Concerns Ofgem’s competition framework is too arbitrary  

Ofgem has dismissed concerns that its competition framework for the household retail market provides “too much freedom to apply arbitrary and potentially contradictory weightings to each policy decision”.

The likes of So Energy and the Energy Systems Catapult raised concerns about the lack of weightings of importance of the specific indicators within the framework relating to: consumer engagement & empowerment; market rivalry and; structural parameters of the market.

However, the regulator has rubbished the idea of weightings within its finalised version of the competition framework for the domestic energy retail market.

“It was argued that in the absence of such weightings the framework provides too much freedom to apply arbitrary and potentially contradictory weightings to each policy decision,” Ofgem explained.

The regulator added that while it does see some benefits of specifying in more detail which indicators are of greater or lesser importance, it considers that “it would be outweighed by a loss of flexibility”.

It further explained: “In particular, the purpose of a framework is to provide guidelines that are flexible enough to be relevant in all circumstances. As such the framework is supposed to be applied on a case-by case basis and the relative importance of indicators will be context specific.

“We note that such an approach is in line with other competition assessment guidelines such as the CMA’s Guidelines for Market Investigations.

“Secondly, we consider that the indicators should be interpreted in-the-round with the exercise of expert judgement, rather than mechanistically or in an algorithmic manner.”

The framework has been devised, as recommended by the Oxera report.

Published in May 2022, the report into Ofgem’s regulation of the energy market recommended the regulator put in place a consumer interest framework; develop a framework for how effective competition is defined and measured; and when making decisions, that Ofgem use both the consumer interest and effective competition frameworks to make decisions on future market design options.

Going forward, Ofgem will apply the framework to future policy decisions that have a potential competition impact, including the review of whether to retain the ban on acquisition-only (‘BAT’) tariffs beyond the current expiry date of March 2024.

The regulator added: “We are currently reviewing our data collections as we emerge from the height of the energy price crisis and are assessing these against both the competition framework and consumer interest framework to ensure alignment between our data collection and the key outcomes of importance to consumers.

“This will allow us to monitor the state of competition in the market on an ongoing basis and also allow us to react rapidly in applying the framework to assess the competitive effects of future policy interventions to enable robust and timely decision-making.

“As part of this review process, and with the objective of efficiency in mind, we are also seeking to rationalise and stabilise our data collection, including the methods with which we collect and quality assure data. Our aim is to work collaboratively with suppliers in this process, to ensure that suppliers can provide high quality data inputs as cost-efficiently as possible.”

An Ofgem spokesperson said: “This new framework is a practical tool to bring about greater consistency in our approach to monitoring competition in the domestic retail market.

“It was developed with stakeholders and seeks to help identify risk areas that could impact on consumers. It will now be embedded into Ofgem decision making processes to provide further reassurance to energy customers.”