Awful News For Energy Customers!

In a crushing blow, the regulator allows long-term contracts to be imposed on customers who switch energy suppliers. What a disaster!

Quis custodiet ipsos custodes?

This Latin phrase from the Roman poet Juvenal is usually translated as "Who will guard the guards?" In other words, who will protect us against the protectors? I ask this question because it appears that the UK's regulators have lost their senses. They have forgotten that their primary objective is to act in the best interests of consumers -- not to enrich the companies which they were created to oversee!

Sadly, we've seen two huge lapses from consumer watchdogs in the space of a week. Last Friday, the Financial Services Authority (FSA) gave a bonkers decision on unfair bank-charge claims as our bank-charges guru explained in Big Blow For Bank Charges Victims.

Yesterday, energy regulator Ofgem agreed that gas and electricity companies can now insist that new customers (including those switching between energy suppliers) enter into long-term contracts. In other words, Ofgem has ditched the rule which ties customers to energy suppliers for just four weeks.

Of course, energy suppliers will aim to cash in on the withdrawal of the four-week rule by insisting that new customers sign up to broadband-style agreements lasting twelve or even eighteen months. In addition, power firms will be allowed to charge financial penalties when customers prematurely terminate these contracts. In short, the vital energy market will migrate to similar terms and conditions as those found in the broadband and mobile-phone markets.

There is some method in Ofgem's madness: it claims that the move to longer-term contracts will promote fuel efficiency. It hopes that removing the four-week rule will encourage energy suppliers to improve energy-efficiency measures, such as installing 'smart' meters, loft insulation and energy-efficient boilers in homes. At present, there is no incentive for energy suppliers to invest in energy-saving devices in customers' homes, as they could lose these customers at a month's notice.

Frankly, I think that Ofgem has been duped, no doubt by the high-pressure lobbying and spin used by big firms when they want to improve their profitability at the expense of consumers. Thus, I expect energy firms to introduce long-term contracts without delay, but to hold fire when it comes to investing in energy-efficiency measures. As the latter isn't tied to the former, power firms have a lovely get-out clause.

As a committed environmentalist, I'm all in favour of reducing energy usage and the associated pollution, but my personal view is that Ofgem seems to have lost its marbles. The blindingly obvious outcome of this rule change will be fewer consumers switching gas and electricity suppliers, reduced competition, and higher energy bills for the UK as a whole.

Call me a cynic, but market deregulation always leads to two things: a financial bonanza for the players, and greater consumer abuse. Indeed, although wholesale energy prices have been falling steeply since late 2006, energy firms have hardly rushed to lower the prices paid by consumers, so they can't be trusted to act in our interests, right?

Furthermore, ditching the four-week rule will lead to a huge raft of new tariffs and services being launched, making it even harder to compare value for money. I expect the members of the Energy Retail Association are rubbing their hands in glee at the prospect of even richer rewards for themselves and their shareholders.

So, nice work, Ofgem. In the words of Homer Simpson: "D'oh"!

Editor's note: The other possible justification for long-term contracts is that consumers could benefit from a fixed price should wholesale prices rise over the contract period. However, like Cliff, I don't believe this is a good move by OFGEM. Any move that effectively reduces competition has to be bad for the consumer in my view.

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