Ofgem is recommending a full scale competition probe to "once and for all clear the air".
Ofgem has called for a full scale competition investigation into the UK’s ‘Big Six’ energy suppliers.
The Big Six - SSE, Scottish Power, British Gas, npower, E.On and EDF Energy - account for about 95% of the UK's energy market.
The energy regulator made the announcement after it found evidence of widespread public distrust, soaring profits, tacit coordination and suppliers charging customers that don’t switch more.
Ofgem said the probe, to be conducted by the new Competition Markets Authority (CMA), would "once and for all clear the air" over the barriers to effective competition.
The state of the market
Ofgem’s announcement concludes the first annual State of the Market Assessment carried out in conjunction with the Office of Fair Trading and the CMA.
Back in December 2013 the joint assessors established a framework of five potential sources of harm to understand how well competition is working in the energy market.
These included questions around consumer engagement, market power, tacit coordination (where companies anticipate each other’s actions), barriers for new entrants and the value of vertical integration (the current system where the Big Six suppliers are able to generate and supply energy).
Overall the assessment confirmed previous analysis of why competition is not working as well as it could.
But as well as bolstering concerns about barriers for independent suppliers and the static market share of the Big Six, the report found new evidence which has prompted the referral of the industry to the CMA. It showed:
- A fall in consumer trust. 43% don’t trust energy suppliers to be open and transparent in their dealings with them in 2013 compared to 39% in 2012. Ofgem feels this sentiment leads to a low level of engagement, which is a sign of an uncompetitive market;
- Retail profits have increased from £233 million in 2009 to £1.1 billion in 2012, with no real evidence of suppliers becoming more efficient and reducing costs, which raises concerns over firms making excess profits;
- Tacit coordination where companies appear to be anticipating each other's actions, like the timing and extent of pricing announcements. While it's not illegal this may limit competition;
- Suppliers are consistently charging those who don’t switch - known as ‘sticky’ customers - more; and
- Uncertainty over whether the current system of vertical integration, where the Big Six firms control both production and supply of energy (especially in electricity) is in customers’ best interests.
Together these factors show a lack of effective competition in the energy market. Ofgem admitted that these problems were highlighted in various other reviews, and have not only persisted but in some cases have actually gotten worse over the last few years.
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Passing the buck
Ofgem is now calling on the UK’s new competition body to investigate the Big Six.
From 1st April the Competition and Markets Authority (CMA) will become the UK’s unitary body for regulating and enforcing effective competition for consumers.
[SPOTLIGHT]The body will merge many of the functions of the Office of Fair Trading (OFT) and the Competition Commission (CC), which will disappear after 31st March 2014.
From the outside it looks as if the energy regulator is passing the buck and leaving it up to the CMA to take action on our broken energy market.
But Ofgem stresses the CMA has more extensive powers to address the concerns raised in the State of the Market Assessment, especially around competition, and therefore perhaps restore confidence in the market.
The body would be able to conclusively decide, for example, whether vertical integration was a good or a bad thing.
Ofgem reforms from its Retail Market Review come into full force from April, which it says offers a ‘safer space’ for energy customers while the CMA does its work.
In the meantime Ofgem will work in parallel and continue ongoing projects to improve competition, like reviewing the switching process and overseeing the roll out of smart meters. The regulator also announced firms will face tougher fines for breaching rules.
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When will we see any changes?
It feels like review after review when it comes to the energy market, with very little changing.
But the recommendation of a full scale independent competition review may finally put the Big Six energy companies under the microscope.
And it appears that's already making at least one big player uncomfortable. Just yesterday SSE announced a two-year prize freeze on standard unit prices and set out plans to seperate its retail and wholesale businesses by March 2015.
Some have suggested we may actually see the break up of the Big Six. Whatever the outcome, we have a long wait ahead. The CMA’s market investigations are only likely to start in June and have a standard timescale of 18 months for the research and six months for remedies, so any change is likely to take over two years to be realised.
What do you think? Will the CMA investigation help? Or should more be done now?
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