Competition authorities look to transform energy market

The Gas and Electricity Markets Authority (GEMA) asked the CMA in June last year to review the market to investigate whether the wholesale and retail markets for gas and electricity display features that result in competition being restricted, distorted or prevented (an Adverse Effect on Competition or AEC).

The CMA provisionally finds in its report a number of features resulting in an AEC. Its notice of possible remedies sets out the measures that it is considering in response.

What are the CMA’s provisional findings?

The referral of the energy market to the CMA for investigation was driven in part by concerns about affordability of energy and standards of service.

The CMA found that average prices for domestic customers are above, and for the SME market “substantially” above, the level that would be expected in a well-functioning competitive market.

It compared return on capital employed with the cost of capital for the Big Six energy companies, and calculated that domestic customers paid around £1.2 billion and SME customers £500m more on an annual basis than they would if competition functioned properly.

The CMA examined six separate markets for the wholesale and retail of gas and electricity in Great Britain. Its key findings are:

Wholesale markets

There is no evidence of features giving rise to an AEC in the wholesale gas market.

In the wholesale electricity market, the current lack of locational pricing for transmission losses, and the mechanisms for allocating “contracts for difference”, lead to an AEC.

Retail markets

The CMA comments that a well-functioning retail market for gas and electricity would be expected to lead to downward pressure on price, compliance with customer service standards and innovation. In respect of retail markets, the CMA provisionally found that the following features give rise to an AEC:

• weak customer response and engagement, meaning that the majority of domestic customers have never switched supplier (56%), or switched tariffs with the same supplier (72%) (this is also a feature of the retail market for SME customers)
• the ability of the six largest energy firms to exploit this inactivity of their customer bases through higher pricing of the standard variable tariffs, which are used by about 70% of their customers
• the “simpler choices” component of the Retail Market Review (RMR) Rules introduced by Ofgem, which reduces the number of tariffs that a supplier can offer
• the systems for gas and electricity settlements, which do not incentivise suppliers to help customers reduce their energy consumption
• the lack of transparency in the relationship between the Department of Energy and Climate Change and Ofgem, and questions about the perceived independence of Ofgem. Ofgem had suggested to the CMA during the investigation that its competition duty had been “down-rated” in relation to its other duties. The CMA described this as “significant cause for concern”.

What happens next?

The CMA, when it finds an AEC, has to decide what action it, or other bodies, should take to remedy, mitigate or prevent it. The CMA has published for consultation a range of 24 possible remedies to address the AECs identified above. These include (among others):

Pricing remedies

The CMA does not plan to introduce price caps or other price controls. It does, however, propose new transitional tariffs to prevent suppliers “rolling over” disengaged customers onto relatively high tariffs. In respect of the AEC in the wholesale gas market, the CMA proposes amendments to the allocation of contracts for difference, and a new standard licence condition that would require transmission losses to be priced on the basis of location.

Informational remedies

Possible remedies to improve the information available to consumers include the establishment of an independent price comparison website; a priority roll-out of smart meters to customers currently using prepayment meters; and rules on the information that must be provided to domestic and/or micro-business customers.

Regulatory remedies

Proposed remedies include the removal of the RMR rules from the standard licence, to enable domestic suppliers to offer as many tariffs as they wish; revision of Ofgem’s statutory objectives and duties to increase its ability to promote effective competition; and granting Ofgem more control over the process of developing industry codes.

The CMA is inviting responses to its report to be submitted by July 31.

How can Ward Hadaway help?

This is a brief summary of the CMA’s report. If you would like further detail about the CMA’s provisional findings, the proposed remedies and how they could affect you, or if you are considering submitting comments to the CMA, please get in touch.

Ward Hadaway’s lawyers combine energy sector expertise with specialism in competition law and sector regulation to offer a comprehensive service to clients on energy issues.

For more information on how we can help you, please get in touch.