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The Topic: CMA investigations UTILITY WEEK | 4TH - 10TH SEPTEMBER 2015 | 9 TOO LITTLE, TOO LATE…? The world in which the CMA operates is moving at a faster pace than its investigations. In the summer of 2014 Ofgem's referral of the energy market to the CMA was heralded by many as a bold step which could see a major overhaul of the industry landscape. But what a differ- ence a year can make. Already the potential remedies that could emerge from the probe by the end of 2015 seem alto- gether less drastic as the sector naturally evolves beyond many of the more troubling areas of contention. For the big six, the possibil- ity of being forced to dismantle their vertically integrated opera- tions posed perhaps the biggest threat. Concerns were raised that vertical integration gave incumbent players an advantage over smaller suppliers without generation assets. In particular, the CMA said it would look into whether any abuse of the wholesale power market by the big six was possible because of their ability to self-supply and limit entry to smaller players. The big six disagreed, and their tumbling profits, slashed divi- dends and tightening cashflows as 2015 unfolds may just prove they were telling the truth. The fact is that vertical integration not only fails to offer an unfair advantage but has in the past year been a severe disadvantage to energy compa- nies that depend on buoyant commodity prices to support their upstream and generation activities. The new world order of low fossil fuel prices and even lower thermal generation earnings means that companies including Eon, Centrica and RWE are already taking steps to move away from the traditional utilities model regardless of what the CMA thinks. Eon has dramatically opted to spin-off its centralised generation assets entirely to form a new company. Meanwhile, Centrica said it will downscale its upstream activi- ties to focus more capital on developing consumer offerings. The CMA itself dismissed the concerns over market abuse and vertical integration in its initial investigation findings, and again in its updated report, signalling a clean bill of health for both the wholesale power markets and vertical integration. But the point is, a change was inevitable as the market evolves organically in reaction to a shi- ing landscape. And the changes have not gone unnoticed by Ofgem – itself a central concern of the probe (story, right) – as the reg- ulator pushes through changes ahead of a potentially damning indictment from the CMA. Ofgem stands accused of limiting competition by sad- dling the sector with prescrip- tive regulatory codes and tariff limits. But the regulator has wasted no time in addressing concerns over its Retail Market Review reforms, offering deroga- tion aer derogation as the "competition stifling" limits are gradually loosened. Ofgem has also quietly done away with its much-maligned Supply Market Indicator report – aer persistent criticism that it lacks any basis in the reality of the supply market – and has launched a consultation on regulation for non-traditional business models. Few would argue that the steps taken by the big six and Ofgem are not moves in the right direction, and ones which are being taken quickly. Aer 18 months of investigation, the CMA may find its probe has sim- ply been overtaken by events. JA RUMBLING THE REGULATOR Ofgem unexpectedly finds itself in the CMA's firing line. The role of the regulator in influ- encing market conditions has become a central thread in the CMA's seminal investigation of the energy market and so far the rumblings are not auspicious for Ofgem. Stephen Littlechild, the former energy regulator, was among the first to encourage the CMA to include scrutiny of the unintended consequences of regulatory intervention in its scope. In the wake of its pre- liminary findings, he has again pressed home the point, wel- coming the CMA's ruling that the four-tariff limit under RMR has had an adverse effect on com- petition, but finding fault with its claim that, between 2009 and 2013 consumers were over- charged by energy companies to the tune of £1.2bn. The calcula- tions behind this assertion seem "inconsistent with the average level of profit actually earned in this market," according to the response Littlechild filed in col- laboration with a group of for- mer regulators. "The CMA fails to acknowl- edge that regulatory interven- tions since 2008, which it finds have restricted competition, were very likely an important reason for the increase in profits," they said, before also summarily dis- missing the CMA's suggestion that an Ofgem-operated price comparison site might increase engagement in switching. They believe such a site "would not be more authoritative [than exist- ing price comparison sites], and could reduce or distort competi- tion in that market'. Crucially, Littlechild, along with a range of other commenta- tors, is also strongly opposed to the idea that Ofgem should be allowed to set a "safeguard tar- iff " for "sticky" standard varia- ble tariff customers who the CMA says are vulnerable to overcharg- ing (see graph, le). JG "The big six appear to be using their large blocks of inactive customers to subsidise protective, loss-leading tariffs. This damages competition." – Ovo Energy "Just because a customer is on an standard variable tariff, it does not mean either that they are not engaged or that they are not active." – Eon Evolution of average standard variable tariff bill against expected direct costs Jan 04 Jan 06 Jan 08 Jan 10 Jan 12 Jan 14 Source: CMA analysis of data collected by Icis and Ofgem 1,400 1,200 1,000 800 600 400 200 0 £ per customer per year One-year cost benchmark (energy, network and policy cost) Adjusted Ofgem SME (18-month: energy, network and policy costs) Simple average dual fuel bill, standard variable tariff (direct debit)