Ofgem’s penalties lack financial clout

Gas and electricity supplier npower last week received its second warning in a year from energy regulator Ofgem, over the behaviour of its sales staff. The latest warning was issued following an “unacceptably” high number of complaints from customers about npower’s sales practices.

Ofgem has warned that it may suspend the company’s marketing activities if it fails to improve the practices of its sales agents by January (MW last week). The regulator can also put restrictions on the rate at which the energy company signs up new customers if it fails to comply.

But past warnings by Ofgem have had little impact on the ruthless sales tactics widely employed in the deregulated energy industry, especially as the regulator claims it is unable to impose fines on companies that flout the rules.

According to Ofgem, the financial powers set out in last year’s Utilities Act cannot be enforced until the Department of Trade and Industry introduces secondary legislation to Parliament.

Most gas and electricity companies, however, believe that with the completion of the Utilities Act on October 1, Ofgem already has the power to impose financial penalties on unruly companies.

A spokeswoman for Powergen says: “With effect from October 1, the Utilities Act can be enforced in its entirety. The financial penalties are live as well.”

According to sections 59 and 95 of the Utilities Act 2000, the regulator can impose financial penalties of up to ten per cent of turnover on a gas or electricity supplier.

Philip Arend, consumer relationship manager at British Gas, which is owned by Centrica, says: “Technically, since October 1, Ofgem has had all the financial powers laid out in the Utilities Act. It now only needs to publish a statement of policy through the media to clarify the ‘whys’ and the ‘whats’ of any financial powers, before it can start using them.”

Iain Bosbery, a research and consultancy manager at Datamonitor, believes the threat of financial sanctions will force energy companies to improve their sales tactics, although the immense pressure to sign up more customers than their competitors is unlikely to recede.

He says: “In the brave new world of competitive gas and electricity markets, there is an increasing clamour to be number two. As things stand, with Centrica clearly the biggest player in the market, other energy companies want to see clear daylight between themselves and the rest of the pack.”

Bosbery adds that customer numbers are important for companies which want to grow organically, but for bigger players acquisition of smaller companies is an easy way to expand the business without having to woo new recruits.

Amerada Hess, one of the smaller players in the market – it has an estimated 400,000 customers – was put up for sale last week and is being eyed up by the major energy suppliers.

The intense competition for new customers means that many energy companies use aggressive sales tactics, deterring rather than enticing potential recruits. But continuously upsetting the very people you want to sign up – the allegations against npower’s sales force include forging signatures and forcing their way into homes – is likely to cause long-term damage to a brand.

One industry insider says: “In an environment of apathetic customers and low profit margins, the only way to sell is through direct selling. So, in order to gain enough customers to be perceived as a major player in the market, sales forces often end up using aggressive tactics.”

Ofgem’s direct selling complaints data for gas, in the first quarter of this year, show that npower topped the list, with 1.61 complaints per thousand transfers. The industry average is 0.58. Npower also had the highest proportion of electricity direct selling complaints in the same period, with 1.48 complaints per thousand transfers. The industry average for electricity is 0.72.

London Electricity (LE), which, like npower, was slapped on the wrist two years ago by Ofgem for using “hard sell” tactics, averaged 0.1 gas complaints and 0.49 electricity complaints for direct selling in the same period.

A spokesman for LE says that by threatening to suspend energy companies’ marketing activities, Ofgem is punishing the marketing department for what is essentially a problem caused by the sales and customer relations management (CRM) functions.

He says: “Following what happened in 1999 we have developed a code of practice for our sales people – a model that Ofgem is developing for the industry. And the industry itself, I think, does take the issue of CRM very seriously.”

So did npower’s marketing promise too much and its sales fail to deliver?

The brand, owned by Innogy, has invested heavily in brand-building through its sponsorship of England’s home test cricket matches and ITV’s police drama The Bill.

Npower director of residential and marketing David Andrew says: “Delivering excellence in sales and service management remains a top priority for our business and its management team. We are pleased to see improvements in our performance on complaints coming through, although there is still some way to go to meet our goals.”

But Thom Newton, head of marketing at design consultancy BamberForsyth, feels that in most cases the sales and marketing functions of energy companies are disjointed.

He adds: “Sales houses have different, more short-term priorities. Sales departments sometimes function entirely without reference to brand values. And so the rest of the brand can be penalised. There is a fairly large communication issue, which needs to be addressed.”

The targets set by Ofgem for npower earlier this year included developing procedures to ensure customers realise they have entered i

nto contracts following a doorstep meeting or a telephone call.

Meanwhile, most industry commentators agree that the role of Ofgem as a “naming-and-shaming” body puts more than adequate pressure on the energy companies to clean up their acts.

Philip Arend adds: “No gas and electricity company, not even npower, would like to be seen acting against Ofgem. The kind of bad press and publicity that npower got in the last week would have affected the City’s and shareholders’ perceptions. And that hurts. Npower surely must be doing all it can to clean up its act and recover that goodwill.”

But where Ofgem falls down is in its uncertainty of its own role and powers. Though the regulator is confident of its right to stop marketing campaigns, it is less sure of its ability to impose financial penalties. Until Ofgem imposes such penalties, it’s unlikely that companies will take seriously what the regulator has to say about poor business practices.

So while the regulator and the industry debate ways to ensure protection for consumers, consumers may have to learn to grin and bear aggressive sales tactics.