Analysis: CMA springs remedy surprises

The energy market finally saw the provisional remedies from by the Competition and Markets Authority (CMA) last week after months of anticipation. Utility Week looks at the proposed remedies, some of which came as a surprise to the industry.

Price regulation in the form of a transitional cap was a hot topic when the CMA requested industry responses in December but the form of regulation the CMA seems to intend on has sparked a different debate about whether the idea assumes prepayment customers are vulnerable and isolates other customer groups.

Data sharing was also a talking point and questions are being asked about the cost to consumers, facilitation and effectiveness of the measure.

Price regulation for PPM customers

The CMA has decided to place a temporary price control on suppliers. The control will apply only to the 4 million customers on prepayment meters (PPM) until 2020 – by which time the smart meter rollout is expected to be complete.

The original suggestion for this remedy was that a transitional price cap would set a fixed maximum price for customers on standard variable tariffs, but the CMA has backed away from this more sweeping intervention.

The CMA claims the measure will save PPM customers £300 million a year as the proposed level of the cap will be generally in line with the cheapest prepayment tariff prices and will include headroom of £25 per fuel per year.

This remedy has sparked concerns from the likes of Ovo Energy and opposition MPs that the CMA has watered down the remedy as a result of pressure from the big six suppliers.

The CMA has proposed some action on the issue of standard variable tariffs, which roughly 70 per cent of households are on, despite the fact they are the most expensive deals. The competition regulator has suggested a change of name in order to encourage consumers to switch away from them.

Data sharing

Perhaps more surprising is that the CMA did not shelve plans for a cloud database to facilitate data sharing between suppliers. The aim of this is to encourage them to compete for customers who have been on a standard variable tariff for more than three years.

This would be an opt-out service which would require suppliers, prior to disclosing the customer’s data to Ofgem, to send a letter explaining their opportunity to opt-out.

The competition watchdog has proposed the Ofgem-controlled database of disengaged customers will allow rival suppliers to target their marketing to those customers but have restricted this marketing to postal only.

This appears to come in response to industry concerns that targeted marketing could overwhelm customers who would be bombarded with marketing, therefore decreasing trust and engagement in the sector.

The CMA says the database will also be “subject to strict safeguards” ensuring customers can opt-out at any time and to ensure that “communication meets strictly controlled criteria”. However, it does not yet specify what those safeguards are. Critics have suggested that opt-out effectively means opt in as it offers no incentive for disengaged customers to engage and requires more effort from the customer to choose opt-out – many of whom never will.

As expected, the report demands the removal of the four-tariff rule because it “limits competition and innovation”. The cap, introduced by Ofgem in 2014 as part of its Retail Market Review reforms, planned to increase consumer engagement by reducing the “bamboozling” range of tariffs on offer and making it easier for them to understand the available deals.

Another proposed remedy would shake up the price comparison websites (PCW) industry through an increase in the use of data PCWs and other intermediaries can use and greater transparency. The CMA also states there needs to be a reset of the relationship between the regulator, the Department for Energy and Climate Change and the energy industry.

Other remedies for the domestic market include reducing barriers such as personal debt issues for switching, transparency of green subsidies on customer’s bills, a recommendation to Citizens Advice to become a recognised provider of information and support to domestic electricity customers on restricted meters. Reforms to the electricity and gas settlement processes to lower costs to consumers were also a suggestion.

With the final report and remedies due to be introduced at the conclusion of the two-year investigation in June 2016, the market has already gone some way to improve. Switching rates are at a record high, prices are falling to reflect a drop in wholesale costs and competition is increasing due to the amount of new entrants to the market.

The findings have taken a softer approach than the industry initially feared, although there are still a couple of unexpected remedies. Price comparison websites, analysts and consumer groups though, still accuse the big six of getting off lightly and the CMA of weakening its approach.