Energy Suppliers: Customer Credit

Alan Whitehead Excerpts

Wednesday 22nd February 2023 Westminster Hall

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

I congratulate the hon. Member for Inverness, Nairn, Badenoch and Strathspey (Drew Hendry) on securing the debate. I share hon. Members’ disappointment that the Chamber is not more full this morning, because this issue is really important as regards the overall life of energy companies. Most importantly, as the hon. Member said—I am happy to repeat it—it is not the companies’ money but the customers’ money that is being used in such a way.

We know from the record what the large sum floating about in energy companies’ bank balances is used for—we cannot get an accurate picture, but £9 billion is probably not too far adrift—and we know how disastrous that is on occasion for the overall operation of those companies. Between the middle of 2021 and the summer of last year, we had the unfortunate experience of 28 energy companies going bust. Some research was done into what those bust companies had been doing with credit balances. A company called Oxera, commissioned by Ofgem, did a research project on seven failed energy suppliers that found that most of the companies did not just use credit balances, but were reliant on them for their business models.

Oxera stated that the companies,

“relied on receiving customer balances prior to the provision of services. Suppliers used these prepayments to fund the ongoing costs of the business and to act as a buffer against any short-term shocks. They then relied on growth in the customer base to keep ahead of future liabilities, making the strategy unsustainable in the long term during times when growth slows down”.

This was not just an accident of balances appearing in companies’ accounts because they had not accurately worked out what to do with direct debits. It was an integral part of the companies’ business model—or so they thought at the time—to accelerate their progress by using customers’ money to borrow ahead and fund their expansion, and of course they came horribly adrift as a result of the slowdown in the market.

The SNP spokesman, the hon. Member for Kilmarnock and Loudoun (Alan Brown), underlined the other part of that dreadful arrangement. When those companies went bust, the credit balances that they held had gone. The companies that took over through the supplier of last resort arrangement looked at the books and found that there were no credit balances in the books because the companies had borrowed and then gone bust, and they had to restore the balances to their new customers. That is what they did in most instances, but they then billed Ofgem for the work they had done to restore credit balances to those customers after the companies had gone bust, and they were paid for doing that. Guess who paid for those companies to restore the credit balances? The customer. It was socialised across their bills, so bills went up as a result of companies borrowing money, going bust and having to have those credit amounts restored.

The system is not just thoroughly rotten but systemically rotten. I do not want to resort to anecdotes, but I will talk about a recent experience I had—a small straw in the wind—when I changed my parliamentary flat. It is a one-bedroom flat that I inhabit now and again. I went to set up a direct debit, and the company quoted me £350 a month to start. I am sure it is a coincidence that it is exactly the sum that the Government have put up for the average household bills. I said, “This is just not right. You can’t start a direct debit at £350 on a small flat like that. I think I would prefer a smaller sum of £150.” We had a long argument on the phone, and the person eventually agreed, but I found when I went into my account that they had stuck with the £350. I had to have further phone calls to say, “I am not paying that amount of money in a direct debit per month. Can you put it down, please?”

[Drew Hendry]

I am grateful that the hon. Gentleman is talking about his personal experience. I looked into this on a personal basis and found that what my constituents were saying was true. What he has just relayed is the real difficulty in communicating with companies that are setting these arbitrary figures, and of course in the process building up credit balances. Does he agree that this poor communication and confusion is a far more common problem than perhaps even we in this Chamber expect?

[Dr Whitehead]

The hon. Gentleman is absolutely right. Had I not had a reasonably informed view of how direct debits work, I may well have just said, “Okay, I’ll go with that,” with the inevitable result that I would have built up a huge credit balance. That would have been good for the company’s working practices. I do not know whether it was an instruction from the company that the person should start with a high direct debit and then argue down, but it looked to me like they should not have been engaging in that practice.

After various companies went bust, Ofgem started looking at companies’ financial resilience, and that process is continuing. There have been a couple of reports and processes. Among them, Ofgem suggested a couple of arrangements that might help with this scandal of how much is in credit balances—money that is not for companies to use. It proposed that credit balances should be restored to nought at the end of each contract year, even if customers had not requested it. I take the point that, in general, it is often in the customer’s interest to smooth payments out over the year, so that higher bills in certain parts of the year are countered by lower bills at other times, and the overall account can be smoothed out, but there is no justification for a large ongoing credit balance in the company’s books after the end of the contract year.

That seemed a good plan from Ofgem, but it decided not to proceed, on the grounds that quite extraordinarily—guess what?—a number of companies responded to the consultation saying, “We would really like to keep the credit balances because it is very helpful to us.” Ofgem concluded that the proposal might be a bit complicated, so it has not been proceeded with, so the situation of rolling credit balances in companies’ books continues.

Another financial resilience proposal from Ofgem was that a company’s customer accounts should be ringfenced. The company might hold the credit balances on its books for the purposes of smoothing customers’ accounts, but they should be in a separate account, since that was not the company’s money; the money should not be usable for other purposes. The company may get some interest, but the money should not be used as working capital.

Ofgem consulted on that proposal. Again, a number of energy companies responded and said, “No, we don’t think that is a good idea, because that might cause us some problems with our working practices.” So Ofgem decided not to proceed with that proposal either, and there is no ringfenced money—except where, and I am finding it hard not to laugh, a company is thought by Ofgem to be in some financial distress. Then it might decide to ringfence the balances so that they could be rescued when the company went bust and not be used to pay further bills in cases such as those when the supplier of last resort took over the bust company only to find that all the money had gone. Presumably, thanks to Ofgem’s intervention, all the money would not be gone in these cases. That is perhaps a sort of progress, but it is not exactly the sort of progress anybody in this Chamber would see as a serious attempt to address the issue.

My concern is not that the matter has not been looked at by the regulator; it is that the regulator has failed to implement the more or less common-sense measures necessary to ensure that where there are credit balances, they are used for the purposes for which they are intended—smoothing over accounts and nothing else. After all, as the hon. Member for Inverness, Nairn, Badenoch and Strathspey said, this is not the companies’ money. The companies should use it on the basis that they have permission from the customer to keep it on trust for the customer, for their bills, and not for the company’s own purposes. That should be the central principle of this whole arrangement in the future.

I congratulate the Minister on her good practice in talking to the hon. Member for Inverness, Nairn, Badenoch and Strathspey. I hope that that good ministerial practice will wash over into good practice on energy companies. She might have a quiet-ish word with Ofgem and say, “Maybe your consultations and discussions on financial resilience did not work out quite as we all hoped. Could you reopen the matter and have another look?”

The principle on which we all agree is that people’s money is there in trust. It is not there for the companies to use; it is there only for the purpose of smoothing out bills. That is the principle that Ofgem ought to apply to protect customers, but I am sorry to say that in this instance that has not happened. It would be great if the Minister addressed that. I hope that she will respond positively and get on the phone to Ofgem to see what can be done.