Littlechild calls for fresh energy market investigation

A new inquiry into “misperceptions” about energy market failures following the Competition and Markets Authority’s investigation should be considered by the House of Lords Economic Affairs Committee, former regulator Stephen Littlechild has said.

The Economic Affairs Committee “may wish to consider a separate investigation into misperceptions surrounding the domestic retail energy market,” said Littlechild in a submission to its inquiry into the economics of UK energy policy.

The former regulator and key architect of privatisation expressed concerns about the “implausible” conclusions of the Competition and Markets Authority (CMA). He worried that the investigation’s conclusions with regards to the domestic retail market may be leading to inappropriate actions to remedy exaggerated or imagined failures.

Littlechild penned the written evidence for the Lords’ inquiry in partnership with a group of former regulators including: Sir Callum McCarthy, Dr Eileen Marshall CBE, Stephen Smith and Clare Spottiswoode CBE.

All of these individuals acknowledged that “in many respects the CMA has delivered a good and constructive report”. In particular, they welcomed its conclusions that the wholesale market “works well” and that vertical integration is not problematic.

However, they said: “Unfortunately, in our view the CMA’s analysis of the domestic market is mistaken”.  They worried that misperceptions arising from its findings in this area are sparking unnecessarily radical views about the need for market interventions – such as those voiced at Utility Week’s recent Energy Customer Conference by CMA energy investigation chair, Roger Witcomb.

This is not the first time that Littlechild and colleagues have raised concerns about the CMA’s methodology. They, and others, made numerous submissions during the authority’s energy market investigation which questioned, in particular, the CMA’s approach to calculating the excess profits being made by energy companies, especially the big six.

Their new submission gives fresh and detailed analysis of the flaws in this methodology. They conclude that the CMA’s direct and indirect approaches to calculating customer detriment were “inconsistent with its own guidlines”. The direct approach was also deemed as lacking in transpareny and based on “hypothetical” and idealised market modelling.

Given their doubts about the CMA’s methodology, the group of former regulators urged the Lords’ committee to omit the domestic energy market from its current inquiry into the economics of UK energy policy, which has undertaken to consider as its “core question”: “what are the failures, if any, in the energy market and what measures are needed to correct them?”.

Littlechild and his co-writers said that the Lords should restrict themselves “other problems in the energy market, particularly those associated with the costs of environmental policies”. A separate investigation into misperceptions around the domestic energy retail might be welcome at a later date.