Analysis: The CMA and Ofgem

In the wake of the Competition and Market Authority’s (CMA) provisional findings report published last month, the energy industry is talking, and one of the hot topics up for discussion is Ofgem.

There are question marks over how the regulator will meet and fund the requirements laid out by the CMA. The list of remedies could drastically shake up how the regulator operates, and includes an Ofgem-controlled database of shared customer data and changes to the Debt Assignment Protocol (DAP).

Ofgem is also having to trim its cloth in the scale of budgetary cutbacks – led by the government and the spending reviews. Its budget for the next five years is being scaled back by around 10 per cent, so the fact the CMA is saddling the regulator with additional responsibilities presents it with an even bigger challenge.

With the potential for so many changes to the regulator in this age of austerity, Utility Week asks: how well placed is Ofgem to implement the CMA’s remedies?

1) Ofgem-controlled database

The data sharing remedy would require energy suppliers to disclose to Ofgem details of domestic customers who have been on a standard variable tariff (SVT) for three or more years in a bid to engage those customers. The report recommends Ofgem retains, uses, and discloses this data via a centrally managed database.

This has raised questions around how the database would be set up, the difficulties in facilitating such a large data-led operation and how it would be funded. Chief executive officer of the Energy Managers Association Lord Redesdale tells Utility Week the difficulties of the database could be more than just cost: “Ofgem doesn’t have the capability to put a cloud based system together – it does sound like a really expensive proposition doesn’t it?

“Interestingly enough, how many of the energy companies actually know who their customers are at any one given time. It feels like it will change and then there could be hundreds of thousands of people suddenly switching.”

2) Changes to the Debt Assignment Protocol

The CMA says Ofgem should have until the end of 2016 to implement changes to the DAP which the regulator is currently developing with the industry. Some changes including increasing the debt threshold so that customers can still switch from £250 to £500 have already been taken on board by many suppliers.

Ofgem is seeing its budget fall from £89.5 million in 2016/17 to £82 million in 2020/21 and it even acknowledged that achieving the efficiency savings that government requires of it, whilst maintaining its high standards is a “challenging target”. This was before the CMA set out the extra responsibilities and changes to existing programmes, such as the DAP.

 Ofgem’s planned expenditure

Source: Ofgem

Adding in the relatively short timeframe for these changes – the final CMA results are published in June –means the regulator will only have six months to ensure the changes are in place. This adds to Ofgem’s challenge to ensure the new DAP is in place, fully functioning and implemented by all the current 37 suppliers, as well as any additional new entrants.

Overall, there is some scepticism about Ofgem’s ability to action the CMA’s remedies effectively. Barriers such as timescales and costs, could be of significant detriment to its new regulatory responsibilities. Redesdale says: “I think the funny thing about it is, in the past the regulators would have taken this on as their responsibility but now they will probably get other people to do it for them.

“There is a lot in there for Ofgem to implement and it is not as if they are swimming in cash. They are going to get cut in the same way that everybody else is.”

Ofgem has been given a three-week time frame for its consultation with the CMA and is expected to respond by the middle of April – setting out whether it agrees and how it proposes to achieve the suggested remedies.

The nation is tightening its belt after the announcement of Osborne’s latest budget plans and the energy industry was not spared from the cuts. The Department of Energy and Climate Change is set to lose almost an eighth of its workforce, begging the question, where is Ofgem going to get the money to make all these changes? Redesdale says: “I suppose what they are going to have to do is offset this with third parties, but then who picks up the tab for that?”