What sort of animal is the CMA?

As companies across the utilities sector anxiously await the Competition & Markets Authority (CMA)’s final decision on the PR19 appeals, Maxine Frerk looks at how the watchdog operates and asks whether it is still fit for purpose.

Clearing out some papers over Christmas I came across a speech I gave at the Regulatory Policy Institute, just after the RIIO ED1 appeal, in which I tried to pull out some lessons around the appeals regime.

Given it was the first time the narrow-focussed energy licence appeals regime had been put to the test there had been some considerable uncertainty about how it would operate. I recounted the debates I had with legal colleagues at the time about the extent to which it was a legal process in which, for example, all representations would have to be made through QCs (as they are in code modification appeals). This did not apply and, as I expected, the Competition & Markets Authority (CMA) continued to want the more traditional “hear it from the decision makers directly” approach.

However, the nature of the test they were applying was essentially a legal one – had Ofgem made an error of fact or law or misapplied its duties – and there were a number of legalistic aspects to the arrangements. The CMA seemed to treat it as essentially a legal dispute between two parties not a question of public policy. For example, the provisional decision, which many of us have scrutinised in the water appeal and attracted 45 responses from a wide array of stakeholders, was not made public in the energy appeal. In the British Gas third party appeal even the networks whose revenues were directly affected struggled to get a full hearing.

In my speech I reflected on the different hybrid animals that exist and concluded that the CMA was a minotaur with a human face but four legal legs. I argued that Pan with a human face and only two legal legs would have offered a better model.

The main problem that I perceived at the time was to do with the cherry-picking nature of energy appeals in contrast to the “in the round” water appeals regime (more accurately described as a re-hearing). This was the problem that Professor George Yarrow had also identified with the single-issue Australian appeals regime where over successive price controls it was clear that the regime benefitted the better resourced companies over consumer bodies. Ofgem have taken this lesson to heart and made a strong play in the RIIO-2 documents about the linkages that exist and the potential for subsequent adjustment to the price control to redress any imbalances created to the “in the round” decision.

However, the idea that everything would be alright from a consumer / regulator perspective if only we had “in the round” appeals has been firmly squashed by the CMA decision on PR19 which has provoked strong reactions from Ofwat and others.

The CMA has recently (8 January) published a consultation on two working papers on cost of capital in which it moves slightly towards the Ofwat position but is holding its line on some of the core elements and in particular the idea of “aiming up”. The argument here is that regulators should pick a figure in the upper part of the range of figures identified because the risks of being wrong in terms of not allowing enough investment or risking the financial failure of a firm are a bigger concern than the risks of consumers slightly over-paying.

The working papers make very clear that this is a question of judgment, balancing the different regulatory duties around consumer protection, resilience and financeability.

Going back to my hybrid animals then the CMA in this instance is not a hybrid animal but pure man. This is not a legal argument about right and wrong. Of course it is bound by the same duties as Ofwat but as I have always argued – and as recent analysis by Slaughter and May for Sustainability First sets out – regulators have a lot of discretion in how they apply their duties.

We have seen the transformation in Ofgem’s focus on decarbonisation over the past year. That has nothing to do with any change of duties and an awful lot to do with the new CEO.

So back to the question at the start. What sort of animal is the CMA? How will it go about balancing the different duties and applying the discretion that it is afforded? I would make two observations.

First it is a body that is disconnected from the industries it regulates and from government. In days of old – when the independence of regulators was sacrosanct – this was a strength. But with the challenges of climate change and with utility bills (and the possibility of nationalisation) a manifesto level issue, regulators these days have to be more alive to the political agenda. In deciding how to balance their duties regulators have always had to take account of the wider social context and that is more important now than ever. The CMA’s extreme independence now risks making it look distant and out of touch.

Second the CMA is not a single body but one whose face changes for each inquiry with a fresh panel appointed each time. It has been remarked on that the panel for the PR19 hearing, while very experienced, came predominantly from an industry background – no obvious consumer advocate or even academic. Another panel with a different set of individuals could reach a different conclusion – there is no “CMA view”. Recall, if you will, that Professor Martin Cave was a member of the panel on the retail markets investigation and put out a minority report supporting a broader price cap. Different people will inevitably have different views and reach different judgments as they seek to balance the various duties, and in this case without a sectoral context and background to draw on.

These features may matter less when the question is whether the regulator’s decision was “wrong” as it is in energy. But there may still a balancing of duties that needs to be done. Either way there would now seem to be a real question of whether this is the sort of animal that we want as the appeal body for our essential utilities or is it time for a rethink?

Maxine spent 15 years at Ofgem, latterly taking on responsibility for all aspects of the regulation of distribution networks. Since leaving Ofgem she has been working as an independent consultant for a mix of regulated company and consumer / community group clients.