Written evidence submitted by Ofgem (EPW0019)

Ofgem is the Office of Gas and Electricity Markets. We are a non-ministerial government department and an independent National Regulatory Authority, recognised by EU Directives. We have competition law powers to enforce the prohibitions on anti-competitive agreements and on abuse of a dominant position in the energy market, and to make market investigation references, held concurrently with the Competition and Markets Authority. Our aim is to make a positive difference for energy consumers.

Our principal objective when carrying out our functions is to protect the interests of existing and future electricity and gas consumers. This aim underpins all aspects of our regulatory activity and the way that we work with stakeholders. We regulate only where necessary to protect consumers’ interests and we carefully consider whether any regulatory requirement we are proposing to introduce is proportionate and necessary to protect consumers.

Ofgem welcomes the ECC Committee’s enquiry into price comparison websites in the energy market and the opportunity to submit evidence. Consumer engagement and switching are crucial for competition to work effectively.

Third party intermediaries (TPIs) such as price comparison websites (PCWs) can play an important role in helping consumers engage in the energy market. A TPI is an intermediary between a domestic consumer and an energy supplier, providing advice and assistance to a consumer in relation to their energy supply. They help consumers access the information they need to make informed choices and get a better deal on their energy.

Ofgem has no direct role in regulating TPIs through licence. However, recognising the important role played by PCWs, we took over the Confidence Code from Consumer Focus in 2013. The Confidence Code is a voluntary code of practice that governs domestic energy price comparison sites.  The Code insists that its members follow key principles, providing reassurance to users about the independence, accuracy and transparency of the website.

In general the Code works well to guarantee high standards of service among accredited sites, and provides stronger consumer protections than arrangements in other sectors and jurisdictions. Nonetheless, we have reviewed the Code and have this week announced a number of improvements to strengthen protections for consumers and ensure they are treated fairly by accredited sites, making sure that sites are more transparent and do not use potentially confusing language.

Switching in the energy market

Our research highlights the importance of consumers feeling confident in comparing tariffs and the overall switching process if they are to engage in the market. Increased switching and consumer engagement places more competitive pressure on suppliers, which can help to drive lower bills, innovation and better service.

Switching rates are relatively low at present. In 2013, 12% of consumers switched energy supplier.[1] Of those that stayed with the same supplier, 14% switched either their tariff or payment method.[2]

Through the Retail Market Review, Ofgem has taken action to encourage consumer engagement by making the market simpler, clearer and fairer. Consumers can make significant savings by switching – currently many consumers can save around £200 by switching.[3] To supplement these reforms, last year we also launched our Be an Energy Shopper campaign to increase consumers’ awareness and ability to take advantage of the changes made.

We want to make sure that consumers have the confidence and ability to compare and switch to take advantage of these savings.

We have also worked closely with stakeholders to improve the reliability and speed of the switching process. Our ultimate aim is to reduce the length of time it takes for a switch to be completed to one day. Faster and more reliable switching will improve consumer confidence to shop around for a better energy deal.

Price comparison websites

Price comparison websites – which are the predominant form of intermediary in the domestic sector - are becoming an increasingly important channel for consumers to engage with the energy market.

In 2013 approximately 30% of all those who switched did so using a comparison site. And of those that compared tariffs during the year a higher percentage (40%) used a comparison site to find information about available tariffs.[4] This is compared to just over 20% in 2011.

Comparison sites can offer a convenient way for consumers to engage with their energy supply and find a better deal. They compile tariff information from multiple suppliers, which can save consumers a significant amount of time searching around for the right deal for them. There are a large number of sites currently operating in the market. Energy comparison sites include large, well-known names that operate in multiple industries, media outlets, and local council comparison services.

Sites can earn revenue in a number of different ways. In the main, sites receive revenue in the form of commission from suppliers for switches completed through their site. However, sites can also obtain funding through, for instance, advertising products or services on their site, or by selling their tariff database or calculator to other comparison services. A number of comparison sites operate across a range of sectors, where they may have alternative funding arrangements in place.

Research has shown that consumers have a high level of trust in comparison sites in general, with 94% reporting that they found them to be ‘reliable’ across industries.[5] However, more in-depth qualitative research conducted by Ofgem has shown that consumers can have doubts about the impartiality of the information provided to them on comparison sites, particularly when commission is involved.[6]

Ofgem’s role and the Confidence Code

Ofgem has no direct role in regulating TPIs through licence. However, recognising the growing importance of TPIs in facilitating and encouraging consumer engagement, we took over the Code from Consumer Focus in 2013. The Code aims to provide consumers with confidence that they are receiving an independent, transparent, accurate and reliable service when using an accredited site. There are currently 11 sites accredited under the Code. [7] Our most recent data suggests that Confidence Code-accredited sites account for around half of all switches made through comparison sites.

The Code provides stronger consumer protections than those that exist in other sectors, such as telecoms, where there is an Ofcom-administered accreditation scheme. We consider the strong Confidence Code requirements to be proportionate due to the nature of energy as an essential service and in light of the current trust problems in the market. Some of the key protections and benefits the Code currently provides include:

• Making a comparison of all tariffs available so consumers can make a fully-informed choice of the right deal for them;
• Preventing accredited sites from advertising energy-related products or services, so that consumers are not misled and inadvertently switch to a poor deal;
• Providing confidence to consumers that accredited sites are trustworthy, as the tariff prices they show are audited and scrutinised by Ofgem – should sites not meet the high standards we expect we can remove their accreditation;
• Ensuring sites are independent of supplier ownership, and act impartially of suppliers so that the order of results a consumer sees is not influenced by whether or not they receive commission from a supplier; and
• Providing consumers with transparent information about which suppliers the sites have commission arrangements with. Where a site shows only commission-backed deals as a default they should explain why to consumers.

In addition, our RMR rules mean that the price a consumer will pay for a tariff will be the same regardless of which route they switch through, so a consumer will not pay more or less if they switch through a comparison site. Any commission that a PCW may receive does not affect the price the consumer pays for their energy – it is part of the acquisition cost met by the supplier.

Previous research undertaken by Consumer Focus has shown that energy comparison sites perform better than their counterparts in other industries across a selection of criteria such as impartiality and transparency.[8] It also highlighted that, on the whole, sites accredited to codes of practice perform better than their non-accredited counterparts. Furthermore, the research suggests that codes of practice can drive higher standards across comparison sites in general within an industry, not just those that are part of the scheme.

Confidence Code review

Notwithstanding these positive research findings, when we took over the Code, we reviewed its contents to examine whether it afforded appropriate protections for consumers. We recognise that the Code needs to set tighter standards on price comparison sites to ensure consumers continue to have confidence that they are presenting a clear and full picture of options available in the market. If consumers distrust the information provided to them by comparison sites this could adversely affect the levels of engagement and switching in the market. This week we have announced the following enhancements we are making to the Code:

-         Banning a default partial view: Sites must show all tariffs available in the market unless consumers actively choose to select to see a smaller number of tariffs.

-         Ending confusing language: The wording surrounding any choice must make it clear to consumers that choice they are making. Sites must test their message with consumers and be able to prove that it is clear and simple. If a site cannot demonstrate this, it will not be able to give consumers a choice of view. The wording around any choices must be approved by Ofgem.

-         Ensuring transparency of commission arrangements: Sites must explain clearly that they earn commission on tariffs that consumers can switch to directly through the site. This means that where a site offers a consumer a choice to view only those tariffs that can be switched to through the site, they should make clear that this is because they have commission arrangements with only some suppliers and on some tariffs. Sites will have to clearly and prominently display a list of the suppliers with whom they have commercial agreements.

Sites will have to show all tariffs available in the market unless consumers actively choose to select to see a smaller number of tariffs. We do not want to stop sites from being able to offer consumers this choice as this may make sites more difficult for consumers to navigate, reduce the convenience they can provide, and may prove a barrier to new entrants. Sites will be able to offer consumers the choice of seeing only those tariffs that can be switched to through the site. In the context of overall savings available to consumers (around £200 for those who have never switched), the difference between a whole and partial market view has tended to be very small – in the region of pounds rather than tens of pounds.

We do not propose to require sites to show the amount of commission they receive from suppliers for switches completed through their site. Our RMR requirements mean that the level of commission a site receives will not impact the price that a consumer pays, so it shouldn’t be a factor in their decision-making. There is a risk that including this information may confuse consumers or lead them to make a poor decision, for example selecting a more expensive tariff because the site receives less commission for it. There is also a risk that making this information available could lead to tacit co-ordination among suppliers and/or sites.

We consider the changes we are making will provide consumers with confidence that they are receiving an independent, transparent, accurate and reliable service when using accredited sites. Our new Code requirements are designed to make sure that consumers are treated fairly by accredited sites. There can be a tension between providing protection for consumers through prescriptive requirements and enabling innovation. We believe the new rules strike the right balance and will provide effective protection for consumers while enabling innovation. The new Code requirements will come into force in the spring.

Through our review, we also sought views on a number of broader issues in relation to domestic third party intermediaries. In particular, we sought views on:

-         The merits of and how to expand the Code to allow sites that do not manage their own database and calculator to become accredited. There are some well-known comparison sites such as Which?Switch and Money Saving Expert who already adhere to the principles of the Code but rely on the calculator of an accredited comparison site.

-         How we could facilitate face-to-face sales by TPIs, which may be an effective way of helping typically hard-to-reach consumers to engage.

-         Broadening the Code to cover collective switching service providers in order to provide protections to consumers choosing to engage through this route.

-         The challenges faced by TPIs, such as how to improve supplier-TPI information flows.

We consider that both now and in future following the rollout of smart meters, good quality TPIs have a key role to play in enabling consumers to engage effectively. Smart meters will be a catalyst for innovation in the energy market, and we want the TPI sector to play a full role in making sure consumers benefit fully from the rollout. It is important that any industry rules and codes do not stifle innovation where this is in consumers’ interests. We are still considering responses to this part of the consultation and will set out our way forward in the spring.

We note that the Competition and Markets Authority (the CMA) is conducting a market investigation into the retail energy market. Part of this investigation, and the potential remedies the CMA proposes, may relate to the role of TPIs in the market, including comparison sites. We will consider the CMA’s findings and proposals as part of any future work we do in this space and will keep the requirements in the Code under review. Consideration is also underway through the UK Regulatory Network (UKRN) on the merits of a cross-sectoral approach to price comparison services in the medium to long term.

January 2015