Domestic Gas and Electricity (Tariff Cap) Bill

Debate between Lord Hunt of Wirral and Lord Teverson

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

[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.

Domestic Gas and Electricity (Tariff Cap) Bill

Debate between Lord Hunt of Wirral and Lord Teverson

2nd reading (Hansard): House of Lords
Tuesday 22nd May 2018 Lords Chamber

[Lord Hunt of Wirral (Con)]

My Lords, I declare my interests as set out in the register, in particular as a partner in the global commercial law firm, DAC Beachcroft LLP and as one of the Ministers who took through the Gas Act 1986. Introducing price controls into the energy market was indeed included in the last Conservative manifesto and codified in a draft Bill published last year. Today’s debate should therefore focus on how a price cap can be implemented in the most appropriate way, not on whether it should be.

The Bill represents a major intervention in the energy market with significant implications for competition and consumers. It is therefore essential that the Bill provides for strong oversight of how the cap is formulated and introduced. The noble Lord, Lord Stevenson of Balmacara, has already mentioned my noble and learned friend Lord Mackay of Clashfern; I know I am not alone in feeling that the Bill does not include the long-established precedent that organisations should be able to appeal to the Competition and Markets Authority against a price control set by a sector-specific regulator. This right exists in every comparable example of sector-specific regulation, including in the energy sector, and plays an important role in driving better regulatory decisions.

The Bill directs the energy regulator, Ofgem, to introduce a price control on default energy tariffs. It also states that the regulator must have regard to ensuring that the market remains competitive, incentivising switching and allowing suppliers to finance their operations while inducing them to operate efficiently. This will be an extremely complex balance for Ofgem to strike. It is clear that greater competition has been vital to improving this market; Ministers have indicated that this trend should not be reversed. There are now 60 suppliers in the market, compared with just six in 2010. Consequently, there is more choice of tariff than ever before, with 17% of customers switching supplier last year. On a historical basis, these switching rates are better than those of broadband, mobiles and fixed-line telephone markets.

Ofgem will also need to undertake a detailed analysis of the cost of major national infrastructure programmes when constructing the cap, including the smart meter rollout programme, which is central to innovation and future competition. Her Majesty’s Treasury estimates that there will be £100,000 million of investment in critical infrastructure between now and 2021. Ofgem’s approach must ensure that a cap does not impede these large investments. Recent regulatory interventions in the energy market show that meeting this balance of regulation and competition is difficult to achieve. Regulators occasionally err in their decisions. I remember that the CMA concluded in 2016 that Ofgem’s previous attempts to regulate the number of retail tariffs that could be offered by a supplier—the Retail Market Review —had damaged competition and should be removed. We have also seen that the introduction of a prepayment meter price cap led to prices bunching to within £15 of a cap. Like any major intervention in a competitive market, the introduction of price regulation therefore needs a strong system of scrutiny and oversight.

Appeals to the CMA are the long-established way of providing such scrutiny and ensuring that any errors can be corrected efficiently. The CMA is a specialist economic regulator, established to review regulatory decisions and ensure that they are well founded. Price control decisions in every other comparable sector—such as telecoms, water, aviation and post—can be appealed to the CMA, as can other price control decisions made by Ofgem. Price regulation for network companies can also be appealed to the CMA by third parties, including consumer organisations. An appeal to the CMA in 2015 on the level of price control imposed by Ofgem found that Ofgem had made an error. As a result, £105 million was returned to consumers.

There are currently 26 panel members on whom the CMA may draw for any price control appeals. There is also a specialist utility panel within the CMA. The CMA and its predecessor, the Competition Commission, have more than two decades’ experience in assessing such matters across any number of industries. My noble friend the Minister may say that there are specific examples, such as payday loans and the PPM price cap, where CMA appeals are not allowed. I do not believe that those are analogous. The FCA is not comparable to Ofgem and has not been tasked with the same challenges of setting a complex price cap that assesses the cost of the provision of service and maintaining competition. The PPM price cap was adopted by the CMA itself, so its scrutiny had already informed the process.

My noble friend the Minister may add that he has concerns that an appeal could delay or frustrate the introduction of a cap. Ministers have made clear their desire that this legislation should be passed by July and implemented by next winter, but there is no precedent for CMA appeals delaying the implementation of a price control. In the last 11 price control appeals, no delay took place. CMA appeals typically take place while the regulator’s original decision remains in place. Any remedies are then implemented prospectively. The Bill could easily make provision to ensure an appeal could not delay or stop the implementation of a cap—no doubt my noble and learned friend Lord Mackay of Clashfern will have all sorts of ideas about how we might do that, particularly in Committee.

On stopping a price cap being introduced at all, this is not possible in practice, because the Bill imposes an explicit duty on Ofgem to impose a cap. No appeal process could override the will of Parliament. A CMA appeal would be less burdensome, more straightforward and less costly than the alternative route of legal challenge; namely, the judicial review. Since 2000, CMA appeals have taken on average a little under nine months end to end, compared to around 10 months for JR cases. The CMA’s procedural rules and the rules on costs deter litigants from bringing vexatious challenges.

Equally significantly, the CMA is able to make changes immediately, while a court would need to remit the matter to the regulator, potentially extending the process by a number of months. Based on my experience, judicial review does not seem the appropriate standard for an assessment of a price control. A judge would be focused primarily on the process through which a price control was set and not on the type of complex considerations relating to the level of the cap that should be taken into account. Additionally, judges are not adequately equipped to assess this type of decision. The CMA was established and equipped with the appropriate resources and specialist expertise to undertake such work. It must be better and more helpful in alleviating the burden on the courts to have a specialist body looking at these technical issues.

In summary, the Bill introduces a significant intervention into the energy market, and recent history shows that care is needed to support competition and consumers. Price interventions are complex and should not be taken lightly. It is our responsibility to ensure that the appropriate checks and balances are in place to provide for a fair measure of legal and regulatory certainty, which is essential to underpin vital confidence and investment in the energy sector. I do not believe the usual mechanism for such oversight, CMA appeal rights, would delay, obstruct or frustrate the implementation of a price cap—on the contrary. I hope the Government will reconsider to ensure that a more proportionate, efficient and appropriate form of intervention is achieved.

[Lord Teverson]

My Lords, although it is a non-financial interest, I should have declared that I am a trustee of Regen SW.