Summary: The Competition and Markets Authority (CMA) published its final report on its heat networks market study on 23 July 2018. The final report confirms the CMA’s recommendations following the launch of the market study in December 2017 and the publication of an update paper in May 2018.

The CMA also published an advisory letter outlining how heat networks should take steps to comply with their legal obligations, and intimating at enforcement action for those that don’t. 

We have previously written a blog on the launch of the market study and a blog on the publication of the update paper. This third heat networks blog examines some of the key points coming out of the final report and the ancillary documents.

No market investigation reference

The final report confirms that the CMA will not make a market investigation reference in respect of the supply of heat networks in the UK.

Instead, the CMA deems ongoing regulatory intervention by a sector-specific regulatory body to be the most appropriate method of remedying the competition and consumer law concerns it has identified.

Sectoral regulation

Accordingly, the final report confirms the position laid out in the update paper – namely, that the CMA is recommending that government puts in place a statutory regime under which there is a sector regulator with the power to regulate the heat networks sector with regards to:

  • price;
  • quality of service;
  • transparency; and
  • compliance with minimum technical standards.

Following the conclusions of the update paper, the regulatory framework ought to be designed such that heat networks customers are, as a minimum, given a comparable level of protection to customers of gas and electricity in the mainstream energy sector.

The relevant regulatory body should be granted formal powers to introduce appropriate regulation and to monitor/enforce compliance with the regulations.

At the update paper stage, the CMA left open the question of who the heat networks sector regulator should be – although there were some indications that Ofgem was regarded as the most obvious candidate.

The final report identifies Ofgem as the appropriate regulatory body:

We consider that Ofgem is well placed to be the sector regulator. Almost all stakeholders that responded to our update paper supported this position. Ofgem is already the regulator for gas and electricity and it has expertise in relation to consumer protection and regulation. Stakeholders also told us that Ofgem would be well placed to align consumer protection measures for customers of heat networks with those supplied by gas and electricity;

and

We recommend that BEIS and the devolved nations work together to determine whether it would be appropriate for Ofgem, which has powers in England, Scotland and Wales, to take responsibility as the sector regular (sic) across these three nations. In this regard, we note that only the UK government has the ability to extend Ofgem’s remit to include heat. In Northern Ireland, there is a separate regulator which could take on a similar role, although there are currently very few heat networks in Northern Ireland.

Ofgem has confirmed its appetite for taking the role of regulator for heat networks.  The Ofgem Chief Executive, Dermot Nolan, has said:

Our principal aim is to protect the interests of current and future energy consumers. We welcome the CMA’s Market Study on heat networks and agree that heat network customers should get the same level of protection as customers in the gas and electricity sectors. We look forward to continuing to work with the government to address the current and future challenges in decarbonising heat and would welcome the opportunity to contribute to the development of the future regulatory arrangements for heat networks.

On this basis, we expect Ofgem to be designated as the relevant regulatory body in respect of heat networks.

Interim period enforcement action

The final report confirms that, during the interim period (i.e. when the CMA’s final recommendations in respect of regulation are being implemented), the CMA may take enforcement action in circumstances where heat networks companies are acting in ways which result in serious detriment to customers. Such enforcement action could be under consumer law powers or competition law powers.

To provide further guidance to heat networks companies on immediate steps to be taken during the interim period, the CMA has published an open letter reminding suppliers of best practice in respect of transparency and obligations under consumer law/competition law as well as under the Heat Network (Metering and Billing) Regulations 2014.

Annex A of the open letter contains short descriptions of the consumer law/competition law issues which are relevant to heat networks during this interim period (e.g. natural monopolies, unfair contract terms).

The letter, while not binding, illustrates the CMA’s view as to what actions such companies ought to take now to ensure compliance with current law (in particular consumer law/competition law) in the lead-up to the implementation of the heat networks regulatory framework, and promises enforcement action if steps are not taken:

“If we suspect a heat supplier or heat network operator is breaking the law, we may consider taking enforcement action. Please take time to read this letter and share it across your business so that, as the government considers introducing regulation, you ensure that you are treating customers fairly.”