Domestic Gas and Electricity (Tariff Cap) Bill

Debate between Oliver Letwin and John Penrose

3rd reading: House of Commons & Report stage: House of Commons
Monday 30th April 2018 Commons Chamber

[John Penrose (Weston-super-Mare) (Con)]

I rise to speak to amendments 2 to 4, which stand in my name and those of a variety of Conservative colleagues, including two members of the Business, Energy and Industrial Strategy Committee as well as former Ministers and Cabinet Ministers.

I should pause to say that I am not arguing against the Bill overall—I spoke and voted in favour of it in principle on Second Reading—and I hope that everyone involved in the campaign I have headed in this area for the past year and a half appreciates that I believe an energy price cap is much needed. I pay tribute to the 214 cross-party MPs who signed up to the idea, plus the Prime Minister and the Minister, who have all been vital in getting us to this point today.

My concern is about not the principles but the detail—the type of price cap envisaged under the Bill—because, to put it bluntly, a fair number of free market Tories are pretty concerned that we are choosing the most anti-competitive, complicated, bureaucratic and inflexible cap on offer. It is inflexible because the Bill specifies an absolute cap that will be set by an all-knowing committee of Ofgem regulators every few months. However, the international price of energy moves around every day, and it is impossible to know what the price will be in the next six minutes, let alone six months, so the cap price will be out of date in moments and will stay out of date until it is reset again months later. That means it will not protect customers in the way we all want and, because it will be officially blessed by Ofgem, it will embed and legitimise high prices. It is not just me who is worried. Which? says it is

“not certain that customers on a capped default tariff will benefit as market conditions change in future”.

The proposed cap is also complicated—hideously complicated. Why? The assiduous folk at Ofgem have already started publishing details of how they might go ahead and they are warming to their task. It would not be just a single cap, they say; it would be 42 different ones to cover gas and electricity, different meter types and different parts of the country. There would be more than 42 different caps, however, because each one may be split into several different versions depending on whether people pay by direct debit or in some other way, and each will have a fixed standing charge and a variable element—oh, and there is headroom, too. Each of those three items can be calculated in a marvellously technical and complicated variety of ways. For example, the variable element could use a basket of market tariffs, an updated competitive reference price, or a bottom-up cost assessment. Those things might be calculated using a periodical review of realised costs, or third-party data with pre-specified allowances for certain cost items, and so on and—turgidly, complicatedly—on.

[Sir Oliver Letwin]

My hon. Friend and I have had an engaging conversation about this for many months, but given all the things he reports Ofgem as planning, surely that means we will have not a single point tariff that rapidly becomes outdated, but rather a tariff that will respond—for example, to input costs?

[John Penrose]

As my right hon. Friend says, he and I have had many conversations about this over many months. I can only say to him that if his argument is that Ofgem might come up with a version of an absolute cap that is a bit less absolute and a bit closer to what I am proposing—in effect, one that caps the gap: a relative cap—I would agree with him that that is a good thing, but if that is the case, as a source of advantage for the cap, why would it not be even better to go the whole hog and have a relative cap in the first place?

Domestic Gas and Electricity (Tariff Cap) Bill

Debate between Oliver Letwin and John Penrose

2nd reading: House of Commons
Tuesday 6th March 2018 Commons Chamber

[John Penrose]

I agree that there is a difference between a freeze and a cap, but there are a couple of things that, none the less, make it an extremely risky and dangerous proposition to go down that road. For example, what if Ofgem picks a number and the international price of energy falls the very next day? What then? Switching customers in the ultra-competitive part of the market would find their prices drop quickly as energy firms react to the news, but Ofgem’s capped prices for loyal, non-switching customers on default tariffs—that is the example my hon. Friend talks about—would not move at all for another six months, when the cap can be reset according to the terms of the Bill. In that situation, the cap would be ineffective at protecting the customers it is designed to help and, because it is officially blessed by Ofgem, it would embed and legitimise high prices. Things would get worse rather than better.

It is not just me who is worried about that. Which? says it is

“not certain that customers on a capped default tariff will benefit as market conditions change in future”.

[Sir Oliver Letwin (West Dorset) (Con)]

As my hon. Friend knows, I have some sympathy with his arguments. Does he recognise that, as drafted, the Bill enables Ofgem to set the cap by formula, which could be related to wholesale prices and have the flexibility required to overcome the problem he describes?

[John Penrose]

I wish I shared my right hon. Friend’s confidence in Ofgem. All the discussion of the Bill so far from Ministers, from comments on the Bill and from people inside Ofgem is not what he describes. They are talking about an absolute cap in which people sit in a room and come up with a number, which stays that way until it is reset after six months—that is the way the Bill is drafted.

If the Bill can be amended in a way that allows it to be far more flexible—that is one of the things I hope to encourage both Members here present and Ministers at later stages to consider—we might be able to iron out some of these issues, but I do not share my right hon. Friend’s optimism in that regard.

[Sir Oliver Letwin]

Looking at clause 2(1)(b), as drafted, it seems perfectly clear to me that Ofgem will have to set out how the cap is to be calculated, which positively points in the direction of a formulaic rather than an absolute position.

[John Penrose]

But as my right hon. Friend will know, it is also stated elsewhere, particularly in the guidance and in many of the other documents on this, that we are looking at an absolute cap. The word “absolute” is used repeatedly, and it has been used repeatedly to me in conversations with Ministers. If we can remove those other points as well, so that they are not going to push us in the direction I worry about, many people here would be a great deal more reassured. We will have to come back to this on Report—

[Sir Oliver Letwin]

rose—

[John Penrose]

I will give way one more time and then I will have to make some progress, because Madam Deputy Speaker is catching my eye.

[Sir Oliver Letwin]

I certainly will not press the point beyond this. Does my hon. Friend not need to distinguish between absolute, which means not relative—to offer tariffs—and formulaic and flexible, which the drafting certainly does allow, as opposed to a point that is set by a Committee for six months?

[John Penrose]

We will need to come back to this matter, but it would be tremendously helpful if Ofgem came up with some clarifications on it, because that might reassure me and others. So far I have had nothing to reassure me in that direction—in fact, quite the opposite.

As I was saying, it is not just me who is worried about this: both Which? and uSwitch worry it will mean cheaper fixed deals will be withdrawn from the market; and leading challenger energy firms such as Octopus Energy, Utilita Energy, Utility Warehouse, Ebico and Good Energy are all worried that Ofgem’s price-fixing efforts will inevitably get it wrong. The lawyers and lobbyists for the big six are licking their lips at the prospect of all those fat fees from legal challenges and persuasive lunches. It is no coincidence that they are already demanding the Bill should allow expensive and time-consuming appeals to the Competition and Markets Authority whenever Ofgem’s committee sets a price.

If all these people think the Bill’s details create problems, what is the alternative? What needs to change? The thing to remember is that default tariff prices are just a symptom of a much deeper problem. The moral flaw at the heart of this market—the thing that sticks in the throat —is the mark-up loyal customers are charged compared with competitive switching deals. I am talking about the enormous, unjustified, sneaky price hike the big six hit people with, without their consent, just because they are loyal or simply too busy to switch. That is the unfairness, the burning injustice and the thing that drives customers—our constituents—to write to each and every one of us demanding, “This must change”.

If the problem is the mark-up as between the competitive deals and the default tariffs, why does the Bill only address half the problem—the price of the default tariffs—rather than the gap between the two? If we are really serious about solving the problem, why not cap the gap instead? A cap that creates a maximum mark-up would deal directly with this moral underlying problem—the cause of the rip-off—rather than only half of it. It would mean default tariffs would have to move in tandem with the ultra-competitive, consumer-friendly part of the market. People who took the trouble to switch would still get the best deals, but customers who forgot or did not want to switch would get protection, too.

Capping the gap is future-proof as well. If the international price of energy fell suddenly, as we were discussing earlier, it would not just be the competitive switching deals that would get cheaper; the price of capped tariffs would fall, too, and people would not have to wait for six months for Ofgem’s all-knowing committee to meet and change it. Capping the gap would not dilute or derail the all-important underlying market changes which are going to make energy feel competitive and normal either. Customers would still have plenty of incentives to start switching. That is why this Bill and its introduction make this a great day— I meant it when I said it. This Bill is important, even though it is only temporary. It will save millions of customers hundreds of pounds on an essential product. Although it is not perfect and it could be better, it is a very important step. So for the moment, for the principle of the thing, for the Second Reading debate today, let us just celebrate the fact that it is here at all and support it.

--- Later in debate ---

[Sir Oliver Letwin (West Dorset) (Con)]

In the interests of brevity, I want to make one point about the rationale for the cap that I do not think has yet been stated in this debate, and two points to reassure my hon. Friends about issues that have arisen.

On the rationale, it is true that Ramsey pricing—the gouging of so-called loyal or, in other words, inertial customers—is a major issue, but predatory pricing on the other side of the balance sheet is equally important. As the hon. Member for Leeds West (Rachel Reeves) said, large suppliers are making uncovenanted surpluses out of the default tariffs, which they are using to cross-subsidise their competitive tariffs to exclude entrants from the market to the greatest possible extent. Once they are deprived of the ability to generate oligopolistic returns from the default tariffs, as my hon. Friend the Member for Weston-super-Mare (John Penrose) mentioned, they will have to do what they are very reluctant to do —namely, recognise more closely the true cost of their own inefficiencies in their more competitive tariffs, thereby allowing much greater penetration of the market by small challengers.

That is why I celebrate the fact that the Government have made the cap a temporary one with reviews. The shadow Secretary of State, when she was engaging in what sounded on this side of the Chamber suspiciously like scraping the barrel to find things to object to, asked the question: how will we know that the time is ripe for the cap to be removed? The answer is when the challengers have actually been able to move into the market in great numbers, because the cross-subsidy in the predatory pricing model has faded away and we therefore have a proper energy supply market.

Of my two crumbs of comfort, I want to offer one directly to my hon. Friend the Member for Weston-super-Mare. We all owe him a great debt of gratitude for banging on about this for a very long time and thinking about it deeply. I assure him that the Bill, whatever anybody may have said about it, clearly allows for a cap that, far from being a freeze, will never be a freeze, as he recognises, and will also not be an absolute point tariff either—or need not be an absolute point tariff. It is entirely in Ofgem’s gift to decide how the cap varies or does not vary depending on circumstances in the external supply markets for energy.

Knowing the current personnel in Ofgem, and having talked to them about this—I am grateful to the Minister for Energy and Clean Growth for facilitating some of those discussions—I am absolutely convinced that they will in fact make this a calculated, formulaic cap that properly reflects the changes in external international circumstances. It will therefore be miles away from the lunacies, although they were politically attractive lunacies at the time, of the Labour party’s original proposal for an absolute price freeze, which, incidentally, would have crippled customers at a time when energy prices were falling.

The second point I want to make to my hon. Friends is that this is the right kind of structure.

[John Penrose]

I seek a little further reassurance from my right hon. Friend. He seems to be coming up with an elegant mechanism for redefining an absolute cap to encompass relative caps, but just relative to the wholesale market rather than relative to other tariffs. If so, that would be incredibly elegant. Does he believe that that would allow repricing within the six-month period before the Ofgem committee sat again?

[Sir Oliver Letwin]

Who knows? The point I was just about to make is that the Bill will hand the whole thing over to Ofgem. This is basically an “Ofgem—you get to decide it” Bill, so we will only know when we see what it produces. However, I would bet my bottom dollar—not that I have very many bottom dollars—that Ofgem will actually produce a formula, not a number, so the cap will vary continuously, or pretty much continuously. Ofgem is pretty sophisticated economically and it knows perfectly well what happens in the wholesale markets. I do not think it will lock itself in to an unvarying cap.

My main point is structural: the Bill will hand the issue to Ofgem. The good news is that that is not nationalising the pricing of the energy markets. It is not taking it into the hands of the Government. What my right hon. Friend the Secretary of State said is true—one of the great achievements of the last 30 or 40 years of the evolution of our utilities markets as a whole is that we have reinvented what the Victorians once had, which we lost in the early and middle part of the 20th century, which was the whole idea of the Government establishing a set of technocrats who are not politically motivated or driven by electoral dynamics, and so are not inclined to do things that are stupid in the long run but look good because they win votes in the short term. Instead, they try to get economically rational results.

Ofgem is such a case. It is not perfect—no regulator is—but it will be a hell of a lot better than politicians at setting prices over time. The Bill therefore has the right structure. It is not a Marxist takeover, a price freeze or a recipe for point tariffs. It is a recipe for allowing a regulator to set an economically rational means of preventing a combination of Ramsey pricing and predatory pricing, and as such those of us who believe in the purities of markets can perfectly well subscribe to it.

European Union (Withdrawal) Bill

Debate between Oliver Letwin and John Penrose

Committee: 6th sitting: House of Commons
Tuesday 12th December 2017 Commons Chamber

[John Penrose]

I absolutely accept that. Another important thing about the sifting committee will be that many of the other bits of Brexit-related legislation that are starting their journey through this House may contain large numbers of statutory instruments—potentially primary legislation-amending statutory instruments. What we agree for this particular Bill may well be an important template for how we treat those similar powers in subsequent pieces of legislation. We are doing important work here and it is crucial that we do it. I also urge my hon. Friend to broaden out the Procedure Committee’s approach to look more broadly at SI scrutiny powers after all this is done; many of us would encourage him to do that. However, such an approach is perhaps too wide for this Bill right now.

[Sir Oliver Letwin]

Before my hon. Friend moves on from sifting, does he agree that it represents substantial progress that we have heard from the Dispatch Box today that the recommendations made by the Procedure Committee will be respected by the Government in their conduct in the House?

[John Penrose]

Absolutely. Those commitments will be important and consequential, but we also need to ensure that everything gets baked properly into the Standing Orders and that the relevant votes are passed correctly.

Moving on to scope, I think still we have further to travel. A whole slew of amendments—not just the three or four tabled by my right hon. and learned Friend the Member for Beaconsfield that I have put my name to, but those of the right hon. Member for Normanton, Pontefract and Castleford (Yvette Cooper) and others—are trying to address the scope of the powers that Ministers will be given. In fact, Ministers themselves have accepted the principle, saying that they are sympathetic to the idea of trying to limit the scope of the powers. The Minister said that both he and the Secretary of State would like to do that if they could; it seemed to be a question of how, not whether it was desirable in principle.

When I tempted the Minister in an intervention, he also said that the view in the Department is that Ministers want to try to take just enough powers to successfully translate EU laws into British laws and no more. We all accept that there must be no less than the minimum required, but he was clear that Ministers only want to take the minimum. The question is not about the principle of necessity and sufficiency; it is about how that is translated into a legal wording that will allow the principle to be clearly expressed. I gently, but I hope forcefully, say to Ministers that the words in the Bill at the moment do not pass the sniff test for an awful lot of us in the Chamber.

I am extremely pleased, therefore, with the open, positive and constructive way in which Ministers have approached the issue and with the commitment from the Dispatch Box this afternoon to go back and have a further look. I could not tempt the Minister into a firm promise to introduce an amendment, but I think that that is going to be necessary by the time we get to Report if the Bill is to be amended in a way that becomes acceptable and passes the sniff test for most of us here.

The Minister was saying—I paraphrase him—that Ministers accept the principle that the minimum necessary, the necessity test, is the right one in principle, but they cannot find the right words because if they use the word “necessary”, and they have multiple necessities, the courts will interpret that in a way that is unhelpful and does not deliver what everyone wants. The problem Ministers have is that the word that they have chosen instead of “necessary” is too broad and brings in all sorts of other possibilities that give a great deal of concern around the House that Ministers will unintentionally but in practice introduce other powers that they have said this afternoon they do not desire, need or want to give themselves in principle.

[Sir Oliver Letwin]

Is my hon. Friend sure that the source of the problem lies in the term “appropriate”? The more I have listened to the debate this afternoon, the more it has seemed that the problem may come from the word “arising”. Perhaps we need words more like “entailed by”, which would limit the scope of appropriateness.

[John Penrose]

What my right hon. Friend has just demonstrated is the point that I was just about to come on to. We are going to need different words—in the plural—than we have at the moment and the discussions that have been promised from the Dispatch Box, even if an amendment has not yet been promised, will be essential to get the issue right. It is not right at the moment.

During the debate this afternoon, three or four options have already been proposed from the Back Benches, by my right hon. and learned Friend the Member for Beaconsfield, by my right hon. Friend the Member for West Dorset (Sir Oliver Letwin) just now and by a couple of others. It is clear that there is no shortage of solutions; it will not be acceptable for Ministers to say, “This problem is too hard so we are going to stick with what we have.” There are enough brains in the room for us to get this right—there are certainly enough on the ministerial Benches and among advisers. So it ain’t going to be good enough for Ministers to say, “We understand the principle and have already accepted it in our remarks today, but it is all too hard and we can’t possibly manage it.” That will not fly.

I have discussed this response with my right hon. and learned Friend the Member for Beaconsfield. We are content, based on what we have heard, not to press the amendments on scope that we have tabled here this evening. However, it will be essential before we get to Report to see some creative alternatives that solve the problems that hon. Members on both sides of the House have alluded to. People on both sides of the House can propose lots of possible solutions. We need to find some that work and make sure that Ministers are content to introduce them in the impressively constructive tone with which they have already addressed the issue of the sifting committee. That needs to be done before Report.