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16 | 6th - 12th June 2014 | utILItY WeeK Policy & Regulation Analysis I n March, Ofgem unveiled its map of the energy market battlefield, with the main areas of attack for the Competition and Markets Authority (CMA) marked out. Those involved in the market, and set to face the wrath of the CMA, took heed of the advance warning and have prepared their defences accordingly. The main areas the CMA is set to foren- sically probe are: consumer engagement; incumbency advantage; possible tacit co- ordination; vertical integration; barriers to new entrants; and profits. In the industry's responses to Ofgem's consultation on the terms of reference of the inquiry, the big suppliers sought to reinforce their positions, outlining where they thought the CMA should be directing its energies. In many cases they shared the same position, presenting a consensus view, but there were also key areas of disagreement, suggesting potential flashpoints. Consensus First things first: the referral to the CMA and the subsequent investigation will happen. And it has been welcomed by everyone con- cerned with the energy market. It is viewed as a major opportunity to start rebuilding consumer trust in the sector – whatever the outcome – and break the disillusionment felt by many consumers. The suppliers and consumer groups have also noted that there has been a ra of new policy and regulatory changes made to the market – meaning that during the (pro- posed) investigation, new initiatives and schemes will still be bedding in. Things such as the four tariff cap, the wholesale market maker obligation, and the government's Electricity Market Reform (EMR) will only just be starting to take effect, and all of them will influence how the market works. The CMA has been urged by most con- cerned to take note of these, and potentially build them into any recommendations it makes. The respondents to the consultation also made it clear that the CMA should have defined and clear objectives for the inquiry – what it is going to look at and what would constitute success. It is claimed that with- out this, the investigation, regardless of its findings, will not satisfy the public demand for answers and will fail to start the trust rebuilding process. As for the competitiveness of the market, agreement was reached that environmental and social policies have an impact. These are the so-called green levies – or as the prime minister is alleged to have said, the "green crap" – that fall on to energy bills. These costs, such as the Energy Company Obliga- tion (Eco), have been acknowledged as "dis- torting" the market, and most respondents said they were keen to see them removed from consumers' bills and absorbed into general taxation. The final area where peaceful agreement was prevalent was on third party interme- diaries (TPIs). The general view was that TPIs – including switching sites – should be under the scrutiny of the CMA, just as the rest of the industry is. Contention While some things are almost set in stone, others are less certain. The key clash came between Centrica and SSE on vertical integration and what ele- ments of this should be investigated. The two heavyweights came to blows over the issue of networks. British Gas, Centrica's UK supply arm, has been ratcheting up the pressure on distribu- tion and transmission companies, suggest- ing slashing £500 million from their revenue allowances. In its response, Centrica stated the CMA should investigate whether allowing the vertically integrated companies – read SSE and Scottish Power – to own energy net- works could result in the "distortion of competition". It added that this should form part of a comprehensive study examining all the con- tributory factors behind why consumer bills have been increasing. SSE, which owns both transmission and distribution networks, unsurprisingly took the opposite view and backed the work com- pleted by Ofgem. SSE insisted that looking at the impact network charges had on consumer bills was unnecessary because "they are subject to economic price regulation" – that is, they are down to Ofgem, not the companies. One caveat from SSE: if the inquiry was to include networks, further consultation must be done before it began. The battle lines were also drawn on verti- cal integration. Centrica, EDF Energy, SSE and Energy UK were among those who stated that the verti- cally integrated structure was "efficient" and had benefits for customers. EDF did break ranks slightly and urged the CMA to have the remit to look at verti- cal integration in both the electricity and gas markets, because there are "different issues" between the two energy types and an "appropriate balance is required between the two during the investigation". Eon stated there were "real benefits" to vertical integration, but also went on the offensive. Aiming its attack at EDF, Eon highlighted issues of internal trading as a barrier to competition, while it also said the cross-subsidy between generation and retail undermined competition. This issue was said to be "more pronounced due to the concen- tration of ownership of nuclear generation". RWE was eager to highlight that while it does own a retail business (Npower) and generation assets in the UK, as well as renewables and trading arms, "these four businesses are independently managed, coming together only at the RWE AG board level in Germany". While the major suppliers were, on the whole, keen to try to defend the vertically integrated structures, there were a couple of respondents that strongly voiced their con- cerns about them. Suppliers set up the sandbags In response to a consultation, the big players laid out to Ofgem who and what the CMA should target in its inquiry – and used the opportunity to point a finger at each other, says Mathew Beech.