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: [email protected] 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.

21 7 Aual reductio i electricity bills sice the start of competitio for people who have chaged their electricity supplier This Figure shows that savigs due to electricity supply competitio total some 143 millio, ad that these are due to switchig electricity supplier, dual fuel discouts ad chagig paymet method. It also shows that sice the start of competitio customers who have chaged supplier have also beefited from savigs of 156 millio due to Ofgem's price cotrols. Some customers are beefitig from ew tariffs ad services offered by alterative suppliers 2.10 Ofgem believe that a importat beefit of competitio will be that compaies will develop ew tariffs ad services to attract customers. There have already bee iovatios (Figure 8). For istace, several compaies offer special, higher, tariffs for electricity procured from reewable sources. 6.5 millio customers have chaged their electricity supplier millio customers are beefitig from dual fuel discouts 54 Millios Per cet of electricity bills before the start of competitio 8 Suppliers are ow offerig a umber of ew tariffs The Figure illustrates some of the ew services available to domestic electricity customers. Dual fuel tariffs, where customers buy gas ad electricity from the same compay. Some suppliers offer a further "dual fuel" discout. Prompt paymet discouts (for quarterly credit customers) millio customers have switched to direct debit (Note 1) 6 Aual savigs due to competitio Aual savigs due to price caps (Note 2) Aual savigs sice the start of competitio Notes: 1. Most customers are able to chage the way they pay for their electricity, whether or ot they also chage their supplier. Suppliers' efforts to retai or wi customers i the competitive market are, however, likely to have cotributed sigificatly to these further savigs. 2. Ofgem cotrol the charges levied by the moopoly distributio ad trasmissio busiesses ad paid by all electricity suppliers, icludig the ew etrats. We calculated the savigs customers had achieved sice the itroductio of competitio from this source. Source: NAO Aalysis Affiity deals. For example, Souther Electric offers vouchers, based o the size of the bill, which ca be used to purchase goods at Argos. Utility Lik offer a "Gree tariff" where the compay offer to match their retail sales with wholesale purchases of electricity from reewable sources. Most suppliers' electricity charges are based o a fixed stadig charge ad a uit charge. Some suppliers have adopted a two-tier uit charge, with o stadig charge. This tariff should beefit customers who use small amouts of electricity, such as sigle householders ad pesioers. TXU is testig a ew tariff desiged for households with low icomes based o a fixed aual charge for electricity regardless of cosumptio. This approach may be particularly attractive to customers who prefer to kow i advace what they will be payig for electricity. Servista.com ad Virgi Eergy offer to sell electricity ad gas to domestic customers over the iteret. Servista.com sell electricity i associatio with Utility Lik, gas i associatio with CPL British Fuels, ad telephoe services i associatio with BT ad others. Virgi Eergy sell electricity ad gas i associatio with Lodo Electricity ad SWEB. Servista.com ad Virgi Eergy operate uder the electricity supply liceces of their associated suppliers. Suppliers are ow offerig a umber of ew tariffs part two 19

22 Customers who have switched supplier are more likely to have complaits about the service they receive 2.11 Ofgem expect electricity suppliers to provide a good level of service to their customers, i particular: Accurate ad prompt bills Arrage direct debits promptly ad accurately Frequet ad accurate meter readigs Easy to cotact i the evet of queries Deal promptly ad effectively with customer queries 2.12 We examied the complaits to Ofgem about the service provided by ew suppliers. I the year to July 2000, electricity customers who had chaged their supplier made 7,900 complaits about ogoig services, mostly cocerig delays i receivig bills or arragig direct debits, ad the accuracy of bills. We compared the level of such complaits with the umber of customers that had chaged their supplier, ad foud that the umber of complaits was six times greater tha from customers who had ot chaged their supplier Resposibility for maitaiig the supply of electricity to customers rests with distributio busiesses ad should ot, therefore, be directly affected by competitio. Ofgem have arragemets desiged to protect customers i the evet of the failure of their electricity supplier. Whe Idepedet Eergy, a gas ad electricity supplier, wet ito receivership i September these arragemets were ot tested because Iogy 18 purchased the major supply busiess assets of Idepedet Eergy UK Limited with effect from the date the compay wet ito receivership. The failure of Idepedet Eergy did ot, therefore, affect cotiuity of supply to customers. The Utilities Act 2000 establishes formal supplier of last resort arragemets for electricity, which will be commeced shortly. Electricity supply competitio should have o direct effect o public safety. Resposibility for public safety rests maily with the electricity distributio busiesses for each area, ad the Departmet of Trade ad Idustry ad the Health ad Safety Executive are resposible for regulatig health ad safety i the idustry. Most customers fid chagig supplier easy, although there have bee problems 2.14 Ofgem periodically survey customers to fid out about their experieces ad perceptios of the competitive market. Their autum 1999 customer survey showed that: a) Eighty-eight per cet of customers who had chaged their electricity supplier 19 foud it very easy or fairly easy to leave their last supplier, about the same level as for gas (86 per cet). b) Five per cet of switchers had foud it fairly difficult to chage electricity supplier ad two per cet said it had bee very difficult, for example because of poor commuicatios with the supplier (ot aswerig letters, for istace) ad problems with billig. The sample size was too small, however, to draw firm coclusios By August 2000, Ofgem had received 18,800 complaits from customers about the service that they received while chagig electricity supplier, or about 2.6 complaits per thousad customers who have switched. More complaits arose after the opeig of the domestic gas market to competitio (45,000 complaits were received by OFGAS i the first te moths of 1998) Ofgem moitor the trasfer process usig iformatio from suppliers. By compariso with the gas market, there have bee fewer cases where customers have bee trasferred agaist their will or where customers' existig supplier has preveted them from switchig. Noetheless, of the some 510,000 customers who siged cotracts to chage their electricity supplier i March 2000: a) 4,000 customers (oe per cet) subsequetly deied that they had siged a cotract to chage supplier (for example, they said that they had merely idicated their iterest i further iformatio). b) 16,000 (three per cet) were preveted from chagig their supplier, usually because they were i debt to their existig supplier or had give isufficiet otice to their existig supplier of their itetio to switch. Ofgem are cosiderig whether to remove suppliers' right to prevet their customers from switchig i these circumstaces. part two 17 Idepedet Eergy called i receivers primarily because of fiacial problems arisig from their difficulty i billig customers. 18 Formerly Natioal Power. 19 MORI iterviewed 667 customers who had chaged their electricity supplier i September/October

23 2.17 Ofgem do ot moitor routiely how log customer trasfers take. Ofgem bega a fudametal review of the trasfer process i May 2000, however, ad collected relevat data from suppliers. They foud that there were o sigificat backlogs of customers waitig to trasfer, although they believed that there had bee backlogs durig the early stages of competitio whe suppliers' workloads were very high. They also foud that the largest proportio of electricity trasfers (37 per cet) take place betwee 31 to 40 days after customers eter ito a cotract. Electricity suppliers reported average trasfer times ragig from 6 days to more tha 60 days. Ofgem will be cosiderig these fidigs durig their fudametal review of the trasfer process. Customers will pay a average of 121 millio each year durig to to pay for the itroductio of competitio 2.18 The programme to deliver supply competitio ivolved developig a legal ad commercial framework for the market, ad developig systems to eable iformatio to be passed betwee differet idustry bodies ad electricity compaies. Each of the 14 distributio busiesses had to desig ad build their ow systems. The programme aimed to ope the market to competitio i full o or before April It was agreed i Jauary 1998 to delay market opeig for five moths. The mai reasos for the delay were the scale of the project ad the large umber of participats ivolved i the programme, coupled with the lack of a sigle poit of authority who could take decisios. Implemetatio was achieved from September 1998 to May More tha 18 orgaisatios were ivolved from the start of the programme i These were the 14 icumbet suppliers, other suppliers icludig British Gas Tradig, two idustry-owed bodies 20, ad the Regulator. Ofgem appoited PA Cosultig to coordiate work by the idustry. Ofgem devised the timetable for the programme, but had o power to esure compaies kept to it. By cotrast, the Gas Act 1995 gave OFGAS statutory powers to itroduce competitio i gas betwee 1996 ad The eed to gai agreemet withi the electricity idustry slowed progress i a umber of areas, icludig resolvig desig icosistecies ad fialisig the market's legal framework. To ecourage progress by the icumbets, Ofgem itroduced fiacial pealties i 1997 for icumbet electricity suppliers who were ot ready for competitio o time. Ofgem imposed pealties of some 50 millio durig ad , which reduced the distributio charges paid by suppliers ad therefore beefited all electricity customers To esure that competitio could be itroduced i 1998, may activities that would ideally have bee progressed i series had to be completed i parallel. For example, the legal ad commercial framework was developed alogside participats' systems ad processes. This meat that participats' systems had to be modified i 1998 to reflect chages i the form of the legal framework, ad this icreased costs. Suppliers have expressed cocer that the desig chages were ot subject to cost-beefit appraisals before beig approved. Ofgem told us that they had cosulted participats o the requiremets for each desig chage ad to esure chages were timely, simple ad effective Ofgem's moitorig of the trasfer process suggests that the systems eablig customers to chage their electricity supplier have, so far, worked largely as iteded. May of the suppliers we cosulted were, however, critical of the way Ofgem hadled the implemetatio programme. I Ofgem's view, the absece of statutory powers of compulsio over the electricity compaies cocered resulted i the problems experieced, from which the followig lessos could be leared for large-scale regulatory projects i the future: a) Esure that a sigle poit of authority is able to take key decisios ad maitai progress. For this programme, Ofgem devised the timetable for the programme i light of the Govermet's April 1998 target for the itroductio of competitio, but iitially had o power to esure compaies kept to it. b) Esure time is allowed to agree iformatio techology requiremets before systems are built. Not doig so carries the risk that, as happeed i this case, iformatio techology systems have to be modified to meet ew requiremets at a late stage i the programme. The costs ad beefits of modifyig the desig of systems after they have bee built should also be carefully assessed before goig ahead Ofgem took ito accout the costs of implemetig competitio i their cotrols over distributio busiesses' charges for etwork services, ad the icumbet electricity suppliers' tariffs. Ofgem allowed compaies to recover some 850 millio from customers over the seve years to , some 121 millio each year, to meet the extra costs the compaies icurred. This is equal to about 4 o the average electricity bill (some two per cet). The overall savigs customers have realised due to competitio are greater tha the extra costs charged to bills (see paragraph 2.5). part two 20 The two bodies were the Electricity Pool of Eglad & Wales (a idustry-owed body which at the time maaged the wholesale electricity market), ad Scottish Settlemets (a ew compay established by the Scottish public electricity suppliers). 21

24 Customers who have remaied with their existig supplier have ot yet saved sigificatly due to competitio, but Ofgem expect them to save i the future 2.23 By Jue 2000, some 19 millio domestic customers were still beig served by their existig electricity supplier. Ofgem believe that competitio should beefit all electricity customers whether or ot they chage supplier. Icumbet electricity suppliers are likely to reduce their prices i their home areas oce they cosider that the beefits of retaiig market share exceed the reveue they would lose from offerig lower prices. Oe of the key tests of the effectiveess of competitio is therefore whether the icumbets have respoded to the lower tariffs beig offered by their competitors by reducig their ow prices. Ofgem aim to ed price cotrols over the icumbets' tariffs oce competitio has developed sufficietly to protect customers' iterests. Ofgem believe this is already the case i the direct debit market ad removed price cotrols over the icumbets' direct debit discouts with effect from April They aim to ed price cotrols over the icumbets' other tariffs i April 2002, provided that they cosider that competitio has cotiued to develop satisfactorily Ofgem moitor the icumbet electricity suppliers' tariffs for their home areas to esure that they comply with price cotrols. Ofgem's aalysis shows that, by October 2000, of the icumbet electricity suppliers oly oe offered a quarterly credit ad four offered a prepaymet meter tariff below the caps that Ofgem have placed o them. Some 1.7 millio customers have beefited i this way, although the amouts are small, about 1-2 a year. We calculated the effect of competitio o the icumbets' direct debit tariffs by examiig how far they had chaged sice April 2000, whe Ofgem removed the price cap, by compariso with the icumbets' quarterly credit tariffs, which are still cotrolled. The fidigs suggest that competitio has yet to beefit some 6 millio of the 8.5 millio direct debit customers who have remaied with their existig supplier: a) I three areas, direct debit tariffs had falle by a greater amout tha the same suppliers' quarterly credit tariff, suggestig that competitio had already begu to affect icumbets' prices. I a further area 21, where the icumbet's quarterly credit was below the price cap, the direct debit tariff had moved i lie with it. These additioal reductios have led to savigs for 2.5 millio customers totallig some 5 millio (oe per cet of their bills). b) I three areas icumbets direct debit tariffs had falle i lie with the quarterly credit tariffs, ad i seve areas direct debit tariffs had falle by less tha quarterly credit tariffs Some 250,000 customers who have ot switched electricity supplier are oetheless beefitig from dual fuel discouts worth 2.9 millio a year, because they ow buy gas from their local electricity compay. These deals have become more widely available sice the itroductio of electricity supply competitio All customers are payig for the cost of itroducig competitio through their electricity bills, icludig those who have ot chaged their electricity supplier (see paragraph 2.22). The 19 millio domestic customers who have ot chaged their electricity supplier betwee them paid a extra 112 millio each year durig to , ad will pay 82 millio each year durig , to meet the costs 22. These costs represet some two per cet of their electricity bills, o average 4 a year. The cost of electricity for domestic customers who have ot switched supplier has, however, falle due to price cotrols 2.27 Customers who have ot chaged their supplier have together saved some 450 millio sice the itroductio of competitio (7.8 per cet) due to the impact of Ofgem's price cotrols. These are cotrols over distributio ad trasmissio costs to suppliers, which beefit all domestic customers, ad cotrols over the prices charged by icumbet suppliers. These savigs iclude the additioal amouts distributio busiesses were allowed to recover from customers to pay for the cost of implemetig competitio. Nearly all domestic customers are payig less for their electricity sice the start of competitio, o average by 29 per customer a year. It is highly probable, however, that they would have made these savigs i the absece of competitio Competitio was itroduced ito the domestic gas market betwee 1996 ad By Jue 2000, some 14.3 millio gas customers, some 72 per cet, were still buyig their gas from British Gas Tradig (the icumbet supplier). Betwee them domestic gas customers' were savig 1,017 millio a year sice competitio started (20 per cet), a average of 71. Some of these savigs arose because British Gas Tradig had reduced their direct debit prices below Ofgem's price caps. Ofgem removed price caps for direct debit prices from April part two East Midlads. 22 This icludes the pealties imposed o suppliers by Ofgem (paragraph 2.19).

25 Most customers cotiue to receive a good stadard of service from icumbets 2.29 Customers of the icumbet electricity suppliers mostly received a good stadard of service durig the trasitio to competitio. For example, the level of complaits to Ofgem about services did ot icrease i the 18 moths before competitio. Ad icumbets' compliace with Ofgem's service stadards, otably esurig that all meters are read oce a year ad replyig to customers' correspodece withi te workig days, remaied at a high level i the four years to March 2000 ad improved betwee ad We compared the level of complaits to Ofgem i the year to July 2000 with the year before competitio. We foud that that while complaits had doubled, to 250 per millio customers, they were still at a very low level. These treds suggests that the service to customers who had ot chaged their electricity supplier was still of a geerally good stadard. Ofgem expect all domestic electricity customers to save from competitio i future 2.30 Competitio gives suppliers a icetive to reduce their supply costs ad pass o savigs to customers. The icetive to reduce prices may lead compaies to achieve ecoomies i their supply costs, for istace if they ca realise ecoomies of scale by icreasig their customer base. Supply costs ad margis are about 17 per cet of the price customers pay. If compaies were able to reduce their supply costs by 50 per cet, ad passed this savig o to customers, a typical bill of 245 would be reduced by 21.50, or ie per cet. Suppliers may reduce their costs through, for example, providig customers with both electricity ad gas ad issuig a sigle bill. Further cost savigs are possible from combiig extra services with electricity ad gas, for example fixed lie telephoes, ad some multiutility tariffs are ow available Ofgem believe, however, that the mai source of savigs from competitio will be through the greater icetive that suppliers have i the competitive market to buy electricity more cheaply o the wholesale market, give that geeratio costs are aroud half of the price customers pay for electricity. Suppliers were formerly able to pass o the costs of geeratio to customers, although before doig so they eeded to satisfy Ofgem that their wholesale purchases were reasoably ecoomical. Hece suppliers had little icetive to drive dow the prices they paid to the geeratig compaies. Ofgem believe that reform of the wholesale market was ecessary before customers could realise the savigs possible from this source. Ofgem therefore developed with the Departmet of Trade ad Idustry a ew framework for the wholesale market, the New Electricity Tradig Arragemets, which they origially plaed to implemet i Autum 2000 i Eglad ad Wales. I October 2000, Ofgem aouced that due to problems highlighted by testig of the New Electricity Tradig Arragemets computer system, the start date would be deferred from November 2000 to March Ofgem pla to alig the wholesale electricity tradig arragemets i Scotlad with those i Eglad ad Wales i Ofgem believe that the framework will make the wholesale market more efficiet ad should put sigificat dowward pressure o electricity prices. part two 23

26 Part 3 Domestic customers could beefit more Summary 3.1 Ofgem aim to develop sufficiet competitio i the domestic electricity market to reder price caps ad some other cotrols redudat. This part of the report cosiders what more Ofgem eed to do to esure that competitio becomes sufficietly well developed to protect the iterests of domestic customers without the eed for price cotrols over supply. Our mai fidigs were: a) A greater proportio of electricity customers have chaged their supplier tha at the equivalet stage i the developmet of the domestic gas market ad i overseas electricity markets. The 19 millio customers who have ot switched could, however, save up to 674 millio a year betwee them if they did so. May customers do ot feel it is worth the effort to chage supplier, ad rural customers are less likely to switch partly because suppliers have so far cocetrated their marketig efforts i urba areas. b) Ofgem are addressig the difficulty may customers ecouter i idetifyig the best deal, ad cotiue to make improvemets i the processes for chagig supplier. But there is further scope to improve customer awareess of the savigs o offer ad couter the risk that problems with chagig supplier or abuses i the sellig process may reduce cosumer cofidece. c) Low-icome groups have so far beefited less from competitio tha others, maily because may are amog the 4 millio customers who pay for their electricity by prepaymet meter. Ofgem are seekig to make it easier for prepaymet meter customers to chage supplier, but electricity suppliers view them as less profitable tha other types of customer. d) Fewer ew compaies have so far etered the domestic electricity market tha the domestic gas market. Some etry barriers are higher tha i the gas market. This is, however, partly due to differeces i the structure of the two idustries. Ofgem are restructurig the wholesale electricity market i Eglad ad Wales ad are plaig to exted the ew arragemets to Scotlad. Customers could save moey by chagig supplier, but may customers are reluctat to switch 3.2 By Jue 2000, a year after all domestic customers had bee able to chage electricity supplier, 6.5 millio people (25 per cet of customers) had doe so. Oe year after full competitio i the domestic gas market some 23 per cet of customers had chaged gas supplier. A greater proportio of domestic customers have chaged their electricity ad gas suppliers tha i the fixed lie telephoes market ad other domestic electricity markets overseas (Figure 9 overleaf). A survey i May 2000 by KPMG foud that i the past year, six per cet had moved their curret or credit card accout, 14 per cet had moved their ladlie or mobile service provider ad 16 per cet had chaged their preferred supermarket. 3.3 Nearly all of the 19 millio people who have ot chaged their electricity supplier would save moey by doig so. If they all chaged to the cheapest supplier i their area, together they would save some 674 millio a year (13 per cet of their bills). Additioal savigs are also available to those willig ad able to pay by direct debit (8.5 millio customers already pay for their electricity i this way). A further 3.5 millio customers would be able to switch to direct debit ad could save a further 51 millio betwee them (five per cet of their bills). part three 25

27 9 The proportio of customers who have chaged their electricity supplier i the first year of competitio compares favourably with switchig levels i other markets The Figure shows the switchig levels i the domestic electricity market, other utility markets i Great Britai ad electricity markets overseas, ad how log the market has bee ope to competitio. How log has the market bee ope to competitio? Years How may domestic customers have chaged supplier? Per Cet Utilities markets i Great Britai Electricity 1-1 ¾ 25 Gas Fixed lie telephoes 8 (Note 1) 25 (Note 2) Overseas electricity markets Germay 4 ¼ 1 Swede 4 ½ (Note 3) 7 Califoria 2 ¼ 2 Pesylvaia 1 ½ 26 Notes: 1. Cable compaies were permitted to offer voice telephoy services from The market had, however, bee opeed to limited competitio i This figure reflects the proportio of fixed lie telephoe customers who have ever switched supplier ad icludes customers who have switched back to BT. 3. Although the market opeed i Jauary 1996, util November 1999 switchers had to chage their electricity meter if they wated to chage supplier. Source: Ceter for the Advacemet of Eergy Markets, Europea Commissio, FT Busiess Services, Germa Federal Miistry of Ecoomics ad Techology, OFTEL, Public Utility Commissio ad Swedish Electricity Associatio part three 3.4 By October 2000, few icumbet electricity suppliers had reduced their prices sigificatly i respose to the lower prices o offer from competitors (see paragraph 2.23). At this time, the icumbets had a average of 80 per cet of the domestic ad small busiess electricity market i their home areas 23, although the shares vary betwee 89 per cet i the North of Scotlad ad 75 per cet i the North East. British Gas Tradig have also maitaied a large share of the domestic gas market (72 per cet). British Gas Tradig had reduced their direct debit gas tariffs below Ofgem's price cap i respose to competitio, ad Ofgem subsequetly removed price caps over British Gas Tradig's direct debit gas tariffs with effect from April British Gas Tradig's other gas tariffs have cotiued broadly i lie with Ofgem's other price caps. As more customers switch electricity supplier there will be icreasig pressure o icumbets to reduce the differece betwee their prices ad those of their competitors, which would beefit customers who do ot wish to chage supplier. 3.5 We therefore examied the reasos why three i four domestic electricity customers had ot switched, usig a variety of sources of evidece: a) Our aalysis of the results of our survey of 4,600 customers i May/Jue b) Ofgem's Autum 1999 survey of 2,315 electricity customers i Eglad, Wales ad Scotlad. c) Research commissioed by the Departmet of Trade ad Idustry ito the barriers to customers switchig suppliers i a rage of markets, icludig gas ad electricity. The research icluded a iterview survey of 1,000 adults i May 2000 ad i-depth iterviews with a further 60. There are variatios i the proportio of customers i differet parts of the commuity who have beefited fiacially from competitio 3.6 Our survey i May/Jue 2000 showed that 30 per cet of customers with household icome above 25,000 a year have chaged supplier. By compariso, 20 per cet of customers with household icome of less tha 9,500 a year have chaged supplier. Our aalysis of our survey results show the followig sigificat variatios i switchig levels which help explai the smaller proportio of lower icome groups who have chaged their supplier: Ofgem's market share statistics do ot separately idetify domestic customers.

28 a) Rural customers are less tha half as likely to have chaged their electricity supplier tha those who live i urba areas, irrespective of icome. b) Customers who pay for their electricity by prepaymet meter are much less likely to have chaged supplier tha others regardless of icome. The use of prepaymet meters is cocetrated amog lower icome groups. c) Customers who live i Scotlad are less likely to have chaged supplier tha those i Eglad ad Wales. This may be due i part to the smaller umber of electricity suppliers actively competig i the Scottish market. d) People who have relatively low bills are less likely to have chaged supplier. Customers with lower bills have less i absolute terms to gai fiacially from switchig, ad this result appears to cofirm that the level of savigs available has a sigificat effect o the decisio to switch. May customers are ot aware of the beefits or machiery of switchig supplier 3.7 Research commissioed by the Departmet of Trade ad Idustry has idicated the importace of doorstep sellig i raisig awareess of competitio ad persuadig customers to chage supplier, ad customers' perceptios of risk i dissuadig themselves from switchig (Figure 10). The researchers cocluded that, to maximise the beefits of competitio, customers eed to be aware of alterative providers ad perceived or actual barriers to switchig must be removed or reduced. To icrease switchig rates, it is ecessary to ehace customers' appreciatio of beefits ad reduce their perceptios of risk. 3.8 Ofgem's customer survey i Autum 1999 idicated that most customers were aware that they could ow buy electricity from suppliers other tha their local electricity compay. May customers were ot aware of the level of savigs available i the domestic electricity market, ad saw o reaso to chage their electricity supplier, either because they are happy with their existig supplier or do ot thik it would be worth the effort. Cosumers are likely to obtai the deal that best suits their circumstaces whe they ca easily compare the prices ad terms of competig offers, but may customers fid it difficult to compare prices ad few customers shop aroud for the best deal (Figure 11 overleaf). 10 Research commissioed by the Departmet of Trade ad Idustry idicates that perceptios of risk are a importat factor discouragig customers from chagig electricity supplier Durig 2000, the Departmet of Trade ad Idustry commissioed research ito the barriers to switchig suppliers i a rage of markets, icludig gas ad electricity. This icluded telephoe iterviews with 1000 adults ad i-depth iterviews with a further 60, which were carried out i May The research was desiged to icrease the Departmet's kowledge of customer switchig behaviour by makig comparisos betwee markets. Researchers compared switchig rates ad customer perceptios i five markets (domestic gas ad electricity; home ad car isurace; curret ad savigs accouts; mortgages; ad fixed-lie ad mobile telephoes). They foud that three factors affect whether customers are likely to chage their supplier: Opportuity, icludig the accessibility of iformatio. I the electricity ad gas markets, most switchig occurs as a cosequece of cotacts by sales agets. A commo theme was iterviewees' iability to remember the ames of more tha two eergy suppliers (the iterviewee's local electricity compay ad British Gas). Icliatio, icludig customers' perceptio of the beefits of switchig (e.g. savigs) or dissatisfactio with service from their existig supplier. Iterviewees' awareess of savigs i the eergy market varied, although few expect to make major savigs if they switch supplier. Disicliatio, icludig perceptios of risk. Risks iclude losig a previously reliable supplier, icoveiece, ad the possibility of somethig goig wrog. Across markets most customers thik it makes more sese to use established compaies rather tha ewer compaies offerig better deals. High levels of satisfactio with existig suppliers, as i the electricity market, reduce icliatio to switch ad icrease the perceived risk of chagig. I all but oe of the markets they studied they foud that the scales were balaced i favour of the existig supplier. The exceptio was home ad car isurace where customers must reew cotracts aually if they wish to stay with the same compay. I the isurace market it is therefore oly slightly easier to stay tha to switch. May customers i the domestic eergy markets are faced with balacig the prospect of relatively small savigs agaist the potetially greater icoveiece or ucertaity ivolved i chagig supplier. part three 27

29 11 Ofgem's autum 1999 customer survey shows that although most customers are aware of competitio may see o reaso to switch supplier The Figure shows importat results from Ofgem surveys of customer perceptios ad experiece of the electricity market. Most customers are aware that they are able to chage their electricity supplier 95 per cet of customers were aware that they could ow buy electricity from suppliers other tha their local electricity compay a similar level of awareess as the survey foud i respect of gas customers (96 per cet). May customers were ot aware of the level of savigs available i the domestic electricity market Customers were asked whether the prices offered by the ew electricity suppliers were higher or lower tha those offered by their local electricity compay. Twety-three per cet thought that the prices offered by ew suppliers were all lower tha those offered by their local electricity compay. Thirty-four per cet said that they were about the same ad 31 per cet did ot kow. Most customers see o reaso to switch supplier Customers who had ot switched electricity supplier were asked why. Nearly two-thirds (65 per cet) said they saw o reaso to chage or that they were happy with their curret supplier, while 22 per cet did ot thik it would be worth the effort. The ext most importat factors were "waitig to see what happes" (five per cet) ad "suspicious that lower prices would ot be maitaied" (four per cet). It ca be difficult to idetify the best deal i terms of price or quality of service 40 per cet of customers who expressed a view said it was very or fairly difficult to compare prices: Very difficult (15 per cet) Very easy (12 per cet) Fairly difficult (25 per cet) Fairly easy (48 per cet) Few customers shop aroud for the best deal May customers have bee cotacted by suppliers, but few customers approach suppliers for iformatio. Per Cet Visited by a doorstep salesma Received a leaflet from a supplier Received a telephoe sales call from a supplier Cotacted a supplier to ask for iformatio Source: Ofgem part three 28

30 3.9 The Departmet of Trade ad Idustry's research showed that may customers were oly aware of two eergy suppliers, their local electricity compay ad British Gas. The suppliers we cosulted told us that they maily use doorstep sellig, direct mail ad telephoe sales to recruit ew customers, ad most customers who chage supplier do so i respose to direct cotact from a supplier. Aalysis of our survey i May/Jue 2000 of 4,600 electricity customers showed that rural customers are less tha half as likely to have chaged their electricity supplier tha those who live i urba areas. This may be 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 Customers' reliace o sales agets is ulikely to maximise the savigs that they may be able to achieve i the market. However, we foud that, oce the ames ad telephoe umbers of alterative suppliers had bee obtaied, shoppig aroud for the best deal i the electricity market is relatively easy. All suppliers were able to quote prices over the telephoe for a give level of cosumptio, ad most were willig to provide writte quotatios Not surprisigly give customers' reliace o sales agets for iformatio, ad the difficulty of drawig comparisos, we foud that may of those who had chaged their electricity supplier were ot o the cheapest available tariff for their preferred paymet method. By chagig supplier agai, some 88 per cet of switchers could save a further 103 millio betwee them. This may be partly because suppliers had lauched may ew offers over precedig moths: some customers may have opted for the best price at the time. Others may have chose their ew supplier o criteria other tha price. It may also, however, be because may customers do ot shop aroud for the best deal. part three 29

31 Ofgem are seekig to make it easier for customers to switch supplier 3.12 Ofgem sought to alert customers to the itroductio of competitio through atioal ad local press advertisemets ad articles. They also published a leaflet available to customers o request, Customer Choice i Electricity Supply. Sice the market opeed, they have issued frequet press otices highlightig the savigs o offer i the market; the savigs switchers have achieved, ad advice o how to chage supplier (see Figure 12). To help customers idetify the best deal, Ofgem also publish comparative price ad service iformatio o their web site ( ad via the freephoe helplie ( ) which is ow operated by eergywatch. 12 Ofgem's top te tips for switchig supplier, published i May Fid out how much you spet o gas ad electricity durig the last year this will help you compare prices 2. Ask for suppliers' prices ad what savigs are available for differet paymet methods, e.g. it is usually cheaper to pay your bill by mothly direct debit 3.13 Ofgem had ot always kept this iformatio up to date, but i Jue 2000 they lauched a improved package of iformatio ad advice, icludig o their web site comparative gas ad electricity price iformatio ad, for the first time, iformatio o dual fuel offers ad complaits agaist idividual suppliers. Ofgem's advice does ot highlight how easy it is for customers to shop aroud for electricity over the telephoe, although customers could beefit from doig so. Some 7,500 people visited Ofgem's website i July 2000, ad they issued about 50,000 iformatio packs to customers durig July ad August. Although Ofgem have ot measured the extet to which their iformatio ad advice is helpig the public, Ofgem's survey i Autum 1999 idicated that oly three per cet of the public had foud out about competitio i the domestic electricity market from Ofgem. Sice Jue 2000, Ofgem have cocetrated upo distributig iformatio for cosumers through local advice agecies ad cosumer bodies. Ofgem cosider that this is more cost-effective tha alteratives such as press advertisemets. Origial desigs 3. Make sure you compare like with like, e.g. direct debit with direct debit (ad that prices iclude VAT) as suppliers have differet prices depedig o how much gas ad electricity you use 4. If a salesperso visits your home, you will be asked to agree a cotract o the doorstep so always ask who they are workig for ad for idetificatio 5. If you agree a cotract either o the doorstep or o the telephoe - remember, by law there is a seve day coolig-off period durig which you ca chage your mid 6. If you agree a cotract either o the doorstep or o the telephoe the supplier should cotact you withi a fortight to make sure you uderstad that you have a cotract ad that you're happy with the way the sale was made if you're ot, you have the right to cacel the cotract 7. If you do ot tell your existig supplier you have siged up to a ew supplier, they may stop you from switchig New desigs 8. Make sure you have paid ay outstadig bills from your existig supplier if you do't, they may stop you from switchig 9. Your ew supplier will read your meter (or ask you to read it) whe you trasfer ad your old supplier will use the readig to work out how much you owe them keep a ote of the readig i case you do't agree with the fial bill from the old supplier 10. All gas ad electricity suppliers must provide special help, o request, to people who are elderly, disabled, chroically ill, blid, partially-sighted or deaf Source: Ofgem Press Notice, May 2000 part three 30

32 3.14 To facilitate price comparisos by customers Ofgem proposed, i February 2000, that whe a compay compared their prices with those of a competitor, it should preset both prices i a stadard format usig a "Eergy Cost Idex". The Idex would work i a similar way to Aual Percetage Rate of Iterest (APR) ad fuel cosumptio (MPG) idices i the fiacial services ad car markets. Suppliers ad cosumer groups have expressed cocers about this approach, such as the cost to suppliers of complyig with ay madatory requiremets. Ofgem therefore ited to commissio market research to test the cost-effectiveess of a Idex ad to obtai evidece about what type of pricig iformatio customers fid it easiest to use. The research will also compare the value to customers of a Idex with existig aids such as the pricig factsheets (paragraph 3.12). Origial desigs 3.15 The Committee of Public Accouts have commeted o the eed for greater trasparecy ad clarity i pricig structures i the telecommuicatios ad gas markets if customers were to make iformed choices betwee differet compaies' services (see Appedix 1). I a recet report 24, the US Federal Trade Commissio cosidered that promotig uiform disclosure by suppliers of the prices ad other relevat attributes of offers to customers is importat i esurig the beefits of electricity supply competitio flow to customers. They also highlighted the eed to esure that: a) The scope of the required disclosures reflects the aspects of suppliers' offers that cosumers cosider most importat. b) The costs of stadardisig disclosure are cosidered Ofgem's proposals focus o prices. Their Autum 1999 survey foud that although most customers said that lower prices would be amog the most importat factors they would cosider whe choosig a supplier, a third said quality of service was also importat. Some electricity suppliers told us that Ofgem were wrog to focus o price compariso aloe as they felt this might ecourage customers to cosider oly price whe choosig a supplier. Madatory disclosure requiremets impose costs o suppliers, for example i repritig marketig material, ad these are likely to be passed o to customers. Ofgem told us that they ited to appraise the costs to suppliers of disclosig iformatio i the format required for their proposed Eergy Cost Idex agaist the beefits to customers, if their market research idicates that this approach would be beeficial to cosumers. New desigs Ofgem are seekig to resolve problems with the customer trasfer process 3.17 The research for the Departmet of Trade ad Idustry (paragraph 3.7) highlighted the importace of customers' perceptio of risk i dissuadig them from cosiderig a chage of supplier. Our aalysis shows that customers with smaller bills are less likely to chage supplier tha those with larger bills, idicatig that customers take ito accout costs ad beefits whe they cosider switchig ad reiforcig the importace of makig it easy to do so Ofgem's survey i late 1999 foud that 76 per cet of customers who had ot chaged their electricity supplier thought it would be easy ad ie per cet thought it would be difficult. Although most customers surveyed who have switched say that chagig supplier was trouble-free, some customers have experieced sigificat delays (see paragraphs ). part three 24 Competitio ad Cosumer Protectio Perspectives o Electricity Power Reform (Federal Trade Commissio, July 2000). 31

33 3.19 Ofgem believe that some electricity trasfer delays may be due to dual fuel suppliers attemptig to brig customers' electricity ad gas supply o lie at the same time. This is because arragemets for chagig gas supplier are differet ad this takes a miimum of 30 days. Ofgem are cosiderig the implicatios i their fudametal review of the trasfer process There is a particular risk of delays to customers switchig for a secod or subsequet time. Although customers do ot eed to give their electricity supplier otice that they ited to switch to aother supplier the first time they switch, the suppliers ca require ew customers to give up to 28 days otice of their itetio to switch agai. Suppliers ca prevet trasfers if they have ot bee give this otice. Similar rules apply i the domestic gas market where by October 1999, suppliers' objectios to customer trasfers had reached 30 per cet of proposed trasfers, ad half of these related to isufficiet termiatio otice. Although objectio rates i the electricity market have remaied at less tha five per cet of proposed trasfers, Ofgem cosidered that the objectios might icrease as more customers cosider chagig supplier for a secod time. I March 2000 Ofgem therefore proposed to ed suppliers' right to object to customer trasfers because they had give isufficiet termiatio otice. Ofgem are seekig to protect customers from high pressure or misleadig sellig practices 3.21 The Gas Cosumers Coucil received a umber of complaits about the doorstep sellig practices of gas suppliers from Jauary 1996, three moths before competitio started. Complaits cocered poor or misleadig iformatio, ad misleadig customers ito eterig cotracts. Ofgem modified gas suppliers' liceces i Jauary 1998 to iclude stadards coverig doorstep sellig. To pre-empt problems of this ature whe they itroduced competitio i the domestic electricity market, Ofgem itroduced licece coditios for domestic electricity suppliers i September 1998 to regulate their marketig activities, icludig doorstep sellig 25. I March 2000 Ofgem exteded the licece coditios coverig marketig, origially set to expire i 2000, for two years to 30 March I Jue Ofgem proposed a umber of ehacemets to esure that customers feel cofidet i chagig supplier 26 (Figure 13). They expect these to be i place by early The Natioal Associatio of Citizes Advice Bureaux told us that their etwork of local offices regularly report a cosiderable quatity of problems with the marketig of fuel. 13 Licece coditios o the marketig of gas ad electricity to domestic customers The Figure shows the chages to licece coditios coverig the marketig of gas ad electricity. Preset licece coditios (Note 1) Suppliers must esure that: Additioal licece coditios (Note 2) Suppliers must esure that: staff are properly selected ad traied; the customer uderstads that they have etered ito a cotract; their agets are readily idetifiable ad that they cotact cosumers at reasoable times; they audit sales o the doorstep ad o the telephoe; they take reasoable steps to cacel cotracts if customers request this; they maitai cotact with customers i case of a delay to processig the cotract; they set up procedures for the maagemet of sales staff; they carry out a audit ad provide the same safeguards for sales coducted i public places (such as supermarkets ad shoppig cetres) as for doorstep ad telephoe sales. Ofgem also proposed extedig to gas suppliers the requiremet that suppliers sed out terms ad coditios followig a telephoe sale. This will fully alig gas ad electricity marketig licece coditios. they provide complait hadlig; they do ot eter ito a agreemet with agecies seekig upfrot paymets from customers; they sed out terms ad coditios followig a telephoe sale (electricity marketig oly). Notes: 1. These coditios applied to domestic gas suppliers from Jauary 1998 ad to electricity suppliers sice April These additioal coditios proposed by Ofgem i Jue 2000 which should come ito effect later i part three 32 Source: Ofgem 25 The licece coditios do ot cover sales over the Iteret. I October 2000, however, Ofgem aouced a ew volutary code of practice for those compaies providig price compariso services over the Iteret. The code is also iteded for compaies providig price compariso services by post or over the telephoe, ad covers areas such as the eed for idepedece, that price comparisos should cover all available tariffs, ad the accuracy of price ad comparisos. 26 Marketig Gas ad Electricity Decisio documet ad proposals o the modificatio of licece coditios (Ofgem, Jue 2000).

34 3.22 I the first year of electricity supply competitio there were some 4,900 complaits, 1.06 complaits per thousad electricity switchers, a similar positio as i the first year of domestic gas competitio. Complaits icluded: Savigs that the iformatio provided by sales agets is misleadig; ad that the customer had ot uderstood that they had etered a cotract (sometimes havig gaied the impressio that they were requestig iformatio) Ofgem's mai method of moitorig the behaviour of suppliers ad their agets is to rely upo complaits from customers. For example, followig persistet complaits from customers about misleadig sales methods, Ofgem ivestigated the activities of doorstep sales agets egaged by Lodo Electricity i As a result, the compay agreed to tighte the moitorig of sales agets ad to flush out rogue operators Complaits, however, may give oly part of the picture. Research by the Office of Fair Tradig 27 suggests that complaits received by regulators are the "tip of the iceberg" with the true level of cosumer problems beig much higher. Some customers may ot cosider it worthwhile to complai, while some may ot realise sales agets had misled them util much later. Others who experiece problems may ot complai at all because they do ot kow who to complai to. The Chair-desigate of eergywatch told us that this could affect certai service problems i particular, icludig sellig ad problems with chagig supplier. She also told us that customers may ot be aware of the stadards of behaviour the regulator requires of suppliers. Ofgem told us that they had begu to supplemet their review of complaits with other techiques icludig mystery shoppig. Services Suppliers marketig literature emphasises the savigs possible, but suppliers expect service factors to become icreasigly importat part three 27 Cosumer Detrimet (OFT 296, February 2000). 33

35 Ofgem are doig more to esure that their regulatio of quality of service is effective 3.25 Suppliers' marketig literature emphasises the savigs possible, the ease of switchig ad each compay's reliability. Some suppliers believed that competitio had bee largely o price so far (see below). This view was shared by may of the cosumer represetative bodies we cosulted. Ideed, the performace of some ew suppliers has falle short of the stadard of ogoig service provided by the icumbets (see paragraph 2.12). Commets by suppliers o the degree of competitio o quality of service The basis of competitio is price perceptio plus perceived brad stregth. Competitio is iitially all o price. Price has bee the major factor i iitially drivig competitio, which has effectively bee a disicetive to suppliers to compete o quality of service. We expect service factors to become icreasigly importat All electricity suppliers are required to produce codes of practice desiged to protect customers' iterests, especially vulerable customers such as those i debt, the sick ad the elderly. All suppliers must also report a rage of performace data to Ofgem each quarter. The icumbets are, i additio, required to meet performace stadards ad report to Ofgem o progress each quarter. For example, icumbets are required to read the meter of all domestic customers at least oce a year. Seve of the 14 icumbet suppliers met the target i I some cases, suppliers are required to compesate customers if they fail to meet the stadard. For example, icumbet suppliers must offer, ad keep, a morig or afteroo appoitmet, or a appoitmet at a specified time if customers request oe. If the supplier fails to keep the appoitmet they should pay the customer 20. Icumbet suppliers made 1,264 such compesatio paymets i The Utilities Act 2000 provides for extedig the service obligatios of icumbets to all electricity suppliers. part three 3.27 Ofgem have worked closely with the Electricity Cosumers Committees i reviewig the quarterly returs from the icumbet electricity suppliers. The Electricity Cosumers Committees, ad Ofgem, pursue uder-performace with the compaies cocered. Ofgem also publish aual league tables of compay performace to give suppliers a icetive to meet the stadards ad they also cosider performace agaist stadards i settig price caps. Uder the Utilities Act, the ew Gas ad Electricity Cosumer Coucil take o resposibility for hadlig customer complaits, but Ofgem will also review complaits. 34

36 3.28 Ofgem seek to esure that each supplier has prepared suitable codes of practice ad check o compliace. Ofgem esure that all suppliers provide performace iformatio each quarter. Followig the itroductio of competitio, Ofgem developed a ew moitorig system to record ad aalyse the performace reported by suppliers. O four occasios, Ofgem have take actio arisig from their moitorig of customer complaits. I the three cases where Ofgem decided to publicise their actio 28, oe compay udertook to improve the maagemet of their direct marketig, ad two compaies agreed to restrictios o the recruitmet of ew customers util they had resolved their billig problems. 14 May people o lower icomes use a prepaymet meter to pay for electricity The Figure shows that a quarter of households with a icome of less tha 17,500 a year pay for electricity by prepaymet meter, while few households with a icome of 17,500 or more use oe. Aual household icome of less tha 17,500 Other (11 per cet) Quarterly credit (33 per cet) Ofgem eed to cotiue to protect customers who pay by prepaymet meter util the market is competitive 3.29 Where customers pay for electricity by prepaymet meter they pre-purchase electricity at a sales outlet 29. The quatity of electricity they have purchased is recorded electroically o a toke, 'smartcard' or key, depedig o the type of meter they have, which the customer iserts ito their meter to use electricity. About four millio people (15 per cet of domestic electricity customers) curretly pay for electricity i this way, a icrease of 2.8 millio sice By compariso, 1.6 millio customers pay for gas by prepaymet meter, double the umber i Prepaymet meter (25 per cet) Aual household icome of 17,500 or more Prepaymet meter (7 per cet) Other (4 per cet) Direct debit (31 per cet) Quarterly credit (26 per cet) 3.30 Prepaymet meter use is cocetrated amog less well off households. Our customer survey i May/Jue 2000 foud that 80 per cet of prepaymet meter customers were i occupatioal categories C2, D ad E (skilled maual workers; semi-skilled maual workers; pesioers, uemployed people ad studets). A quarter of electricity customers with a household icome of less tha 17,500 a year use a prepaymet meter (Figure 14). Direct debit (63 per cet) Note: Other icludes weekly or fortightly cash, fuel direct/deductios from icome support. Source: NAO/Ofgem survey i May/Jue Idepedet Eergy, Lodo Electricity ad Norther Electric ad Gas. 29 Prepaymet meters provide a limited amout of emergecy credit, for example to eable customers to have access to a supply overight. part three 35

37 15 May electricity customers with a prepaymet meter iherit it from the previous occupat of their dwellig The Figure shows that a sigificat miority of prepaymet meter customers (over 40 per cet) iherited their prepaymet meter whe they moved ito their curret dwellig. It was there whe I moved i 0% 10% 20% 30% 40% 50% I asked for oe because I had difficulty i payig my bills I asked for oe for some other reaso The compay isisted o istallig it because we were i arrears The compay isisted o istallig it because we were i arrears Source: Ofgem survey, Jue It should cost efficiet suppliers a average of a year more to supply customers who have a prepaymet meter The Figure shows Erst & Youg's estimate of the additioal aual costs to the icumbet electricity suppliers of servig prepaymet meter customers, by compariso with the costs of servig quarterly credit customers. Ofgem cocluded that savigs from better debt maagemet, workig capital maagemet ad other operatioal beefits would broadly equal the extra ifrastructure costs. Extra costs Aual costs Capital ad operatig costs of the meter Ifrastructure costs (Note 1) Total extra costs Less Savigs from better debt maagemet, workig capital maagemet ad other operatioal beefits (Note 2), (11.50) Net additioal cost by compariso with quarterly credit Notes: 1. The cost of issuig cards ad tokes, collectig cash from customers through a etwork of outlets, ad dissemiatig paymets ad iformatio to suppliers. Erst ad Youg's calculatio relates to the icumbet electricity suppliers. 2. Other operatioal beefits iclude the elimiatio of the eed for a maual meter readig for some types of meter (smartcard ad key meters) Suppliers ofte istall prepaymet meters to recover outstadig debt, but the meters the remai i place after the debt has bee repaid uless the customer asks to pay i aother way. Ofgem estimate that some 250,000 electricity customers (about six per cet of the total) usig prepaymet meters are repayig debt 30. Some 43 per cet of customers who pay by prepaymet meter started doig so after they moved ito a house or flat equipped with oe (Figure 15) Research commissioed by Ofgem suggests that customers who use a prepaymet meter are more expesive to supply because of the cost of the meter ad the ifrastructure to support this paymet method (Figure 16), although the research also suggested that the cost of prepaymet meters was fallig. Uless customers who pay by prepaymet meter obtai a lower price by chagig supplier, i all but oe regio they pay betwee 9 ad 15 a year more tha those who pay the quarterly credit tariff 31. Eve if they chage to a supplier offerig a lower prepaymet meter tariff, they would usually pay more tha customers who pay the quarterly credit or direct debit tariff who switch suppliers. For example, for customers with typical electricity cosumptio who live i Norther Eglad, the lowest prepaymet meter tariff offered i July 2000 was 243 a year, a savig of 15 a year o the icumbet s tariff. By compariso, the lowest quarterly credit tariff was 206 a year, ad the lowest direct debit tariff was 197. Source: Prepaymet Meters A Cosultatio Documet (Ofgem, October 1999) part three Prepaymet Meters - A Cosultatio Documet (Ofgem, October 1999). 31 The exceptio is Norther Scotlad where Scottish ad Souther Eergy's prepaymet meter tariff is the same as the quarterly credit tariff.

38 17 A smaller proportio of prepaymet meter customers have chaged supplier tha those who pay for their electricity i other ways The Figure shows that there is variatio i the rate at which customers have chaged their supplier depedig o how customers pay for their electricity. Over 30 per cet of direct debit customers had chaged supplier, more tha twice the proportio of prepaymet meter customers who had doe so (15 per cet). Quarterly credit Customers who have chaged their electricity supplier 0% 5% 10% 15% 20% 25% 30% 35% Direct debit Prepaymet Meter Other (Note) Note: Other icludes paymet i cash at a Post Office. Source: NAO/Ofgem survey May/Jue Two compaies offer prepaymet meter tariffs lower tha those of icumbet electricity suppliers i their home areas 32. But most suppliers do ot offer competitive tariffs ad hece their marketig efforts are of little value to customers with prepaymet meters. Our survey i May/Jue 2000 foud that, sice the start of competitio, a smaller proportio of customers who pay by prepaymet meter had chaged supplier tha those who pay the quarterly credit or direct debit tariffs (Figure 17). Nevertheless, early 500,000 prepaymet meter customers have chaged their supplier sice the start of competitio Customers with prepaymet meters ca obtai bigger savigs whe they switch supplier by chagig paymet method at the same time. By Jue 2000, 139,000 customers had chaged from prepaymet meter to aother paymet method at the same time as chagig supplier ad have therefore beefited from competitio. About 100,000 customers had, however, chaged to the prepaymet meter tariff whe they switched supplier. May prepaymet meter customers would prefer ot to chage to aother paymet method. Ofgem surveys show that prepaymet meters are geerally popular with the customers that use them, for istace because usig them avoids the build up of debt (as ca happe, for example, with direct debit). Ad some customers are uable to pay by cheque or direct debit because they do ot have a bak accout We surveyed the views of suppliers o the stregth of price competitio i differet segmets of the electricity market. Although most suppliers rated the stregth of price competitio as high i other segmets of the market, most of the 20 suppliers who expressed a opiio believed that the prepaymet meter market was ot yet price competitive. Some suppliers told us that the margis o prepaymet meter customers were lower tha o customers who pay i other ways, makig such customers less attractive to recruit. Figure 16 above 32 British Gas Tradig ad Powerge. idicates what Ofgem believes to be the additioal costs icumbets icur i servig prepaymet meter customers, provided they are operatig efficietly. Suppliers believed, however, that Ofgem had uderestimated these additioal costs Uder market rules, gas ad electricity suppliers ca prevet customers who owe them moey from movig to a competitor. These rules were iteded to prevet customers chagig supplier to avoid payig their debts. Although most customers who pay by prepaymet meter are ot i debt to their supplier, Ofgem believe that those who use prepaymet meters to maage their debts are particularly affected. Prepaymet meter customers are a idetifiable group who may be preveted from switchig, ad prevetio from switchig imposes costs o the iteded ew supplier. Ofgem believe this may be discouragig suppliers from seekig to recruit such customers. Ofgem are seekig to protect the iterests of prepaymet meter customers 3.37 Ofgem have a rage of measures i place or plaed to protect the iterests of customers who pay for their electricity usig a prepaymet meter: a) Ofgem's price cotrols over the icumbets' tariffs from April 2000 reduced prepaymet meter tariffs i lie with quarterly credit tariffs ad required them to charge prepaymet meter customers o more tha 15 a year more tha quarterly credit customers or the existig differece if lower. They did this because, at the ed of 1999, three of the icumbets were chargig prepaymet meter customers with typical cosumptio some a year more tha their quarterly credit customers. At October 2000, the average prepaymet meter charge was some 12 a year more tha quarterly credit, ragig from six compaies chargig 15 more to oe with o additioal charge. part three 37

39 b) Ofgem are proposig a ew stadard coditio i both electricity ad gas supply liceces requirig compaies to prepare a code of practice to esure that prepaymet meter customers receive better iformatio ad advice about the services available. The codes must iclude iformatio about where keys ad smartcards ca be charged, what the customer should do if their meter malfuctios ad stadards of performace that apply if this happes. Licece coditios require suppliers to compesate customers if they do ot comply with these stadards of performace. The ew codes of practice were operatig by October Icumbet suppliers lack a icetive to ecourage prepaymet meter customers to chage paymet method, as they would bear the cost of the chage. c) At the ed of 1999, Ofgem proposed chages to market rules to remove a supplier's ability to stop customers i debt movig to aother supplier. Suppliers could trasfer the debt to the ew supplier by volutary agreemet, write off small debts or pursue larger debts through the courts, or sell the debt to a third party. Some suppliers ad cosumer groups believe that Ofgem's proposal carries risks ad that chage should be delayed util the market had bee ope loger, to give suppliers time to adjust. For example, the Public Utilities Access Forum, a cosumer group, have suggested that if the chage were itroduced suppliers may be more likely to isist that customers provide a security deposit, or eve require more customers to use a prepaymet meter. Ofgem have ot yet reached a fial decisio o whether to proceed. d) Ofgem are lookig at how far better debt maagemet ad prevetio by suppliers could help customers avoid gettig ito debt, ad are cosiderig ew ways for customers without bak accouts to pay their bills, icludig the developmet of credit uios Competitio has ecouraged suppliers to produce ew tariffs ad some of these may be attractive to customers who curretly pay by prepaymet meter. For example, oe compay 33 is pilotig a ew tariff based o a fixed aual charge, payable i istalmets, regardless of how much electricity customers use, thereby eablig customers to budget for their electricity without icurrig the extra cost of usig a prepaymet meter. Ofgem pla chages to stregthe competitio i Scotlad where a smaller proportio of customers have switched tha i the rest of Great Britai 3.39 A smaller proportio of domestic electricity customers have chaged their supplier i Scotlad tha i Eglad ad Wales (Figure 18), ad the two Scottish icumbet suppliers have retaied over 80 per cet of the domestic electricity market i their home areas. Fewer domestic customers have chaged supplier i Scotlad, eve allowig for the greater umber of rural ad prepaymet meter customers there (these groups have switched i smaller umbers throughout the coutry). By cotrast, i the domestic gas market, the level of switchig is broadly i lie with Eglad ad Wales after adjustig for the greater umber of prepaymet meter ad rural customers. 18 Fewer people i Scotlad have chaged their electricity supplier tha those i Eglad ad Wales Scotlad Eglad & Wales Source: NAO/Ofgem survey Customers who have chages their electricity supplier 0% 5% 10% 15% 20% 25% 30% 3.40 Most suppliers we cosulted 34 believed that price competitio was weaker i Scotlad tha i Eglad ad Wales. They attributed this i part to the differet wholesale tradig arragemets i Scotlad 35 ad the itegratio of trasmissio ad distributio with the two icumbets' supply busiesses, see below. The positio i the larger busiess electricity market appears to provide evidece for this view. For example, the 100 kw to 1 MW sector of the electricity market has bee ope to competitio sice By , ew suppliers had gaied 56 per cet of the market i Eglad ad Wales but oly 20 per cet i Scotlad. Oe Scottish supplier 36 told us that ew etrats ca purchase electricity from a umber of idepedet geerators, ad oted that where ew etrats do purchase from a Scottish icumbet the price is tied to that i Eglad ad Wales. The supplier also took the view that less switchig i Scotlad reflected i part Scottish customers' high degree of loyalty to the Scottish icumbets, ad the lower peetratio of gas i the North of Scotlad which limits the scope for dual fuel offers. part three 33 TXU Europe 34 Thirtee out of the 18 suppliers who expressed a opiio. 35 Ofgem pla to alig wholesale electricity tradig arragemets with those i Eglad ad Wales i Scottish ad Souther Eergy. 38

40 Suppliers attribute less price competitio i Scotlad to higher barriers to etry ad expasio The differet tradig arragemets i Scotlad are a barrier to market etry esurig fewer suppliers actively target Scotlad. Suppliers view low margis ad the high cost of acquirig ew customers as the most importat barriers to etry ad expasio i the domestic electricity market Ogoig price reductios due to price cotrols have reduced the profit icetive ad cosequetly the attractiveess of the market to ew etrats. Tradig arragemets, the availability of competitive wholesale prices ad differet systems ad processes i Scotlad have bee barriers. Low margis may restrict routes to market. The vertically itegrated icumbets are the domiat providers of wholesale electricity to ew etrats, with whom they are competig. Scotlad is a relatively small market ad therefore ay process differeces act as a barrier. Scottish customers are less iclied to move from their existig (Scottish) suppliers ad other suppliers have yet to focus their efforts o the Scottish market. Arragemets for securig access to geeratio i Scotlad are also less satisfactory tha i Eglad ad Wales. Ofgem are seekig to esure that suppliers ca compete o equal terms 3.41 The possibility that compaies will eter a market reduces the risk that the existig compaies will develop iformal uderstadigs ad expectatios of "reasoable prices". New etrats are also a importat source of iovatio. There are 14 competitors i the domestic electricity market: the icumbet electricity suppliers (ow owed by ie compaies) ad five ew etrats 37. All the electricity suppliers also sell gas to domestic customers, but seve gas suppliers, mostly smaller suppliers, do ot sell electricity. I 2000, British Eergy withdrew from the domestic electricity market after 14 moths by sellig SWALEC to Scottish ad Souther Eergy ad Iogy, owers of Midlads Electricity, purchased the major supply busiess assets of Idepedet Eergy, a ew etrat to the electricity market. Mergers ad acquisitios are leadig to icreasig cocetratio i the market The three ew etrats we cosulted believed there were sigificat barriers to eterig the domestic electricity market. Six out of eight gas suppliers we cosulted who expressed a view agreed. The factor suppliers metioed most ofte was the low profit margi i the electricity market, see below. Some suppliers attributed this i particular to the strigecy of Ofgem's caps over electricity prices by compariso with those o British Gas Tradig's gas prices. Some viewed the low margis i the electricity market as particularly sigificat i deterrig ew etrats because of the high cost of acquirig ew customers through doorstep sellig. The margis i electricity are historically lower tha i gas, therefore, the savigs for customers are less. Gas price cotrols have bee further above market prices because of British Gas Tradig's purchase cotracts. There are o sigificat barriers to growig market share other tha the fudametal ecoomics of profitability ad attractig ad retaiig customers, give the tight margis available. Customer acquisitio costs (usig direct marketig) rage from aroud 30 to 50. Price cotrols have reduced profit to aroud two per cet. Profit o a average domestic cosumer spedig of 250 is 5. So it ca take betwee six to te years to recover customer acquisitio costs. Bad debt risk is icreasig so the preferred meas of gaiig market share is to buy a competitor The relatively low profit margis arise from Ofgem's aim of strikig a balace betwee protectig customers through price caps ad ecouragig competitio, ad therefore are relevat oly so log as price caps are retaied. Other problems metioed by the suppliers are structural, i particular: a) The lack of separatio betwee distributio ad supply. b) Differeces i the processes for obtaiig a electricity supply licece by compariso with obtaiig a gas supply licece Whe competitio was itroduced, the compaies owig the icumbet supply busiesses also owed the distributio busiess for the area. Sice the, the owership has become separate i four of the 12 regios i Eglad ad Wales. Licece coditios require the icumbet distributio busiess to provide ope access to their etworks to all suppliers, prohibits them from discrimiatig betwee suppliers o prices for their services ad bas cross subsidies betwee distributio ad supply. Differet arragemets exist i the gas market. Uder the Gas Act 1995, trasportatio was separated from shippig ad supply. I 1997, British Gas took a commercial decisio to separate their trasportatio from their supply ad shippig busiess ito two separate compaies. These chages followed the August 1993 recommedatios of the Moopolies ad Mergers Commissio aimed at esurig that the part three 37 Two of the ew etrats operate i associatio with existig suppliers. 39

41 trasportatio of gas was available to all gas shippers without udue discrimiatio. The Utilities Act 2000 provides for similar chages i the electricity idustry to those implemeted i gas i The Act provides that compaies caot both supply electricity ad provide electricity distributio services Compaies take about six moths to obtai a domestic electricity or gas supply licece from Ofgem 38. Some suppliers told us, however, that it was easier to obtai a gas supply licece. More work is required to prepare computer systems to operate i the domestic electricity market tha i the gas market, ad electricity suppliers eed to eter ito a much larger umber of service cotracts with other compaies (for distributio services, for istace). The latter is because distributio ad other services are provided by 14 separate regioal compaies. Ofgem's licesig requiremets also differ betwee electricity ad gas supply. The Utilities Act 2000, however, provides for aligig the licesig requiremets i the two idustries. Ofgem hope that the ew liceces will come ito effect i April New wholesale electricity tradig arragemets are to be implemeted i 2001 i Eglad ad Wales ad 2002 i Scotlad (see paragraph 2.31). Ofgem have calculated the costs likely to be icurred by participats i the wholesale market, icludig idepedet electricity suppliers. Ofgem estimate that participats set up costs could be up to 12 millio (Figure 19). Oe supplier told us that profits o a typical domestic electricity customer would be of the order of 5 each year. If suppliers sought to recover their set up costs over five years, this equates to the profit o 500,000 customers. Compaies ca, however, share these costs with existig suppliers. For example, Virgi etered the electricity market i 2000 i partership with Lodo Electricity. 19 Ofgem estimated the costs to suppliers who participate i the ew wholesale market i Eglad ad Wales at up to 12 millio for a ew etrat The Figure shows the estimated costs to participats of the ew electricity wholesale market Chages to participats' iteral fiace systems Up to 10 millio (Note 1) Hardware ad software Up to 2 millio (Note 2) Legal costs for reviewig the ew cotracts before sigig 100,000 Credit cover 150,000 TOTAL Up to millio Notes 1. Ofgem believed that about a fifth of market participats would eed to replace their iteral fiacial systems completely. Ofgem expect the remaider to icur much more modest costs, of the order of 100, For tradig systems, settlemet systems ad for coectio to the Natioal Grid Compay's etwork cotrol system. part three Icludig testig the ecessary iformatio techology systems.

42 Glossary Direct debit Distributio Electricity supply price cap Geeratio Icumbet electricity suppliers Prepaymet meter Stadard credit Switchig Supply Tariffs Trasmissio A paymet method by which the customer s bill is paid automatically from their bak accout each moth or each quarter. The trasfer of electricity from the trasmissio etwork to customers. It is carried at lower voltages tha trasmissio. The maximum tariffs, set by Ofgem, that are payable by domestic customers. The productio of electricity, maily at power statios. The compaies which, before the itroductio of competitio, had a moopoly to supply electricity to all domestic premises i their assiged geographical areas. A meter ito which a customer iserts a electroic card, mechaical tokes or cois i order to obtai electricity. The tariff charged by suppliers to customers who pay their bills by cash, cheque, ad credit or debit card. The process of chagig from oe supplier of electricity to aother. The sellig of electricity to customers. The process icludes wholesale purchasig, marketig, readig meters, billig, processig paymets ad dealig with equiries from customers. The published prices charged by electricity suppliers. The trasfer of electricity at high voltages from the poit of geeratio to the compaies resposible for distributio to ed users. High voltages are used to miimise losses. glossary 41

43 Appedix 1 Mai Recommedatios of the Committee of Public Accouts i their 1999 Report: "Givig Customers A Choice: The Itroductio of Competitio i the Domestic Gas Market" 1. O the basis of a report by the Comptroller ad Auditor Geeral, the Committee examied Ofgem o the itroductio of competitio for domestic gas customers. Four mai poits emerged from our examiatio: We are cocered that low icome customers who use prepaymet meters to pay for their gas are ot beefitig as much as other customers from the itroductio of competitio. We ote Ofgem's cocer that low icome customers who use other paymet methods should ot be asked to subsidise prepaymet meter users. But Ofgem eed to look more closely at ways of promotig price competitio i this part of the market, ad esurig that low icome customers use prepaymet meters oly whe they wat to or beefit from doig so. Ofgem eed, for example, to pursue rigorously their work with compaies to make it easier for customers who use prepaymet meters to repay debt to chage supplier, whilst protectig the positio of suppliers to whom debts are owed. As a result of errors o the part of gas suppliers, or i some cases dishoest marketig, some 100,000 customers have had their gas provided by a ew supplier without havig asked for this to be doe. We are cocered at the axiety that such ivolutary trasfers ca cause to customers, especially the elderly ad other potetially vulerable groups. Customers may be cocered for example, that they might be charged twice for the gas they use. Some customers have ecoutered cosiderable difficulty i chagig back to their origial supplier. We expect Ofgem to put pressure o suppliers to stop trasferrig customers who have ot asked to move, ad to require ay compaies that do so to correct such trasfers whe they occur ad to compesate customers for ay icoveiece caused. I our 1998 report o the work of the Office of Telecommuicatios to couter ati-competitive behaviour i the telecommuicatios idustry, we foud that there was a eed for greater trasparecy ad clarity i pricig structures if customers were to make iformed choices betwee differet operators' services. 39 It is evidet that customers are ecouterig similar problems i the gas market, where, for example, over 60 per cet of customers do ot realise that the prices o offer from the ew suppliers are lower tha those of British Gas Tradig. Matters are further complicated by the fact that at least two compaies - a supplier of gas ad a trasporter of gas - are ivolved i deliverig gas to each customer's home. We recommed that Ofgem should cosider what more they ca do to improve the iformatio available to gas customers o the choices available to them i the gas market ad o the issues they eed to address whe cosiderig whether or ot to chage supplier. It is vital that safety stadards i the gas idustry do ot slip. The gas trasportatio compay Trasco are resposible for comig ad attedig to gas escapes reported by the public ad have a target of gettig to 97 per cet of ucotrolled gas escapes withi a hour. We are cocered that, whereas 99 per cet of such escapes were reached withi a hour i both 1993 ad 1994, i 1995 this fell to 92 per cet, ad i 1998 had recovered to o more tha 97 per cet. This meas that i 1998 it took Trasco more tha a hour to get to the premises i some 40,000 cases. We recommed that Ofgem examie with the Health ad Safety Executive the risk to households i this deterioratio i performace for both safety ad public cofidece i domestic gas supply, ad whether Trasco should be required to set a target of their performace at the level of 99 per cet achieved i 1993 ad appedix oe PAC 64th Report, , paragraph 4 (HC 842)

44 Appedix 2 Study Methods 1. The mai sources of evidece for the coclusios draw i this report were: We collected ad evaluated iformatio from Ofgem relatig to the implemetatio of competitio i the domestic electricity market, ad their moitorig of electricity compaies' compliace with their licece coditios. This icluded iformatio obtaied from Ofgem s most recet customer survey, udertake by MORI i Autum Joitly with Ofgem we commissioed Ipsos-Capibus Limited to carry out a survey of a represetative sample of 4,600 electricity customers i Great Britai. This provided up to date iformatio o customers, coverig characteristics such as locatio, paymet method, occupatioal class, household icome, ad whether they had chaged their electricity or gas supplier. We aalysed the results to assess the ifluece of various factors o the propesity of customers to switch supplier. Further details are provided i Appedix 3. We collected iformatio o electricity ad gas tariffs directly from compaies. This, together with similar iformatio held by Ofgem, was used to prepare estimates of the savigs beig achieved ad still achievable at Jue We examied the results of research udertake by the Departmet of Trade ad Idustry ito the reasos why customers did ot switch suppliers. We examied the iformatio that Ofgem provide to customers o electricity ad gas prices ad quality of service, i particular the iformatio icluded o their website, with a view to drawig coclusios o the iformatio available to customers. We telephoed, aoymously, the sales poits of all electricity suppliers to obtai quotatios to test whether ay pressure was exerted to sig up ad to obtai iformatio packs. We checked the accuracy of the iformatio provided agaist prited tariff iformatio to assess whether it was possible to obtai reliable iformatio o tariffs over the telephoe. I September 1999, we set a questioaire to compaies that had bee directly ivolved with the implemetatio of competitio i the electricity supply idustry, the regioal Electricity Cosumer Committees ad atioal cosumer orgaisatios. The 40 (89 per cet) completed questioaires helped us to formulate the study's issues for examiatio. I May 2000, we set a further questioaire to some 90 compaies i the electricity ad gas idustries to obtai more detailed iformatio about their views ad experieces of electricity ad gas competitio, icludig overseas practice. All but oe of the icumbet electricity suppliers replied. We also received resposes from the two mai ew etrats to the electricity idustry. Some compaies operatig solely i the gas idustry also respoded, but most, while welcomig the opportuity to commet, declied to do so because of their limited first had experiece of electricity supply. We aalysed the database of complaits received by Ofgem to idetify the types of issues ad cocers that customers were raisig with them. We also reviewed the actio, where appropriate, which Ofgem were takig i respose to those cocers. This eabled us to draw coclusios o the tred i the level of complaits ad Ofgem's hadlig of them. We collected ad evaluated iformatio o the electricity markets of Germay, Swede, Pesylvaia ad Califoria. We also compared the characteristics of the electricity market i Great Britai with other home markets, such as telecommuicatios ad gas. This iformatio eabled us to bechmark the developmet of electricity supply competitio with similar markets elsewhere. 2. As well as speakig to key staff at Ofgem, we cosulted widely with those cocered with the itroductio of competitio to obtai their views. Those we cosulted icluded: Represetatives of electricity idustry ad cosumers Electricity Pool of Eglad ad Wales MRA Service Compay 40 Natioal Associatio of Citizes Advice Bureaux Natioal Cosumer Coucil Natioal Electricity Cosumers Coucil PA Cosultig Group 41 Public Utilities Access Forum appedix two MRA Service Compay oversee the computer systems that eable customers to chage their electricity supplier. 41 Ofgem's programme maager for itroducig competitio.

45 Compaies ivolved i the electricity supply market British Gas Tradig Easter Group Ero Lodo Electricity Maweb Scottish ad Souther Eergy A potetial supplier who had cosidered but decided agaist eterig the market Electricity safety issues The Egieerig Ispectorate of the Departmet of Trade ad Idustry Health ad Safety Executive Evirometal matters Associatio for the Coservatio of Eergy Cetre for Sustaiable Eergy Frieds of the Earth 3. We set up a expert advisory pael to provide us with iformed commet o the scope of our study, study methods, fidigs ad coclusios. The Natioal Audit Office expert advisory pael Professor Joh Chesshire of the Sciece ad Techology Policy Research Uit at the Uiversity of Sussex Michelle Childs of the Cosumers Associatio Philip Daubeey of the Electricity Associatio Gareth Davies of OXERA Peter Vass of the Cetre for Regulated Idustries at the Uiversity of Bath (later David Parker of Asto Busiess School) Catherie Waddams of the Warwick Busiess School We thak the members of our expert pael, together with those we cosulted ad staff withi Ofgem ad Departmet of Trade ad Idustry, for their assistace i completig this examiatio. appedix two 44

46 Appedix 3 Aalysis of Customer Survey Data 1 The Natioal Audit Office, with Ofgem, commissioed Ipsos-Capibus to telephoe a sample of 4,600 electricity customers i Eglad, Scotlad ad Wales i May/Jue The data obtaied icluded whether respodets had switched electricity ad/or gas suppliers, or siged a cotract to do so, together with demographic details (socio-ecoomic status, geographic area, icome, whether livig i a rural locatio) ad details about electricity ad gas bills ad paymet methods. Our iitial aalysis of the data revealed differeces i the switchig behaviour for differet subgroups i the sample: 20 per cet of those with a household icome of less tha 9,500 a year had switched electricity supplier, compared with 30 per cet of those with household icome above 25,000 a year; 12 per cet of those i rural areas had switched electricity supplier, compared with 24 per cet overall; 15 per cet of customers who pay their electricity bill by prepaymet meter had switched supplier, compared with 31 per cet of those who pay by direct debit; 15 per cet of customers i Scotlad had switched electricity supplier compared with 25 per cet i Eglad ad Wales. 2 These sub-groupigs are ot, however, idepedet of each other. For istace, there are more customers i rural areas i Scotlad tha i Eglad ad Wales. To assess the effect of, for example, beig i a rural area o a customer's likelihood of switchig electricity supplier, it is ecessary to cotrol for these other factors, such as geographic locatio ad icome. We ca the look at the relative importace of the differet factors i predictig whether or ot customers switch supplier. 3 We did this statistically usig a techique kow as logistic regressio. This is a method of examiig the relatioship betwee a set of explaatory variables (such as socio-ecoomic status, icome, locatio, electricity paymet method) ad a respose variable which ca oly take oe of two values (i this case, switched electricity supplier or did ot switch electricity supplier ). This techique eabled us to model the probability that a respodet would have switched electricity supplier, give that respodet's characteristics, as described by the explaatory variables. We have icluded techical details of the regressio model at the ed of this Appedix. Factors ifluecig switchig behaviour for electricity customers 4 We foud that the followig factors were most importat i determiig whether respodets switched electricity supplier or ot: Paymet method (whether direct debit, prepaymet meter or quarterly bill); Electricity supply group area (whether Scotlad, Norther Eglad, Wales/Cetral Eglad or Souther Eglad) 42 ; Locatio (whether urba, suburba or rural); Size of electricity bill (as classed ito oe of three bads i the survey). Oce these factors had bee icluded i the model its fit was ot improved by addig household icome level or socio-ecoomic status. This suggests that the above factors betwee them already accout for most of the differeces i switchig betwee those with differet household icomes. 5 Figure 20 overleaf below quatifies the effects of those factors that were statistically sigificat at the 95 per cet level of cofidece. The umbers preseted are odds ratios, which idicate the chage i the odds of a respodet switchig electricity supplier for each category listed, by compariso with the referece category. For example, the odds of a customer who pays by direct debit havig switched supplier are about 1.5 times the odds of a quarterly bill payer switchig. We see that factors that ted to icrease the chaces that a customer has switched supplier are payig by direct debit ad livig i Norther or Cetral Eglad/Wales. Factors which ted to decrease the chaces are: payig by pre-paymet meter; livig i a rural area; livig i Scotlad; ad payig less tha 3 per week for electricity. 6 Although the effects i Figure 20 are all statistically sigificat, idividually they oly represet effects that are substatively small to moderate. The joit effects of various combiatios of these factors ca be substatial however. For example, the type of customer which this model would predict to be least likely to have switched appedix three 42 For the aalysis, we divided Great Britai ito four areas: Scotlad (Scottish Power ad Scottish Hydro-Electric regios); Norther Eglad (Norweb, Norther Electric ad Gas ad Yorkshire regios); Wales ad Cetral Eglad (SWALEC, Maweb, Npower, Powerge, ad Easter Eergy regios); ad Souther Eglad (Lodo Electricity, Seeboard, Souther Electric ad SWEB regios). 45

47 20 21 Sigificat predictors of electricity switchig The Figure shows odds ratios, or the chage i the odds of a respodet switchig electricity supplier for each category listed, i compariso with the referece category. For example, customers payig for electricity by direct debit are 1.5 times as likely to have chaged supplier by compariso with quarterly credit customers, the referece category i this case. It also shows that the factors tedig to decrease the chaces of switchig are: payig by prepaymet meter; livig i a rural area; livig i Scotlad; ad payig less tha 3 per week for electricity. Factor Odds ratio Paymet method (as cotrasted with quarterly bill) Direct Debit 1.54 Prepaymet meter 0.55 Electricity supply group (as cotrasted with Souther Eglad) Scotlad 0.66 Norther Eglad 1.44 Wales/Cetral Eglad 1.54 Locatio (as cotrasted with urba) Rural 0.45 Size of bill (as cotrasted with 'Bad 3: more tha 7/week') Less tha 3/week 0.75 Source: NAO Aalysis Sigificat predictors of gas switchig The Figure shows odds ratios, or the chage i the odds of a respodet switchig gas supplier for each category listed, i compariso with the referece category. It also shows that the factors tedig to decrease the chaces of switchig are: payig by prepaymet meter ad livig i a rural area. Factor Odds ratio electricity supplier would be someoe livig i rural Scotlad, who pays by prepaymet meter ad whose electricity bill is less tha 3 per week. There were, i fact, o respodets with these characteristics i the sample, but the predicted probability of such a customer havig switched electricity supplier is about three per cet. By cotrast, the type of respodet predicted to be most likely to have switched supplier would be someoe livig i urba cetral Eglad, who pays by direct debit ad whose electricity bill is more tha 7 per week. There were 39 respodets to the survey with these characteristics, of whom 19 (49 per cet) had switched supplier. Compariso with gas switchers 7 We also carried out a logistic regressio aalysis for respodets who had switched gas supplier. The three factors which emerged as importat, i predictig whether or ot respodets had switched, were, i this case, paymet method, electricity supply group area ad locatio. Note that data o the size of respodets' gas bills were ot available. However, addig icome bad to the model did ot sigificatly improve its fit. Figure 21 below gives odds ratios which idicate the relative sizes of the sigificat effects for gas switchers. 8 We see that there are some differeces from those for electricity switchers. There is o loger a sigificat effect of livig i Scotlad. The oly sigificat cotrast to Souther Eglad is Norther Eglad, for which the odds of a customer havig switched gas supplier are about 1.4 times as great. The effects of paymet method are similar, with those payig by direct debit beig more likely to have switched, ad those payig by prepaymet meter less likely. Respodets i rural areas are less likely to have switched gas supplier but the effect is ot as strog as we foud for the electricity market. appedix three 46 Paymet method (as cotrasted with quarterly bill) Direct Debit 1.54 Prepaymet meter 0.55 Paymet method (as cotrasted with quarterly bill) Direct Debit 1.39 Prepaymet meter 0.61 Electricity supply group (as cotrasted with Souther Eglad) Norther Eglad 1.41 Locatio (as cotrasted with suburba) Rural 0.70 Source: NAO Aalysis Techical ote 9 Figure 22 below gives the results of the logistic regressio of whether respodet switched electricity supplier o the variables: paymet method, geographic area, locatio (urba, suburba, rural) ad size of electricity bill. Examiatio of the likelihood ratio statistic (a measure of the comparative fit of models ivolvig differet predictor variables) showed that addig socio-ecoomic status (graded AB, C1, C2, D or E) ad icome (reported i bads of less tha 9,500, 9,500 to 17,499, 17,500 to 24,999 ad 25,000 plus ) to the model did ot sigificatly improve its fit. 10 For the model reported i Figure 22 below, the Hosmer ad Lemeshow test for goodess of fit gave X 2 =3.6, d.f.=8, p=.88. I this test, resposes are divided ito deciles based o predicted probabilities, ad predicted ad actual frequecies are compared usig the chi-

48 22 Model coefficiets: electricity switchig B Stadard Error p for Wald Exp(B) 95% Cofidece statistic limit PAYMENT METHOD <.0005 (cotrast with quarterly bill) Direct Debit < [1.32,1.81] Prepaymet Meter < [.43,.69] Other (e.g. i cash) [.57,1.02] AREA <.0005 (cotrast with Souther Eglad) Scotlad [.48,.90] Norther Eglad < [1.17,1.76] Wales/Cetral Eglad < [1.29,1.82] LOCATION <.0005 (cotrast with urba) Suburba [.84,1.17] Rural < [.31,.66] SIZE OF ELECTRICITY BILL.12 (cotrast with highest bad 3) Bad 1 (less tha 3 per week) [.56,.99] Bad 2 ( 3-7 per week) [.83,1.15] Do't kow [.60,1.11] CONSTANT < Model coefficiets: gas switchig B Stadard Error p for Wald Exp(B) 95% Cofidece statistic limit PAYMENT METHOD <.0005 (cotrast with quarterly) Direct. Debit < [1.20,1.62] Prepaymet Meter < [.48,.77] Other [.87,1.41] AREA <.0005 (cotrast with Souther Eglad) Scotlad [.65,1.14] Norther Eglad < [1.17,1.71] Wales/Cetral Eglad [.96,1.34] LOCATION.026 (cotrast with suburba) Urba [.73,1.02] Rural [.52,.95] CONSTANT < appedix three 47

49 squared test. A small p-value (e.g or less) idicates a sigificat differece betwee predicted ad actual values, i.e. a poor model fit. A larger p-value, as here, idicates that the model is a good fit. 11 The colums i Figure 22 give the values of the model parameters. The effect of each factor is estimated by its B-value; ad the precisio of this estimate is idicated by the correspodig stadard error. The colum headed p for Wald statistic idicates the result of testig whether each effect is sigificatly differet from zero: values of 0.05 or less idicate sigificace at the five per cet level. The value of exp(b) reported i the peultimate colum gives the odds ratio for each effect (a more easily iterpretable figure tha the raw B-value). Thus the value of 1.54 for exp(b) i the first row of the table idicates that, accordig to this model, the odds of a customer who pays by direct debit switchig electricity supplier are 1.54 times the odds of a customer who pays by quarterly bill doig so. (Odds ratios greater tha oe idicate factors which ted to icrease the likelihood of switchig, i compariso with the referece category, ad odds ratios less tha oe idicate factors that ted to decrease the likelihood.) The fial colum of the table gives a 95 per cet cofidece iterval for the estimated odds ratio for each factor. Thus, i the first row, the estimated odds ratio is 1.54: but there is, of course, some ucertaity associated with this estimate. A 95 per cet cofidece iterval (i.e. the likely rage of values for the estimate, give this ucertaity) is betwee 1.32 ad Figure 23 gives the correspodig results for the model for gas switchig (excludig size of bill, which was uavailable for gas). The Hosmer ad Lemeshow test for goodess of fit i this case gave X 2 =7.0, d.f.=8, p=.53. appedix three 48