Domestic Gas and Electricity (Tariff Cap) Bill (First sitting)

Alan Whitehead Excerpts

Committee Debate: 1st sitting: House of Commons
Tuesday 13th March 2018 Public Bill Committees

[Alan Brown]

Q I was going to ask whether it was okay if Hayden could give an answer. Greg was saying that he favours an absolute cap with a relative cap underneath it, combining the two options. I just wonder whether Hayden had a view on that.

Hayden Wood: We think that the top priority is the absolute cap. As I have mentioned before, there is a risk that homes will not get relief from the cap if that is not in. The idea of a relative cap underneath the absolute cap sounds fine to us, too. I think more price competition in the energy market is a great thing.

The third point I would mention on these extraordinary powers that Ofgem would have under this new set-up to set prices is that those powers need to come with more transparency. The formula and methodology for calculating what the absolute cap would be should be published so that there are no surprises for suppliers and we can plan. We also think there should be more transparency around the contributions that Ofgem receives from suppliers and the meetings that they hold with them, in order to ensure that there is more transparency.

[Dr Alan Whitehead (Southampton, Test) (Lab)]

Q I want to pursue the question of the absolute and relative cap. The way the relative cap has been talked about, it does not look like a cap to my mind. In fact, as Greg mentioned, it is a process of narrowing the range between possible tariffs that are offered, in order, I would have thought, to regulate the market subsequent to an absolute cap. Is it your view that that is the role that might be played by what is called a relative price cap? Or is it something that ought to be done in parallel with an absolute cap? That is, is it a market solution for the future or is it a cap solution for now?

Greg Jackson: You are quite right that the phrase “relative price cap” is not necessarily the most helpful name. It is a simple restriction—a simple limit—on the difference between the highest and lowest price from a single supplier. There is no reason at all why that would not operate underneath an absolute cap. In fact, there is no reason at all why it would not be defined at the same time as the pricing rules of an absolute cap.

If we did that, it would simultaneously attack the loyalty penalty, which is one of the biggest topics currently being looked at in pricing in consumer markets where you pay by direct debit. The real issue is that in consumer markets where you pay by direct debit—running an account—you do not know what you are being charged. If you do not know what you are being charged, companies essentially can have these enormous false differentials, and the opportunity, alongside this absolute cap, to bring the differential down is sitting there today. That would turbocharge competition because it would mean that, if a company wants to win new customers, it would have to bring prices down for its existing ones. But not only that: if it wanted to hang on to its existing customers, it would have to bring prices down.

We saw that British Gas provided a useful case study during the period when they were having to sit in front of Select Committees. They reduced their differential to basically zero for that period, and they lost 823,000 accounts in four months, I think, leading to a 12.5% drop in share price and a 20-year share price low. That demonstrates that companies that try not to offer good value in a world of a relative price cap will lose customers, market share and share price.

Therefore, we think that bringing that alongside the absolute cap, sitting underneath it, is the best way to use the force of competition to drive prices down for everyone. When you remove the protection of the absolute price cap, you will actually have a competitive market.

[The Chair]

I want to bring in Stephen Kerr here. I should say that we have only another seven minutes.

--- Later in debate ---

[The Chair]

No, no, I am sorry. I am just keen to get as many people in as possible. Alan Whitehead.

[Dr Whitehead]

Q I just want to be clear about the point on five months, Dermot, that you have mentioned. Could you briefly break down what that five-month period will consist of? And are you able to guarantee that there will not be any drift in that process, so that the five months is an absolute outside time rather than an approximate time?

Dermot Nolan: I might ask Rob to answer that, but I may come back at the end.

Rob Salter-Church: That five-month period will start with us issuing a statutory consultation, which will run for eight weeks, or two months. That is something that we are required to do by law as part of the due process that we go through. Thereafter, we would have a period to analyse fully the responses to the consultation. As we said, that will be a transparent process; there will be lots of information that we will need to review. Thereafter, when we publish our decision and the final drafting of the cap, it is subject to a 56-day notice period, which again is a legal requirement that we have to go through before the changes can take effect. When you add those various stages together, it gets to five months. Can I guarantee you that there will not be any drift? What I can guarantee is that we will have this as our absolute No.1 priority for Ofgem to deliver.

One of the things that is important for us to consider in ensuring that this cap is in place as quickly as possible is making sure that the due process is gone through. It would be unfortunate if, in trying to do something more quickly, we created a legal risk around process, and that could be exploited by somebody challenging it and seeking to delay the introduction of the cap. So, we are confident that we have a good, robust process and we will get through it as quickly as we can.

[The Minister for Energy and Clean Growth (Claire Perry)]

Q We are all very much appraised of the need—cross-party—to get this cap introduced by the end of the year. For us, winter does not start in February 2019; it starts in November 2018. What is the opportunity to apply the cap retrospectively, particularly if there is any form of legal challenge?

Dermot Nolan: Retrospectively, Minister, in the sense of—?

--- Later in debate ---

[Vicky Ford]

Q In my view, 2023 is the sunset clause: a window to get the competition in the market working. If you bring in measures such as faster switching, prompts and Midata, I am sure we will see more innovation with smart appliances that feed off smart meters and therefore there is smart consumption. Are those the measures that you would write into your report in 2020 for us to be able to decide come 2021 that the competition had maybe already been achieved? You said it could be done in a couple of years. Why do we need five years?

Dermot Nolan: I hope we do not, frankly. We will do our very best to bring competition as quickly as possible.

[Dr Whitehead]

Q I just wanted to reflect the fact that there is a sequence in the Bill, which is that Ofgem carries out a review as to whether conditions are in place for effective competition, and then you have just one requirement to put into your review, which is the vision of smart meters. The Minister then has to make a statement following the report, but it is all sequentially based on your report in the first instance.

Are you happy with what appears to be an almost complete lack of pillars on which your report might be based? Is that something that you can live with easily, or would you prefer or welcome further pillars in the report to ensure that your understanding of the report was in line with what was required to bring competition back into the market?

Dermot Nolan: It is a fair question. I am personally content with the drafting, but I respect the fact that it is a matter for Parliament. I think we have a reasonably clear idea, and I hope we have given some of it today, but I assure you that we will spend a lot of time preparing an analysis of whether we think competition is working effectively in the market.

If further areas are to be put in, that is a matter for Parliament. I am slightly worried that putting specific targets and measures directly into legislative language now, in a market that will change radically over the next five years, might be somewhat distortionary. All I can say is that on the current language we will do as comprehensive a job as we can and look at all possible indicators to give an overall assessment to the Secretary of State of whether we think the market is working for consumers.

[The Chair]

Order. I am very sorry, but that brings our session to an end. I thank the witnesses for giving their evidence and I ask the next panel to come forward.

Examination of Witnesses

Rich Hall, Pete Moorey and Peter Smith gave evidence.

--- Later in debate ---

[Kerry McCarthy]

Q At the moment, you have to be first in the queue to get the tariff. There is no reason why—

Peter Smith: You are either doubly benefited or doubly negatively impacted, because you do not receive the warm home discount scheme and therefore miss out on the safeguard cap, or you get the warm home discount scheme and the safeguard cap. We can reconcile all of that without these provisions. It was encouraging to hear Dermot Nolan say that he is minded to have due consideration of those issues when he sets the cap—because we could get into a situation where we look to preserve the extended safeguard cap at the same time as continuing with this endeavour. That would make sure that some of the issues I have spoken to are addressed. We would welcome that approach.

[Dr Whitehead]

Q Pete Moorey, your submission to the pre-legislative scrutiny of the BEIS Select Committee raised issues about the extent to which the remedies put forward by the CMA as far as market restitution was concerned were not, in your view, sufficient. Bearing in mind that it is going to be down to Ofgem to declare that the market is now functioning reasonably well and that the cap can now be taken off, what sort of remedies, in addition to those suggested by the CMA, might you have in mind to get the market working again? Do you think those should be introduced during the price cap or after it? Should they run after the price cap is over or concurrent with it?

Pete Moorey: We supported many of the remedies of the CMA, so while we did not believe that they would take us far enough to deliver effective competition, it was absolutely right that the CMA recommended that we would be testing and trialling new ways of engaging people in the energy market. We were disappointed that the energy industry did not respond effectively enough to that. We said to the industry immediately after the CMA inquiry, “Start getting on with it. Test and trial new ways of engaging particularly the most disengaged people with the energy market.” I think that a lot of that work should continue. The good news from Dermot Nolan this morning, and from other statements Ofgem have made over time, is that they are going to continue to do work on that, which is welcome.

We are not necessarily suggesting that there are other remedies such as that that could be trialled. It is more that we should be spending time considering what transformational changes can be made to the market along the lines that Dermot Nolan was talking about, particularly in his responses to James Heappey, to ensure that we have much more innovation in the market through new suppliers who can be tapping into the benefits that smart and other changes in the energy market will make. That is likely to be the transformation that will lead to a new kind of energy market where consumers are more engaged. That is the critical element, alongside all the key factors around switching levels—particularly engagement of more vulnerable consumers, energy satisfaction, trust in the market and so on—that we should be looking at.

As I say, simply removing the cap in 2023, and the market looking effectively as it is now, will not, I think, be the kind of change that we all want to see in the energy industry, and certainly will not deliver the kind of change that consumers need.

[Alan Brown]

Q Are there any improvements needed to the Bill? I have a couple of suggestions and considerations. We have already heard the merits of trying to introduce what is called a relative cap to work underneath the absolute cap, and we have spoken about vulnerable customers. Are there any improvements that could be made to the Bill to protect vulnerable and disabled customers?

Peter Smith: I will try to be a bit more concise than I was earlier. Clause 2 needs to be amended specifically to ensure that the safeguard tariff is considered when setting the SVT-wide cap, and Ofgem needs to have a duty to consider that. In clauses 7 and 8, we need to include customer engagement, particularly vulnerable customer engagement, as part of that overall assessment of competition and of whether it is working effectively.

I could give you a couple of examples, but perhaps they are best fleshed out in some further written evidence. They would include online access. For instance, we know that households that are offline do not benefit from the considerable discounts for online deals and from paperless billing discounts, and they do not get to apply to the warm home discount scheme. Cumulatively that could be up to £300. Things like that need to be considered when we make that overall assessment.

Rich Hall: From our perspective, we are broadly comfortable with the Bill in its current form. In the area of providing enhanced assurance that vulnerable customers’ circumstances are being improved, we think that is something that should be captured within the annual assessment by Ofgem and by the Secretary of State. We are reasonably comfortable that that is implicitly delivered through the Bill, but I can understand that there are arguments that there might be benefits in it being explicitly delivered on the face of the Bill.

In terms of there potentially being a relative cap underneath the absolute cap, I have some similar views to Dermot on that, in that it is an idea that has been floated only really in the last few days and weeks, possibly by people who would prefer a relative cap and who are now trying to use absolute plus relative as an alternative vehicle to reintroduce that approach.

We have some concerns about the relative cap approach. Because the large incumbents have so many sticky customers, in comparison with the relatively small number of customers they could pick up through any promotional campaign, if they were to seek to hold their line on their acquisition prices, that would make the cost of acquiring new customers punitively expensive. Because of that, we think it is more likely that the large incumbents would simply exit the acquisition market, which would neither help their SVT customers, who would continue to pay the same prices, nor improve pressure in that market. There is a risk that a relative price cap could backfire and be worse than the status quo, so we see the decision on absolute versus relative as not simply a choice between a good model and an excellent model, but as a choice between a good model and an unworkable model.

Pete Moorey: I would not add anything to what Rich said, but in terms of other changes to the Bill, there could be some changes to ensure there is more transparency and accountability of Ofgem, in terms of setting the cap. We would like to see changes so that Ofgem are required to set out clear criteria for monitoring and evaluating the success of the cap. We wanted to see a requirement to review the price cap every six months. It may well be that the evidence you have just heard from Dermot Nolan suggests that they will be reviewing it anyway every six months and that the bar could be set lower. It may well be that that is unnecessary in the Bill itself, given that it seems likely from what he said this morning that we will have a consultation on that as well. I think Ofgem should be required to publish reports on the impact of the cap on a regular basis and on how they would take any action if the cap was having any negative impacts.