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UTILITY WEEK | 4Th - 10Th JULY 2014 | 15 Policy & Regulation Analysis Suppliers under the spotlight After months of phoney war, Ofgem has finally unleashed the CMA on the energy market. Mathew Beech reports. A nd so it begins. Ofgem gave the sec- tor plenty of notice that it faced an inquiry by the Competition and Markets Authority (CMA), and on 26 June it became official. The CMA's inquiry is expected to take 18 months, and will put the retail market under forensic scrutiny to measure just how com- petitive it is – and whether consumers are getting a fair deal. Announcing the inquiry, Ofgem chief executive Dermot Nolan said there was "near-unanimous support for a referral" and that it would "help rebuild consumer trust and confidence in the energy market". He said: "A CMA investigation should ensure there are no barriers to stop effective competition bearing down on prices." The CMA has been given a mandate to examine the following key areas: weak cus- tomer response; the impact of vertical inte- gration; barriers to entry and expansion for smaller suppliers; the incumbency advan- tages of the larger suppliers; and the possi- bility of tacit co-ordination. Alongside this, Ofgem said the CMA could look at "any issue connected with the sup- ply or acquisition of energy", including the role of third-party intermediaries, and other goods and services linked to retail supply – such as the bundling of boiler services with a tariff. Not deemed problematic by Ofgem, and therefore not part of the referral, are the wholesale gas market, transmission and dis- tribution, gas storage, interconnection, and settlement reform. Only the domestic and small-business retail markets will be investigated, because Ofgem found "little evidence of harmful fea- tures" in the large customer segment. As far as the consumer market is con- cerned, Ofgem said it had observed weak consumer response and engagement in the market "for some years" . This is a "harmful feature" because the less engaged the con- sumer, the less likely they are to switch. The CMA has been asked to assess whether consumer apathy harms competi- tion and, if so, how it can be addressed. Vertical integration, acknowledged by Ofgem as "an important feature of the elec- tricity market", is also in the CMA's cross- hairs. It "contributes to weak competitive dynamics between the largest suppliers", according to the referral, because self-supply reduces liquidity and the transparency of wholesale prices. Tacit co-ordination will also be a big area of inquiry. The CMA has been pointed towards the fact that the suppliers have matching hedging strategies, announce tariff changes at the same time, and have "signs of converging" profitability. Of course, before it can address tacit co- ordination, the CMA must first establish that it exists. The big six also have an incumbency advantage over smaller competitors, and the CMA will examine how much of a problem this is, if at all. Related to this is whether incumbents are using the large numbers of disengaged consumers they inherited to effectively subsidise the better deals offered to active switchers. The final area of concern is the barriers to entry and expansion for new and smaller suppliers. The money needed to enter the market, and to sign up to industry codes, is prohibi- tive for some potential new entrants and a significant cost for existing small suppliers – and it is set to get worse with the introduc- tion of Electricity Market Reform. The obli- gations put on suppliers by the government are also potentially harmful to competition, in particular the 250,000 customer account threshold of the Energy Company Obligation. Finally, the CMA will look into the toxic reputation of the energy sector and how the reputational risk of being part of the market is putting off potential new entrants. It's a long leash that Ofgem has given the CMA. Essentially, the CMA is free to probe the market and unearth the truth – for better or for worse. With the general election fast approach- ing and the CMA inquiry now underway, change is the only certainty for the retail energy market. "The competition inquiry will allow us to put to bed the toxic debate and shine a light on the progress the industry has already made." angela Knight, chief executive, Energy UK "If anyone can sort out the energy industry it's the heavyweight CMA – and it has quite a job on its hands." ann robinson, director of consumer policy, Uswitch "The investigation could hand real power back to the people – let's not settle for turning the big six into the big seven or eight." Dr Doug Parr, chief scientist, Greenpeace UK "I do not expect the investigation alone to rebuild trust. That remains our responsibility." Vincent de rivaz, chief executive, EDF Energy On the record