Oral evidence: Pre-legislative scrutiny of the draft Domestic Gas and Electricity (Tariff Cap) Bill, HC 517
Oral evidence, 19 December 2017.
Witnesses
Michael Lewis, Sarwjit Sambhi, Ed Kamm and Stephen Forbes.
Chair
Thank you very much to the four of you for coming to give evidence to our Select Committee today on the pre-legislative scrutiny of the draft Domestic Gas and Electricity (Tariff Cap) Bill inquiry. We have about an hour for this session, so we will get started. We have a number of questions. We are going to start with Peter Kyle.
Peter Kyle
Thank you and good morning. I am going to jump straight in. If you three could just clarify one thing, I know that your three companies are suspicious and sometimes against the idea in principle of a price cap. Perhaps we can start with SSE and Stephen. Could you just tell us why you think that customers who are getting the same product delivered in the same way should pay sometimes £200 different a year?
Stephen Forbes
We all want the same thing. We want a healthy, competitive market that customers trust. We believe that competition is the best way of serving that, rather than price regulation through a cap, if we are going to deliver sustainable benefits for customers.
Peter Kyle
You would not argue that competition is working for vulnerable customers and for people on standard variable tariffs.
Stephen Forbes
The CMA, which is an expert in this field, did an investigation of over two and a half years. It concluded that the market is generally functioning well, and that a market-wide cap would be disproportionate and would likely undermine the competitive process. We think that will result in worse outcomes for customers, and we do not believe there is any new evidence to challenge that. In fact, competition has increased since then: we now have 60 suppliers competing in the market; 5 million customers who have switched energy supplier this year to date, which is a 14% increase; the independent suppliers have 18% market share now; and prices on average are below what they were four years ago in the sector.
Peter Kyle
Ofgem data shows that on average, since 2012, all standard variable tariffs were considerably more expensive than other tariffs. How can you say competition is working when patently it is not working on SVTs?
Stephen Forbes
I think competition is working. We are seeing increased switching; as I said, it is 14% up year on year. That is a good example of a competitive market. We have 60 competitors working very hard to win new customers and retain the customers that we have. Differentials play an important role in the sector. The basic tenet of competition is that customers need incentives to switch and move supplier.
Peter Kyle
Michael, if you accept the principle that differentials are important for the market, why is it vulnerable people who are playing a disproportionate role in that differential? Vulnerable customers are not switching. They are paying more; they are providing the differential. You are profiting on the back of vulnerable customers.
Michael Lewis
It is very important to clarify our position in relation to a price cap. We are opposed to a general price cap on the whole market. We are not opposed to the prepayment meter price cap, or indeed the vulnerable customer price cap for Warm Home Discount. Once you have taken the vulnerable customers out of the market and protected them, it is a question of engagement. The issue is not one of price. Stephen has already given the data there. The average electricity and gas price has fallen over the last five years. The prices in the UK are lower than the EU average for gas and electricity, so customers can switch and get a much better price, as you rightly said. The problem we have is one of engagement. We have done a lot of things to engage with our standard variable tariff customers. In fact, in the last year, our standard variable tariff customer base has fallen by 10% because of the work we have done on engagement. We announced in September that we are going to proactively take people off the SVT starting next year as the SMETS2 rollout starts, because we think the world will change with smart meters. Then it is about engaging with customers and getting them on to the right tariff for them. One really important point: customers want value for money, but they do not all want the same thing. Some customers want a no-frills online tariff; other customers want the ability to have payment by cheque and various other things.
Peter Kyle
Is the key here that a customer should not have to fight to get a decent price? To give you an example, let us go to the other extreme. The Secretary of State gave evidence here. He says he has not changed tariff, because he is too busy to change tariff. Should he be punished for that, whereby the person who is living next door to the Secretary of State should pay less, because they are not as busy as him, for the same product delivered in the same way to the same house in the same street?
Michael Lewis
I would only say I do not think it is as difficult and complex as you are saying.
Chair
It is the Secretary of State saying it, not Peter.
Michael Lewis
Fair enough. You will know that you can either switch suppliers or switch by staying with the same supplier. Then it is much easier: you just call them, and they will move you on to another tariff.
Peter Kyle
Let us stick to the principle. Do you think it is right that the person living next to the Secretary of State, who has the time, should pay sometimes £200 less for the same product delivered in the same way to the same property in the same street?
Michael Lewis
It is right that somebody who engages with the market and searches for the product that is right for them gets a better deal than the person who does not. That is what the market is all about: getting that engagement. That is why we announced that we are taking people off the SVT, so we can engage with them when they get a smart meter.
Peter Kyle
Am I right in assuming that you would believe the Government are wrong to believe that the onus should be on you as a company to run more efficiently and effectively, in order to give better tariffs and a more equal pricing structure?
Ed Kamm
The onus should be on suppliers. It should be on suppliers to run our businesses well. It should be on suppliers to hedge, to give our customers that certainty. It should be on suppliers to engage their customers, and that is what makes us different: we actively engage our customers. If you look at any of the standard variable tariff data that is out there, we have a fraction of our customers on the standard variable tariff compared to the big six, because we actively engage our customers to choose a deal that is right for them. We will communicate to our customers at least 13 times a year if we have a better tariff for them. That is the fundamental difference: we do not end up with customers stuck on the SVT for three-plus years, as you have with the big six.
Peter Kyle
Finally, to Centrica, Ofgem is basically saying that it is a two-tiered market here. It is not one fully functional market; there are two markets operating. That is the way that your company and the big six have structured your profit modelling. That is correct, is it not? You cannot argue against that.
Sarwjit Sambhi
I do not think it is correct. In terms of the question as to why differences in the market exist, I agree that, in the actual raw products of gas and electricity, it is homogeneous and the same for everybody. But there are different services provided on top. At the lower end of the market, there are differences. There are suppliers that do not have a contact centre, and therefore the only way of contacting that company is online. There are companies that do not offer prepayment meters, and that has a cost difference. There are companies that do not offer smart meters, and that has a cost difference. In addition, we have exemptions for smaller suppliers, which amount to about £40. If you add it all up, it accounts for a big part of the difference that we have seen in the market, but not all of it.
Peter Kyle
Surely the market is a split market: there are engaged customers and there are disengaged customers. You profit from the disengaged customers. You do not make much money from the engaged customers. It is as simple as that.
Sarwjit Sambhi
That is the issue that was identified by the CMA. The CMA identified that the issue is the engagement of customers who, by and large, have been on the standard variable tariff for a long time. Last time I gave evidence at this Committee, I said that was the issue the industry should be focused on. It is why we have said we are contacting all our standard variable tariff customers, to show them there are alternatives. We will do that again. Also, on 20 November, we said that we would end the standard variable tariff for new customers.
Peter Kyle
This is the nub of it, though, is it not, Stephen? You feel that people who are disengaged customers, whether they are vulnerable, lazy or rich, are ripe for the picking. It is as simple as that.
Stephen Forbes
I do not think that is true. On average, the industry makes 5% profit across the board, and that is the same as the VAT on a bill. That is reasonable.
Peter Kyle
You are saying across the board; my question was not about across the board. You are making a disproportionate amount of profit from disengaged customers compared to engaged customers. I am focusing on the disengaged customers.
Stephen Forbes
Some customers are on SVT because they want to be on SVT. Some customers choose to be on that product. Some customers choose to be on longer-term fixed-rate tariffs. Some customers choose to select the products they are on. Yes, there are customers who have been on SVT for a period of time.
Chair
Could I just follow up on a couple of the answers to Peter Kyle’s questions? Stephen, you said that the CMA says the market generally works well. I am not sure if that is the conclusion the CMA reached. The CMA said that there was customer detriment of £14 billion a year, and the customers who are experiencing the detriment are those on standard variable tariffs, including the 82% of your customers who are on standard variable tariffs. Have you looked at your customer satisfaction among customers on standard variable tariffs?
Stephen Forbes
Yes. We are very proud of the customer service record we have. In fact, in 11 out of the last 12 Citizens Advice customer service statistics, we have been top. We think that we give our customers a great service.
Chair
What about customers on standard variable tariffs?
Stephen Forbes
Those customers are included within those.
Chair
Do you know how they compare with customers who are on better tariffs?
Stephen Forbes
I do not have that information to hand.
Chair
Would that be information you are able get to us?
Stephen Forbes
I can certainly look at that.
Chair
Thank you. We can get back to you with the questions, so you do not need to note them down. You said that your average profit margin was 5%. What profits are you making from customers on standard variable tariffs compared to customers on other rates?
Stephen Forbes
As you pointed out, we have a large majority of our customers on SVT. On average, we are making 5.9% profit over the last five years. That is the margin we have made on our customers, and we think that is a fair return for the work we do.
Chair
Sorry, that was not the question. My question was: what profit margin are you making on customers on standard variable tariffs compared with other customers?
Stephen Forbes
The margin would be slightly more than that, but I do not have the actual information in front of me today. It is cost effective. We do not price products below cost. It is a competitive market, and we have to work really hard to win and retain customers.
Chair
Would you be able to get back to us with the profit margin on customers on standard variable tariffs?
Stephen Forbes
It is obviously a competitive market, and I certainly would not be able to share that sort of information with my competitors.
Chair
Could you share it on a confidential basis with the Committee?
Stephen Forbes
I would need to consider that.
Rachel Maclean
Have you all attempted to quantify or model the impact of a price cap on your business revenue and profits. If so, what is it?
Sarwjit Sambhi
We have not been able to run a number of scenarios that accurately model the impact of a cap. That is simply because there is not sufficient detail on how the cap will be constructed and the level it will be set at. When the CMA published the methodology for the prepay price cap, we could very quickly estimate the impact, and we have published that. At the end of 2016, we said that the impact in 2017 of the prepay price cap, which would apply for three-quarters of the year, was about £50 million. That is just covering, for us, about 1.4 million customers on prepay. I mention that because it is only when we have the level of detail comparable with what the CMA published for the prepay price cap that we can estimate the impact of a market-wide price cap.
Rachel Maclean
Is that the same for you, Mr Lewis?
Michael Lewis
Yes. Until we know exactly what the price cap looks like, we cannot model it, and there are various ways in which it could be done; there are relative and absolute caps, and different levels. We will obviously look again when Ofgem publishes its initial consultation paper, and look at what the impact might be.
Stephen Forbes
Similar to my colleagues here, it depends on the level that the cap is set at and the methodology used. We believe that the prepayment cap did not take into account costs associated with supplying energy to those customers. If the cap is designed in a way that takes that into account, that would have a very different impact on our business than otherwise.
Rachel Maclean
Mr Kamm, obviously your company is in favour of the price cap. Is that because, under your business model, you will be making more profits and increasing your market share?
Ed Kamm
No. We would still have an impact under the price cap, because we have a standard variable: 18% of our customer base is on the standard variable, although the period they are on it can be measured in months, not years and decades like my panel members here today. I cannot answer for them. The impact on them must be massive, hence the reasons they are putting forth and the actions they are putting together.
Rachel Maclean
Such as raising prices recently after the Prime Minister announced this potential legislation. Is that what you are referring to?
Ed Kamm
I am just referring to their level of profitability and the percentage of customers they have on the SVT, which is over 60%, and over 60% of those have been on it for three-plus years. It has to have an impact; otherwise they would not be putting forth the defences and obstacles they are putting in the way. It still has an impact on us, but we are encouraged about the other potential impact it has around the market, and that will be where there is some potential upside. The question is whether it offsets the downside for us as a business.
Rachel Maclean
Your SVTs are as expensive as the big sixes’, are they not? You have mentioned that they are not on there for years and years, but you have 3%, which is 24,000 customers. That is still quite a large number, is it not?
Ed Kamm
Sure.
Rachel Maclean
What are you doing to encourage them to switch?
Ed Kamm
We actively market to our customer base. We bill our customers monthly, which is unique among the panel members here today. On each of those monthly bills, we include our supplier cheapest tariff. We market to our customers outside of the bills. We are constantly giving new information about the better tariffs that we have available to get them to move off, hence the reason that we are at 3% of our customer base rather than 35% of our customer base.
Rachel Maclean
Are you able to give any assessment of what you think would be the upside for your business if this price cap came in? What would it mean for your market share and your profits?
Ed Kamm
Profit would be a straight hit in the initial implementation of a price cap. However, it depends on how the market changes. If the big six cannot offer these loss-leading tariffs that we believe they offer from time to time, that means we will have a better chance of winning their SVT customers when they do come to market. At the same time, one of the things we are concerned about is, if you are on the safeguard tariff or the price cap tariff, whether that means as a consumer you are less likely to engage in the market, and your churn rates and switching rates go down. That is a concern. We do not yet know how all these variables play out, but we are a net positive on the price cap.
Chair
I am just interested, Ed Kamm. You communicate 13 times a year, do you say, with customers who are on standard variable tariffs?
Ed Kamm
Yes.
Chair
During the course of a year, what proportion of customers who are going on to standard variable tariffs do you manage to move on to other tariffs?
Ed Kamm
Given that 18% of my customer base is on a standard variable tariff, that suggests 82% of my customers.
Chair
If, say, this month, 15,000 of your customers move on to SVTs, within a year, do you think you get 82% off them?
Ed Kamm
Yes, absolutely.
Chair
Can I just ask the other three companies how many times a year you communicate with customers who are on standard variable tariffs to offer them a better rate?
Stephen Forbes
As a minimum, four times a year, and then for some customers, it would be a lot more than that.
Chair
What proportion of your customers are on standard variable tariffs?
Stephen Forbes
The Ofgem metric said 72%.
Chair
What proportion have been on them for more than three years?
Stephen Forbes
39%.
Chair
I think Ofgem says 44%.
Stephen Forbes
It is 39% of our overall customer base at today’s date.
Chair
For more than three years, okay. Michael Lewis, how many times do you communicate?
Michael Lewis
Four times a year as a base, and then some of them more depending on what issues arise. We have 61% on SVT, and that has fallen from 68%.
Chair
What proportion have been on it for more than three years?
Michael Lewis
I would have to look that data up.
Chair
38%, Ofgem says.
Michael Lewis
Actually, it has fallen since that date. It is now at 37%.
Chair
Okay, a fall of 1%. For Centrica, how many times a year do you communicate with customers who are on standard variable tariffs?
Sarwjit Sambhi
At least six times a year.
Chair
What proportion of your customers are on standard variable tariffs?
Sarwjit Sambhi
We have 65% of the overall base, including customers on prepay, on the standard variable tariff. About two-thirds of those have been with us longer than three years.
Chair
43% of them have been on their standard variable tariffs for more than three years.
Sarwjit Sambhi
Correct.
Chair
Why do you not do what First Utility does? Why do you not communicate 13 times a year? Maybe then you would not have in excess of a third of your customers on standard variable tariffs for three years.
Sarwjit Sambhi
We would like to encourage all our customers to move to monthly billing. That would give us the opportunity to contact customers and offer them an alternative.
Chair
Is anyone stopping you contacting your customers 13 times a year?
Sarwjit Sambhi
No. We have said we are going to end the standard variable tariff.
Chair
No, that is not what you are doing. You are ending standard variable tariffs for new customers. Standard variable tariffs have not ended for the 69% of customers, from the Ofgem numbers, that we have just spoken about. Please be very careful with your words and your language.
Sarwjit Sambhi
For those customers, we have said that, as well as contacting them through the normal billing cycle that we have for our customers, we will contact them at least twice a year to say, “You are on the standard variable tariff. There are alternatives to the standard variable tariff”. We will do that as many times as possible.
Chair
No one is stopping you from doing what First Utility is doing. You say, “We would like to”, et cetera. There is no one stopping you from contacting your customers 13 times a year. I would suggest the reason you do not do that is because you are quite happy to have 69% of your customers on standard variable tariffs, because that is where you make your profits. Is that not the case?
Sarwjit Sambhi
I do not think it is.
Chair
Why are you not contacting your customers 13 times a year?
Sarwjit Sambhi
First, I do not think customers would appreciate being contacted on separate occasions 13 times. The reason that First Utility contacts its customers 13 times a year is because it has monthly billing for all its customers. If we could have monthly billing for all our customers, we would be contacting them every month. That is why we want to accelerate and push hard on the implementation of the smart meter programme, because then we can.
Chair
I do not see why your billing system as it is today, however that works, stops you from contacting your customers as often as you would like. Mr Kamm, have you ever had customers complain? What percentage of your customers complain about the frequency of your contact?
Ed Kamm
We do not get many complaints at all about the frequency of billing. If anything, it acts as an engagement tool so customers know exactly where they stand and exactly their fixed direct debit will be.
Chair
Thank you. Mr Sambhi, what is stopping you from contacting your customers on a regular basis, like First Utility and other energy suppliers, to encourage them to move off the very expensive standard variable tariffs?
Sarwjit Sambhi
In terms of the points of contact with a customer through a required communication, when we bill them and when we have an alternative offer, that adds up to a standard variable tariff customer on quarterly billing at least six times a year. That is not the only route to contact our customers. We have launched a rewards programme for all our standard variable tariff customers. Any customer who signs up to rewards—so far, since the launch, it is 700,000 customers, and we want all our customers to be on rewards—is contacted every month.
Chair
Why do you not do that for all customers, then?
Sarwjit Sambhi
They are being contacted every month through the rewards programme.
Chair
You just said 700,000 were on the rewards programme. You have 7 million customers, so that is 10% of your customers.
Sarwjit Sambhi
Every customer is contacted to join the rewards programme. They have to actively sign up.
Chair
Why make customers go through a hoop? Why make them join a rewards programme before you contact them more frequently? Why not just contact your customers on a monthly basis to encourage them to come off the expensive standard variable tariffs? Why not just do that?
Sarwjit Sambhi
They are contacted every month. It is one click to sign up to rewards.
Chair
No, they are not. I have asked you already to be careful with your language. I think we have just agreed that 10% of your customers are contacted on a monthly basis: the 700,000 who have signed up to rewards. That is not the question I am asking you. I am asking why you are not contacting all 7 million of your customers, or all the customers who are on standard variable tariffs, on a monthly basis to encourage them to come off those tariffs and on to more competitive rates. Would you like to answer that question?
Sarwjit Sambhi
We think contacting them at least six times a year, and through the rewards programme, is enough to incentivise customers to switch away from the standard variable tariffs.
Chair
It is clearly not, with all respect, because you have 69% of your customers on standard variable tariffs. We will move on. Can I ask you, Mr Lewis and Mr Forbes, why you are not contacting your customers on a more frequent basis to encourage them to come off these expensive standard variable tariffs, when you have more competitive rates out there that would be suitable for them?
Michael Lewis
We are doing more than that. As I already said, in the first quarter of next year, when we will start rolling out SMETS2 meters, we are going to take customers off the SVT. We are not just going to contact them and tell them about other products; we are going to say, “As a minimum, we are going to put you on to a fixed-term one-year contract that is priced below the SVT”. We want to have a conversation with them about other tariffs.
Chair
Just to be clear about that, you have your standard variable tariff. At the moment, how much is that on average per year?
Michael Lewis
£1,123.
Chair
How much is the new default tariff they will be going on to?
Michael Lewis
We have not decided yet, because it depends on what happens in the wholesale market. It will be a fixed-price deal, and we will have to look at how the cost of energy is at the time we move the customers.
Chair
What is the best acquisition rate you have at the moment?
Michael Lewis
It is 9% below that number, so it is £1,020.
Chair
Can you guarantee that your new default tariff will be lower than standard variable tariffs?
Michael Lewis
Yes.
Chair
Why will it not be as low as the acquisition rate in the market, or will it be?
Michael Lewis
Honestly, I cannot say at the moment. That acquisition tariff changes periodically as the wholesale market changes.
Chair
Yes, sure, but your default tariff rate could match the acquisition rate.
Michael Lewis
It may do. It depends where the wholesale market is at the time. Our acquisition tariff—which, by the way, is not just an acquisition tariff; it is open to all customers at any time—is a no-frills online tariff called “Go Online”. Not all customers necessarily want that. We have to balance what the customers want with which tariff is available.
Chair
That was an answer to a previous question: that some customers do not want to be on direct debit. But why should some customers who are on direct debit and getting the same product be paying 9% more than other customers for the same rate?
Michael Lewis
Do you mean the SVT versus the acquisition tariff? A point I have already made is that it is not just an acquisition tariff; it is available to all customers. As part of the engagement we will do with them, we aim to get more people off the SVT. That is a default that we will make it lower than the SVT, but of course we will give customers the option to go on to every tariff we have at the time. It might be the Go Online tariff, which some customers may want, the clean energy tariff, electric vehicle tariff, or cap and track tariff. We introduced a number of tariffs in the last few months in preparation for this movement of people off the standard variable tariff.
Chair
Mr Forbes, finally, why do you not contact your customers more frequently?
Stephen Forbes
As I said, we currently contact them four times a year as a minimum. That is in line with our billing cycles and is for all customers. Like some of my panel members here, we have a rewards scheme, and we contact some of those customers 50 times a year or every week. We think, from a customer perspective, customers need to choose the level of engagement they want with us, but we are more than happy to do some research with our customers to establish whether they want to be contacted every month or every quarter.
Antoinette Sandbach
Effectively, your billing cycle is the required information that the regulator made you publish on your bill to warn people that there was a cheaper tariff. Is that how you are notifying them, Mr Forbes?
Stephen Forbes
That is some of the communication. We write other letters and emails to our customers, and communicate with them via our website. There are a number of different things.
Antoinette Sandbach
You have 82% of your customers on the standard variable tariff. Why is it that such a high proportion of your customers are on the standard variable tariff, unlike Centrica, which has only 44% or 39%?
Stephen Forbes
What we said is 39% of our customers have been on that tariff for more than three years.
Antoinette Sandbach
Yes, and 82% are on the standard variable tariff. That is what Ofgem found.
Stephen Forbes
It is currently 72%, and part of that is history. That was the main product we sold for many years.
Antoinette Sandbach
Competition is not working, is it, Mr Forbes? It has not worked, even with the requirement of you to publish on your bills that there are cheaper tariffs available. It is not working, is it, if 82% of your customers are on a standard variable tariff?
Stephen Forbes
We have said that 72% of our current customers are on SVT, and there is some history behind that. We have more recently started offering fixed-term tariffs, and that has meant a shift towards those. We are having fewer customers on SVT. As part of that, one of the challenges we have is that, at the end of that fixed-term period, customers default back on to SVT, so there is this self-perpetuating issue.
Antoinette Sandbach
Can I just interrupt you? You said from April next year that you are not going to automatically roll over.
Stephen Forbes
That is correct.
Antoinette Sandbach
How many customers is that going to address? How many customers will that mean will not automatically roll over?
Stephen Forbes
At the moment, I think we have got roughly 700,000 customers on fixed-term tariffs.
Antoinette Sandbach
That is less than half the number of people you have had on standard variable tariff for three years or more.
Stephen Forbes
That is correct, but some customers like SVT. Some customers like having the flexibility.
Antoinette Sandbach
We know from First Utility that only 18% of their customers like SVT. I accept from you that some may.
Stephen Forbes
Some round the table here will have mortgages on variable rates and some will have fixed-term mortgages.
Antoinette Sandbach
Do you have a call centre?
Stephen Forbes
Yes, we do have a call centre.
Antoinette Sandbach
How many times a year do you call the 1.5 million of your customers who have been on the standard variable tariff for three years or more?
Stephen Forbes
I do not have that information. I do not know that off the top of my head.
Antoinette Sandbach
Could you write to the Committee and give us that information, please?
Stephen Forbes
Yes.
Antoinette Sandbach
Have you done an analysis to see whether there are a disproportionate amount of women or older people stuck on your standard variable tariff?
Stephen Forbes
Can I just answer the previous question first? We recognise that there is public, media, and political pressure, challenge and debate around the role of the SVT going forward. We recognise it is a potential issue and it is unpopular. We have listened, and we are committed to changing. We recognise we have more customers than others have on SVT, but we have made a voluntary announcement last week. We have said—
Antoinette Sandbach
I am sorry to interrupt, but you are here to answer my questions, and not to deliver your PR blurb. You knew that the CMA was doing an inquiry into your market. You knew how many customers you had on standard variable tariffs. Why has it taken this Parliament acting to impose a price cap to get you to take action about your customers?
Stephen Forbes
We think our SVT is at a fair price, and we want to engage with Ofgem and this Committee to make sure that we help develop the market in a way that is good for customers.
Antoinette Sandbach
Your standing charge per day on your quarterly on-demand paper bills is 27.41p. On your fixed tariff, it is the same as that for the quarterly on demand. But there are substantial differences in terms of what customers pay on SVTs. I am concerned about the fact that you have not acted for three years with 1.5 million of your customers. That is nearly half of them, is it not? How many customers do you have?
Stephen Forbes
We currently have just shy of 4 million customers.
Antoinette Sandbach
Just under half of your customers have been on this.
Stephen Forbes
39% have been on it for longer than three years.
Antoinette Sandbach
I was asking you whether you have looked at your customer database to find out how many of those 1.4 million customers are either elderly or women?
Stephen Forbes
We have some information that would record that on our systems, but I would not know it. I do not think we have the specifics; we do not have the dates of birth for all our customers. With families, it depends whose name the bill is in and whether it is a man or a woman. It is not easy data to find.
Antoinette Sandbach
You can easily check if the bill is in the name of a man or a woman. You have that information easily to hand.
Stephen Forbes
I am sure we could.
Antoinette Sandbach
It is just that I am quite struck by the panel. We have four men here. I know, Mr Forbes, that SSE has published its gender pay gap. Are you able to tell us what the gender pay gap in your company is?
Stephen Forbes
It is not something that I am familiar with.
Antoinette Sandbach
Let me tell you. It is a 19.4% difference between men and women; 32% of the men and 12% of the women get bonuses. When we are looking at your competitors, I am going to praise Centrica, because your pay differential is less than 1% between the men and women you employ. I am wondering, Mr Forbes, whether your company has looked at how it treats its female customers, and whether there is a disproportionate amount of female customers or older customers on these standard variable tariffs. Are you prepared to write, again in confidence, to the Committee, to let us know what proportion of women are the lead bill-payer in the SVT category?
Stephen Forbes
If we have that data, I would be more than happy to share it. Just to be clear, we pay people of different sexes the same amount of money. The reason we have a differential like that is because the history of our group means that we have 4,000 people out in our networks business repairing cables and wires, and those people are on different salary scales.
Antoinette Sandbach
I am sorry. The pay gap looks at the same people doing the same job.
Stephen Forbes
I do not think that is correct.
Antoinette Sandbach
You can correct that if I am wrong.
Chair
I would be interested to know the gender pay gap for E.ON and First Utility. Have you published it yet?
Michael Lewis
Yes. It is 12%.
Ed Kamm
We have not published ours yet.
Chair
Will you be publishing it by the end of April?
Ed Kamm
Yes.
Chair
I am looking forward to seeing that. A 19.4% gender pay gap seems exceptionally high, and higher than your competitors, Stephen Forbes.
Stephen Forbes
I think it is the shape of the SSE group and the service, given that we are also in wholesale power station networks, which means that we have a very large proportion of male workforce.
Chair
Just because you have more men working somewhere does not mean you need to pay them higher.
Stephen Forbes
On a comparable basis, men and women are paid the same amount for the same jobs in our organisation.
Chair
I think you will find that I am speaking. It has been 47 years since the Equal Pay Act, and a 19.4% gender pay gap at SSE is pretty poor. Would you agree with that?
Stephen Forbes
We are always working to try to improve things, but I am not an expert in this particular area, so we can share information with you after the hearing.
Chair
We look forward to seeing that.
Stephen Kerr
My question is for Mr Lewis. You have 3.3 million customers.
Michael Lewis
We have 3.9 million customers.
Stephen Kerr
I am using the Ofgem numbers. Ofgem says you have 3.3 million customers, 68% of whom—2.3 million—are on SVTs, and 1.2 million of your customers have been on SVTs for over three years. You announced in September that, in 2018, you are going to stop rolling automatically.
Michael Lewis
It is more than that. We will stop rolling automatically, but we are also going to actively move people off the SVT when we install a SMETS2 meter. That rollout will take place next year. The idea is that, when we talk to a customer to install a smart meter, we have a conversation about what the right tariff for them is. We want to move to a much more personalised, engaged relationship with our customer. To be very clear, I started in this job eight months ago. It was very clear to me that we had to change the relationship with our customers and move away from the SVT model, and that is precisely what we are doing.
Stephen Kerr
You have 1 million customers who are on tariffs other than SVT, but they have to have a smart meter for you not to roll them on to SVTs.
Michael Lewis
No. They can choose to go on to any of our other tariffs at any time, first.
Stephen Kerr
With or without a smart meter?
Michael Lewis
Yes, regardless of whether they have a smart meter. Second, we will stop rolling people on to the SVT and continue on the equivalent product they were already on. We will not default people back on to the SVT, regardless of whether they have a smart meter. We will proactively take people off the SVT when we put a smart meter in, because that is the right time to build relationships with customers.
Stephen Kerr
What about customers who do not want a smart meter? I know that might be something that sounds incredible to you, but some people will not want a smart meter. What will happen to them?
Michael Lewis
At some point, I believe that everyone will have a smart meter, because it makes so much sense. It is a surprise to me that customers do not a smart meter, because I cannot understand why you would not want to know how much energy you are consuming and have an accurate bill all the time.
Stephen Kerr
There are such customers. It is a matter of free will, is it not? What happens to customers who exercise their free will?
Michael Lewis
We will not proactively move them off the SVT. As I said before, we will not roll them on to the SVT when they come to the end of a fixed-term contract, and we will always have our product open to them at any time. That will be an ever diminishing number of people.
Stephen Kerr
We have heard descriptions of the sorts of customers who are on SVTs today. If they do not want a smart meter, they will stay on SVTs.
Michael Lewis
They will not necessarily stay on an SVT. It depends. We are engaging with them in other ways. We had a tear-off slip communication to our vulnerable SVT customers last year. We basically sent them a letter with a tear-off slip asking, “What is the right tariff for you?” We had a very high response rate of 32%, which for direct mail is very good, and we moved people off the SVT. Our SVT numbers have come down from 68% in April to 61% now, so we are doing other things. This is another one of those things, because, as I said, when you install a smart meter, it is a great opportunity to talk to customers about how they use energy, to help them use it in a better way, and to get them on to the right tariff for them.
Stephen Kerr
I am still not sure I would feel satisfied that those customers who do not want a smart meter are not going to be disadvantaged in this dialogue. Is your company doing anything else to reach out to your SVT customers and encourage them to change? You mentioned the tear-off slip.
Michael Lewis
That was one specific initiative we did earlier this year. We are also introducing new tariffs. As I said, in the last few months we have introduced a clean energy tariff and a cap and track tariff, which means that the price is capped but can come down if wholesale prices go down.
Stephen Kerr
It is the engagement, really.
Michael Lewis
Precisely. By having more products, better products, and products that appeal to different customers, we believe we can build better engagement. It is a constant struggle. That is what we are doing. It is our obligation to engage customers, and that is what we are doing.
Stephen Kerr
Let me talk a little more widely about smart meters and the potential of smart meters. You have enthusiasm, and quite a few of us have enthusiasm, for what smart meters can do to transform the marketplace. Do you think that smart meters will eventually mean that we do not need a price cap?
Michael Lewis
Absolutely, yes.
Stephen Kerr
Why?
Michael Lewis
They will transform the way customers use energy. We have just installed our millionth SMETS1 meter and we are moving into SMETS2 next year. We find that, when we install a smart meter, the net promoter score as we call it—how much a customer appreciates the service we provide—goes up significantly, because they get much better transparency on how much energy they are using and how they are using it. We can provide much more targeted advice on which devices use the most energy, and give them advice on how to reduce their energy consumption. You start to get into a dialogue with them.
Stephen Kerr
Do you expect to see an increase in switching?
Michael Lewis
I would not necessarily say you would see an increase in switching. I would hope that we develop a much more intimate relationship with customers and give them a tariff and associated products that are right for them, for example smart thermostats like Tado, which we are marketing at the moment, and other devices like solar PV and battery. I know that is at the top end of the market, but we are looking at other devices as well. The idea is to create a personalised energy offer to help people consume energy in the way they want to consume it.
Stephen Kerr
Does it make your company more efficient to operate? In other words, will there be cost savings because you will no longer have to have the infrastructure for physical meter readings?
Michael Lewis
Yes, indeed.
Stephen Kerr
Will that be reflected in a reduction in retail prices?
Michael Lewis
Over time, yes, of course.
Stephen Kerr
It will?
Michael Lewis
Of course.
Stephen Kerr
Let me ask the other panellists about the potential for smart meters, if you can make your replies quite brief. I expect you all to agree that there is the potential to transform the market. What impact will it have on customer behaviour?
Sarwjit Sambhi
We have rolled out 4.5 million smart meters now, so we have a lot of data and feedback from customers on how they are using smart meters. On average, each customer with a smart meter is saving between £30 and £40.
Stephen Kerr
How many did you say you had rolled out?
Sarwjit Sambhi
4.5 million.
Stephen Kerr
How many of those customers have switched since you rolled out the smart meter to them? I have to confess an interest here; I am one of them.
Sarwjit Sambhi
In terms of the smart meter customers who have switched, it is about 12% versus 17%. It reflects the fact that, in terms of the use of a smart meter to save energy and time, because there are no meter reads, it has a positive impact on customers. In terms of what it will do to the market, when all smart meters are interoperable—we are only months away from that point—it should increase switching in the market. That should be good for competition.
Stephen Kerr
Does it make Centrica more efficient as a business to run?
Sarwjit Sambhi
Yes, it does.
Stephen Kerr
Will you be passing those savings on to customers in decreased retail prices?
Sarwjit Sambhi
Over time, absolutely. Remember, while the roll out is happening, there is a cost to us of about £250 million a year.
Stephen Kerr
I am going to go to Stephen at SSE with the same questions. What do smart meters do in terms of customer switching in your business?
Stephen Forbes
It is slightly less for a customer with a smart meter than our standard switching rates. Our customers are more engaged; they understand what their energy usage is and it enables them to have better information to help them switch.
Stephen Kerr
Do you know how many of your smart meter customers have switched since they had smart meters installed?
Stephen Forbes
I do not have the data to hand, but I can certainly provide that. We have installed about 800,000 smart meters.
Stephen Kerr
In terms of business model, will you become a more efficient company? Will you be passing on price reductions to customers?
Stephen Forbes
Yes. Right at the moment, there is a cost associated with installing smart meters. Over time, we would expect costs to come down, and we will be sharing that with the customer.
Ed Kamm
I have a slightly divergent view. We have talked about the tale of two markets; Mr Kyle mentioned that earlier. We very fundamentally believe that there are two markets, one for engaged consumers and one for disengaged consumers. Smart meters help engaged consumers engage even more, and they will take advantage of that. My concern is that they allow disengaged consumers to disengage even more: they do not have to read the meter each month or at whatever frequency another supplier asked them for the reads. It is another way for them to disengage. My concern is that it will continue the tale of two markets, even though it is a good technology and the right technology. We would not accept on our mobile phones not knowing how many texts and how much data we have, but we seem to accept that in energy. It should be a net positive, but there is a watch-out: does it help the disengaged become even more disengaged?
Stephen Kerr
Does the real time meter reading lead to real time billing? Does your monthly bill reflect the read?
Ed Kamm
Our monthly bill reflects the read.
Sarwjit Sambhi
For those that have smart meters, yes.
Chair
Can I just ask all four of you to supply two additional pieces of information? I would like to know what the customer switching rate is for customers on smart meters compared with those who are not. I would also like to know the proportion of customers on smart meters who are on standard variable tariffs with your company compared with those who are not. Is that something that you will be able to supply?
Michael Lewis
Yes. There is a problem with smart meters at the moment.
Chair
I know, about switching, yes.
Michael Lewis
It may dampen switching at the moment.
Chair
We would like to know that. Before I move on, you are moving customers who are going on to smart meters from standard variable tariffs to a better rate. If it is good enough for customers who are moving on to smart meters, why is it not good enough for all your customers who are on standard variable tariffs?
Michael Lewis
The whole point is to engage with customers. We want to have a conversation with them and say to them, “What is the right tariff for you?” We have various tariffs offering different things, from green energy, through to electric vehicle tariffs, through to very cheap and basic online tariffs. They do not all want the same thing; that is the point. The whole point is to engage with them, find out the best tariff for them and put them on to it. That is how we develop a more intimate relationship with them. Having a smart meter enables them to engage better with the market. That is the philosophy behind it.
Chair
Would there be any detriment to the consumer from moving them from a standard variable tariff to your best rate, for new customers or for customers who are switching? Would there be any detriment at all to a consumer from doing that?
Michael Lewis
It depends what the customer wants, and I cannot answer that. I would have to talk to them.
Chair
You are default moving your customers who are going on to smart meters from standard variable tariffs to another rate. You are not asking them what they want to be moving to.
Michael Lewis
We are. We have a conversation with them first. At the most basic, we will move them on to a tariff off the SVT. We will have a conversation and say, “These are the tariffs”—
Chair
If they do not engage in that conversation, do you still move them?
Michael Lewis
We will advise them of the different tariffs we have, and we will tell them, “If you choose not to take one of these, we will move you on to another tariff, because we want to get you off the SVT”.
Chair
I will ask you again. If it is good enough for customers who are going on to smart meters, why is that service not good enough for all your customers who are on standard variable tariffs?
Michael Lewis
Because we want to use it as a tool for engaging customers when they get a smart meter.
Chair
You are moving the customers who are not engaging but are going on to smart meters to a different tariff. Why is that not good enough for all your customers?
Michael Lewis
Because we want to have a conversation with them when we install a smart meter.
Chair
If they do not want to have a conversation with you and they go on to a smart meter, you move them anyway, but if do not go on to a smart meter, they stay on the more expensive rate.
Michael Lewis
Yes, but we will move customers on to smart meters. Over the next three to four years, we expect to get the vast majority of our customers on to a smart meter. That is the whole point of tying them together: so that we gradually move all our customers to the right tariff for them.
Chair
Do you think that a sign of a successful market is customers paying a competitive price for their product, or customers being engaged? Which one is the sign of a market that works: engagement, or customers on competitive rates? Not just in energy but in all markets, which is the sign of a competitive market?
Michael Lewis
It is both, because an engaged customer will get a competitive rate, or they will get a product that is the right one for them, which may be more expensive, but may be something that they want, for example because they have an electric vehicle and want an EV tariff.
Chair
Is engagement not a means to an end rather than an end in itself? A customer engages to get a good rate. You want customers being on competitive rates, not necessarily engaged customers.
Michael Lewis
It is engaging to get on the right rate for them: their preference, their choice, whichever tariff they want. As I said, we have several tariffs with different characteristics, and different customers do not all want the same thing.
Chair
But, if they are going on to a smart meter, if they do not engage, you will still be moving them.
Michael Lewis
We will.
Vernon Coaker
You can see from the questioning from the Chair, and a little while ago from other members of the Committee, the nub of the issue here. I am addressing my remark to Mr Sambhi, but it really speaks to the way the whole market operates. Let us just remind ourselves of the facts with respect to Centrica, which most people would still see as British Gas. You are the largest supplier of both fuels to the energy market. According to Ofgem—it may vary a little by your own figures—you have 7 million customers. Of those, 69% are on the standard variable tariff; of those, 3 million for more than three years. Other members have questioned the other suppliers. Using that as an example, you can see why people say, “What on earth is going on when that number of people, for that length of time, have been paying more than they could have done?” I know that Centrica has announced those seven steps. Why would anybody think that is going to make the difference and move significant numbers of people off that standard variable tariff on to a better deal? How is that going to work, not only for new customers, which as the Chair pointed out is the specific offer, but for existing customers? How is that going to make a real difference?
Sarwjit Sambhi
Going back to the previous point, the CMA said that the issue is engagement. I completely agree: engagement should result in customers being on the most competitive products for that supplier or in the market. That is why we are saying that engaging the customer base is the route to getting customers on to competitive tariffs. It is one view. We are trying to increase engagement.
Vernon Coaker
Have you not been doing that for the last three years?
Sarwjit Sambhi
We would say that we have not done enough for the last three years. After the CMA findings, we all had to look in the mirror and say, “What is it that we have not been doing with respect to engagement?” We have tried to up our game. We can do a lot more. Perhaps the answer is that we should be contacting our customers every month. I will certainly look at whether the frequency should be increased. That is what we are focused on as an alternative to the price cap.
Vernon Coaker
Has your company—British Gas, Centrica—set a target for those 3 million who have been on standard variable tariffs for over three years? Have you put a timescale to that, or is it an aspirational thing within your seven steps?
Sarwjit Sambhi
We have not set a target.
Vernon Coaker
You have not set a target.
Sarwjit Sambhi
No. We have said that we want to publish the data on the number of customers on SVT on a frequent basis. I am happy to be challenged on how frequent that is. We want to demonstrate that that number is coming down and coming down fast.
Vernon Coaker
You graciously said in answer to the Chair that you would take it back to your company about contacting customers more times. Can I suggest that the public need to have some way of judging whether what you are doing is successful? In most cases, people would set a target or some way of measuring whether what they are doing is having the desired impact. For the 3 million people who have been paying more than they should for over three years, personally—I do not know what the rest of the Committee thinks—I think it would be a good idea to say, “Our company thinks that we should eliminate that in whatever”, and give a broader figure for moving people on standard variable tariffs on to a better deal. Does Ofgem not suggest mandatory targets?
Sarwjit Sambhi
Actually, it does not.
Vernon Coaker
Is it not suggesting that? It might be one way forward.
Sarwjit Sambhi
We have advocated that the mandatory target is to end the standard variable tariff for the whole market. We would be supportive of saying that, by a certain date, all customers have to be off the standard variable tariff.
Vernon Coaker
You would support Ofgem saying to the whole market that standard variable tariffs should end in two years or a year.
Sarwjit Sambhi
Yes. We have said that publicly.
Vernon Coaker
What would be the impact on your profit margins of moving everybody from standard variable tariffs, where the profit margin is greater, on to a fixed-term deal? Have you made any assessment of the impact on your profits if you moved them on to a cheaper deal? No doubt it would impact on the profits of others. What would the impact on profit be?
Sarwjit Sambhi
Engagement will result in more competitive offers. We think that will mean, overall, the cheapest offer in the market. We have accepted that it would mean that overall our profitability would be lower. We have not made an assessment of how much lower, because that is difficult to calculate.
Chair
I am not asking you to tell us this; I recognise it is confidential. Centrica knows what the profit margin is for customers on a fixed tariff, and you know what the profit margin is for customers on standard variable tariffs. I would be flabbergasted if you did not know what impact it would have on your profits, in answer to Vernon’s question.
Sarwjit Sambhi
It depends on the pace at which—
Chair
Vernon’s question was pretty straightforward. If all your customers who are on standard variable tariffs were instead on your fixed tariff, what impact would that have on your profits?
Sarwjit Sambhi
That is one scenario.
Chair
That is the scenario that Mr Coaker asked about. Do you know the answer to that?
Sarwjit Sambhi
It is not a scenario where that is the target we think we might be able to achieve, because it is dependent on the rate at which we can get customers off the standard variable tariff.
Chair
Nobody asked you whether that was something you were trying to achieve, or whether it was a likely scenario. Mr Coaker just asked you whether you have looked at what impact it would have on your profits if the 7 million or 69% of your customers who were on standard variable tariffs were now on your fixed tariff. Is that something that Centrica has calculated?
Chair
Is that something that Centrica has calculated?
Sarwjit Sambhi
If that is the scenario you would like us to present to the Committee, I am happy to share that on a confidential basis.
Chair
Yes. Could all four of the companies in front of us today, on a confidential basis, supply us with that information?
Vernon Coaker
That would be really helpful. Moving on to a further question, one of the things that suppliers have objected to is the lack of a right of appeal re the way Ofgem will set the cap, although it is obliged to consult with you. Not just to you, Mr Sambhi, but to the others: is it not enough for it to consult with you about what the cap should be—it is the regulator—and then come forward with how it thinks it should operate and what it thinks it should be?
Stephen Forbes
Whatever the Government decide to do, we will work constructively with you, with Ofgem and with any other stakeholders, so that we understand the impacts of the cap. We think there will be a negative detriment for customers and we want to minimise that, so we will work constructively to make sure that that is minimised.
Michael Lewis
An appeal mechanism is just a good matter of administrative law. There should be an appeal against a decision of a regulator.
Vernon Coaker
You are fine with Ofgem consulting with you and then deciding.
Michael Lewis
There should be a formal appeal mechanism. At the moment, all we have is judicial review. That is just good practice.
Vernon Coaker
Is that because you do not think Ofgem will come forward with the right—
Michael Lewis
No, not necessarily. It is good practice to have an appeal mechanism when a regulator is making a critical decision.
Ed Kamm
We are not passionate either way. We think it is right to have an appeal mechanism generally across business, but we do not have a strong opinion one way or another.
Sarwjit Sambhi
The appeal mechanism is solely on appeal against how the cap is set and the level of it. To be clear, it is an appeal right that all key stakeholders should have: consumer groups and suppliers. The analogy I would use is that, recently, an appeal was made on network charges that resulted in £100 million given back to customers. It is an appeal right that already exists in this sector and other sectors. All we are asking is that it is included in how the Bill is implemented.
Mark Pawsey
I am interested in the relationship between wholesale costs and retail prices, and the speed with which you, as suppliers, pass on changes to your customers. Can you tell us to what extent retail prices mirror fluctuations in wholesale and network costs, and how frequently you change your prices?
Sarwjit Sambhi
The important things to note in the bill are two parts: the wholesale price of gas and electricity—
Mark Pawsey
I am not interested in the Bill. Sorry, you mean the bill that you provide your customers.
Sarwjit Sambhi
Yes. There are two important moving parts: the actual commodity costs; then the non-commodity costs, which include transmission and distribution and energy-policy costs. The most volatile is the commodity price, and each company has a different hedging strategy for those costs. For us, we keep the prices under constant review.
Mark Pawsey
How often would you change prices on average in a year?
Sarwjit Sambhi
We do not have a set—
Mark Pawsey
How many times did you change prices in the last 12 months?
Sarwjit Sambhi
In the last 12 months, once.
Mark Pawsey
You put your electricity prices up by 12.5% and you claimed that a large part of that was due to green taxes. Is that right?
Sarwjit Sambhi
Due to energy-policy costs overall.
Mark Pawsey
To green taxes.
Sarwjit Sambhi
Energy-policy costs overall, the biggest part of which was the renewables obligation.
Mark Pawsey
In those 12 months, what happened to wholesale costs?
Sarwjit Sambhi
For gas and power prices, they came down, but you cannot—
Mark Pawsey
They came down and you put your prices up by 12.5%.