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OfWhat? Are Regulators Protecting Consumers Sufficiently?

Images © Ofwat, Ofgem and Ofcom respectively.

About The Author

Georgia Mitchell (Writer)

Georgia is in her second year of Law at Newcastle University. She is currently pursuing a career as a commercial solicitor, and hopes to work abroad within the EU at some point in her future career. Outside of her studies, Georgia is an avid tennis fan.

Last week Owen Paterson, Environment Secretary, urged water companies to reduce their costs and revoke any plans of future price hikes to alleviate the pressure inflicted on people’s finances. The government has instructed the water regulator to pressurise and scrutinise suppliers to certify that the increase is not merely to maximise their profits.

Unfortunately, it seems this advice was sent to the wrong regulatory authority; Ofwat has been more stringent on price increases than Ofgem (the UK’s energy regulator). Ofgem have compromised and allowed the top energy firms to increase prices by an average of around 9.8%, whilst Ofwat denied an application by Thames Water to increase prices by 8%.

This raises the question, are regulators really protecting consumers sufficiently?

It is not only Ofgem that have been somewhat slow to protect consumers. Ofcom, the communications industry regulator has also recently received bad press.

A plethora of Britain’s largest mobile phone operators have come under recent scrutiny by Government after deplorable figures revealed that a large majority of certain areas cease to be covered by the companies’ promised 3G network.

Some of the most renowned corporations such as Vodafone and EE relentlessly promote their alleged rapid connection speeds and vast network coverage. However, Ofcom ascertained that on average a mere 35% of Britain’s major roads were actually being provided with 3G from the companies, with 10% of the roads having no 3G coverage whatsoever.

It could be argued that when people agree to a mobile phone contract because of companies’ assured advantages (such as network coverage) and this then ceases to be the case, then the contract has been breached, meaning some sort of compensation is due to the customer.

However is this argument feasible? Unfortunately it seems not. In short, most companies ensure they include subtle exceptions within their contracts to protect themselves from claims. The majority of large corporations have ‘safeguards’ implemented within contracts, excluding themselves from liability in case for lack of coverage. Contracts often stipulate coverage cannot be guaranteed in all areas due to interference, whether it is due to geographical issues or simply due to the surrounding infrastructure. Usually, the responsibility to check whether the area is suitable for 3G is with the customer before agreeing to the proposed contract.

Although a moot point whether telephone contracts can be regarded as ‘Goods’, Section 14 of The Sales of Goods Act 1979 provides that goods must be of satisfactory quality and fit for purpose. Usually, when making the contract the company requires you to state the reason and purpose for the device and contract. Essentially, a lack of coverage is not a breach of contract - the coverage maps all have disclaimers on stating that local conditions vary and that they are all based on an outdoor signal. In any case coverage is almost always viewed as a ‘best effort’, not a promise or a guarantee.

This does not appear to be a satisfactory state of affairs. This is a prime example of suppliers abusing their dominant positions and the freedom of contract.

Alongside the lack of connection, Ofcom has recognised a number of issues in respect to companies covertly increasing the price of consumer tariffs without prior notice. Ofcom’s major proposal this year was to intervene to allow consumers to terminate their contract without penalty if their provider introduces any price increase within the duration of their contract. Ofcom has also expressed that they expect providers to be unambiguous and upfront about potential price rises and of the consumer’s right to revoke the contract in the event of such an increase. As recent as October 23rd, Ofcom provided that it would now regard any increase to the "recurring monthly subscription charge" in a fixed-price deal as "materially detrimental" to customers and small businesses. However, the regulator said EU law made it impossible to ban price hikes during fixed-price contracts completely, but that it had gone as far as it possibly could.

The EU directive 93/13 states that if a service provider alters the conditions of a fixed term directive during the agreed term they must by law inform the consumer of their right to leave the contract penalty free. This was codified into British Law in the Unfair Terms Consumer Contracts regulations 2009.

Mobile companies comply with the directive all over Europe. It is argued that only in the UK has the regulatory authority failed to enforce the directive allowing service providers to extort customers to the tune of billions of pounds. Whilst Ofcom have eventually complied with the directive, it has taken four years to do so. This delay in action is not satisfactory, especially when it provokes unnecessary anguish for the public.

Moreover, this issue leads us to the main headline story: the controversial price hikes from some of the UK’s top energy suppliers, which have provoked various large protests. One of which occurred as recently as 5th November 2013.

The recent price increases to gas and electricity further reflect the shortfall of UK regulators to protect the vulnerable consumer. The UK’s leading energy supplier, British Gas has said they will be imposing a substantial increase in gas and electricity prices, affecting nearly 8 million households. It is imperative to highlight that British Gas is just one of many central suppliers who are enforcing this price rise: SSE, npower and E.ON are just a few of the other main energy suppliers who are planning to impose similar changes.

With many arguing that the government should ‘do more’ to prevent these recent price growths, Energy Secretary, Ed Davey, declares there is nothing they can do, arguing the main reason we are witnessing these rises is due to the cost of wholesale gas on international markets. If the government is in fact powerless to these price increases, then perhaps there are alternatives to resolve this issue. Some believe that nationalisation of suppliers proved to be more beneficial to consumers than the current form of privatisation. David Cameron has opposed such suggestions, saying a market with a monopoly supplier was inefficient. He argued that nationalism does not promote competition. Instead he stated that competition derives from privatisation, proper regulations and making it possible for companies to come to the market.

Many argue that regulations should be implemented by organisations such as Ofgem to prevent these price hikes from occurring in the future. Therefore, it is asked how such a significant rise in price has occurred yet again in energy supply. It is a frequent accusation that energy companies are simply exploiting the public, raising their prices when wholesale energy prices increase, but failing to decrease prices when wholesale energy prices recede.

Labour leader Ed Miliband recently claimed that energy companies have been "overcharging" their clients for years. However, the industries indubitably deny the accusation. The complexity of the market makes the truth hard to extricate. Energy companies defend their profits by arguing that they have to invest in new power lines and forms of energy generation. Labour has also argued that while energy company profits have been rising within the last few years, renewable energy investment has been falling with around only half of renewable energy investment deriving from the six largest energy companies.

The vast majority, from energy regulator Ofgem to the Energy and Climate Change Committee, agree that the market needs to be more transparent and understandable. Until this issue is addressed thoroughly, it is extremely difficult to work out whether or not energy companies are in fact making alleged excess profits. Energy companies dispute the prevailing belief that excess profits are to blame. Unless the industries invent an improved way of proving otherwise, they will inevitably have problems countering such an argument.

It is questioned what should be the proposed solution for this ongoing debate. One suggestion would be for Ofgem to enforce a number of criteria to be met by the suppliers. For instance, stipulating a specific profit percentage which must not be exceeded; this would continue to promote growth within the company (whilst the percentage will remain the same, real profit will increase as the company grows). This would compel the suppliers to either invest their excess profits into a renewable energy and the upgrade of infrastructure, or decrease/freeze consumer prices. This brings some of the advantages of a nationalised energy market, without the potential loss of efficiency through a lack of competition.

Overall, it is clear that as things stands several of our regulatory bodies are failing to protect vulnerable consumers.

It may be easy to justify price amendment clauses and other equally damaging clauses with the principle of the freedom of contract. However, it is arguable that regulatory bodies exist to protect consumers where they fall foul of freedom of contract through lack of choice, and at present many of the UK’s regulators do not seem to be doing this. This is all the more important for utilities that in the modern age are a necessity of life.

Credit is due to Ofwat for taking a strong stance against Thames Water; it is about time other regulators were forced to follow suit.

Many of these problems may shortly be solved by the Consumer Rights Bill, which I will be writing about in two weeks time, so be sure to check back!

Be sure to subscribe, like us on Facebook or follow us @KeepCalmTalkLaw for all the latest updates!

Further Reading

Ofcom, Ofcom sets out proposals to tackle mid-contract price rises.

Eur-Lex, Council Directive 93/13/EEC of 5 April 1993 on unfair terms in consumer contracts.

Ofcom, Price rises in fixed term contracts.

Steven Swinford, The Telegraph, Labour pledge to freeze energy prices has 'hit a nerve' with voters, admits minister.

Matt Chorley and Tamara Cohen, Don't put up water bills, ministers plead with suppliers.

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Tagged: Commercial Law, Consumer Rights, Contract Law, Regulators

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