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Utility Week 18th April

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14 | 18th - 24th April 2014 | UtilitY WEEK Policy & Regulation Market view T he provisional decision by Ofgem to make a market investigation reference of the UK energy market to the newly formed Competition and Markets Authority, and to consult on that issue, has ramped up the energy debate within the industry, politi- cal circles and consumer groups. Much has been said in the press recently about pricing in the UK energy sector – con- sumer groups have been campaigning for some time for a "level playing field" and greater transparency. The cost of energy has been seized upon by the Labour party, and Ed Miliband has given a commitment to freeze domestic energy bills for 20 months, break up the big six and dismantle Ofgem if his party is elected at the next general elec- tion. It is a bold political move for an oppo- sition leader who has been accused in the past of not being audible on important voter issues. He has, ironically, also taken flak for failing to seize the opportunity to introduce reform when he was energy minister in the last Labour government. Let us look at some of the issues this throws up for the wider public debate: Political risk. The manner in which the cur- rent situation has evolved, with a change at the top of Ofgem (a regulator with a patchy record on competition) – the creation of the Competition and Markets Authority, Labour's pledge on pricing followed in short order by SSE's statement committing to hold down prices voluntarily until 2016 – all capped off by the potential Ofgem referral, demon- strates the high stakes and political risks associated with the energy market. Some, fearing government influence over the potential CMA referral, have accused ministers of kicking the energy debate into the long grass, given that the outcome of the inquiry will not be known until aer the next election. This is rejected by Alex Chisholm, the chief executive of the CMA, who stresses the independence of the new body. That said, it is a matter of record that energy sec- retary Ed Davey wrote to Ofgem urging it to undertake a thorough inquiry, particularly in relation to the gas sector. The warning of blackouts and energy investment freezes sounded by Sam Laidlaw, chief executive of Centrica, immediately aer the industry watchdog's decision, serves to further emphasise the high stakes. Other commentators have reinforced the message about capacity margins being cut, raising the spectre of power outages. Chris Huhne, the former Liberal Democrat energy secretary, has predicted electricity rationing over the 2015 winter. These messages come hard on the heels of the power cuts asso- ciated with the recent unprec- edented flooding events in some parts of the country, and serves as a chilling reminder of the uncer- tainty of the market right now and just how uncomfortable life can be without security of supply. Consumer confidence. Much has been said about the poor deal for consumers in the current market. The Retail Market Review in 2011 identified some improvements but overall found that competi- tion in energy markets was being stifled by a lack of transparency, complexity of tariffs and poor behaviour by the supply compa- nies. This has resulted in various measures, including a reduction in the num- ber of published tariffs and a requirement for energy companies to advise customers of the availability of lower tariffs than those they currently enjoy. None of this seems to have improved consumer confidence and clearly much more has to be done. The big six received 5.6 million com- plaints last year – a staggering figure and in light of this it is hoped that the outcomes of the referral, if made, will be consumer focused. Certainty for investors. The threat of struc- tural change coming out of the referral will undoubtedly create further uncertainty for investors at a time when, to meet the nation's energy appetite and honour its broader green commitments, it should be making record levels of investment. It has already been observed in some quarters that the current government's inconsistent approach to sup- port for green energy projects has frightened off would-be investors. Dermot Nolan, the new chief executive of Ofgem, is insisting that any inquiry would enhance confidence in the investment mar- ket. He stresses that Ofgem believes a refer- ral offers the opportunity to "clear the air" once and for all and to decide if there are any further bar- riers preventing competition from bearing down on prices. In other words, it is a price worth paying for an inquiry that sheds light on current practices and uses its wide-ranging powers to impose remedies Publicly the majority of the big six have welcomed the Ofgem call for an inquiry, on the basis that it would take politics and media out of the situation. Clearly, the companies themselves must bear much of the blame for the current situation so any of their public statements must be considered in light of that position. Crucially, Centrica, the owner of British Gas, has been voluble in its sugges- tion that a two-year inquiry would make it more likely that the lights would go out and freeze investment. This has been interpreted by the press as a thinly veiled threat and is unlikely to have been well received by any of its customers. That said, many are coming to the view that energy is a national security issue which is too important to be le entirely to the free market. The need to secure a reduction in energy demand together with a deliverable plan for adequate, stable and increasingly carbon friendly energy supply is key to man- aging expectations. Until now the rather negative debate has added to the tension surrounding the loom- ing power capacity crisis. If a referral can defuse tensions and shed some light on prac- tices within the industry, surely that has to be a starting point. Tracy Hall, partner, Watson Burton LLP Everyone needs answers The energy market has become a tangled mess for companies, politicians and the regulator alike. Much is riding on the CMA's ability to clear the air, says Tracy Hall. Many are coming to the view that energy is a national security issue, too important to be left entirely to the free market

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