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UTILITY WEEK | 11Th - 17Th AprIL 2014 | 15 Policy & Regulation Market view Is a CMA inquiry worth it? Is the cost and inconvenience of a CMA investigation worth it just to clear the air for energy firms? By Catherine Waddams. T he decision to refer the energy market to the new Competition and Markets Authority (CMA) will be welcomed by many but will also have its costs. On the positive side, the opportunity for a thor- ough review of the market enables analysis without immediate political pressure, either directly on the market or on the regulator, but such market investigations are expensive. The CMA costs will be over £2 million, and those who provide evidence, including regulators and companies, will have to spend both time and money presenting their evidence. The inquiry will take 18 months to reach a conclusion, and this period might be extended through appeals against potential remedies, such as vertical sepa- ration, during which time inves- tors might be reluctant to commit funds. But the current environment is also fraught with uncertainty, and investors might be more com- fortable with a well-structured competition inquiry than with intermittent and apparently ran- dom interventions from politicians. The benefits will be maximised only if politicians stop using the market as a political football by calling for structural changes or price freezes. The object of an inquiry is first to establish whether the market really is "broken", that is, whether there is a feature or features which have an "adverse effect on competition" (AEC). Only if the CMA finds such an effect will it go on to suggest appropriate remedies. Politicians intervene in this market because energy is essential both for busi- nesses and households. Households have faced rising costs for the past decade, and a combination of world gas prices and envi- ronmental policies are likely to push them higher still. It is not surprising that politi- cians find voters responsive to their calls for action. The danger is the familiar fallacy of "something must be done". "This" is some- thing; therefore "this" must be done. As in any market, it is all too easy to make mistakes. The regulator, anxious to alleviate concerns that the big six discrimi- nate against households who have never switched, imposed non-discrimination clauses which contributed to a reduction in competition, a decrease in the size of savings that could be made from changing supplier and a consequent dramatic fall in switching, which remains very low despite the inroads of new entrants. Some of the regulator's more recent changes to simplify tariffs will have similar effects. Against this back- ground, there are obvious benefits of an in-depth analysis of the market from a new perspective. What can we reasonably hope and expect for this sector? One of the perceived problems is that many households do not switch supplier even though they could save money. If competition is fierce and drives prices down to marginal costs, then companies will not be able to cover their fixed costs, and even if these are small, there may be room for very few, perhaps only one supplier in the market. A vibrant market with several competitors might require some "soening" of competition so that companies can cover their fixed costs. Just what a well-functioning market would look like in the retail energy sector is one of the crucial issues the CMA will need to resolve. The reference is important to the competi- tiveness of the UK and to the well-being of every household, as they face rising underly- ing energy costs in the coming years. These rising trends make it all the more important that the market works as well as it can do, and that consumers, companies, politicians and potential investors have well-placed confidence in its operation. The CMA has an important and high profile challenge as one of its earliest inquiries. Professor Catherine Waddams, Centre for Competition Policy, University of East Anglia light over the past two to three years con- cerning whether such integrated business models (of delivery and governance) provide the industry with the necessary confidence in arrangements. This review continues. Market separation must also apply inde- pendent challenge and rigour. Further sepa- ration, and indeed a physical split between the governance arrangement and the market operator, could facilitate a robust independ- ent challenge of the market operator's ongo- ing IT systems, costs and operations. It makes sense to play to strengths. The separation of the (retail) governance arrange- ments from the market operator's central services allows the market operator to be focused on security and the integrity of the central arrangements and services to market participants. System integration and ongoing IT service delivery are set to be integral func- tions of the market operator. However, the skills and expertise of IT management does not sit well with the unique skill sets of code management and secretariat services for market governance arrangements. Market governance arrangements should be specific and proportionate to market needs. One size does not fit all. The gov- ernance arrangements must satisfy the principles of good governance and enable rigorous, independent challenge avoiding any potential conflicts of interest, whether real or perceived. We can see merits for an enhanced model to have clear separation between the market operator responsibilities and the governance of the arrangements. Drawing on experiences of other govern- ance models, there is a case for further sepa- ration of governance from delivery. In other words, for the market operator to be focused on securing integrity of the central market systems and delivery of data services to the industry ( see Enhanced model, le). As opposed to the market opera- tor insourcing services for governance of the arrangements, this alternative model includes the establishment of a retail govern- ing body that separates the retail governance arrangements from the procurement and operation of the IT systems. This retail gov- erning body could provide the code adminis- trative and support services for the retail and registration activities. Having considered the contents of the blueprint in the context of the wider Water Bill and Water White Paper, we believe there are a number of options to allow a seam- less evolution into the arrangements for upstream wholesale competition. Paul Witton-Dauris, business development manager, Gemserv "The benefits will be maximised only if politicians stop using the market as a political football"