A response to the CMA: why so hasty?

As part of Utility Week's regular Voices series, Stephen Littlechild gives his response the CMA’s provisional decision on the future of the prepayment meter price cap

The Competition and Markets Authority (CMA) is reviewing the price cap on prepayment meter tariffs. Its Provisional Decision accepts that the present method of setting the cap fails to take adequate account of the actual costs incurred by suppliers. Social and environmental costs consequent on government policy have been higher than allowed for. And the costs of installing smart meters have been significantly higher.

The CMA recognises that it needs to adjust the method of setting the price cap. Otherwise, there is a risk that suppliers will have to reduce quality of service, competition will reduce, and some suppliers may be forced to exit the market.

It is very unfortunate, not least for suppliers forced to make losses and for customers that are no longer attractive to acquire, that the CMA set the prepayment price cap too low in the first place. But the CMA is right to adjust and increase it now.

The CMA also proposes to recommend that Ofgem extend the prepayment price cap after it expires in December 2020. The reason is that the smart meter roll-out is behind schedule.

This is a very different matter. And this proposal is puzzling. It is not necessary for the CMA to do this to protect prepayment customers. Because once the prepayment price cap ends in December 2020, these customers will be protected by the general price cap on variable tariffs.

Introducing any price cap is a major and controversial policy. So too is extending a price cap beyond its scheduled date when there are other ways to protect customers.  What then is the CMA’s purpose?

Ofgem has a duty to carry out a review into whether conditions are in place for effective competition in this market. Ofgem must then recommend whether or not the cap on variable tariffs should be extended after December 2020.

So, the CMA is recommending that Ofgem should extend the prepayment price cap regardless of its own review. This pre-empts Ofgem’s statutorily required judgement.

Is that important? Yes. Because price caps are potentially problematic policies that need proper justification. In its earlier investigation, the CMA explained that extensive price controls “run excessive risks of undermining the competitive process, likely resulting in worse outcomes for customers in the long run”. Moreover, the CMA’s present proposal has significant limitations.

First, the CMA’s recommendation today is inconsistent with what the CMA concluded back in 2016, after its intensive two-year energy market investigation. It then considered the possibility that the roll-out of smart meters would not be complete by 31 December 2020.  It said that, in this case, the CMA would consider whether to encourage Ofgem to review the situation and take whatever action it considered appropriate. This might or might not include extending the prepayment meter price cap. The CMA then explained that this approach was more proportionate than simply extending the prepayment meter price cap.

Second, the CMA has not adequately consulted on this issue. Its proposed recommendation has varied during its consultation process without acknowledgement or explanation or justification. It has not asked for views on whether the CMA should pre-empt Ofgem’s statutory review.

Third, the CMA has not collected, analysed and assessed the evidence necessary to make an informed and balanced judgement. It has not considered other possible means of protecting customers. It has not reassessed its previous analysis. It has confused underlying changes in the market with the effects of the price cap. It has not assessed the actual impact of smart meters on competition. It has not explained why it rejects the recommendation of its previous investigation. It has not examined how the price cap has distorted competition.

Fourth, over the course of the next year Ofgem will be better able to assess the situation, to consult on options, and to take whatever action seems appropriate. It will have access to better and more up-to-date information than the CMA. And it has a statutory duty to do this.

The energy price cap is a sensitive issue, for suppliers as well as customers. The CMA is right to acknowledge that it got its calculations wrong initially. It accepts that, unless there are changes, this threatens competition and quality of service. All the more reason, then, not to rush into a premature judgement that the prepayment price cap should be extended. Let Ofgem carry out its scheduled review and form its own conclusions.

Why so hasty? A response to the CMA’s Provisional Decision of 9 June 2019 in its Review of the Energy Market Investigation (Prepayment Charge Restriction) Order 2016, submitted 28 June 2019, is available here.

Stephen Littlechild is Emeritus Professor, University of Birmingham; Fellow, Cambridge Judge Business School; Associate Researcher, Energy Policy Research Group, University of Cambridge; first Director General of Electricity Supply (1989-1998). The views expressed here should not be taken as reflecting the views of any of the above organisations.