Utilita’s appeal against Ofgem’s decision to introduce minimum capital requirements for energy retailers has been slammed as “ill-founded” by the regulator.
The prepayment meter (PPM) specialist supplier was granted permission by the Competition and Markets Authority (CMA) to appeal Ofgem’s decision last month.
Utilita has concerns that the capital target of £115 adjusted net assets per domestic dual fuel equivalent customer, to be introduced in 2025, will not achieve its objective for four key reasons.
These include: the fact that it believes a market with a capital target will not face materially lower levels of supplier failure and mutualised cost than one without one; that the risks which the target is designed to address are already adequately addressed in the existing regulatory framework; because it believes the target systematically favours traditional suppliers; and because the regulator’s impact assessment was flawed.
In its response to the CMA, Ofgem describes the challenge as “ill-founded” and even accuses Utilita of not being a resilient supplier, saying the retailer’s “own financial position provides a clear illustration of the importance of and necessity for the challenged measures”.
The response argues that minimum levels of capital will help improve market resilience by allowing the regulator to intervene early to support recapitalisation by a supplier where it is below the capital target. It will also reduce “moral hazard” by requiring “skin in the game”; and reduce the mutualised costs to consumers in the event of supplier failure.
Ofgem’s response further refutes Utilita’s assertion that the level of the capital target is based on erroneous calculations, was the result of an arbitrary reduction, and/or is too high.
It adds: “Utilita does not come close to showing that the level which has chosen is ‘wrong’. This ground is premised on some level of capital target being appropriate. Such a decision is not susceptible to a single, ‘correct’ answer and is quintessentially a matter for the expert regulator. The careful process which followed also belies Utilita’s suggestion that its decision was arbitrary”.
The regulator’s response adds that its decision to set the target at £115 was “informed by a range of evidence” such as quantitative data, qualitative factors, and consultation feedback.
It adds: “Utilita criticises the reduction to the level of the target, but these revisions were all in the suppliers’ favour. In light of the foregoing, Utilita’s further criticism of the target as ‘disproportionately high’ is inconsistent and unjustified. It is based on a further, unsustainable criticism of analysis.
“In sum, given the inherent uncertainties in predicting the likelihood of future events, and that any level of target chosen can be criticised from both directions, the CMA should exercise appropriate restraint. legitimate, expert decision as to the appropriate level for the target is not outside the bounds of reasonable regulatory judgement, and its decision should not be disturbed.”
Ofgem additionally takes issue with Utilita’s assertion that the capital target, at any level, is unnecessary and disproportionate.
It adds: “That argument mischaracterises the flexible and supplier-specific compliance framework which has devised, and which strikes a careful balance between having regard for suppliers’ circumstances on the one hand, and achieving policy objectives on the other.
“Further, Utilita suggests that any level of capital target was unnecessary, citing alternatives which it would prefer. However, rejected more complex permutations of the policy as inferior and/or as disproportionate, for reasons which were reasonable and appropriate.”
According to the government’s website, the main hearings of the appeal will take place this month and the deadline for the CMA’s final determination is 21 January 2024 unless there is an extension.