How can we stop the next competition breach?

For the first time ever two energy suppliers have been financially penalised for breaching competition law, a move which shows Ofgem does have clout and will use it.

The regulator has sent out a “strong signal” to the industry as it fined failed supplier Economy Energy and E (Gas and Electricity), along with consultancy firm Dyball Associates £870,000 collectively for anti-competitive behaviour.

The two energy suppliers with more than half a million customers between them – most of which were on prepayment meters, considered vulnerable and therefore less likely to switch – were found to have colluded to avoid competing for each other’s customers.

In their defence E (Gas and Electricity) and Economy Energy put forward an argument that they were a combined family enterprise, but this was rejected by Ofgem.

But could such a case be the first of many?

Regulatory competition expert Colm Gibson suggests that while existing rules make it harder for companies to breach competition, they do not prevent them from doing so.

The managing director in Berkeley Research Group’s European economic regulation practice tells Utility Week: “There are rules in place that make it harder but there aren’t rules in place that actually stop it. The stopping it relies on an incentive regime and the fear of getting caught, getting penalised and getting embarrassed out of business.

“One of the reasons I am sure Ofgem is doing this is to send a strong signal, that they are not frightened of taking companies to task on it.”

Gibson, who has more than 30 years of experience in energy and regulated industries, adds: “My experience of regulation is that once regulators have pushed a certain button and taken a certain action, they are actually more likely to pursue those cases in future. They feel a bit more bullish, a bit more confident.

“In marginal cases, Ofgem faces a decision about whether to settle with a voluntary penalty and a slap on the wrist or go all the way through the process. My guess is that balance has now tipped and Ofgem is going to be a bit tougher in those marginal cases.”

Citizens Advice’s chief executive Gillian Guy has similar concerns about market rules in that companies shown by the regulator to be breaking the law were able to enter the market in the first place.

All three parties in this case were found to have infringed Chapter I of the Competition Act 1998.

Economy Energy and E (Gas and Electricity) agreed not to target one another’s customers through face-to-face sales.

The consultancy firm aided this by designing, implementing and maintaining software systems that allowed customer meter point details to be shared, and recruitment of each other’s customers to be blocked.

Citizens Advice has known “for some time” that suppliers who were “unprepared and unsustainable” were able to get into the energy market, Guy adds.

While this is not the first time a company has been suspected of being in breach, it is the first time such a penalty has been levied and shows the full extent of the regulatory powers at the regulator’s disposal.

Tim Speed, associate partner at law firm Shakespeare Martineau, says Ofgem has lain down a “marker” for the standards it expects from the energy supply market.

Speed says: “The latest finding should not be considered in isolation, but as part of Ofgem’s overall strategy to ensure that there is, what it considers to be, ‘healthy competition’ in the market.

“The message Ofgem has sent out over the last 18 months is that it is closely monitoring the activities of all suppliers and will do what is necessary to promote competition and improve customer service. This should deter suppliers from entering into agreements that are anti-competitive.”

Speed further argues that other suppliers with arrangements in place potentially undermining competition will need to “seriously consider” their own position.

Following the ruling Anthony Pygram, director of conduct and enforcement at Ofgem, said the enforcement action sends a “strong signal” that Ofgem will take action and penalise those who undermine competition and do not act fairly.

“Anti-competitive agreements are a serious breach of competition law and could cause widespread detriment and harm to consumers, especially those in vulnerable situations”, he added.

As mentioned, the majority of customers involved in this case were on prepayment meters.

Gillian Guy says: “It’s especially troubling that the people affected were most likely prepayment meter customers, who are more likely to be vulnerable or on low incomes and less likely to switch.

“Ofgem has taken steps to tighten the rules around who can get into the market, including a fit and proper person test. But this case shows a clear need for stronger rules on supplier conduct  and close scrutiny of the management of firms.”

In terms of “stronger rules” Citizens Advice says it specifically wants to see the introduction of an ongoing fit and proper requirement, to match the new entry tests, the introduction of rules requiring stronger governance such as having a named person responsible for compliance and requirements for independent audit.

In the past Ofgem, while not fining companies for a breach of competition, has accepted “commitments” from suppliers suspected of unfair practices.

Where Ofgem has begun an investigation under section 25 of the Competition Act 1998, it may accept such “commitments” to take action as it considers appropriate for the purposes of addressing the competition concerns it has identified.

These commitments, it must be stressed, are not admissions of infringement.

When Ofgem has formally accepted commitments, it must close its investigation into the conduct that was the subject of said investigation.

This was evidenced in the case of power exchange company Epex and its parent EEX following a similar investigation into whether the former had “abused a dominant position” by failing to take the steps required to enable rival firm Nord Pool to participate in certain electricity trading auctions between the British and Irish energy markets.

Last month Ofgem said it is minded to close its investigation as the company committed to take steps to enable Nord Pool to participate in the auctions and to carry out an internal review of its competition law training.

But before it makes that final decision however, the regulator is considering responses to a public consultation on the commitments raised by Epex and EEX.

It will be interesting to see if any more cases like this develop following the introduction of tighter rules for market entry in June. However it must be noted that considering there are c70 suppliers in the energy retail sector, one case which has resulted in a financial penalty is not a bad showing.

It is worrying that three companies would conspire with each other to the potential detriment of honest consumers.

What is clear is that Ofgem’s actions in this case serve as a warning to others who attempt to undermine effective market competition.