February 2000 Comparing Electricity and Gas Prices Consultation Paper
Contents Page Executive Summary Chapter 1 Introduction 1 Chapter 2 Regulatory Position 6 Chapter 3 Current Practice 9 Chapter 4 Customer Experience 11 Chapter 5 Making Information Available to Customers 17 Chapter 6 Conclusions 30 Annex A Examples of Ofgem pricing factsheets Annex B Text of relevant existing electricity licence conditions Annex C Text of relevant existing gas licence conditions Annex D MORI methodology Annex E Text of proposed new licence condition for electricity supply licences Annex F Text of proposed new licence condition for gas supply licences
Executive Summary Overview This document seeks views on Ofgem s proposals to assist domestic gas and electricity customers by introducing arrangements to simplify the presentation of prices by gas and electricity suppliers and to provide the means by which customers can readily identify and compare the various prices on offer from suppliers. The purpose is to ensure that all customers, including those who may be fuel poor, have access to good quality information to enable them to make informed decisions about the choice of prices and suppliers available in the market. Present Position The Director has no direct powers to prescribe how gas and electricity suppliers will present price information to customers. However, the electricity and gas supply licences set out a number of obligations on domestic gas and electricity suppliers to publish information relating to their principal terms and conditions. The marketing licence conditions of both the gas and electricity suppliers licences also contain provisions requiring suppliers to recruit and train their sales agents so as not to mislead customers in their sales approach. These conditions have had the effect of tightening up the marketing activities of suppliers and have alleviated some of the concerns about misleading information being given to customers on prices and other services or goods available. As competition has developed, new tariff choices have also become available to customers. Suppliers offering dual fuel supplies of both gas and electricity (often with additional discounts for customers who take both fuels) are now common. The range of tariff offers now available is generally encouraging. Whilst many competitors continue to structure their offers to match the pricing structure of the incumbent suppliers, others are introducing new tariff forms, increasing the range of choices available to customers. Against this background, it has not always been straightforward for customers to compare suppliers prices. Although many practices have been reasonable responses to
competitive pressures, the practices of some suppliers have been either misleading or likely to add to customer confusion in comparing prices. Proposals Pricing information presently used by suppliers on promotional material is complex and is not presented in a way which facilitates ready comparison between different tariffs and different suppliers. This is likely to discourage customers from comparing prices with the result that fewer customers switch to cheaper options or that customers will switch to less suitable tariffs. In these circumstances a better means of providing customer confidence in price comparison material seems appropriate. In Ofgem s view there is a strong case for introducing an energy cost index (eci) for use by domestic electricity and gas suppliers. The index would be calculated in accordance with pre-determined rules. There is a range of detailed considerations about the calculation of the index, the form it should take and when and how it should be presented which would need to be resolved. Ofgem s initial view is that a formal licence requirement to use the index is appropriate to ensure the successful introduction of the scheme. However, in an increasingly competitive market any licence requirement should be subject to review and require positive renewal only if the circumstances justify continuing regulation in this area. Ofgem also believes that there will be an increasing development of price comparison services available to customers and these services should comply with certain basic requirements if customers are to have confidence in using them. The requirements should be drawn up by Ofgem in discussion with suppliers and customer groups. Ofgem would welcome views on the issues raised in this paper and specifically on its proposals for an energy cost index and price comparison services.
1. Introduction This Document 1.1 This document seeks views on Ofgem s proposals to assist domestic gas and electricity customers by introducing arrangements to simplify the presentation of prices by gas and electricity suppliers and to provide the means by which customers can readily identify and compare the various prices on offer from suppliers. The purpose of these proposals is to ensure that all customers, including those who may be fuel poor, have access to good quality information to enable them to make informed decisions about the choice of tariffs and supplier(s). 1.2 This document sets out the problems some customers have experienced when comparing prices, the action Ofgem has taken to address these issues, and the industry s response to these. The document also reviews practical experience with existing arrangements. 1.3 The document considers the implications of various possible options for reform, and concludes with Ofgem s proposals for licence changes. It proposes that these should be brought into operation as soon as practicable and sets out the next steps. Background 1.4 The Electricity Act 1989 and the Gas Act 1985 make no direct provisions for the way in which suppliers display pricing information, although they are required to make information available to anyone who asks for it. Shortly after the gas market opened in the South West of England in 1996, it became clear that some customers found it difficult to compare the various prices on offer. Ofgas therefore contracted with the Consumers Association (the publisher of Which? magazine) to produce a price comparison factsheet. This was sent to all to customers who contacted Ofgas and requested information on comparative prices. Ofgas also produced a factsheet that explained to customers how they could calculate their annual consumption of gas and therefore calculate more accurately the charges payable under competing suppliers tariffs and for different payment methods. In preparation for the competitive market start up in electricity in 1998, OFFER produced a range of similar material comparing the 1
prices offered by competing suppliers in each of the 14 Public Electricity Suppliers (PES) areas. Examples of these are at Annex A. This information has been widely used in press reporting of the competitive market. 1.5 There are currently 23 domestic gas suppliers and 17 second tier domestic electricity suppliers offering a very wide range of different tariffs covering a variety of payment methods. One gas and electricity supplier, which has in place a number of affinity arrangements, currently offers over 50 different tariffs for domestic customers depending on PES area, customer age, payment method and other individual circumstances. Which? has recently highlighted that the difference in the annual bill for a typical customer supplied by the most expensive supplier rather than the cheapest could be as much as 100 a year. 1.6 Since the supply markets opened to competition a number of complaints have been made about misleading advertising, particularly in relation to price comparisons. Complaints of this type relating to print advertising, eg roadside billboards and newspaper advertisements are considered by the Advertising Standards Authority (ASA). The Committee for Advertising Practice (CAP) and the ASA work together to regulate utility advertising. 1.7 The number of complaints upheld by the ASA against energy companies for price comparison advertisements rose from 15 in 1997 to 38 in 1998. Many of the complaints were about inaccurate and misleading comparisons of tariffs. Complaints were also received about the failure to include VAT in price comparisons and the savings which customers could make from switching supplier. 1.8 Following the rise in complaints the ASA/CAP published a help note for advertisements in which rivals prices and offers were compared. The help note stated unequivocally that advertisements should quote VAT-inclusive prices. Ofgem supports this position. Since the introduction of the utility codes, the number of upheld complaints in relation to price comparison advertisements has fallen to 14 in 1999. 1.9 Under the Broadcasting Act 1990, the Independent Television Commission (ITC) was given statutory powers to regulate the content of television advertising. To fulfil this function it has published a number of guidance notes, including one on misleading 2
advertising and price comparisons. The broadcasters have set up the Broadcasting Advertising Clearance Centre (BACC) to try to ensure that television advertising does not breach the ITC codes. The television broadcasters will only screen adverts cleared by the BACC. However, some adverts cleared by the BACC haave been found to be in breach of the ITC codes, eg BGT s Monster 2002 campaign. 1.10 Ofgem has expressed particular concern about the effect of misleading advertising by domestic gas and electricitiy suppliers, including BGT and the PESs. Ofgem stated that it will consider taking action against BGT under the Competition Act 1998 from 1 March 2000 if it continued to breach the ASA or ITC codes. 1 1.11 In 1998 the Association of Energy Suppliers voluntarily introduced into its Code of Practice a requirement for members to ensure that their doorstep sales agents provide all potential customers (even if they do not enter into a contract) with written details of relevant prices and charges. The Code requires that written details of all relevant prices and charges will be given to a consumer: at any time on request, offered to the consumer when a sales presentation is made, and given to a consumer when a contract is signed. 1.12 Ofgem has recently proposed that the present licence conditions on marketing should be extended and has proposed changes to strengthen the present conditions 2. 1.13 The Government s Consumer White Paper Modern Markets: Confident Consumers, recognises that confident, demanding consumers are good for business. They promote innovation and stimulate better value and in return they get better products and lower prices. Some of the key methods of achieving this are for consumers to have better information, truthful adverts, clear, helpful and adequate pre-contractual information, and an effective complaints handling system. The Government proposes that codes of practice which incorporate these key principles will assist consumers make more informed choices about which products or services they buy and enable business to meet this demand. 1 Review of British Gas Trading s behaviour in the Domestic Gas Market A Follow up document - Ofgem July 1999 2 Marketing Gas and Electricity A Consultation document Ofgem January 2000 3
1.14 In May 1999 the National Audit Office (NAO) published a report into the introduction of domestic gas supply competition by Ofgas. In it the NAO recommended that Ofgem should: Seek to improve customers knowledge of the impact on their bills of their choice of supplier and of payment method. While it is for companies to advertise their prices and terms, Ofgas should consider the scope for measures to make it easier for customers to make comparisons. These might include encouraging companies to provide information on prices in a standard format. 3 1.15 In the October 1999 paper, Social Action Plan: Framework Document, Ofgem raised the issue that some customers may be transferring to another supplier who is more expensive than their current supplier because they did not know what the new supplier s prices were. While some of the issues were summarised in the Framework Document, this document sets out the issues in more detail. Structure of Document 1.16 The chapters in this consultation document are structured in the following way: Chapter 2 describes the relevant provisions of both the electricity and gas suppliers licences Chapter 3 describes current practice for presenting prices Chapter 4 sets out customer and supplier views Chapter 5 considers the alternative options for making information available to customers in order to address views expressed Chapter 6 draws conclusions and sets out Ofgem s proposals for reform and a timetable. Annex A contains copies of the gas and electricity factsheets Annex B contains the text of relevant existing electricity licence conditions Annex C contains the text of relevant existing gas licence conditions Annex D sets out the MORI methodology 3 National Audit Office Report Giving Customers a Choice The Introduction of Competition into the Domestic Gas Market (paragraph 18). 4
Annex E contains the text of a possible new licence condition for PES and second tier electricity supply licences Annex F contains the text of a possible new standard licence condition for domestic gas suppliers licences 1.17 Comments are invited on the issues raised in this document and in particular Ofgem s proposals. It would be helpful to receive replies by Friday 31 March. Responses should be sent to: Rosalind Cole Director, Retail Markets Ofgem Stockley House 130 Wilton Road London SW1V 1LQ Or by e-mail: Rosalind.Cole@ofgem.gov.uk. 1.18 It is open to respondents to mark all or part of their responses as confidential. However, we would prefer it if, as far as possible, responses were provided in a form that can be placed in the Ofgem library. If you have any queries concerning this document Fran Gillon (0171 932 5883) would be pleased to help. 5
2. Regulatory Position The Electricity Act 2.1 The general duties of the Director General of Electricity Supply (DGES) are set out in section 3 of the Electricity Act 1989. The DGES must exercise his functions in the manner he considers is best calculated to secure that all reasonable demands for electricity are met, to secure that licence holders can finance their licensed activities and to promote competition in the generation and supply of electricity. 2.2 Subject to these primary duties, the DGES also has a duty to exercise his functions in the manner he considers is best calculated to protect the interests of electricity customers in terms of price, quality of service, continuity of supply, to promote research and development on the part of licence holders in the generation, transmission and supply of electricity, to protect the public from the dangers arising from generation, transmission or supply, and to ensure that health and safety promotion is facilitated within the electricity industry. The DGES also has a duty to take into account the effect on the environment of the generation, transmission and supply activities. The Gas Act 2.3 The general duties of the Director General of Gas Supply ( DGGS ) are set out in Sections 4 and 4A of the Gas Act 1986. The DGGS must exercise his functions in the manner he considers is best calculated to secure that all reasonable and economic demands for gas are met, to secure that licence holders can finance their licensed activities and to secure effective competition in gas shipping and supply. 2.4 Subject to these primary duties, the DGGS also has a duty to exercise his functions in the manner he considers is best calculated to protect the interests of gas customers in terms of price, service, continuity of supply, to promote efficiency and economy on the part of licence holders and to secure effective competition in new connections and the laying of gas pipes, and activities ancillary to the shipping and supply of gas 4. In doing so, he shall take into account the effect on the environment and to protect the public from the dangers of supplying gas. 4 This includes gas metering, meter reading and storage services. 6
The Electricity and Gas Suppliers Licences 2.5 The Director has no direct powers to prescribe how gas and electricity suppliers will present price information to customers. However, the electricity and gas supply licences set out a number of obligations on domestic gas and electricity suppliers to publish information relating to their principal terms and conditions. 2.6 The electricity supply licences contain conditions relating to contract terms and customer protection to cover all domestic customers and small business customers whose annual consumption is 12,000kWh or less ( designated customers ). The relevant conditions are set out in Annex B. 2.7 The main safeguards which apply to supply to designated electricity consumers include: a) A duty to supply: PESs and any second tier suppliers which notify the DGES of their intention to supply designated customers must offer to supply any designated customer who has requested a supply. All suppliers which supply designated customers must publish their prices and make available their principal terms and conditions of supply. They can only seek a deposit or payment through a prepayment meter if the customer is uncreditworthy. b) A range of payment options: all electricity suppliers are required to have available a range of payment methods which customers may use. These include payment by cash at reasonable locations, cheque, an agreed monthly amount or quarterly in arrears, and by prepayment meter. 2.8 There are equivalent conditions in the standard conditions of domestic gas suppliers licences. The relevant conditions are set out in Annex C. These include: a) An obligation to supply as soon as reasonably practicable any domestic customer who requests a supply. All domestic gas suppliers must publish their prices and the principal terms and conditions of supply. b) A range of payment options: all domestic gas suppliers are obliged to offer customers a range of payment methods. These include payment by cash at reasonable locations, cheque and postal order, and a choice of 7
frequency of payment such as monthly and quarterly in arrears and monthly payment plans. 2.9 The marketing licence conditions of both the gas and electricity suppliers licences also require suppliers to recruit and train their sales agents so as not to mislead customers in their sales approach. These conditions have had the effect of tightening up the marketing activities of suppliers and have alleviated some of the concerns about misleading information being given to customers on prices and other services or goods available. Utility Bill 2.10 The Utility Bill 2000, currently before Parliament, will make a number of important changes to the legislative regime. In particular, under the Bill greater emphasis will be placed on customer interests in decision-making by the regulatory Authority. As presently drafted the Bill includes no special provisions dealing with pricing. Ofgem s initial view is that the proposals set out in this paper are consistent with the Bill s aims to improve customer protection and that, subject to consultation, the proposed licence conditions should become standard conditions in the new gas and electricity supply licences. 2.11 All gas customers are presently supplied under either an express contract or a deemed contract, while electricity customers are either supplied under an express contract by a second tier supplier or on tariff terms by a PES. Under the Utility Bill, both gas and electricity will be supplied to domestic customers under contract. In this document the expression tariff is used to include prices for both tariff and contract customers. 8
3. Current Practice Present Tariff Options 3.1 For most domestic customers there is a large range of competing tariff offers available. In both gas and electricity most suppliers offer different tariffs depending on payment method (commonly cash, quarterly credit, direct debit and prepayment meter). Some suppliers offer discounts for early payment (or surcharges for late payment). 3.2 The structure of charges can also vary between suppliers (indeed some suppliers offer more than one structure). For example, many suppliers have explicit standing charges, whilst others do not. Some have differential energy (unit) charges so that the first tranche of units is charged at a different (usually higher) level than those of subsequent units. Suppliers may also make different charges for associated services such as providing replacement keys to prepayment meter customers or making special visits to customers premises. 3.3 Some electricity customers use night rate meters for which the charges for electricity consumed overnight are lower than those for electricity consumed at other times and are measured using different meters. For such customers there is an additional complexity in comparing prices on offer. There is variation in the definition of the period in which the cheaper rates apply some suppliers define it as being any seven hour period between midnight and 8:30am, while others specify what the seven hour period will be between 10pm and 10am. Suppliers charges may also include regional variations to reflect the regulated PES tariffs. 3.4 As competition has developed, new tariff choices have also become available to customers. Dual fuel suppliers (where a single supplier offers both gas and electricity) are common. Some suppliers give additional discounts for duel fuel supplies. However, duel fuel suppliers are not necessarily the cheapest method for customers to source both fuels. 3.5 Suppliers are also increasingly offering affinity arrangements with third parties, including supermarkets, credit card companies and others. In many cases these affinity arrangements and other tariffs are associated with other benefits such as points, supermarket loyalty schemes, Air Miles or holiday discounts. Some suppliers offer tariffs 9
to take account of customer interest in eg environmental issues where green tariffs have been developed. 3.6 The range of tariff offers available is generally encouraging. Whilst many competitors continue to structure their offers to match the pricing structure of the incumbent suppliers, others are introducing new tariff forms, increasing the range of choices available to customers. Such developments are an expected and welcome feature of the competitive market. Pricing Comparisons by Suppliers 3.7 Against this background, it has not always been straightforward for customers to compare suppliers prices. Although many practices have been reasonable responses to competitive pressures, the practices of some suppliers have been either misleading or likely to add to customer confusion in comparing prices. A number of suppliers have made claims about savings which were not based on comparing similar payment types, but compared, for example, their direct debit prices with the incumbent s relatively expensive late payer tariff. 10
4. Customer Experience MORI Surveys 4.1 Ofgem (and its predecessor bodies) has commissioned MORI to undertake independent surveys of customer awareness of, experience of, and attitudes towards the competitive gas and electricity supply markets. The findings of the surveys are of direct relevance to the present discussion. The most recent study was published in January 2000 5. MORI interviewed a representative sample of 2,315 electricity and gas consumers in Great Britain during September and October 1999. The methodology used by MORI is set out in Annex D. Survey Results 4.2 Customers report financial savings as one of the most significant factors in their decision about whether or not change supplier. Figure 1: Reasons for Switching (after prompting) % Electricity Gas Cheaper prices 87 79 Dual fuel 23 19 Persuasive salesman 11 14 Better service 7 8 Special offers 4 3 Poor service from previous supplier 4 8 Advertising by new supplier 2 5 Recommended by friends 3 4 Base: All Electricity (664) / Gas Switchers (684) Source: MORI 4.3 Price, or perhaps perception of prices, has also been an important consideration for those who have not switched. Reduced cost is the main thing that would encourage them to switch. Electricity and Gas Competition Review research study conducted for Ofgem by MORI published in January 2000 11
Figure 2: Reasons for Not Switching (after prompting) % Electricity Gas No reason to change/satisfied 70 73 Can t be bothered 28 28 Lower prices may not be maintained 13 11 Waiting to see what happens 11 11 Don t know enough about suppliers 9 7 Savings not enough 8 5 Don t trust other suppliers 7 5 Not been approached 5 5 Suspect poorer service from other supplier 5 6 Base: All non-switchers Electricity (1,648) / Gas (1,414) Source: MORI 4.4 Although price is stated to be an important consideration in switching (or deciding not to switch) relatively few customers have obtained pricing or other information from suppliers. Figure 3: Customers who have had information from suppliers about electricity and gas supply and prices % Supply Information Price and payment terms information None 14 36 1 22 21 2 30 25 3 15 7 4+ 14 5 Base All gas/electricity customers (2,315) Source MORI 4.5 Electricity and gas customers who have switched supplier are more likely to say they have received both general and price and payment terms information from suppliers but this was usually from only one or two suppliers. 12
4.6 MORI reports that those customers who have information on price and payment terms generally find it easier than in previous surveys to compare cost differentials. However there remains a significant minority who find it difficult. Figure 4 Ease of Comparing Pricing % Very Easy 10 Fairly Easy 38 Fairly Difficult 20 Very Difficult 12 Don t Know 21 Base: All received information on prices (1,464) Source MORI 4.7 Among those who have experienced difficulty in comparing price and payment terms, the main problem is that information is either unclear or confusing. A general lack of information is also a problem. This is evident from the one in five customers who say they have nothing to compare price and payment terms with. One in six of those customers who find it difficult to compare prices display cynicism and state that companies always say that their prices are lower than others. Figure 5 Difficulty in Comparing Prices Reasons % Confusing/not clear 45 Lack of information 36 Difficult to compare like with like 28 Nothing to compare figures to yet 21 None give an exact price 20 Difficult to understand 19 Always say prices are low 17 Base: All who find it difficult to compare (416) Source: MORI 13
4.8 The findings also show that many customers do not know about the relative prices of different suppliers. When asked whether the new suppliers prices were higher or lower than those of the local PES (for electricity) or British Gas (for gas) nearly a third replied Don t know. Figure 6 Prices for New Suppliers compared with incumbent % Electricity Gas All higher 2 2 About the same 34 31 All lower 23 26 Some higher some lower 11 12 Don t know 31 29 Base: (Electricity All 2,315) (Gas - All on mains gas 2,098) Source: MORI 4.9 There is some evidence that a lack of knowledge about relative prices is impacting on switching. When non-switchers were asked about the percentage reduction in bills required for them to consider switching the average response was about 20%, with many saying they would switch for less. However just over a third of non-switchers (37%) in the case of electricity and 35% for gas thought that in practice no savings were achievable. 4.10 It is not just in the case of switching supplier where customer uncertainty about relative pricing may be having an influence on their behaviour. Many customers can make considerable savings by switching payment method. However, while they are content with their current method of payment, many customers display a lack of awareness regarding the relative costs of the payment method they use. When asked if they thought that the payment method they currently use to pay for their electricity is the cheapest (Figure 7), a large proportion of customers either wrongly think that it is or do not know whether they pay by the cheapest method. While around two-thirds of direct debit / standing order customers are aware that they are paying by the cheapest method, there remain three in ten such customers who either do not think it is the cheapest method (4%) or do not know whether or not it is (28%). 14
4.11 Awareness of price differentials is noticeably lower among those customers who are not paying by the cheapest method. Around one-quarter of those who pay for electricity quarterly by cash or cheque (23%) or prepayment meter (25%) wrongly believe that their current payment method is the cheapest. A significant proportion also do not know if their chosen payment method is the cheapest quarterly cash/cheque (45%don t know), prepayment meter (33% don t know). 4.12 However, significant proportions 32% of cash/cheque payers and 43% of prepayment meter customers still pay for their electricity in this way even though they know it is not the cheapest. This indicates that their reasons for paying in the way that they do outweigh any potential of the perceived cost savings available from paying by direct debit. Those who are aware that they are not paying by the cheapest method cite ease and convenience, and the ability to budget and control payment in a way that they feel comfortable with, as reasons for continuing to pay in the way that they do. The picture for gas payment is virtually identical. Figure 7 Customer Awareness of Relative Cost Q. Is this the cheapest payment method. % Direct Debit/ Quarterly Cash/ Prepayment Meter Standing Order Cheque Electricity Gas Electricity Gas Electricity Gas No 4 4 32 20 43 42 Yes 68 66 23 37 25 25 Don t know 28 30 45 43 33 33 Base: All electricity 2,315. All on mains gas 2,098 Source: MORI 4.13 Some caution needs to be exercised in interpreting these figures. In particular, prepayment meter customers may be using the cheapest payment method for them in the sense that it is the payment method most likely to ensure that they budget successfully. When asked what their main reasons were for not choosing a cheaper payment meter option, prepayment customers who knew it was not the cheapest method gave budgeting and control over payments amongst their main reasons. However, over a quarter of prepayment meter customers (28% electricity and 27% gas) 15
would take the option of returning to a credit meter if it also meant a reduction in the price of electricity and gas (including those who would if there was no charge for doing so). Of those who would change, 28% of electricity customers and 39% of gas customers would change to direct debit. 4.14 In summary, this review suggests that many customers do not have a good understanding of how to compare prices both between suppliers and between payment methods. This is not wholly surprising but these are indications that many customers find it difficult to compare prices and obtain reliable information. It seems likely that better information would encourage more customers to switch supplier and/or move to cheaper payment methods. 4.15 One of the issues which affects customers ability to switch between suppliers is not only how easy it is to switch supplier but also how easy customers perceive it to be. It has been noted that research undertaken by the OFT in 1998 6 revealed that vulnerable consumers were more likely to experience higher search costs and difficulties in assimilating information than consumers in general. This can mean that such consumers make inappropriate purchases and hence experience a loss in economic well-being similar to the effects brought about by monopoly. 6 OFT Vulnerable Consumers and Financial Services. The report of the Director General s Inquiry 1998. 16
5. Making Information Available to Customers Discussion 5.1 Customer groups have stressed the importance of good quality customer information. They have stated that to be useful, information must be readily understood by customers and relevant to the individual customer s circumstances. 5.2 Ofgem has been discussing with suppliers and consumer groups some options for providing better information to customers. The proposals set out in this section build on these discussions. The chapter considers two aspects of better information. First, the need for clearer information from the companies themselves about the prices they are charging to enable customers to make more straightforward comparisons of prices. Second, the availability of price comparison services which enable customers to search for the product which best meets their particular needs. Clearer information for customers 5.3 Although suppliers are required under their licences to make available their prices to domestic customers, there is no requirement that this should be done in a standardised way. Suppliers are, however, subject to general consumer legislation on misleading price indications and to the rules of advertising bodies on the presentation of pricing claims. 5.4 During 1999 Ofgem worked with the industry to establish whether it would be possible to develop a standard format in which suppliers would be required to publish their prices. A number of possible formats were considered. These ranged from relatively complicated formulations in which the standing charge and a unit charge for consumption would be shown separately for each tariff displayed on promotional material, through to a simple formulation based on a total annual bill for a standard consumption rate. Other issues which were considered were whether there should be a range of indicators set either as snapshots of consumption levels or covering bands of consumption levels. Attempts were made to simplify the information using representations of different types of property to indicate the consumption levels being illustrated. 17
5.5 In response to these proposals suppliers said that any attempt to determine average consumption levels by size or type of property would be fundamentally misleading. They argued that there was a range of factors such as property age, construction method and insulation levels which would materially affect individual consumption levels. Other factors such as the age and number of occupants play a major role in determining domestic energy consumption levels in identical properties. Suppliers were concerned that the approach would result in customer confusion and an increase in complaints from customers whose annual bill/savings did not match those set out in the standard table. In addition, the approach did not cater for the pricing differentials charged by some gas suppliers on non-transco networks. In general the industry has appeared reluctant to pursue self-regulatory options for improving the information available to customers. 5.6 Inevitably any standardised form of costing has its drawbacks. Most customers will not match the typical customers used in illustrations. However, pricing information presently used by suppliers on promotional material is complex and is not presented in a way which facilitates ready comparison between different tariffs and different suppliers. This is likely to discourage customers from comparing prices with the result that fewer customers switch to cheaper options or that customers will switch to less suitable tariffs. In the medium term it seems likely that tariff designs will become more complex as suppliers identify new ways to meet economically different usage patterns. 5.7 In these circumstances a better means of providing customer confidence in price comparison material seems appropriate. Ofgem recognises that there are real difficulties in achieving this given the range of products on offer and the variation in customer circumstances. However, a carefully designed scheme should be capable of addressing these issues. Standardised information on interest rates in the financial services sector and on vehicle fuel consumption data indicate that complex information can be summarised for customers. Equally, customer experience with standardised data such as miles per gallon has helped ensure that customers are aware of the benefits and limitations of such information. 5.8 One approach for the gas and electricity markets would be to calculate an average usage cost. In practice this is already done for the existing price comparison 18
information published by Ofgem. The typical annual bills are calculated on the basis of rules about consumption levels. If the scheme is to have more general application, the set of rules defining the calculations will need to be explicit and cover all relevant circumstances. These are discussed further below. Once a methodology is identified, calculating a standardised cost should be reasonably straightforward. It would then be for suppliers to use this standardised energy cost index (eci) in presenting pricing information. The next sections discuss how such an index would deal with different consumption levels and an indication of other issues to be addressed in calculating the index, the presentation of the index, and the circumstances in which it should be used. Views are invited on the proposed general approach. Consumption Levels 5.9 In both electricity and gas the levels of consumption of domestic customers vary widely. The Ofgem pricing factsheets use single standard consumption levels as follows: 3,300 kwh per year for customers on standard electricity tariffs 6,600 kwh per year for customers on economy 7 and related supplies (split between 3000 kwh day units and 3600 kwh night units). 20,964 kwh per year for gas customers on credit meters 12,300 kwh per year for gas customers on prepayment meters 5.10 In practice this provides only a broad guide for customers. Household type, number of occupants and appliances used would give some further information about likely overall consumption levels but are not likely to provide an accurate picture. In any event including such variables would add significantly to the presentational complexity of the approach. Similarly most customers do not have a ready recollection of their annual usage levels and, given seasonal and other variations in electricity and gas consumption, individual quarterly bills can provide only a broad indication of a customer s usage. 5.11 An alternative to the single approach would be to identify consumption levels for low, standard and high users and develop an index for each. This would provide a greater range of potential comparison points. It would have the advantage of linking price comparisons more closely to customer usage levels and would allow 19
competitors which have developed tariffs designed for high or low users to make more relevant statements about their products. This would add some complexity to the basic approach. If suppliers had to show all three comparison points it would reduce the clarity of the index, but if suppliers could choose a single consumption level it would reduce the number of direct comparisons that could be made by customers. 5.12 Our initial view is that we should proceed on the basis of designing three consumption levels high, standard and low users, and that the standard level should be the same as that used in the Ofgem pricing factsheets. To use a different level may introduce confusion for customers comparing suppliers promotional material with the information set out in the factsheets. It would be for suppliers to decide whether to present one or more of the indices for each of the tariffs they are presenting to customers. However our initial view is that suppliers should at least include reference to the standard user index. Other Issues 5.13 The following gives a first indication of the sort of issues that will need to be considered in calculating the index: a) the precise consumption levels to be used in the calculation of the indices; b) how to take account of tariffs with prices that vary according to the timing of consumption both from month to month and from hour to hour during a 24 hour period (this will be particularly relevant for more complex tariff designs in electricity); c) payment method (our initial view is that the three main payment methods (direct debit, prepayment and quarterly billed) should be assigned different indices to facilitate like for like comparisons; d) whether account should be taken of early pay discounts or late pay penalties (our initial view is that a standardised payment pattern should be adopted for quarterly billed indices); e) whether account should be taken of charges for special services (our initial view is that unless the additional charge relates to a routine matter and is not ordinarily made by other suppliers no account should be taken of special charges); f) the treatment of regional or other variations in charges (our initial view is that most regional variations should be identified separately); 20
g) the way in which any dual fuel offers should be treated including any dual fuel discounts (we would in particular welcome views on whether it would be both desirable and practical to produce a single index for a dual fuel supply rather than to require a separate index for each of the electricity and gas elements of a dual fuel tariff. Our initial view is that a single index would be desirable if practicable); and, h) the treatment of other special discounts and non cash benefits such as vouchers, and other terms with some financial value (our initial view is that such features should not normally be taken into account in calculation of the index unless they have a direct cash value. Care will also need to be taken in relation to the presentation of short-term discounts or introductory offers). 5.14 It should be recognised that the way in which these issues are handled could have a significant commercial impact on suppliers in that it might change the relative perceived advantages of existing tariffs. Ofgem will want to be assured that the approach adopted is reasonable and provides the customer with an accurate picture of the likely overall relative costs of consumption under the various tariffs offered by a supplier. 5.15 We have considered whether any explicit account should be taken of service standard issues in calculating the index. Whilst price is an important consideration in selecting a tariff, other issues including customer service are also important for customers. However, it is difficult to place specific values on service level issues. Information is already published about service issues by Ofgem and further information is expected to be published in accordance with the Utilities Bill. In these circumstances we have concluded that including service issues within the general approach to the indicator would not be appropriate. We would welcome views on the approach to the methodology underlying the index. Presenting the Index 5.16 The standardised energy cost index could be calculated and presented as the monetary value of consumption at the standardised levels. The overall cost of gas and/or electricity for the predetermined levels of consumption would be calculated using the details of the company s tariffs. The question then arises how this should be presented 21
by suppliers to customers. It could be presented as being a typical annual bill, for example 357. This would clearly be most the meaningful approach for customers. However, as the typical annual bill is unlikely to reflect the individual customer s bill it may give rise to unnecessary customer concerns about the accuracy of the bill they actually pay. 5.17 An alternative would be to present the index in the form of an average unit charge, for example 5.87p. This would allow customers to scale the comparison to a level closer to their own consumption to compare bills. However the publication of a separate unit charge might be meaningless to customers and could in practice increase confusion. A common unit based calculation would also raise issues about customer perceptions of the relative costs of electricity and gas. 5.18 A variation on these approaches would be to calculate the same information but to present it as a straightforward index for example 357 or 587. This would allow customers to make the same calculations but would avoid highlighting the monetary link with the index. 5.19 Ofgem s initial view is that, although an index which was directly related to a typical bill might be confusing for some customers, it would be more meaningful than an index in the form of 567, particularly in relation to dual fuel supply. 5.20 This is one of several areas where direct customer research would be helpful to identify customer preferences and the implications of the various options. We would welcome views on how the index should be presented. When the Index should be used 5.21 If this form of pricing index is to be effective it will need to be widely used by suppliers and others in presenting and commenting on prices. In whatever way the index is calculated and presented it will also be important to be clear where and when it should be used. If the requirement is too narrowly drawn, customers may not become accustomed to the approach and may therefore still find it hard to obtain information on comparative prices. If the requirement is drawn too widely it may distort competition 22
between suppliers, place an undue emphasis on price and restrict a supplier s proper flexibility in the marketing of their products. 5.22 One approach would be to require all suppliers to quote the index for their relevant product in any written promotional material dealing with prices and to include it in any other material (including advertisements) which made specific pricing claims. Subject to some minimum requirements about font size to ensure legibility it would be for the company to decide what degree of emphasis to give the index in its material. It is not intended that the standardised index will replace individual suppliers pricing presentation but rather that it will be presented as an addition to it. This is similar in effect to the use of interest rate and car fuel usage data in promotional material and advertising. 5.23 Ofgem does not envisage that suppliers should be required to show the index for all their tariffs on every occasion where they refer to a particular tariff, but it is intended that where a supplier refers to a particular tariff it would also publish the relevant index for that tariff. If suppliers are making specific price comparisons with those of a competitor then they would be required to publish the index for both tariffs. 5.24 We have also considered whether the use of the index should be extended to include all communications with customers which make reference to gas and or electricity prices, including bills and annual statements. We are concerned however that to do so could increase rather than reduce customer confusion about material which is fundamentally concerned with identifying the amount which the customer actually owes the supplier. There may also be systems implications for suppliers and it could also increase suppliers costs, to no great benefit to customers. Ofgem does, however, see value in extending the requirement to use the index on some written material sent to customers, for example when informing customers that their tariff has changed. In this way, customers who wished to switch to another supplier would have the information available to enable them to make comparisons with the other tariffs on offer in the market. 5.25 It will be important to ensure that the approach adopted here is readily understood by suppliers and is in keeping with general advertising and price indication rules. 23
We would welcome views on the general approach we have proposed. Introducing the Index 5.26 There are various means by which the use of the index could be promoted. First, it could develop on a voluntary basis with encouragement from Ofgem and consumer organisations. If suppliers were to be free to decide whether or not to use the index, companies which chose not to do so would risk customer dissatisfaction and, potentially, would find it more difficult to demonstrate that price comparisons were accurate. The main problem with this approach would be to get the critical mass necessary to make such a voluntary scheme successful and to draw it to the attention of customers. 5.27 Alternatively use of the index could be a requirement on all electricity and gas suppliers. This could be achieved by introducing a condition into the electricity and gas supply licences. 5.28 Ofgem s initial view is that use of the eci should be a licence requirement in order to act as a catalyst for this new arrangement and to ensure the successful introduction of the scheme. The licence would require each supplier to comply with a scheme for the index, setting out the detailed rules on calculating the index and the circumstances in which the index should be used. However, this should be an area where regulation should act as a catalyst to beneficial change in an increasingly competitive market rather than requiring continuing oversight. The objective therefore should be to pass responsibility for the development and implementation of the index to industry trade bodies so that self-regulation can take over as competition develops. With this in mind the licence requirement should be in place for a limited duration, subject to renewal only if the circumstances warrant it. Similarly the rules supporting the index should be for the industry itself to develop in discussion with interested parties, perhaps initially subject to Ofgem s approval. The licence should, however, provide for Ofgem to implement a scheme for the index if the industry has not brought forward satisfactory proposals within a defined timescale. The licence would also need to deal with amendments to the scheme. Draft conditions are set out in Annexes E and F 24