Interview: Martin Cave, deputy panel chair, Competition and Markets Authority

“There is an opportunity, via a market reference, to really get to the bottom of what is going on in energy.”

Will the big six energy companies be split up? It is one of the biggest questions facing the sector, following Ofgem’s decision to order a competition investigation. Everyone has an opinion. Yet it is those with the greatest influence who are bound to say the least.

Martin Cave is necessarily circumspect. As a deputy panel chair at the Competition and Markets Authority (CMA), he may well be called on to lead the impending energy market investigation. Whoever gets that assignment must go in with an open mind.

When Utility Week meets Cave at the CMA’s London offices, he certainly gives the impression of a man driven by intellectual curiosity rather than any predetermined agenda. He steers clear of the macho rhetoric deployed by politicians, leaving his record to speak for itself. He is fresh from setting a tough price control for Northern Ireland Electricity (NIE), which has triggered a regulatory squeeze on other network businesses. Meanwhile, his seminal 2009 report on water competition is slowly but surely driving the biggest culture shift in that sector since privatisation.

In a career that has spanned academia, regulatory economics and competition law, Cave rates the his role at the Competition Commission (rebranded the CMA on 1 April in a merger with the Office of Fair Trading) as “probably the best job I have had”. It may not take him to such exotic locations as does his interest in mobile broadband in developing countries (most recently Mexico), but he appreciates the “finely balanced” nature of competition casework.

It puts him in a prime position to take on the upcoming energy market investigation, which Ofgem’s assessment suggests will be finely balanced indeed. The regulator did not find damning evidence of competition problems in the market, but presented the move as a chance to “clear the air” of mistrust towards energy companies. Is that what a competition referral is for? “I would not have thought that was its primary function,” Cave says with a wry smile. But he adds: “There seems to be a fair consensus that there is an opportunity, via a market reference, to really get to the bottom of what is going on.”

Cave scrupulously notes that Ofgem has not yet made a referral to the CMA. The regulator is consulting on the plans until 23 May and could, in theory, decide not to go ahead. Ofgem has made its intentions pretty clear, however, and a U-turn would trigger the eating of hats up and down the country.

If and when the referral does come, Cave is one of six candidates to lead the investigation. CMA panel chair Roger Witcomb assigns one of five deputy panel chairs to lead each inquiry, or he may decide to take it on himself. In a big case, he may appoint more than one deputy panel chair to the inquiry, as well as a number of panel members. There are no hard and fast selection criteria, but Witcomb will take into account areas of expertise, availability and some stringent conflict of interest rules.

The CMA panel will have 18 months (with an option to extend for another six months) to identify any “adverse effects on competition” and order remedies. It will have “considerable resources” at its disposal, says Cave. “It really is a very thorough, painstaking process that involves vast amounts of data.”

While the notion of splitting up the major energy companies is what grabs the headlines, there is a range of options. The competition regulator has completed fewer than 20 full market investigations and some cases will give more comfort to energy bosses than others.

Perhaps the most dramatic ruling was in the airports inquiry, which forced BAA to sell Gatwick, Stansted and one of its Scottish airports. A recent investigation into the lower profile but economically important aggregates, cement and ready-mix concrete market resulted in an order for one big player to sell two plants. That ruling is being appealed.

At the other end of the spectrum, the movies on pay TV market got a clean bill of health in 2012. And despite strong public hostility towards supermarkets at the time, a 2006 inquiry into the groceries sector found that by and large, competition was working well for customers.

In energy, as with any other sector, the CMA is there to bring a “fresh pair of eyes”. It will look at the behaviour of all companies, not just the big ones, and the policy and regulatory regime.

It is a high profile case, yet Cave does not admit to any personal ambition to lead it. By convention, CMA members take what they are given. Besides, you get the impression he is more interested in the intellectual possibilities of a project than the prospect of fame.

When he accepted the commission for reviewing competition in the water sector, it was highly unlikely to make him a popular hero. If the energy market investigation was rendered inevitable by the strength of public feeling, the Cave Review came about in the context of general public apathy.

Water is “a regime in which there’s little political or public appetite for reform”, Cave said shortly after the review’s publication in 2009. Following the financial crash, anyone proposing deregulation was “going against the tide”. He struck a pessimistic tone as he outlined his strategy: “When you’re contemplating an offensive, the first thing you should do is prepare for your inevitable retreat.” Commissioned by a Labour government towards the end of its term in office, the report had little chance of translating into legislation before an election.

Five years later, many of his recommendations are being taken forward. There is a Water Bill going through Parliament, with measures to bring in retail competition for business customers in England from 2017 and upstream competition from 2019. The Welsh Government remains unconvinced of the benefits and is sticking with a non-competitive model.

Now, Cave says, he is “rather more optimistic”. He partly puts that down to the example of retail competition in Scotland, which led the way. “The success of the Scottish experiment is an important factor and in the past 12 months, that has really taken off, with much more competitive pressure on [incumbent retailer] Business Stream.”

Importantly, the industry itself has come round to the idea. “The sector was really quite hostile to competition in England and Wales, so I did encounter quite a lot of pushback,” reflects Cave. “It was quite a struggle to get support for proposals for competition, but I think that has changed now.”

There are gaps, however. Reform of the system of rights to draw water from aquifers and rivers has been deferred until the mid-2020s. “Abstraction reform is the missing piece,” says Cave. “It is not an easy problem by any means but I am disappointed that it seems to be destined to take such a long time.”

An absence of competition for abstraction rights could limit the opportunities for customers to benefit, he says. “It is hard to see how competition in upstream water treatment, say, can really take hold without reform in abstraction… Most of the costs of providing water are not in retail, they are in abstraction and treatment and transport and things of that kind, so in order to give the benefit of competition to customers you need to embrace those activities.”

Ultimately, Cave expects retail competition to be extended to household customers. It is “probably best” to wait until the retail market for business customers is up and running. But once they see businesses getting the chance to switch their water supplier, Cave expects consumers to “start agitating for it”. He points out that telecoms, another of his specialist subjects, was seen as a perennial monopoly in the 1970s and 1980s and has since become highly competitive.

As Cave’s recommendations percolate through the water sector, his latest case is sending ripples through the energy networks.

The day before we meet, NIE got the unwelcome news it must make do with less money after Cave re-wrote its price control. The network company had failed to reach agreement on its investment plans with the Utility Regulator for Northern Ireland and it fell to the competition regulator to adjudicate. If NIE executives had hoped for a more generous result, they were to be disappointed. The final determination allowed them to claim 6.4 per cent less in revenues than the Utility Regulator had provided for – cutting the average household bill by £10.

Cave insists he “had no prior intention” to cut prices. That simply happened to be the outcome of changes
to the methodology and some of the numbers feeding into it.

With cost of living at the top of the political agenda right now, Ofgem and energy companies are under considerable pressure to keep bills down. Cave claims not to be been swayed by that climate. He says: “We didn’t feel or respond to that pressure. We have to balance a whole range of considerations and that is what we did. We want to get good value for customers but also we want investment.”

Likewise, he distances himself from the consequences of his decision in the NIE case to cut the assumed rate of return to equity investors. Ofgem picked up on his provisional determination in November and decided to replicate the tighter financial allowances for electricity distribution networks across the rest of the UK. Ofwat has also taken note and is assuming a historically low cost of capital in its ongoing price review of the water sector.

Cave did not set out to influence the other regulators, he says, but as the first referral of its kind since Bristol Water in 2010 it was likely to attract attention. “Regulators or anyone else can read it [the determination] and respond to it as they think. I expect that they will take note of what we say.”

He may not have an agenda to push, but when Cave forms an opinion on any subject, you can be sure it is worth taking note of. That is true whether his next assignment is the energy market or some other problem altogether.