CMA dismisses Utilita appeal against Ofgem

The Competition and Markets Authority (CMA) has dismissed Utilita’s appeal against Ofgem’s decision to introduce minimum capital requirements for energy retailers.

The competition watchdog has thrown out all of the prepayment meter (PPM) specialist supplier’s grounds for appeal, concluding that Ofgem was correct in its original decision.

Utilita launched the appeal late last year over concerns that the capital target of £115 adjusted net assets per domestic dual fuel equivalent customer, to be introduced in 2025, will not achieve its objective for four key reasons.

These include: the fact that it believes a market with a capital target will not face materially lower levels of supplier failure and mutualised cost than one without one; that the risks which the target is designed to address are already adequately addressed in the existing regulatory framework; because it believes the target systematically favours traditional suppliers; and because the regulator’s impact assessment was flawed.

Utilita argued that the introduction of the Capital Target fails to achieve Ofgem’s goal of helping “deliver a retail energy market that is secure, sustainable, and therefore able to deliver the innovation and positive consumer outcomes needed in the future”.

However, the CMA said it was “not persuaded by Utilita’s arguments”.

“Utilita had not shown that [Ofgem’s] theoretical basis for concluding that having a positive loss-absorbing capital buffer would reduce the risk of supplier failure and the likely mutualisation costs was flawed,” it explained.

It later added: “It was not in dispute that other measures introduced by […] (either previously or alongside the Capital Target) would contribute to addressing the risks that the Capital Target is also aimed at addressing. However, we concluded that Utilita had not shown that [Ofgem] was wrong to have concluded that the Capital Target would be likely to further address these risks.”

On Utilita’s argument that the target would favour incumbent suppliers and traditional energy supply models, and therefore drive down competition and innovation, the CMA said Ofgem had considered the impacts on competition “extensively”.

“The submissions we received had not shown that [Ofgem] was wrong to have concluded that the introduction of the Capital Target would have a beneficial impact on competition by removing incentives which had otherwise tended to lead to excessive risk taking and unsustainable commercial behaviour,” it said.

One of Utilita’s other concerns was that it believed Ofgem’s decision was based on a flawed impact assessment.

The CMA admitted that it did find “some errors” in Ofgem’s approach, “specifically relating to the calculation of future hedging costs transferred to customers in the event of supplier failure”.

“However, when we corrected for these errors (and considered the uncertainty of the impact of the Capital Target on credit ratings), we found that the result of the impact assessment model remained positive for consumers,” it added.

Meanwhile, the CMA further rejected Utilita’s assertion that the regulator was wrong in the way it calculated the level at which the Capital Target ought to be set and also that the target itself is unnecessary and disproportionate.

Responding to the CMA’s decision, a Utilita spokesperson said the company was disappointed with the outcome but confirmed that it will hit its Capital Target levels.

They added: “Our decision to appeal was purely in the long-term interests of households, since we believe we would deliver more value to consumers if we were allowed to increase investment in our systems. The arbitrary nature of what Ofgem has decided to include and exclude in regard to the Capital Target will introduce a distortion in the market.

“We remain convinced that far from achieving its principal objective of furthering competition, the introduction of a minimum capital requirement will have the opposite effect – ultimately impacting the welfare of customers.

“This is why we will keep advocating a market which is fair to the consumer and sustainable. We also hope Ofgem carefully considers the CMA’s conclusions regarding the ‘relationship between future price cap decisions and the requirement for suppliers to meet the Capital Target’.”

A spokesperson for Ofgem said: “During the energy crisis we saw multiple suppliers fail because they were not on a strong enough financial footing to cope with it. That is why Ofgem toughened the rules to ensure companies are more financially resilient and have crucial funds in reserve.

“The Competition and Markets Authority has supported the positive steps we took to introduce a minimum capital requirement.”