Summary
 Ofgem's Energy Supply Markets Probe ( 90kb)
Citizens Advice welcomes the opportunity to provide evidence to OFGEM’s energy supply markets probe. In particular we welcome some of the commitments made by Ofgem, Government and fuel suppliers at the fuel poverty summit, particularly the proposed switching advice campaign. Citizens Advice is keen to work with Ofgem, government, the fuel industry and other interested organizations to deliver this.
Many people on low incomes choose to pay for their fuel by pre-payment meter (PPM) because it helps them manage their income. However, pre-payment customers pay significantly more for their fuel than people who pay by quarterly bill or direct debit. Recent fuel price rises have also made it difficult for people to pay their fuel and other bills. Citizens Advice believes that Ofgem should take action to tackle these issues.
CAB evidence often shows that fuel companies provide poor customer service, and treat people who are querying their fuel bills and measures to alleviate fuel poverty should not only address the price of fuel, but should also cover measures to improve fuel suppliers’ levels of customer service and compliance with OFGEM’s debt and disconnection guidelines.
Whilst switching supplier can help reduce fuel costs, it is difficult to compare prices offered by different companies, without access to the internet. People on lower incomes and those with mobility problems are much less likely to have home access to the internet. Other barriers to switching include people’s previous experience of switching fuel suppliers, requiring many phone calls to resolve the matter. Research by Citizens Advice also shows that levels of customer service are also extremely important for customers in deciding whether and where to switch their fuel supply.
Citizens Advice has a large collection of case studies about the problems experienced by people on low incomes when switching their fuel supplier or when experiencing difficulties paying for their fuel. We would be very happy for Ofgem to interrogate our database in order to gain an accurate picture of the difficulties that our clients can face.
Introduction
The Citizens Advice Bureaux (CAB) network is the largest independent network of free advice centres in Europe, providing advice from over 3,200 outlets throughout Wales, England and Northern Ireland. We provide advice from a range of outlets, including GPs’ surgeries, hospitals, community centres, county courts and magistrates courts, and mobile services both in rural areas and to serve particular dispersed groups.
The Citizens Advice service provides free, independent, confidential and impartial advice to everyone on their rights and responsibilities. It values diversity, promotes equality and challenges discrimination.
The service aims:
- To provide the advice people need for the problems they face; and
- To improve the policies and practices that affect people’s lives.
In 2006-2007 the CAB service in England and Wales dealt with 5.7 million enquiries in total, including 1.7 million on debt. The CAB service has seen a significant increase in inquiries on fuel issues over recent years. In 2006/07 we received 60,000 new enquiries specifically about fuel debts – an increase of 33 percent on the previous year – with two-thirds of these enquiries related to dealing with debt repayments.
In addition, the service dealt with 47,000 enquiries about a range of other fuel matters, a 74 percent increase on 2005/06. Billing and metering issues were responsible for 38 percent of these enquiries, with complaints and redress accounting for 16.5 percent of enquiries, 14 percent due to methods of payment and 9 percent prompted by issues arising from switching supplier.
Initial figures for the first half of 2007-8 show that this general upward trend has continued, with bureaux dealing with almost 35,000 new enquiries about fuel debt and almost 25,000 enquiries about wider fuel matters.
General comments
Citizens Advice welcomes the opportunity to submit comments to Ofgem’s Call for Evidence into the energy supply markets. We are pleased that Ofgem is actively scrutinizing the way that the energy market is working. In our view, this analysis is overdue, as there are a number of features of the market which suggest that the market is not working as it should. Moreover, this is having a detrimental impact on some low income and vulnerable consumers.
Before we go on to answer the specific questions posed in Ofgem’s call for evidence, we will set out our views on the fuel poverty summit, fuel price rises and higher charges for prepayment meters.
Actions resulting from the fuel poverty summit
We recognise that Ofgem has recently held a Fuel Poverty summit and agreed a package of measures to improve the targeting of help on customers facing increasing hardship created by the rising cost of energy. We welcome the commitment which emerged from the summit from the fuel industry, government and regulators to do more to tackle the growing and pernicious problem of fuel poverty and we stand ready to help ensure that vulnerable customers and those on low incomes have every opportunity to reduce their bills and receive the help they are entitled to. In particular, we welcome the measures which were agreed to:
- better target help that is available;
- provide clear information for trusted advice agencies to enable them to guide the elderly and other vulnerable consumers to the best offerings;
- facilitate switching for pre payment meter customers through switching sites.
We are also encouraged that the regulator is looking at whether further measures are necessary to address the large premiums which exist between different payment methods. This submission highlights the impact that this can have on people living on low incomes.
Finally, we are delighted to learn that there are plans to roll out a region-by-region switching advice campaign. Recently Citizens Advice ran an ‘Energy Best Deal’ pilot with Ofgem in Devon and Cornwall, Yorkshire and Wales. This revealed how much people could save simply by switching providers, tariffs or moving off a pre-payment meter, once they had access to clear information from a trusted source. These local financial education and information sessions provided information and advice to low income households, demystifying the myriad of offers and help that are available from the industry and from government. Citizens Advice is keen to work with Ofgem, government, the fuel industry and other interested organizations to deliver this much-needed assistance on a much wider scale. We would also ask Ofgem to consider using this service to gather evidence on barriers to switching for pre-payment customers.
The impact of rising prices on fuel poverty
The recent spate of large price rises announced by all the major fuel suppliers means that consumers have seen massive rises in their annual energy bills, with energy prices currently about 50 percent above their 2003 levels in real terms. Such hefty price rises are hitting vulnerable people and those on low incomes particularly hard, especially since they have been accompanied by rises in other essential expenditure – rises which show no sign of slowing, for example water and sewerage bills are set to rise by an average of 5.8 percent for the average household from April 2008 while council tax bills will increase on average by 4 percent in England in 2008-09.1
Benefit income and wages have failed to keep pace with such increases2 and their impact can be seen in the significant rise in the number of enquiries relating to fuel debt and disconnection dealt with by Citizens Advice Bureaux. In 2006-7, enquiries about fuel debt increased by a third compared to the previous year. More recently, new figures released by Citizens Advice comparing the types of debt problems dealt with in the first two months of 2008 with the same period in 2007 reveal continuing increases in problems relating to basic essentials such as gas and electricity, water, telephone and council tax debts.3
Large price rises have reversed some of the progress previously made in eradicating fuel poverty, with the Fuel Poverty Advisory Group’s (FPAG) annual report 2007 stating that “it is likely that in 2007 there were about 2.9m households and 2.3m vulnerable households in fuel poverty in England – the highest levels for nearly a decade.”4
Higher (and increasing) charges for PPM users
Of particular concern is the large and recently greatly increasing surcharges paid by customers with prepayment meters (PPMs). The additional amounts charged by many fuel suppliers for PPMs are a major contributory factor to affordability problems. Since those on the lowest incomes are more likely to use PPMs5 these surcharges disproportionately affect people on low incomes, forcing them not just to pay in advance but to pay significantly more than customers who pay by standard credit or direct debit.
A CAB in the West Midlands reported the case of a client, who lived on his own in local authority accommodation on a low income. He suffered suffers from chronic lung disease. The client wanted pre-payment meters installed for his gas and electricity supply to help with budgeting, but was unhappy about the fact that he would have to pay more to pay for his fuel in this way. The client considered that it was not fair for people on low incomes to have to pay more to budget and avoid debt.
The Energy White Paper quantified just how much extra PPM users have to pay for their fuel, noting “the cost differential between direct debit and prepayment meters (used by a relatively high proportion of low income households) is increasing, standing at around £120 for a combined gas and electricity bill in 2006 compared to £84 in 2005.”6 This difference amounts to 16 percent of the average gas and electricity bill. For someone on benefits or a low income this is money they cannot afford.
The excess charged to PPM customers is often attributed to the fact that it apparently costs suppliers around £85 a year more to supply PPM customers than customers who pay by direct debit (DD), and £60 more for customers who pay when their bill arrives (i.e. by Standard Credit (SC)).7 Yet recent Ofgem analysis points out that
“The average differential between PPM and DD of the six main suppliers has increased from around £80 at the beginning of 2005 to around £125 now – an increase of more than 50 per cent. Over the same period, the average differential between SC and DD increased from around £40 to £80 – an increase of 100 per cent.”8
This leads us to question why differentials between PPMs and direct debit payments have increased substantially in recent years – up by 42 percent in just one year based on figures provided in the Government’s Energy White Paper. In addition, it makes even more pressing the need for Ofgem to examine more closely why such large differentials do not exist elsewhere. For example, in Northern Ireland PPM users are charged only a small amount more than direct debit customers for their electricity.
Taken together, these points suggest that PPM customers in the UK are being unfairly penalised by suppliers through having to pay higher prices. Citizens Advice therefore believes that Ofgem should take action to ensure that PPM customers do not have to pay substantially more for their fuel than customers who pay by direct debit or standard credit.
The impact of higher charges on CAB clients
The increased flow of individual cases reported by CABx describing how clients are struggling to make ends meet demonstrates the difficulties people on low fixed incomes, many of whom pay for their fuel by PPMs, experience in attempting to cope with massive rises to their fuel bills:
A CAB in Buckinghamshire reported that their client, a man with long term physical and mental health problems, came to the CAB for money advice since he had a number of priority debts to sort out. The client was in receipt of short term, lower rate incapacity benefit of £59.20 per week but his ongoing payments for gas, electricity and water accounted for approximately half his weekly income. Since it was difficult for him to meet essential expenditure and have sufficient available income to offer creditors, he decided to not use his gas heating because he could not afford to pay this and his other priority commitments.
A Lincolnshire CAB reported a case in which their clients, a young couple in their twenties in rented accommodation with good jobs and a two-year-old child, had been managing to repay debts which they had previously accumulated. However, the spate of recent household fuel rises had tipped the balance of their precarious finances and pushed them into a state where they could not afford to maintain their repayments at the current level. As a consequence they were sinking deeper into debt.
A disabled man in his fifties sought advice from a Leicestershire CAB because he was extremely worried about paying his electricity bill. His electricity supplier had increased their prices by 34 percent in the last year, meaning that the client was now unable to afford regular electricity payments and was faced with the prospect of getting into debt or self-disconnecting from his electricity supply.
A Norfolk CAB saw a disabled woman living in fuel poverty. Her only income was disability living allowance and income support. She relied on storage heaters to heat her home. The client told the CAB that nearly half of her weekly income was going to pay her electricity bill and that without the disability living allowance, she would find it difficult to afford any heating to speak of at all. The client felt that she had to choose between being cold and being hungry.
1. Oral Statement by JohnHealeyMP, Minister of State for Local Government, Department for Communitites and Local Government, 27 March 2008
2. In April 2008, means-tested benefits increased by 2.3% and non-means-tested benefits by 3.9% (See DWP press release 5 December 2007)
3. Many more seek help with mortgage arrears - new Citizens Advice figures, Citizens Advice, Press Release, 18 March 2008 4. Fuel Poverty Advisory Group – Sixth Annual Report, 2007, p.4
5. Ofgem research found that PPM usage is high among low income/social group E households, with approximately 25 percent of those with annual incomes below £10k using PPMs and 20 percent of those in social group E doing so. Ofgem Accent market research, May 2005
6. Meeting the Energy Challenge - A White Paper on Energy, Department of Trade and Industry, May 2007, p.81
7. Prepayment meters and fuel poverty, Ofgem, Factsheet 26, June 2007
8. Ofgem-led summit pinpoints help on fuel poverty, Ofgem, Press Release, 23 April 2008
Ofgem's Energy Supply Markets Probe ( 90kb)
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