On 8 January 2009, OFGEM published its consultation paper "Addressing unfair price differentials" as part of its probe into energy supply pricing. OFGEM's stated aim is to guard against discriminatory, without hindering innovation or competition in the market. Their view is that competitive pressures and encouraging customers to switch provider do not have the far-reaching effect which they believe is necessary to protect consumers. In the paper OFGEM asks for views from suppliers, consumers, consumer organisations and other interested parties on four proposals for ensuring fair pricing, which are as follows:
- differences in charges for different payment methods must be cost reflective (this is the "minimum" level of change identified by OFGEM);
- prohibition on undue discrimination against customers because of their individual circumstances. This is wider than proposal (a) and would require additional costs imposed on customers due to their payment method/location/any other circumstance to be cost reflective, and for there to be no unjustified discrimination in the terms offered to these customers;
- introduction of relative price controls, monitored by OFGEM. These would be implemented by having a benchmark price for particular payment methods, with OFGEM setting a maximum percentage by which this benchmark can be exceeded. The price controls would be periodically reviewed (OFGEM suggest every 3 years) and would be subject to an annual inflation adjustment. This is an alternative to proposal (b); and
- prohibition on cross subsidies to eradicate higher margins on electricity supply than on gas.
The consultation focuses on the idea that there should be full cost justification i.e. consumers' bills should reflect the costs which can be attributed to them. However, for suppliers this may mean that some costs are not recoverable, e.g. debt management costs. It is also not clear from the consultation paper whether the same controls would apply to all suppliers regardless of their position in the market.
The consultation closes on 20 February 2009. OFGEM's suggestion is that any changes will be implemented by a collective modification to supply licences. OFGEM will be publishing a further report in Spring 2009 on the responses to its probe into the energy supply market, which will suggest other areas for change. Therefore, electricity suppliers are likely to find that the suggested modifications are not the only outcome from the probe.