Last updated: March 26, 2014 9:01 am

Energy’s big six embrace review as way to dispel mistrust

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Electricity Power Lines U.K. Utility Breakup Plan Seen As Investment Threat©Bloomberg

The threat of a full-scale competition review has been hanging over Britain’s big utility companies for months, with political accusations of profiteering dragging down share prices and adding to break-up fears.

Regulator Ofgem is widely expected to announce a referral on Thursday, but surprisingly, this is a move that would be welcomed by the energy sector who want to rid the industry of uncertainty.

Power struggles

Power struggles

The mood was captured on Tuesday by Paul Massara, chief executive of RWE Npower, one of the big six suppliers. If it is decided to launch such an inquiry, he told a utilities conference in London, “I for one would welcome it as the best way to get to the facts once and for all”.

Privately, most energy company bosses believe that an investigation will not vindicate politician’s claims that profits in the sector are excessive, and that consumers are being ripped off.

David Cameron, prime minister, announced last October that he was subjecting the big six to an “annual competition test”, to be carried out by Ofgem, the energy regulator, the Office of Fair Trading and the Competition and Markets Authority (CMA). The three are set to present their findings on Thursday.

Ofgem is expected to say it is minded to refer the market to the CMA for a more thorough investigation, which could take around two years to complete. It will first put the issue out to consultation – a process that will take six to eight weeks – with a review then likely to be announced in early June.

That could presage the biggest shake-up of the energy industry since privatisation. Some say the CMA might even call for the break-up of the big six, forcing them to separate out their generation and supply businesses.

Despite this, many in the sector believe the time is right for a proper investigation of the sector, regardless of the consequences.

“So many people have lost confidence in the market and the regulator that we now need to have a really good look at both, to find out what is wrong and address it,” says Catherine Waddams Price, director of the ESRC centre for competition policy at the University of East Anglia.

Rising domestic fuel bills, which have nearly tripled over the past ten years, have turned energy into a political issue. Ed Miliband pushed it even higher up the agenda last year when he promised that a future Labour government would freeze fuel prices for 20 months.

The coalition government then tried to seize back the initiative by curbing some of the green levies which are paid through consumer bills. Last month, Ed Davey, energy secretary, went further, warning that British Gas might need to be broken up to tackle its dominance of the market.

Some experts think a full CMA inquiry could help the government by drawing the sting from the row over energy prices, defusing it as an issue ahead of next year’s general election.

Senior industry figures have also pushed for a referral to the competition authority, arguing it is the only way to restore trust. Two chief executives – Tony Cocker of EON and Vincent de Rivaz of EDF Energy – have publicly called for a full inquiry.

“It will lance the boil,” says Tony Ward, head of power and utilities at Ernst & Young. “People will see merit in it even if it’s painful.”

But some expressed concern that the probe could create a mood of uncertainty which would damage business sentiment. Energy companies have already been holding off on big-ticket investments as they await clarity on government reforms of the electricity market and a two-year inquiry into the market could make things worse.

“The hiatus in power generation investment we have seen in recent years will continue and probably deepen,” says Peter Atherton of Liberum Capital. He predicted that as a result, the looming power crunch as Britain’s ageing coal and gas-fired plants are retired could now “extend for at least two more years”.

However, others disagree. “The Labour price freeze idea has already done so much damage,” said one senior executive at a big six supplier. “I don’t think the CMA could make the situation any worse than it is now.”

Meanwhile, the idea of an inquiry could prove problematic for Labour. Coalition aides believe it will make it harder for the opposition party to stick to its promise of a post-election price freeze, and force it to delay such a move until after the probe.

Also, if the CMA decides there is no evidence the energy market is “broken”, as Labour alleges, Mr Miliband might find it hard to justify pushing through the policy.

But one Labour aide said the freeze would go ahead as planned even if the authorities announced an inquiry on Thursday. He said the party would press on regardless with a green paper on the energy market, which laid the groundwork for the abolition of Ofgem and the creation of a new “pool” modelled on the Scandinavian energy market.

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