Analysis: The CMA – the £1.7bn question

The Competition and Markets Authority (CMA) has now proposed various remedies to make the UK retail energy market more competitive.

However, much debate has focussed on the average £1.7 billion a year between 2012 and 2015 by which the CMA believes retail customers are being over-charged because of their reluctance to shop around.

Centrica put out a statement challenging this figure, that – in time-honoured civil service jargon – it appeared not to recognise. Indeed, Centrica stated “we continue to disagree” with it.

The CMA confirmed in its provisional Decisions of Remedies Report its analysis had been based primarily on the estimated detriment caused by Adverse Effective Competition (AEC); in short, apathy, or – in the CMA’s phraseology – customer disengagement.

In calculating the level of detriment from AEC, the CMA used the average prices offered by different suppliers to their customers and compared these with a benchmark price, which is derived from the average prices offered by the most competitive suppliers.

In addition, various adjustments were made to achieve a credible like-for-like comparison – at least in the CMA’s judgement.

The CMA estimated that “the detriment from excessive prices to the domestic customers of the six large energy firms to be about £1.7 billion a year on average over 2012 and 2015”. It added that its latest figures suggested the annual over-charge figure was now £2.5 billion.

On its alternative indirect methodology, the over-charge figure came out appreciably lower at between £600 million and £1.1 billion per year.

However, this latter financial methodology is based on suppliers’ profitability levels and the efficiency of their cost bases; its data is arguably less robust.

Undoubtedly, when full details of the CMA’s financial methodology become more widely available, they will be rigorously scrutinised by the leading energy suppliers, who may well come up with very different figures.

To address the alleged over-charging issue, the CMA has proposed various remedies, especially in the pre-payment meter segment.

It advocates a price cap on domestic customers’ pre-payment meters beginning next year and lasting until the end of 2020. Several of the other proposed remedies are rather more arcane.

For example, the CMA plans to authorise “Gemserv and Xoserve to give PCWs access upon request to the Ecoes [Electricity Central Online Enquiry Service] and Scoges [Single Centralised Online Gas Enquiry Service] data-bases respectively on reasonable terms………”. Enough said.

Of the larger energy companies, Centrica apart, few offered substantive views on the CMA’s conclusions.

But financial markets were reassured and shares in both Centrica and SSE rallied.

For the smaller players, the outcome was disappointing. Good Energy chief executive Juliet Davenport, stated the priority now should be to “unstick the stickies”. Her counterpart at Ovo Energy, Stephen Fitzpatrick, was distinctly unimpressed, describing the CMA two-year enquiry as ‘a complete waste of time’.

Debate about the planned remedies and the CMA’s financial modelling behind its controversial £1.7 billion annual ‘rip-off’ figure will surely continue.

The focus now shifts to Decc and Ofgem – and their responses.