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The Affordability of Energy: How Much Protection for the Vulnerable Consumers?

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Abstract

Affordability is a new “alien” concept penetrating the field of contract and consumer law as one of the obligations related to the provision of “universal services” or “public service” in the context of services of general economic interest. Affordability becomes an important element of the European social model (using Scharf’s terminology; Scharf, J Common Mark Stud 40:645–670, 2002) and its constitutional dimension will be confirmed by the Treaty of Lisbon and the Charter of Fundamental Rights of the European Union (EU). The major European Commission policy tool for ensuring the Affordability of Energy Supply is, on the one hand, functioning competition, which should bring about reasonable prices in general, and on the other hand, regulation targeted at so-called vulnerable consumers. First tested in the UK, it was later spread mainly by the requirements of the Second Energy Package in other Member States (MS). The Third Energy Package (to be implemented by March 2011) further develops this idea and clarifies the set of obligations that the protection of consumers and ensuring the Affordability of Energy Supply require in the understanding of the EU legislator. One could speculate to what extent this is a reaction to the fact that some MS and, in particular, the new MS did not implement the consumer protection requirements of the Second Energy Package, but rather opted for very different regulatory strategies. This paper will examine different regulatory strategies employed in four MS (the UK, France, the Czech Republic, and Slovakia), with special focus on the situation in the two new MS, in order to respond to the question as to whether these different regulatory strategies provide what is promised, i.e., affordable energy for all.

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Notes

  1. “There is broad consensus that market mechanisms alone cannot fully ensure consumers’ best interests in the energy sector.” COM (2007a), p. 3.

  2. See also ERGEG (2007), p. 9.

  3. The major components of liberalization of the market (privatization, unbundling, regulation etc.). However, the EU did not follow the UK example to reform “at once,” but it has rather divided the liberalization into several steps, depending on the political support for the liberalization by the MS.

  4. Recital 58 of the Directive 2009/72/EC, of 13 July 2009, concerning common rules for the internal market in electricity and repealing Directive 2003/54/EC (Electricity Directive 2009).

  5. Driver of competition is free choice and consumer switching.

  6. COM (2007b), p. 1.

  7. COM (2003), p. 15.

  8. European Charter of Fundamental Rights, Art. 36: Access to services of general economic interest: The Union recognizes and respects access to services of general economic interest as provided for in national laws and practices, in accordance with the Treaty establishing the European Community, in order to promote the social and territorial cohesion of the Union.

  9. Art. 3(5) of the Directive 2003/54/EC of the European Parliament and the Council, concerning common rules for the internal market in electricity (Electricity Directive 2003). There is no similar requirement in the Gas directive (due to the substitutability of gas by the electricity), and protection is mostly afforded to the consumers who are already connected.

  10. Art. 3(5) of the Electricity Directive 2003, and Art. 3(3) of the Directive 2003/55/EC of the European Parliament and the Council, concerning common rules for the internal market in natural gas (Gas Directive 2003).

  11. Art. 3(7) of the Electricity Directive 2009.

  12. Ibid.

  13. Ibid.

  14. Art. 3(13) of the Electricity Directive 2009.

  15. Art. 3(9) of the Electricity Directive 2009.

  16. Art. 3(12) of the Electricity Directive 2009.

  17. OFGEM (2007b), p. 31.

  18. Presentation of Kyriakos Gialoglou, DG Sanco, on the 2nd Social Forum of the Energy Community held in Zagreb on 14 October 2009. Presentation available at http://www.energy-community.org/pls/portal/docs/432203.PDF.

  19. As for the general measures and the general questions regarding comparison of the effects of the price competition, it will not be addressed in this paper.

  20. This is the case in France, Spain, etc. ERGEG (2007), p. 12.

  21. Ibid., p. 31.

  22. See Commission de Regulation de l’energie (2007). The price setting, however, considerably diverges from the model outlined by that Report to the Commission (ERGEG 2007, p. 16). The last price set is from 2005 and, according to the agreement between the state and the incumbent, it should not rise more than the inflation rate until the following year.

  23. See, e.g., http://www.energie-info.fr/pratique/comparer-offres#choix or the country report.

  24. ERGEG (2007), p. 32.

  25. See Commission de Regulation de l’energie (2008), p. 42.

  26. The incumbent will not rise prices for more than the inflation rate until 2010 (Commission de Regulation de l’energie 2007, p. 89).

  27. ERGEG (2007), p. 17.

  28. Ibid.

  29. Commission de Regulation de l’energie (2006).

  30. Décret no 2001-531 du 20 juin 2001 relatif à l’aide aux personnes en situation de précarité pour préserver ou garantir leur accès à l’électricité.

  31. Décret no 2005-971 du 10 août 2005 relatif à la procédure applicable en cas d’impayés des factures d’électricité. In case of default, the provider is obliged to inform the consumer that in case he does not fulfil his contractual obligations, the level of service may be reduced. The provider informs the consumer that he can apply to the social solidarity fund, and that in case he refuses, the provider will inform the local authorities. Thus, before any reduction of the service, one of the above-mentioned bodies has to discuss the case of the consumer. The time from defaulting the payment until the reduction of the provision of the service is rather lengthy, and in many instances, consumers can apply for help. On no occasion does the decree speak about “termination” or any other equivalent, which means that the consumers cannot be completely deprived of the provision of the service.

  32. Commission de Regulation de l’energie (2007), p. 88.

  33. Energy and Gas Authority is a collegial executive body, to whom is subordinated the Office of Gas and Electricity market (OFGEM). However, Authority and OFGEM are used interchangeably even by the regulator itself. See http://www.ofgem.gov.uk/About%20us/Pages/AboutUsPage.aspx.

  34. Similar to the Slovak Regulator URSO whose only statutory objective is the protection of competition in the energy market. However, consumer protection has been proclaimed an objective, e.g., in the reports to the Commission (see Urad na regulaci sietovych odvetvi 2006 or Urad na regulaci sietovych odvetvi 2007).

  35. OFGEM, OFT (2005).

  36. OFGEM has the right to enforce license conditions from 2002, under both the Gas Act 1984 and the Electricity Act 1989.

  37. See, e.g., OFGEM (2007a).

  38. Simplification of the Supply License Condition took effect from 2008. Ibid.

  39. E.g., Energy Retail Association Safety Net (http://www.energy-retail.org.uk/).

  40. Such consumer “watchdog” was also established in postal services; in telecommunications, a different path was taken from the beginning (self-regulatory schemes Otelo). For more details, see Elizabeth France, Ombudsman ∼ their developing role in consumer policy and utilities, CRI occasional lecture at University College London on 6 November 2006, p. 3.

  41. See Sections 17–27 of the Utilities Act (2000).

  42. See OFGEM (2005).

  43. COM (2007c), p. 4. See also http://www.energy-ombudsman.org.uk/links/3-5-case_study_bulletins.php.

  44. Prepayment meters are installed usually by vulnerable consumers as a way to prevent disconnection. However, the old token meters needed to be updated after every change of price which the energy companies have not done regularly and which has led to back-billing and, inevitably, has left many of the consumers in debt. See Energywatch (2007).

  45. See Consumers, Estate Agents and Redress Scheme Act (2007), Part 1.

  46. See Consumers, Estate Agents and Redress Scheme Act (2007), Part 2.

  47. Low-income consumers (and consumers living in rural areas) are not among the vulnerable groups mentioned in the supply license conditions. However, the concept of “low-income” consumer embraces all kind of vulnerability and thus has been target directly by the regulation. See, e.g., Energywatch (2007).

  48. Mirror provision contains also the Standard Gas Supply Condition.

  49. Fuel Direct implies direct deduction of the payment for electricity, and a proportional amount for outstanding debt, from the social benefits. It is very helpful in cases of irresponsible handling of financial resources (e.g., in cases of gambling and drug abuse, and in some new MS, it may serve as a means of protecting vulnerable consumers from the effects of usury loans they often enter into). Prepayment meters on the other hand are usually installed instead of disconnection, when the consumer has to recharge its account for electricity in advance. See http://www.energywatch.org.uk.

  50. OFGEM (2006), pp. 41–42.

  51. As partly mentioned before, the first generation of prepayment meters were token meters, which had to manually adjusted after every price rise and given that the energy companies have been slow to recalibrate or adjust these meters, people may have built up hundreds of pounds of debt which is likely to be added to the meter. Often consumers only became aware of this problem when they wanted to switch supplier.

  52. The reason given by the majority of the suppliers are the higher costs for the provision of this method of payment.

  53. See http://www.homeheathelpline.org. This is a free national helpline run by energy suppliers for customers having difficulties in paying their fuel bills.

  54. Suppliers are required to establish and maintain a Priority Service Register which lists their domestic customers who are of pensionable age, disabled, or chronically sick. Customers on the PSR are eligible for additional services free of charge and suppliers are prohibited from disconnecting premises occupied by a customer eligible for the PSR during the winter months.

  55. See http://www.thepensionservice.gov.uk/winterfuel/home.asp. The Winter Fuel Payment is an annual payment to help with the costs of keeping warm in winter. The payment is available to people who are aged 60 or over. For individuals between 60 and 79 the payment is either £125 or £250, those who are aged 80 or over may receive £ 200, £275, or £400, depending on individual circumstances.

  56. See http://www.warmfront.co.uk. The Government’s Warm Front Grant can provide a package of insulation and/or heating improvements up to a maximum value of £3,500 (or £6,000 where oil, low carbon, or renewable technologies are recommended) for some home owners and those renting from private landlords. See http://www.warmfront.co.uk.

  57. OFGEM (2007c) OFGEM’ s Submission to the European Commission reporting requirements under Directives 2003/54/EC and 2003/55/EC, p. 90.

  58. See http://www.energy-retail.org.uk/preventingdisconnection.html. The energy suppliers have also established schemes for the vulnerable consumers within the corporate responsibility. See, e.g., http://www.britishgas.co.uk/about-british-gas/what’s-important-to-us/customer-commitment.html.

  59. See http://www.energy-retail.org.uk/preventingdisconnection.html.

  60. OFGEM (2006), p. 36.

  61. Waddams and Pham (2007) argue that special competition authority sets lower standards than the general competition authority would do, as it unconsciously colludes with the firms.

  62. There is a number of ways how the price caps are set, e.g., classic price caps, revenue caps, profit caps etc.

  63. OFGEM (2002), pp. 2 and 16.

  64. Mathios and Rogers (1989) empirically show that the effects of price caps might be positive, negative, and neutral, in particular as it concerns the benefits passed to the consumers.

  65. See http://www.urso.sk.

  66. Act on regulation in network industries No. 276/2001 Coll., § 12 (7).

  67. Decree of the Regulator, No. 1/2007 Coll.

  68. Decree of the Regulator, No. 1/2007 Coll., which stipulates the level of price regulation, § 2–5 and Decree of the Regulator, No. 2/2007 Coll., which stipulates the methodology for setting a price (resembling, to a certain extent, the infamous rate of return price regulation).

  69. ERGEG (2007), p. 14.

  70. See Internal Market Fact Sheet Slovakia, January 2007.

  71. According to the Slovak Statistical Office, the average income per person (depending on the size of household) is approximately EUR 300 (http://portal.statistics.sk/showdoc.do?docid=4618). The average income in the Czech Republic is 30% higher. See http://www.czso.cz/csu/2006edicniplan.nsf/t/B5002C52E0/$File/3012061a.pdf or http://www.czso.cz/csu/2006edicniplan.nsf/t/B5002C52E6/$File/3012062a.pdf.

  72. COM (2007b), Annex 2.

  73. COM (2007i).

  74. For comparison, the incumbent in the Czech Republic, the CEZ will make profit of almost two billion EUR (despite the crisis).

  75. Compare COM (2007d, e, f, g) Internal market fact sheets: Austria, Poland, Czech Republic, Hungary, and Slovakia.

  76. COM (2007d) Internal market fact sheet: Slovakia.

  77. The act on the regulation in network industries, No. 276/2001 Coll.

  78. Electricity Directive 2003 and Gas Directive 2003.

  79. There is no specific regulation of quality of electricity supply, thus the contract applies, i.e., in fact the standard contract term set by supplier.

  80. National Report 2006, Regulatory Office for Network Industries, Slovak Republic.

  81. This was not an exceptional number cause by some peculiar situation. A year before, the number reached 35 000 disconnected households. See Slovak National Report 2006, Regulatory Office for Network Industries, Slovak Republic.

  82. National Report 2007, Regulatory Office for Network Industries, Slovak Republic, p. 53.

  83. OFGEM (2007c). OFGEM’ s submission to the European Commission reporting requirements under directives 2003/54/EC and 2003/55/EC, p. 90.

  84. See above, no. 71.

  85. Not to worsen already high social exclusion of some vulnerable consumers. Despite missing statistics there is a big possibility that many of the disconnected consumers belong to the Roma minority.

  86. Act No. 458/2000 Coll. on business conditions and supervision in energy sector (Energy law), §21/2/e.

  87. Ibid., § 17.

  88. Komp 3/2006-51, Czech Supreme Administrative Court, Decision of 18 December 2007.

  89. Energy Law, § 17.

  90. One could imagine more sophisticated ways of cooperation between these authorities, but it is not the case in practice.

  91. COM (2007h) Energy Mix Fact Sheet: Czech Republic and COM (2007e) Internal Market Fact Sheet: Czech Republic.

  92. See Energeticky regulacni urad (2007), p. 43.

  93. Energy Law, § 35.

  94. Energy Law § 12a; until the end of 2007, no consumer has used his right to the supplier of last instance. Energeticky regulacni urad (2007), p. 44.

  95. Energy Law, § 21(2) d.

  96. Energy Law, § 63 (1) a.

  97. Energy Law, § 21 (2) c.

  98. Energy Law, §17 (7) a.

  99. Energy Law, §17 (7) d, l.

  100. In the last report to the ERGEG, the Czech Republic states practically that there is no reason for concern, as persons can be disconnected only for the reasons explicitly provided for by the Energy Law: “i.e. chiefly due to unauthorized take of energy, in particular when the customer fails to pay.” Energeticky regulacni urad (2008), p. 54.

  101. See http://www.eon.cz/cs/corporate/profile/eon_distribuce.shtml.

  102. The numbers of disconnections by the incumbent will also be higher as low income consumers tend to switch less and usually stay with the incumbents.

  103. See Energywatch, FAQ: http://www.energywatch.org.uk/your_questions/index.asp.

  104. Ibid.

  105. Art. 3(13) of the Electricity Directive 2009 requires that the MS ensure the establishment of an independent dispute settlement mechanism.

  106. This would however require number of changes in case of the Czech Republic, starting from competences, budget, to the personnel structure of the regulator.

  107. The price of energy will decrease in the next calendar year in the Czech Republic; it is however unlikely it will be a long-term trend.

  108. The prices are increasing considerably every year. See Fact Sheet Internal Market in Energy: Czech Republic. The state holds approximately 60% share in the incumbent energy supplier CEZ.

  109. Electricity Directive 2009.

  110. See also ERA (2007).

  111. See Energy Supply Ombudsman (2008), p. 9.

  112. See http://aktualne.centrum.cz/finance/penize-a-investice/clanek.phtml?id=622923. The incumbent company CEZ has increased their profit by 40%, to two billion EUR for 2008. See http://aktualne.centrum.cz/ekonomika/penize/clanek.phtml?id=652767.

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Acknowledgements

I would like to thank to my supervisor Hans W. Micklitz for his help and support. To the team of the Czech Energy Regulator (ERU), that is to say to Martina Veselá, Helena Arnoldová, Jarmila Grígelová, Miroslav Belica, Pavel Círek, and Pavel Fucik, I give thanks for their kindness and unrestricted access to the relevant documentation. Finally, I wish to thank the two peer reviewers for their valuable comments.

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    Marija Bartl

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Bartl, M. The Affordability of Energy: How Much Protection for the Vulnerable Consumers?. J Consum Policy 33, 225–245 (2010). https://doi.org/10.1007/s10603-009-9122-9

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