Deregulation of the gas industry in Britain, one of the most fundamental restructurings of a key industry in years, has not been spared teething problems - but already 3.2 million of the UK's 20 million domestic consumers have switched to their choice of gas supplier.
At the rate consumers have been switching since national roll-out was completed in May, the number could rise to four million by early next year.
Deregulation is important because it is introducing an element of competition that is advantageous to consumers. Britain is the only country in the world with a fully competitive gas market where 20 million customers can choose which company they want to supply their gas.
Electricity suppliers, oil companies, a supermarket chain, trade unions, a national newspaper and at least one financial services specialist are just some of the companies that are now competing in the domestic market against British Gas Trading, the former monopoly supplier,. In the industrial and commercial market, there are already over 60 suppliers serving customers that range in size from a fish and chip shop to a giant gas-fired power station.
Significantly, competition is working for the consumer far better than any regulation ever did. In the domestic market, gas prices fell by 24% in real terms between 1986 and 1996 as a result of regulation. They fell a further 20% in one day on 29 April 1996, when domestic usage was released from the standard monopoly tariff and greater competition kicked in. (This was the date on which the first pilot project was rolled out in Cornwall, Devon and Somerset.)
Gas consumers are tapping into the benefits of deregulation more quickly than did telecommunications customers when that sector was deregulated in 1984.
The problem with any dramatic shake-up is that customers can be exploited by unscrupulous suppliers. At Ofgas, we are determined to avoid this exploitation in the gas industry. Controls and checks have been built into the deregulation process for this purpose.
First, there has been a fundamental restructuring of the industry that bears a stronger resemblance to that of the rail network than electricity or other utilities. Unlike those utilities, the mains pipeline infrastructure has been separated from all other gas industry activities. Companies are prohibited by law from being both the monopoly owner of the pipeline and a supplier through that system to consumers. As a result, the pipeline owner BG Transco now actively promotes competition in supply because it is good for the pipeline business, rather than protecting its own supply business at the expense of consumers.
Second, Ofgas has been set up to act as regulator of the industry. What we can and cannot do is governed by legislation, which has its advantages and disadvantages. At the moment, Ofgas controls the prices that British Gas Trading can charge domestic customers. This price control will expire in the year 2000 and I would not expect it to be renewed. This is because the control was introduced to protect customers in the initial stages of deregulation. By the year 2000, it is expected that competition between different suppliers will have developed sufficiently to provide its own voluntary price check. If so, controls of this sort will no longer be needed and the industry can avoid becoming weighed down with unnecessary bureaucracy.
In other areas, we are learning through experience. New suppliers must market their product. For many new domestic gas suppliers, doorstep selling has proved a successful way of picking up customers and one that has found favour with many domestic consumers - especially those on low incomes. Independent research carried out by MORI for Ofgas has shown that 83% of people who have switched to a new supplier were contacted on the doorstep. MORI also found that customers on low incomes were switching in higher numbers than other social groups. So savings are going where they are needed most.
While the gas industry has promised to regulate itself, such self-policing arrangements, put together by industry committees, are inevitably voluntary.
They have proved ineffective against a trend towards 'creative marketing' by some of the suppliers. Complaints to Ofgas about their bad sales practices began to surface soon after the industry was deregulated, reaching a peak in March this year.
Ofgas had no powers to control these practices directly but it does have the sole power to issue the licences that all gas suppliers need to operate in the market. We therefore decided in 1997 to add an extra condition to this licence to enable us to take action against any supplier with misleading sales and marketing practices. It is not easy for Ofgas to change these licence conditions, however, as the law requires us to obtain the agreement of 90% of all licence holders before it can do so. In the event, when agreement was sought, we gained the support of every domestic supplier and, as a result, the marketing condition came into force in January 1998.
Domestic gas suppliers must now provide stringent training for their sales staff and must follow up any doorstep or telephone sales.
Fresh contact must be made with the customer within two weeks of the sales contract being signed, to check that the customer was happy with the way in which the sale was conducted and to ensure they understand that they have signed a contract. If the answer to either of these questions is no, the supplier has to cancel the contract.
Since January, when the marketing condition came in to effect, we have taken action against two companies. One of them has been forced to retrain its 3,000-strong salesforce - an expensive operation. Complaints about bad sales practice are now in decline and we think the industry has got the message. Gas competition is here to stay but the consumer will be protected.
