The deregulation of gas supplies has thrown the spotlight on one of the most vital issues in direct marketing – data protection. Tony Masters investigates the threat to the industry and how the leading players plan to combat it.

If you live in the South or West of England, you are one of the 2 million customers who already knows what it is like to be able to choose who supplies your gas. From November, consumers in Scotland and the North-east will also have the choice. As of next year, deregulation of gas supplies will roll out month by month until it becomes nationwide by May.

It is hoped that by then the marketing techniques used by competing suppliers will be more sophisticated. In the first regions to be deregulated, the approaches used have ranged from the blunt (door-to-door salespeople) to the broad (door drops). But the most targeted method of all – direct marketing – may be restricted, depending on the outcome of current data protection disputes.

Were that to happen, there could be two important consequences for the market. First, existing suppliers would have to employ more wasteful advertising channels to communicate with prospects and customers. This would raise marketing costs and influence the utility prices. Second, the potential for real competition to grow could be limited.

Therefore, defending the right to use customer data for marketing purposes is one of the most important battles direct marketers have had to fight. When Arthur Andersen researched the factors for success in deregulated utilities last year, it named three features as vital – customers, cost and culture. “Companies will lose market share if they fail to get all of these right,” said Howard Barrett, head of the consultancy’s customer satisfaction practice.

Understanding customers is one of the things direct marketing does best. By analysing data and looking for behavioural patterns, key segments can be identified and targeted with specific offers and services. These are the activities which Arthur Andersen puts at the top of utilities’ priorities.

And in the deregulated market for gas and electricity supply, companies will have to engage in two parallel marketing activities which demand the use of a database. Customer retention will be the prime objective for the former monopolies – British Gas Trading and the Regional Electricity Companies (RECs) – whose markets are being opened up.

At the same time, these suppliers, together with new entrants, will be trying to identify those consumers most likely to switch suppliers. Research into areas where competition already exists shows broadcast advertising may not be appropriate. According to a MORI poll (source: Gas Matters) of 1,100 consumers in the South-east, 79 per cent gave British Gas a positive rating and only 15 per cent had changed supplier. Price was the main motive for switching.

The prevailing attitude towards competition was wait and see. Of those still buying from British Gas, 27 per cent said they were considering switching. Out of the 85 per cent who had not changed supplier, just over one-quarter were potential targets for rivals.

Early figures from Ofgas show how variable the level of movement in the market can be. At the end of 1996, having been deregulated since April, 96,456 customers had switched in Cornwall, Devon and Somerset out of a total of 500,000. But in Avon and Dorset, with a similar sized market, only 31,032 consumers had chosen a new supplier. Identifying such target segments, by comparing known switchers with potential prospects, would provide a good target for direct marketing.

But this presupposes the ability to use customer data for a variety of marketing purposes. Not only could one market gas-related products and services, but also provide relevant marketing on non-related products and services. This issue will be argued out at a data protection tribunal this autumn. British Gas Trading is challenging restriction notices issued by the Data Protection Registrar, which has also issued preliminary notices to London Electricity, Southern Electric and Thames Water.

The issues raised are complex, but can be separated into two strands. The initial objections to utilities’ marketing activities were based on the legislation which put those companies into the private sector. The Gas, Electricity and Water Acts restrict disclosure of information held on customer databases to the promotion of supply of their main utility.

When the Gas Act 1995 came into force last year, British Gas mailed its customers notices of the change in their supply contracts. Included was an invitation to opt out of receiving information from the new company, British Gas Trading. Some complaints were made, but no action followed. It was a mailing in March this year by British Gas Trading which led to an enforcement notice being issued.

The company mailed customers a leaflet called “Your data protection rights – the right to choose the information you need”. It offered consumers the chance to opt out of future information, including details of electricity and financial services. In challenging the use of customer data for this mailing, the Data Protection Registrar raised a second strand of objection – opt in rather than opt out.

Initially, the challenge had been on the basis that suppliers’ licences did not allow customer data to be used for marketing purposes.

However, in the amended enforcement notice, the Registrar offered permission for a one-time use of data. But customers would have to opt in to future mailings. This has since been amended further to allow an opt-in mailing.

London Electricity has also challenged the notice it received. Three objections were raised by the Registrar: that unsolicited material on non-electricity supply services had been included in bills; that personal data had been disclosed to a third party; and that a mailing had been carried out to customers offering a mobile phone.

According to the company, no breaches either of its licence or of the Data Protection Act have taken place. It says the bill stuffers were for electricity-related products and did not involve third parties. The company to which information was disclosed – Knight Debt Recovery Services – is a wholly-owned subsidiary, which recovers bad debts. “We have a statutory duty to do that. Customers who pay promptly and in full also expect us to do that. By using another name, it produces a more effective response,” says a London Electricity spokesman.

As for the mobile phone offer, London Electricity says this was an incentive to customers to sign up for bill payment by direct debit. Again, no third parties were involved. “We are awaiting developments. Other companies going through similar processes are in front of us,” says the company.

Direct marketers in all sectors are waiting to see what happens. In amending the enforcement notices, the Registrar appears to be introducing a significant new principle to data gathering – the opt-in.

After initial confusion when the Data Protection Act was introduced in 1984, the point of what constituted “fair obtaining” of data, as required under the Act’s First Principle, was resolved by Guidance Note 19. This established the practice of offering customers the chance to opt out of future use of their personal information for marketing purposes.

Until last year, complaints to the Registrar about the use of data in direct mail had been in steady decline. This suggests that the general public is comfortable with this arrangement. Even where stricter regulations on marketing are in force, such as the Banking Code of Practice, the opt-out remains the benchmark.

By offering the chance to carry out a mailing, but only if it offers an opt-in, the Registrar would establish a potentially damaging precedent. If people were as active in exercising their rights as we might hope, every general election would have a 100 per cent turnout, for example. But since everybody knows they have a vote, if they choose not to cast it they have to accept whatever outcome ensues.

Opting out is the same principle. This has been recognised in the Data Protection Directive adopted by the European Union, and is due to pass into UK law in October l998. It provides for consumers to be able to object to their personal data being used for direct marketing purposes. It does not require positive consent for that use.

Offering consumers greater choice is one of the main functions of marketing. Identifying those individuals most likely to be interested in an offer is one of the main strengths of direct marketing. In deregulating utilities, the issue of choice has to be supported by the ability to increase market share through reaching hot prospects. In these circumstances, there is little reason to impose a stricter requirement over how permission to use customer data is obtained. Otherwise, existing suppliers might rightly feel that the rules they are working to are not fair.

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