Committee of Public Accounts


Press Notice No. 2 of Session 2003-04, dated 16 December 2003


SECOND REPORT: THE NEW ELECTRICITY TRADING ARRANGEMENTS IN ENGLAND AND WALES (HC 63)

Mr Edward Leigh MP, Chairman of the Committee of Public Accounts, today said that domestic electricity consumers have got a very poor deal from the New Electricity Trading Arrangements, and urged Ofgem to raise customer awareness, and review whether suppliers are acting anti-competitively.

Mr Leigh was speaking as the Committee published its 2nd Report of this Session, which examined the impact of the New Electricity Trading Arrangements (NETA) on consumers of the electricity market, the competitiveness of the market and the security of supply. The Department of Trade and Industry and Ofgem share responsibility for the implementation of NETA.

The Committee found that electricity prices have fallen, but by much less for domestic customers than for industrial and commercial customers. Wholesale prices have fallen by around 40% since 1998 and reductions for industrial and commercial customers have been consistent with this fall. But domestic reductions have been much smaller and only 1% to 3% since NETA was implemented in 2001.

Customer loyalty is penalised. Since the market was opened to competition in 1998, only some 40% of domestic consumers have switched supplier, with a lower proportion for the elderly and those who live in rural areas. Customers who have stayed loyal have benefited much less from competition and pay much more than those who have switched.

Some customers who might have liked to switch supplier have not done so because they have not had the necessary information. Others may always be resistant to the idea of "shopping around" for a service where their interests have traditionally been protected in other ways-for instance switching rates are lower amongst the elderly. Ofgem, working with energywatch, should increase consumer awareness of the information already available to assist the switching process including price and quality comparison services, for instance by requiring these to be signposted more visibly on customer bills.

The domestic retail market has been less competitive than that for industrial and commercial consumers, who have seen much greater price reductions since NETA was implemented. Ofgem should carry out a review to determine whether the suppliers are acting in an anti-competitive manner to the detriment of domestic consumers and Ofgem should take action such as fines or price caps as appropriate.

Ofgem has very limited information on suppliers' profit margins, an important indicator of market conditions. To enable Ofgem to form a clearer judgement of the competitiveness of the market Ofgem should start to collect information from the suppliers on their profit margins from domestic supply.

Over recent years, the level of vertical integration has increased in the electricity market. In Ofgem's view vertical integration in the industry should not be a problem so long as both the wholesale and retail markets are competitive. Nevertheless, Ofgem should take seriously the risk that vertically integrated companies may exploit their position and Ofgem should adapt its competition analysis of the wholesale market and retail markets to reflect the new reality of the market.

Whether the system can meet future increases in electricity demand in severe winter weather is uncertain. At present, the electricity system has more capacity to generate electricity than required. Ofgem appears confident that market mechanisms will ensure that companies have sufficient generating plants to produce enough electricity to meet all reasonable demands. But the margin of spare capacity over expected demand has been falling continuously since the introduction of NETA when it was nearly 30%, and currently stands at around 17%. Ofgem takes confidence from the potential for "mothballed" power stations (those taken out of service by their owners) to meet rising electricity demand. Ofgem has, however no formal powers to ensure that, if a power station is mothballed or a generating company goes into receivership, these assets are kept in a serviceable condition for future needs.

The system operator (National Grid Company) may not know the condition of generating capacity that is taken out of service. We recommend that Ofgem, with the Department, introduce obligations on administrators of generating companies, and owners of mothballed plant, to ensure that the condition of generating capacity is clearly communicated to enable the National Grid Company to understand better the availability of power stations to meet demand.

Mr Leigh said today:

"So far, domestic electricity consumers have got a very poor deal from the New Electricity Trading Arrangements. Wholesale prices have fallen by around 40% since 1998 but reductions in domestic prices have been much smaller at 1%-3% since NETA was implemented. Customer loyalty is penalised and, worst of all, potentially vulnerable groups including the elderly are losing out most. Ofgem cannot be sure that suppliers are not lining their own pockets at consumers' expense. I urge Ofgem to raise customer awareness, and review whether suppliers are acting anti-competitively, and respond with fines and price caps where necessary."


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