On March 27 2014, Ofgem, the UK energy regulator, announced its provisional decision to refer the UK energy market to the new UK super regulator, the Competition and Markets Authority (“CMA”) for a full market investigation.

Ofgem will now hold a consultation on whether their provisional decision to ask for a market investigation should be confirmed. Interested parties have until 23 May 2014 to respond when the consultation closes.

If confirmed the CMA (which comes into force on April 1st 2014) will have 18 months under its new rules to carry out the market investigation.

This news is part of a long running public debate about consumer energy prices and allegations of “profiteering” by the UK’s big six energy providers.

Ofgem’s report which was ordered by the UK Prime Minister David Cameron last year, raised several concerns in the energy market including:

  • Declining customer confidence meaning customers are less likely to engage in price comparisons and switch suppliers to get a better deal for themselves.
  • Concerns regarding the vertical integration that energy companies enjoyed between their power generation business and the actual selling of the energy to customers’ homes.
  • Retail profits increasing from £233 million in 2009 to £1.1 billion in 2012 with no clear evidence of costs or efficiency improvements.
  • Suppliers consistently setting higher prices for customers who have not switched providers.

In their report, Ofgem have asked the CMA to undertake a full market investigation under the Enterprise Act 2002. This is the most in depth and comprehensive method UK regulators have to inquire into whether competition is working effectively for consumers in a particular market and, if competition is being impeded, how can any identified impediments be removed.

Ofgem believe the CMA’s extensive powers can better address long-term structural barriers to competition and could lead to structural as well as behavioural remedies in this market. Structural remedies could involve divestment or functional and accounting separation between power generation and the consumer supply arms of the large energy companies. In principle, this could create further competition in the market as consumer suppliers shop around for the lowest energy prices from the producers.

The performance and pricing of the big six energy companies has increasingly come under the political spotlight over the last year.

With the political stakes raised ahead of the 2015 General Election, calls for a detailed inquiry into the UK energy market was hard for Ofgem to resist. Their decision to refer this matter to the CMA for a Market Investigation Reference comes hot on the heels of an recent announcement by the main UK opposition, the Labour party, that if elected they would freeze energy consumer energy prices and replace Ofgem with a more powerful regulator.