Utility Week

UTILITY Week 4th April 2014

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Policy & Regulation 14 | 4Th - 10Th AprIL 2014 | UTILITY WEEK Analysis W hen major companies welcome with open arms an intrusive inves- tigation that could lead to their being forcibly broken up, you know the alternative must look pretty bleak. This is where the big six energy suppliers find themselves. It has come to such a pass that 18 months of the Competition and Markets Authority (CMA) riffling through the accounts looks preferable to more pummelling from politi- cians – not that there is any guarantee the former will forestall the latter. As Ofgem on Thursday bowed to the inevitable and ordered a competition inves- tigation into the energy sector, both industry and regulator spoke of "clearing the air". The phrase reflects the fact that Ofgem has yet to prove a market failure, while the big six insist they have nothing to hide. The hope is that a sober and, crucially, independent review of the facts will back that up. The first task will be to establish whether the market really is "broken" and if so, how. The only undisputed argument for the refer- ral is public distrust in the sector, a self- perpetuating condition with no obvious structural remedy. Ofgem has sketched out some areas of concern (see facing page), but admits the evidence is inconclusive. The industry is happy to point out figures that tell a more positive story. The UK has some of the low- est retail energy prices in Europe, they cry, to no avail. Research by Cornwall Consulting for Energy UK shows competition is actually increasing. Market concentration is declin- ing, both on a regional basis and country- wide, the researchers found. The combined household market share of the big six fell below 95 per cent across electricity and gas for the first time in January. If it nonetheless finds a problem to solve, the CMA will then consider a broad range of remedies. Breaking up the big six is the headline-grabbing option, but that is far from a foregone conclusion. Neither is it only the big six who are under scrutiny; Ofgem's role will also be examined. The beleaguered regulator has a patchy record when it comes to competition and the CMA might recommend changes to the way the sector is regulated. Regulators are traditionally reluctant to make competition referrals, in part to avoid that risk. Now is a relatively good time for Ofgem to open its books, though. It has a newly appointed chairman in David Gray and chief executive in Dermot Nolan, whose reputations are not bound up in the work of their predecessors. The process will come at a cost: upwards of £2 million for the CMA plus the time and resources of Ofgem and the industry. A basic investigation takes 18 months and any appeals could drag it out further. Then there are indirect costs. The threat of structural change adds risk to the indus- try just as it needs to make record investment in infrastructure. It could extend the current investment hiatus and worsen the looming power capacity crunch. Despite all this, the emerging indus- try consensus is that it will be worth it if it defuses the political tensions around energy. So will it? Labour's reaction is not particularly encouraging. Shadow energy secretary Caro- line Flint insists Labour will go ahead with its promised energy price freeze if elected, not waiting for the CMA to complete its investiga- tion. Indeed, she takes Ofgem's assessment as further evidence the sector needs Labour's radical reforms. The opposition put energy affordability right up the political agenda and is not going to give up the initiative lightly. Energy secretary Ed Davey's reaction is more soothing. He offers support to get the investigation done as quickly as pos- sible and declines to prejudge the outcome. "This is just too important for people to rely on guesses about how to fix the energy mar- kets," he says. Ultimately, politicians may say what they like: any remedies recommended by the CMA are legally binding. Whatever the political parties may promise in the run-up to the next election, the winning side cannot ignore the CMA's recommendations. Those recommen- dations will rest on facts and figures, not partisan rhetoric. In the current climate, that can only be a good thing. Is that a fact? Ofgem's referral of the energy sector to the CMA should go some way towards restoring public trust, says Megan Darby. Alistair Phillips-Davies, chief executive of SSE: "Regula- tors, politicians, customers and SSE all want the same thing: an energy market that not only works for customers, but is also trusted and seen to do so." Sam Laidlaw, chief executive of Centrica: "A prolonged period of uncertainty could damage investment at a time when Britain's energy security is being seriously challenged." Tony Cocker, chief executive of Eon-UK: "A full market investigation by the CMA is the only way to restore full public confidence to the energy sec- tor and depoliticise the whole issue." Vincent de Rivaz, chief executive of EDF Energy: "Our industry should approach the proposed market investigation with an open mind. We must not be defensive. An inquiry won't restore trust by itself. Earning trust remains the prime responsibility of the energy compa- nies who deal directly with their customers every day. However, the inquiry will be an important opportunity to establish the facts in a wholly transparent way." Keith Anderson, chief corpo- rate officer of Scottish Power: "It is important that the CMA is now left to get on with its job, free of distraction so that it can conduct a thorough review and produce authoritative answers. It will be equally important not to pre-empt this evidence-based process, to retain the confi- dence of investors during the investigation." Paul Massara, chief execu- tive of Npower: "It's time the realities of the energy market were made public. Britain has the third cheapest gas prices in Europe and the seventh cheapest electricity prices, and we have taken steps to get to the facts as to why bills are going up. If there are problems, they need to be dealt with." Reaction

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