Ofgem submits Treasury bid for extra funding

Ofgem has submitted a bid for more Treasury funding, Jonathan Brearley has revealed, as he warned that the next price cap is likely to top his previous estimate of £2,800.

Giving evidence on Monday (11 July) to the House of Commons Public Accounts Committee (PAC), which is conducting a hearing into the regulation of energy suppliers, the Ofgem boss said the watchdog requires extra resources to carry out beefed-up oversight of retail company finances.

Ofgem is moving towards a system of prudential regulation, which requires firms to hold adequate levels of capital, like that already operating in much of the financial services sector.

“This crisis shows us that we need to look at regulation much more like banking regulation,” Brearley explained.

But delivering this new and “more proactive role” on prudential regulation will require “different resources and skills”.

Moving from the previous system, which he described as “reactive monitoring” of companies, to a system akin to prudential regulation would be a “massive shift,” according to Brearley: “We will need to bring in more financial oversight skills, we need to build better systems to monitor and we need to increase compliance teams so we can handle the new questions we are asking.”

He said that Ofgem also needs additional resources because it is running more government schemes and is taking on new functions, such as developing a new regulatory regime for carbon capture and storage.

Brearley also admitted to the PAC that October’s next revision of the retail price cap will be higher than his previous estimate of £2,800 in May.

Despite recent hikes, Brearley said the mechanism continues to play a valuable role in protecting customers against profiteering by retailers.

Pointing out that energy suppliers were making up to eight per cent margins prior to the price cap’s introduction, the Ofgem boss said that it offers a “huge amount of reassurance to customers”.

“Customers would be paying much more,” he remarked. “We need some form of price regulation.”

The committee also pressed Brearley on concerns raised in a new report published by Citizens Advice on Monday about unregulated debt collection by the administrators of failed energy suppliers.

The charity called for an urgent review of the interactions between insolvency rules and the Supplier of Last Resort (SolR) process.

Brearley acknowledged that a legal gap exists between the SoLR regime and insolvency law, which crosses many sectors.

Ofgem is working with the Insolvency Service to give better guidance to administrators but if this avenue does not succeed, it will pursue the Department for Business, Energy and Industrial Strategy (BEIS) for legislative remedies, he said: “The interaction between insolvency law and the SoLR regimes is something we are going to have to continue to look at.”

Sarah Munby, permanent secretary at BEIS, told the MPs that it would be complex and problematic to change insolvency law.