Removing price controls

• Report: Protecting consumers? Removing price controls
• Public Accounts Committee

Edward Leigh MP, Chairman of the Committee of Public Accounts, today said:

“Where price controls have been removed from a market, suppliers are under pressure to keep their prices as low as possible and their service as good as possible by the ability of consumers to switch suppliers easily and effectively. In practice, however, the removal of price controls from energy, telecoms and business postal services has failed to generate the expected market pressures to the benefit of all consumers.

"Consumers simply do not have the kind of good quality information needed to get the best deals on price and service. It is very telling that, according to an NAO survey, a quarter of electricity consumers who had switched supplier ended up paying higher prices. Recent Ofgem research indicates the proportion might be even higher. And telecoms customers could well be having the same problem.

"It is the poorer and older citizens who are least able and yet would benefit most from switching to a cheaper supplier. They have been exposed to huge increases in gas and electricity prices, far greater than in many other countries. This Committee highlighted some time ago the ludicrous situation that prepayment meter customers are discriminated against by being made to pay over the odds for their energy.

"Consumers and businesses must have confidence that markets without price controls are working properly. Ofgem has at long last carried out a formal probe into the market, the initial findings of which were published last month. It is welcome that the regulator’s key conclusions reflect recommendations made by the NAO and this Committee. I am less pleased that it has taken Ofgem so long to respond seriously to the Committee’s concerns in this area.”

Mr Leigh was speaking as the Committee published its 52nd Report of this Session which, on the basis of evidence from Postcomm, Ofgem and Ofcom, examined the regulators’ decision to remove price controls; the benefits of this decision to different groups of consumers; and the challenges of regulating these markets and the success with which the regulators met these challenges.

When competition in a market is weak, price controls can help to protect consumers from the risk that companies might take advantage of their position to set excessive prices. However, price controls can also stifle innovation. To work well they depend on the regulator being able to set price limits at the right level. Ofcom, Ofgem and Postcomm have statutory objectives requiring them to protect consumers through the introduction of competition, where appropriate. Between 2002 and 2006, each removed retail price controls from, respectively, fixed line telephone provision, gas and electricity supply, and Special Delivery (Next Day) postal services for business account users. In each case, the regulator felt that the market was sufficiently well developed for consumers to be protected by competition.

Once price controls have been removed, regulators rely on consumers to switch suppliers, thereby rewarding companies who offer good service and competitive prices, and punishing the inefficient. For this to work, consumers need to have good information about different suppliers, be able to switch supplier easily, have sufficient confidence in the market to believe that changing supplier can make a difference, and to be able to obtain redress where a company behaves anti-competitively. But regulators also need to make sure that competition is working well and that vulnerable consumers are protected, especially at a time of large increases in energy prices, and telecoms prices above those of many countries.

Within hours of the Committee’s hearing on 14 May, Postcomm published new information directly relevant to the Committee’s questioning, without having mentioned in its evidence that it was going to. The Committee therefore recalled Postcomm for a further evidence session on 30 June to explain why it had withheld this information.