Ofgem asks competition authorities to investigate the UK energy market

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The Office of Gas and Electricity Markets ( Ofgem) a non-ministerial government department and an independent National Regulatory Authority formed to protect the interests of existing and future electricity and gas consumers, announced on Thursday that it has asked the Competition and Markets Authority (CMA) to investigate the UK energy market.

Ofgem said profit increases for energy companies and rises in energy prices, which increased from GBP233m in 2009 to GBP1.1bn in 2012, have resulted in an intensified public distrust of suppliers. Therefore a market investigation by the CMA is necessary to ensure that there are no further barriers to effective competition and will also complement Ofgem’s reforms for a simpler, clearer and fairer energy market. These reforms come into force from April and are designed to protect consumers and help them get a better energy deal. Ofgem also said it will continue to take action to protect consumers including higher penalties for firms breaking the rules.

The regulator has released a State of the Market assessment, prepared jointly with the Office of Fair Trading (OFT) and CMA, which confirms previous analysis by Ofgem that competition in the energy market is not working efficiently. The report underlines concerns that independent suppliers face barriers to entry into the market and that there are high market shares of the largest energy companies, which could be against consumers’ interests. Consumer confidence is declining, with 43% not trusting energy companies to be open and transparent.

Despite increases in energy retail profits, there is no clear evidence of suppliers becoming more efficient in reducing their own costs. Further evidence is needed to determine if energy suppliers have consistently set higher prices for consumers who have not switched and if firms earned excess profits.

Dermot Nolan, Ofgem chief executive, stated: “Ofgem believes a referral offers the opportunity to once and for all clear the air and decide if there are any further barriers which are preventing competition from bearing down as hard as possible on prices. “The CMA has powers, not available to Ofgem, to address any structural barriers that would undermine competition. Now consumers are protected by our simpler, clearer and fairer reforms, we think a market investigation is in their long-term interests. “I want to make sure that consumers are put at the heart of this market, so we will continue to take action to help consumers. This includes from today putting the industry on notice that any new serious breach of the rules which comes to light will be likely to attract a higher penalty from Ofgem. I am determined that energy companies use our reforms to transform their relationship with consumers.”

In response to Ofgem’s report, the Katja Hall, chief policy director for Confederation of British Industry (CBI), commented:

“We must have an energy market in this country that can attract the GBP110 billion of investment needed over the coming years to secure and transform our power supply, while ensuring bills are manageable for both households and businesses.

“An inquiry provides an opportunity to resolve the current debate and win back some much-needed confidence in the market. To achieve this, it is vital that the CMA is able to get on with its job swiftly, free from political interference.”

Gas and electricity suppliers SSE and npower both welcomed the proposed investigation.

Alistair Phillips-Davies, chief executive of SSE stated: “Regulators, politicians, customers and SSE all want the same thing: an energy market that not only works for customers, but is also trusted and seen to do so. We welcome any efforts to clear the air, and in the meantime SSE will continue with its positive agenda for customers including its price freeze until at least, 2016.”

Paul Massara, CEO RWE npower, said the company supported a full competition inquiry and commented: “In order for our customers to be confident in the facts around our business and the way we operate, the work started by Ofgem and OFT over the last few months mustn’t be left half finished.

“It’s time that the realities of the energy market were made public. Britain has the 3rd cheapest gas prices in Europe and the 7th cheapest electricity prices, and we have taken steps to get to the facts as to why bills are going up. If there are problems they need to be dealt with, and where the market is operating well this can be acknowledged.”

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