UK energy suppliers face partial price regulation under CMA

The UK’s energy companies face the possibility of partial tariff regulation under measures put forward by the Competition and Markets Authority, after the authority accused suppliers of taking advantage of their disengaged customers.

If the CMA’s proposed remedies, published today, are implemented in full suppliers could be forced to offer a ‘safeguard tariff’ with a fixed maximum price so that customers who have never switched from the standard variable tariff (SVT) are protected against rising costs while wider reforms are made.

The CMA has put forward around 20 proposed market reforms which broadly aim to boost competition within the retail energy market and remove barriers to engagement for the 34 per cent of customers who have never switched.

The CMA found that even though electricity prices have risen by around 75 per cent and gas prices by around 125 per cent in the last 10 years, around 70 per cent of customers are on the ‘default’ SVT and pay £160 per year more than they would if they switched to cheaper deals which are available in the market.

The authority acknowledges that the price hikes are largely due to increases in the cost of green policies and network costs, but warned that suppliers are not forced to be competitive because they know that ‘sticky’ customers are unlikely to leave.

“The result is that some energy suppliers know they don’t have to work hard to keep these customers. It’s notable that there are such high levels of complaints about customer service,” said the CMA’s chairman of the investigation Roger Witcomb.

But the authority stops short of full tariff regulation, even proposing to cut Ofgem’s ‘simpler choices’ RMR rules which it says are “not having the desired effect of increasing engagement”.

“While one possible response might be to return to full price regulation, this would remove any prospect of reaping the benefits from the competitive process both now and in the future.

“[T]here are other maybe less visible factors which can have just as significant an effect on bills. We don’t think that regulatory interventions have always benefitted competition and customers,” Witcomb added.

The CMA’s report on proposed remedies said: “The approach to remedies that we are considering is therefore based principally on enabling competition and supporting customer engagement, while considering the need for some form of protection from high prices for disengaged customers.”

The CMA’s full remedies:

• It proposes a regulated backstop tariff for customers who failed to switch to better deals. This ‘transitional safeguard’ tariff would be set by Ofgem or the CMA itself, and is intended as a measure of last resort. Other remedies are proposed that would encourage customers to switch before being transferred onto this tariff. For example, a formal prompt to switch, and a range of measures to make switching easier.
• The CMA suggests that Ofgem should host an independent price comparison website. This is intended to create greater confidence in price comparison websites, which the CMA sees as a means to promoting competition, and provide wary customers with an independent means of checking quotes they receive on those websites.
• The CMA proposes to scrap the four tariff rule of Retail Market Reform (RMR). It says the rule hampers innovations, which is critical to the market, and hopes that scrapping it will bring forward new tariffs and further encourage competition via price comparison websites.
• The CMA proposes a range of measures to improve the “transparency and robustness” of Ofgem’s regulation of the energy sector. These include clearer and comparable reporting by the energy companies, so comparisons can be made on a like-for-like basis; a revision of the regulator’s statutory duties with an emphasis on the duty to promote competition; and a transparent mechanism by which Decc and Ofgem can air disagreements, presumably intended to prevent Ofgem’s hand being forced on policy driven regulatory decisions.
• Other recommendations cover variable transmission losses; the CfD auction process; and measures to protect micro-businesses.

The CMA has set out the remedies it is considering in its full report and invites comment before July 31.