Is a CMA inquiry worth it?

Is the cost and inconvenience of a CMA investigation worth it just to clear the air for energy firms? By Catherine Waddams.

The decision to refer the energy market to the new Competition and Markets Authority (CMA) will be welcomed by many but will also have its costs. On the positive side, the opportunity for a thorough review of the market enables analysis without immediate political pressure, either directly on the market or on the regulator, but such market investigations are expensive.

The CMA costs will be over £2 million, and those who provide evidence, including regulators and companies, will have to spend both time and money presenting their evidence. The inquiry will take 18 months to reach a conclusion, and this period might be extended through appeals against potential remedies, such as vertical separation, during which time investors might be reluctant to commit funds. But the current environment is also fraught with uncertainty, and investors might be more comfortable with a well-structured competition inquiry than with intermittent and apparently random interventions from politicians.

The benefits will be maximised only if politicians stop using the market as a political football by calling for structural changes or price freezes. The object of an inquiry is first to establish whether the market really is “broken”, that is, whether there is a feature or features which have an “adverse effect on competition” (AEC). Only if the CMA finds such an effect will it go on to suggest appropriate remedies.

Politicians intervene in this market because energy is essential both for businesses and households. Households have faced rising costs for the past decade, and a combination of world gas prices and environmental policies are likely to push them higher still. It is not surprising that politicians find voters responsive to their calls for action. The danger is the familiar fallacy of “something must be done”. “This” is something; therefore “this” must be done.

As in any market, it is all too easy to make mistakes. The regulator, anxious to alleviate concerns that the big six discriminate against households who have never switched, imposed non-discrimination clauses which contributed to a reduction in competition, a decrease in the size of savings that could be made from changing supplier and a consequent dramatic fall in switching, which remains very low despite the inroads of new entrants. Some of the regulator’s more recent changes to simplify tariffs will have similar effects. Against this background, there are obvious benefits of an in-depth analysis of the market from a new perspective.

What can we reasonably hope and expect for this sector? One of the perceived problems is that many households do not switch supplier even though they could save money. If competition is fierce and drives prices down to marginal costs, then companies will not be able to cover their fixed costs, and even if these are small, there may be room for very few, perhaps only one supplier in the market. A vibrant market with several competitors might require some “softening” of competition so that companies can cover their fixed costs. Just what a well-functioning market would look like in the retail energy sector is one of the crucial issues the CMA will need to resolve.

The reference is important to the competitiveness of the UK and to the well-being of every household, as they face rising underlying energy costs in the coming years. These rising trends make it all the more important that the market works as well as it can do, and that consumers, companies, politicians and potential investors have well-placed confidence in its operation. The CMA has an important and high profile challenge as one of its earliest inquiries.