Angulo microfibrilar

5.52 We note concerns raised during our study regarding disruption to supply last winter. Prolonged periods of severe cold weather, snowfall rendering certain areas inaccessible and supply failures at some refineries created a situation where some consumers were left without an energy supply at a very critical time. We are aware of a number of measures implemented by suppliers at the time to overcome supply issues including the

recruitment of additional drivers, utilising 4x4 vehicles for deliveries, part filling tanks to spread supplies available and topping up customers early.

We have talked with suppliers about ways to avoid a recurrence over future winters. The larger suppliers have told us for example that they have invested in additional bulk storage and snow-appropriate delivery vehicles and put in place larger call centres to deal with additional calls from customers. Suppliers also acknowledged the need for continued investment in refineries to ensure security of supply.

5.53 Compared to the heating oil market, we believe that the LPG suppliers are better able to make the investments necessary to ensure security of supply because of their size in comparison to the average heating oil distributor.

5.54 However, the most prevalent complaint raised with us was about frequent and significant increases in the price of bulk LPG, including sharp increases once an introductory pricing period had expired.

5.55 Data collected during our study²⁵⁹ demonstrate that the retail price of domestic bulk LPG has increased sharply in recent years. In GB, the

259 The major suppliers provided us with their average purchase price of propane and average retail price of bulk LPG on a monthly basis between January 2008 and March 2011. These data are confidential to the parties and are therefore not published here. We also obtained similar data from some smaller suppliers but over a shorter time period.

average price charged by the major suppliers increased by two thirds between 2005 and 2010. In NI, average price increases have been more substantial, almost doubling during the period.²⁶⁰

• LPG used in the UK is primarily produced as a by-product from the refining of crude oil and hence its price is related to the price of crude oil and the internationally traded price of propane. The LPG price is also influenced by the relative demand for other refined products, as production volumes are interrelated within the refining process. Escalations in input prices, particularly over last winter, have contributed at least in part to pushing up the price of LPG as evidenced in Annexe J. Other operating costs also contribute to the end price – particularly transport costs, given that road fuel prices have also risen.

• Suppliers told us that they do not pass on every increase and

decrease in input costs, instead trying to minimise the frequency of price changes to the consumer. Data they have provided show that in both GB and NI, retail prices tend to not fluctuate as much as input costs. Some of the larger companies have told us that they engage in hedging activities, such as investing in storage facilities and buying forward, to provide greater price stability.

5.56 Although the price increases observed credibly appear to be driven in part by external input cost pressures, and despite the efforts suppliers have informed us they make to smooth price fluctuations, this does not remove the challenge of managing the resulting price increases,

particularly where consumers are contracted to purchase exclusively from a given supplier.

260 Supplier responses to OFT information requests. A LPG supplier told the OFT that any differences in price increases between GB and NI are mainly attributable to the higher cost of shipping product to NI and the ongoing distribution costs to customers, both of which were impacted by sharply higher diesel costs which would have resulted in inflationary effects on the NI LPG domestic central heating prices.

5.57 Some customers complained that their contract terms meant they had to accept these price increases, while others, whose contracts contained price limits, complained that their suppliers did not abide by these.

5.58 The Orders imposed new contract terms on suppliers. These changes have brought advantages to consumers, for example by reducing

exclusivity periods to no more than two years. This is likely to increase competition in the market by allowing customers more opportunities to switch supplier. However, where customers are locked into contracts even for a minimum period, it is important that the contracts offer sufficient protection for consumers against material variations, including variations in the price.

5.59 In our view, consumers should either have some form of contractual protection against price variation (for example price limits) or they should be able to cancel the contract on reasonable terms if the price varies significantly. If the price change reflects underlying costs, for example wholesale LPG prices, then customers will not necessarily be able to find a better deal elsewhere, and they may stay in their existing contract. If, however, suppliers offer competitive introductory prices but then

unilaterally increase the price significantly mid-way through the contract term, customers may choose to cancel.

5.60 With this in mind, we have reviewed a sample of current contracts provided by suppliers.

5.61 We note that, prior to the CC Orders, the OFT had considered similar issues before and as part of this work had agreed undertakings with some bulk LPG suppliers to address concerns identified with a number of contract terms. The OFT had identified concerns regarding clauses

where it considered that suppliers might be able to vary prices, but reserved judgment pending further evidence of reaction to the revised terms proposed. We consider that the complaints received in the last year may suggest that certain prevailing contract terms could result in consumer detriment.

5.62 The OFT has therefore reviewed the terms of current customer contracts against previous undertakings and in light of complaints received. In conclusion:

• Our review has identified concerns that some suppliers' contract terms may not be entirely consistent with existing consumer

protection legislation. In particular, we have some concerns relating to the clarity and fairness of termination rights and we are engaging with the major suppliers to discuss these.

• Furthermore, where contracts are terminated early by a customer in line with their contractual rights, the OFT considers that the

provisions of the Order should apply to switching requests upon termination. We will work with industry to seek to ensure that guidance and contract documentation clarify this point where necessary.

Conclusions

The initial impact of the Orders

5.63 For individual tank customers, the Orders appear to be facilitating an increase in the amount of switching between LPG suppliers. In addition, smaller companies generally appear to be gaining customers at the

expense of the major suppliers. As well as facilitating switching, it would therefore appear that the Orders have been effective in stimulating entry and the expansion of smaller firms.

5.64 Metered estate customers seem to continue to find it difficult to switch, indicated by the low incidence of switching. While it is too early to draw any firm conclusions, several of the constraints identified on metered estate switching seem likely to persist, so that we do not have strong expectations for large increases in switching levels absent any other market developments.

5.65 We have found that some of the potential pricing concerns identified by the CC persist in the market. However, the Orders have only been in

operation for around two years and are still in their relative infancy.

Competition may further increase over time as the Orders bite.

Consumer protection issues

5.66 The OFT has concerns that some contract terms may not be entirely consistent with consumer protection legislation. We are engaging with suppliers to seek, where necessary, improvement in the clarity of

contract terms and protection of consumers' cancellation and switching rights.

5.67 While competition appears to have improved, at least in some segments of the market based on higher switching rates since the CC Orders took effect, the likelihood that competition is continuing to evolve in this market given that the Orders were only recently made, increases the importance of enforcing consumer rights, particularly as regards

cancellation and switching. Such steps may help to reduce detriment in the market directly but should also reinforce the effect of the Orders on competition in the market.