Office of Gas and Electricity Markets

OFGEM is an acronym used to apply for the Office of Gas and Electricity Markets. A UK based organization; it seeks to protect consumers of energy as a first priority.

This is done by promoting competition in the energy market, whenever it becomes relevant, and regulation of monopoly companies, which are active players in the gas and electricity markets. This organization also has interests in the reduction of greenhouse gases and both the supply and security of electricity and gas. Other priorities include helping to secure Britain’s energy in supply by encouraging competitive markets in the gas and electricity sectors. OFGEM takes into account of the needs of vulnerable customers, especially older people, disabled and those on low incomes, who can be misused by mischievous suppliers in the market (PRIMARY SOURCE MEDIA LIMITED. 1973 pg 23).

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Governance of Ofgem is by an authority that consists of executive and non-executive members and a non-executive chair. The non-executive group provides experience and expertise from a range of areas which include social policy, industry, environmental work and Europe. This Authority determines sets policies, priorities and strategies and makes decisions on a wide variety of matters including the control of prices and enforcement. The Authority’s powers are provided under legislation being the Gas Act 1986, the Competition Act 1998, the Electricity Act 1989, the Utilities Act 2000 and the Enterprise Act 2002. Ofgem has endeavored to keep all its operations transparent as much as possible through activities like having an annual open meeting of the Authority, thorough and full consultation in developing ideas and formulation of decisions and policies and publishing of minutes of its authority meetings.

Funds are recovered from costs through the licensed companies regulated by Ofgem. The licensed companies are obliged to pay a license fee which is normally set to cover Ofgem’s costs in its operations (GREAT BRITAIN. 2008 pg 63). The strapping six gas and energy suppliers recently announced large increases in energy prices. British Gas Business, which is part of Centrica, is the biggest of the six UK energy suppliers.

It offers business electricity prices as well as gas and incorporates several other companies under it including Scottish Gas Business, Enron, Bizzenergy, Electricity4Business and Electricity Direct. This is then followed by EDF which stands for Electricite de France which is a company owned by the French. In the UK, it has build up its reputation by the utility it provided to its customers of SWEB, London Electricity and Seeboard. Third on the big six is German owned E.ON, which includes customers of Norweb, Eastern Electricity, Independent Energy, Powergen and Economy Power.

Following close is Npower which is also a German company supplies gas and electricity in the UK and some of its customers include Northern Electric, Midlands Electricity and Yorkshire Electricity. The other key player in the energy market is Scottish Power Business which is owned by the Spanish parent company Iberdrola but supplies energy throughout the UK. The last of this six is British owned Scottish and Southern and is also known as SSE. It incorporates the customers of Atlantic Electric and Gas, SWALEC, Southern Electric and Scottish Hydro Electric. In August 2003, Ofgem came up with a consultation document which tried to put measures in place so as to make markets work for the consumers (GREAT BRITAIN. 1996 pg 34).

This was in respect to the regulation of electricity and gas both respect to marketing and sales. ‘A review of standard licence condition 48-87/03′. This consultation document considered the way in there is a certain regulation in the energy sector of direct marketing activity to the extent of establishing change. The document reviewed the provision of licenses and started a discussion about a range of proposals for change. Ofgem incorporated views of several consumer organizations, and suppliers to indulge in seminars to discuss on the issue further.

Ofgem considers specific sector regulation in respect to the regulation of energy, sales and marketing may become unnecessary. It would be inappropriate to withdraw fully from formal regulation. Towards the present, Ofgem came to a conclusion that there is a wide scope to change the licensing condition so as to reflect better the requirements of both consumers and suppliers. Ofgem seeks out to clarify the definitions of which activities are regulated by the licence conditions. It places a set of core requirements that applicable to all sales and marketing media. Another regulationput in place for energy and gas suppliers is the prohibition of certain specific activities and the improvement of information provided to consumers.

It also pushes for a 14 day cancellation period and an alternative method to the existing reporting requirements. Regulation by the House of Commons in support to Ofgem has ensured marketing of electricity and gas to residential customers is subject to licence condition 48 of the licence of electricity and gas suppliers. Ofgem has aspired to back from the specific sector regulation of sales and looks forward to proof that industry tries to tackle the problem of misselling. This will ensure the development of an independent co-regulator approach in the future. Ofgem has held high regard to the potentially influential costs that regulation can give rise to and recognizing that additional costs may not be in the interests of utility providers or indeed consumers. These are likely ultimately to be given in the form of higher prices.

However, it has sought to balance miscellaneous costs with the benefit they will provide, not only by reduction of transfer costs, which are erroneous and cancellation, but also by provided improved consumer satisfaction and enhanced confidence which will lead to increased propensity to switch. Since the introduction of the aspect of competition into the electricity and gas supply markets, utility providers have made extensive use of selling through a direct channel to the market. They have explored several means such as doorstep marketing, internet, telephone and utilization of public places such as supermarkets. The results, which have been high levels of switching, have led to significant benefits for energy consumers in the form of differentiated service and lowered prices. This has not been without some difficulty because there have been complaints about the sale methods of some suppliers. Misselling has attracted criticism and concern because of its impact on consumers and generally on the market itself.

Ofgem has come to recognize that even though the number of complaints has reduced significantly, the problem of misselling is still a major item that requires addressing. The company is committed to creating a regulatory environment in which both suppliers and consumers are on fair ground and that consumers believe they will be treated fairly and appropriately. This means that suppliers will take control and responsibility for their sales representatives. Ofgem has already taken action against suppliers who have failed to comply with licence obligations.Ofgem continues to be of the view that in the longer term sector specific regulation of energy sales and marketing should become unnecessary. Suppliers’ brands are key assets and publicity about misselling damages these assets (CRAIG, D.

2008 pg 43). To the extent that misselling happens as a result of deliberate supplier choice, or as a result of negligence, this appears to reflect a supplier perception that the value of incremental customers outweighs any potential brand damage. Suppliers continue to invest in their brand, so that the value of these services will cover a wider area and will ensure consumers access energy fully. If Ofgem observes that the provisions of the AES Energy Selling Code of Practice (“the AES Code”) are sufficient to reduce misselling, and keep the level down through a period of market evolution, the Code may be a good candidate for the co-regulatory approach. Ofgem currently expects to review this before reviewing whether SLC 48 should be renewed in April 2006. One supplier said that doorstep selling is seen by the majority of customers as a worthwhile and informative experience, however one representative organization suggested that neither Ofgem nor energy suppliers had sufficiently appreciated the negative impact of energy misselling, which affected not only the energy market but also the telecoms market.

It was suggested that it was vital to the success of competition that Ofgem correctly managed the balance between the benefits to be gained from direct selling and the size of the problem of misselling overall (SLOMAN, J. 2006 pg 45). The consultation document asked for views on the retention of a requirement to review the licence condition at regular intervals. There was little consensus among respondents. Some suppliers said that any continuation of the licence condition was unjustified, given the range of other consumer protection legislation and steps taken by the industry to introduce a self-regulatory Code.

Other suppliers said that self-regulation was more effective thann the licence condition and supported its retention, although these suppliers had different views as to whether the licence condition should be amended. While no specific I representative organizations responded to the consultation Directly, they indicated during the course of a regular meeting with Ofgem that additional regulation was inappropriate (BARTLE, I., & VASS, P. 2007 pg 56). Several consumer groups supported a proposal to the extension of the scope of the licence condition, in particular to smaller businesses which have energy needs or purchasing behavior which they saw as similar to domestic consumers. Energy watch has said that it has evidence of a slight increase in the number of I complaints received.

Energy watch said that it was concerned at the number of complaints that it received from vulnerable consumers. Energy watch suggested that a licence breach involving vulnerable consumers (as defined in the energy watch remit under the Utilities act 2000) should result in more serious sanctions by Ofgem. Consumer organizations suggest that the licence condition should be extended to cover related sales of energy efficiency equipment and energy maintenance contracts, specifically to ensure that such sales do not interfere with consumer rights to switch supplier (BARTLE, I., & VASS, P. 2007 pg 62).

It also pointed out that cross-selling could lead to a loss of price transparency and consumer confusion. Another reports that it was receiving complaints about other products supplied by energy companies, such as service contracts and insurance and expressed the hope that enforcing the licence condition would lead to a reduction in the misselling of other products. Suppliers were generally of the view that it was unnecessary to specify minimum requirements or that the items identified by Ofgem were already provided for in legislation, regulations or the AES Code and that to include them in the licence condition would increase the regulatory burden. However one supplier said that customers should have a record of any calculation of predicted savings, but that this would result in additional costs. Energy watch said that a contract should be explained as such, with the word ‘contract’ included in or next to the signature box.

Another consumer organization suggested that cancellation rights should be provided on the front of the agreement, adjacent to the signature with a tear off slip to facilitateCancellation, and to include the address where cancellation must be received. Ofgem asked for views on the introduction of a mandatory 14 day cooling off period. Suppliers did not support this proposal in general. Some argued that there was no evidence that consumers wanted a 14 day period and that there was already provision for cooling off periods in a range of legislation and regulations. One supplier suggested that an effective cancellation period did not result from its length, but was a question of clarity and that all customer correspondence should clearly communicate with customers. It was suggested that ‘reasonable steps’ can be an effective term if Ofgem is willing to provide guidance in advance, rather than investigating a supplier after the event, which was said to be ‘invariably unhelpful’.

One consumer organization suggested the term “reasonable endeavors” implies that if companies are to abuse their position with consumers it will be perfectly acceptable if their practices do indeed completely fail some consumers (MCELWEE, M., & TYRIE, A. 2002 pg 75). Ofgem has considered the responses from its initial consultation document and concluded that it is appropriate to propose an amendment to the existing licence condition. In making this proposal Ofgem has balanced the potential costs and benefits from these proposals and concluded that they will have a positive impact upon competition, benefiting both suppliers and consumers.

Ofgem continue to believe that misselling has not yet been fully addressed by the industry, although it is encouraged by industry initiatives to do so (SLOMAN, J. 2007 pg 77). Ofgem is a company that has ensured the interests of all parties in the market are at a level field. Consumers are able to use energy from a supplier that they think offers the best standard interns of quality. Suppliers, however, are also able to give services which are standardized and which cover the best interest of the consumers.