Competition investigation on the cards

As Ofgem prepares to publish its energy market review this week, the big question is: will the regulator call a full competition investigation?

Ofgem has been working with the Office of Fair Trading and the Competition and Markets Authority (CMA) to examine whether the energy market is competitive enough. The regulators could make any number of recommendations, but the big decision is whether to refer the matter to the CMA. A referral would mean an 18-month investigation that could lead to the break-up of the big six.

The case for

The big six energy companies between them have a 95 per cent share of the domestic supply market. Trust in the sector is at an all-time low. Consumers have faced above-inflation bill rises for years, while incomes are frozen. Despite efforts to improve transparency, the complex structure of vertically integrated companies fuels suspicion of hidden profits.

Supporters of a referral

• Energy secretary Ed Davey last month heavily hinted that Ofgem should order a competition investigation last month. In a letter to the regulator, Davey singled out Centrica profits for scrutiny and suggested breaking up any companies “found to have monopoly power”.
• Which? and the Federation for Small Businesses said “the energy market is broken and urgently needs fixing” in a letter to the regulators on Monday
• Tony Cocker, chief executive of Eon-UK, has argued a competition referral might help show the industry has “nothing to hide”

The case against

There have been more than a dozen reviews of the energy market in the past decade. While all have recommended minor changes, none have found evidence of significant market failures. Independent suppliers have a larger share of the domestic market than ever before. A competition investigation ramps up political risk for energy companies just as large-scale investment is needed in new energy infrastructure.

Pushing back against a referral

• Industry body Energy UK. Chief executive Angela Knight says: “We are more competitive than most of Europe: many countries don’t have the plural market we have.”
• Centrica said in a statement the energy market in Britain is “intensely competitive” and prices are among the lowest in Europe. Given Davey’s comments, Centrica is potentially most threatened by a competition inquiry.

Sitting on the fence

The Labour Party is promising to split up the big six if elected in 2015. While a competition investigation could lead to the same outcome, it could equally reach a different conclusion. Either way, it takes the initiative away from the opposition.

Shadow energy secretary Caroline Flint said she would welcome anything to “help shine a light” on the energy market. However, she added: “Consumers will be rightly disappointed if the government uses this review as an excuse to kick the problem of rip-off energy bills into the long grass. We have hardly been short of reviews of the energy market in recent years – but what has been missing is decisive action to protect consumers.”