The CMA starts picking its way through first tranche of submisions

Two months into the CMA’s big investigation of the energy industry and the submissions are piling up. Jane Gray sifts through the paperwork to see what early themes are emerging.

In late July and throughout August, 33 organisations and individuals made submissions to the Competition and Markets Authority to help inform its investigation of the UK energy market.

The submissions are varied in their concerns and conclusions, with a clear and unsurprising divide between integrated energy companies and independent energy suppliers. A surprise request by Conservative MP Tim Yeo to include the distribution networks and wholesale gas market in the CMA investigation made national headlines.

Yeo wrote to the CMA to warn it that its investigation would be “compromised at the outset” if the wholesale gas market was not taken into account, but Roger Whitcomb, who is leading the market probe, said it would not change its plans unless “further evidence emerges” of foul play in the market to the detriment of customers.

Ecotricity is among those that challenged this decision. In its submission it said: “Whilst the market is not as vertically integrated and does show higher levels of liquidity than the electricity wholesale market, we suggest that it form part of the CMA’s investigation. This is because:

•    gas prices have a significant effect on electricity generation; 33 per cent of electricity is generated by gas power stations;

•    wholesale gas prices usually change with electricity prices, suggesting they are subject to the same influences;

•    impact of gas prices on consumers is significant; an average consumer uses four times more gas than electricity in their home;

•    there have been incidences of market manipulation in the gas market such as the St Fergus & Bacton Scandal in 1999.

•    we would suggest that the presence or absence of vertical integration within the gas wholesale market is not, of itself, an indicator of an efficient market. The lack of vertical integration is more likely for structural reasons which have no bearing on the efficiency or competitiveness of that market or on consumers’ experiences of the same.”

Another target of criticism in many submissions is Ofgem, which several companies suggest has, albeit unintentionally, had a negative impact on the energy market because of inappropriate or continuous market interventions.

Former UK electricity regulator Stephen Littlechild, with Sir Callum MaCarthy and Eileen Marshall, triggered this debate when he wrote to the CMA on 7 August. He urged the watchdog to take into account the impact of increased interventions by Ofgem since 2008 and the impact these may have had on competition in addition to the CMAs four stated “Theories of Harm”. Ovo Energy and SSE were among those supported this view.

Other submissions have called for more appreciation of the European context in which the UK energy market operates, and for the CMA to consider the impact on competition of brokers and third parties, including price comparison and switching sites.

Theories of harm

The Competition and Markets Authority’s investigation of the UK energy market’s structure uses four main “theories of harm” which, it says, could damage the integrity of the market either independently or in combination.

They are:

1.    Opaque prices and low levels of liquidity in wholesale electricity markets, which can create barriers to entry in energy retail and generation as well as “perverse incentives for generators” and other inefficiencies in market.

2.    Vertical integration, which may be harming the competitive position of non-integrated firms to the detriment of customers, either by increasing the costs of non-integrated suppliers or reducing the sales of non-integrated generating companies.

3.    Market power in generation, leading to higher prices.

4.    Weak incentives for suppliers to compete on price and non-price factors in retail markets. The CMA proposes that this may be happening as a consequence of inactive customers, supplier behaviour or regulatory interventions.

The judges

The CMA inquiry is being led by Roger Whitcomb, formerly financial director of National Power, with assistance from a panel of competition experts. They are:

Roger Whitcomb. Previously chairman of the Competition Commission, Whitcomb has also held a non-executive directorship at Anglian Water. While at National Power, Whitcomb was a key player in its attempted takeover of Southern Electric – a move that was blocked by the Mergers and Monopolies Commission, a predecessor of the CMA. Whitcomb is now a non-executive director and utilities expert for the CMA.

Lesley Ainsworth. A lawyer who worked for Hogan Lovells for 25 years, Ainsworth is a specialist in competition law and has practised in London, Brussels and New York.

Malcolm Nicholson. A lawyer, Nicholson worked at Slaughter & May for 25 years and retired in 2009. In the intervening time he has been non-executive director to Cambridge University Hospital’s NHS Trust, director of the Solicitors Regulation Committee and chair of the Case Management Committee at the Financial Reporting Council.

Martin Cave. An economist with international experience advising governments and competition authorities. Cave also worked for the Competition Commission.

Bob Spedding. An accountant, Spedding worked for KPMG for 25 years ending up as head of advisory risk management for KPMG Europe. He has since held chairmanships for the audit committees at The Open University, The Law Society and the Coal Authority.