Business, Energy and Industrial Strategy Committee
Oral evidence: CMA's investigation of the UK Energy Market, HC 982
Tuesday 31 January 2017
Ordered by the House of Commons to be published on 31 January 2017.
Watch the meeting
Members present: Mr Iain Wright (Chair); Richard Fuller; Peter Kyle; Amanda Milling; Albert Owen; Amanda Solloway; Michelle Thomson; Craig Tracey; Chris White.
Questions 1-101
Witnesses
I: Simeon Thornton, Project Director, Competition and Markets Authority, Susannah Meeke, Remedies Director, Competition and Markets Authority, Victoria MacGregor, Director of Energy, Citizens Advice, and Pete Moorey, Head of Campaigns, Which?.
II: Greg Jackson, Chief Executive, Octopus Energy, Simon Stacey, Managing Director of Domestic Markets, npower, Dan Hopcroft, Residential Sales Director, EDF, and Ed Kamm, UK Managing Director, First Utility.
Witnesses: Simeon Thornton, Susannah Meeke, Victoria MacGregor and Pete Moorey.
Q1 Chair: Good morning. Thank you for coming to give evidence to the Select Committee. We are very grateful. I am very conscious that we have BEIS oral questions in the House this morning, so I am keen to get on as quickly as possible. For the purposes of the record, do you mind telling us who you are and which organisation you represent, starting with you, Pete?
Pete Moorey: I am Pete Moorey. I am head of campaigns at Which?.
Victoria MacGregor: I am Victoria MacGregor. I am the director of energy at Citizens Advice.
Simeon Thornton: I am Simeon Thornton. I was the project director on the energy market investigation at the CMA.
Susannah Meeke: I am Susannah Meeke. I am director of remedies at the CMA.
Q2 Chair: Thank you. Pete, may I start with you? The question is, however, obviously open to all witnesses. What do you think about the current state of the energy market in terms of competition, in terms of prices and in terms of customer service? Where are the particular weaknesses that you think need to be addressed now?
Pete Moorey: The energy market is still far from working effectively for consumers, across a whole range of metrics. Energy prices remains consumers’ number one financial concern. We have seen that move over the last few years, but it is right back there as people’s top financial concern this winter. We see energy as a sector that is distrusted, almost more than any other sector. I think the only other sector that is distrusted more in Which?’s latest research is used-car dealers. It is a sector where there are still very low levels of satisfaction from customers. Our latest satisfaction survey of 10,000 energy customers once again found lots and lots of problems with energy suppliers, with the six largest energy suppliers right down at the bottom when it comes to customer service.
Q3 Chair: Why do they not get their act together?
Pete Moorey: That is a good question. That is one of our big questions coming out of the CMA inquiry. The CMA found that the lack of competition in the market means that collectively consumers are overpaying by £1.4 billion. We know that the remedies coming out of the inquiry are going to take some time to introduce and to start working effectively, but in the meantime we would have expected a much bigger response from energy suppliers given that we have had this big investigation and it has found huge problems in the market. We think the response from the suppliers in that six months since the inquiry has been dismal.
That is why this winter we have been campaigning and calling on energy suppliers to do much more to engage particularly those people who sit on standard variable tariffs. That was one of the big findings, again, from the CMA’s inquiry: that people are paying hundreds of pounds more than the cheapest deals on the market, and yet the energy providers seem to be doing very little to properly engage with those stickiest of customers.
Q4 Chair: Thank you. Victoria, citizens advice bureaux across the country will be seeing very similar things to MPs’ inboxes in respect of energy prices. Do you echo what Pete was saying in respect of prices, customer service and general quality to the customer?
Victoria MacGregor: Very much so. Prices are definitely people’s biggest concern. Rather than repeat what has been said already, I would say that through the contacts we receive at the Citizens Advice consumer service, we see that customer service as well is just still too patchy. Far too often people are having to come to us for help with what should be very basic parts of a supplier’s customer-service offering. A third of the contacts we receive every year are about bills: late bills, missing bills, inaccurate bills. These are things that should be very basic, but thousands and thousands of people every year have to come for our help with them. Again, that is not good enough either.
Q5 Chair: Representatives from the CMA, is this in line with what you found in your investigation: a poor market that is not serving customers adequately, too high prices and poor customer service. Is that generally correct?
Simeon Thornton: In short: yes, it is consistent with our findings. I should say that the investigation covered a wide range of issues, including the wholesale and retail markets, gas and electricity, vertical integration and the broader regulatory framework. I am sure we will cover some of those in the questions. However, clearly the retail market has been the area that has generated the most interest. I would like to just highlight two findings that are particularly relevant.
One is the relative lack of interest or engagement from consumers in exploiting the switching opportunities that are there. As Pete says, we have got 70% of the customers of the six large energy firms who are on the default standard variable tariff despite the fact that they could have saved an average of £330 by switching.
We did a survey of 7,000 customers. We found that roughly a third—34%—of those customers had never considered switching. It just did not occur to them, whereas 56% had either never switched or did not know if they had switched. We have therefore put in place measures to try to improve engagement in switching, ranging from measures to give Ofgem powers to try to improve the way in which information is provided to customers, to measures to try to improve competition between suppliers. I am sure we will talk about those measures in a minute.
The other area I just wanted to mention in my introductory remarks concerns prepayment customers. Customers on prepayment meters are not well served compared with the rest of the population. Whereas the rest of us can, if we want to, access cheaper tariffs, those cheaper tariffs are not available for prepayment customers. We found that, as of April last year, the cheapest tariff for a prepayment customer was about £300 more expensive than the cheapest tariff for a direct debit customer. We find these are generally vulnerable customers with low levels of income and low levels of educational attainment.
That is why, in that case, we took the step, which is a major step, of introducing a price cap, which will reduce bills by about £300 million a year. I just want to be clear that there are broad issues in the retail market, but there are very specific issues for prepayment customers, and that is why we took the decision to introduce the price cap.
Q6 Chair: Is it fair to say that the CMA found that the business model, certainly of established energy companies, is that they rely to a large extent on a high proportion of their customers being on standard variable tariffs? They are the most expensive, and therefore the most profitable. They might use loss leaders to attract new customers in, but ultimately they want to see as many customers as possible on or reverting to SVTs, because that boosts their profit. Is that fair?
Simeon Thornton: That is a fair assessment. The interesting question, as it always is, is: “What do you do about it?” We took the view that the best way to deal with that situation is to give customers the tools to switch easily, to search around and to shop around, because we have all been in the situation where we do not really consider switching energy supplier. Maybe we are more interested in other markets. However, it is extremely important, if we are to move away from that business model, that customers be given greater opportunities to seek deals in the market and to switch energy supplier.
Q7 Chair: May I ask about a particular bugbear of mine? Standard variable tariffs are not really standard as such, in that they are the most expensive. Why can we not call them “expensive tariffs”? If we did, customers might have a nudge to thinking, “I am getting a bit fleeced here. I might need to do something about it.”
Simeon Thornton: That is a very good point. One of the issues that we suggest Ofgem test and trial is the name of the standard variable tariff, because it does sound very reasonable. If it were called “emergency tariff” or “out-of-contract tariff” or, as you say “expensive tariff”, people might feel less inclined to pay it.
Q8 Chair: Before I pass on to Albert, who will want to talk about the CMA investigation a bit further, what are a couple of things that need to happen? You mention switching. You mentioned prepayments. What are the things that we could be recommending to and pushing on the Government and energy companies to ensure that customers get a fairer deal?
Simeon Thornton: The two areas I mentioned are extremely important. Certainly the work that Ofgem announced yesterday to trial measures to try to provide information in a way that is relevant and salient to customers is extremely positive. They announced that they are going to look at renaming the default tariff, look at the ways in which the bill can provide information in a way that is relevant to customers, and also trial what we call “all‑market tariff messaging”, so the bill might provide information on the cheapest tariff on the market, and see if that works.
It is about nudges, and in the area of nudges we have to trial to see what works. We can all come up with interesting hypotheses about how you might frame a bill to communicate information to customers, but really what matters is the evidence. Ofgem’s announcement yesterday is therefore incredibly important.
Chair: Thank you. That is very helpful.
Q9 Albert Owen: I just want to say it is a great idea on behalf of the Chair to call them “higher tariffs”, and I hope they will take that on board, because we hear about “bargains” and the use of the word “bargains” in the retail sector. When they are trying to convince us to switch, they say we will get a “bargain”, but they do not tell us that if we stay it is going to be a higher rate.
I just want to ask the CMA representatives what they thought of their investigation. Did you get the results that you expected? The reason I mention that is that, at the time that you were asked to investigate this, we had cuts in services, a freeze in pay, benefits being cut and energy prices going up. It was a very difficult period. Do you think things have settled down now? Would your investigation come out with different outcomes?
Simeon Thornton: It is a very interesting question. If I go back to the beginning of the investigation in the middle of 2014—two‑and‑a‑half years ago now—you are right in your characterisation of the sector as a whole. There was a degree of mistrust and a lack of understanding about what was causing price increases, which, in the case of gas, had increased by 125% in real terms between 2004 and 2014. There were a number of specific issues that were put to us in the reference of the markets from Ofgem.
Some we ended up finding a problem with, such as lack of customer engagement. On others, such as vertical integration, there were lots of calls to break up the big six. We found there were not problems there, and we were able to communicate quite effectively why we concluded there were not problems. In terms of our expectations, we probably ended up identifying issues that had not been spoken about before. Prepayment is one of those. At the time of the reference, no one was talking very loudly about the plight of prepayment customers.
Albert Owen: I disagree with that. There have been debates in the House. There have been the consumer groups raising it for some time. Maybe it had been ignored by the regulator and Government, but it was certainly being debated.
Simeon Thornton: Let me rephrase that. In the reference of the markets to us, it was not as specific as you mentioned. Yes, you are right about that. That was an area that got much more attention than was expected at the time of the reference. I hope that we have been able to both identify problems and come up with wide-ranging remedies—we have got over 30 of those remedies—but also identify areas where there were public concerns. However, in the event we did not find a material problem.
Q10 Albert Owen: There were issues there that you did not expect. How good do you think the progress has been in terms of implementation? Do you think the energy companies “get it”? Do you think the regulator and Government understand things a little clearer now?
Susannah Meeke: In terms of implementation, there are two methods. We have got our orders, which the CMA puts in place, and we did that. We published all of those just prior to Christmas. Some of those took effect straight away from December. The prepayment price cap, which we have already mentioned, comes into effect from April this year, so just a couple of months away. Those things are happening.
Looking at, say, Ofgem and the recommendations that we have made to Ofgem, they have been working incredibly hard and have started consulting on the measures and designing trials, both for prompts and for the database. They have very much taken on that package of remedies and are running with that. From the point of view of the CMA and Ofgem, there is really quite a lot of progress being made.
We are waiting for a formal response from BEIS on the recommendations that we have made to Government. However, in the meantime we are quite pleased to see they are progressing one of those remedies, which relates to midata, and this is making it easier for customers to give PCWs permission to get access to data and then make the switching process much easier for them. There is quite a lot that is happening. Others may be better placed to discuss the response of the energy suppliers.
Q11 Albert Owen: Have you given the Government a timetable? Do they have to respond in a certain period? Do you have to wait for that before you see full progress on the implementations of your recommendations?
Susannah Meeke: Government generally responds within 90 days. In this particular instance that has not been possible for BEIS. They have said both publicly and directly to us that they do intend to respond and they are considering our recommendations. There are certain measures that only Government can progress, such as the very important elements around legislative reform for code governance for Ofgem. That is important, because that allows Ofgem to ensure that important changes are made to the way the industry works, and that is beneficial for consumers. However, as Simeon mentioned before, there are over 30 measures, and quite a lot of that is being progressed at the moment.
Q12 Albert Owen: Thank you for that. Before I move on to the other two panellists on this, can you just explain to me what recalibrating the relationship between DECC, BIS—obviously now BEIS—and Ofgem to give the regulator more independence yet greater co-ordination really means? Are we saying what many of us were calling for—that it needs more teeth and it needs to be able to get on with things, intervene and help the customer? That is what it is set up to do in many ways: help the customer.
Simeon Thornton: That is right. To go back to your earlier characterisation of the context for the reference of the markets to us, there was a lot of distrust. There were concerns around transparency and around profitability in relation to hidden costs and prices. Our recommendations in terms of the role of Ofgem are to give it greater powers to set out transparently the drivers for price increases, the profitability of different companies—so that is part of it—and greater information to inform the public debate.
Furthermore, we also recommend giving it the role of expressing its views clearly on government policy where it thinks that policy will have an impact on competition or consumers’ interests. Ofgem should state clearly what its views are. Of course in any policy area there may well be differences of view between Ofgem and BEIS, but we think, given the importance of transparency in the sector, it is incredibly important for Ofgem to express its views independently. That is the context for those recommendations.
Q13 Albert Owen: Okay. I will move on to the other witnesses, if I may, and just ask about what your impressions are of the findings. Do you think the CMA’s conclusion that vertical integration was not a problem was the correct finding?
Victoria MacGregor: Generally we were pleased with the report. We are particularly pleased with the prepayment meter cap. We had been campaigning for fairer treatment for PPM customers for some time. There are other areas that we are more concerned about, such as the disengaged customer database and the whole‑of‑market price comparison. On vertical integration we do have some residual concerns about price transparency, and although Ofgem have just published their new SCI, we would like that to be more granular and to include information on suppliers’ costs and on estimates of profits.
Q14 Albert Owen: What is “SCI”?
Victoria MacGregor: Supplier cost index—data about the things that are driving energy prices. Historically it included estimates of suppliers’ costs and profits, but that is no longer included and we would like to see that come back.
Pete Moorey: Consumers will be frustrated by the pace of change, going back to your earlier questions. Part of the problem with the inquiry is that the CMA spent an awful lot of time conducting analysis on the problem in the market—and we would generally agree with the problems that they set out in the market—but less time on the remedies to solve them.
As a result, Ofgem have been left with an awful lot of work to do on trialling and testing the remedies. In a way, you could characterise us being in year 3 of the energy competition inquiry, where we are still now seeing the energy regulator starting to test some key remedies and seeing whether they work. If they do not work, effectively we will be in a position of saying, “What next? What should we do to improve the market?”
That is frustrating for consumers, although we recognise some of the reasons why that is the case. Which? is broadly supportive of the remedies in general. However, we support the prepayment meter cap. We think it is right that there is much more testing and trialling of things like the database, particularly the prompts to engage that Simeon just mentioned and that Ofgem are now starting to take forward with the energy suppliers.
The other frustration that we have is that the industry has not stepped up in the intervening period. We have had six months, effectively, since the report. Ofgem is starting the process of now consulting on and starting to test and trial the remedies. We think, in that period, energy suppliers themselves should have been doing much more to demonstrate that they have learnt the lessons of the flaws in the market and that they are willing to re-engage with their customers, particularly those who are on these high standard tariffs. We are very disappointed that they have not done that so far.
We are hoping that in the coming days they are going to set out to us what plans they have to be doing that, and that is one of the things that we have been campaigning for. Today is our deadline to hear from energy suppliers about their plans around engaging with their standard variable tariff customers.
Q15 Albert Owen: Could you tell us what specifically they did not cover and whether that was because that was not in their remit in the first instance, or do you think they have covered over it and did not do it properly?
Victoria MacGregor: There are two things we would have liked to have seen covered more. One is regulated network costs. They currently make up about a third of the bill, and we feel that there is some evidence of over‑reward in that area. As that is a very significant cost driver, we felt it should have been covered.
One of the other areas, which I think touches on your points about SVTs, is that we felt more attention should have been given to extending that price protection to other vulnerable customers who were not on prepayment meters, such as vulnerable customers on credit meters, who are not covered by the prepayment meter cap. We would have liked to see that extended and go further.
Q16 Albert Owen: I guess I know the answer to the next question I am going to ask, from what you have just said. However, I just want it on the record. The CMA said that the remedies would revitalise the energy market, intensify competition and bear down on costs, allowing customers to be more informed. Do you agree with that assessment?
Pete Moorey: We are going to wait and see. The critical thing for this Committee and indeed the Government is what the measures of success for this market are. That is not particularly clear coming out from the CMA inquiry, and that is an area where this Committee can be holding the CMA, the regulator, the Government and the industry to account to say, “How is anything improved for consumers coming out of this inquiry?”
Q17 Albert Owen: That is important, but to be fair to the CMA, as explained in their answers to my previous questions, they are basically giving more freedom to the regulator. Do you think the regulator can deal with this now in a more open and transparent way?
Pete Moorey: This is a big test for the regulator, and we are going to start to see that in the coming months, as they test and trial the prompts-to-engage remedy that they are bringing forward and the database. It is going to be a really important test of whether the energy regulator is up to the job.
They are also making a big shift at the moment from very prescriptive regulation to a more principles‑based regulation approach, which means that they should have more freedom to act when energy suppliers are not treating their customers fairly. We want to see them doing that, in the way that we have seen the financial regulator act over the past few years. There are big tests for Ofgem, and the Committee has got a big role to play over the coming years to hold them to account to this role that they have.
Q18 Albert Owen: Do you think they have enough in their toolkit to do that or do you think Government needs to give them further powers?
Pete Moorey: Broadly they have enough in their toolkit to do that already.
Victoria MacGregor: One of our concerns is that there have been lots of attempts to revitalise the energy market; most of those have been around informational prompts, and they have not really been particularly effective in the past because they have not been based on evidence of how consumers actually behave. We are very pleased with this testing approach but concerned about how long that is going to take and concerned about particularly vulnerable customers who are still potentially paying £200 a year more for their energy than they need to. Again, we are looking for more action voluntarily by the customers or by the companies or from Government, if that is not forthcoming, to help protect those vulnerable customers that are paying too much unnecessarily.
Q19 Chris White: This is just a quick question to you, Mr Moorey. You said the deadline for submissions is today. Do you know which organisations have responded to that deadline?
Pete Moorey: I cannot say in front of the Committee today, because we are still having those conversations. However, we are hopeful that a handful of energy providers will come forward and say that they have got a plan for how they are going to engage with their standard-variable-tariff customers and that it will be a plan that we think will be testing and trialling new ways to wake them up. We are still looking through those. We have still got until the end of the day today to see which ones come in, and perhaps you would like to ask the companies who are in the next evidence session.
Chris White: I was just going to see if we could help.
Chair: Funny you should say that.
Chris White: I was going to say: if we can help your campaign, would you be happy to submit your evidence to the Committee?
Pete Moorey: Absolutely. I am very happy to do that.
Chair: That would be very helpful.
Q20 Amanda Milling: We have already touched on information in terms of the CMA’s recommendation of giving consumers more information to therefore hopefully engage them. I suppose this is a question to both Which? and Citizens Advice. Do you feel that this goes far enough? What else would you have liked to see in terms of information provision?
Pete Moorey: The important thing is the range of things that the energy regulator is going to be testing and trialling with the energy suppliers. We do not want to see a limit on the range of things you could be testing: new ways of doing bills, new ways of sending wake-up messages to people, and whether email communication works or telephone calls work. The sky should be the limit in terms of the different types of things that we trial and test to see how you can wake up these stickiest customers.
Furthermore, it has to be based on a good evidence base. We need to be testing this with thousands of customers. Again, if you look at some of the work that the FCA has done with financial firms over recent months, they have conducted really good trials around things like saving messages: when you are coming to the end of your bonus rate, how do you ensure that people are aware that it is a good time for them to switch and are aware of the interest rate that they are going to move on to?
The FCA conducted that with banks with tens of thousands of customers, and we would like to see that level of testing done in the energy market as well, so that we have some really strong evidence to show what does wake up customers. As Victoria said, so many things have been introduced in the past by the energy regulator, perhaps without enough trialling and testing, that clearly have not made a difference.
Q21 Amanda Milling: On that, the FCA has had the treating customers fairly initiative for nearly 10 years now. Do you think the energy sector is going far enough? Do you think more can be learnt from TCF?
Pete Moorey: A lot more can be learnt. It is going to be really important in particular with the tariff changes that we have seen. We had a situation where all of the energy companies were bound to having four tariffs. That rule has now been removed. We welcome that removal, but that makes it critically important that the energy regulator can look at the different tariffs that are coming on to the market from the energy suppliers and judge whether they are treating customers fairly.
The situation that we saw years ago, before Ofgem introduced the four-tariff rule, was mass proliferation of energy tariffs, mass customer confusion about what the best deal on the market was and, from the analysis that Which? and others conducted, an awful lot of tariffs on the market that were promising things that they were not really delivering. That is where the energy regulator needs to then be able to intervene and say, “Hang on a minute. These tariffs that you are offering really are not treating your customers fairly.”
Simeon Thornton: I would like to mention here the importance of the customer database that we are putting in place. This is the database that will cover customers who have been on the default tariff for three years or more. That is potentially a population of up to 10 million people. That is a tremendously powerful tool for understanding what works in practice for different categories of customer.
It is not the case that people of different demographic characteristics are necessarily going to respond in the same way to different prompts. That database is incredibly important in putting in place the measures to ensure that suppliers now have to provide that information to Ofgem. We think we should regard that as an incredibly important tool for Ofgem to understand how they can help customers with different characteristics.
Q22 Chair: In terms of any policy prescriptions, such a price cap or some restrictions on tariffs, is there any evidence that in response to any of those policy levers energy companies raise their standard variable tariffs so that customers do not feel better off?
Victoria MacGregor: I do not know about any evidence. There is certainly a risk that the unintended consequence is that those sorts of things drive prices up for everybody, which is why we have focused more on targeted interventions than whole‑of‑market price caps. That is not to say that competition and price caps cannot coexist. Switching rates are lower than they were before the removal of price caps in 2002. It is possible for the two to coexist, but we would prefer, at this point, some very targeted interventions to protect those most in need.
Simeon Thornton: I have just one response to what your question was getting at. We have found that some of the quite prescriptive rules have led to gaming behaviour. One example is cheapest tariff messaging, which currently requires a supplier to say, “This is my cheapest tariff, customers.” Implicitly it is saying, “Do you want to switch?” We have found—and we have documented this in the report—that, where you impose that sort of obligation, you do give incentives to suppliers maybe not to discount as heavily as would otherwise be the case. That is why one of the things we are calling for, and Ofgem announced yesterday it is implementing, is an all‑market tariff-messaging principle, which would say, “This is the cheapest tariff on the market,” which does not create that perverse incentive to reduce discounting.
Q23 Amanda Milling: Can I just pick up on the four-tariff point? We have gone from a restricted number of tariffs to an unlimited number. There is an argument to say that it becomes incredibly complicated. You said you welcomed the opening up. I suppose I am interested in understanding why. Is opening it up to an unlimited number the solution, or would it be more interesting to see a greater number, so moving from four to a dozen different alternatives?
Pete Moorey: The critical thing is how you introduce comparability of tariffs. Rather than getting fixated on a specific number, we would like to see energy suppliers doing much more to make sure it is very easy for people to compare the deal they are on with the best deal on the market. If you get to the situation where you have that, it starts to become pointless for suppliers to have hundreds of tariffs, because as people go on to a price comparison website or indeed look in other forms of advertising, they can very quickly see, “That is the best deal on the market, so that is the one that I want to move to.”
That has been the position that Which? has held for years, both when we were in a market where there were hundreds or thousands of energy deals and when there was the four-tariff rule. Comparability is the critical issue, and Ofgem now needs to work on that again. We want to see that tested and trialled, and see how suppliers are ensuring that people understand the deal they are on and how much they are paying but also what the cheapest deal out there is.
Victoria MacGregor: We also supported the removal of the four-tariff rule, partly because it just was not fit for purpose for the future of a market where you are moving to smart meters, you might be developing time‑of‑use tariffs and all of that sort of thing. We are very concerned about tariff proliferation and would strongly support Ofgem enforcing its new principles to prevent that very strongly, because the thread that runs through the thousands of complaints that we get every year about the energy market is confusion. Already people are confused. That comparability point is very important. It was one of the concerns we had about the removal of the whole-of-market view on the price comparison websites, but we may come on to that.
Simeon Thornton: We are probably in agreement on the main issues. The RMR itself has three main components. The first is simpler choices, which is the four‑tariff rule and prohibition on certain types of discount. That is what we want to get rid of. We are simultaneously reinforcing the second two elements.
The second element is better information, and we have spoken a bit about that, using prompts that are based on evidence. The third is about fairer treatment. We have called for Ofgem to introduce—and they accepted—a principle that would require suppliers to ensure that their tariffs can readily be compared in terms of their value for money. We think that principle is vastly preferable to a set of rules that are gameable and seem to effectively endorse any behaviour that is not explicitly proscribed by the rules. We think that is the right way to go.
To go back to the four‑tariff rule, we do not think it achieved its purpose. You have, what, 40 or more suppliers in the market. If you multiply 40 suppliers by four tariffs, you still have well over 100 tariffs to negotiate and you will still need a price comparison website. It does not serve a useful purpose; it ended up eliminating certain niche tariffs that were valuable to customers and certain approaches to discounting, which ended up undermining competition. We do not think it will be lamented.
Q24 Amanda Milling: I will come back to the comparison sites, but picking up on midata as well, is there a danger that consumers will be flooded with direct mail and what have you in terms of rival suppliers providing their options? On the one hand, it is welcome that you are informed that those options are there, but is there a danger that we go to the other extent, where we will get complaints from people about the huge numbers of letters coming through the door?
Pete Moorey: We do not want to return to the situation we had with doorstep selling, years ago. That would be a bad outcome. It is something we have to keep a very close eye on with regard to the database remedy. The database remedy is a challenging one. On the one hand, we have concerns it will potentially have no impact at all. People could simply switch off and say, “I am not interested, and however much people market at me, I will not do anything.” On the other hand, it could be so effective from a suppliers’ perspective that people are being bombarded with direct mail. Beyond direct mail, we need to consider whether that would be the most effective way of reaching people. Ofgem having the freedom to think about whether other routes, such as email or phone call, would work instead is important. Equally, as an organisation that has had a long‑standing campaign on nuisance calls and texts, we do not want that to be the outcome from such a remedy.
Q25 Chris White: What do you think is the most effective way of putting information out there?
Pete Moorey: We do not know, and that is one of the main findings from the CMA inquiry. Ofgem, in a way, moved to a whole range of remedies through its retail market review that aimed to better engage people in the energy market and that seemingly did not achieve that. The CMA have put at the centre of their inquiry a process of testing and trialling new ways of waking customers up. That is what we want to see. We really welcome that. We welcome the fact that, as Simeon said, Ofgem announced yesterday how they are starting to take those remedies forward.
We would have liked to see the energy suppliers trying some of these things already, over the last six months. We now want to see them engaging with Ofgem. From your perspective, in terms of holding this whole process to account, I would be pressing Ofgem, the suppliers and the Government to find out what the outcomes of those trials are at the earliest possible moment and see whether any of that is making a difference to consumers.
Q26 Chair: But do you think there are other industries and markets that we can look at that are good pointers, such as the mortgage market?
Pete Moorey: As I have said, the financial regulator is an interesting place to look in terms of a regulator that has been trialling and testing different remedies for some time. I mentioned savings; another interesting one is around insurance renewal. One of our campaigns was to ensure that, when you are renewing your insurance, you have what last year’s renewal amount was. They tested and trialled that with lots of industry providers, and now, when you get your insurance renewal, you have last year’s renewal.
I had it the other day. I found that I was paying £50 more than last year, and immediately I got an email from one of the price comparison websites, telling me that I could save £100. Within five minutes, I had saved £100. Those bits of information are clearly critical.
Q27 Chris White: Are you on the computer all the time?
Pete Moorey: Yes. I work for Which? and I am highly engaged in these kinds of things, but it was simple and straightforward. If we could see similar things in the energy market, it could make a difference to people. That is where testing and trialling comes in.
Susannah Meeke: On the database point, and the testing and trialling, our order makes the database possible, from Ofgem’s point of view, and what Ofgem is currently doing is exactly that: a trial. They are looking at the design of the database and how that would work, and what is the most effective way of getting customers to engage with it. They are very aware that this needs to be designed, and the results of those trials are expected in March, I understand.
Q28 Amanda Milling: Can I ask one small question? One of the things you identified in your example about car insurance was the fact that you were online. A lot of the consumers that we are talking about here, who are not engaging, are not online. I suppose this might be a question to Victoria.
Pete Moorey: I would agree. That has to be tested, and I am sure Victoria will be able to say more on that.
Victoria MacGregor: Yes, those people who are not digitally enabled are already being excluded from the market, and we have a great concern about that. That is why one of the things we see as very important is continuing our face‑to‑face advice services, as Citizens Advice, to help those people. We help people to switch regularly; we do it on their behalf. It is much more difficult if you are not online. You do not have access to the best deals so easily. It should be addressed.
Simeon Thornton: Just to endorse that, we found on the basis of our survey that, of that 10 million group that I mentioned to you earlier—people who have been on a default tariff for three years or more—around 50% either do not have access to the internet or do not feel confident in using PCWs. That is why a medium that involves sending letters is appropriate for that group. For many of us who are already engaged, we can use PCWs or the internet; for many of us, it is still not really a viable option. That is why we think the database is potentially important.
Q29 Craig Tracey: My question was pretty much on that point that Amanda has just made. I am just following up. I think of myself as reasonably savvy. I used to work in the insurance industry, so I am used to comparison websites. I did a lot of comparisons on my own energy and saved a few hundred quid. I went into Citizens Advice, to the launch of a project you were running, and they saved me another £200. That worked really well. I was obviously paying well over the top in the first place, so thank you for that.
However, using the analogy of the insurance industry, one of the problems the insurance industry had was reputational issues. I think you said that the energy industry is one of the least trusted. Do you think there is a mindset in people that they do not want to switch because it is better the devil you know? In some cases, I have seen quite a few examples where people have been on a set amount and they are promised a cheaper deal, but at the end of the year when they go to switch, they get lumped with a big bill. That is a big worry for the most vulnerable customers.
Victoria MacGregor: There are lots of reasons why people do not switch, which is why testing a range of engagement measures is important. For some people, there will just never be a financial driver to bother with it. For some people, there is definitely a lack of trust: they have had a bad experience before, and it has put them off. There is a range of reasons why people do not switch. People do like the comfort of a brand, as well: “Oh, it is all right; I have known them; I have been with them since they were the LEB,” or whatever it is. It is about trialling a variety of messages to find the most suitable thing for different people.
Simeon Thornton: Also, traditional meters are part of the explanation for why people may be more mistrustful of the energy sector. That is because, since the meters are not read very often, it is very difficult to verify whether the bill you are getting corresponds to what you have used. The introduction of smart meters is potentially a very important change. Much like a mobile, you can say, “Yes, that looks right,” or “No, that does not look right.” The current situation is that we have these standing balances that are totally impenetrable. Possibly no‑one in this room could really understand their bill and whether it is true or not, and that does lead to mistrust around switching. Sometimes, when you effectuate the switch, you end up paying a big balance.
Q30 Craig Tracey: On that point, do you think the simplification of bills would be a step in the right direction? They are hugely confusing in any event.
Simeon Thornton: On that, the format of bills is clearly an important area, and that is one of the areas that Ofgem have said they are going to trial. But a more fundamental point is that, with traditional meters, everything is based on an estimate. No matter how clearly you present it, it is a bit of a work of fiction, because you do not know what you have actually consumed. When smart meters are rolled out, it will not be an estimate but your actual consumption. That will make quite a big change.
Q31 Amanda Solloway: I was going to ask the question Craig asked first, and then the second question he asked was my second question. Just for my clarification, it occurs to me that not everybody will go to the CAB, as an example. That is a challenge, as you say. Regarding the distrust that Craig was talking about, I found that to be really strong language: “the most distrusted industry”, or certainly one of them. I wondered whether the reality of that was just because it is impacting everybody’s lives, or is it actually the fact that it is to be distrusted?
Pete Moorey: It is both. Distrust is not necessarily always a bad thing, of course. There is probably a good reason why people should distrust some providers on some occasions, because that will drive people to demand more and to look for a better deal. Of course, one of the reasons why the sector has been so distrusted is that it affects everyone, and everyone has seen huge price rises, as Simeon mentioned, over the last 10 years or so. There has often been a clear correlation in our data between price rises and distrust, but also the levels of satisfaction that people have had with the sector.
As Victoria said, a lot of the basics have been delivered in a very poor way over the years. That has been evidenced by the fact that Ofgem has repeatedly had to take enforcement action against the energy companies for things like failings in their bill systems, a poor handling of complaints, and some of the most basic things that consumers would expect to see from what is an essential service.
Q32 Chair: It is like an abusive relationship. I cannot believe that customers are getting beaten black and blue all the time, and yet stay with their existing providers. Why is that the case?
Pete Moorey: That is one of the things we are going to be testing and trialling over the coming months, particularly with the database, because it is going to be so focused on these people who have been with their supplier for three years or more. There is no quick answer to that question.
Q33 Amanda Solloway: Who is saying that those people who have been with a supplier for three years or more are being mistreated? You said that these people have been with the supplier for three years or more. Who believes they should be changing or they are not being dealt a good deal? Who is saying that?
Pete Moorey: It is a wide range of people. Our energy satisfaction survey takes a group of energy customers from each supplier, and asks them, across a whole range of factors, how they would rate their company. That is how we get “poor” from the satisfaction survey, but from the point of view of Citizens Advice, they will hear a whole range of complaints from people.
Q34 Amanda Solloway: But they are the audience who would be saying they had a problem. Somebody who goes to the CAB clearly has a problem. Is there any evidence to say that some people are quite satisfied with their suppliers?
Pete Moorey: Yes. In our satisfaction survey, there are energy suppliers who do very well. Some of the smaller suppliers score 80% out of 100% in terms of the satisfaction score, and do so on a consistent basis. For the last few years, Which? has been able to give a recommended provider status to one energy supplier on a number of occasions. There is clearly evidence that some suppliers are able to get it right and to deliver a decent level of customer service. The fact also remains that the majority of people are on standard tariffs with big suppliers, who, sadly, in our satisfaction surveys, have consistently scored very poorly.
Simeon Thornton: Our main concern about people who have been on a standard tariff for three years or more is that they are paying much more for exactly the same product. That is the essence of the concern, and I do not think there is a plausible argument that they like the characteristics of a standard variable tariff to such an extent that they would be prepared to pay a £300 premium for it. It is more just that they are not engaging and therefore paying the penalty.
Q35 Amanda Solloway: In a nutshell, you are saying that if there is a cheaper option available, there should be some activity that kick‑starts that, as opposed to letting people stay—
Simeon Thornton: Yes, a prompt to people so that they can explore the options open to them.
Q36 Peter Kyle: This is an incredibly wide‑ranging debate. Simeon, did I hear you right in your opening response that 34% of customers do not know whether they have or have not switched?
Simeon Thornton: It is worse than that, I am afraid. It is 56%.
Peter Kyle: 56%?
Simeon Thornton: This is in response to our survey of 7,000 customers: 56% had not switched, or did not know whether they had switched; 34% had never considered it, which we would consider to be a prior stage, which is never really reflected.
Q37 Peter Kyle: Because there has been change within the big six and the energy suppliers in their behaviour, and if there is complete recalcitrance among consumers, at what point do we have to shift from beating up the companies to starting to challenge the consumer? My point is that the company that supplies my energy writes to me if there is another tariff, better than the one I am on, with another company. There is no other sector that does that. I would love Tesco to do the same. We are being spoiled, in some ways, as consumers, and yet all the dialogue coming from you is beating up the suppliers.
Simeon Thornton: I hope it is not beating up the suppliers. We took quite a measured view across the wholesale and retail markets. In relation to the specific point you make about advertising the cheapest tariff on the market, that is something we would want to see explored further. Also, in relation to my earlier comment, a lot of the confusion does relate to the standard, rather antiquated meters that we have. I believe there will be, alongside the remedies we are putting in place, a step change in understanding of the market once we have smart meters that explain in a more transparent way the relationship between what we consume and what we pay.
It is very early days since the conclusion of our report, but my understanding of the switching data this year is that there has been a bit of an uptick, and that is probably due to the focus on the sector arising from our report and the response to it. I do think things will get better as a result of our remedies, and also as a result of smart meters being rolled out.
Q38 Peter Kyle: Your main remedy is switching. Overwhelmingly, the recommendation is to make it easier to switch, with a focus on the switching process and so forth. Greg Clark gave evidence, as you might well have seen, to the Lord’s Select Committee last week. He said, and I quote, ”There is a dawning recognition on the part of some companies that it is not all about switching.” Was he wrong?
Simeon Thornton: That what is not all about switching?
Peter Kyle: Getting it right for consumers, getting consumer power, is not all about switching.
Simeon Thornton: Clearly, from a company’s perspective, they are going to want to make sure that their customers are satisfied and do not switch away from them.
Q39 Peter Kyle: What Greg Clark is saying, and it is quite a long paragraph in which he says it, is that in terms of giving rights to consumers and empowering them in the market, it is not all about switching. It is about making sure that the standard offerings from companies are broader and have more value to them. He says that getting that right is as important as switching, but your recommendations overwhelmingly talk about switching.
Simeon Thornton: It is difficult to disassociate the two things. To be absolutely clear, we do not think that in a well-functioning market there needs to be enormous levels of switching all the time, with lots of sound and fury. However, we do think that the prerequisite for a well-functioning market, including reasonable tariffs for customers, is that customers are aware of the options available to them, and have the potential to switch if they are dissatisfied. They must be aware. The idea that companies will offer a good tariff if the customers are unaware is not one that is substantiated by the facts. We do not necessarily need to see lots of switching activity, but we do need engaged and aware customers.
Q40 Peter Kyle: The Secretary of State is wrong, then, to shift the emphasis away from switching?
Simeon Thornton: As I said, I do not think it needs to result in many switches per year, but you do need to have an engaged customer group.
Q41 Peter Kyle: Finally, if anybody wants to comment: is there any other market that shares the same characteristics and challenges as this market? In retail, in the supermarket sector, if you discount broccoli by 10 pence, you have people flooding from one side of town to the other—Chris in particular.
Simeon Thornton: There are two very important distinctions. I will not flog a dead horse, but metering is one of them. The other is that, for very good reasons, customers have security of supply, whether or not they actively engage. With a supermarket, you have to go to a shop and engage in a transaction. With energy, you get supply even if you have not entered into a specific contract with the supplier, for very good reasons: we do not want people being cut off. That means there is no natural prompt. If you look at the comparison between, say, motor insurance and energy, there is much more engagement in switching motor insurance, because there is that natural prompt to switch at the end of the year.
Q42 Peter Kyle: Does anyone want to come in?
Pete Moorey: It is a unique market in many respects. It is essential, because we all have to have gas and electricity in a way that we do not, necessarily, with all other services that it might be compared to. That does mean that it requires particular attention, first, in terms of the most vulnerable customers—which is in part why we are very supportive of a prepayment meter remedy—but it goes beyond that to other vulnerable customers, who will sit outside that group but are still getting a poor deal.
Secondly, it requires attention in terms of ensuring that, given that a competitive market is where we have decided to go with the energy market, it functions in a competitive way. The CMA found that the lack of competition in the market was meaning that consumers were overpaying as a result. That is why it has to be tackled and given such a priority.
Chair: Speaking of prepayments: Albert?
Q43 Albert Owen: Yes, I want to come in on prepayments, but I just wanted to comment on the Secretary of State. He is absolutely right. This industry is perverse in many ways. It says, “If you do not like our deal, go somewhere else.” Can you imagine retailers saying that? Retailers have loyalty cards and that is the way forward: “If you stay with us as a customer for X years, we will give you some loyalty bonuses in many ways.” That has not been considered. I think the Secretary of State is minded to go down that way, and it is a good way forward. Could you comment on that?
Simeon Thornton: Just on that, I would observe that a loyalty bonus was one of the activities that was precluded under RMR. Now we have repealed those provisions, suppliers can offer a loyalty bonus or discount if they wish. The rub is “if they wish”. We have to be realistic about our expectations. Suppliers offer loyalty discounts where there is a credible threat of the customer moving elsewhere. If we increase the power to the consumer, you will start to see this.
Q44 Albert Owen: Okay. However, the people who have difficulty moving are people on prepay. Quite rightly, all panellists have said helping those on prepaid meters is a good idea. However, there is too much emphasis, in my opinion, on smart metering. First, it is cumbersome and will be difficult; many of these people live in flats and in difficult properties, so it will be hard to get the roll-out. Secondly, and this is for the CMA and others to comment on, are you confident that this will liberate those people in switching and being able to get a better deal?
Simeon Thornton: Firstly, it was in explicit recognition of the difficulties of roll-out of smart meters to prepayment customers who live in flats that we thought it was a good idea to introduce the cap. The cap applies when you are on what is called a dumb prepayment meter with the old infrastructure. People will be protected until such time as they accept a combination of a smart meter and a favourable offer from the supplier. That is why we are doing it. Clearly, the Government are committed to a roll-out by the end of 2020. To the extent to which there are concerns about that roll-out, particularly for prepayment customers, they will retain the coverage of the cap. What was your follow‑up question?
Albert Owen: You have answered it.
Victoria MacGregor: There is some risk, and we will be watching this very closely. Obviously, the prepayment meter cap will not apply to people on SMETS 2—second generation—meters. We are a little bit concerned that that might put customers off accepting a meter, if they think that they are not going to get a good enough deal, or encourage suppliers to pressure PPM customers to move on to a SMETS 2 meter. We want to watch that very carefully to make sure there are no unintended consequences around that. There have been issues with the roll-out to date: as you said, the Government are committed to 2020, but this remedy is due for review in 2019. We think it should be open to extension if the roll-out is not progressing as fast at that point.
Albert Owen: Do you want to come in, Pete?
Pete Moorey: An awful lot of importance has been placed on smart meters and price comparison websites by the CMA as important drivers to deliver on the remedies that they have set out. That is a risk, both in terms of whether the roll-out will deliver on time, but also whether smart meters will deliver the benefits that everyone thinks they will. I would agree with Victoria that it needs to be watched very carefully, and if smart meters do not deliver the outcomes people are expecting, that review may well need to decide that the prepayment meter cap needs to roll on for a longer term.
Q45 Albert Owen: I have just one more question. You talked earlier, and you are absolutely right, about network costs. Do you think it was a missed opportunity that the CMA were not allowed to look at this in their remit? That is a quarter of it. If you add the other big factor, fuel prices, that gives you 75% of the bill determined by network costs and oil prices particularly. It will be difficult on oil prices because of the fluctuation, but on network costs, do you think the Government and the regulator can do a piece of work here that will help customers?
Victoria MacGregor: Yes. It is really important that the network costs are scrutinised. They are one‑third of the bill, and Ofgem are just about to start the process of developing their next round of price controls. We are going to be working with them very closely to make sure that the consumer voice is represented in that very technical discussion. It is a substantial part of the bill that people do not often get to see or understand, so it is very important that it is scrutinised.
Simeon Thornton: Can I just say something there? It was a very wide‑ranging investigation, but we took the view that we should focus on the competitive aspects of the market, rather than natural monopoly regulation. Part of the reason for that is that the CMA has a role as the appellate body for Ofgem’s decisions in relation to network costs. Indeed, in the course of our investigation, a different part of the CMA was hearing an appeal on the size of those network costs. It is something that the CMA does, but not within the context of our investigation.
Q46 Chris White: Energy is very different from a supermarket. A supermarket depends on things like vicinity and parking service; that is why you go to one rather than another. With energy coming into your home, it does not really matter who that supplier is. Presumably, the only driver is the price of that energy, and how we look at all these things makes a difference to your choice. How do we maintain that this market is competitive and there is not one supplier that takes a monopoly position through economies of scale, for example?
Simeon Thornton: In the last few years, notwithstanding the concerns we have around widespread lack of engagement, we have seen increasing numbers of suppliers. We probably have 40 or maybe more at the moment.
Q47 Chris White: Is it not the big six and then a super tail?
Simeon Thornton: The non‑big six have about 15% market share. Compare that with 2010, when it was probably less than 1%. It has increased quite considerably, and that would suggest that economies of scale are not a huge issue in relation to supply.
Susannah Meeke: Indeed, when we were looking at and comparing the levels of efficiency across the firms, we did not see evidence that the big six were more efficient than their smaller competitors. Indeed, in some cases it was quite the opposite.
Q48 Chair: Can I ask about this, Pete? I am very taken with your word “dismal”. Would you differentiate or distinguish between big six companies and new entrants in terms of how dismal they are?
Pete Moorey: There is a particular issue that the big six have in comparison with the rest of the suppliers, which is the sheer number of standard variable tariff customers that they have. They have a particular responsibility, particularly following this inquiry, to do better in terms of engaging, and to demonstrate very publicly to us, to Citizens Advice, to the competition authorities and others that they have learnt the lessons of the inquiry and are willing to do much more to ensure that they are giving their customers a better deal.
Q49 Chair: A final question, if I may: you have been very helpful, and the Committee are very grateful, but I just want to ask about vertical integration. I will ask Pete, then Victoria, and then maybe the CMA will want to comment. Did the CMA pull its punches when it came to vertical integration, in terms of whether customers are getting fleeced, to some extent, by this? Would you like to see a splitting up of energy companies in order to provide real competition?
Pete Moorey: Vertical integration was something we highlighted in our evidence to the CMA, but we were never calling for a splitting up, necessarily, of big six providers.
Q50 Chair: Is it greater transparency of costs that you wanted?
Pete Moorey: Yes, that is the critical point. The CMA have made some recommendations on that. It is an area that requires much more focus, because we are very focused on the retail market and the changes that are coming here. It is an area where we would welcome more work by your Committee. With the supply cost index now being out there, and Ofgem saying, effectively, off the back of the recent figures, that there is no reason that they can see why there should be price rises in the coming months, that is important scrutiny. It provides a useful way for energy suppliers to be held to account, and it is something we would like to see more of.
Susannah Meeke: Picking up on that, Pete has mentioned the SCI. There was another recommendation we made, which was that Ofgem should build on its CSS, which is basically a financial reporting system that they had in place. We made a number of detailed recommendations about how they should strengthen that in order to be absolutely clear where profits were being made—what were retail profits and what were profits in the upstream markets, basically in generation. That was specifically with the aim that it should be clear what was happening in the different markets, and should sit alongside the SCI as part of their overall assessment of how competition is working.
Chair: Thank you very much for that; we really appreciate it. Thank you.
Examination of witnesses
Witnesses: Greg Jackson, Simon Stacey, Dan Hopcroft and Ed Kamm.
Q51 Chair: Gentlemen, good morning. I am very conscious of time. We have BEIS oral questions in about an hour’s time, so I am keen to move on as quickly as possible. For the purpose of the record, could you introduce yourselves and tell us the firms that you are representing, starting with you, Greg?
Greg Jackson: I am Greg Jackson, founder of Octopus Energy. You will not have heard of us, but we are a relatively new entrant, launched in April. We have an e‑commerce background, trying to bring transparency and efficiency to this market.
Dan Hopcroft: I am Dan Hopcroft. I am a residential sales director for EDF Energy.
Simon Stacey: Good morning. I am Simon Stacey, the MD of npower’s domestic business.
Ed Kamm: Good morning, I am Ed Kamm, MD of First Utility, the largest challenger brand to the big six.
Q52 Chair: Thank you. I do not know if you were here for the first panel, but Which? has just called you dismal. How do you answer that?
Greg Jackson: Someone asked if that applied differently to challengers than to some of the incumbents. We now have something like 60,000 customers and a satisfaction rating that is consistently 85%. If you look on Trustpilot you will see 9.6 out of 10 from hundreds of happy reviewers.
Chair: You do not think you are dismal.
Greg Jackson: The sector itself is dire for customers. To Peter’s observation earlier, and yours, Iain, it is a sector in which many people are essentially in the equivalent of an abusive relationship. They are trapped there, and we should not blame the victims but look at the 20 years of experience they have had.
Q53 Chair: Dan and Simon, do you think it is unfair that you are classed as dismal and on a par with used-car salespeople?
Dan Hopcroft: Yes. The issue that we come across all the time is that the term “the big six” is used, which from an EDF Energy perspective we find upsetting. It implies that we are a club, and that we get together and determine what prices are going to be. That is definitely not the case, because we see our competitors among the other major suppliers as competitors as serious as any other competitor in the market. It is quite upsetting to hear that.
Simon Stacey: For us at npower, we recognise that the industry has an issue, and it is incumbent on all of us—Government, regulator and suppliers—to address that. The market is improving; the small suppliers have been incredibly helpful in bringing challenge and innovation to the market, and we welcome that. What you have seen in the last year is a significant amount of switching and high degrees of engagement, compared to previous years. Small and medium suppliers are now the second largest supplier behind BG in the UK. That is a significant improvement post‑CMA, but it does not mean there is not still work to do.
The other thing I would add is that CSAT, as measured by uSwitch or Which?, has seen significant improvements in that. There are a lot of customers who are very satisfied with their suppliers.
Q54 Chair: Ed, you are shaking your head vigorously at that.
Ed Kamm: It is no surprise that at the bottom of the league table you have the big six congregated around a certain score in every major customer satisfaction survey out there, while the independents are performing better. That is from a customer segment, and we all know that the big six have a vast majority more of the disengaged customers, so they are getting that score from their average customer base, many of whom are disengaged and probably never giving them a score in the first place.
Something is clearly broken, and in any other market you would see a lot more consumers going to market. I keep hearing reference to the higher switching rates. I believe, if you cut through the data, it is the engaged customers who are switching more often, and that is why switching has grown. We see from PCWs that in 2016 only 10% of switchers on PCWs were switching from a standard variable tariff, yet they make up 70% of the big six’s customer base. There is a problem, and we cannot keep looking at PCWs to solve this problem.
Q55 Chair: Dan and Simon, this is probably a question for you, if I may. Simon, you have admitted in particular that there may be failings and needs to improve. Where are those areas of failings? Where do you need to improve, and what are you doing to improve the condition of customer service? Are there particular aspects, such as pricing, simplicity, customer loyalty or service? Where are you trying to improve?
Simon Stacey: It is a complex industry, and we have probably made it over‑complex. A number of the remarks in the earlier session were asking, “Why do suppliers not do this?” We have not been able to; RMR restricted us from doing a lot of things that we know customers would like. We have had some fairly well documented issues around billing systems; certainly, for our organisation, those are behind us now, but they were a problem. The reality is that the biggest issue is engagement. We need to be clear, and hopefully today’s conversation will be helpful in trying to understand, what good looks like. What is success? Is success a high degree of switching, which is where the market and the industry have been steered? Our economic model is based on switching. Are we looking for fairer, or more levelised, tariffs? I heard a number of members earlier talking about very high standard tariffs. That is a product of where the market is today. Obviously, if those prices come down, the discounted prices will switch as well. Therefore, everybody will get a fairer tariff, but it will be in a much lower bandwidth; there will be less opportunity for switching and you will see less of it.
Q56 Chair: Your standard variable tariff is the most expensive tariff, is it not? Why do you not call it that? Why do you not help customers be informed, by saying, “You are on the SVT, but you are on the most expensive tariff.” Call it that.
Simon Stacey: It is not necessarily the most expensive tariff.
Q57 Chair: Yes, it is; I have checked.
Simon Stacey: It is today, but just for clarity, there are moments of time when it is not. We would welcome a discussion about what you could call it, whether it is a default tariff, or something else other than standard, but I would point out it is a question of a moment in time. For example, for many of us on this panel, the gap between our standard and discounted tariffs could have been as much as £200 last year. It is far lower now, because the markets have changed. There is less opportunity, and therefore you will probably see less switching.
Q58 Chair: Could I ask everybody that? What is the difference between your standard variable tariff and the cheapest tariff you can offer?
Dan Hopcroft: I can answer for us. Our standard variable tariff before we made our announcement in December was 1,069. As we sit here today, because we made the gas decrease on 6 January, it is now at 1,040, and our cheapest tariff in the market is 1,003.
Q59 Chair: Sorry, Dan. I am a bit confused. I know you have reduced your gas tariff. To balance it up, your electricity tariff has gone up by 8.4% as of 1 March.
Dan Hopcroft: Yes, it is going up from 1 March. That is right. It will go to 1,082, so the difference will be just under £80.
Ed Kamm: We try to tar everybody with the same brush. Our difference at the moment is £88. If I am completely transparent, it has been much higher than that. There was a point last year when it was over £250. At one point, it might have been over £300. I hate to put the small suppliers in the same bucket as the large suppliers, but the one key fact that is missing is the percentage of customers on the SVT, and the tenure they have been on it. Sitting here today, I was shocked to learn, as I did not pick it up in the CMA filings, that 10 million customers have been on the SVT for three or more years.
If I look at my customer base, my SVT is priced at a very similar level to the big six, but not for the same reason. For me, it is because my customers end up on it for a period of months, because they were on a fixed tariff that expired, and they may not have made a decision. However, we talk a little bit about what suppliers are doing and what good looks like. We are a great example of what good looks like. Less than one out of five of my customers is on an SVT, and their tenure can be measured in months. I contrast that with the big six, who have seven out of 10. One of them has nine out of 10 customers as SVT customers. I do not know this for a fact, but I bet, if you look at the tenure, we are talking about more than five years on average. One of the big six published a CMA filing that suggested 25% of their SVT customers have been on it for more than 15 years. That is not with the same supplier—
Q60 Chair: Sorry, Ed, may I put that question to you, gentlemen? What proportion of your customers are on SVTs, and how long have they been on them?
Dan Hopcroft: We have 56% on standard variable. In terms of duration, we have about 1.3 million customers, of the number quoted earlier, who are going into the database.
Q61 Chair: They have been on the standard variable tariff—
Dan Hopcroft: For over three years.
Simon Stacey: As for us, we have a reasonably well engaged customer base: we have 52% on standard now, which is one of the lowest of the big six. Of that 52%, about 35% or one‑third of our circa 2 million standard customers have been with us for more than three years. I would add—and this is important in terms of understanding—that for some customers it is the right tariff. If you are a low consumer, then it is the right tariff for you. To switch that customer would cost them more money.
Q62 Chair: Why?
Simon Stacey: It is because of the way the standing charges work. If you are consuming a low amount of energy, that tariff works better for you than a discounted online tariff, which is where all the comparisons are being made.
Q63 Chair: Is it fair to say that the business model of traditional energy companies is based upon a large proportion of their customers being on SVTs that are more profitable for those companies, and therefore those firms can cross‑subsidise new customers in terms of, perhaps, loss leaders? Is that fair?
Greg Jackson: Can I just answer that question on the gap? Our gap is £15, currently, for an average customer. For us, this is all about transparency, and the big issue here is that no one really knows what the price is in the market. A lot of the big guys will tell you, “Currently our gap is X”, but they will dip into the market for a short term with a fixed offer, and the gap will be a lot more than X. They will not tell the customers who are signing up to that cheap price what the real price is. This came up in the earlier session, but what we really have to do is give much clearer, more transparent information to customers. Otherwise, the very act of switching causes dissatisfaction. You switch, get a cheap deal, and a year later you will get stuck with these high SVTs.
Q64 Chair: Gentlemen, would you answer the question in terms of the business model?
Dan Hopcroft: To answer your question, yes, that is a possibility. A supplier could do that. In any market, if one prices higher, then one can use that money to price lower elsewhere, if one has the same profit motive across all tariffs. From our perspective, we do not do that, and you can see that from our segmental results. We have struggled to make a profit over the last few years. Clearly, we have not been doing that, because we have not been profitable, so we have not been able to do that.
Simon Stacey: Your assessment is right, in a generality. Stephen Littlechild has submitted some data to you that we would support in terms of the economic model. There is an important discussion to be had around the economic model. You have to recognise that the standard price is effectively subsidising the non‑standard, and if you start to put everybody on the non‑standard, then the non‑standard price will inevitably go up. As Dan has just said, though, as npower we lost money in 2016 and in 2015, so it is not helping us, because we are still losing money.
Ed Kamm: That is the fundamental business model. The fact that the big six percentages range between 52% and 91% proves that. We are able to drive a profitable business, unlike EDF, with only 19% of our customers on a standard variable, and that is a point in time. That is a moment in time, because our customers are on it for a period of months. We have ranged between 13% and 20%, because that is constantly flipping over. We have built a business model that is not based on apathy and customers rolling onto the standard variable, and that is what we think needs to happen across the industry. It is a bit like leading lemmings; they will not do it on their own, so we ask for leadership out of the big six, to make a change on that.
Q65 Albert Owen: I am sorry to have upset people by calling you the big six. It just happens to be a fact that you are the six biggest companies, and you have a dominant share of the market. It is from that perspective that we label you, not as a club but as the dominant six companies. Historically some of you, at least the big two, have inherited infrastructure in many ways. That is the reason we call you the big six. The reason we have the investigation is because of rocketing prices for many of us, due to fuel, as you have said. We have had this investigation now. You have heard me asking this of the CMA, but do you think the CMA conducted a thorough investigation, and do you think its outcomes and remedies are helpful to customers?
Dan Hopcroft: My answer is, yes, the CMA conducted a thorough investigation; it certainly felt like that. I was involved throughout the whole of the period. I would say that it was exhaustive, and exhausting, from our perspective, to be part of that investigation. The amount of data, both written and numeric, that was required by the CMA, often to really tight deadlines, was extensive. Overall, we feel it did a very good job. The one thing that hangs out for me—and it was spoken about earlier—is that there is no real clear definition of what is a well operating market.
It has been really helpful that Ofgem has published the percentage of standard variable for the different suppliers, because it shows the kind of spread that there is. I am not really clear as to where the right number is, and even if that was a range, I still cannot really see what would be defined as a well operating market.
Greg Jackson: The reality of the CMA, sadly, is that on the whole it probably undoes some of the good of RMR. It creates market confusion; there was a discussion earlier about the number of tariffs. We are already seeing a proliferation. I was looking yesterday at one of the comparison sites, and spotted three tariffs from a big six player, which is not here today, that were £3 apart in price. Two of them had the same name, same term, same exit penalty; every single word apart from a code underneath it was the same. I do not know what they are trying to achieve there.
Q66 Albert Owen: On that, do you think the regulator now has the ability to do something about it—to expose them in terms of transparency?
Greg Jackson: We do not know what that might look like, but we know, when there were at least four tariff restrictions, people could not play that kind of game. We are already seeing it. When it comes to the other CMA remedies, the sad reality is that the market changed dramatically during the CMA investigation. There are now two and a half, maybe three, times as many suppliers as there were when they started that investigation. You now have a vibrant, competitive market in the switching arena, but no remedies apart from the database, which is highly unproven and possibly expensive, to tackle the problem that roughly two‑thirds of customers are, for example, paying £200 to £300 too much per year.
Simon Stacey: The inquiry, as Dan said, was very detailed, and we should allow it, and us, time now to implement the remedies. We have concerns about some of the remedies, and I daresay we will get into a conversation about those as today’s conversation goes on. There are some flaws around profitability, and profitability is an important word. We have to recognise that, as competitive businesses, we need to be able to make a return. At the moment returns are very low in the sector and, for a number of us, loss‑making.
The reality, again, is that, if we are going to make an acceptable return of circa 3% as an industry, that relies on the standard and non‑standard balance being either levelised or allowed to stay as it is. I do not think you can have both worlds, and it is important that we work out which world we would like to operate in.
Ed Kamm: The CMA correctly identified the problem. This is not one market but two. We call it the “tale of two markets”. You have one for engaged consumers who know they can switch. They may even switch with the same provider, and that is okay. They take a good tariff. You have another market that does not look to engage: they do not have the information to engage; they are not prompted to engage; or they do not have the confidence to engage.
Putting the database remedy to the side for the moment, the solutions that are put forward, in the first instance, help the engaged customers even more. They allow suppliers to put out new customer‑exclusive tariffs that were not available to their existing customers, and five of the big six blew through that door, and offered new customer‑exclusive tariffs, while increasing the best price they made available to existing customers. They did not solve the core problem, and remember what the CMA said. The CMA said that the big six had unilateral market power over their SVT customers. For us, the remedies needed to be focused on the SVT customers.
The big remedy there is the database, and we have three issues with that. Many customers will choose to opt out; if they do not, they will not choose to engage with postal. If they are not listening to hundreds of millions of pounds of switching site advertisements on radio, TV and internet then they are not going to pay attention to a few pieces of post coming through. More importantly, if I were the big six, which I am glad I am not, I am sure the actions we will see out of the big six—
Albert Owen: Big seven.
Ed Kamm: They will find a way to put those customers on a tariff that looks a lot like the standard variable, but is no longer the standard variable, in a way that is not hugely beneficial for those customers. We will find ways, because the big companies are great at gaming things. I wanted to pick up on Mr Kyle’s point from before. Your supplier has a tariff that has a price promise, but it is only available for those customers.
Q67 Albert Owen: We are going to come to the tariffs in a minute. I am asking some specific questions on the investigation. Simon, you said that the profit margins are curtailed somewhat, and you need to make money. We all understand that private companies need to make money, but are there areas of this investigation that were not looked at? I am thinking in particular of network costs, which is where you have to pay the price regardless. Do you think that was a missed opportunity? Do you think the CMA should have looked at that? We heard the reason why it did not. Do you think we should have another inquiry? Perhaps others could comment on that too.
Simon Stacey: There is some benefit in a better understanding of the cost components of the average bill, yes. We are seeing at the moment network costs, capacity mechanism and smart costs, all of which are significant increases in costs, in the coming years. It is important that there is a good understanding among commentators about what is driving that, and an assurance that it is appropriate.
Q68 Albert Owen: To answer the question, you think it should have been looked at.
Simon Stacey: The answer would be yes.
Dan Hopcroft: We would agree with that.
Q69 Albert Owen: Do you think there was anything else that was not looked into, but should have been?
Dan Hopcroft: I have mentioned the market, in terms of the number of disengaged consumers and what would represent a good market. That is the only point.
Albert Owen: Ed, you have sort of answered.
Ed Kamm: One thing I would add is on prepay. While we are supportive of the prepay price cap, the most damning piece of evidence in the CMA was that less than 10% of prepay customers are in a debt situation. Nine out of 10 customers are on a prepay meter, paying the full price of prepay, when in fact most of them could get a credit meter and therefore have access to the lower prices available on the credit meter market. Nothing is being done about that point.
Greg Jackson: To the question about profit, which you opened on, the reality is, in a competitive market, companies are forced to be more efficient, whatever the conditions of the market may be. One of the reasons we entered this market is that energy gross profit margins are typically between 11% and 15%. I know we talk about net profit of 3%, 4% or negative, but if we look at energy, we have two products, gas and electricity, and we have a direct debit, wires to the house and pipes to the house. It is pretty straightforward. There is some complexity in buying and some complexity in finance, but Amazon, which has 330 million products, works off a roughly 2% cost of administration, compared to maybe 9% in this sector.
The reality is that bringing more transparency to the market, and allowing us to properly compete, will force that inefficiency out. Then people have to become profitable, rather than complaining that they are not. In terms of network costs, from a competition point of view we all face the same ones. I would observe, though, for example, that one of the network operators sends us so many invoices every fortnight—on paper, although it can email us and we can print them out—that we could cover that picture there just with paper invoices. There is definitely room for improving efficiency in the networks.
Q70 Albert Owen: Ed, you mentioned prepaid meters, and I wanted to go on to that as well. You were not 100% satisfied with the findings, but there was some progress, and progress is that there will be a transitional cap and then smart metering. Do you think there is too much emphasis on the smart metering, and do you think the transitional cap will help in the short term? You have sort of answered the third part of my question, which is: is this a market you would be interested in investing in?
Ed Kamm: Historically, we have not been interested in investing in the prepaid market, because we could not operate the type of business model that we wanted. That is because of some of the infrastructural items at an industry level. We could not operate the model that we have operated in credit meters, where we are launching fixed tariffs based on what the latest wholesale prices are, and doing that frequently. It just does not work with the way the current prepayment, pre‑smart, works.
Smart is important, to your point. There are some particular challenges around flats and apartments, high‑rises, etc, and they will take some time. It is right to do that because then, when a customer has paid off their debt and they can take a credit meter, we can switch the meter directly over to that. Therefore, they have not paid off the debt only to still have the burden of a much higher price, as they do in the market today.
Albert Owen: The same series of questions to you, Simon.
Simon Stacey: We have well documented concerns about the nature of the cap, and the calculations behind that, but we have to get on with implementing it, and we are on track to do that within our organisation. We are concerned, though, and we have to be clear in our discussions around what it is seeking to do. We are talking about engagement. Inevitably, if you put a cap in place, that is going to drive less engagement, because people will naturally take the cap price and not engage. That, in some respects, is a shame. One of the benefits of the CMA was—
Q71 Albert Owen: Respectfully, we are talking about a section of society that is vulnerable. Many of them have very tight budgets, and they do not engage. They may not have the digital, internet infrastructure—
Simon Stacey: That is not the case. A lot of—
Albert Owen: It is the case for many of my constituents who come to see me, with respect.
Simon Stacey: That may be the case for your constituents, but ours are reasonably well engaged.
Albert Owen: They are people there, and across the country, who are on prepayments. This is the type of person we are predominantly talking about.
Simon Stacey: I understand, but equally, a lot of them are reasonably engaged, and we fear that the cap will reduce their engagement. As was touched on in the earlier session, we are also concerned about smart and whether it will slow down our smart installs.
Q72 Albert Owen: Many of these do not want to be on prepayment meters. It is not a choice for them. They find themselves in this position, so to say they are engaged means they do not enter the system properly. There are many reasons why they cannot engage.
Simon Stacey: Okay, but equally, we have just launched a fixed prepayment tariff with a reasonably high degree of success. That would demonstrate that they are engaged and they are aware of the options available to them.
Dan Hopcroft: I wholeheartedly agree with the prepay cap. There is some question around the edges in terms of the calculation of it, but the actual essence of the remedy the right thing to do. The prepayment infrastructure was never designed for a competitive market. It cannot cope with the level of suppliers or tariffs that would need to go through it, in order to have any kind of meaningful competitive market there. It is the right thing to do. It is the right remedy while smart comes in. You have obviously talked about it earlier, but smart metering will transform, particularly for prepayment customers, the propositions that are available to them. It will be a real game changer.
Q73 Albert Owen: There will be increased engagement, you think, as a consequence of smart metering.
Dan Hopcroft: Yes, I do.
Greg Jackson: On the prepaid question, we are launching our prepaid operation at the moment. There are a lot of problems with smart meters, let us be clear, and a lot of them need to be serviced at some point. However, in a smart world, looking after a prepaid customer costs very little more than looking after a normal customer. Therefore, we think the pricing for a prepaid customer should be pretty close to that for anyone else. In the old world, as they have described it, prepaid was expensive, but there is no need for that anymore.
Q74 Amanda Milling: Greg, I want to go back so something you said. There were a couple of things you said earlier on. One was on midata, and the role that would play. You sounded quite sceptical. Could you elaborate a bit further? What value do you think this will add? Will it achieve what we are looking for in terms of engagement, and is there a danger that there will be a deluge of direct mail and emails and texts?
Greg Jackson: The challenge with the database at the moment is that it is set up only for direct mail. You are talking to 10 million households, which in many cases might not have ever switched energy supplier. They know they can get a better deal, but, for whatever reason, they just do not trust anyone. The idea that even a brilliantly written piece of direct mail landing on their doorstep will change that trust is probably unlikely to be effective.
We have been engaging with Ofgem in early stage trials. We have had the best direct mail writers in the world working on it, and I can tell you it is unbelievably difficult to engage those people in this way. It is right to carry out some trials there, but the reality is that, while the CMA’s analysis was good, that was just one idea. We need more ideas on the table, and rapidly, in order to help those two‑thirds of customers, who, by the way, are typically the people who are least well off in society according to the CMA’s own data, get off those exploitative tariffs.
It is also unlikely, unfortunately, that the existing suppliers will do that, because of course their revenue depends on those people paying those tariffs. I would welcome the opportunity to bring more ideas to the table rapidly, to tackle that problem among that section of society.
Q75 Amanda Milling: Are you suggesting that these people can never be engaged?
Greg Jackson: I am suggesting that the means of engagement currently on the table are unlikely to be massively effective. If you think about it, for example, Martin Lewis was the guy everyone wanted to hear from during the Brexit referendum. He was the most trusted person in Britain. He is the guy who is on TV every week, saying, “You have to switch.” The people who watch that programme hear that and they still do not switch. For 20 years, the Government and the Prime Minister have made speeches saying that people are being ripped off here, and yet they are still not switching.
The reality is that there are a whole bunch of reasons why they do not trust these offers. “All the companies are the same. I know there is a catch in there. At least I know where I stand right now; if I take this, it is a risk.” Even if they do switch, there is a 20% chance on any switch that it will end up going wrong in some way. That means that for someone who switches maybe twice, or for two people who have switched, there is a 40% chance that one of those switches has gone wrong. Very quickly, this becomes a highly—what is the word—dissatisfying market to engage in. We would really welcome the opportunity to bring some more ideas to the table to deal with those two‑thirds of the population.
Q76 Amanda Milling: I do not know who would like to answer this, but one thing that strikes me is that we talk about price all the time, but dissatisfaction will be a function of a whole variety of issues. There is service in this. You are right about switching experiences: one of the reasons that people have switched in the past and they do not switch again is because the experience was awful. That was five or 10 years ago. I suppose I am just wondering what you as the sector, as providers, can do to address this price issue, but also the service point as well.
Greg Jackson: On the service point, one of the critical things is moving to same‑day switching. At the moment, it can take about three weeks, during which time many customers do not know whom they should give a meter reading to or who is their supplier on any given day. They get double‑charged; the two suppliers are arguing about what the end state of the account is. That is a terrible process. You have heard car insurance mentioned earlier. When I took out my car insurance, they said, “From 11.19 am this morning, you are covered by us.” It is perfectly possible—in fact, it should be easier in energy than in most other sectors—to bring in things like same‑day switching, or let people try it. “You can try it, and if you do not like it, you can cancel in 14 days.” At the moment, the 14 days are up before you have switched.
Ed Kamm: That is right. Smart has a real role to play in this. Obviously, we are a few years behind where we were supposed to be on smart, but if you think about the customer experience, as the customer satisfaction tables show, we all, to varying degrees, face an issue where an estimated read ends up in a high bill. Then you go to switch, and all of a sudden that materialises in a high bill, because we did not have a read. We have built our business model in the classic meter market to be getting as much information from our customers, and driving as much engagement, as possible, not only on tariffs but also on meter readings and billings.
There are suppliers at this table that bill some of their customers only once a year. Once a year, they have a chance to get that bill correct. Once a year, they have a chance to see that supplier’s best tariff. Guess what? That supplier’s best tariff at that time is probably not likely to be a very good tariff. They are giving a message of, “Everything is okay; you are on a very good tariff” at that time. There are some fundamental things that smart will help with. The issue is that that programme, in and of itself, is a very complicated programme in the way it has been chosen to roll out.
Q77 Amanda Milling: This is to Dan and Simon. I am conscious that you need to have your voice too, but if I look at the current account market, about three years ago, the current account switch guarantee was introduced. The sector all worked together to try to cut through some of these legacy systems, because often it is legacy systems that cause the barriers. As a sector, are you working in the same direction, so that you can reduce this period of time it takes to switch? That is known to be one of the reasons why people say, “Do you know what? It is too much bother. It seems like a lot of hassle; I do not understand; and it is going to take ages.”
Dan Hopcroft: Absolutely. We are signed up for quicker switching. In terms of engaging customers, there are four fundamental things that you have to have in place. You have to have a value proposition, which does not have to be all about price, but generally has an element of it there. You have to be able to say to the customer that they can get that very quickly, with a little effort from them. That is where midata and quicker switching come in, so they can get that value really quickly.
You need a high level of trust. We talked about it earlier, and we would recognise that there is more that needs to be done there. The customers need to know that something is not going to go wrong in the switching process or further down the line. Finally, because of the dynamics of this market, you need prompts, because if you do not have a prompt then you could be on a tariff in perpetuity, and that is not good. You need those four components, and they all need to work together to get good engagement in the market.
Q78 Amanda Milling: There are lots of similarities between this and credit cards. With credit cards, you have lots of attractive offers, 0% balance transfers, and then they drop into high rates. Then, again, you have a lot of people sitting on standard APRs, basically paying for those on the great rates. There is more being done in that industry, in terms of making sure there is communication on the bill, to ensure that consumers are aware of that. What is being done, and what are you proposing to do, to inform people to a greater extent—to inform your existing customers through your billing?
Simon Stacey: At the moment, we share our cheapest tariff on the bill. We have tried to find other ways of talking to customers, other than just the bill. We have done quite a lot of research, and we know that a lot of our customers will look at the headline of the bill and that is it. They do not really read it; that is the reality. The bill is very prescriptive, and we have been working with Government and some behavioural psychologists about what phrases and words we could better use. We will share with Ofgem that information about what a better bill, to properly engage customers so they properly read the information that is there, would look like.
In addition, we are doing quite a lot of trials post‑CMA. We have been calling our customers and talking to them about the tariff they are on and whether they would like to switch. These are standard customers, and of the 15,000 trial that we did, only 5% ended up saying, “I want to switch”, at the end of that. That was having shared all the respective data at the time. There are some lessons for us in that, and we would like to understand better why people have said, “I do not want the £100 that is available; I am quite happy with where I am.”
Q79 Chair: It is because people do not trust you, Simon.
Simon Stacey: But they are happy to stay with us, aren’t they?
Q80 Chair: If somebody phones me up and says, “Would you like to save £100?” I am instantly suspicious. I am thinking, “What is going on here?” and I will say, “Look, I have not got time to talk about this. Goodbye.” That is what happens.
Simon Stacey: That is fine. It is a trial. Again, in answer to the question, we were asked to share what we are doing to engage in contact with our customers. That is one of the things.
Ed Kamm: We think we know what good looks like, so we bill our customers monthly. One of the things that has not been picked up is frequency of communication. We know that a lot of the big players do very infrequent communication, because it is in their best interest. We bill monthly. It is not in our best interest to bill monthly; it is very hard to bill monthly. It is very hard to bill in energy, given the way that energy works. We take that extra penalty. A lot of the new start‑ups bill monthly. We ask for meter reads monthly.
When your tariff is coming up to expiry, we communicate to you at least 10 times across three channels to get you onto your next fixed tariff. It works. After a year, less than 10% of our customers have transferred onto the SVT a year after their fixed tariff has expired. They may have gone for a period of a month or months, but they do not stay there forever. We think we know what works, and frequency is a very big part. Channels are a big part. We do it via email, the app, SMS and phone calls. There is no one-size solution here, but the big players are economically rational beings. There is no economic rationality to push their customers to pay less.
Q81 Chris White: As I am sure you know, we are doing a couple of inquiries at the moment into corporate governance and the future world of work. There is obviously an opportunity to look at consumer protection. My question was going to be on the issue of trust, and it is interesting that the Chair brought that question in, because your rapid response, Simon, was, “Consumers are happy to stay with us”. First of all, would you agree that that might demonstrate a degree of complacency? Why are we having to hear from Which? and Citizens Advice? I am talking to EDF and npower. Why are they bringing you to the table? When are we going to hear an initiative from you, where you have done something that will surprise and impress people, rather than where you have been pushed and dragged to change your company policy?
Simon Stacey: Just for clarity, my response to that was in relation to the trial we had done. That trial was a 15,000‑customer trial, and the feedback that we had was, “No, we are happy to stay with you.” That is the feedback. We can make a judgment about that, but that was the feedback from that trial of 15,000 customers. What else are we doing? We have launched a number of new tariffs, which are helpful for our customers.
For our standard customers, one of the things we are looking at, which Mr Owen made reference to earlier, is around loyalty. One of the things we would like to do, which we were unable to do before RMR, was see what rewards we could give our customers. For example, could we provide standard customers with a free boiler service? We have done a trial of that, to see whether that resonated with customers. That was not something we were obliged to do; we want to try to reward customers in a way that they would not expect, and, to use your words, to surprise them.
That was the feedback that we had from talking to our standard customers. The overwhelming feeling was not that they felt ripped off; they were happy to stay with us. They like npower as a brand. They are, in some respects, concerned about some of the smaller suppliers. There are some very good small suppliers in the market, but equally there have been some failures. Therefore, they said, “We just want you to reward our loyalty”, so we have started to look at some ideas around what we could provide our customers with, which would reward them for their loyalty.
As I described earlier, we do not have that many who have been with us for more than three years, but we have enough that we would like to do some more for them, so we are looking at that.
Dan Hopcroft: We are doing very similar things. We are also looking at a loyalty proposition. In response to the question earlier about Which?, we have responded to the Which? challenge. We have sent that in. We have an email going out today to over 500,000 of our standard variable customers, which is doing four things. It is asking whether they are happy on the tariff they are on, and if not there is a choice to switch. We have not talked about this so far, but fundamental in the market is asking them whether they are on the right payment method for them. Any customer on cash or cheque can save themselves £70 literally at the press of a button.
We are asking them whether they want any insulation, so where there are any eco‑type measures that they would benefit from. That is where we would like to push eco much more towards our own customers. Lastly, it is smart meter sign‑up, trying to get customers signed up for smart meters, and we talked about the benefits of smart meters earlier.
Q82 Chris White: Thank you. Greg, why on earth did you enter this market?
Greg Jackson: We saw, frankly, customers getting a bum deal from companies that did not understand them very well. From our point of view, we saw a market that was hugely bureaucratic. Companies are investing an enormous amount in big, clunky systems, just as we are going into the biggest period of change imaginable, with smart metering, distributed generation and so on. From our point of view, that created the opportunity for a company that can create very nimble and agile technology—an e‑commerce approach, if you like—to operate with much lower costs of operation, and share the benefits of that with customers. That is the core of our reasoning.
Q83 Chris White: Where do you plan to be in a year’s time, or five years’ time?
Greg Jackson: Our target was to have 600,000 customers by 2021. We are currently running at more than twice our expected growth rate, so hopefully we will beat that. The reality here is that often Ofgem and others will talk about smaller suppliers. We do not want to be a small supplier. Ed has proven that, in a relatively small number of years, a company can go from start‑up to a significant size, looking after a lot of customers because it understands how to look out for them. Our view is that the customer of tomorrow is going to need more nimble, agile suppliers, with lower costs of operation and without all that bureaucracy.
That is the opportunity for us. What is my real vision? I want to be the Amazon of energy.
Q84 Chris White: I will leave that hanging there for a moment. Ed, you have been praised by your competition: you have seen exponential growth over the last several years. Why is that? What have you done that the others have not done?
Ed Kamm: It was not rocket science on our part. We put out a good price. We went through some early service challenges, because we grew way too fast in our early days. We worked through that, and we are now at the top of the league table in terms of customer satisfaction ratings. We have Good Housekeeping “reader recommends” awards, etc. Now, we are at the point where, if I am self‑critical of our business, we have mostly driven the engaged market to get a good deal. We have led the pricing, and the CMA survey said this: the small suppliers—at the time we were small, although now we would argue we are a medium‑sized supplier—and particularly First Utility led the pricing that happened in the market.
We played a useful role in the development of the independents. Now, the challenge is, unfortunately, something that the regulation changes by the CMA have enabled. They reinvigorated the big six to compete for those engaged customers, because they allowed them to show a tariff that they did not have to show to their existing customers. On average, across the five suppliers who did that, that tariff was more than £180 cheaper than the best tariff offered to their loyal customers. All of a sudden, the competitive market has shifted. If I am frustrated with our business, and with all small suppliers for that matter, it is because we have done a really good job helping the engaged segment of the market, but we have not done a great job getting to the hard‑to‑reach, disengaged customers.
Somebody said it before: invariably they are two or three times more likely to be below £18,000 in income level, with no qualifications, in social housing, not owning their own property. It is the vulnerable customers who are broadly the ones on the standard variable. I agree with Simon’s point that there is a small percentage of customers for whom, for whatever reason, the standard variable tariff is the right tariff, but that is small. It is obfuscating the issue; it is very small, as the CMA found.
My frustration is that it will become harder for us, because we keep fishing from the same pond. We have to find a way as a brand, and Greg has to find this way as well, to reach the 70% of the big six customers. I am really disappointed, after being in this industry for four and a half years, that that number is still at 70%. We often get accolades that the independent sector has grown from less than 1% to 15%, but now we are cycling through the same customers. We have to find a way to give the value to the people who need it the most.
Q85 Chris White: What next?
Ed Kamm: We have championed a bunch of things in the industry. We were the ones who called for getting to faster switching. We moved the industry from 35 days to 21. Thankfully, the big six helped us with that process, because that is not something we could have done ourselves. We are a champion, not necessarily of next day, because I do not think there are a lot of consumers asking for next day. However, when you say 21 days, that sounds like it is more complicated than it is. I hope, working with Ofgem and BEIS, that we are a bit more realistic. If 72 hours is a lower-cost solution for customers, because let’s be honest, they are paying that cost, then let’s do 72 hours.
I do not think there is a big demand for 24 hours versus 72, but 21 days just sounds painful. We champion constantly. We are calling for more changes like market cheapest tariffs. You might have read today that Ofgem is starting a trial on market cheapest tariffs. We were the first ones to call for that, and say, “Let’s be transparent, and by the way, let’s talk about service.” We are not shy about talking about service. It should not just be a price buy. Give me another industry where the cheapest players are also the high‑quality players. If you go into the grocery market, you know Waitrose is the quality player, and Asda is the low‑cost. You do not have the situation where 70% of Asda’s customers are paying 30% over the odds, and that is what we have in this industry.
Q86 Amanda Solloway: Greg mentioned Amazon twice in terms of where you possibly see yourself. I wonder if it is because the emphasis there is on the company, as opposed to the customer, to change. That was the first part. Secondly, this is really ignorant of me, but I always thought that if I changed my supplier, going back about 10 years, somebody would turn up outside my house and start digging up my pipes and having to change it all over.
I wonder if there is something around that, and if research has been done in order to satisfy people who do not have social media that it is just as easy as switching a button, as I think you said, Simon.
Simon Stacey: Ofgem has done some research on that. I think the number is that something like 87% of customers truly understand about the opportunity to switch and what that means, that it is not digging up the lawn, as you describe. They understand that. They then have to make a choice, for whatever reason, as to whether to switch or not. There is some research that Ofgem has done.
Q87 Peter Kyle: I have a very quick question. Mr Kamm, you have rightly, repeatedly, criticised the big six for their poaching tendencies, and offering exclusive deals to customers of other big six companies, as opposed to offering deals to their existing customers. However, you do exactly the same.
Ed Kamm: We do not do the same. We did the same once, and we did it to send a message to the big six. We saw our sales dry up when the big six came out with new customer exclusives that were priced at a massive loss.
Q88 Peter Kyle: When I heard you had repeatedly criticised the others for it, I quickly Googled it, because it did jog my memory. Your quote to the Telegraph was, “We do disapprove of this tactic. It’s our way of calling out this tactic. We can confidently say our existing customers get a great price. We are giving a further discount [to new customers] to call out the practice.”
Ed Kamm: We did that once. We took the big six price that they were not offering to their customers, and offered that price to their customers. That is what challenger brands do. We took a risk with that. It is not something we want to do.
Q89 Peter Kyle: Why do you repeatedly criticise them for doing it today, and do it yourself? We want challenger brands. We want the market to be diverse, but we do want people to stay true to what they say.
Ed Kamm: The reason we did that is because, if that practice continued, we would not have an independent sector. Only large suppliers, which have 70% of their customers overpaying, can afford to sustain that strategy. If they had sustained that strategy, then Greg and I would not be at this table. That is what we are trying to call out. You could argue the tactics of that, but we wanted to be aggressive about saying, “We are not going to stand for this, and we are not going to sit back and take it”. That was our way to deal with it. That tariff was out there for a very short time, and it got the press talking, it got Ofgem talking and it got BEIS talking.
Q90 Peter Kyle: It certainly got the press talking, but it made you look a bit ridiculous, didn’t it?
Ed Kamm: That is the risk we took, because that practice was so bad and could only be done by the incumbent suppliers.
Q91 Peter Kyle: What percentage of your customers now are on prepaid or classed as vulnerable?
Ed Kamm: We have never targeted the prepaid market. I think that less than 0.5% of our customer base is on prepay. Prepaid is more likely to be vulnerable, yes, but as I said before, because of how that market operates, we could not operate our business model in that market. We will launch in that market when we get a smart solution and a pay‑as‑you‑go solution.
Q92 Peter Kyle: The big six have a large client base percentage that is vulnerable and is on prepaid. You are not attracting or going for that market. You are using, and you have used, their tactics to poach their quality customers, whilst on purpose leaving behind the high‑maintenance, difficult customers.
Ed Kamm: I think somebody said it before, but prepay is not as high‑cost as people make it out to be. In fact, they have a guaranteed payment relationship once they are on prepay. We have chosen not to go after prepay.
Q93 Peter Kyle: It sounds as though you are using the market to your advantage at the moment.
Ed Kamm: I am not using the market to my advantage. That is wrong. We chose not to focus on that market because we could not operate our business model in that market. That market is dependent on high‑tariff price points, and historically has not been a great switching market. We optimised our business, in the first instance, going after the mass market. Prepay is less than 30% of the market; we went after the 70%. In the coming future with prepay, we can start to operate our business model in that market.
Q94 Peter Kyle: The market failure is occurring in the part of the market where people do not switch, and the consumer rights and marketing are not reaching down to them. Your challenger status is completely blown out of the water, because you are not going for that part of the market.
Ed Kamm: We are going for that.
Q95 Peter Kyle: You are not going for the part of the market where the market is failing. You are going for the part of the market where the market is succeeding.
Ed Kamm: I would argue that, in the SVT market and the credit meter market, it is not succeeding. The fact that 70% of customers are on the highest-priced product is not succeeding in the credit market. Because of how the prepay market operated, we could not implement the business model that we launched in credit. We could not launch the tariffs that we launched on a continual basis. That was not down to us; that is how the prepayment infrastructure operates. That is why the CMA said what it said and it put the temporary price cap in that market.
Q96 Chair: Can I ask Greg and Ed quite an impertinent question—a rude question? Do you make any money?
Greg Jackson: Yes, we will be breaking even at 100,000 customers. We are on 60,000 now. By the way, we are backed by a very large investment fund. There was a reference earlier to failing suppliers. Out of 40‑odd suppliers, one has failed. That is probably fair in a dynamic market. Very briefly—
Chair: Quickly.
Greg Jackson: I would say the one thing we have not touched on today is the tremendous expense to consumers of price comparison site commissions, which are completely hidden. Typically, they are as much as £70, one of the largest components of your bill. The frequent switching and the price comparison sites are some of the biggest barriers to us and others making money.
Q97 Chair: Ed, do you make any money?
Ed Kamm: Yes, our last financial statements that were produced, which are in Companies House, show that we have made £1.6 million profit in 2015. We have not reported our 2016 results yet.
Q98 Chair: Big is not necessarily beautiful here, is it? How can you keep control of your costs in a way that larger incumbents seemingly cannot?
Ed Kamm: We have an incentive to control our costs in a way that, I would argue, the big six do not. Because the big six have 70% overpaying, there is not that market pressure on their cost that you would have in any other market. We have the lowest cost among the big six, and likely the lowest among the independent suppliers as well, at our scale. Scale is a little bit of an advantage, but there is a point where there is no incremental advantage.
Greg Jackson: I made the comparison to Amazon a couple of times. Amazon, by the way, is hugely close to its consumer. It is also astonishingly efficient. Of course, it has some employment practices that we are not referencing here. What we are talking about is systems, and the reality is that the big companies have enormous legacy systems, dating back many decades, to the point that some of them are inherited from when they were nationalised local gas boards.
Instead, with a fully cloud‑based platform, virtually built in‑house, we are able to be dramatically more efficient, not only for the people who buy online but for the people who phone us. It means that we have all the information immediately at our fingertips to sort out a problem, rather than someone saying, “I have to go to another screen”; “I have five more minutes just to enter a meter reading”. That nimbleness and agility, coming from being fresh, give us a tremendous competitive advantage, even at a smaller scale.
Q99 Chair: My final question is this, largely to Dan and Simon. There is that reluctance to focus on operational costs. There is the sense that, in terms of the wholesale markets, when prices rise in the wholesale markets, prices to customers rise and yet, when they fall, there does not seem to be a commensurate fall in people’s energy bills. You want to have your cake and eat it, don’t you, in that regard? How are you going to address that?
Dan Hopcroft: There are two questions there. The first one is about costs. I can say that we are taking our costs really seriously. Again, you can go back to the segmental accounts to see where they sit against competitors. We went through a restructuring exercise in the second half of last year. We have exited 900 people from our business, to try to get our costs down. We have pulled out of central London. We are doing a lot of things to bear down on our costs. That is a good thing about competitive markets. It is one of the drivers for us to do that.
The second part of your question was around the rise and fall of prices. There have been some academic studies around what was called “rockets and feathers”. I may be wrong in this, but I thought they had been largely—
Q100 Chair: I am just very conscious that in terms of the hedging strategies, as well, you can mitigate the risk of this to some extent, but the customer does not seem to benefit.
Dan Hopcroft: I would say the customer does benefit from that. Hedging is a very important aspect of our business. Clearly, it is a big risk. The CMA has looked at that. It is linked to standard variable and how standard variable is priced, to try to ease out the peaks and falls from the market.
Simon Stacey: Ofgem introduced its cost index, which was released in the past few weeks. While that omitted some costs, like capacity mechanism and smart, nevertheless it demonstrated with real transparency what the costs are in the marketplace. That is helpful in conversation. As Dan has described, and I may have mentioned it in my remarks, one of the benefits of small suppliers joining the market is that it has driven efficiency. In our organisation, we are making significant improvements to how we do things, in order to drive customer satisfaction and lower costs.
The other thing I would say, coming back down to profitability, is that I would urge caution. One of the benefits of small suppliers that we have seen in the marketplace is innovation and competition. The entry criteria should be looked at; the GB Energy recent failure has created a very bad customer experience, where they have held onto customers’ money. That has been re–socialised among suppliers. I would urge you to take a look at that, because I fear that there will be other failures as well, which will damage the industry.
Q101 Chair: Final, final, final question: how much did each of you spend on contributing to the CMA investigation?
Greg Jackson: We were not in existence.
Dan Hopcroft: I cannot remember that number off the top of my head, but we can come back.
Chair: Could you provide that to us? Thank you.
Simon Stacey: Same answer: a significant amount of money and time.
Ed Kamm: Yes, I do not think we ever totalled it out. It was mostly hours spent by teams.
Chair: It would be helpful to get an idea. Gentlemen, thank you very much for your time.