Speaker: Stephen Littlechild is a fellow at Judge Business School, University of Cambridge, emeritus professor at the University of Birmingham, and the UK electricity regulator 1989-98.
All-Party Parliamentary Group on Energy Costs
Wednesday 10 September 2014
Speaker: Stephen Littlechild, former Director General of Electricity Supply
Some comments on regulation:
- Introduction of simple tariffs and limiting the number of tariffs to 4 on the basis of the offering being too complicated. Why has switching halved since 2008? Simplicity is not a factor in switching. Limiting suppliers to 4 tariffs created barriers to innovation and stopped the introduction of new products to the market. This is not helpful. Customers need good alternative offers.
- Rise in fuel prices are outside of regulatory control. Competition issue is ensuring that customers have access to the best tariff.
- Climate change policies and redistributional policies are under the control of government and increase energy bills for customers.
- Some customers pay higher prices than others for the same services (particularly true for those on low income). Ofgem required the additional cost paid for pre-payment meters to be removed. This reduced prices for pre-payment customers by £500m, but was not cost reflective and caused those costs to be borne on other bills.
- Non Discrimination Conditions (NDC): by concentrating on this, Ofgem’s policies increased the profits of supply retail business. Whilst NDC was only supposed to be for 3 years (until 2011) Ofgem refused to re-consider it after the initial period. The NDC only works if the costs are different, otherwise it does not ensure different prices to different customers.
Changes should be made to enable customers to engage with the market and competition. Switching supplier (take-up of which has halved since 2008) occurs when there are good deals and offers. Customers switch when there are good deals and discounts.
The biggest issues (which is out of both regulatory and government control) is the cost of fuel. However, government policies such as energy efficiency, climate change and redistribution efforts (more so from previous governments, over time, than the current one) have had their effects on pricing.
The government is working on collective switching, which will help disadvantaged consumers. Some customers do pay more than others: rather than hampering the markets it is better to help those customers work to get the benefits.
The management of Ofgem and their area of focus will determine the outcome of the problems listed above. The referral to the Competition and Markets Authority (CMA) is a good decision.
Question from the Chair: How does referral to the CMA fix the problems caused by Ofgem’s policy on NDC? How would Ofgem explain the rational?
Stephen Littlechild: The benefit is that CMA will provide an independent overview and an authoritative view on the correctness of the NDC policy. The explanation would be that the different prices were unfair and it was Ofgem’s job to bring about fairer prices, so they decided on the limit of 4 tariffs.
Questions from the group
There has been a decline in switching, how is it possible then that the non-big 6 suppliers have grown in the last couple of years if Ofgem’s policy is not working?
Stephen Littlechild: It seems that the decline in switching is a result of Ofgem policy; new entrants have been brought into the market since 2008 because of the increase of supplier profits. This is evidence that the market is working. There is a question as to whether Ofgem policy slowed down switching; there seems no evidence to show otherwise.
Switching is not allowed on the doorstep, where vulnerable people had done most of the switching in the past. Neither Ofgem nor the big six support switching sites to do this. Ofgem rules prevent companies from creating cheap deals, what role is Ofgem playing in the markets for consumers?
Stephen Littlechild: Ofgem did a good job until 2008. Whilst the switching sites in the UK are the best in the world, we have 12 sites competing with each other which attract customer attention. They are immensely helpful, however, they should do more work with customers who are vulnerable and disadvantaged, although they may not be able to do that for legal reasons? Ofgem has confused itself with an interest in behavioural economics, you have to attract customer attention, which is what switching sites do relatively well.
The doorstep selling issue in an interesting one worth exploring; Is Ofgem right in not encouraging it and are the companies acting properly in refusing to allow product to be sold by switching sites at the door step?
Is there a need for transparent, default tariffs and prices?
Stephen Littlechild: No need for default tariffs and prices. (On an earlier point raised; suggesting that switching sites perhaps promote only the companies that have paid for more prominent positions) is this such a big issue? Is it seriously disadvantaging suppliers in anyway? Supermarkets operate in the same way. On balance the advantages outweighed any disadvantages.
A contributor who runs a switching site explained that his site did not discriminate against any suppliers and promoted them all.
Is vertical integration an issue, with more information available to more companies?
Stephen Littlechild: Is the market more efficient and competitive than not, that is a question to which the market must decide the answer. It does seem to work for resale companies more than for retail.
Competition has enormous transaction costs, whilst Ofgem, a large bureaucracy has enormous costs too. Is it time to move to one regulated market – a retail market?
Stephen Littlechild: No. Regarding the costs associated with the market; the costs of supply is becoming more uncertain than 20/30 years ago (a nationalised industry using coal and nuclear) now prices are determined by movements in international fuel prices and the uncertainties that creates. Is a market a better way of dealing with that uncertainty? A retail market is part of that; companies now have to buy in a certain way because they no longer have a monopoly.
There are lots of customers on very high tariffs who tend not to switch, for whatever reason, then there are those obtaining more competitive deals. Could Ofgem potentially offer a ruling on the differential between one price and another, sometimes in the same region would give some form of protection and give the market some competition?
Disagree with that proposal, it is the same logic as NDC, where the low prices went to the level of the high ones, not vice versa; stopping the big six from cutting but not from raising prices.
Would any of your proposals change in light of a) implementation of EMR b) Labour party policy on a price freeze?
Stephen Littlechild: Keeping out of the EMR morass and nightmare, a case for more competition in the retail market. There would be no positive to a price freeze, although it would depend on the level at which prices are set, how it affects consumers. It would jam up the market and investment in the market would be put on hold.
There is still a case for competition in the retail market, whatever happens in the wholesale market.
The group agreed that price freezes would probably be preceded by price increases, to off-set the freeze. The Chair: Suggested this could be a prima facie case of a cartel, being close to evidence of the market not working. Stephen Littlechild and the other contributors suggested this would not be the case.
Has the impact of greater transparency in the market been that the big 6 can now see more information? What should the regulator be doing about the fact that companies are not allowed to have differential rates for smart meters.
Stephen Littlechild: It’s not clear what the smart meter market will look like, however, it will need a maximum amount of experimentation.
The group concluded that Ofgem should focus on customer engagement and trust in the market.
Stephen Littlechild: research carried out identified that customers did not actually want simple tariffs if it meant price increases.
The meeting came to an end at 6:05pm