Domestic Gas and Electricity (Tariff Cap) Bill

Lord Redesdale Excerpts

Report stage (Hansard): House of Lords
Wednesday 27th June 2018 Lords Chamber

[Lord Grantchester (Lab)]

My Lords, Amendment 11was previously moved in Committee. It may be the last but it is certainly not the least of those being debated today. Perhaps it is the most crucial, because it proposes an on-going condition in the energy market that the electricity and gas suppliers will always operate fairly and proportionately between customers and tariffs.

Labour is in favour of the Bill. The energy market has been broken for some time. My right honourable friend in the other place, Ed Miliband, first proposed that price caps should be in place to protect consumers from excessive gas and electricity prices. Customers have been paying on average up to £300 more than they would have paid if the market operated more competitively. The excess weighs more heavily on more vulnerable households—those less able to bear it.

While it is flattering to see our policies recognised and implemented by the Government, they have to be implemented right, and preferably right first time. While accepting and applauding what the Bill achieves, it is nevertheless not quite there. It does not tackle the scourge of “tease and squeeze” by the utility companies. This amendment calls out the behaviour of energy suppliers where they tease customers to nominate a cheaper, more attractive tariff in the first instance, only to move them slowly over time to a higher tariff when the customer will be squeezed again.

This feature of the market has been operating for some time. The effect is that those customers who do not ceaselessly monitor and challenge what is happening, once again move back to being in a more disadvantaged position vis-à-vis the more nimble and fleet of hand and foot customers. Those whom the Government call disengaged are protected by the price cap mechanism on the standard variable tariff and default tariffs of the Bill, while it is in operation. Once these mechanisms are withdrawn, ultimately no later than 2023, this protection will fall away. The loyalty penalty is a self-perpetuating dynamic of the market. This is perverse.

The Bill is only a short-term measure. It professes that whatever happens, however competitive the market may or may not be, the price cap will cease in 2023. Clause 8 provides for this to happen at an even earlier date should the Secretary of State be advised that effective competition has returned to the market. However, the default mechanism of 2023 does not mean that competitive conditions will be operating at that date. Indeed, under amendments proposed by the noble Baroness, Lady Neville-Rolfe, the default date would be sooner.

It would be risky and optimistic to expect competition to return. We do not know whether the Bill will be enough. Notwithstanding that, Labour wants to outlaw tease and squeeze from the market, which could generate a more competitive market altogether hereafter. Under Ofgem’s determination of a relative tariff cap operating in relation to the lowest price tariff, this behaviour can be removed from the market.

This measure does not indicate that Ofgem must look both ways. By this I mean it cannot be claimed, if it is determined that the market is operating competitively and therefore that the cap may be removed in 2020, 2021 or 2022, that the amendment is contradictory—that the market is operating competitively. There is no contradiction as the competitive market would be operating within a relative price differential: the more competitive, the narrower the differential would be. It would be up to Ofgem to determine that differential.

The market could look very different by 2023. The House has just passed the Smart Meters Act, in which the Government gave strong assurances that the UK’s infrastructure will have been transformed by that date. The Government are on notice to make those changes. Here, we have the means to outlaw tease and squeeze for all time without the need for new legislation at some later date. It is a priority now and we cannot be sure that it will remain a priority under whatever market conditions might pertain at a later date, or even should the market move away again and back towards a less competitive environment where this kind of behaviour thrives. Not only must it be clarified that Ofgem will have the power through the amendment; Ofgem must act to underline that tease and squeeze behaviour will not be tolerated. It is an open goal for the Government to score. I beg to move.

[Lord Redesdale (LD)]

My Lords, while I understand where the amendment is coming from, it is not one I can support. The problem is that while we are asking the authority, Ofgem, to set a maximum price, we are now also specifying that there must be a minimum price. It would then be almost impossible for the authority to have a competitive marketplace to operate with.

The second problem inherent in this—a problem with the whole Bill—is that, while I understand the problems the bigger companies have because they do not have some of the obligations of the small companies, it will be an issue for Ofgem to try to work out where the cap will be in the first place. That will cause problems. We are also in a period where wholesale prices are rising. Therefore, there might be a slight problem if the companies, for different financial reasons, have to raise their prices. Would Ofgem then have to set a date at which all the companies raise their prices at the same time so that they do not break the cap? At that date, would it also then say that the minimum price has to be raised at the same rate?

I understand the idea that vulnerable customers should be protected. However, we are ending up with a marketplace in which there will be one default tariff that every single supplier will have to put forward. If there is a vote, I will vote against this, which is very much against my views—obviously my Front Bench will have a different view on this. This, however, is an area where what we want to happen and the reality on the ground vary substantially.

I should also declare an interest as the CEO of the Energy Managers Association. We represent all energy managers. It is rather unfortunate that while we are looking to protect vulnerable customers, we are not doing the same to protect SMEs and micro-businesses. There is an enormous amount of bad practice in the industry, with TPIs that have no code of practice, and Ofgem failing to enforce or even to have the power to protect SMEs in this marketplace. We are looking at protecting one sector of the marketplace while non-domestic customers will be hammered under bad practice. I raise this as this is the tail end of the Bill, although I spoke at Second Reading. I hope the Government can bring forward a Bill further down the line to regulate the whole third party, intermediary and energy broker marketplace for the non-domestic, but obviously it might be beyond the Minister’s ability to bring that forward.

[Baroness Kennedy of Cradley (Lab)]

My Lords, I wish to speak in favour of Amendment 11, in the name of my noble friend Lord Grantchester. Millions of people who stay with the same energy supplier are being overcharged, ripped off and paying hundreds of pounds more for the same gas and electricity because they are cross-subsidising deals for new customers. There are recent examples of companies charging new customers as little as £800 a year and existing customers more than £1,200 for exactly the same product. In this way, the energy market is not harnessing competition to bring about low prices for all customers, because suppliers are able to exploit and overcharge their existing customer base to subsidise time-limited, often loss-leading, tariffs designed to scoop up new customers. This “tease and squeeze” behaviour is becoming the standard business model for some energy companies and it means that the most reliable customers face a hefty loyalty penalty.

While the Bill marks an important first step in protecting customers from the worst excesses of this failing market, it is clear that political consensus is emerging that, until the cause of this detriment is addressed, it will be only a sticking plaster. It is also clear that there is growing support for a relative price cap as the only way truly to reform the market and harness competition to the benefit, and not the detriment, of customers. Indeed, the tease and squeeze dynamic will become only more pressing as society becomes more digital and customers more distant from the point of sale in consumer markets. As well as accepting this amendment, I ask the Government to meet those experts calling for a relative price cap to find a way truly to address the tease and squeeze dynamic in energy and build a regulatory structure that will be fit for purpose for all consumer markets.

It would be a wasted opportunity to allow this legislation to pass without also addressing the cause of the loyalty penalty, which is why I support Amendment 11, to bring in a relative price cap. Such a cap would force energy companies to link their teaser rates to their underlying default tariff. The Government’s solution is to encourage switching, but if 100% of customers switched every year, administration costs would go up and undoubtedly be passed on to the customer. Where is the incentive for companies to build quality relationships with their customers when they know that they will leave them in 12 months’ time?

In well-functioning consumer markets, such as groceries, loyal customers get low prices even when they do not switch, because new customers are offered the same price as loyal ones. Switching may have increased, but a recent YouGov poll found that 33% of people did not feel that they knew enough to select the right tariff or supplier for them. Data from the energy regulator, Ofgem, reveal that an even higher percentage of people, 42%, are not confident comparing the different energy deals available.

Only a relative price cap will bring an end to exploitative overcharging once and for all. It will give customers the choice to stay where they are without fear of being exploited and remove the need to hunt every year for a fair price. Introducing a fairness mechanism into the UK energy market is long overdue and will benefit everyone, from those who buy energy to the suppliers who are forced to improve efficiencies to compete. A relative price cap is a good idea for everyone. I hope that the Government will support the amendment and agree to meet those in the energy market who are confident about the benefits to consumers of a relative price cap.

--- Later in debate ---

[Lord Henley]

I am grateful to the noble Baroness, Lady Featherstone, for giving that clear and concise explanation of why the Liberal Democrats will support the amendment. I am also grateful that the noble Lord, Lord Redesdale, is prepared to stand up against the might of his party whips and explain why he thinks it is not such a good idea. I am also grateful to the noble Baroness, Lady Kennedy of Cradley, for her remarks. I agree.

[Lord Redesdale]

I am grateful to my noble kinsman— I always like saying that; it is so rare to be able to say that in this House now. For the avoidance of doubt, I do not support this Bill in any shape or form. I think it is a very bad piece of legislation. However, I think this amendment might make a very bad piece of legislation somewhat unworkable.

[Lord Henley]

I thank my noble kinsman for that explanation, and make it quite clear that I am sure the reason for his support is nothing to do with the fact that we happen to be related, but he does bring a breath of fresh air to his Benches.

Turning to the remarks of the noble Baroness, Lady Kennedy of Cradley, I will come on to “tease and squeeze” later, but I agree with her that that is a problem, and we think there are ways to deal with that. She made it clear that she would like certain experts from the industry to talk to Ministers, and if she gets back to me I will certainly make sure that that is possible. I would be more than happy to talk to them as the Bill continues its passage—but we are near the end of it—about life post the Bill and under the new arrangements.

The noble Lord, Lord Grantchester, is seeking to place a duty on Ofgem to develop a relative price cap that would come into effect on the termination of the tariff cap conditions which are set out in this Bill. The noble Lord is nodding in assent, so I think that I have got it right. That would cap each supplier’s most expensive advertised standard variable and default-rate tariffs as a proportion of its cheapest fixed-term deal, and again, Ofgem would set the differential. The new clause would be inserted by the amendment and its effect would be to introduce an indefinite relative price cap. It remains the Government’s position that this amendment is not necessary, and I hope to set out why we believe that that is the case.

It is not the intention of this Bill or the Government to put in place a permanent market-wide cap, as I have explained on earlier occasions, and I would pass that on to my noble kinsman Lord Redesdale. I know that the intention of the amendment is to stop the practice of “tease and squeeze”, whereby customers are lured in with a cheap fixed rate and then fall into an expensive default rate at the end of the fixed term. However, as with any relative cap, there is a risk that under this proposed amendment suppliers would raise their least expensive tariffs rather than decrease their most expensive standard variable rates. That is the Government’s fundamental concern about any kind of relative price cap.

The Government and others, which includes the detailed work done by the BEIS Select Committee during its pre-legislative scrutiny of the Bill, believe that a relative price cap would not work. Indeed, a relative cap as a permanent feature of the market risks undoing the work of the temporary absolute cap, because it would remove the incentive for the market to innovate and reform. I would emphasise in particular those points to the noble Baroness, Lady Kennedy of Cradley, who I think possibly did not understand how markets work. It also puts in place a solution to a problem that is anticipated some years hence. We believe that it is better for Ofgem to consider what measures may be needed once the price cap is lifted rather than prejudge the situation now and tie Ofgem’s hands in a way that might damage consumers or be ineffective.

The key way of ending the practice of “tease and squeeze” will be the detailed work that Ofgem is undertaking to develop better ways of securing customer engagement. The work was emphasised by the noble Lord, Lord Grantchester, when he talked about smart meters. It will make switching quicker and more reliable, so smart meters and other programmes will help to make the market work better.

I recognise the concerns of noble Lords opposite in this area and the need for action to protect consumers following the removal of the price cap, should that be necessary. In acknowledging this, I can confirm a triple commitment by the regulator on this issue. I can confirm that Ofgem has committed to assessing whether ongoing protection will be needed for vulnerable consumers beyond the end of the price cap. I can confirm that Ofgem considers that it can implement price protection for selected consumers should that be appropriate. I can also confirm that, ahead of the price cap ending, Ofgem has committed to producing a report on what additional protection might be needed, who needs that protection—we are thinking of vulnerable consumers—and what form that protection should take. Following the production of that report, Ofgem will act accordingly. I repeat: Ofgem will act accordingly having produced a report on what additional protection might be needed, who needs the protection and what form that protection should take.

The House might also have seen Dermot Nolan, the chief executive officer of Ofgem, giving evidence to the BEIS Select Committee during its pre-legislative scrutiny of the Bill. He was asked whether a price cap or other protection might be needed for vulnerable consumers upon the removal of a market-wide price cap. Mr Nolan responded:

“In my view, yes. … I would envisage a very possible situation in which if a full, marketwide price cap was removed, Ofgem would continue with the price cap for vulnerable customers”.


I hope that those commitments from the regulator, alongside the comments of its chief executive officer, would go some way to reassuring noble Lords, including the noble Lord, Lord Grantchester, of Ofgem’s capabilities and stance towards protecting consumers beyond the life of the Bill. I hope that my explanations have been helpful and that the noble Lord will therefore see fit to withdraw his amendment.