Ofgem needs bigger role in British network code changes – CMA

British energy regulator Ofgem could be granted more powers to manage and control the timetable of implementing electricity and natural gas network code changes, if a recommendation from the Competition and Markets Authority (CMA) is followed up.

As part of its wide-reaching investigation in the British energy market, the CMA set out how the characteristics of code governance that it deemed adverse to competition.

Conflicting interests

One of the key issues with the current state of code governance, according to the CMA, is the potential conflict of interests that industry participants have.

Since the first network codes were set up, 25 years ago, the domain subject to industry-led regulation has expanded “dramatically”, the CMA said.

As a result, industry participants “collectively control the large majority of substantive and technical expertise” needed to drive code development.

A large amount of regulatory control is developed by participants who have commercial interests, which may contradict those of the consumer.

The CMA noted that it would be careless to disregard the industry’s depth of knowledge and that it was essential they stayed engaged in the governance of codes.

To help combat potential conflicts of interest, the CMA recommended that Ofgem, in partnership with the Department of Energy and Climate Change, regularly assess whether the scope of industry-led regulation is appropriate.

The role of Ofgem

The second key factor hampering competition is “Ofgem’s insufficient ability to influence the development and implementation phases of a code modification process”, according to the CMA.

Ofgem does not have a direct role in code governance and only interacts with it in a certain contexts. As a consequence, Ofgem’s expertise of network code regulation is lacking when compared to the industry.

The CMA has recommended that there are “prioritisation mechanisms” in which substantial resources and expertise are allocated to code modification deemed to have an significant impact on consumers.

This was put into practice recently when Ofgem took a more involved role in the overhaul of the IT system governing Britain’s natural gas network, known as Project Nexus, under instruction from the CMA (see ESGM 14 March 2016). thomas.rodgers@icis.com