UK competition inquiry: a regulator’s last stand?

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This is a guest post by the editor of ICIS’s European Daily Electricity Markets, Jamie Stewart.

The UK wholesale energy markets were given a clean bill of health on Wednesday, when the initial findings of a major competition inquiry were published here.

The report, which clearly indicates the probe’s future direction, picked on aspects of the retail market as needing further investigation, but found little at fault on the wholesale side, beyond some gripes with the design of looming power market reforms.

The real story behind the Competition and Markets Authority’s (CMA’s) update is not in the report itself, but in the fact a full-scale, multi-million pound probe was ordered by regulator Ofgem in the first place, and whether the move represents a final roll of the dice from a regulator that has itself felt the full force of public scrutiny.

Many of the CMA’s findings will surprise some: electricity market liquidity, long held up as a barrier to entry, is not skewed against smaller companies, which have ample opportunity to secure products on the forward market, the CMA found.

Both Ofgem and government department DECC were praised for specific interventions, while aspects of market design that one or the other has responsibility for – in Ofgem’s case liquidity and in DECC’s case market reform – were held up as positive developments.

Even vertical integration, consistently under the microscope for years on grounds that internal trade keeps volume from the visible market, was directly cited, but not criticised: “The six large energy firms in general trade enough externally to construct their own hedged positions, even if they also engage in internal trades,” the watchdog reported.

What was not said however should be of primary concern to the industry and its regulator. Ofgem’s primary mandate is to watch over the market in the interest of consumers. It called in the CMA last year to conduct the inquiry in the face of extreme pressure from the public as end-user energy bills rose.

While this noise rumbled on DECC, headed by a Liberal Democrat secretary of state but ultimately run by a majority Conservative government, stuck to its ideological guns, insisting free-market forces and competition were keeping prices in check.

Yet the public was still not convinced. So Ofgem, facing an existential threat of its own after the opposition Labour party threatened to disband it if voted into office, had to act in the most decisive terms possible – hence the CMA referral.

For those familiar with the wholesale market the authority’s findings to date will not shock. But regardless of the results, which will be published here in November or December, the fact the watchdog was called in to investigate is reflective more of public perception than of demonstrable fact.

Big business in the UK has had a rough ride since the global recession of 2008/9, in some cases rightly so. But the biggest energy firms are largely at the mercy of fundamental global forces which no regulator – even one facing an existential crisis – can control, yet this exposure is rarely a consideration in forming public perception.

Ofgem’s decision to call in the CMA is something of a last resort in the battle to reverse long-standing scepticism. It is therefore a fascinating test of the real powers held by the energy regulator, because if the UK wholesale markets are given the all clear – which they are now effectively half-way to receiving – yet the public continue to resist the assurances, the question has to be asked: is there any other way for a regulator to convince its detractors it is fulfilling its primary mandate?

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