Paying more and getting less: exclusion from utilities

While all of us need access to gas, electricity, water and telephone services as part of our daily lives, some pay more than others. Privatisation and competition are not in the best interests of the most disadvantaged, argues the National Consumer Council. Direct debit payment or energy efficient provision are not often feasible for those on low incomes or otherwise vulnerable. Government, regulators and suppliers must work together to stop the poor paying more.

What is market-based exclusion?
Why is it an important issue?
Market-based exclusion from utilities
Why do the poor pay more?
Energy
Water
Telecommunications
Solving market-based exclusion
Working together
Footnotes

It remains a sad fact of 21st-century life that, if you are poor and trying to access a range of everyday essential goods and services, you are likely to find yourself paying more or getting less for your money – or paying more and getting less. Statistics show that:

• the health gap between rich and poor is equal to nine years of life;
• two million people can’t afford to heat their homes properly;
• a third of households have no savings to draw on in an emergency.

Poor consumers are still dying younger, living in cold homes and coping with no financial safety net whatsoever. This is market-based exclusion. It is the problem to be tackled if the Government is to be successful in eliminating poverty and social exclusion.

What is market-based exclusion?
Market-based exclusion affects those who are already the most disadvantaged in terms of their income, employment, health and life chances. It means that they find it hardest to access even the basic goods and services – heat, light, health services, banking facilities – they need to live in modern society. It also means that they may end up paying more than their better-off counterparts for these goods and services – even though they often don’t meet their needs – despite having little, if any, money to spare.

Frequently, the factors associated with market-based exclusion combine to ensure that the most vulnerable people in our society, who face the hardest daily struggle to get by, have little time, money or energy to improve their situation. They become trapped in a cycle of poverty which is hard to survive and even harder to escape.

Why is it an important issue?
Previously we would simply have called this type of exclusion ‘poverty’ and viewed such limited access to the market as an inevitable outcome of ongoing income inadequacy. But changes to the mechanisms for delivering essential goods and services mean that this is no longer simply the case.

In the current day and age, services such as heat, light, water and telecommunications are clearly basic needs. We need them for health and well-being and for active and meaningful participation in society. However, many of the essential goods and services that people need in order to get by – such as energy for heating and clean water – are now provided by the private market. Increasingly, government has encouraged the private sector in the supply of essentials. This can be seen in the privatisation of national industries and the introduction of competition; mixed models of provision in public services; and the withdrawal of state subsidies from public services.

Yet ample evidence clearly illustrates that competition is not serving the needs of the most disadvantaged. A range of anti-poverty initiatives since the late 1990s – focusing on improving public services and raising incomes – have had notable success, for older people and young families in particular. The extent to which improving access to the market for basic essentials could also deliver antipoverty objectives has not been considered consistently or from a ‘disadvantaged consumer’ focus.

Market-based exclusion from utilities

The experiences of low-income and vulnerable consumers – including families with young children, people from black and ethnic minority groups, and people with basic skills difficulties – prove, without doubt, that drastic action is needed to ensure affordable access to utilities. Service-providers are not meeting the basic needs of those who need them most. Consequently, even in 21st century Britain, some people use candles instead of lights, avoid cooking, burn rubbish in the fireplace and sleep entire families in one room, in order to cut energy bills.

My boys sleep in the front room if it’s in the winter time because it’s warmer in there.
(Young parent with basic skills difficulties, Cornwall)

Why do the poor pay more?
Market-based exclusion is not the result of any single policy. It arises from a complex set of policies developed by government, industry and the regulators. It can relate to:

• who you are;
• how you pay;
• how you buy;
• how you access services.

In relation to utility services, the poor pay more for a number of reasons. Some groups of vulnerable consumers – including older people, those with health problems or disabilities, families with children and unemployed people who spend a lot of time at home – inevitably have higher than average levels of use. People on low incomes are also more likely to live in poor quality, energy inefficient housing, requiring far higher levels of use.

Many prefer, or are stuck with, payment methods (e.g., prepayment meters) and suppliers that are more expensive. Most people on low incomes are unwilling to spread the cost of bills using direct debits and thus benefit from the discounted tariffs, because automated transactions make it difficult to keep control of their budget and can result in heavy financial penalties for missed payments. They tend to prefer to make weekly payments, in cash, so these payments can be slotted into their budgeting cycle. But life on cash is more expensive and, across the utilities, disadvantages consumers. Poor consumers are more likely to fall into debt, be disconnected and incur extra costs as a result. The industry develops more attractive deals for profitable consumers, leaving the poor with the worst deals.

In addition, financial assistance to help with utility bills is inadequate, complex and fails to respond to regional price differences. Rights of access are inconsistent across sectors and between different consumer groups. There is a lack of clarity about the respective roles of regulators and government in relation to achieving social goals, and inconsistency in the definition of these goals across the sectors. For example, disconnections for non-payment are not allowed for water but are for most energy and all telephone consumers. Some of these issues are explored in more detail below.

Inadequate regulation and funding
Approaches to helping disadvantaged consumers are largely self-regulatory, sector-specific and out-of-date. Problems include:

• inadequate charging systems, insufficient tariffs and payment options, and a lack of services to assist low-income consumers to manage their small budgets;
• unhelpful and sometimes draconian debt recovery and disconnection practices;
• misleading sales practices and anti-competitive barriers to switching suppliers;
• inadequate complaints handling;
• poor monitoring of competition and price regulation by regulators; and
• insufficient financial assistance towards household bills for the poor.

Limited choice
Competition has helped lead to the diversification of goods and services. But the choices available are rarely designed for disadvantaged groups. Market complexity also makes decisions more difficult, and beyond the capacity of people with low basic skills. This increases the potential for mis-selling and leads to people making inappropriate decisions, which can be particularly costly to those who can least afford it.

Cherry-picking
Competition can help bring prices down, but providers ‘cherry-pick’ the most profitable consumers using increasingly sophisticated marketing techniques.

Inadequate market intervention has meant that some socio-economic groups benefit far less from price competition than others. Consumers who are costly to supply are charged in excess of their ability to pay or denied services altogether. The reduction of socially motivated consumer cross-subsidies has compounded this problem.

Social goals
Regulation for the achievement of social objectives and the protection of vulnerable consumer groups is frequently a poor rival for economic (primarily pro-competition) and environmental regulation. This is particularly the case in the utilities sectors.

Basic skills
Many people lack the skills and confidence to get the services they need. National Consumer Council (NCC) research found that consumers varied greatly in their degree of confidence and ability to tackle providers. Consumers with basic skills difficulties have trouble with most consumer transactions. They experience the greatest access problems, yet are the least catered for. Independent help is highly valued, but in short supply. They rely heavily on community centres, friends and family for dealing with providers – even for basics such as reading and understanding bills.

Energy
The Government’s UK Fuel Poverty Strategy aims to ensure that energy bills are affordable for vulnerable households by 2010, and for all households by 2016.

There have been some gains as a result of lower energy prices, but we are already seeing price rises and this trend is certain to increase over the next decade. Unless lower bills are achieved, or the poor receive greater financial assistance, fuel poverty will rise with drastic consequences.

The Fuel Poverty Advisory Group has warned that the 2010 target will only be met if the strategy’s current failings are addressed. Over three million households spend more than 10 per cent of their total income on energy – the level deemed acceptable by government. Two million of these are vulnerable households – i.e., elderly, disabled and chronically sick people, or families with young children.

An effective strategy must tackle all the causes of affordability problems: high fuel prices, high demand due to poor home energy efficiency, low household income and poor company practices. Other factors that need to be tackled include:

• expensive prepayment meter tariffs – pre-payment meters allow small and controllable cash payments, making them popular with low-income consumers. However, they are the most expensive payment method, making debt repayment even harder and self-disconnection more likely;
• uneven benefits from competition – while rates for switching are fairly even across various consumer groups, the benefits are not. The largest price decreases are associated with payment by direct debit (17 per cent), not prepayment (8 per cent). Disadvantaged consumers are more likely to be targeted for mis-selling and are, therefore, at greatest risk of switching to a worse deal;
• inadequate integration and resources for schemes set up to tackle fuel poverty;
• inadequate debt management practices by fuel companies.

Water
Overall access to water is not a widespread problem because disconnections are banned; however, water bills remain costly. The average bill amounts to around 1 per cent of a household’s income. For many households with lower-than-average incomes, the proportion is far greater. And, following the regulator Ofwat’s price review, average household water bills will rise by 13 per cent before inflation from April 2005 to April 2010.

Problems in water provision are being caused by price rises. Affordability was not a key consideration in Ofwat’s price review. There is insufficient help for the poor towards paying their bills, and companies have inadequate debt prevention and money management practices to help consumers who are in debt.

Factors compounding these problems include:

• ratable values – most household water use is unmeasured and charged for using the outdated ratable value of a home, a poor proxy for the ability to pay;
• unfair optional metering – households can have a meter installed free of charge so they pay by volume. Those likely to choose this will be small households living in high ratable value properties who can save on their bills. This means that other consumers pay more. In the South West, the difference between an average metered bill and an average unmetered bill will be over £200 per year in 2010.

Telecommunications
All consumers have the right to affordable fixed-line telephone services and access to public call boxes, but this remains a goal rather than a reality. Landline disconnection rates remain high, indicating inadequacies in the provision of low-cost social tariffs and debt management practices. Affordability problems in telecoms can be attributed to excessive prices (including poor price controls and lack of competition), poor debt and disconnection prevention practices, poor public access, and insufficient regulation of company practices.

Factors compounding these problems include:

• limited price comparison information – the regulator Ofcom has introduced an accreditation scheme to provide impartial price comparisons online, and has a link to uswitch.com on its website. However, not all consumers have access to the Internet and those on the lowest incomes are least likely to go online;
• mis-selling and erroneous transfers – consumers are wary of switching suppliers as a result of problems in the energy sector;
• paying more for controllable bills – most low-income consumers who do not have a fixed line aspire to have one but are concerned about costs. Awareness of services to help control bills is low. Prepayment mobile phone use is greatest among low-income users, and many of the three-and-a-half million people with mobile-only access fall into this group;
• inadequate choice of payment options – special schemes can be complicated and are not well publicised, resulting in low consumer awareness;
• public payphone access being reduced because of the continuing decline in use – yet people without a home telephone, especially in areas of social deprivation, often rely on payphones. In 2003 Oftel approved BT’s removal of some phones from a multi-phone site;
• poor company monitoring – in contrast to Ofgem and Ofwat, Ofcom does not collect consumer debt data, despite it being an important indicator of affordability and company debt management practices.

Solving market-based exclusion
As with any set of problems with complex causes, the solutions are equally complex. They will differ in relation to different groups of consumers and across different types of goods and services, and may need to be applied in various combinations. The NCC’s Solutions Tree was published for the first time in its consultation pack, Why do they poor pay more . . . and get less?, launched in September 2004. The Solutions Tree sets out the range of solutions to market-based exclusion that should be considered in relation to particular groups of consumers, goods and services, and whole market sectors.

To tackle market-based exclusion from the utilities the NCC calls for the following action:

• Stop the poor paying more
  Utility regulators and Government should ensure that industry does not charge excessively for services preferred or used disproportionately by low-income consumers. Where charges are considered to be appropriate but still unaffordable, subsidies should be introduced which reflect the reality of people’s bills.
• Adequate and clear social obligations
  The Department of Trade and Industry and the Department for Environment, Food and Rural Affairs should consult on and make affordable access to a defined level of universal service in the electricity and gas sectors, and the water and sewerage services, a prime objective of the regulators. Guidance should be issued to all regulators clarifying the roles and responsibilities of Government and others, and setting clear objectives for achieving affordable access against which performance must be monitored.
• Improved debt prevention and recovery
  The utility regulators should require suppliers to provide, market and achieve take-up targets for an adequate choice of low-cost social tariffs, provide an appropriate choice of payment methods and follow best practice in dealing with consumers in payment difficulties and debt management. The Department for Work and Pensions should lead on the urgent revision and further development of the third party deduction scheme in the context of basic bank accounts and the Post Office Card Account, in conjunction with the Inland Revenue, Ofgem, Ofwat, Oftel, the Post Office and providers. Access should be widened to include all benefit, pension and tax credit recipients, those without utility debts and telephone users.
• Improved consumer protection
  Ofcom and Ofgem should work together to ensure improved cross-utility, mandatory regulation of the industry’s competitive sales practices to avoid any undue adverse impacts on disadvantaged consumers. This should cover price controls, switching and sales practices and complaints handling.

Working together
If we are to alleviate market exclusion, the Government, regulators and suppliers need to work together to improve access to essentials, not least by tackling the higher costs of access experienced by disadvantaged consumers. The NCC’s consultation pack also issues a call to all stakeholders – Government, industry, regulators, community groups and the voluntary sector – to join it in working to overcome market-based exclusion and making a real difference to the consumers who are most in need.

Nicola O'Reilly is Policy Officer at the National Consumer Council
Georgia Klein is Senior Policy Officer at the National Consumer Council
Claire Whyley is Deputy Director of Policy at the National Consumer Council

Footnotes
1. Fuel Poverty Advisory Group, Annual Report 2003/04 [back to text]
2. BACS Ltd, How could paying your bills by direct debit save you money?, 2004. Paying household bills by direct debit could save the average consumer each year around £22 in electricity charges, £38 for gas and £12 for telephone. [back to text]
3. Energywatch, Pricing Comparison Factsheets, April 2003 [back to text]
4. Ofwat, Average Water Bills 2003-2004, April 2003 [back to text]
5. Andrew Linacre, Regional and sub-regional and local area household income, Office for National Statistics, May 2002. Based on the most recent figures available (1999), Londoners had a gross household income per capita of £21,207. Those in Wales had an income of £8,870 and in the South West an income of £10,073. Wales and the South West have the third and fourth lowest incomes of the 12 regions, with London the highest. [back to text]
6. Ofcom, BT’s residential gross disconnection figures, October 2002–September 2003 [back to text]
7. Watervoice South West, meeting minutes, 11 July 2002 [back to text]

Poverty 120, Winter 2005