The CMA’s strong medicine for small business market ailments

Lis Blunsdon highlights the CMA’s divergence from promoting market principles in its proposed remedies for microbusiness market problems.

The terms of reference for the CMA market investigation specifically included the supply of energy to microbusinesses, (a business with fewer than ten employees and an annual turnover of no more than €2,000,000 or that consumes no more than 100,000 kWh of electricity or 293,000 kWh of gas per year). 

According to Ofgem there are about 1.6 million electricity meter points and 0.55 million gas meter points registered to microbusinesses. However in practice it can be difficult to distinguish between SMEs and microbusinesses.  Suppliers tend to apply the microbusiness specific licence conditions to all SMEs, unless there is a specific reason not to in an individual case, but there is no standard definition for an SME. 

In identifying Adverse Effects on Competition (AECs) relating to the microbusiness and SME markets (microbusiness markets for these purposes), there are common themes to the AECs identified by the CMA in the domestic sector:  in particular, a lack of customer engagement, a lack of transparency and issues with access to pricing information. 

That said, microbusinesses face particularly acute challenges in some areas.  The third party intermediaries (TPIs) that provide assistance to non-domestic customers in procuring energy supplies seem to be particularly problematic for microbusinesses, partly due to the small size of the annual volumes and partly due to a lack of trust on the customer side. As for profit margins, according to the CMA, the Big Six make profit margins in the SME markets that can be twice as large as in the domestic or I&C markets. 

Along with its provisional findings report, the CMA also published for consultation a notice of possible remedies.  Given the correlation of issues between the domestic and microbusiness markets it is not surprising that many of the proposed remedies tackling the issues referred to above apply to both sectors. 

However, there are some specific remedies proposed for the microbusiness sector, including a new licence obligation requiring suppliers to provide price lists for microbusinesses and introducing rules on TPIs requiring them to provide certain information to microbusinesses.  Another proposal is a licence condition which would prevent contracts with microbusinesses automatically rolling over on expiry with a narrow window thereafter for switching supplier or tariff. This would be easy to implement and should reduce the number of microbusinesses locked into default tariff rates. 

Of course, one of the key issues is a lack of engagement from customers, and it is difficult to enforce a remedy that will overcome customer apathy, whatever its cause. There are therefore various proposals to encourage engagement, including notifying customers that are on or are about to be put onto default tariffs. 

The final proposed remedy in this category of AECs is the creation of a “transitional safeguard regulated tariff” for disengaged domestic and microbusiness customers. In effect, this would be a price cap. In a report that is championing market forces and competition this sits somewhat strangely, and the range of responses published so far demonstrates some serious concerns with this proposal – not least, the difficulty in determining a methodology for setting such a cap in a sector where the supply costs for this disparate group of customers vary hugely. 

The fact that the particular issues faced by the microbusiness sector have been scrutinised in such detail is a welcome development.  It will be interesting to see the full results of the remedies consultation later in the year.  

N.B: Find out more abou the preliminary findings and suggested remedies of the CMA energy market investigation, and concurrent water and energy network investigations, in Utility Week’s upcoming Topic feature, availble online and in print form 4 Sept.