Penrose: Ofgem is too soft on monopolies

Ex-Rishi Sunak regulation adviser John Penrose MP has accused utility watchdogs of giving an “overly-easy ride” to the monopolies they police.

In a new report, entitled ‘Unfinished Revolution’, the Somerset MP writes that the way some monopoly energy firms are regulated has been “too soft”.

The new paper is a follow-up to his ‘Power to the People’ report, which Penrose submitted to then chancellor and now prime minister Sunak last year.

“Big, comfy incumbents” have been able to “get away with delivering services that are more expensive and lower quality than they should”, it says.

Economic regulators should ensure that monopoly utility businesses make a “bit less money on average” than other companies in exchange for “ultra-stable profits”, says the report.

But an analysis of these firms’ profits over the past five years in the latest report shows this has not been the case, it says: “When we strip out the variability of the shareholder returns for the economy overall… firms regulated by Ofgem and Ofcom (but not Ofwat) made a lot more money than the average for the rest of the economy.

“Their shareholders earnt monopoly profits that were both very high and extremely stable too, which meant customers and suppliers were being ripped off by having to pay too much for what they were getting.”

The report adds that regulators are also failing to ensure that monopoly owning firms aren’t providing ‘second-rate’ products or services.

“If regulators could argue that the firms they cover had dramatically cut the amount of sewage going into rivers; or reduced hosepipe bans and river water abstraction in dry spells; or got power back in hours rather than days after winter storms; or prevented hundreds of millions of pounds being added to customer bills from bailing out bankrupt energy firms; then they might be able to argue that the prices which utility firms had been charging were worth it. But of course, they haven’t delivered these things.”

The steadily worsening global economic picture since the publication of ‘Power To The People’ in early 2021 has made its recommendations even more urgent, the new report says: “If the system had worked better then, while energy prices would still have gone up after Putin invaded Ukraine, they would nonetheless be lower than they have turned out today, and the quality of what they are providing would be better too.”

The report recommends “immediate” action on the unimplemented recommendations in Penrose’s previous report, which include a new “one in, two out” rule for utility regulations.

The report also recommends the closure of the Contracts for Difference (CfD) process once the UK has secured enough low-carbon electricity generating capacity to turn it into an energy exporter.

It says the CfD process should then be closed because the industry will then be able to renew and expand the low carbon generation fleet without the need for further subsidies.

The report also calls for new legislation to redesign UK infrastructure planning to cut the length of the approval process from years to “weeks or months”.