On 26 June 2014, Ofgem made the decision to make a reference to the Competition and Markets Authority (CMA) for a market investigation into the supply and acquisition of energy in Great Britain. This follows the findings of the joint assessment of competition in the energy retail market carried out by Ofgem, the Office of Fair Trading (OFT) and the CMA, and the results of a consultation on Ofgem’s proposals to make a market investigation reference.

Background 

In November 2013 we reported that Ofgem, the CMA and the OFT were working together to undertake a joint assessment of the market. On 27 March 2014, Ofgem published its State of the Market Assessment which set out the findings regarding the state of competition in the energy markets. Many stakeholders in the assessment expressed the view that ongoing problems remain with competition in the market.

As a result of the assessment, Ofgem proposed to refer the market to the CMA for investigation and sought views on this proposal through a consultation process. The consultation period ended on 23 May 2014.

Findings of the State of the Market Assessment

In summary, in undertaking an assessment of the market it was found that competition may not be achieving good outcomes for all consumers and small businesses. Primarily, the assessment found evidence of weak competition between the largest energy suppliers. The assessment identified low levels of consumer confidence and engagement in the sector as well as barriers to entry and expansion.  The key findings of concern to Ofgem are grouped as follows:

  • Incumbency advantages – evidence of the advantages of the ability of incumbents to exercise market power.
  • Possible tacit coordination – while there is no evidence of explicit collusion between the Big Six, there were concerns over possible tacit coordination. In particular, evidence shows strong alignment of pricing announcements, including their timing and scope, as well as a pattern of more rapid price rises in response to increases in costs than there is reduction in response to falling costs.
  • Vertical integration and barriers to entry – there is a high degree of vertical integration between generation and supply, as well as low wholesale market liquidity.
  • Increased supplier profits – there is evidence of an increase in average profitability in the Big Six over last 4 years.
  • Weak customer response – there is evidence of a low level of consumer engagement and a fall in switching between suppliers.

Collectively, Ofgem concluded, these problems indicate a lack of effective competition and form the basis for the market investigation reference.

Market Investigation Reference

Ofgem has now taken the decision to refer the market to the CMA for investigation. The aim is to establish “once and for all” if there are market features which have an adverse effect on competition and, if there are, to identify reforms which would make competition in the market more effective. Ofgem believes that a comprehensive review will also help to restore consumer confidence in the market.

The market referred is that for “supply” of energy but this is stated to include “the activities of, and activities connected with, wholesale supply and retail supply of energy”. The CMA has broad discretion within the Terms of Reference to decide which features of the market to focus on in its investigation.

Next Steps

Under the Enterprise Act, the CMA has 18 months in which to carry out its market investigation and publish its final decision. The CMA is likely to publish its provisional decision in the first half of 2015. In the event that the CMA ultimately identifies market features which have an adverse effect on competition, it may take such action that it considers reasonable and practicable to ‘remedy, mitigate or prevent’ the adverse effect on competition and related detrimental effects on consumers. The CMA must finalise any remedies within 6 months of the date of its final decision.

This market investigation represents one of the CMA’s first big challenges, with the CMA having only opened for business on 1 April 2014. The decision to propose a market investigation reference was “strongly supported” by the Secretary of State for Energy and Climate Change, Edward Davey, as detailed in his statement to Parliament on 27 March 2014. It was also supported by a number of the energy suppliers who see it as an opportunity to restore confidence and public trust in the market.