Competition and Market Authority's energy market investigation inquiry one off evidence session

Transcription

1 Angus Brendan MacNeil MP Chair, Energy and Climate Change Committee House of Commons London SW1H 9NB 29th June 2016 Competition and Market Authority's energy market investigation inquiry one off evidence session Dear Mr MacNeil MP I am writing to set out First Utility s concerns with the CMA s final remedies package and to suggest some initial solutions. First Utility is the UK s largest independent energy supplier, growing from just over 50,000 customers in 2011 to more than 950,000 today. We have won and retained new customers by offering low cost, fair and transparent energy prices. First Utility accepted Ofgem s original Retail Market Reforms, including the four tariff rule, because we know our customers value simplicity and transparency over complexity and confusion. As well as the four tariff rule, we also backed Ofgem s accompanying information and engagement remedies, because we recognise that energy is a market like no other. Energy is an essential service. Our customers cannot live without it. It is relatively easy for customers to go throughout life without ever having to make a proactive choice about who their energy supplier is indeed, the CMA found that 40% of consumers have never switched. That has a real cost both for customers who don t switch (over 300 a year, as Chart 1 below demonstrates) and for the long term competitive health of the industry. Ofgem s information remedies were therefore designed to help activate the Big Six s disengaged customers. Measures included explicitly notifying customers once their 1

2 Fixed Terms Tariffs expired; and regularly prompting customers to switch to their supplier s cheapest tariff. However, we have long been concerned that RMR did not go far enough to tackle consumer disengagement, with the Big Six actively finding loopholes even within the existing rules. This includes deliberately minimising communication and offers to existing customers, thereby ensuring their customers remain or roll onto their most expensive tariffs. To give just a few examples EDF only bills its Direct Debit customers once a year, meaning that Ofgem rules requiring suppliers to show customers on the bill if there is a cheaper tariff available are effectively circumvented by only providing that information on an annual basis, British Gas has a white label brand with Sainsbury s energy, offering cheap tariffs designed to acquire new customers. Until late 2015, the rules meant that British Gas didn t need to inform its existing customers who were paying a few hundred pounds a year more about these cheaper options, despite Ofgem s rules. Once the rules changed forcing British Gas to show Sainsbury s energy tariffs to its customers, the price of a Sainsbury's energy tariff increased. E.ON advertises a price promise to alert customers if there is a cheaper tariff for them. However, it is not available to those customers who would benefit the most those on a standard variable tariff which comprises approximately 70% of its customer base. A number of suppliers deliberately withdrew their cheapest tariff prior to billing runs to avoid highlighting via Cheapest Tariff messaging other options. This practice was used to temporarily minimise the differentiation between customers actual tariffs and the possible savings listed via that supplier's cheapest tariff. First Utility s concerns about continued consumer disengagement were borne out by the CMA s findings: 70% of Big Six customers remain on their supplier s most expensive tariff, and they are getting a substantially worse deal as a result, as our chart below clearly shows. 2

3 Chart 1: The Tale of Two Markets : A Good Deal for the Few, But a Bad Deal for the Many Data from 23 rd June 2016, First Utility Comparison The CMA found that 70% of Big 6 Customers were on Standard Tariffs The CMA s Inquiry rightly focused on the number of customers on standard variable tariffs (SVT) and the overcharging they faced. Whilst First Utility does have customers on the SVT (and a default tariff was and is still required by Ofgem), only a vanishingly small proportion have been on that tariff for three years. This is because we prompt our customers to switch once a month; and we also provide our customers with tools to help them stay on top of their energy bills, including a market leading smart phone app to help them submit meter readings, track their bills and understand and compare their energy usage. Whilst the CMA correctly identified consumer disengagement and the resultant overcharging as a key issue, First Utility is concerned that Friday's package of measures did not go far enough at helping the most disengaged. Instead, the CMA s first focus was to significantly alter the existing rules to allow a potential unlimited increase is number of tariffs on offer. We believe these changes will result in a vast and confusing array of tariffs, explicitly designed to make it harder for loyal customers to find the best possible deals. In 2011, prior to RMR, there were over 400 tariffs on the market place with just 13 suppliers. At the time, this was acknowledged as a key barrier to switching. Indeed, a predecessor Committee of yours concluded that: It is clear that many consumers are 3

4 bamboozled by the number of available tariffs from the whole energy industry. 1 Ofgem told the same Select Committee 2 that 40% of those who had managed to switch had actually switched to a worse deal. In today s market place of 38 suppliers, we believe the tariff proliferation could be even more severe. Consumers faced 400 tariffs in Today they could face 3 more than 1000 tariffs, with all the confusion that implies. It is particularly concerning that the CMA s changes to the number and structure of tariffs will not be immediately accompanied by support to help the disengaged navigate this complex new market. The CMA has agreed that Ofgem should test a number of remedies to help disengaged consumers compare deals. But the timeline is too slow (potentially as late as 2018). There is a very real risk that the retail market will have fundamentally changed shape once the proposed engagement remedies are finally ready, and we are concerned that, as a result, they are less likely therefore to be as effective as they could be. Indeed we are already seeing the Big Six offering exclusive deals to new customers, deliberately locking out their long term and long suffering customers. It is deeply concerning that the Big Six s immediate response to the 'new' regulatory environment has been to offer loss leading tariffs exclusively to new customers, leveraging and exploiting their existing customers to do so. As a matter of urgency, First Utility believes that DECC and Ofgem must immediately work together to: 1. Set, publish and monitor clear criteria for success for the on going retail market reforms recommended by the CMA. This should include setting, as an explicit policy priority, an increase in customer engagement. 2. Immediately put in place a mass industry testing programme to tackle consumer disengagement and then amend licence conditions to ensure all suppliers improve their communication offerings. The testing programme should include renaming the Standard Variable Tariff the Out of Contract rate, thereby 1 Energy and Climate Change Sixth Report, Ofgem's Retail Market Review, 19 July 2011,

5 helping disengaged Big Six consumers to know they are paying a penalty rate; and putting in place monthly (not annual) letters, s or texts to alert customers to the cheapest possible deals. We are pleased by Ofgem s proposal to work with the Behavioural Insights Team, or Nudge Unit, which has put forward similar proposals As part of the Better Markets Bill, put in place backstop measures for more radical interventions to enable the disengaged to switch, should information remedies fail. This will not only focus industry attention: it will protect the most vulnerable customers from decades more of being overcharged. Only by doing this we will avoid a wild west, free for all energy market that doesn t operate in the best interest of the vast majority of customers. Finally, we find it surprising that having (in our view rightly) raised concerns around the lack of liquidity at the start of the investigation, the CMA did not then find any adverse effects on competition arising from this, although it did recognise that some of the more 5 recent changes may not fully address concerns and could even exacerbate this. A lack of liquidity in the UK power market makes it much harder for independent suppliers to hedge, imposing real costs on our customers. I would be delighted to meet with your Committee to discuss these issues further. Yours sincerely Ian McCaig, CEO 4 Behavioural Insights Team response to the Energy Market Investigation, November E.g. the BIT proposed calling the Standard Variable Tariff the emergency tariff to prompt action. 5 Following the Electricity Balancing Significant Code Review, Ofgem approved P305, a modification to the Balancing and Settlement Code, which modification moved to a single cash out regime (which was generally supported) and amongst other changes to more marginal short term prices for suppliers trying to balance their energy positions. The CMA has indicated that the impact should be monitored, which Ofgem is doing. 5