The closing date for Ofgem’s consultation on the proposed reference of energy supply to the Competition and Markets Authority (CMA) is 23 May. Conventional wisdom among investors and companies, and indeed politicians, seems to be that it would be best to “keep politics out of the inquiry” – but is this feasible or desirable?
If Ofgem rather than the energy secretary makes the reference, the CMA will be forced to look almost exclusively at competition issues (although Ofgem says the CMA could take Ofgem’s broader statutory duties into account to some extent). Furthermore, any remedies proposed by the CMA to rectify competition problems would be binding on the energy secretary.
While investors may hope that this will take the politics out of the issue, is this credible for energy supply? Will an inquiry legally constrained to competition issues deliver the right balance for the environment, security of supply or affordability?
If the CMA rejects vertical separation or price caps, would this settle the issue? The CMA might conclude that technological disruption is on the way with smart meters and distributed generation. Trying to standardise energy products and cap prices to provide short-term consumer protection might lead to the distortion of innovation.
Alternatively, if the CMA forces company break-ups, would this support political views on long-term supply security and protection of vulnerable customers? Could smaller retailers procure gas from the global LNG market on competitive terms? Could politicians get hundreds of suppliers into a room to do a deal on energy efficiency?
If future governments want flexibility on energy policy, they may prefer public interest issues to be considered now, alongside competition issues. Equally, if companies want a sustainable end-point from this process, it might be better to include broader public interest issues in the terms of reference. Otherwise, in 2016, the irresistible force of a legally binding CMA inquiry might meet the immovable object of political reality.
Martin Brough, utilities equity analyst, Deutsche Bank