Giving Domestic Customers a Choice of Electricity Supplier

Transcription

1 Office of Gas ad Electricity Markets Givig Domestic Customers a Choice of Electricity Supplier REPORT BY THE COMPTROLLER AND AUDITOR GENERAL HC 85 Sessio : 5 Jauary 2001

2 Office of Gas ad Electricty Markets Givig Domestic Customers a Choice of Electricity Supplier REPORT BY THE COMPTROLLER AND AUDITOR GENERAL HC 85 Sessio : 5 Jauary 2001 LONDON: The Statioery Office 0.00 Ordered by the House of Commos to be prited o 21 December 2000

3 Executive Summary 1 Part 1: Domestic electricity 11 supply competitio is iteded to beefit customers Ofgem are resposible for protectig the ecoomic 12 iterests of electricity ad gas customers Ofgem itroduced competitio ito the domestic 14 electricity market durig Competitio had already bee itroduced ito the 14 domestic gas market Several other coutries are also itroducig 15 competitio ito their domestic eergy markets This report has bee prepared uder Sectio 6 of the Natioal Audit Act 1983 for presetatio to the House of Commos i accordace with Sectio 9 of the Act. Joh Bour Natioal Audit Office Comptroller ad Auditor Geeral 21 December 2000 The Comptroller ad Auditor Geeral is the head of the Natioal Audit Office employig some 750 staff. He, ad the Natioal Audit Office, are totally idepedet of Govermet. He certifies the accouts of all Govermet departmets ad a wide rage of other public sector bodies; ad he has statutory authority to report to Parliamet o the ecoomy, efficiecy ad effectiveess with which departmets ad other bodies have used their resources. We examied the impact of electricity supply 15 competitio o domestic customers Part 2: Domestic customers 17 have beefited from competitio Summary 17 The oe i four customers who have chaged their 17 electricity supplier have beefited fiacially from competitio Customers who have remaied with their existig 22 supplier have ot yet saved moey due to competitio, but Ofgem expect them to save i the future The cost of electricity for domestic customers who 22 have ot switched supplier has, however, falle due to price cotrols For further iformatio about the Natioal Audit Office please cotact: Natioal Audit Office Press Office Buckigham Palace Road Victoria Lodo SW1W 9SP Tel: equiries@ao.gsi.gov.uk Website address:

4 Cotets Part 3: Domestic customers 25 could beefit more Summary 25 Customers could save moey by chagig supplier, 25 but may customers are reluctat to switch Ofgem are seekig to make it easier for customers 30 to switch supplier Ofgem are seekig to resolve problems with the 31 customer trasfer process Ofgem eed to cotiue to protect customers who pay 31 by prepaymet meter util the market is competitive Ofgem are seekig to protect customers from high 32 pressure or misleadig sellig practices Ofgem are doig more to esure that their 34 regulatio of quality of service is effective Ofgem eed to cotiue to protect customers who 35 pay by prepaymet meter util the market is competitive Ofgem pla chages to stregthe competitio i 38 Scotlad where a smaller proportio of customers have switched tha i the rest of Great Britai Ofgem are seekig to esure that suppliers ca 39 compete o equal terms Glossary 41 Appedices 1 Mai Recommedatios of the Committee 42 of Public Accouts i their 1999 Report: "Givig Customers A Choice: The Itroductio of Competitio i the Domestic Gas Market" 2 Study Methods 43 3 Aalysis of Customer Survey Data 45 Cover Artist: Beradette Feeley

5 executive summary I this chapter Lower bills but more 6 complaits Some customers are 13 beefitig more tha others Ofgem s actio to help 14 more customers beefit Recommedatios 20 This report examies the impact of electricity supply competitio o domestic customers 1 The 26 millio households i Great Britai sped some 8 billio each year o electricity. For most households electricity is a small part of expediture, but four millio low icome households sped more tha 10 per cet of their icome o fuel to heat their homes. Sice May 1999 all domestic electricity customers i Great Britai have bee able to choose which compay supplies their electricity. This represets a major achievemet by the Office of Gas ad Electricity Markets (Ofgem), the idustry's regulator, which has sice Jauary 1999 bee headed by Mr Callum McCarthy 1. It would also ot have bee possible without the co-operatio of the compaies ivolved i the supply of electricity. By Jue 2000, 6.5 millio customers, oe i four, had exercised their choice to chage their electricity supplier ad every moth some 400,000 customers were chagig supplier. 2 Successive Govermets have take the view that competitio is the best way to protect customers' iterests because it icreases choice ad gives compaies a icetive to lower prices ad improve customer service. Fourtee regioal electricity distributio ad supply compaies were established at privatisatio, i 1990 ad 1991, ad were iitially give a moopoly of supply to domestic ad smaller busiess customers i their areas. The sale prospectuses of these compaies stated, however, that the Govermet were committed to itroducig competitio i electricity supply for all customers by Meawhile, to protect customers from the electricity compaies' local moopoly, Ofgem have regulated prices ad quality stadards. 3 I lie with Govermet objectives, Ofgem itroduced domestic electricity supply competitio durig September 1998 to May , followig the itroductio of competitio ito the domestic gas market betwee 1996 ad Ofgem will cotiue to regulate the prices ad quality stadards of electricity suppliers util they cosider that competitio is sufficiet to meet their pricipal statutory objective of protectig the iterests of cosumers, havig regard to their other duties icludig the protectio of vulerable groups. 4 Preparig the systems of the electricity compaies for domestic competitio cost the compaies some 850 millio ad took five moths loger tha origially plaed. I the absece of statutory powers to require electricity compaies to co-operate with the implemetatio process, Ofgem ecoutered project maagemet problems, which provide lessos for future 1 Mr Callum McCarthy was appoited Director Geeral of Gas Supply i November 1998 ad Director Geeral of Electricity Supply two moths later. The Offices that he headed, the Office of Gas Supply (OFGAS) ad the Office of Electricity Regulatio (OFFER), have sice merged to form Ofgem. The Director Geeral posts will be replaced with a board, the Gas ad Electricity Markets Authority. Mr Callum McCarthy is the Chairma-desigate of the ew Authority. 2 Competitio was itroduced ito the small busiess market at the same time. Larger users of electricity could already choose their supplier by September executive summary

6 projects of this ature. Ofgem have allowed compaies to recover a additioal 121 millio a year from customers o average betwee ad to meet the additioal costs they icurred 3. 5 This report examies the extet to which domestic customers have beefited from electricity supply competitio, through reduced prices ad improved services, ad what more Ofgem could do to sustai ad exted the beefits. I doig so we have cosidered the impact o customers of chages made to the price cotrols that Ofgem apply to electricity distributio ad supply compaies. We have also compared the impact of competitio with other coutries ad sectors of the British ecoomy, ad take accout of our previous report, ad the subsequet report of the Committee of Public Accouts, o the itroductio of competitio ito gas supply 4. Mai Fidigs Competitio has reduced electricity bills for may customers although some have experieced problems 6 The 6.5 millio customers who had chaged their electricity supplier by Jue 2000 have together see their bills fall by 299 millio sice the start of competitio. This is a 15 per cet reductio i real terms, a average of 45 per customer 5. About half of this reductio is attributable to competitio (Figure 1). 1 The 6.5 millio domestic customers who have chaged their supplier have saved 15 per cet of the electricity bills i real terms sice the start of competitio, half of which is due to competitio ad half due to price cuts Savigs due to Ofgem's price caps are some 156 millio (Note) Savigs due to competitio are 143 millio: 6.5 millio have together saved 83 millio a year by chagig their electricity supplier 2executive summary 3 Ofgem had iitially allowed the compaies to recover 726 millio over five years ad gave this figure to the House of Commos Trade ad Idustry Select Committee i Ofgem icreased the amout the compaies were allowed to recover, ad exteded the period of recovery to seve years, after compaies supplied ew iformatio o the costs they had icurred. 4 Office of Gas Supply: Givig Customers A Choice The Itroductio of Competitio ito the Domestic Gas Market (HC 403 ( ) 12 May 1999) ad the Committee of Public Accouts' 8th Report, HC 171 ( ) 3 February The Committee's recommedatios are set out i Appedix 1. 5 The rage of tariffs offered by domestic suppliers, ad variatios i cosumptio, mea that customer savigs vary substatially ad few customers have saved precisely this amout. Note: 3.9 millio customers are savig 54 millio a year from dual fuel discouts 0.42 millio customers have switched to direct debit savig 6 millio a year These savigs are due to Ofgem's cotrols over the prices trasmissio ad distributio busiesses charge suppliers for their etwork services. Source: NAO aalysis

7 7 Customers who have ot chaged supplier have also see their bills reduced sice competitio was itroduced. Ofgem's reductio of price caps for the distributio ad supply compaies sice competitio bega meas that customers who have ot switched are payig lower prices overall by some 450 millio a year (eight per cet), a average of 23 per customer. Competitio has allowed Ofgem to develop a clearer view of costs ad available price reductios, ad Ofgem believe that competitio may also have helped force dow the prices paid to electricity geerators for the electricity they supplied. It may be therefore that supply price caps from April 2000 were lower tha would have bee the case i the absece of competitio. Customers who have remaied with their existig supplier are better off due to chages to price cotrols, but have ot otherwise beefited fiacially to ay sigificat extet 8 Of about 19 millio customers who have remaied with their existig supplier, four-fifths (15.4 millio customers) have ot yet, however, made ay fiacial savigs, beyod those arisig from the reduced price caps, o accout of supply competitio. This is because most of the 'icumbet' electricity compaies that supply their electricity have ot reduced their prices below Ofgem's price caps i respose to competitio. The remaiig 4.2 millio customers have made savigs due to competitio i that their existig suppliers have reduced their tariffs a little below Ofgem's price caps. The savigs to such customers have bee mostly o more tha 2 a year 6. 9 All customers are payig a extra 4 each year o average to meet the costs compaies icurred i itroducig competitio, which meas that customers who have ot switched have ot beefited fiacially to ay sigificat extet sice competitio was itroduced, ad some may have lost out slightly. Customers who have ot switched have, however, bee able to beefit from a greater rage of tariffs ad complemetary products (such as gas) offered by their existig suppliers. 10 By Jue 2000, some 25 per cet of domestic customers had chaged their electricity supplier a slightly higher proportio of customers tha had chaged gas supplier oe year after gas competitio was itroduced (23 per cet). The rate of switchig i the gas ad electricity markets is higher tha i may other British markets ad overseas electricity markets. Most customers who chage supplier do so i respose to direct cotact from a supplier, ofte home visits by suppliers' sales agets ad the relatively high level of switchig i the electricity market is attributable to the effectiveess of this marketig techique. Doorstep sellig has, however, give rise to complaits from customers, for example that sales agets had misled them about the savigs they would achieve if they switched or they had bee switched without givig their coset. I the first year of electricity supply competitio there were some 4,900 complaits. This represeted 1.06 complaits per thousad electricity switchers, a similar positio as i the first year of domestic gas competitio. Switchig levels i the domestic electricity market are relatively high 11 Although most customers who chaged supplier foud switchig easy, there is a large variatio i how log it takes to complete trasfers to ew suppliers. I the first two years of domestic electricity supply competitio, some 18,800 customers experieced problems with the switchig process. Complait statistics suggest that the customers of some of the ew suppliers are much more likely to have received a poor service after they have switched, for example iaccurate ad delayed bills. The stadard of service provided by the icumbet suppliers to those who have ot chaged their supplier has remaied at a high level durig the trasitio to competitio ad sice. 6 A exceptio is 250,000 customers who have ot switched electricity supplier but are oetheless beefittig from dual fuel discouts worth 2.9 millio a year, or over 11 a year each, because they ow buy gas from their local electricity compay. Customers who have switched supplier are more likely to have complaits about the service they receive 3executive summary

8 Although there have bee problems, most customers fid chagig supplier easy 12 Although problems i chagig supplier reported by customers are likely to uderstate the umber of customers experiecig problems, surveys evertheless suggest that those experiecig problems are a relatively small proportio. Resposibility for maitaiig supply to customers rests with distributio busiesses ad has ot, therefore, bee directly affected by competitio amog suppliers. I September 2000, Idepedet Eergy, a ew supplier with 240,000 electricity customers, wet ito receivership but these customers cotiued to receive a supply of electricity o the same terms, because aother compay agreed to take them o. There are variatios i the proportio of customers who have beefited fiacially from competitio betwee differet parts of the commuity How customers pay for their electricity ad where they live has a sigificat effect o the likelihood that they will chage their electricity supplier 13 A survey i May/Jue 2000, which we commissioed i associatio with Ofgem, disclosed sigificat variatios i the proportio of customers who had switched electricity supplier: a) Rural customers are less tha half as likely to have chaged their electricity supplier tha those who live i urba areas. This is probably because may customers chage their electricity supplier i respose to a visit from a sales aget, ad direct marketig of electricity has so far bee less itesive i rural areas. b) The proportio of domestic customers switchig supplier, ad hece payig lower bills, is lower tha average amogst poorer households (Figure 2). A major reaso for this disparity is that a higher tha average proportio of poorer households use a prepaymet meter. Customers who use a prepaymet meter cost more to serve (eve allowig for the greater certaity of icome), ad few compaies compete with the icumbets' tariffs. Ofgem allow the icumbets to recover some of the additioal costs of supportig such meters by chargig up to 15 a year more to the customers cocered 7. c) Scotlad has relatively more rural customers ad customers usig a prepaymet meter tha the rest of Britai. Eve after allowig for this, a smaller proportio of customers i Scotlad have chaged their supplier tha i Eglad ad Wales. This may be because fewer electricity suppliers have actively marketed electricity i Scotlad, which reflects the smaller size of the market, the high degree of customer loyalty to the two icumbet suppliers ad the more limited scope to offer dual fuel deals due 2 Fewer customers o low icomes have chaged their electricity supplier tha others have Customers who have chages their electricity supplier 4executive summary Aual household icome Less tha 9,500 9,500-17,499 17,500-24,999 25,000 or more Source: NAO/Ofgem survey May/Jue % 5% 10% 15% 20% 25% 30% 7 I October 2000, the average additioal charge was 12, ragig from 0 i oe case to 15 i six cases.

9 to the lower peetratio of gas i orther Scotlad. The differet market structure whereby the icumbet suppliers also ow the geeratio, trasmissio ad distributio busiesses i Scotlad may also have had a effect. Ofgem are actig to help more customers beefit from competitio 14 The 19 millio customers who have ot switched supplier could save up to 674 millio, or 13 per cet of their aual bills were they to switch. Before that happes there should come a poit whe icumbet suppliers' reduce prices i their home regios to stem the loss of customers, as has already happeed i the domestic gas market. Ofgem have therefore sought to help domestic customers beefit from electricity supply competitio: a) They have sought media coverage for the savigs available to domestic customers i the electricity market. Most customers are aware that they ca choose their electricity supplier. Research commissioed by the Departmet of Trade ad Idustry has show, however, that may do ot kow the level of savigs available or the ames of alterative suppliers, ad hece few customers shop aroud for the best deal ad switchers have teded ot to obtai the largest savigs available i the market. b) They have made icreasig amouts of comparative price ad service iformatio available to the public via a freephoe helplie ad website. These services reach relatively few customers, but Ofgem are ivestigatig whether requirig suppliers to disclose prices i a stadard format would make it easier to draw comparisos, a task may customers fid difficult. Iformatio o quality of service is, however, still hard to obtai. c) They itroduced ew licece coditios goverig sellig practices i September 1998 followig earlier complaits about the doorstep sellig of gas. Complaits about ufair sellig practices i the first year of electricity competitio were at a similar level to the first year of gas competitio ad Ofgem therefore cotiue to moitor ad take actio o such problems. Ofgem have sought to alert customers through the media to the savigs available by chagig supplier Ofgem are seekig to help customers idetify the best deal Ofgem have sought to combat high pressure ad misleadig sellig practices Ofgem are seekig to streamlie the trasfer process d) They are cosiderig, i a fudametal review of the trasfer process, how far aligig the differet gas ad electricity trasfer processes could reduce the delays experieced by some customers. 15 Domestic electricity suppliers have so far competed maily o price rather tha o service, but Ofgem believe supply competitio should evetually remove the eed for specific regulatio of customer service. Meawhile, Ofgem regulate the quality ad rage of services suppliers provide. Ofgem recogise the eed to improve their moitorig of customer service, ad will be workig with the ew Gas ad Electricity Cosumer Coucil 8, kow as eergywatch, to develop appropriate mechaisms. Ofgem are seekig to improve their moitorig of customer service 16 The market is less well developed for prepaymet meters ad fewer prepaymet customers have switched. May suppliers cosider prepaymet meter customers to be uprofitable at curret price levels ad competitio should ted to make tariffs more closely reflect costs. If Ofgem lift price cotrols over the icumbets' prepaymet meter tariffs they may, therefore, eed to develop other ways of protectig such customers if they wish to avoid icreases i the relative prices they pay. Ofgem are already takig or cosiderig several actios to help protect prepaymet meter customers: 8 The Gas ad Electricity Cosumer Coucil was established uder the Utilities Act The Coucil, also kow as eergywatch, will take over from Ofgem the hadlig of complaits from electricity cosumers, advisig ad iformig them, ad represetig their views. Ofgem will eed to cotiue to protect customers who pay by prepaymet meter util the market is competitive 5executive summary

10 Ofgem are seekig to protect the iterests of prepaymet meter customers ad help them beefit from competitio a) They believe that competitio would be stregtheed if suppliers lost their right to block customers with outstadig debt from chagig supplier, ad are cosultig o removig or curtailig this right, while protectig suppliers' rights to recover debt. b) From October 2000, they have required suppliers to iform prepaymet meter customers who are ot i debt about cheaper ways to pay for their electricity. May customers begi to use a prepaymet meter whe they move ito a ew home already equipped with oe. Because suppliers icur costs whe customers chage their meter there was before the a risk that they might ot tell customers about cheaper alteratives. 17 Ofgem research shows that may customers usig prepaymet meters prefer this method of paymet, ad some caot switch to payig by cheque or direct debit because they do ot have a bak accout. New techology, however, offers opportuities to reduce the costs of prepaymet meters, ad Ofgem are explorig alterative paymet methods for those without a bak accout. Ofgem are seekig to miimise barriers to etry ad esure all suppliers are able to compete o a equal footig 18 The possibility that ew compaies will eter the market places competitive pressure o existig suppliers, but fewer ew compaies have so far etered the domestic electricity market tha the domestic gas market ad etry barriers are higher tha i the gas market. The Utilities Act 2000 provides Ofgem with powers to reduce barriers to competitio ad help esure that suppliers ca compete o equal terms. For example: a) Ofgem are empowered by the Act to prevet the same compay from both supplyig electricity ad providig electricity distributio services, which should reduce the risk of distributio busiesses givig their ow supply busiess preferetial treatmet. Ofgem are addressig issues i Scotlad, where a smaller proportio of customers have switched supplier tha i the rest of Great Britai Ofgem expect that price reductios arisig from competitio will be sustaiable b) Ofgem cosider that the lower rate of switchig i Scotlad relative to Eglad ad Wales is due i part to the domiace of the two icumbet electricity suppliers i Scotlad (paragraph 13c above), ad the differet wholesale tradig arragemets i Scotlad. The Act provides for separatig the owership of distributio ad supply busiesses i Scotlad, ad for creatig separate electricity trasmissio compaies for Scotlad. Ofgem pla to alig the wholesale tradig framework i Scotlad with that i Eglad ad Wales i Ofgem expect the competitive market to cotiue to deliver choice ad value for customers. They cosider that larger savigs could be achieved if suppliers seek to build a competitive advatage by drivig dow the 'wholesale' cost of electricity they buy from geeratig compaies, as wholesale electricity prices are about half of the price of electricity to customers. They believe that the ew framework they pla to itroduce i 2001 for buyig ad sellig electricity o the 'wholesale' market 9 will aid this process. 'Wholesale' prices are, however, also affected by other factors such as fuel costs ad Govermet ecouragemet of geerators to switch to reewable fuel sources, which could cause prices to rise. 6executive summary 9 The ew framework for tradig electricity is kow as the New Electricity Tradig Arragemets. Ofgem had iteded to itroduce the ew tradig framework i November Followig problems with systems testig, i October 2000 they aouced a ew target date of 27 March 2001 for implemetig the ew framework.

11 Recommedatios For customers ad suppliers 20 The achievemet of the Govermet's objectives for itroducig competitio ito the domestic supply of electricity ultimately relies o customers. We recommed that customers, if they are to beefit fully from electricity supply competitio, should review whether their curret electricity supplier best meets their eeds. They should take ito accout prices, quality of service ad the scope for deals that ca provide a rage of services, icludig gas, from a sigle supplier, especially where the supplier offers a discout for doig so. We recommed suppliers to help by keepig customers iformed of the scope for beefits ad of the latest developmets. Suppliers may also be able to take advatage of chages i the way that electricity geerators sell electricity ad the availability of ew techology, such as the iteret, to offer customers better deals. For Ofgem 21 Ofgem have a importat role to play i helpig customers ad suppliers make the most of the ew market i domestic electricity. While Ofgem have take may actios to help develop a competitive market for electricity, we cosider that there are other actios that might prove worthwhile: i ii iii Improve customers awareess of how to beefit from competitio. If customers are to beefit from competitio, they eed to be able to make iformed decisios as to whether it is worth chagig supplier. Although most are aware of competitio, may are ot aware of the savigs available, alterative compaies i the market, ad the differet ways of payig for electricity. May customers who have switched have relied o doorstep sellig for their iformatio, which has meat that switchig levels have bee lower i rural areas. Ofgem have sought media coverage for the fiacial savigs available ad have published comparative price iformatio o their website. Ofgem i 1999 distributed a leaflet, produced joitly with the Natioal Audit Office, to gas customers, ad we have recommeded that Ofgem should help us to produce a similar leaflet for eergywatch to distribute to electricity customers. Improve the accessibility of price ad service iformatio. The icreasig rage of tariffs ad services available from suppliers has made it harder for customers to compare prices. Iformatio o quality of service is hard to come by, ad competitio has largely bee o price so far. Ofgem should press ahead with their research o the feasibility of requirig suppliers to disclose prices i a stadard format to make comparisos easier, ad cosider extedig this to iclude customer service iformatio. They ad eergywatch should also cosider raisig the profile of the comparative price ad service data they cotiue to produce to the extet that eergywatch have ot take o these resposibilities. Act to reduce the problems customers experiece whe they chage suppliers. Some customers have experieced problems whe switchig supplier such as misleadig iformatio from sales agets or delays i the trasfer process. Although such problems have so far affected a small proportio of customers, the bad publicity egedered could erode cosumer cofidece. Ofgem therefore eed to be able to quickly idetify ad remedy problems with the switchig process, ad should cotiue developig other sources of iformatio such as mystery 7executive summary

12 shoppig 10. They should take timely actio agaist suppliers that provide a sub-stadard service. Oce Ofgem have reviewed the trasfer process they should also act to streamlie it, possibly by removig ay uecessary differeces betwee the electricity ad gas trasfer processes. iv v vi Cotiue to work with the idustry to reduce the costs bore by prepaymet meter customers. Prepaymet meters are the most expesive paymet method both for customers ad suppliers, ad the limited competitio to serve customers usig these meters helps to explai why lower icome households have so far beefited less from competitio tha others. Some customers use prepaymet meters because they moved ito a property already equipped with oe, ad Ofgem should cotiue to ecourage suppliers to make clear to these customers that they could save moey by chagig paymet method. Research shows, however, that some customers prefer to use a prepaymet meter, while some caot pay i other ways because they do ot have a bak accout. Obtaiig the full beefits of competitio for these customers will probably require the developmet of cheaper ways to serve them. Ofgem should therefore cotiue to support the developmet of cheaper paymet optios, for example by promotig the developmet of cheaper prepaymet meterig techology. Press ahead with measures to stregthe competitio i Scotlad. The differet market structure i Scotlad has cotributed to lower rates of customer switchig tha i the rest of Great Britai. To make the market i Scotlad more competitive, Ofgem should press ahead with separatig the owership of distributio, supply ad trasmissio busiesses ad brigig the framework for tradig wholesale electricity ito lie with that i Eglad ad Wales. Miimise barriers to etry to the electricity supply market. The possibility of ew compaies eterig the market is a importat source of competitive pressure o existig suppliers ad ew etrats ca be a importat source of iovatio. Fewer compaies have so far etered the domestic electricity market tha have etered the domestic gas market. Barriers to etry are higher tha i the domestic gas market ad Ofgem are aligig the regulatio of the two markets so that compaies ca compete o a equal footig. Ofgem eed to cotiue to moitor the impact of etry barriers, ad pay particular attetio to the impact of chages such as the ew wholesale electricity-tradig framework i Eglad ad Wales to be itroduced i executive summary 10 Mystery shoppig ivolves seekig first had experiece as a cosumer of the services compaies are deliverig. The mystery shopper does ot reveal to the compay that they are evaluatig the stadard of service provided.

13 For eergywatch The Utilities Act 2000 has established the Gas ad Electricity Cosumer Coucil, which will be kow as eergywatch. Their focus will be o the eeds of electricity ad gas cosumers. They will have a key educatioal role to play i raisig cosumers awareess of the competitive electricity market, ad hece i takig forward some of the actios recommeded above. I particular, we recommed that eergywatch: vii viii ix Improve customer awareess of electricity competitio ad how to make a iformed choice. There would be a role for eergywatch i esurig that ay leaflet produced by the Natioal Audit Office (see recommedatio i above) receives wide circulatio ad publicity. They should also seek to secure greater cosumer awareess of the website, curretly ru by Ofgem, ad the helplie for which eergywatch are ow resposible, ad to develop the value for cosumers of these ad other commuicatio tools. Develop clear ad cosistet processes for moitorig ad reviewig the performace of electricity compaies. This will be a importat rôle for eergywatch workig alogside Ofgem. As part of their remit, eergywatch should seek to put quality of service iformatio ito the public domai i such a way that cosumers ca better uderstad it ad make choices about differet levels of performace. Help esure that all parts of the commuity take advatage of the competitive market. Access to a competitive electricity supply market is ot cosistet across all classes of domestic cosumers, ad it might be urealistic to expect this to be the case. There is, however, a role for eergywatch to keep uder review how the market is developig ad whether there are groups of cosumers who are beig excluded from the full beefits of competitio, ad to propose remedies. 9executive summary

14 Part 1 Domestic electricity supply competitio is iteded to beefit customers 1.1 There are over 26 millio households i Great Britai which altogether spet 7.7 billio o electricity i 1998 or about 4 a week. Lower icome households sped proportioately more o electricity tha higher icome households do ad the poorest teth of households sped o average four per cet of their icome o electricity. Overall, the Office of Gas ad Electricity Markets (Ofgem) estimate that some four millio households sped more tha 10 per cet of their icomes o fuel to heat their homes. 1.2 Electricity supply ivolves buyig electricity from geerators, arragig with the trasmissio ad distributio compaies for it to be trasmitted ad distributed, ad sellig it o to customers (Figure 3). 1.3 The Electricity Act 1989 provided for privatisig the electricity idustry ad established competig geeratig compaies. The the Govermet viewed trasmissio ad distributio as "atural moopolies", because it would ot be cost-effective for ew compaies to duplicate the existig etworks. I Eglad ad Wales, the Govermet established the Natioal Grid Compay to operate the trasmissio etwork ad 12 regioal compaies to operate distributio etworks ad supply electricity. I Scotlad, resposibility for trasmissio rests with two regioal distributio ad supply compaies who also geerate electricity. Figure 4 overleaf shows the 14 icumbet electricity suppliers. 3 Electricity supply ivolves buyig electricity from geeratig compaies ad sellig it to customers Electricity reaches customers from power statios through the trasmissio ad distributio etworks (Note) Suppliers buy electricity from geeratig compaies. They must also pay for usig trasmissio ad distributio etworks Electricity supplier Suppliers market ad sell electricity, bill customers, process paymets ad hadle customer equiries Note: The bulk trasmissio etwork uses high voltages to miimise losses. The voltage is reduced i electricity sub-statios ad distributed to customers through "local wires". I Eglad ad Wales differet compaies operate the trasmissio ad distributio etworks. part oe 11

15 4 The 14 icumbet electricity suppliers i Great Britai The Figure shows the regios of the 14 icumbet electricity suppliers i Great Britai. part oe 1.4 The Govermet were committed at privatisatio, to itroducig competitio ito supply. Larger busiesses were able to choose their supplier at the outset, ad prospectuses for the sale of the distributio ad supply busiesses stated that all customers would be able to choose their supplier from The key dates i the developmet of the electricity idustry are set out below. Ofgem are resposible for protectig the ecoomic iterests of electricity ad gas customers 1.5 Ofgem are a o-miisterial govermet departmet resposible for the ecoomic regulatio of the electricity ad gas idustries. Ofgem were created followig the merger i 1999 of the gas ad electricity regulators 11. Their ruig costs i will be some 75 millio ad they have about 330 staff. Further details about Ofgem's resources ad orgaisatio are set out below The Office of Gas Supply ad the Office of Electricity Regulatio. Note that throughout this report we refer to the electricity regulatory office as Ofgem, icludig whe referrig to actio by the electricity regulatory office before the merger o 1999.

16 Key developmets i the electricity idustry sice the Electricity Act The Electricity Act provides for privatisig the electricity idustry The Govermet sells the 12 regioal distributio ad supply busiesses i Eglad ad Wales (kow as public electricity suppliers). They have a frachise i their areas to supply all customers with a peak load of up to 1 MW (the frachise limit). This gives the 5,000 largest customers i Great Britai with a peak load above the limit the ability to choose their electricity supplier. The electricity compaies ow the Natioal Grid Compay, which cotrols electricity trasmissio i Eglad ad Wales The two Scottish itegrated geeratio, trasmissio, distributio ad supply busiesses are privatised. Also kow as public electricity suppliers, they have a supply frachise similar to the public electricity suppliers i Eglad ad Wales. The Govermet also sell 60 per cet of the two mai geerators i Eglad ad Wales, Natioal Power ad Powerge The public electricity suppliers' frachise limit is reduced to 100kW ad 45,000 more busiess customers are able to choose their supplier The public electricity suppliers float their shares i the Natioal Grid Compay o the Lodo Stock Exchage ad trasfer these shares to their ow shareholders. The Govermet also sell their remaiig 40 per cet stake i Natioal Power ad Powerge The Govermet privatise British Eergy plc, who operate the eight most moder uclear power statios i the UK. The older uclear statios remai publicly owed All remaiig customers are allowed to choose their electricity supplier i a phased roll out from September 1998 to May Opeig the market was delayed because ot all suppliers were ready by April 1998, the origial start date. 1.6 Ofgem have statutory resposibility for licesig compaies i the electricity idustry. They have a duty to exercise their fuctios i a maer best calculated to secure that: all reasoable demads for electricity are met; licece holders are able to fiace the carryig o of their licesed activities; ad to promote competitio i the geeratio ad supply of electricity. Ofgem ca use licece coditios to cap prices ad a combiatio of licece coditios ad stadards of performace to set quality stadards i the idustry. The Utilities Act 2000 made Ofgem's pricipal objective protectig the iterests of cosumers, wherever appropriate by promotig effective competitio. The Act also requires that Ofgem cosider the iterests of certai groups icludig the disabled, pesioers, people o low icomes ad people who live i rural areas. Uder the Act, Ofgem share all these resposibilities with the Secretary of State. I practice, however, the Govermet have defied their rôle as settig the objectives ad the framework of regulatio, while the regulators, icludig Ofgem, idepedetly fulfil their duties withi this framework. 1.7 Licece coditios are the basis of price cotrols limitig the charges made to electricity suppliers by distributio ad trasmissio compaies, ad the overall prices paid for electricity by domestic ad small busiess customers 12. Ofgem moitor whether the compaies comply with their liceces, ad ca order them to comply. Where licesees do ot coset to proposed chages, Ofgem ca refer the matter to the Competitio Commissio. The Commissio rule o whether compaies' existig liceces operate or may be expected to operate agaist the public iterest; ad whether this may be remedied by modifyig the licece. 1.8 The Utilities Act 2000 chages the framework of the regulatio of the electricity ad gas idustries. With effect from November 2000, the Act: a) Made protectig cosumers' iterests Ofgem's pricipal objective, wherever appropriate by promotig competitio, ad made other chages referred to i paragraph 1.6 above. b) Replaced the posts of Director Geeral of Gas Supply ad Director Geeral of Electricity Supply with the Gas ad Electricity Markets Authority, cosistig of a chairma ad at least two other members, appoited by the Secretary of State. c) Gave resposibility for electricity cosumer represetatio, previously hadled by Ofgem's regioal Electricity Cosumer Committees, to eergywatch, a ew idepedet Gas ad Electricity Cosumer Coucil which takes over from Ofgem the hadlig of complaits from cosumers 13, advisig ad iformig them, ad represetig their views. d) Provided for aligig the licesig of operators i the electricity ad gas idustries to simplify regulatio for suppliers, may of whom operate i both markets. e) Gave Ofgem powers to impose fiacial pealties o compaies for breaches of their liceces ad to modify licece coditios with the coset of a majority of compaies. Key facts about the resources ad orgaisatio of Ofgem Ruig costs i will be 75 millio, icludig 30 millio for the reform of the wholesale electricity market ad 22 millio for the costs of the merger of OFGAS ad OFFER, ad the move to the ew headquarters i Lodo. Their 330 staff iclude ecoomists, lawyers, aalysts ad support staff. They service the Gas ad Electricity Markets Authority which comprises the Chairma, who is also Ofgem's Chief Executive, ad members who are appoited by the Secretary of State for Trade ad Idustry. Ofgem are orgaised ito three policy divisios, each headed by Maagig Director, hadlig customers ad supply, competitio ad tradig arragemets, ad regulatio ad fiacial affairs. To esure that Scottish eeds are fully reflected i Ofgem's work, the work of their Glasgow office is itegrated with that of the three policy divisios i Lodo. part oe From April 2000 Ofgem s cotrols over overall prices cover domestic customers oly. 13 Eergywatch will, however, refer to Ofgem ay complaits from cosumers that allege a breach of licece coditios or that cocer Ofgem eergy policy.

17 part oe f) Requires the Secretary of State to provide Ofgem with guidace o ay of the Govermet's social or evirometal policies i order that the Authority ca make a appropriate cotributio to the attaimet of these policies. g) Required that differet compaies should ow the regioal electricity distributio busiesses ad the icumbets' supply busiesses. 1.9 Ofgem also have powers cocurretly with the Office of Fair Tradig: a) Uder the Competitio Act 1998, to prohibit aticompetitive agreemets ad the abuse of a domiat positio i the gas ad electricity idustries. These powers iclude the ability to fie compaies for breaches. b) Uder the Ufair Terms i Cosumer Cotract Regulatios 1999, to act agaist cotract terms which uduly favour compaies where this could cause cosumer detrimet. Ofgem do ot regulate advertisig by electricity ad gas compaies. The Advertisig Stadards Authority regulates advertisemets i prit, posters, ciema ad video, ad direct marketig. Ofgem itroduced competitio ito the domestic electricity market durig The Govermet ad Ofgem believe competitio is the best way to protect customers' iterests, ad Ofgem aim to itroduce competitio ito the electricity idustry wherever possible. Ofgem judge that competitio i the supply of electricity should spur suppliers to offer lower prices, provide iovative ew tariffs ad customer services, ad improve efficiecy Ofgem devoted about 55 staff-years of effort to itroducig competitio i electricity supply. They determied the implemetatio strategy, arraged the ecessary amedmets to liceces, ad developed arragemets for resolvig disputes betwee suppliers. Betwee September 1998 ad Jauary 1999 competitio was itroduced i the areas served by Easter Electricity, Maweb, Scottish Power ad Yorkshire Electricity ad by May 1999 all customers were able to choose their supplier Ofgem have allowed the electricity distributio busiesses to recover some 850 millio from customers over the seve years to to meet their costs of implemetig competitio. The mai costs the compaies icurred were for developig ew iformatio techology systems so that compaies could register ad exchage iformatio The itroductio of competitio ito electricity supply is complemeted by two other importat Ofgem iitiatives: a) Reform of the wholesale electricity market, to be implemeted i 2001 i Eglad ad Wales (ad kow as the New Electricity Tradig Arragemets). The reforms replace a Pool system, i which all electricity geerators received the same price for electricity, with a system based o commodity tradig practices. Ofgem believe that the reforms will esure that electricity prices more closely reflect costs ad should brig dow prices. Wholesale electricity prices i Scotlad are tied to prices i Eglad ad Wales. Ofgem pla to exted the ew wholesale market to Scotlad i b) The Social Actio Pla, a programme of work iteded to cotribute to the Govermet's efforts to tackle fuel poverty. This icludes a ew eergy efficiecy scheme from April 2000 which should assist some low-icome households, ad chages to the liceces of electricity ad gas suppliers to oblige them to offer paymet methods that suit the eeds of their customers. I additio, Ofgem have itroduced competitio to all meter, data ad coectios services provided by the electricity distributio ad supply busiesses. Competitio had already bee itroduced ito the domestic gas market 1.14 Betwee April 1996 ad May 1998 competitio was itroduced ito the domestic gas market. I 1999, we reported 14 that by February 1999 twety-five ew compaies were sellig gas ad over four millio customers had exercised their choice ad switched from British Gas Tradig, the former moopoly supplier. We also foud that the total reductio i customers' bills sice the itroductio of competitio was the equivalet of 1 billio each year. The Committee of Public Accouts took evidece o the Report i July I their Report 15, the Committee said that they were cocered that low icome customers who use prepaymet meters to pay for their gas were ot beefitig as much as other customers from the itroductio of competitio. They also recommeded further actio by Ofgem to improve the iformatio available to gas customers o the choices available to them i the gas market; ad actio to deal with problems i the processes for chagig supplier. Appedix 1 shows the Committee's mai coclusios ad recommedatios Office of Gas Supply: Givig Customers A Choice The Itroductio of Competitio ito the Domestic Gas Market, HC 403 ( ) 12 May The Committee of Public Accouts 8th Report, HC 171 ( ) 3 February 2000.

18 Several other coutries are also itroducig competitio ito their domestic eergy markets 1.15 Uder a Europea Commuity Directive, member states are obliged to ope at least 26 per cet of their electricity supply market to competitio by February 1999, risig to 33 per cet by Twelve out of 15 member states met the 26 per cet target (Figure 5). By 1999 three Europea Uio coutries besides the UK (Filad, Germay ad Swede) had fully opeed their electricity markets to competitio. We examied the impact of electricity supply competitio o domestic customers 1.17 Agaist this backgroud, we examied: a) Whether domestic customers have beefited from the itroductio of competitio i electricity supply (Part 2); ad b) What more Ofgem ca do to help domestic customers beefit (Part 3) Appedix 2 describes our study methods. The mai features were: 5 Progress by Europea Uio coutries i implemetig EC Directive 96/92 26 per cet of the electricity market ope to competitio by February 1999 Austria Yes Belgium Met the target i 2000 Demark Yes Filad Yes Frace Yes Germay Yes Greece Aim to meet the target by 2001 Irelad Met the target i 2000 Italy Yes Luxembourg Yes Netherlads Yes a) We commissioed a joit survey with Ofgem of 4,600 electricity customers i May/Jue 2000 to assess the fiacial impact of competitio o customers. b) We cosidered developmets i other markets, icludig the domestic gas market ad overseas electricity markets. c) We cosulted cosumer represetatives. d) We cosulted electricity ad gas suppliers, icludig several suppliers who had chose ot to compete i the domestic electricity market We are grateful for the help ad co-operatio we received from Ofgem, eergywatch ad compaies i the electricity ad gas idustries, ad the support we received from the expert advisory pael we established for this examiatio. Portugal Spai Swede UK Yes Yes Yes Yes Source: Europea Commissio 1.16 I the Uited States, Califoria was the first State to ope its electricity markets to competitio i Pesylvaia itroduced competitio i To date, States represetig over 50 per cet of the U.S. populatio have established target dates for iitiatig retail competitio. part oe 15

19 Part 2 Domestic customers have beefited from competitio Summary 2.1 Ofgem are ecouragig competitio to put suppliers uder pressure to offer tariffs ad services that customers fid attractive, with a view to deliverig: a) Lower prices through lower geeratio ad supply costs which compaies will have a icetive to pass o to customers. b) More choice for customers, icludig a greater rage of tariffs, paymet methods ad paymet frequecies that suit customers eeds. c) Improved customer service. I particular, suppliers should have a icetive to cocetrate o improvig those aspects of their service that are most importat to customers. 2.2 I this Part we examie the effect of competitio o the prices domestic customers pay ad the rage ad stadard of services o offer. Competitio has resulted i lower prices for the 6.5 millio customers who have chaged electricity supplier. The market has see the emergece of greater choice i the types of service available ad ways of buyig electricity alogside other commodities such as gas. Stadards of service have yet to improve overall ad the level of complaits agaist some ew suppliers is higher tha before competitio. The 19 millio customers who have ot switched supplier have yet to beefit to a sigificat extet fiacially, beyod the reductios i price caps from which all customers have beefited. The oe i four customers who have chaged their electricity supplier have beefited fiacially from competitio 2.3 Whe the domestic electricity market was opeed to competitio all of the icumbet electricity suppliers etered the market i other suppliers' areas. Five other compaies have also etered the market. Some of the icumbets' supply busiesses are ow part of larger groups, while established geerators have purchased others. By September 2000, 13 compaies were sellig electricity to domestic customers i Great Britai (see below). There were 13 compaies active i the domestic electricity market by October 2000 Icumbet Electricity Suppliers 1. Easter Eergy/Norweb Eergi (owed by TXU Europe) 2. Iogy (who trade as Npower) (Note) 3. Lodo Electricity/SWEB (owed by Electricite de Frace) 4. Norther Electricity ad Gas 5. Powerge 6. Scottish Hydro-Electric/Souther Electric/SWALEC (owed by Scottish ad Souther Eergy) 7. Scottish Power/Maweb 8. Seeboard 9. Yorkshire Electricity New etrats 10. British Gas Tradig (who trade as Scottish Gas i Scotlad ad are owed by Cetrica) 11. Eergy Supplies UK 12. Utility Lik 13. Amerada Hess Note: I September 2000, Iogy purchased the major supply busiess assets of the ew etrat Idepedet Eergy. Source: Ofgem part two 17

20 6 Aual savigs available by switchig electricity supplier i Merseyside ad North Wales regio as at Jue 2000 The Figure shows the savigs available to customers i the Merseyside ad North Wales regio if they switch from the icumbet, Maweb, to the cheapest electricity supplier i their regio. Some suppliers offer further discouts to customers who opt to buy both electricity ad gas from them (dual fuel discouts) ad customers ca also save by chagig their paymet method. Mothly Direct Debit Quarterly credit Prepaymet meter Icumbet Cheapest supplier Aual Bill Aual Bill Aual Bill Savig 42 Savig 41 Savig 19 Notes: 1. Bills iclude Value Added Tax at 5 per cet. 2. Bills are based o aual cosumptio of 3,300 kwh. Source: Ofgem 2.4 Nearly 80 per cet of domestic customers pay for their electricity by cheque quarterly i arrears or by direct debit. For these customers, most compaies operatig i the domestic electricity market are offerig tariffs lower tha the icumbet electricity suppliers. This icludes the icumbets themselves operatig outside their home areas. Figure 6 illustrates the savigs available from chagig electricity supplier i oe regio, as at Jue By Jue 2000, 6.5 millio customers had chaged their supplier (25 per cet of all domestic customers). With Ofgem, we commissioed a survey of 4,600 electricity customers i May/Jue We used the results to estimate the savigs achieved by customers sice the start of competitio i By Jue 2000 customers who had chaged supplier were savig a total of 299 millio a year sice competitio started (15.5 per cet), a average of 45 a year. Just uder half of the savigs are attributable to competitio (Figure 7). 2.6 Aroud half of the reductios i customers' electricity bills have resulted from chages made by Ofgem i the price caps o electricity trasmissio ad distributio charges that suppliers pay. These costs represet some 44 per cet of the price customers pay for electricity. Details of Ofgem's price cotrols are set out below. 2.7 Eighty-four per cet of customers who have chaged their electricity supplier (some 5.5 millio people) have take advatage of offers to buy electricity ad gas from the same compay. Customers optig for these "dual fuel" cotracts have the advatage of oly havig to deal with oe compay, ad seve suppliers offer further discouts beefitig some 3.9 millio customers. Despite these further discouts, however, dual fuel cotracts are rarely cheaper tha the lowest price sigle fuel cotracts. 2.8 By the summer of 2000, some 400,000 customers were chagig their electricity supplier each moth (1.5 per cet of all domestic customers). Based o savigs achieved so far, for each additioal 1.5 per cet of customers that chage their supplier, the aual savig would icrease by a further 8.7 millio Competitio was itroduced ito the domestic gas market durig By Jue 2000, some 5.6 millio gas customers, some 28 per cet, were receivig their gas supply from oe of the ew suppliers. Betwee them they had see their gas bills fall by some 533 millio a year sice competitio started (26 per cet), a average of 95 per customer. How price cotrols work Ofgem's price cotrols prevet the average price, or reveue, icreasig by more tha a specified level. This level has bee set below the rate of iflatio, as measured by the Retail Price Idex, hece this is kow as "RPI X" price regulatio. Ofgem usually revise the price cotrols every five years. They set price cotrols to allow compaies to recover the aticipated levels of operatig costs ad capital expediture over the period ad esure that returs are sufficiet to allow compaies to cotiue to fiace their activities. part two Customers have beefited from RPI-X price cotrols through lower prices. Price cotrols also give compaies a icetive to improve efficiecy. They have geerally bee based o the assumptio that compaies could improve their efficiecy durig the five years of the cotrol. Compaies have therefore bee required to improve their efficiecy to maitai their returs to shareholders. Compaies ca retai ay gais from efficiecy improvemets over ad above those aticipated i the price cotrol. Ofgem have cosidered efficiecy improvemets whe settig price cotrols for the ext five-year period This estimate takes accout of savigs from dual fuel discouts ad from switchig to payig by direct debit.