Deemed contracts and rates | June 2020

Overview

A deemed contract is normally in place when a customer moves to new premises and starts to consume gas or electricity, or both, without agreeing a contract with a supplier. A deemed contract may also exist where an existing contract comes to an end, but the customer continues to use energy.

Customers on deemed rates are likely to have to pay more than customers on contracts, for two main reasons. Firstly, suppliers are not able to purchase gas/electricity in advance and instead must pay the market rate at the time energy is consumed – meaning they are often not buying energy at the most optimal time. Secondly, deemed rate customers are more likely than others not to pay their bills, meaning there is a greater credit risk.

For these reasons, it generally costs more to supply gas and/or electricity to deemed rate customers (as a group) and these increased costs are passed on to customers on deemed rate contracts.

Ofgem has introduced rules to protect customers on deemed rates. These rules state that the terms of deemed rate contracts should not be “unduly onerous”. According to the rules, suppliers can ensure contracts are not unduly onerous by making sure that profit it derives from deemed rate customers is not significantly higher than the profit derived from contracted customers.

The risks and costs involved in serving deemed contract customers vary from supplier to supplier. It may cost one supplier more to serve deemed rate contract customers than another. Therefore, even though the charges on a deemed rate contract may be significantly higher than on an agreed contract, it does not automatically follow that the supplier profit made from a deemed rate contract is significantly higher.

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Change in practice

We have previously issued some decisions that have included conclusions that deemed prices were unduly onerous. This was usually because of a significant difference in price between the deemed rates and contracted rates. However, for the reasons above, that difference may have been justified by higher costs to serve customers on deemed contracts.

Considering whether prices are unduly onerous would require analysis of the costs of supplying, and the profits derived from, customers other than the one complaining to Ombudsman Services. We do not have the remit to request the necessary information to do this. Further, looking at a company’s overall pricing policy goes beyond our role of investigating individual complaints.

Therefore, we will no longer make decisions about whether deemed contract prices are unduly onerous.

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Decision-making principles for deemed contract and rate complaints

What we can do

Ombudsman Services will:

  • Accept complaints about deemed contracts for investigation.
  • Where appropriate, explain to customers why deemed rate contracts are likely to be more expensive than rates offered to contracted customers (see ‘Overview’ section above).
  • Consider whether it was appropriate for a supplier to place a customer on a deemed rate contract, or whether supplier error or omission left the customer on high deemed contract prices for longer than necessary.
  • Consider supplier and customer expectations and obligations in relation to customers on deemed contracts, for example:
  • There is a general expectation that a customer will contact their energy supplier to confirm they have moved to a new address; and
  • The licence conditions (7.7) set out an obligation for suppliers to send information regarding the deemed contract rates explaining the prices and informing the customer of cheaper prices.
  • Investigate complaints where the supplier has objected to a transfer of a deemed rate contract customer. Ofgem guidance states that “a supplier cannot prevent you from switching to another supplier, for any reason or at any time, (i.e. they cannot object to you transferring for reasons of debt or contract)”.
  • Consider other customer service issues involving customers on deemed rate contracts such as failed call backs and incorrect action taken.

What we won’t do

Ombudsman Services will not:

  • Comment on whether the rate charged on a deemed rate contract is unduly onerous. For us to determine whether a deemed contract rate was unduly onerous we would have to complete an investigation into the costs and risks for each individual supplier to provide a service to customers that are on deemed rate contracts. It is not for Ombudsman Services to decide whether the rates themselves are unduly onerous as we do not have access to the relevant information to make that decision.

Summary

As part of our investigation we cannot look into the tariff prices of a deemed contract. This is because we are not privy to information relating to the costs and risks associated for each supplier to serve customers on deemed contracts. This information is commercially sensitive to each supplier due to the competitive nature of the industry. Therefore, it is not possible for us to determine whether a deemed contract rate is unduly onerous.

Whilst we will not investigate whether the deemed contract is unduly onerous, we do share information with individual energy suppliers and the regulator, Ofgem if we see a trend within the industry that is affecting consumers.

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Background

It is our role to assess individual complaints. An investigation into whether pricing was unfair would require a detailed review of the costs and risks involved in serving deemed contract customers – something that would go above and beyond our role. As such, we do not comment on whether the rates charged under a deemed rate contract are fair. Ultimately, it would be for Ofgem to determine whether a supplier has breached a licence condition.

We do, however, have some concerns about the pricing of some deemed rate contracts. We have seen examples where deemed rate customers are charged more than double the rate of customers on contracts. While we are not in a position to assess whether this truly represents the increased cost of supplying deemed rate customers, we note that a report from the Competition and Markets Commission in 2016 criticised this level of increased pricing and said it did not represent the additional costs incurred by suppliers. The frequency and nature of complaints we currently receive about this issue suggests a perception of unfairness amongst microbusiness customers.

When we see evidence of potentially unfair practice, we may share data and insight with Ofgem in line with the memorandum of understanding between the organisations.

We have also seen examples of cases where either a customer has been placed on a deemed rate inappropriately by a supplier or where a customer has remained on a deemed contract for longer than necessary as a result of a supplier’s actions. This may have arisen, for example, because a supplier has failed to process a change of tenancy or failed to notify the customer of the rates they are being charged. We will consider, in such complaints, whether it is reasonable for the supplier to expect the customer to pay for energy consumed on the deemed rates, and in some cases we may decide to require a supplier to reduce the rate charged.

We will also continue to consider complaints about the level of customer service received by customers questioning the rates they have been charged.

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Case studies

Case study one: Three-year backbilling on deemed rates
A microbusiness complained to Ombudsman Services after receiving a bill for three years of electricity charges billed on a deemed rate.

The microbusiness explained that the landlord had always taken readings and they incorrectly believed that the energy charges were included in the rent. The microbusiness subsequently found that it was responsible for paying its own bills directly to the energy supplier.

The energy supplier hadn’t sent any correspondence to the supply address because the previous tenant hadn’t told the energy supplier they’d moved out. The supplier had continued to issue bills to the previous tenant’s head office and continued to receive payment. After three years, the previous tenant got in touch to confirm the change of tenancy and request a refund. It was at this point that the supplier billed the microbusiness at deemed rates.

When the microbusiness contacted the supplier, they were offered a new contract. The standing charge on the new contract was less than half the amount paid on deemed rates. And the unit rate was also significantly lower. If the period of deemed prices was recalculated at the agreed contract prices, the charges would have nearly halved. Therefore, the microbusiness complained that the deemed prices were unfair because they were significantly higher than contract prices.

In line with the approach set out above, we would not consider whether the prices charged to the customer were fair. We would, however, be able to consider whether it was fair for the supplier to bill the customer on deemed rates or whether the supplier error had left the consumer on deemed rates for an extended period.

In this instance, the supplier was not to know a new tenant had moved into the property, so couldn’t take the action required in the licence conditions to inform the consumer of the deemed rates and offer contracted prices. There was no supplier error; and the backbilling rules didn’t apply for the same reason.

The error lay with the consumer for not informing the supplier that they had moved into the property and they were responsible.

Therefore, we would not uphold the complaint.

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Case study two: Supplier objects to transfer requests
A microbusiness took a tenancy at new premises. They were the first tenant at the premises.

Prior to the microbusiness moving in, the landlord informed the microbusiness that Supplier A was the gas and electricity supplier for the premises. The microbusiness found a deal with Supplier B and arranged for them to take over both supplies in time for the tenancy to begin.

A few months after the microbusiness moved into the premises, Supplier B explained that it had completed the transfer of the electricity supply but Supplier A had objected to the gas transfer request. The microbusiness asked what to do and the Supplier B said they did not need to take any action and Supplier A would be in touch.

The issue did not appear important to the microbusiness because they were not using any gas, so they followed the advice of Supplier B and did not chase.

Several months later, the microbusiness received a gas bill from Supplier A calculated at deemed rates. The deemed standing charge was over £3 per day, and the bill had a balance of over £1,000 even though the microbusiness had used no gas. The microbusiness did not dispute that a standing charge applied, as there was a gas supply to the property, but considered the amount unfair because the standing charge on the contract they had agreed with Supplier B was 22 pence per day. In this instance, the standing charge on the deemed contract was nearly 14 times higher than the consumer could have achieved on contract if everything had happened as they intended.

In line with the approach set out above, we would not consider whether the prices charged to the customer were fair. We would, however, be able to consider whether the deemed rates had been applied unfairly or whether the supplier had made an error which had left the consumer on deemed rates for an extended period.

In this instance, Supplier A explained that it objected to the transfer requests because the previous customer was still in contract. The supplier had not been informed of a change of tenancy, and all notifications of objection, and bills, had been sent to the previous customer’s head office (rather than the site address).

The evidence showed that the microbusiness was aware Supplier A was the supplier for almost the entire period but had not contacted Supplier A to confirm they were responsible for the address. Although the microbusiness was informed by Supplier B to wait for contact from Supplier A, we could not criticise Supplier A for this misinformation.

Therefore, we would not uphold the complaint.

A further consideration for this complaint was whether a deemed contract existed in the first place. The Gas Act 1986 sets out:

“Where a gas supplier supplies gas to a consumer otherwise than in pursuance of a contract, the supplier shall be deemed to have contracted with the consumer for the supply of gas as from the time (“the relevant time”) when he began so to supply gas to the consumer.”

It could be argued that because the microbusiness did not consume any gas, they did not enter a deemed contract. However, the general approach we take to such cases is that where gas is available to a consumer or microbusiness, the supplier has supplied gas to that customer. The supplier incurs costs in maintaining an available supply and one function of the standing charge is to cover these costs.

The microbusiness in this case knew there was gas available if they wished to consume it. They chose not to consume it and did not tell Supplier A that they no longer wanted a supply of gas to be available. We were satisfied that a deemed contract existed for these reasons.

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Case scenario three: MPAN and address confusion
The microbusiness engaged with an energy broker to look after their energy affairs. The broker found an energy deal for the microbusiness shortly after they moved into a new property and arranged to transfer the electricity supply.

The microbusiness’s preferred supplier (Supplier A) took over the MPAN that appeared to be recorded against the microbusiness’s postal address on industry records. The previous supplier raised no objections to the transfer; everything appeared to have gone smoothly.

However, the records on the industry database were confusing. The microbusiness ran a takeaway food shop on a High Street which covered two addresses: 1-2 High Street. The industry database had three separate listings that covered these addresses: 1 High Street, 2 High Street, and Landlord’s supply 1-2 High Street.

Supplier A had taken over 1 High Street, when the supply into the business was the one recorded on industry records as 2 High Street. This meant Supplier A had taken over the wrong supply.

Supplier B – the correct supplier for the address – sent a bill for several months based on deemed rates. As the microbusiness ran a high energy consuming food business, the bill was for over £10,000. Based on the tariff with supplier A – the bill would have been less than £5,000. The energy broker asked that the account was rebilled at the rates the microbusiness would have enjoyed with Supplier A, but Supplier B refused.

The energy broker highlighted that the prices appeared to be unduly onerous as they were more than double the amount the customer could have got elsewhere, equating to several thousands of pounds over a short period. They considered it likely that, in a competitive market, Supplier B’s contract rates would have been close to Supplier A’s rates. And charging double the amount on deemed rates would mean Supplier B was gaining a significantly greater revenue from the microbusiness than from the generality of its customers of the same class.

The broker also cited the CMA Energy Market investigation and the conclusion in the final report that

“…average revenues are substantially higher on the default tariff types that less engaged microbusiness customers end up on, compared with acquisition or retention tariffs, which require an active choice by customers. These differences in revenues between tariffs go beyond what is justified by costs.”

Their view was that deemed prices in general are unduly onerous – and that applied in this case.

Finally, the broker contended that Supplier B had sent all correspondence, prior to the first bill the microbusiness received, to the wrong address: an upstairs flat whose address was not registered with Royal Mail.

In line with the approach set out, we would not consider whether the prices charged to the customer were fair.

We would, however, consider whether the deemed rates had been applied unfairly, or whether the supplier error had left the consumer on deemed rates for an extended period.

In this instance, the consultant contended that correspondence had been sent to the wrong address. The evidence confirmed that Supplier B had been sending correspondence to an address that was close to, but not the correct address, for the premises. It was more likely than not that the microbusiness wouldn’t have received the correspondence.

As the microbusiness was paying bills to who they believed was the correct supplier, they had no reason to seek out or chase bills from another supplier. Therefore, the microbusiness was not at fault for failing to notify the correct supplier they were in the premises. And Supplier B’s address error, however minor, had led to a delay in the microbusiness finding out they were on deemed rates.

Had the microbusiness known earlier they were on deemed rates, they could have taken action earlier to move away from those rates, resulting in a significant saving.

Therefore, we would uphold the complaint and make an award to cover the difference between the deemed rates and contracted rates for the period of delay.