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Customers UTILITY WEEK | 1ST - 7TH APRIL 2016 | 27 Comment T he Competition and Markets Authority (CMA) has just issued the full version of its Provisional Decision on Reme- dies for the UK energy supply market. At 750 pages, it is a door-stopper. Since the recent publication of the sum- marised version, the responses from the big six have been muted, although Centrica has reaffirmed its disagreement with the notori- ous 2013 £1.7 billion alleged overcharging figure promulgated by the CMA. The 2015 equivalent was £2.5 billion. It seems likely that Centrica will come out with both barrels and refute this figure. The CMA's preferred "direct" methodol- ogy to assess the numerical detriment from "adverse effective competition" is based pri- marily upon using First Utility's and Ovo's retail selling prices as benchmarks – a bizarre approach. Aer all, their combined market share is around 6 per cent. They are hardly price-setters. It would be almost as illogical to use the retail selling prices of Lidl and Iceland – also with a combined market share of c6 per cent – as benchmarks in carrying out a similar exercise in the groceries sector. Crucially, the 2013 £1.7 billion alleged overcharging figure is predicated on this flawed analytical base. It is also relevant that market newcomers oen offer eye-catching price deals, as indeed does Lidl in the grocer- ies market. The CMA argues that both energy com- panies' price offerings are sustainable in the long term. Although both are comparative minnows, Ovo Energy still chalked up a £30- plus million loss in 2014. Second, the CMA's direct methodology is further flawed by any material recognition of the weighted average cost of gas and its electricity equivalent. These inevitably have a major impact on the end-user price. Aer all, energy companies need to main- tain a portfolio of supply contracts of varying duration: they are struck on very different terms. Inevitably, they will periodically get it wrong, as British Gas famously did in the 1990s with its notorious take or pay con- tracts. But this does not mean that customers are necessarily overcharged. Aer all, both Easyjet and Ryanair have faced challenging commercial decisions about whether or not to hedge against fuel prices. With the benefit of hindsight, a long- term hedge at pre-2014 oil prices would have been very imprudent, but at the time few people expected oil prices to plummet. Assuming stable profit margins, whether or not to hedge fuel costs will inevitably impact end-user prices. But it does not mean that, if Easyjet and Ryanair adopt very differ- ing hedging strategies, one is overcharging its customers while the other is undercharg- ing them. Third, the CMA's less favoured "indirect" approach is based partly on analysing profit margins and partly on incurred costs. Interestingly, its alleged overcharge fig- ure from this analysis could be below £700 million a year between 2007 and 2014 for domestic customers. The difference between the two methodologies in 2014 was c£1.5 bil- lion. These are not mere rounding errors. It is questionable whether such appar- ently flawed numbers should be given house-room – or indeed wide circulation – by a public body. Nigel Hawkins, director, Nigel Hawkins Associates The CMA's flawed analysis After months investigating the energy market, the CMA has come up with erroneous conclusions because the basic methodology it employed was flawed, says Nigel Hawkins. The CMA's remedies A possible name change for standard variable tariffs. Temporary price control for prepayment meter customers until the end of the smart meter rollout (2020). An Ofgem-controlled cloud database for customers' information to be accessed by suppliers. Removal of the four-tariff rule under Retail Market Reform. Greater independence for Ofgem and a "reset" of the relationship between the regulator, Decc and the industry. More data for price comparison websites and intermediaries. Approximately 700,000 households on non-Economy 7 restricted meters are allowed to switch to cheaper single-rate tariffs without requiring a replacement meter. Ensuring the costs of green subsidies are transparent to consumers on their bill. Reforms to the electricity and gas set- tlement processes to lower costs to consumers. Removing barriers such as personal debt issues to allow customers to switch. "Energy prices are not falling fast enough." David Cameron, prime minister (January 2016) "Energy suppliers should be seeking to regain the trust of consumers by reflecting this in their pricing decisions." Amber Rudd, energy secretary (June 2015) PRESSURE POINTS