UK energy price “shambles” to be subject to rigorous CMA regulatory scrutiny

On 26 June 2014, Ofgem announced that it had formally referred the UK energy market to the Competition and Markets Authority (CMA) for a full market investigation under the Enterprise Act 2002. This announcement followed a provisional decision by Ofgem to refer the market back in March. High energy prices, poor customer service standards as well as concerns about future investment in the sector will be the focus of an 18 month Market Investigation enquiry by an independent panel of the CMA featuring senior representatives from the world of business, law and economics.

A final report is due by 25 December 2015, the first Christmas after the next UK General Election. The energy sector has long been high on the political and regulatory agenda in Britain and has been seized upon by political parties, including the Labour Party, who made an energy price freeze a central manifesto promise last year.

The CMA will now study the market to assess whether any aspect distorts or harms competition. What has caught the public attention and aggrieved consumers in the UK is the year on year rise in retail energy costs while the wholesale price for energy generation has been falling. The allegation is that the failure to pass on the price reductions in wholesale energy costs has led to the major energy companies making profits which far outstrip return on capital made by most other major companies in the UK. In addition, energy companies have historically publicly announced price rises, one after the other in a way that has angered consumers. Is this evidence of price collusion, price signalling or merely promoting price transparency for consumers.

However, it is widely reported that the energy firms themselves have welcomed the investigation as they believe it will clear them of wrongdoing and instil confidence in the current system. Whatever the rights and wrongs of the current case the reality is that regulators and the Government will need to balance price competition and consumer interests on the one hand with the need for investment in energy generating capacity and infrastructure on the other. The current uncertainty in the market had already led British Gas to delay plans in investing in gas-fired power stations.

If any impediments to competition are found, the CMA is empowered to make behavioural and structural remedies to the market. These could include providing consumers with more information. However, customers are already weighed down with a surfeit of information, more information requirements are not needed. Information remedies are more likely to focus on providing consumers with a simpler and more easily understandable price comparison. More drastic measures could include breaking up energy firms so that the generation and production business is separate from the retail sales business, very much like the original structure of the electricity industry upon privatisation –Plus ca change!