The Competition and Markets Authority is seeking evidence that customers are being unfairly treated as a result of co-ordinated price increases by the UK’s dominant energy suppliers.
The new competition agency identified the potential for competition being limited by “tacit co-ordination” on pricing between the big six gas and electricity suppliers as one of four key “theories of harm” it would probe as part of a root-and-branch investigation into the UK’s energy market announced last month.
Roger Witcomb, chairman of a five-strong panel of competition experts appointed to conduct the investigation, said on Thursday that initial theories on what might be adversely affecting competition in the sector were “topics for investigation and are not views, let alone findings or conclusions”.
However he said it made sense for the investigation – launched amid a wave of protest from politicians and consumer groups over escalating fuel bills and allegations of profiteering by energy suppliers – to focus its firepower on four key areas of concern.
“This is a market which is very complex so it is important at an early stage to focus the investigation on the most relevant issues,” Mr Witcomb said.
Setting out the scope of the CMA investigation on Thursday, the panel said it would call for evidence on whether the big six, led by market leader British Gas, had insufficiently strong incentives to compete on price and service.
The watchdog conceded that the large number of “inactive customers” and recent regulatory interventions, including a simplification of tariffs, could also be to blame for muted levels of retail competition among gas and electricity retailers.
The probe will also focus on whether the pattern of price increase announcements by leading energy retailers – British Gas, SSE, Npower, EDF, Eon and Scottish Power – works against consumer interests.
While collusion among companies to fix prices is illegal, the CMA pointed to suggestions made by industry regulator Ofgem this year that subtler forms of “tacit co-ordination” among the big six could be restricting competition.
“Aspects of the behaviour of the six largest suppliers would appear to be consistent with tacit co-ordination between them, including the announcement of price changes around the same time and of a similar magnitude and convergence of domestic supply margins,” the CMA said.
The year-long investigation, which is expected to report its recommendations by no later than December next year, will also examine potential barriers to entry to the growing number of smaller gas and electricity retailers taking on the big six, alongside competition concerns in the power generation sector.
Other “high level theories of harm” put at the centre of the CMA probe include whether opaque pricing and low liquidity in wholesale electricity markets creates barriers to entry in retail and generation, and whether vertically integrated companies – which produce and sell electricity – harm the long-term competitive position of standalone power generators and retailers. It will also examine whether market power in electricity generation leads to higher prices.
The investigation is the first major challenge for the newly constituted competition watchdog, which took over from the Competition Commission and Office of Fair Trading in April. It also announced plans this month for a full-blown competition review of UK banking.
Richard Lloyd, executive director of consumer campaign group Which?, said the launch of the CMA inquiry should not be taken as an excuse by Ofgem, the industry’s regulator, to lessen pressure on energy companies to deliver fair prices.
“We welcome the breadth of issues that the CMA will study in its energy market investigation. It’s vital no stone is left unturned in establishing the truth behind our energy prices,” Mr Lloyd said. “In the meantime, Ofgem must continue its renewed, tougher approach to protecting consumers – and energy companies should make urgent changes to do more for their customers.”
Ed Miliband, Labour party leader, used Twitter to point to the publication of the CMA’s statement as “more evidence that we need to freeze energy prices and reform our broken energy market”.
Centrica, parent company of market leader British Gas, declined to comment on Thursday. But in a submission in May, welcoming the referral to the CMA, Centrica’s chief executive Sam Laidlaw said the probe needed to address the impact that rising commodity costs, network charges and government-imposed levies have had on gas and electricity bills.
Professor David Elmes, head of Warwick Business School’s global energy research network, said the investigation also needed to recognise the deepening involvement of government in directly managing the energy sector, rather than simply looking for competition-based remedies to any areas of market failure.
“What we need to hope for is that the CMA will step back and consider energy’s role in society and our economy and whether the past focus on market competition is the right way to tackle today’s challenges.”
Though he expected a thorough investigation, Prof Elmes added “there is a level of political expediency about being seen to be doing something before the election, with the results coming after the election”.
Panel game: Team leader has seen both sides of inquiries
If the outcome of the CMA’s investigation into the UK energy market is uncertain, it at least lies in experienced hands.
Roger Witcomb, who leads a panel of five experts conducting the review, is a former chairman of the Competition Commission- which along with the Office of Fair Trading is a predecessor body of the CMA - who has seen the workings of such investigations from both sides.
At the commission he helped preside over the merger of his own agency with the OFT, aimed at beefing up the UK’s antitrust regime. Within weeks of his appointment, the commission was gearing up to rule on whether the politically controversial takeover proposal of BSkyB by leading shareholder News Corp should proceed, only for the bid to collapse amid the phone-hacking scandal at News of the World.
Soon after that the commission showed its teeth by decreeing that BAA must sell London Stansted and one of Scotland’s two main airports. Despite a legal challenge to the ruling, Stansted was eventually sold.
Mr Witcomb’s career in industry also included coming out on the wrong side of an antitrust decision. When finance director of National Power, the company’s proposed takeover of Southern Electric in 1995 was blocked by the Monopolies & Mergers Commission, the predecessor but one to the newly launched CMA.
While handling merger proposals to create the CMA, Mr Witcomb told the Financial Times that his role was also to secure a wide enough pool of independently minded experts capable of handling the workload involved in the wide range of inquiries referred to the UK’s leading antitrust agency.
“These are strong-willed people and they don’t work for me,” Mr Witcomb said.
Taking on the review of the UK’s energy sector alongside Mr Whitcomb are lawyers Lesley Ainsworth and Malcolm Nicholson, who between them have decades of experience dealing in competition law.
Martin Cave, an economist and another former member of the Competition Commission who has led government reviews into spectrum policy, the regulation of social housing and competition in the water sector, is also sitting on the panel.
Bob Spedding, a chartered accountant and former head of advisory risk management at professional services firm KPMG Europe, makes up the team of five.
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