Ofgem’s investigation into SSE should spur the other DNOs into acting at last to drive up competition. Jillian Ambrose reports.

The news this week that SSE will be investigated for potentially anticompetitive dealings in the electricity connections market is neither surprising nor sudden. After all, it was in 2010 that Ofgem warned the UK’s seven distribution network operators (DNOs) to open up the power connections business to competition, and more than six months since SSE was identified as the DNO with the lowest signs of competition in its region.

Competition has increased since Ofgem called on the incumbent networks to open the market, but only slowly. New customers, such as recently built housing developments, do not have to opt for the local distribution company to connect to the grid. But Ofgem said while there are signs of greater competition between local DNOs and independent connection providers (ICPs), incumbent providers such as SSE continue to dominate.

The incumbent DNOs had three years until 31 December 2013 to demonstrate to the regulator they were promoting competition across nine market segments. This involved showing that ICPs were getting a reasonable share of the market in connecting distributed generation and new demand. If successful, DNOs would be allowed to charge an unregulated margin on the relevant activities.

But in the three years, just one-third of the market segments passed Ofgem’s tests, with SSE Power Distribution failing to pass a single segment in its Scottish region and only one in its southern patch.

After reporting the results in mid-2014, Ofgem initiated a review, uncovering the fact that SSE might have used its position as an incumbent DNO to put smaller rivals at a disadvantage. An Ofgem spokeswoman said the regulator will use the powers it shares with the Competition and Markets Authority to investigate whether anticompetitive behaviour has taken place. If found guilty, SSE could face a fine of up to ten per cent of its annual turnover. The development does little to ease the political pressure already felt by SSE in the run-up to an election dominated by scrutiny of the big energy firms.

“The competition review is yet more evidence that pressure on all aspects of the value chain is mounting to ensure sufficient competition and fair value for money for customers,” said Citigroup utilities analysts.

Ofgem said it does not currently have evidence to support a similar investigation into other DNOs, but it has set out the steps they must take in the next six months to drive competition in the connections market further.

Ofgem’s senior partner for distribution, Maxine Frerk, said: “We are requiring electricity network companies to work quickly to resolve the issues identified in the connections market, to reduce the hassle of getting connected to the grid and help lower costs for customers.”

This time around, there is little doubt that networks will have noted ‘quickly’ as being the operative word.

In the hot seat

The increased scrutiny of the UK’s DNOs looks set to continue following the sector’s annus horribilis in 2014.

January 2014

Christmas power cuts

DNOs faced a huge compensation bill in the aftermath of the Christmas power cuts. SSE and UKPN were investigated by Ofgem and were found to have been slow to respond and forced to pay £8 million. Energy and Climate Change committee chair Tim Yeo claimed DNOs “could get away with murder and they probably do”.

May 2014

Ofgem slams competition failures

After giving DNOs three years to improve competition, Ofgem said their efforts had not been enough: “In the majority of market segments, we have still not seen enough evidence of effective competition.”

July 2014

Committee questions costs

Networks faced scrutiny by the Energy and Climate Change select committee where British Gas called for DNOs to be referred to the National Audit Committee; Yeo said “even the worst-performing DNOs are rewarded as if they have above average performance” due to Ofgem’s “feebleness”.

August 2014

Billions wiped in draft determinations

Ofgem’s draft determinations under its RIIO-ED1 regime wiped a further £1.4 billion off DNOs’ business plans, in addition to £700 million of savings the companies had already found in their redrafted plans.

November 2014

Ofgem holds the line

Ofgem held the line on its controversial summer draft determinations with little wiggle room left for the networks. The DNOs have until the end of January to decide whether they can take the hit or take the regulator to the CMA.