CMA provisionally approves PPM cap methodology change

The Competition and Markets Authority (CMA) has made a provisional decision to adopt Ofgem’s default tariff cap methodology (DTC) in calculating the prepayment meter cap.

It has also made a provisional recommendation to Ofgem to extend protection to prepay customers beyond the end of 2020, because of the delayed rollout of smart meters.

The CMA says it explored two options for the reform of the order imposing a cap on prepay meters, which came into effect in December 2016.

The order limits the unit rate and standing charge for households on a prepay meter until the deadline for the completion of the smart meter rollout at the end of 2020.

The first option involved adopting Ofgem’s DTC methodology and adjusting it to reflect the specific costs in supplying prepayment customers while the second involved a hybrid approach of the current prepayment charge restriction methodology with calculations for policy and pass-through smart metering costs taken from Ofgem’s DTC methodology.

As such the CMA has provisionally concluded to adopt Ofgem’s DTC methodology.

The CMA is now seeking industry views on its provisional decision, and on the draft variation order, the draft explanatory note and the model that would replace the CMA’s original prepayment price cap model.

Those who wish to respond should do so in writing to the CMA by 5pm on Monday 8 July.

In response to the decision to adjust the methodology, an Ofgem spokesperson said: “The CMA’s provisional decision to change the prepayment meter price cap methodology seeks to better reflect the true cost of providing energy to customers on prepayment meters.

“This ensures the market offers choice and protection to prepayment customers both now and in the future. Under the default and prepayment meter price caps, households are protected and will always pay a fair price for their energy and not be overcharged.

“If approved, the new prepayment meter cap level methodology will be reflected in the next cap period coming into effect in October, which Ofgem will announce in August. Alongside the price caps, we are continuing to work with government and the industry to deliver a more competitive, fairer, greener and smarter energy market that works for all consumers.”

The spokesperson added that Ofgem “welcomes” the CMA’s recommendation on extending protection and said that Ofgem will now consider how best to provide protection for prepayment customers after 2020.

The order was one of a number of remedies put in place following the CMA’s two-year investigation into the energy market.

In December the CMA invited stakeholders to give their thoughts on whether a review should be held, and if so, what it should cover.

It initially proposed to examine the allowances under the cap for policy costs and indirect costs relating to the Data Communications Company (DCC) – the firm responsible for managing the smart metering data and communications infrastructure.

Among other things, respondents raised concerns that the coexistence of two price caps – calculated in different ways and on the basis of different data – could lead to unintended consequences for consumers and competition, for instance, reduced incentives to obtain a smart meter.