Domestic Gas and Electricity (Tariff Cap) Bill

Baroness Neville-Rolfe Excerpts

Committee: 1st sitting (Hansard): House of Lords
Monday 11th June 2018 Grand Committee

[Lord Carlile of Berriew (CB)]

My Lords, I want to speak, if I may, in favour of Amendment 23 in the name of the noble Lord, Lord Grantchester. At Second Reading, I referred briefly to my attempts to change tariff with my electricity and gas supplier. I think I described it as a parlour game on a computer system that did not always work. It seems to me that what we need to give the public is, first, clarity and, secondly, the capacity to compare one supplier with another.

Let me give two analogies, one good and one bad. The first occurred to me on Saturday when I was standing at a bus stop in central London alongside a hoarding advertising a new credit card deal. At the bottom of the advertisement, in big letters, it said, “Interest rate 57%”. On the face of it, that is quite a high interest rate, but the company has to advertise that interest rate so that it is really clear to the consumer. That is the sort of clarity we need. The bad analogy relates to train fares. Noble Lords who travel a great deal by train may, like me, go on to one of the internet sites that offer you the timetable and the train fares. With train fares there is absolutely no way of making a decent comparison between the different options available. Indeed, it is so complicated that, if you buy your ticket in Llandrindod Wells to go to Paddington, it may be a different price for precisely the same ticket if you buy it in Paddington to go to Llandrindod Wells.

If we are going to do this job now in the Bill, what is required is to ensure that consumers are able to make a proper comparison between the supplier they have and the alternative suppliers available. It does not mean that they will necessarily take the cheapest supplier. The noble Lord, Lord Lennie, made a point about green suppliers. Some of us might decide that we are prepared to pay a few pounds extra for the purposes of a better environment, but at the moment we have no way of knowing what sort of value green suppliers present. We have to go on to their website and take their word for it, which is not necessarily good enough. Amendment 23 at least makes a start in achieving those joint aims of clarity and the ability to compare.

[Baroness Neville-Rolfe (Con)]

My Lords, I join others in thanking the noble Lord, Lord Berkeley, for setting off a discussion on this important issue of communication with consumers on electricity prices and the cap. I was going to add to the discussion from my own experience as a householder in Wiltshire. I have had a letter from SSE which is meant to tell me simply how my electricity prices are increasing, what I could do and how I might be able to pay less. I have to say that it is very difficult to understand, so there is a problem outwith the legislation that we are putting through. It is also wrong to suggest that energy companies are always trying to dissemble. How well they do depends on satisfying the consumer and the better ones want to be able to say clearly what is happening.

If we were to add to the system a requirement to communicate about the tariff cap provision, it would make the sort of letter that I have already described yet more complicated. My own experience is that these things can be costly to business. When the minimum wage came in, I remember being telephoned by the business department—I was at Tesco at the time—to ask whether we could put the minimum wage on our payslips. Having talked to our ICT people, I discovered that it would cost us an extra £1 million to put the minimum wage on the payslip. It was therefore agreed that the minimum wage could be communicated in other things. I worry that if we in this Committee put down requirements, it could have a similarly escalating effect on costs.

I have looked at the impact assessment—noble Lords will remember that I am always passionate about the usefulness of impact assessments—but this one does not go into any detail. It just suggests that there are savings to consumers. If we were to add extra provisions on communication, we would need to consider the cost of that because it would then get passed through to the consumer. That cost will apply to the small, new entrants to the industry as well as to the bigger suppliers.

That leads me to one final thought. When we took through the Consumer Rights Bill, in which we were also concerned about communication to consumers, the department worked with the industry to produce special communication. That was then used across the retail industry to inform shops as to the new rights that were coming in for consumers. I wonder whether some of the concerns raised today could not be met by voluntary action within the industry, dedicated to improving clarity for consumers in this important area.

[Lord Berkeley]

The noble Baroness cited a figure for the cost for communication but in terms of the total cost to the businesses we are talking about, that figure must still be very small. Given the example that I quoted of the banks being required to provide paper statements for anybody who wanted them, surely it is more important that anybody should have access by whatever reasonable means to the information, even at the expense of them paying a little more on communication. The people who will suffer are those who cannot fiddle with their emails, even if they can get the information by email.

[Baroness Neville-Rolfe]

I can understand that. Clearly, there may well be a case for requiring some communication to be online and some on paper because some people cannot manage online. However, what I am saying is that this will involve changes in systems across however many energy suppliers there now are—I do not know whether it might be 40, 50 or 60—and there is a cost to that, which we have not looked at or costed. How that fits in with suppliers’ information systems can make a big difference. Clearly, the Bill is going ahead rather rapidly. I have seen no analysis of this angle of things, which is why I support these amendments this afternoon, at least in the form of probing amendments.

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[Lord Henley]

What it will do, as I thought I had made clear, is make it easier to open the door to innovative third-party switching devices, such as the devices I referred to, I think, during the debate on the Smart Meters Bill. These will allow the consumer to find himself automatically shifted from one supplier to another if he says, “I always want the cheapest tariff”, or, “I always want the greenest tariff”. Such things are being developed and midata will help towards that.

[Baroness Neville-Rolfe]

I now understand why the letter I received is so difficult to understand. It reflects the provisions that the Minister has explained that Ofcom has imposed about having to show how you could pay less even if you cannot in fact pay less, which is the situation in my letter. That leads me to make a small request. It would be great if the Minister were able, between now and Report, to look at how communication is actually decided in the Ofcom area. Is there proper communication with consumers who might be recipients of these letters? We tend to be policy-driven rather than customer-driven, and I heartily endorse what the Minister said about keeping it simple. Talking to consumers about what they are going to be sent might be very helpful.

[Lord Henley]

I am more than happy to consider that and to write to my noble friend so that we can perhaps consider this again on Report. As I was saying in winding up, we all have the same desire: we want to make sure that the consumer has the right information to make the appropriate decisions that they wish to make. With that in mind, we hope that Ofgem—not Ofcom—will continue to develop its work in that field.

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Moved by

[Baroness Neville-Rolfe]

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

[Baroness Neville-Rolfe]

My Lords, in moving Amendment 29 I will speak to linked Amendments 30 and 34. I should perhaps express my regret that I arrived too late to speak at Second Reading as a consequence of other commitments.

The purpose of these amendments is to make it more difficult to extend the duration of a price cap and to ensure that it is temporary, if I may pick up the useful word used by the noble Baroness, Lady Featherstone, in her amendment to Clause 2. As the helpful notes on the Bill say in paragraph 15:

“The cap applies until the end of 2020 but it may be extended, for a year on up to three occasions, if the conditions for effective competition in the market for supply contracts are not in place”.


The basic point is that I am unconvinced of the merits of price caps. Setting prices at a low level may seem superficially attractive but experience in many jurisdictions shows the problems that they create. For example, in California in 2001 retail prices were capped at levels that ended up being below the wholesale cost of energy. As a result, retailers found themselves $20 billion in debt and one of them went bankrupt. The state then had to step in. Price caps are against most economic theory and have unintended consequences, as we have discussed, so there is no need for me to labour the point.

If I may, though, I will share one personal experience of price regulation somewhat akin to what we are now discussing. As a junior civil servant, I was responsible for the milk costing system, administered with the help of a leading accountancy firm. In effect, we were responsible for setting the permitted retail price of milk. Unfortunately, a member of the departmental team unwisely agreed that a visit to an international dairy conference in Miami was a legitimate expense. As a result, everyone paid more for their milk. This was an early lesson in why it is better to avoid government interference in pricing.

Still, we are where we are and we need to improve the Bill. I believe it would be much better if the cap ended in 2020 and that, as drafted, it is far too easy for the Government to extend it. Indeed, there seems to be almost no prospect of ending it before 2023. Yet the Minister, Claire Perry, said in Committee in the Commons that there was,

“strong consensus in the Committee”,

that the cap should be temporary and that a proposal under discussion to extend it further,

“creates disincentives and uncertainty in a market where we have to have certainty to generate investment”.—[Official Report, Commons, Domestic Gas and Electricity (Tariff Cap) Bill Committee, 15/3/18; cols. 86-88.]

I would add that price caps where the case for a cap is strongest—for those 4 million households with prepayment meters, and for a million vulnerable consumers—have already been introduced by Ofgem. I ask the Minister to update us on the impact of those before the Bill leaves Committee. The noble Lord, Lord Whitty, made some powerful points about those very consumers and the complications of dealing with them. I hope his commission will come up with some simple innovative ideas that we can all support.

I heartily dislike needless regulation. I would like the Government to come back to Parliament and seek primary legislation if they want to extend these temporary controls beyond 2020. Clause 8 makes it far too easy to extend them, and my amendments would return this power to Parliament. I know from my wide experience of government as a civil servant, from working in business and as a Business Minister that getting rid of regulation is always a low priority in the modern world. This hurts competitiveness and is bad for our economy. I very much welcome the use of a sunset clause but it should be just that. As for the detail of what is proposed, my Amendments 29, 30 and 34 would remove the possibility of extending the cap by deleting most of Clause 8 and making related amendments to the review procedure in Clause 7.

I have to accept that there is a political dimension to the proposed price cap, and I know the Minister will have to support the Bill in the round. However, I would ask him to go away and think about whether we should really extend the cap beyond 2020 without primary legislation—that is, another Bill—and the process of review that always precedes such legislation. I beg to move.

[Lord Stevenson of Balmacara]

My Lords, this is a somewhat complicated group of amendments because within it are points of view that are mutually contradictory and indeed on which we hold contradictory positions. So we are not going to agree on this, and I look forward to hearing the Minister trying to weave a way through that does not upset one side or the other too much. He does not normally care too much about whether he does that, but that is for another time.

Our amendments are probably based on the assumption that the rather high aspirations that you can read into the Bill in terms of how it might reform and change the basic market for electricity and gas supply will be achieved, and takes the sanguine view that they are not going to be achieved in time for the cap to be reduced at the appropriate time. If that is the case, it also has the benefit of making sure that vulnerable consumers are not caught by the other schemes referred to by the noble Baroness, Lady Neville-Rolfe, which we discussed earlier. They would continue to operate and we would take that to be a good thing, but as we have discovered, that is of course not the primary purpose of this Bill.

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[Lord Henley]

My Lords, I hope that I can deal with this group of amendments in the two, three or four-dimensional manner that the noble Lord, Lord Stevenson, has asked me to. Given that my noble friend Lady Neville-Rolfe moved the first amendment, I should say that, like her, generally speaking the Government are not convinced about price caps. We have our doubts and we made it clear at Second Reading that we do not like to go down this route and we said that it had to be temporary, albeit with an ability to extend the cap for a short while, year by year, but no more than that.

The aim of my noble friend’s amendment is to end it in 2020. The noble Baroness, Lady Featherstone, also has some sympathy with that, as she returns her party to classic, 19th-century liberalism—a wonderful development. We believe that it should be a temporary measure and that 2020 is the right time to end it, with the ability to extend it to a final, absolute sunset in 2023. I do not think that removing the possibility of extending would provide consumers with protection if the conditions for effective competition were not in place at the same time. As I said, we prefer to do it that way. I rather dread the thought of further primary legislation each year if we wanted to extend it or do it for another year. We have already had that with other Bills.

My noble friend asked if I could report a little on the prepayment meter cap and the effect it has had. The evidence seems to be that, since the cap, prices have come down to below it. There has been some bunching of prices, but there is competition below the cap in the prepayment market. That shows that these things can occasionally work. However, as I said to my noble friend, philosophically we do not like the idea of caps. I rather agree with her.

I turn to the other amendments in the group. The noble Lord, Lord Stevenson, spoke to Amendment 32, the purpose of which appears to be to create a firm link between the price cap’s removal and the completion of the rollout of smart meters. It seems to suggest that the cap can be extended in circumstances where the smart meters programme has been completed, but the conditions for effective competition are not in place. The rollout of smart meters is but one of many possible indicators that define a competitive market. There will be other indicators of the conditions for effective competition. Ofgem’s consultation points towards other factors that might indicate that the conditions for effective competition are in place, including ways of improving customer engagement and increasing switching. I am sure that the amendment aims to be helpful, but I believe it is simpler and safer to leave it to Ofgem to assess the conditions for effective competition, rather than put provisions on the face of the Bill that would link statements about the future of the price cap to particular programmes.

The noble Lord also spoke to Amendments 33 and 35. The Government would not wish to see an inversion of this Bill’s policy intention by removing the price cap’s sunset clause. I repeat that we have no intention of delivering an indefinite price cap. As I have made clear on a number of occasions, this is a targeted and temporary intervention until the conditions for effective competition are in place. I think that is why the Bill achieved broad, cross-party consensus in another place and was endorsed by the BEIS Select Committee. Amendment 35 would also increase the risk of transforming this temporary measure into a permanent feature of the retail energy market. Again, we do not believe that that would be appropriate.

Finally, I turn to Amendment 37, which is a probing amendment seeking to understand the purpose of Clause 9. Clause 9 empowers Ofgem to modify the standard supply licence conditions following the removal or cessation of the tariff cap as specified under Clause 8. The clause allows Ofgem to modify the standard supply licence conditions as it considers necessary or expedient, but with the requirement that Ofgem publishes the modifications to alert all stakeholders as to the impact of the modifications. The publication of the Secretary of State’s decision will alert stakeholders to the cap coming to an end. This provision would enable the licence conditions to be tidied up to reflect the cap being lifted. Otherwise, they would remain in the licence but would be redundant.

We have been clear that the price cap is a necessary intervention in the market, but one that should only remain until the conditions for effective competition are in place. The decision on extending or removing the cap will be made in the light of the report and recommendation from the expert regulator. The Government are not prepared to enable this price cap to be a permanent feature as it could risk distorting the market, but noble Lords will wish to note that Ofgem has enduring powers to protect consumers and specific duties regarding vulnerable consumers. Indeed, Ofgem has indicated that it may be necessary to have in place price protection for a narrower set of consumers once the price cap under this Bill has ceased to be in place.

I hope I have provided the appropriate assurances. Though the amendments are coming from rather different directions, I hope first of all that my noble friend will withdraw her amendment with the assurance I have given and, secondly, that the noble Lord, Lord Stevenson, will not feel it necessary to move his amendments.

[Baroness Neville-Rolfe]

I thank my noble friend for his philosophical reassurance. Certainly, I would not want to add a link to smart meters because, as he said, it is only one factor that we will need to take into account. The extension power in Clause 8 gives the Executive too much power and I ask the Minister to give the matter further thought before Report, but I withdraw my amendment with great pleasure.

Amendment 29 withdrawn.

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[Baroness Kennedy of Cradley (Lab)]

My Lords, I shall speak to my Amendment 36A. I am very grateful to the noble Lord, Lord Teverson, for putting his name to it.

The discussions around the Bill have touched on the loyalty penalty and the tease-and-squeeze tactics mentioned by my noble friend Lord Stevenson of Balmacara, which are the root cause. In good consumer markets, competition drives down prices to deliver good outcomes for all customers—even those who shop around only every once in a while—because new customers see the same prices as loyal customers. In bad consumer markets, competition pits a small minority of highly engaged customers against the vast majority of those who, quite reasonably, engage only occasionally. These loyal customers cross-subsidise deals for a tiny minority of new customers for the first year of their deals. We know that those who can least afford it are disproportionately losing out under this broken market. To put it another way, our poorest citizens are subsidising the better-off in society. Currently, this loyalty penalty runs to hundreds of pounds per year being overpaid by millions of people to companies that exploit them. It is good that the absolute price cap will set an upper limit on the effects of this detriment, but it will still allow the behaviour to continue. It would be a wasted opportunity to allow this legislation to pass without also addressing the cause of the loyalty penalty.

Amendments 36 and 36A propose a relative price cap: a limit between a supplier’s cheapest tariff and its most expensive. In moving Amendment 36, my noble friend Lord Stevenson of Balmacara set out the arguments for a relative price cap. I want to add my support to this for two reasons. The first is fairness. We must bring an end to the grotesque idea that markets must necessarily punish those customers who do not relentlessly police them. Britain’s consumer regulations are some of the best in the world. They embody the principles of transparency and fair play to ensure that customers operate on a level playing field with corporations, so that our citizens can use their collective consumer power to get a better deal for everyone. That means that shopkeepers who short-change us, or manufacturers that mislabel their products, can be brought to justice.

However, in this area, our regulations simply fail, and they fail our most vulnerable citizens the hardest. They must be updated for the modern era. We must send a signal to markets—and the companies that seek to operate within them—that a “divide and conquer” or “tease and squeeze” approach to customers is not acceptable. Our hard-working citizens deserve to buy a product from a retailer without having the price hiked up when they are not looking. We must banish the principle of tease and squeeze.

Secondly, the role of legislation should be to bring lasting, meaningful reform that addresses the root cause of the problems facing our society. The loyalty penalty is a self-perpetuating dynamic. Efficient suppliers who want to offer good-value prices to their customers and not inflict tease-and-squeeze deals on them are disadvantaged in a market in which competition is purely driven by their position on a price comparison website. We have already seen this happen with some of the early challenger suppliers, which have started to ape the behaviour of the big six so that they can succeed in the market. Unless we break this cycle, the market will continue to be dysfunctional. The absolute cap will partially mask the symptoms for a couple of years, but the core detriment will continue and return with full force once the cap is lifted.

Introducing a limit on the gap between a supplier’s cheapest tariff and its most expensive will force companies to compete equally for new customers and loyal customers. This will reveal once and for all which companies are genuinely driving costs down and which companies are masking the real cost all along through pricing trickery. Some well-meaning people have warned that a relative price cap could lead to the big six removing their cheapest deals from the market, but we know that these so-called cheap deals are anything but, as 95% of people will roll on to an expensive tariff at the end of their first year, and end up paying more overall. Losing these deceptive deals would be good riddance to bad rubbish.

What is more, once we make pricing transparent, we will unleash the forces of the dozens of newer, more efficient suppliers. Once they are able to compete on a level playing field, customers will see a daily price war for their custom, as we see for groceries. By cleaning up energy pricing, customers who switch can be confident of getting a cheaper supplier, not one that is simply dangling misleading offers. Switching will be worthwhile, instead of being a merry-go-round, and we will restore consumer trust in a market that currently does not deserve it.

In moving Amendment 36, my noble friend Lord Stevenson of Balmacara has already proposed that a relative price cap should be implemented after the price cap, but why wait to introduce meaningful reform to a market that has already been failing customers for two decades? If something is worth doing, it is worth doing now. What is more, we are going to see a full-scale rollout of smart meters in the next two years. That gives us an imminent deadline to clean up pricing and restore trust in the market. Otherwise, we face a real danger that people will reject the opportunities that smart energy can provide.

Amendment 36A proposes that the relative price cap should be introduced immediately, alongside the absolute price cap, and be ongoing. Amendment 36 will therefore 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. It could be a step towards reducing the number of tariffs on the market, making buying energy even simpler for customers. Introducing a fair mechanism into the UK energy market is long overdue and benefits everyone, from those who buy energy to their suppliers, who are forced to improve their efficiencies to compete. That is why a relative price cap is a good idea for everyone and why it should be implemented at the same time as the absolute cap and be ongoing. I hope the Minister will see the benefits in both these amendments.

[Baroness Neville-Rolfe]

Noble Lords will know that I am not in favour of extending the cap, in whatever way. However, I am interested to hear about the relative tariff differential and would like to understand further how that works. I think the proposal here is that it should be imposed as well as a cap—it seems to me that that gives you a double regulation and I am not convinced that that is necessary. It would, however, be good to understand—the Minister may well be able to comment on this—what the advantages are of a relative cap in relation to the end I think we all seek, which is a more competitive market.

The noble Baroness mentioned retailers. As I was a retailer, I know that 19% to 20% of customers changing their supplier annually is quite a high figure, but the key point is that the underlying dynamics in the market are encouraging players to reduce prices and to innovate. That is what we want to see in energy. It would be good to hear from the Minister how he sees that happening in a situation where we have a cap, whatever its nature.

[Lord Henley]

I welcome the noble Baroness, Lady Kennedy of Cradley, to our discussions. Amendments 36 and 36A are broadly similar in asking the Secretary of State to develop an ongoing relative tariff differential. However, Amendment 36 says:

“The relative tariff differential shall take effect on the termination of the tariff cap conditions”,


while Amendment 36A, in the name of the noble Baroness, Lady Kennedy, to which a Liberal, the noble Lord, Lord Teverson, has joined his name—it must have good free-market credentials—says:

“The relative tariff differential is to take effect on the commencement of the tariff cap conditions and to be ongoing after the tariff cap conditions cease”.


They are broadly similar but would come into effect at different times. They would cap the most expensive advertised variable and default rate tariffs as a proportion of the cheapest, and Ofgem would set the differential.

There may be a need for further protections once the cap has ended, particularly for vulnerable consumers. Ofgem has indicated as much and has enduring powers to operate protections but I do not think it would be sensible to seek to determine the precise form that any protection takes, if it is needed at all. The energy market is likely to change significantly between now and then. Smart meters are just one part of that. The new clause inserted by these amendments would seem to introduce an indefinite relative price cap. It is not the intention of the Bill or the Government to put in place such a permanent cap.

We have come back again to tease and squeeze, which the noble Lord mentioned earlier. I briefly responded to that. I appreciate that the aim is to get rid of the practice of tease and squeeze. However, there is the risk that under the amendments suppliers would raise their least expensive standard variable and default tariffs, rather than decrease their most expensive. That is the Government’s fundamental concern about any kind of relative price cap. The Government and others, including the BEIS Select Committee, believe that a relative price cap would not work. I do not see how the outcome of a relative price cap would be any different, whether it was in place alongside an absolute cap or after the absolute price cap had been removed. A relative cap as a permanent feature of the market risks undoing the work of the temporary absolute cap.

The best way of ending the practice of tease and squeeze will be the detailed work, as I said, that Ofgem is undertaking to test better ways to secure customer engagement; the work to make switching quicker and more reliable; and the many other programmes to make the market work better. Recent changes mean suppliers can now make their default tariff a fixed-rate rather than a variable-rate deal, and many have done so. The Government believe that better engagement and better switching that leads to more effective competition is a proportionate and sustainable solution, rather than concurrent and permanent relative price caps. I hope that my explanations will satisfy noble Lords and my noble friend. I hope, therefore, that the noble Lord will feel able to withdraw his amendment.