Last week, as part of its energy market investigation, the Competition & Markets Authority (the CMA) published its delayed report setting out a summary of proposed remedies to address adverse effects on competition (or AECs) in the energy market in Great Britain.

The list of provisional remedies proposed is a broad one, including the introduction of a transitional price control for prepayment meter customers, the dismantling of much of Ofgem's Retail Market Reform (RMR) rules on tariff complexity, a new Ofgem-controlled database of 'disengaged customers' and introducing the licensing of code bodies.

The CMA's provisional decision on remedies follows Ofgem's decision to refer the energy market for investigation in June 2014 and the CMA's provisional findings published in July (and added to in December ) 2015.

In this alert, we set out an overview of the CMA's provisional remedies. A fuller explanation of these remedies, the reasons behind them and the background to the investigation can be found in the CMA's press release and the CMA's summary report. The CMA has also published a full list of its proposed remedies. The full report (apparently accompanied by 30 appendices) is due to be published this week.

We also set out the next steps for the investigation below.

Domestic retail remedies

The CMA found AECs and consequent detriment affecting domestic customers relating to weak customer response and aspects of the regulatory framework (in particular relating to the 'simpler choices' component of Ofgem's RMR rules and to settlement rules). The CMA's provisional remedies to address these AECs are as follows:

  • Removal of the RMR rules on 'simpler choices' - A number of standard supply licence conditions (see SLCs 22A and 22B) relating to the 'simpler choices' component of the RMR rules should be withdrawn, including the four tariff rule and the bans on complex tariffs, certain discounts and certain bundled products. Ofgem's enforcement of any breach of these conditions should be deprioritised pending their withdrawal.
  • New Ofgem controlled database of 'disengaged customers' - To reengage disengaged consumers, there should be an Ofgem controlled database containing details of customers who have been on their supplier's default standard variable tariff for three years or more. This database would be accessible to suppliers; allowing them to target their marketing specifically to this customer pool. Customers would have the right to opt-out of being added to the database in advance (and would be contacted by post only, unless they agree otherwise).
  • Further information to be made available to third party intermediaries - Third party intermediaries (such as price compare websites) should be given access to the Electricity Central Online Enquiry Service and Single Centralised On-Line Gas Enquiry Service industry databases, which hold various customer information, on reasonable terms. Such intermediaries should also be given increased access to customer data through the Department of Energy and Climate Change (DECC)'s Midata programme (subject to customer consent).
  • Fewer restrictions to be imposed on price comparison websites - The rule in Ofgem's Confidence Code for accredited price comparison sites - requiring such sites to use all reasonable endeavours to include price comparisons for all available domestic tariffs - should be withdrawn and replaced with a requirement to be transparent over what market coverage they provide.
  • Ensure options for customers on restricted meters - Suppliers should be required to make all of their single-rate tariffs available to any domestic customer on any type of restricted meter (such as a non-Economy 7 restricted meter), without the switch being conditional on meter replacement. They should also ensure that such customers have access to information on the options available to them.
  • 'Ofgem-led' programme on measures to promote engagement - To address the CMA's concerns that previous customer-focused rules (such as the above RMR rules) were not adequately tested, Ofgem should establish an ongoing programme of identifying, testing and implementing measures to promote engagement in the domestic retail energy markets. Suppliers should be invited to give undertakings to participate in such a programme or (failing this) be obliged to participate by the CMA or by licence modification or legislative change.
  • Additional 'standard of conduct' on suppliers - Ofgem should make greater use of principles rather than prescriptive rules in addressing potential adverse supplier behaviour. This should include Ofgem introducing an additional 'standard of conduct' into Standard Licence Condition 25C, requiring suppliers to have regard in the design of tariffs to the ease with which consumers can compare value with other tariffs that they offer.
  • Changes to the rules governing settlement - Settlement, the process by which disparities between volumes of energy purchased by suppliers and volumes used by their customers are reconciled, was the subject of recommendations in relation to electricity and gas. In electricity, these consist of various actions to be taken by DECC (including amending the provisions of the Smart Energy Code in relation to the collection of customer data), actions to be taken by Ofgem and some joint actions. In relation to gas, Ofgem should take certain steps (including ensuring the implementation of Project Nexus) and gas suppliers should be ordered to submit specified meter readings within prescribed timeframes to assist with settlement.
  • Timeliness of smart meter roll-out - On the basis that it is vitally important for competition and engagement that the prescribed timetable for smart meter roll-out is adhered to, Ofgem's power to impose penalties on suppliers which fail to meet the timetable should be effectively exercised to aid compliance. That deadline is 2020 for the roll-out of smart meters to domestic consumers.

Additional domestic retail remedies for prepayment customers

The CMA's provisional analysis of the prepayment segment of the retail market suggested that competition is significantly weaker in this segment than in the wider GB domestic retail energy markets. It identified a specific AEC in relation to this segment. This analysis comes across in its provisional remedies specific to prepayment customers, which are as follows:

  • Transitional price cap for prepayment meter customers - A transitional price cap should apply to all customers on prepayment meters (from 2017 to the end of 2020). The price cap would be set using a 'reference price and cost index approach' based on the CMA's competitive benchmark analysis. The cap would change over time according to movements in the relevant cost indices. The CMA's provisional decision is that the cap should include headroom of £25 per fuel per year, to mitigate the risk that it would not allow for the recovery of efficient costs.
  • Mitigate the impact of gas tariff codes in relation to meters which are not smart meters - Ofgem should take responsibility for the efficient allocation of gas tariff pages (on which tariff codes are based) and, if necessary, make licence modifications to the supply licence conditions to mandate the transfer of gas tariff codes between suppliers. Ofgem should also modify SLC 22B.7(b) to allow suppliers to set prices for prepayment customers on the basis of regional cost variations.
  • Changes to the Debt Assignment Protocol to enhance prepayment meter customers' ability to switch - Ofgem should make sure that changes to the Debt Assignment Protocol (under which a customer's debt to a supplier can be transferred to their new supplier on a switch) currently being developed are implemented before the end of 2016.

Microbusiness retail remedies

A number of remedies proposed for the domestic energy market apply similarly for microbusiness customers. These include the CMA's proposed remedies in relation to electricity and gas settlement and an Ofgem-led programme to promote engagement (although the programme in relation to microbusiness customers has a more specific focus on the availability of information). In addition, the CMA's provisional remedies in relation to microbusiness customers are as follows:

  • Requirements on price transparency - Ofgem should modify the supply licence conditions to require suppliers to disclose the prices of all available acquisition and retention contracts to a specified category of microbusiness customer. Suppliers would also be required to disclose their out-of-contract and deemed contract prices on their websites.
  • Address barriers to switching on auto-rollover contracts - Ofgem should modify the supply licence conditions to increase the time window during which business customers would be able to give a termination notice to a supplier. A further modification should be made to prohibit suppliers from including termination fees and no-exit clauses in contracts with microbusiness customers.

Wholesale electricity market remedies

The provisional remedies proposed by the CMA in relation to the wholesale electricity market include the following:

  • Consulting on the allocation of Contracts for Difference (CfD) without an auction - The CMA expressed concern in relation to the power of the Secretary of State (in section 13 of the Energy Act 2013) to award CfDs without first undertaking a competitive auction. In any particular case, DECC should prepare an impact assessment on why it is not feasible to hold a competitive auction and should consult on the impact assessment prior to commencing negotiations. DECC should then consult on an updated impact assessment once there is a provisional agreement of a strike price.
  • Consulting on the allocation of technologies between 'pots' and the CfD budget to different pots - Before allocating technologies to a particular pot and before allocating the CfD budget to different pots, DECC should prepare and consult on an impact assessment. DECC should then finalise its proposals for the allocation of technologies and budgets at least one year ahead of each auction.
  • Introduction of locational adjustments for electricity transmission losses - National Grid (as the system operator) should be ordered to introduce a locational pricing system for transmission losses (covering electricity lost while being transported around the country). The system should require that variable transmission losses are priced on the basis of location, and assign 100% of losses to generators (rather than 45%, as under current charging arrangements).

Regulatory governance

Finally, the CMA considered that the AECs related in part to the governance of the broader regulatory framework and that remedies should also be proposed in this area. Its provisional remedies include the following:

  • Direct modification of industry codes by Ofgem and licensing of code administration - Legislation should be enacted to give Ofgem the ability directly to modify industry codes in certain exceptional circumstances. Legislation should also provide for the provision of code administration and delivery services to be activities that are licensed by Ofgem. This would allow Ofgem to exert influence over the relevant code bodies.
  • Big Six to be required to provide further financial reporting - Ofgem should have further financial information so that it is in a better place to make decisions. Licence conditions should be modified to require the six large energy firms to report further financial information in relation to their generation and retail profitability.
  • Amendment of Ofgem's statutory objectives and duties - Legislation should be enacted to remove any constraint (actual or perceived) on Ofgem's ability to pursue its principal objective (protecting the interests of existing and future customers) by promoting effective competition where it considers this appropriate.
  • Recalibration of the relationship between DECC and Ofgem - Legislation should be enacted to set out a clear process requiring Ofgem to publish opinions on all draft legislation and policy proposals that are relevant to its statutory objectives and that are likely to have a material impact on the GB energy markets. In addition, DECC and Ofgem should publish detailed joint statements setting out action plans for the implementation of proposed DECC policy objectives that are likely to necessitate Ofgem interventions, with clear responsibilities and timetables.
  • Ofgem to publish annual state of the market report - Ofgem should publish an annual state of the market report, providing analysis regarding issues such as, for example, the evolution of energy prices and bills over time.

Commentary

While the CMA clearly considered the issue, the majority of the CMA panel ultimately decided that it would be disproportionate to impose a price cap in relation to a majority of domestic customers. But that decision was not unanimous. One of the five panel members (Professor Martin Cave) considered that a short-term price cap covering a substantially larger number of customers is required to reset the market. In his view the CMA's provisional remedy package in the retail sector is unlikely to reduce customer detriment in a timely way.

Many of the above remedies were previously set out in the CMA's notice of possible remedies, published in July 2015 and its supplemental notices of possible remedies (published in October 2015 and December 2015). Remedies which have not made it through to the provisional decision include requiring energy suppliers to: inform customers about the cheapest tariff on the market; opt-out collective switching for disengaged customers; and Ofgem setting up its own price comparison site.

Despite remedies such as these not being taken forward, the CMA's decision still includes a broad range of measures, across different segments of the energy market. Some of these are unsurprising. It has long been suspected that the CMA would consider that many of the RMR rules (which were introduced in 2013) have had the effect of stifling innovation.

Suppliers would no doubt be pleased to put to one side the detailed rules (currently in licence conditions) governing tariff numbers and structures, discounts and the use of bundled products. The proposal that an additional standard of conduct should be imposed on suppliers may be less welcome - the current principles-based standards of conduct generate considerable regulatory risk.

Other remedies which are being taken forward are perhaps more surprising. As an example, while the licensing of code bodies would operate as a mechanism for Ofgem to exert control (and therefore influence) over such bodies, it is far from clear that the evidence exists to show that such licensing is necessary to address a real problem.

It is clear that the CMA has sought to remedy AECs and customer detriment both in the short-term and the longer term. An example of the latter is the proposed change to Ofgem's statutory objectives and duties. Whether this change would have any material impact on its activities will remain to be seen.

Next Steps

In relation to the CMA's investigation, there will now follow a period of consultation on the proposed remedies (before the CMA's deadline for reporting on 25 June 2016). Consultation Responses are requested by 7 April 2016.