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The Topic: CMA investigations CMA INVESTIGATIONS THE TOPIC 10 | 4TH - 10TH SEPTEMBER 2015 | UTILITY WEEK THE TOPIC Easiest to implement Remedy: locational charging of trans- mission losses. Licence changes or BSC modifications should not be too much of a complication. Remedy: removing the four-tariff cap of RMR. There are few barriers to change. Remedy: prohibiting auto-rollovers for microbusiness customers. Would allow suppliers to roll customers on to flexible contracts, but could be more expensive for the customer. Consumer bodies are likely to want to limit the price of a flexible tariff. Implementation would be fairly easy, with many suppli- ers already opting out of the practice. Challenging to implement Remedy: measures to address barriers to switching. The CMA is considering a broad range of options, from fines to giving additional customer data to comparison sites. Remedy: measures to prompt custom- ers on default tariffs to switch. The CMA is open to radical ideas such as the sharing of customer information between suppliers, but privacy security controls would need to be addressed. Remedy: changes to management and governance of codes. The CMA is keen for change, but wary of undermining the industry-led approach entirely. The establishment of an independent body would take time and effort, and require additional work by Ofgem. Remedies unlikely to become realities Remedy: Ofgem to provide an inde- pendent price comparison website. A significant number of details would have to be resolved. Remedy: introduction of a Safeguard Regulated Tariff. This would reduce the pricing freedom of those suppliers impacted, with substantial implications on the market.. Remedy: half-hourly settlement for domestic customers. Would require smart meters, a change to the archi- tecture of the settlement systems, and a change to suppliers' own settlement- related systems, and therefore it is not clear how far the CMA can go in mandating this. NO PAIN, NO GAIN? COMMENT: MICROBUSINESS ISSUES UNDER SCRUTINY Most commentators on the pro- gress of the CMA focused on what it had to say about the domestic market when its preliminary find- ings were published on 7 July, over- looking the potentially significant impact for small and medium-sized enterprise (SME) retailers. The CMA views excess profits from SME supply – where margins are 8.4 per cent compared with 3.3 per cent in the domestic market – as a sign of market failure. Indeed, over the time period of the analysis (2009-13), the SME market, while only making up 10 per cent of the revenues earned by suppliers, con- tributed to a quarter of total profits. The CMA also found similarly low levels of customer engagement as the domestic sector, with 45 per cent of microbusiness customers on default tariffs in 2013. As a result, the CMA proposed a number of radical changes to the SME sector. These include an Ofgem-led, independent price comparison service, requirements on suppliers to provide price lists for microbusinesses on their websites and an outright ban on tariff auto- rollovers. The Safeguard Regulated Tariff and measures to provide ad- ditional information to reduce bar- riers to switching were also mooted in the microbusiness market as well as the domestic. Such measures are likely to have a profound impact. Ultimately, we expect the CMA to introduce remedies that will see the six larg- est energy companies lose further market share in the SME sector. This would continue the trend in the SME gas market, where the market share of the six largest suppliers had already fallen to 66 per cent by April 2014 (it was 89 per cent in the SME electricity market). The big unknown is the Safeguard Regulated Tariff. If it is introduced, not only will it create significant delivery challenges – it also runs the risk of substantial unintended consequences. It is no surprise that a host of former regulators and small suppliers have called for the idea to be scrapped, suggesting it could stifle an other- wise pro-market set of reforms. Stuart Cook, head of utility strategy and regulation, PwC WILL PREPAYMENT CUSTOMERS GET SMART METER FAST TRACKING? The CMA is considering making prepay customers a priority in the smart rollout. One of the CMA's proposals is for prepay- ment smart meters to be prioritised in the smart meter rollout due to start next year. This is part of the remedy "to facilitate wide- spread engagement" and thereby increase switching in the energy market. The CMA found that traditional meters and billing technicalities play a fundamental role in the limited awareness of, and engage- ment with, switching among consumers. It concluded that prepayment customers stand to benefit more from receiving a smart meter. A smart prepayment meter would facilitate access to a wider range of domestic tariffs, for example. The CMA has proposed two options, either stopping the installation of dumb meters from a certain point, or prioritising prepayment meters in the general rollout. In its analysis of the likely impact and ease of implementation of the CMA's first set of suggested remedies (see "No Pain, No Gain", le), professional services firm PwC said such a proposal was unlikely to go ahead as the implementation would be dif- ficult. Suppliers would have to change their rollout strategies, and programme complexi- ties that could hold up the entire rollout would be brought to the fore. It would also be difficult to monitor and enforce the required licence condition, observed PwC's market experts. The firm concluded that the fact the CMA has asked for alternative proposals on how to engage prepayment customers in its remedy sug- gests there will be more thinking to be done in this area before a final solution is decided upon. LD The CMA put forward a number of remedies in its provisional findings in July, but how easy would it be to implement those with the highest impact? Adapted from PwC's The CMA Energy Market Investigation Switching in different markets in the past three years Car insurance Energy Mobile provider Mortgage Bank 100% 50% 0% Not switched in other market Switched in other markets Have switched energy Have not switched energy in past 3 years Source: CMA/GfK NOP 12% 12% 24% 27% 62% 27% 72% 53% 46%