“A market for an essential service which is presently working very badly for most British households.”
This was the damning verdict on the energy market issued almost exactly two years ago by the man unveiled last week by business secretary Greg Clark as his pick for the chairmanship of Ofgem.
The line is taken from the conclusion of Professor Martin Cave’s dissenting report on the Competition and Market Authority’s investigation into the energy market.
The two and a half page-long statement, tucked away at the back of the report, has turned out to be more influential than the rest of the 1423-page long document put together.
This is thanks to the government’s adoption of the academic’s recommendation that temporary price cap should be imposed on the default tariffs that the bulk of customers use.
Prof Cave was pretty damning about the report’s other remedies, which he described as “untried and untested” and which would take “some time to come into effect” for the large majority of households.
He added that it would be “good” if the measures, including the smart meter roll out, work rapidly. But he wrote that he was “far from confident” that they would and evidence that they will be effective is “conjectural or limited”.
Prof Cave’s appointment, which is subject to confirmation by a hearing of the BEIS (business, energy and industrial strategy) select committee, shows that the wind of change signalled by energy minister Claire Perry earlier this year is now blowing through Ofgem’s corridors.
Current chairman David Gray has been strongly associated with the pro-competition stance that was until recently the hallmark of his organisation’s approach to energy prices.
Inspired appointment
The professor’s appointment has won applause in Parliament where Ofgem has become a whipping boy over the past 18 months. Many MPs believe that the regulator has dragged its feet about tackling what they perceive as over-charging by suppliers.
The appointment has clearly delighted John Penrose, the backbench MP who was ring leader of cross-party efforts to cap energy prices.
The Somerset MP, who has been one of Ofgem’s fiercest critics, says: “This could be an inspired appointment. Martin Cave was the only person to stand up for an energy price cap when CMA did their review, so with any luck he will push for the energy customer to be king, rather than being taken for granted by the big six.
“He will have his work cut out at Ofgem. I’m sure we all wish him the very best of luck.”
Alan Whitehead, Labour’s shadow energy spokesman says Prof Cave’s appointment suggests a stronger read across between the government’s aspirations and implementation on the price cap.
“You could see that working better than was the case previously,” he says, highlighting the “crucial role” that Ofgem will play in the design and delivery of the cap.
Wide-ranging experience
Tony Smith, chief executive of the Consumer Council for Water (CCWater), says Prof Cave was “very keen” to hear the customers perspective during the study on competition in the water industry, which he undertook for the government nearly a decade ago.
Stuart Cook, managing director of consultancy Complete Strategy, is a former senior partner at Ofgem. He views Prof Cave’s support price cap through the lens of wider political and consumer dissatisfaction with excessive charges. “Whatever economists may think the reality is that politicians and society as whole have a different view.”
But he points out that Prof Cave’s outright dissent only materially extended to one, albeit very important, aspect of the CMA’s list of remedies.
Overall the regulator will be in safe hands under the stewardship of Prof Cave, thanks to his wide-ranging experience of regulated markets both in the UK and abroad, says Cook: “They’ve recruited someone with a very strategic economic and regulatory pedigree.
“I understand why the secretary of state emphasised the consumer champion aspect but a lot of people will take comfort that are at the heart of the regulator they have someone with a long track record of understanding the way regulator needs to operate both from an academic and practical perspective.”
He expects to see a commitment to regulatory good practice, which many argue Ofgem has departed from in some of its recent moves, like restricting the number of tariffs suppliers could provide.
And Prof Cave’s market-friendly credentials were on show in his government sponsored review of the water supply for business, which paved the way for the introduction of competition into the non-household sector.
And the ex-Competition Commission deputy chair recommended that his proposed temporary price cap on energy bills should only be renewed by tabling fresh legislation, making it harder for the measure to be rolled forward automatically.
Meanwhile though retail price caps will be the most high-profile issue facing Prof Cave, he has a number of other items in his in-tray, including the upcoming RIIO review of the district network operators’ price control framework.
Richard Black, director of the Energy and Climate Intelligence Unit, wants to see firmer pressure from Ofgem on the DNOs to speed up the decentralisation of the energy system.
But he is pleased that the new chair has noted the importance of addressing the long-term transformation that the electricity sector is undergoing. “I hope he pays as much attention to the needs of tomorrow’s consumer as those of today but price caps will clearly be top of his agenda.”
Regulation and customer service will be one of the key themes of this year’s Utility Week Congress. Click below for more details: