Competition isn’t working …oh yes it is say former regulators

There is usually little substantial news in August but some former energy regulators, perhaps bored with retirement, took it up upon themselves to pen a letter this month to the Competition and Markets Authority (CMA) to extol the virtues of competition.

There is a feeling of mild panic in the missive (signed by former Offer head Stephen Littlechild, former Ofgem head, Sir Callum McCarthy, free market gurus Eileen Marshall and Stephen Smith, as well as Clare Spottiswoode, former gas regulator) sent to the CMA inquiry  into the working of the energy industry. This was launched because of the perception suppliers are able to keep on raising prices, free of any real competitive pressure, despite falling wholesale costs.

According to the Office of Fair Trading (OFT) and CMA, competition is not, in fact, working as well as it should for consumers. The probe showed increasing distrust of energy suppliers, uncertainty about the relationship between the supply businesses and the generation arms of the six largest suppliers, and their rising profits. It showed that there is no clear evidence of suppliers reducing their own costs or becoming better at meeting customer expectations.

As a result, things could change and drastic measures taken. Competition is a great thing when it works but there is a virtual oligopoly in the retail market made up for the most part by major players that are not threatened by meaningful new entry. And competition rarely does much to address social aims too. If prices go up and costs do not everybody gets poorer. Meaningful regulation is paramount to fix this.

So what will happen as a result of the probe? This has been previously mentioned. Competition in energy retail has not really worked out as planned. Bills have gone up and there has been very little technical innovation. In January 2002 analysts at UBS Warburg showed that the Herfindahl–Hirschmann Index (HHI) (a measure of competition) of the Great Britain market, which then had eight competitors, stood at 2,133 – and so was already deemed highly concentrated under US anti-trust guidelines. Since then further mergers have taken place leaving just six large suppliers in the market.

So is market restructuring an option? Maybe? Splitting up the generation and supply businesses? Perhaps? Picking apart vertical integration? A possibility?

And then what happens to the green agenda? Going green, although very laudable, doesn’t come cheap. And there are binding European rules that the UK might fail to meet. Competition is seen as the best means to achieve this at least cost. But is it? Will a price control be a better option? Will the electorate speak up? We will have to wait and see.

Dominic Maclaine is an EPG Associate and used to be the editor of New Power before he sold the business. He conducted PhD research into electricity supply competition in the UK and Norway at SPRU. He was previously the editor of the monthly newsletter Power UK published by Platts (and previously the Financial Times). He is currently writing a book about recent developments in the UK electricity market, to be published by Routledge.

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