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Domestic Energy Users

– in the House of Commons at 2:30 pm on 3rd July 2009.

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Motion made, and Question proposed, That this House do now adjourn. —(Mr. Frank Roy.)

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Photo of Mark Todd Mark Todd Labour, South Derbyshire 2:34 pm, 3rd July 2009

I congratulate the Minister on his appointment to his post, but I shall reserve further congratulation until I have heard how he answers this debate. I could not have chosen a much more appropriate time to call for it, because in the past week Ofgem has published its report on complaint handling by energy companies, Consumer Focus has published a major report on energy pricing, and Ofgem has intervened to criticise aspects of that report. I shall discuss those events and link them to some constituency experience.

First, let me sketch where we have come from. Until October 2008 consumers concerned about the practices of their energy company could approach Energywatch to assist them in their complaints. During the long period in which British Gas struggled with its billing system, I made heavy use of Energywatch to tackle repeated errors and overcharging. It handled individual complaints and sought to champion consumer interests generally.

The Government decided to merge Energywatch with other consumer bodies to form Consumer Focus. They transferred to Ofgem—until then largely a regulator of competition within the energy sector—the task of oversight of complaint handling. The argument was that energy was a mature market: consumers could readily vote with their feet if they were unhappy, and companies should be the main focus of complaint handling. Presumably, it was argued that the existence of Energywatch, as a quasi governmental substitute, led companies to invest fewer resources in customer service and complaint handling.

Such a robust, market-centred strategy would have much to commend it if the underlying assumptions were right. Those would be that consumers had appropriate information to prompt choice; that transferring to another supplier was straightforward; that there were sufficient variations in price and customer service to make changing suppliers worthwhile; and that the companies' handling of customers was of a sufficiently high standard as not to require assistance. None of those assumptions is true.

A small number of consumers switch suppliers, often playing the special offers. However, most of the market is inert, with people staying with whatever company inherited the supply from the former state provision on privatisation. Most consumers find it hard to make comparisons. The study by Which ? of consumer views on their bills showed widespread difficulty in understanding how the bills work and how consumers' own behaviour might influence their bills. One customer said:

"It is impossible from my bills to see exactly how much I am paying per 'unit' of gas or electricity, or to compare offers by different suppliers. We need a system which is completely transparent and answers the questions: how much have I used? How much did each 'unit' cost? and sets this out so I can then compare with other suppliers' charges, like for like."

Another said:

"I find it very difficult to understand my energy bills. I endeavour to be as economical as possible but have no idea whether I am succeeding."

Those are typical comments from the survey.

There is also some mistrust in the market. People doubt how genuinely competitive it is, and some recall the hard selling of the initial period of competition. They have also heard, as most MPs have, of problems arising when a supplier is changed—I have dealt with some such cases myself. Energy provision is so important that few like to take risks—it is not like testing a new brand of breakfast cereal. This is a sticky market, and as such it is exploited by the companies. There is evidence from one of Ofgem's studies of overpricing in companies' core, inherited market, deliberately taking advantage of the conservatism of loyal customers while offers are pitched at areas of the country where they seek a greater market share.

What advantage would a consumer gain from changing supplier? There may be a short-term price advantage. The bundling of electricity and gas may offer gains, but those offers are not relevant in areas without mains gas. However, the prices tend to move in tandem and there would appear to be few long-term gains. As for customer service, it is uniformly abysmal.

Ofgem's study of complaint handling—accompanied by characteristically tepid advice to the companies and an expectation of better results next year—presents data that suggest this must be the worst service offered by any industry in our country. The best company at handling domestic complaints, E.ON, managed to leave 57 per cent. of customers surveyed unhappy with the quality of its complaint handling. The worst, npower, to which I will return in a moment, left a staggering 70 per cent. dissatisfied with the way that their complaint had been dealt with. There is clearly no competitive pressure whatever to provide high standards in that key measure. The chief executive of Ofgem, however, is perhaps more optimistic. He opined:

"It is in suppliers' best interests to ensure that the service they provide is of a high standard. This is clearly an opportunity for them to raise the bar to retain existing customers and attract new ones."

Would that that were true.

Back in the spring and summer of last year, while Energywatch was facing its demise, I anticipated that problem and tabled parliamentary questions and wrote to Ofgem about how to establish proper complaint handling standards. One specific area, as an example, came up in its current survey, in which it identified the difficulty of mapping precisely what a complaint was for one customer—exactly the problem that I anticipated 12 months ago in correspondence with Ofgem.

So the Government's assumptions about the maturity of the market and the ability of consumers to lever gain is flawed. The consumer support infrastructure designed around those assumptions is struggling and, as I will illustrate, squabbling. Ofgem has the lead role. It commissions studies into the sector. It does not assist consumers directly but can address group complaints as it did on npower's price sculpting activities. Ofgem leaves individual support to an ombudsman and to Consumer Focus. There is a lengthy time limit before a complaint may be referred to an ombudsman and Consumer Focus, as a body covering most aspects of consumer assistance, is not able to give the scale of support previously offered by Energywatch to energy-specific complaints. One senses some degree of turf war behaviour between the organisations.

Last week, Consumer Focus released a study suggesting that the common consumer concern—I would be amazed if other hon. Members did not have examples of such problems—that prices seem to go up further and faster than they come down when wholesale prices vary over a period of time. Consumer Focus used Ofgem data and model assumptions to suggest that consumers were right in that view and that they were being substantially overcharged. Ofgem publicly contradicted that. The two bodies should share a common interest—to serve consumers. It scarcely breeds confidence that that goal is central to either of them if they squabble in public.

Let me now turn to one example of the industry's poor quality service to customers—npower's foray into what has been called gas price sculpting. I will not seek to explain its model in detail. I have not got time—the company offered a five page text on its website to consumers who did not understand that method of calculating their gas prices, so I certainly will not attempt to read it out. It is sufficient to say that it introduced a two-tier pricing model with a quantitative start date for the trigger for the higher scale price set by the company. Several of my constituents spotted that they might well face higher bills and complained.

As I have mentioned, the company produced material that was well nigh impenetrable. I read the five pages and, frankly, if I had been one of their customers I would not have been able to work out how it affected me. Most ordinary consumers presumably just trusted that whatever it meant, they would not be mistreated. Ofgem, at the initial prompting of Energywatch, instituted an inquiry into the practice that took nearly a year to report. When it did, it failed to condemn the company's practice, merely expressing concern about the company's failure properly to inform customers. Perhaps surprisingly, bearing in mind the mildness of the reproof, npower agreed to pay £1.2 million to 200,000 consumers—that is, about £6 a head.

An apparently minor victory for consumers, however, rapidly dissolved when scrutinised in more detail by people such as my constituents, Mr. Stratton and Mr. Vallis, who were determined on the matter. They and many others did their own calculations—to be honest, they were better than I in that respect—and were able to pursue claims against npower. One of those gentlemen received an £85 ex gratia payment. I shall come back to one of the interesting aspects of that payment at the end of my speech. Far higher sums than that are quoted on the web, particularly in cases where court action was threatened against npower.

I have drawn the apparent inadequacy and weakness of the Ofgem judgment to Ofgem's attention. The relaxed response essentially drew attention to any consumer's right to pursue the matter further with npower; there is, of course, that right, but only a minority of consumers are equipped to pursue the matter further. Our purpose, in a complex marketplace—as I have suggested, some companies seek to make it as complex as they can—is to assist the individual householder who must fight a giant company. Our purpose is not to empower the capable and well organised in our constituencies to do that, but to protect the vulnerable.

In correspondence with one of my constituents, attention was drawn to the possible legal constraints on Ofgem insisting on compensation because of time delays since the original price increase. The leisurely course of the investigation clearly did not seem to have been affected by that concern. In my correspondence with npower, I was requested to treat the payment made to my constituent as a matter of commercial confidence, and was told not to disclose it to any third party under any circumstances. I had not asked to be treated in that way and, prima facie, I would have said that it was a breach of parliamentary privilege to suggest that I should not be able to discuss what my constituent had received. I can well understand the company's embarrassment in that matter, but I have never before been told by any company that I owe any duty other than to my constituent in a matter of that kind.

So what do I seek from my hon. Friend the Minister? First, I seek clarity on consumer assistance in the marketplace; there should be no more squabbling or turf wars. Secondly, I seek recognition that the market remains complex to most consumers, and that additional specific assistance is required. Thirdly, I seek a far more robust approach to the companies on their customer complaint handling capability. Their current shocking performance will not be corrected by market pressure. Fourthly, clear obligations should be placed on companies to ensure that bills and billing models are clear. Obscurity and complexity are two of the few areas in which the companies seem genuinely to compete; they try to make what they offer customers as difficult to understand as possible. Fifthly, if there are legal constraints on a regulator when it comes to tackling activities such as npower's price sculpting, let us address them. In the meantime, the investigation by Ofgem should itself be examined. How long did it take? How were data collected? How did consumers and the company have their say? That would be a test of Ofgem's fitness for purpose in such matters.

Finally, in spite of Ofgem's qualified all-clear last year, most consumers do not believe the market to be genuinely competitive. Its price movements appear to be like an elephantine dance programme, and the normal triggers prompting quality improvements and sustained price advantages simply do not seem to function. Let us have the Competition Commission examine the market.

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Photo of David Kidney David Kidney Parliamentary Under-Secretary, Department for Energy and Climate Change 2:48 pm, 3rd July 2009

I congratulate my hon. Friend Mr. Todd on his choice of subject—it is an important subject, and he showed a great command of it—and on the timeliness of this debate, to which he referred. To the events that he described at the beginning of his speech, I would add the publication yesterday of the Government White Paper, "A Better Deal for Consumers: Delivering Real Help Now and Change for the Future". A lot of the publicity that the White Paper received, yesterday and today, was about those consumers with personal debt, but there are relevancies to this debate. For example, in the White Paper, there is mention of breathing space relief for consumers who are overburdened with arrears on their utility bills and other secured debts. There are to be reviews of how effectively energy and water suppliers protect vulnerable customers from disconnection. There is to be help for customers with problem debt, and programmes to reduce household energy bills.

It is to the great credit of my right hon. Friend the Secretary of State that within my portfolio at the Department of Energy and Climate Change I have responsibility for consumer interests. I appreciate that the Department is young, but this is a first and I believe it is a very welcome development. I agree with my hon. Friend that we need to be active and demanding in relation to consumer concerns about energy, and I am happy to take on that responsibility.

With that in mind, let me say at the outset that the Department regards it as essential that all consumers should have confidence that they can use energy reliably, safely and affordably. I regard the description of "consumer" as all-encompassing, so, for example, it incorporates industrial and commercial consumers of energy, just as it covers domestic householders. My job is to ensure that consumers will be treated fairly by the companies that deliver our energy. I want everyone to have confidence in the rules and arrangements under which those energy companies operate. In particular, that means that people and organisations should have the right help and information to make good decisions about the way they buy their energy, and about how to save energy and save money.

Last year, the gas and electricity regulator Ofgem registered public concern about prices, and about other aspects of the energy supply markets. Ofgem responded by launching a detailed probe into the energy supply markets. I have seen Ofgem's report of those findings. Ofgem concluded that the markets were working well overall and that there was no evidence of collusion between companies in the sector, but it also discovered some areas where real improvement is needed.

Ofgem's work revealed that many consumers were suffering significant disadvantages in what they were paying for their energy. Some practices relating to prepayment meters may have attracted most public attention and reporting at the time, but there were also broader issues of unfair charging, as described by my hon. Friend today. Under pressure from Government and the regulator, suppliers have taken action to remove those unfair practices, and that is a start, but all the suppliers need to continue to take responsibility for putting an end to such practices and avoiding any repetition in future.

Ofgem is in a position to make changes to the suppliers' licences to secure better, fairer practices from now on, and I shall be watchful to ensure that consumers get the benefits of these changes. I want people and organisations to have confidence that they will be treated fairly however they pay for energy, and that they will be properly and clearly informed about charges. They need to know that suppliers are competing actively and fairly for their custom. We would all like to see such problems solved more quickly. Nevertheless, the Ofgem probe has been of great value. It has provided evidence to show where specific problems are. It is only with such evidence that the right changes can be made to achieve real improvements.

As my hon. Friend said, clarity is an important factor for householders and business customers alike. Ofgem's investigation showed that consumers are not always able to make the best choices about tariffs, payment methods and energy use. Ofgem accordingly proposes new obligations on suppliers to provide clearer information to their customers which includes a standard annual statement including the tariff name, the customer's consumption and a reminder of the right to switch, and simplified information on tariffs to make comparison easier, including a clear price scorecard.

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Photo of Mark Todd Mark Todd Labour, South Derbyshire

One of the other elements that has been discussed is an obligation on the company to point the way to a cheaper source within its own suite of offerings. Does my hon. Friend see that as an obligation that would be placed on the company as well?

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Photo of David Kidney David Kidney Parliamentary Under-Secretary, Department for Energy and Climate Change

I will take that as a representation and think about it. I remind my hon. Friend that in the fifth Session legislative programme there will be an energy Bill, in which we might be able to come back to that issue.

Better clarity of information and the avoidance of confusion about tariffs offer consumers much-needed confidence. They, and the proposed licence condition changes on preventing unfair tariff discrimination, will go a long way towards avoiding the kind of problem that my hon. Friend describes.

I fully appreciate my hon. Friend's concern about customer information; other hon. Members raised similar concerns in a debate in Westminster Hall on 10 June. My hon. Friend the Minister of State responded to that debate. In doing so, she offered hon. Members the opportunity of a meeting with Ofgem to discuss the concerns. I am currently making the arrangements for that meeting. Ofgem has consulted on its proposals, and I will ensure that my hon. Friend's concern and constructive suggestions are fed into that consultation process. I am sure that many interested parties will have responded to the consultation, and I know that consumer bodies have been involved.

It is essential to get the matter right and to make sure that in future all consumers have the appropriate level of information in a user-friendly format. Whether they are basing their decisions on their past energy usage or on their response to marketing, consumers must be able to rely on the information provided to them by others. On the subject of marketing, I should mention that Ofgem has also addressed standards in doorstep selling. It is proposing new rules to require suppliers to offer written quotations following doorstep sales and to provide that the offer made and accepted on the doorstep must be better than the customer's existing deal. Taken together, those actions represent significant strides forward in ensuring that in future consumers can have much more confidence that they are paying fair prices for their energy.

With respect to the npower case mentioned by my hon. Friend, I understand that the company failed to notify consumers of changes in some of its tariffs; because of that, those consumers were unable to take action to move to a different tariff or supplier. Clearly, it is essential that suppliers meet their licence obligations in relation to changes to tariff rates and that the regulator has the powers that it needs and is prepared to use them. That, I think, is my hon. Friend's message to me. Ofgem's recent proposals on improving consumer information should also impact on the issue.

As my hon. Friend said, last year the Government changed the arrangements for consumer representation, bringing together the public's representatives in the energy, postal services and water sectors. We believe that we have put in place a more effective system. However, we are not complacent. I agree with my hon. Friend that the new arrangements must be monitored to ensure that they are working as intended and that there are no gaps. The guiding principle in judging their effectiveness is whether they are serving the best interests of consumers.

I assure my hon. Friend that the Department for Business, Innovation and Skills is planning a review of the new arrangements in the autumn, and I will be looking carefully at the current arrangements myself. We need to make sure that all the organisations involved are working effectively together.

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Photo of Mark Todd Mark Todd Labour, South Derbyshire

Would the Minister use as one of the criteria the way in which individual consumers are assisted? The great strength of Energywatch was its ability to pick up an individual complaint, understand its greater significance, assist the individual and apply some of the lessons to the companies.

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Photo of David Kidney David Kidney Parliamentary Under-Secretary, Department for Energy and Climate Change

I understand what my hon. Friend is saying and as a constituency MP myself I certainly recognise what he said about Energywatch. However, I am not prepared to go as far as him and say that the new organisation will not be as effective as Energywatch. It can be as effective—if not more so, given the time and support. I will not take up the particular suggestion made by my hon. Friend, although of course I want the consumer representatives and the companies to be consumer-focused.

On prices, a subject of popular discussion and debate is whether reductions in the wholesale costs of energy are passed on to consumers promptly by energy companies. We have evidence that, in the past, competition in the UK's markets has pushed down prices following wholesale price falls more quickly here than in countries with less competitive supply markets. However, the subject is of such keen and continuing interest among all consumers that I want there to be constant reassurance that that remains the case today and for the future. Are suppliers still competing on price? Is competition working in favour of the people who have to pay the bills?

It is precisely because Ministers, like everyone else in the country, want the answers to those questions that we asked Ofgem to get involved and stay involved. Ofgem now tracks the link between wholesale and household prices and provides greater transparency. In this way, we can give consumers answers. So far this year, Ofgem's analysis is that the price cuts of 2009 appear to reflect the falls in wholesale costs to date. I am encouraged by that news, but the effectiveness of this work depends on keeping it going. I shall be watchful of this, as I want to be sure that competition is working and that consumers are getting fair treatment from suppliers and from the energy system.

I am aware of the Consumer Focus news release on price movements that my hon. Friend mentioned. My officials are discussing the data with Consumer Focus. Our initial assessment was that we did not recognise the figures and analyses used. However, I agree that it is important that bodies in the sector, while being able to question and interrogate each other constructively, ought not to fall out in public, and it is certainly regrettable if confusing information is thereby provided to consumers.

As my hon. Friend says, Ofgem's recent report on complaint handling showed some very disappointing results of consumer dissatisfaction with suppliers' performance. It is not sufficient for suppliers to have the necessary systems in place, although that is a start. They need to improve the consumer's experience of those systems. I believe that Ofgem is meeting stakeholders this month to discuss how to ensure that. I agree that price will be the most important factor when consumers choose between suppliers, but satisfaction is also a significant issue, and suppliers have a real interest in getting the procedures working more effectively. I will pursue that issue actively in my discussions with companies and consumer bodies. There may be a case for the regulator to take action where the supplier does not meet the standards that are laid down. Ofgem has powers to fine suppliers up to 10 per cent. of turnover for a breach of these standards.

As regards my hon. Friend's concern about competition, compared with many markets there is a high level of switching. The process of switching has been made easier. As I mentioned, there are new proposals to make doorstep selling—probably the most controversial channel for switching—much safer for consumers. A small number of consumers are very active, as my hon. Friend says, but large numbers of other consumers have moved to better deals. Those who have not yet switched can still make considerable savings if they do so.

Suppliers have sometimes changed prices within a similar time frame, but they share many of the same cost pressures, particularly movements in wholesale prices. In most sectors, businesses will price with an eye on the competition: this is not proof of a failing market. In fact, when it comes to lowering prices following falls in wholesale prices, it is easy to become concerned if one or two companies do not move with the others. As my hon. Friend says, Ofgem found evidence of unfair differentials in pricing, and it has taken action to prevent this in future; the Government have strongly supported that action. We need to ensure that competition is working and to act where it is restricted, but we need to base actions on real understanding of what is happening, and what is not happening.

Our energy markets in the UK have ensured that over the past decade household consumers have benefited from some of the lowest energy prices in Europe. However, that is history: we need always to be vigilant on behalf of the consumer. I recognise that none of us, least of all Government, can be complacent about the services that paying energy customers receive. I am aiming for the best and the fairest service for all consumers. To achieve that ambition, I shall be calling on the regulator, the energy companies, consumer representation groups and consumers themselves to help me. I take it that I can say with confidence that my hon. Friend is willing to help, and I shall seek support from other right hon. and hon. Members. Regulation needs to be active and effective, attuned to current business and social standards. Where necessary, rules must be amended now and in the future to stop unfair practices. Those investing and operating in the energy sector need to work for the steady improvement of the ways in which the markets function for consumers.

I appreciate the interest that my hon. Friend has shown in the serious subject of protecting current and future energy consumers. I pay tribute to his personal efforts on behalf of his constituents. I hope he can see that I am determined to act upon the issues that he has raised in this debate.

House adjourned without Question put (Standing Order No. 9(7)).

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