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UTILITY WEEK | 23rd - 29Th MaY 2014 | 21 Finance & Investment T he closing date for Ofgem's consultation on the proposed reference of energy supply to the Com- petition and Markets Authority (CMA) is 23 May. Conventional wisdom among investors and companies, and indeed politicians, seems to be that it would be best to "keep politics out of the inquiry" – but is this feasible or desirable? If Ofgem rather than the energy secretary makes the reference, the CMA will be forced to look almost exclusively at competition issues (although Ofgem says the CMA could take Ofgem's broader statutory duties into account to some extent). Furthermore, any remedies proposed by the CMA to rectify competition problems would be binding on the energy secretary. While investors may hope that this will take the politics out of the issue, is this credible for energy sup- ply? Will an inquiry legally constrained to competition issues deliver the right balance for the environment, security of supply or affordability? If the CMA rejects vertical separation or price caps, would this settle the issue? The CMA might conclude that technological disruption is on the way with smart meters and distributed generation. Trying to standardise energy products and cap prices to provide short-term consumer protection might lead to the distortion of innovation. Alternatively, if the CMA forces company break-ups, would this support political views on long-term supply security and protection of vulnerable customers? Could smaller retailers procure gas from the global LNG market on competitive terms? Could politicians get hundreds of suppliers into a room to do a deal on energy efficiency? If future governments want flexibility on energy policy, they may prefer public interest issues to be considered now, alongside competition issues. Equally, if companies want a sustainable end-point from this pro- cess, it might be better to include broader public interest issues in the terms of reference. Otherwise, in 2016, the irresistible force of a legally binding CMA inquiry might meet the immovable object of political reality. Martin Brough, utilities equity analyst, Deutsche Bank "Conventional wisdom seems to be that it would be best to 'keep politics out of the CMA inquiry' – but is this feasible or desirable?" Analyst view Martin Brough For SSE, generation remains the key driver. This division faces major uncertain- ties, not least September's referendum. However, the company is the target of less political flak than Centrica and is better placed to ride out sustained criticism or adverse CMA recommendations. The four other big six members are foreign-based, so they are less financially exposed to major reverses in the UK. None- theless, some are clearly disenchanted with the seemingly endless political intervention – a fact shown by the current modest level of generation investment in the UK. Selling its energy supply business would clearly be an option for each big six com- pany, but becoming more reliant on UK generation may not seem a particularly attractive option at present. The "nuclear option" would, quite simply, be full market exit and tacit admission that the UK utility kitchen has become too hot in which to operate. RWE, which is facing fun- damental strategic challenges in Germany, is the most likely of the big six to adopt one of these radical options. Where all this leaves the paramount need to invest more than £100 billion in the UK electricity sector by the early 2020s is any- one's guess. Nigel Hawkins is a director of Nigel Hawkins Associates, which undertakes investment and policy research CentriCa key nuMbers Preliminary results for the year to 31 december 2013, announced in February £2,695m Group operating profit, up 2 per cent on previous year £1,030m Total British gas operating profit, up 6 per cent on previous year £571m residential energy supply operating profit, up 6 per cent on previous year £141m Business energy supply and services operating profit, up 19 per cent on previous year £1,326m Total centrica international upstream operating profit, up 6 per cent on previous year £1,155m gas exploration and production operating profit, up 23 per cent on previous year -£133m Total operating loss from gas- fired power generation in the UK, up from -£4 million the previous year the story by nuMbers CentriCa share priCe, 2014 350 340 330 320 300 Jan Feb Mar Apr May If the CMA rejects vertical separation or price caps, would this settle the issue?