In response to a consultation, the big players laid out to Ofgem who and what the CMA should target in its inquiry – and used the opportunity to point a finger at each other, says Mathew Beech.

In March, Ofgem unveiled its map of the energy market battlefield, with the main areas of attack for the Competition and Markets Authority (CMA) marked out.

Those involved in the market, and set to face the wrath of the CMA, took heed of the advance warning and have prepared their defences accordingly.

The main areas the CMA is set to forensically probe are: consumer engagement; incumbency advantage; possible tacit co-ordination; vertical integration; barriers to new entrants; and profits.

In the industry’s responses to Ofgem’s consultation on the terms of reference of the inquiry, the big suppliers sought to reinforce their positions, outlining where they thought the CMA should be directing its energies. In many cases they shared the same position, presenting a consensus view, but there were also key areas of disagreement, suggesting potential flashpoints.

Consensus

First things first: the referral to the CMA and the subsequent investigation will happen. And it has been welcomed by everyone concerned with the energy market. It is viewed as a major opportunity to start rebuilding consumer trust in the sector – whatever the outcome – and break the disillusionment felt by many consumers.

The suppliers and consumer groups have also noted that there has been a raft of new policy and regulatory changes made to the market – meaning that during the (proposed) investigation, new initiatives and schemes will still be bedding in.

Things such as the four tariff cap, the wholesale market maker obligation, and the government’s Electricity Market Reform (EMR) will only just be starting to take effect, and all of them will influence how the ­market works.

The CMA has been urged by most concerned to take note of these, and potentially build them into any recommendations it makes.

The respondents to the consultation also made it clear that the CMA should have defined and clear objectives for the inquiry – what it is going to look at and what would constitute success. It is claimed that without this, the investigation, regardless of its findings, will not satisfy the public demand for answers and will fail to start the trust rebuilding process.

As for the competitiveness of the market, agreement was reached that environmental and social policies have an impact. These are the so-called green levies – or as the prime minister is alleged to have said, the “green crap” – that fall on to energy bills. These costs, such as the Energy Company Obligation (Eco), have been acknowledged as “distorting” the market, and most respondents said they were keen to see them removed from consumers’ bills and absorbed into ­general taxation.

The final area where peaceful agreement was prevalent was on third party intermediaries (TPIs). The general view was that TPIs – including switching sites – should be under the scrutiny of the CMA, just as the rest of the industry is.

Contention

While some things are almost set in stone, others are less certain.

The key clash came between Centrica and SSE on vertical integration and what elements of this should be investigated.

The two heavyweights came to blows over the issue of networks.

British Gas, Centrica’s UK supply arm, has been ratcheting up the pressure on distribution and transmission companies, suggesting slashing £500 million from their revenue allowances.

In its response, Centrica stated the CMA should investigate whether allowing the vertically integrated companies – read SSE and Scottish Power – to own energy networks could result in the “distortion of competition”.

It added that this should form part of a comprehensive study examining all the contributory factors behind why consumer bills have been increasing.

SSE, which owns both transmission and distribution networks, unsurprisingly took the opposite view and backed the work completed by Ofgem.

SSE insisted that looking at the impact network charges had on consumer bills was unnecessary because “they are subject to economic price regulation” – that is, they are down to Ofgem, not the companies.

One caveat from SSE: if the inquiry was to include networks, further consultation must be done before it began.

The battle lines were also drawn on vertical integration.

Centrica, EDF Energy, SSE and Energy UK were among those who stated that the vertically integrated structure was “efficient” and had benefits for customers.

EDF did break ranks slightly and urged the CMA to have the remit to look at vertical integration in both the electricity and gas markets, because there are “different issues” between the two energy types and an “appropriate balance is required between the two during the investigation”.

Eon stated there were “real benefits” to vertical integration, but also went on the offensive. Aiming its attack at EDF, Eon highlighted issues of internal trading as a barrier to competition, while it also said the cross-subsidy between generation and retail undermined competition. This issue was said to be “more pronounced due to the concentration of ownership of nuclear generation”.

RWE was eager to highlight that while it does own a retail business (Npower) and generation assets in the UK, as well as renewables and trading arms, “these four businesses are independently managed, coming together only at the RWE AG board level in Germany”.

While the major suppliers were, on the whole, keen to try to defend the vertically integrated structures, there were a couple of respondents that strongly voiced their concerns about them.

First Utility used the consultation response as an opportunity to call for a “prohibition on self-supply” and said the CMA needed to address “structural issues that ­currently distort competition”.

Chief financial officer Darren Braham said the vertically integrated companies were structured in such a way that it was more important for them to maintain their market share, rather than compete for new custom. This then made it harder for smaller suppliers to gain fair and equal access to the wholesale market, and therefore offer cheaper deals. Essentially, it was a call of being bullied by the big boys.

Lines of attack

Away from the accusation of picking on the little guys, the bigger players actually come to the defence of the small suppliers – highlighting the barriers to entry needed to be assessed.

The major companies, in particular SSE and EDF Energy, stated that the stringent regulation and collateral costs needed to establish an energy supply business could act as a barrier to new entrants, but that they were essential “to protect the interests of consumers” – essentially they act as a fit for purpose test.

The flip-side is that these costs and burdensome regulations that have to be adhered to put off new entrants and price them out of the market, even before they enter it.

The waiting game of the phony war has now begun, as Ofgem deciphers the responses and pulls together the final line of attack for the CMA to take. In the meantime, sparks have already started to fly, with those in the CMA crosshairs already turning on each other (see box). With the suppliers bickering and turning on each other, as well as the regulator, the need to “draw a line” under all the issues of mistrust is paramount, especially with consumer trust continuing to fall to new lows.

But for now we must wait for Ofgem’s final battle plan for the CMA to take on the energy market.

Key clashes

Centrica vs SSE

Centrica: Does “ownership of networks by energy suppliers result in any distortion of competition”?

SSE: Networks are “already subject to robust and challenging economic price regulation”

Eon vs EDF Energy

Eon: Problems with internal trading and cross-subsidy “may be more ­pronounced due to the concentration of ownership of nuclear generation”

EDF Energy: There are “benefits attributable to generation-supply business models”

Eon vs Centrica

Eon: “Horizontal integration [that is, boiler maintenance] may operate as a barrier to switching”

Centrica: British Gas offers boiler installation, servicing, repair and ­replacement services

RWE and Eon vs Ofgem

RWE: The volume and impact of new regulation “may have been to the ­detriment of other change in customer service”

Eon: The complex regulatory system “has consumed a significant proportion of our business’s capability to cope with change”

Ofgem: “We work in the interests of consumers”

First Utility vs The big six

First Utility: “Prohibition on self-supply would neutralise the competitive distortions caused by the big six’s vertical integration”

The big six: The market “is competitive”

Citizens Advice vs Energy UK

Citizens Advice: “Switching rates are declining”

Energy UK: “There has been a sustained upward trend in recent months”

Where they stand

Centrica – Look at networks; retail competition is “delivering value for ­customers”

SSE – Don’t look at networks; the market is changing for the better already

RWE – The retail market has “solid foundations”; we’ve already separated supply and generation; excessive regulation affects customer service

EDF Energy – Incumbency has both advantages and disadvantages (or ­“responsibilities” – such as bad debt); look at profits in relation to risk; we’re not like the others (“lower price rise in November 2013”)

Eon – Strong wholesale and supply competition; horizontal integration
(that is, boiler servicing) may limit switching; vertical integration has “real benefits”, but undermined by internal trading and cross-subsidy

First Utility – The big six are blocking us out and hurting competition; a ­distorted market means consumers pay more; switching needs to be easier

Citizens Advice – A lack of competition is making consumers pay more; public trust remains low; we need answers to the “deep-seated problems”

Energy UK – The market works for consumers and is competitive – the CMA will prove this