27th Mar 2014 10:48
LONDON (Alliance News) - UK energy industry regulator Ofgem proposed Thursday an independent investigation into the UK's energy market by the Competition and Markets Authority, asking the CMA to investigate "once and for all" whether there are barriers to effective competition with the "Big Six" suppliers.
Ofgem said growing profits, coupled with price hikes, have intensified public distrust of suppliers and highlight the need for a market investigation "to clear the air", with the investigation expected to reassure consumers and complement Ofgem's reforms for a simpler, clearer and fairer energy market.
The Big Six energy firms are Centrica PLC owned British Gas, E.ON, EDF, Npower, ScottishPower and SSE PLC.
The 'State of Market' assessment, prepared jointly with the Office of Fair Trading and CMA, confirms Ofgem's previous analysis of why competition is not working as well as it could, said the regulator.
As well as concerns over barriers to entry for independent suppliers and persistent high market shares of the largest energy companies, the report notes a plethora of issues within the energy market. These include declining consumer confidence. Some 43% of consumers distrust energy companies to be open and transparent, which may deter them from engaging in the market and prevent them from getting a better deal for their energy, said Ofgem.
Concerns over whether the vertical integration of the large energy companies is in consumers' interests also are rife, with Ofgem noting that retail profits have increased from GBP233 million in 2009 to GBP1.1 billion in 2012, "with no clear evidence of suppliers becoming more efficient in reducing their own costs, although further evidence would be required to determine whether firms have had the opportunity to earn excess profits."
Ofgem also said that suppliers consistently set higher prices for consumers who have not switched.
As a result, the regulator said it believes its referral to the CMA is necessary as the latter's more extensive powers can address any long-term structural barriers to competition and an investigation into vertical integration practices can conclusively determine whether this is in consumers' interests or whether there should be more separation between the largest companies' supply businesses and generation arms. This raises the prospect of the Big Six companies being split up.
Ofgem said its reforms announced in January for a simpler, clearer, and fairer market have created a safer space for consumers to shop around for a better energy deal while the CMA investigation takes place, adding: "Major change is coming with the roll-out of smart meters. A CMA investigation will ensure that there are no further barriers that prevent consumers from making the most of the transformation smart meters will bring to the energy market."
The decision to launch the CMA investigation follows months of speculation about the likelihood of an official industry-wide investigation, and comes after Ofgem led its own ongoing competition review, ahead of the regulator's reforms which are set to come into effect next month, designed to protect consumers and help customers get a better energy deal.
The regulator's ban on complex tariffs, for instance where consumers are initially charged a higher rate, which falls the more energy they use, came in to effect in January. From April, a raft of further reforms will come into force including suppliers having to tell consumers regularly in writing which of their tariffs is cheapest for them on bills, annual statements and other communications.
"Ofgem believes a referral offers the opportunity to once and for all clear the air and decide if there are any further barriers which are preventing competition from bearing down as hard as possible on prices," said Dermot Nolan, Ofgem Chief Executive. "The CMA has powers, not available to Ofgem, to address any structural barriers that would undermine competition. Now consumers are protected by our simpler, clearer and fairer reforms, we think a market investigation is in their long-term interests."
Ofgem said it will continue to take action to protect consumers including higher penalties for firms breaking the rules. "We will substantially increase the level of penalties we impose for breaches coming to light in the future," it said.
In a separate statement Thursday, the CMA said: "The assessment identified weak competition between larger energy suppliers, low customer trust and engagement, and barriers to entry and expansion." Following the results of the joint assessment, should Ofgem decide that a market investigation reference into the energy sector is appropriate, a group of independent Panel Members would conduct a more detailed inquiry, the consumer protection body said.
The Office of Fair Trading said it welcomes the regulator's provisional decision to refer the energy market for an in-depth investigation by the CMA, after the joint assessment indicated that competition in energy markets may not be achieving good outcomes for all consumers and small businesses.
"Our joint assessment identifies weak competition between larger energy suppliers, low customer trust and engagement, and barriers to entry and expansion. It also identifies a trend of rising profitability against a backdrop of declining demand, particularly in gas. Further analysis would be required to establish whether energy firms have had the opportunity to earn excess profits," said OFT Chief Executive Vivienne Dews.
Following the announcement, Centrica PLC, which owns British Gas, released a statement stating that it remains committed to an open, transparent and competitive British energy market and "welcomes an objective review, by an independent and respected regulatory authority, that could help rebuild trust in the sector."
The energy giant noted that competition within the sector is intense, and that Centrica and British Gas, "reject any suggestion of possible tacit coordination with other market participants."
"Anything that clears the air and helps rebuild trust in the industry must be a good thing," Centrica Chief Executive Sam Laidlaw said, adding: "We hope that a lengthy review process will not damage confidence in the market, when over GBP100 billion of investment in new infrastructure is needed. A prolonged period of uncertainty could damage investment at a time when Britain?s energy security is being seriously challenged."
SSE also commented on the proposed investigation, stating that the competitive energy market has "brought significant benefits for customers, and that much has been done in recent years to make it more transparent and easier to understand, ranging from greater liquidity in the wholesale electricity market to simplification of tariffs in the retail markets."
"Regulators, politicians, customers and SSE all want the same thing: an energy market that not only works for customers, but is also trusted and seen to do so. We welcome any efforts to clear the air," said Chief Executive Alistair Phillips-Davies.
The news comes a day after SSE announced a major asset-disposal plan, cost-cutting initiatives, and a freezing of UK household energy bills ahead of its full-year results next week. The company said that as part of a new value programme, which is focused on simplifying operations and securing more operational efficiencies for the company, it is now planning asset and business disposals that will secure proceeds and debt reduction estimated to total around GBP1 billion
Energy prices have become a contentious political issue of late, with bill increases toward the end of 2013 blamed on a combination of higher wholesale prices, rising costs for maintaining infrastructure, and the cost of the government's green energy taxes.
In December, UK Chancellor George Osborne announced that customers of the Big Six energy companies would see an average GBP50 reduction in their bills based on reductions in green and social levies.
Prime Minister David Cameron later announced a review of energy pricing and competition in the Commons, coupled with a pledge to cut green taxes next year.
Opposition leader Ed Miliband has said Labour will freeze energy prices for two years if elected to power in 2015, prompting energy companies to warn that they may not be able to fund investments and warnings from critics who say companies may raise prices even more ahead of any freeze.
Shares in Centrica rose 0.60% to 325.00 pence per share Thursday morning. SSE is one of the biggest FTSE 100 decliners Thursday morning, having risen on Wednesday on the announcement of its price freeze. It is down 1.6% at 1,493.07 pence per share.
By Alice Attwood; [email protected]; @AliceAtAlliance
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