the reality on the ground vary substantially.

I should also declare an interest as the CEO of the Energy Managers Association. We represent all energy managers. It is rather unfortunate that while we are looking to protect vulnerable customers, we are not doing the same to protect SMEs and micro-businesses. There is an enormous amount of bad practice in the industry, with TPIs that have no code of practice, and Ofgem failing to enforce or even to have the power to protect SMEs in this marketplace. We are looking at protecting one sector of the marketplace while non-domestic customers will be hammered under bad practice. I raise this as this is the tail end of the Bill, although I spoke at Second Reading. I hope the Government can bring forward a Bill further down the line to regulate the whole third party, intermediary and energy broker marketplace for the non-domestic, but obviously it might be beyond the Minister’s ability to bring that forward.

[Baroness Kennedy of Cradley (Lab)]

My Lords, I wish to speak in favour of Amendment 11, in the name of my noble friend Lord Grantchester. Millions of people who stay with the same energy supplier are being overcharged, ripped off and paying hundreds of pounds more for the same gas and electricity because they are cross-subsidising deals for new customers. There are recent examples of companies charging new customers as little as £800 a year and existing customers more than £1,200 for exactly the same product. In this way, the energy market is not harnessing competition to bring about low prices for all customers, because suppliers are able to exploit and overcharge their existing customer base to subsidise time-limited, often loss-leading, tariffs designed to scoop up new customers. This “tease and squeeze” behaviour is becoming the standard business model for some energy companies and it means that the most reliable customers face a hefty loyalty penalty.

While the Bill marks an important first step in protecting customers from the worst excesses of this failing market, it is clear that political consensus is emerging that, until the cause of this detriment is addressed, it will be only a sticking plaster. It is also clear that there is growing support for a relative price cap as the only way truly to reform the market and harness competition to the benefit, and not the detriment, of customers. Indeed, the tease and squeeze dynamic will become only more pressing as society becomes more digital and customers more distant from the point of sale in consumer markets. As well as accepting this amendment, I ask the Government to meet those experts calling for a relative price cap to find a way truly to address the tease and squeeze dynamic in energy and build a regulatory structure that will be fit for purpose for all consumer markets.

It would be a wasted opportunity to allow this legislation to pass without also addressing the cause of the loyalty penalty, which is why I support Amendment 11, to bring in a relative price cap. Such a cap would force energy companies to link their teaser rates to their underlying default tariff. The Government’s solution is to encourage switching, but if 100% of customers switched every year, administration costs would go up and undoubtedly be passed on to the customer. Where is the incentive for companies to build quality relationships with their customers when they know that they will leave them in 12 months’ time?

In well-functioning consumer markets, such as groceries, loyal customers get low prices even when they do not switch, because new customers are offered the same price as loyal ones. Switching may have increased, but a recent YouGov poll found that 33% of people did not feel that they knew enough to select the right tariff or supplier for them. Data from the energy regulator, Ofgem, reveal that an even higher percentage of people, 42%, are not confident comparing the different energy deals available.

Only a relative price cap will bring an end to exploitative overcharging once and for all. It will give customers the choice to stay where they are without fear of being exploited and remove the need to hunt every year for a fair price. Introducing a fairness mechanism into the UK energy market is long overdue and will benefit everyone, from those who buy energy to the suppliers who are forced to improve efficiencies to compete. A relative price cap is a good idea for everyone. I hope that the Government will support the amendment and agree to meet those in the energy market who are confident about the benefits to consumers of a relative price cap.

17:15

[Lord Hunt of Wirral (Con)]

My Lords, I listened with great care to the noble Lord, Lord Grantchester, but I have to tell him that I do not think that this amendment makes sense. I very much agree with the noble Lord, Lord Redesdale.

The noble Lord, Lord Grantchester, stressed the importance of getting this right. It takes me back to our earlier debates on the Bill. Noble Lords will be aware that I have broad concern that the Government, in partnership with Ofgem, are facilitating a major regulatory intervention into the energy market without proportionate oversight. I have on several occasions during the proceedings of the Bill drawn attention to the absence of any mechanism whereby the CMA can adjudicate on whether, in the words of the noble Lord, Lord Grantchester, a cap is placed in the right place. I remind noble Lords that the CMA is there for a clear purpose. The Government set this out in the consumer markets Green Paper, saying:

“We have an independent expert competition body, the Competition and Markets Authority … to promote competition in the interests of consumers and business across the economy”.


We all agree with that, but where is the role of the CMA in adjudicating on this cap, however long it lasts? There are huge dangers in setting off in the wrong direction. Noble Lords may say that Ofgem does get it right. However, we have already seen examples whereby the CMA has had to roll back poor regulation around the retail market review; it had to deliver £105 million back to consumers through their scrutiny of network pricing. That is just one example of why we need the CMA.

Once again, my noble and learned friend Lord Mackay of Clashfern—I put my name to the amendment to which he spoke earlier—had it absolutely right about how important it is for technical experts to scrutinise this cap. I have reservations about having a cap in the first place, but what I am sure about is that it has to be right. I am much more concerned about the start of this process than about looking forward, as the noble Lord, Lord Grantchester, is doing, to what will happen further down the line. It will be a huge tragedy for consumers if the cap is put in the wrong place. The situation is fraught with extensive difficulties and dangers.

Although I can understand why the noble Lord has proposed the amendment and why the noble Baroness, Lady Kennedy, said what she did, it does not make sense, particularly if the whole technical process has not been managed properly, with adequate control mechanisms and oversight scrutiny. Therefore, I will vote against the amendment.

[Lord Teverson (LD)]

My Lords, it seems to me that the noble Lord, Lord Hunt of Wirral, should have voted against the Bill at Second Reading because he clearly does not believe in it. I have my own reservations about how this absolute price cap will work, but the relative price cap proposed in the amendment is a much better way of doing things. Ofgem will not have to set a cap under that regime; the companies themselves will set the cap by their entry rate. That is why this system works.

The only reason I disagree with the amendment, although I support it because it would make the Bill much better than it would be otherwise, is because we should have a relative cap immediately and not worry so much about the absolute cap. In fact, we could have both at the same time. At least the amendment would introduce a relative cap. As the noble Baroness, Lady Kennedy, has said, it would remove the “tease and squeeze” factor, which is one of the worst aspects of the energy market and price comparison sites. We would achieve our long-term aim of having rates that reflect market conditions, leading to competition on an even playing field that people can understand. It seems to me that the relative price cap is hugely superior to the absolute price cap that Ofgem is being asked to implement.

I support this amendment. I just wish that the relative price cap could be brought forward to now rather than after the present price cap ends, but this is a way for the future and the right approach. All Ofgem has to decide is what the maximum differential should be, and then the energy companies would decide their own cap. What could be better? I cannot understand any argument against a relative price cap. It just makes so much sense.

[Lord Henley]

My Lords, the noble Lord, Lord Grantchester, has put forward his amendment and it is quite obvious that he is in favour of it. I have to warn him that if he is intending to press this amendment to a vote, it would possibly create further delay and uncertainty and, whatever anyone’s views on the Bill, we on these Benches and noble Lords opposite feel that it is important to get it on the statute book as quickly as possible so that those whose duty is to do so can get on with finding the appropriate cap and get it in place before the cold weather arrives. It might be that in this wonderful spell the noble Lord has forgotten what cold weather is, and I will remind him of that come November. We want Ofgem and others to be able to get on with their work, and any delay which this amendment might create would be unfortunate.

I am grateful to hear from various elements on the Liberal Democrat Back Benches. I do not know what the official view of the Liberal Party is, but I am grateful to the noble Lord, Lord Redesdale, who gave very concise and encouraging reasons why this amendment ought to be opposed and emphasised that the situation is changing and we are facing a time when wholesale prices might rise. We also had an intervention from the noble Lord, Lord Teverson. I normally find the noble Lord a breath of clarity, but if I wrote his remarks down correctly, I think he said that he disagrees with the amendment but supports it and went on to say that he agrees with it—anyway, I was confused by his lines.

[Baroness Featherstone]

For the avoidance of doubt, the party’s position is to support the amendment.

[Lord Henley]

I am grateful to the noble Baroness, Lady Featherstone, for giving that clear and concise explanation of why the Liberal Democrats will support the amendment. I am also grateful that the noble Lord, Lord Redesdale, is prepared to stand up against the might of his party whips and explain why he thinks it is not such a good idea. I am also grateful to the noble Baroness, Lady Kennedy of Cradley, for her remarks. I agree.

[Lord Redesdale]

I am grateful to my noble kinsman— I always like saying that; it is so rare to be able to say that in this House now. For the avoidance of doubt, I do not support this Bill in any shape or form. I think it is a very bad piece of legislation. However, I think this amendment might make a very bad piece of legislation somewhat unworkable.

[Lord Henley]

I thank my noble kinsman for that explanation, and make it quite clear that I am sure the reason for his support is nothing to do with the fact that we happen to be related, but he does bring a breath of fresh air to his Benches.

Turning to the remarks of the noble Baroness, Lady Kennedy of Cradley, I will come on to “tease and squeeze” later, but I agree with her that that is a problem, and we think there are ways to deal with that. She made it clear that she would like certain experts from the industry to talk to Ministers, and if she gets back to me I will certainly make sure that that is possible. I would be more than happy to talk to them as the Bill continues its passage—but we are near the end of it—about life post the Bill and under the new arrangements.

The noble Lord, Lord Grantchester, is seeking to place a duty on Ofgem to develop a relative price cap that would come into effect on the termination of the tariff cap conditions which are set out in this Bill. The noble Lord is nodding in assent, so I think that I have got it right. That would cap each supplier’s most expensive advertised standard variable and default-rate tariffs as a proportion of its cheapest fixed-term deal, and again, Ofgem would set the differential. The new clause would be inserted by the amendment and its effect would be to introduce an indefinite relative price cap. It remains the Government’s position that this amendment is not necessary, and I hope to set out why we believe that that is the case.

It is not the intention of this Bill or the Government to put in place a permanent market-wide cap, as I have explained on earlier occasions, and I would pass that on to my noble kinsman Lord Redesdale. I know that the intention of the amendment is to stop the practice of “tease and squeeze”, whereby customers are lured in with a cheap fixed rate and then fall into an expensive default rate at the end of the fixed term. However, as with any relative cap, there is a risk that under this proposed amendment suppliers would raise their least expensive tariffs rather than decrease their most expensive standard variable rates. That is the Government’s fundamental concern about any kind of relative price cap.

The Government and others, which includes the detailed work done by the BEIS Select Committee during its pre-legislative scrutiny of the Bill, believe that a relative price cap would not work. Indeed, a relative cap as a permanent feature of the market risks undoing the work of the temporary absolute cap, because it would remove the incentive for the market to innovate and reform. I would emphasise in particular those points to the noble Baroness, Lady Kennedy of Cradley, who I think possibly did not understand how markets work. It also puts in place a solution to a problem that is anticipated some years hence. We believe that it is better for Ofgem to consider what measures may be needed once the price cap is lifted rather than prejudge the situation now and tie Ofgem’s hands in a way that might damage consumers or be ineffective.

The key way of ending the practice of “tease and squeeze” will be the detailed work that Ofgem is undertaking to develop better ways of securing customer engagement. The work was emphasised by the noble Lord, Lord Grantchester, when he talked about smart meters. It will make switching quicker and more reliable, so smart meters and other programmes will help to make the market work better.

I recognise the concerns of noble Lords opposite in this area and the need for action to protect consumers following the removal of the price cap, should that be necessary. In acknowledging this, I can confirm a triple commitment by the regulator on this issue. I can confirm that Ofgem has committed to assessing whether ongoing protection will be needed for vulnerable consumers beyond the end of the price cap. I can confirm that Ofgem considers that it can implement price protection for selected consumers should that be appropriate. I can also confirm that, ahead of the price cap ending, Ofgem has committed to producing a report on what additional protection might be needed, who needs that protection—we are thinking of vulnerable consumers—and what form that protection should take. Following the production of that report, Ofgem will act accordingly. I repeat: Ofgem will act accordingly having produced a report on what additional protection might be needed, who needs the protection and what form that protection should take.

The House might also have seen Dermot Nolan, the chief executive officer of Ofgem, giving evidence to the BEIS Select Committee during its pre-legislative scrutiny of the Bill. He was asked whether a price cap or other protection might be needed for vulnerable consumers upon the removal of a market-wide price cap. Mr Nolan responded:

“In my view, yes. … I would envisage a very possible situation in which if a full, marketwide price cap was removed, Ofgem would continue with the price cap for vulnerable customers”.


I hope that those commitments from the regulator, alongside the comments of its chief executive officer, would go some way to reassuring noble Lords, including the noble Lord, Lord Grantchester, of Ofgem’s capabilities and stance towards protecting consumers beyond the life of the Bill. I hope that my explanations have been helpful and that the noble Lord will therefore see fit to withdraw his amendment.

17:30

[Lord Grantchester]

I thank all noble Lords who have spoken on this amendment. I am very grateful for the support of my noble friend Lady Kennedy of Cradley, who has underlined most forcefully how egregious this behaviour is and how widespread it has become, with the effects landing on those least able to counter it.

I certainly understand the remarks of the noble Lord, Lord Hunt, that we must get the Bill right. However, I did rather think that his remarks might be more pertinent to the appeals section amendment that had already been debated. Nevertheless, I agree with him that we must get it right, which means, I take it, that he is looking for further improvements, such as this amendment, to be brought forward.

I suggest that the noble Lord, Lord Redesdale, has perhaps misunderstood the relative price mechanism, in that the relative price mechanism will not be applied across the piece; it applies only to the standard variable tariff and default tariffs, as the Bill does. Ofgem would not necessarily apply a minimum tariff; it is setting a differential that will apply between tariffs. In that regard, I am grateful to the noble Lord, Lord Teverson, for correcting his noble friend in his explanation of the amendment.

I also thank the Minister for his response, to which I have listened most carefully. However, I do not believe that it will cause any delay in the implementation of the Bill, as this proposal would come in only at the end of the price cap conditions.

I wanted to understand more how this tariff would operate in practice and how much work Ofgem had put into examining how it could be brought in. In this regard, I am very grateful to David Gray, chairman of Ofgem, who responded so promptly to our request for a meeting, following an invitation from my noble friend Lord Lennie. It is my understanding that Ofgem already has the power to set a relative cap mechanism via individual licences. It is often, though, perceived that in these licensing caps Ofgem fails to take action—to the dismay of so many, especially consumer bodies.

Britain’s consumer regulations are some of the best in the world, but here we have opaqueness that can be remedied immediately by this amendment. Not only must Ofgem be assured that it can do this, but it must implement it at the end of the price cap conditions, within which competition will thrive.

I stress once again that, the more competition there is, the narrower the gap will be. Against the charge that the market would move up in tandem, I suggest that the market is then not working competitively and that Ofgem would have the power, by this setting of the differential, to counteract that behaviour. I understand that Ofgem has begun to look at the various measures needed to be implemented.

I repeat again that, as the noble Lord, Lord Hunt, said, we must get this right. The Bill is before your Lordships’ House today, and I am very grateful to the Minister for the triple commitment he outlined in his remarks, but I stress that it is somewhat vague at this stage and nothing that could not have been done in any case. That being so, I beg leave to test the opinion of the House.

17:35

Division 1

Ayes: 193

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Labour: 105
Liberal Democrat: 66
Crossbench: 13
Independent: 7

Noes: 192

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Conservative: 161
Crossbench: 20
Independent: 4
Democratic Unionist Party: 3
Ulster Unionist Party: 2
Bishops: 1
Liberal Democrat: 1

17:46

Sitting suspended.