Ofgem has been heavily criticised by Citizens Advice over its decision to row back on proposals requiring all energy retailers to ringfence consumer credit balances (CCB).
Credit balances and how they are used have been a major source of contention in the sector in recent years, with Ofgem chief executive Jonathan Brearley recently stating some suppliers are using them “like an interest free company credit card”.
In a consultation published last year the regulator said instead of requiring ringfencing it plans to set a “monitoring threshold” to avoid over reliance on the funds to support supplier businesses. Ofgem argues that a combination of reforms such as the tightening of rules on the setting of direct debits, as well as capital adequacy requirements, are more proportionate.
It has further proposed new powers allowing it to order individual suppliers to ringfence their credit balances when they are at risk of not meeting or do not meet the requirements set out in the enhanced Financial Responsibility Principle (FRP) and/or the minimum capital requirement.
Richard Hall, chief energy economist at Citizens Advice, said this discretionary approach “worries” his organisation as it relies heavily on Ofgem’s ability and willingness to identify problems and step in.
“Our Market Meltdown report highlighted that Ofgem reduced its enforcement headcount during the years when unsustainable suppliers were entering – and often subsequently chaotically leaving – the market,” he continued.
While welcoming some of the recent changes to strengthen Ofgem’s monitoring work, he warned that it is important the regulator is “mindful that its track record on monitoring and enforcement is not beyond reproach”.
“Given these concerns, our ability to support these revised proposals is entirely contingent on Ofgem demonstrating that it has and will continuously adequately resource the monitoring and enforcement of the Financial Responsibility Principles,” he added.
Hall highlighted that while Ofgem appears to see ringfencing as unnecessary given separate capital adequacy requirements, it also implies that CCBs could form part of suppliers demonstrating capital adequacy.
“In our view, this would be inappropriate as it would not address the problem you are trying to solve – suppliers with inadequate financial resources, and a lack of equity investment, misusing consumer cashflows to fund their business,” he said.
Hall also warned about the potentially negative impacts of Ofgem having discretionary powers with regards to requiring individual suppliers to ringfence funds.
He added: “Noting that the arguments for a multiple year transition to new financial resilience arrangements is founded on concerns that moving quicker could cause the very financial sustainability problems they are trying to solve, we think there are also some risks that discretionary CCB step in powers may be triggered too late to be used (eg that by the time it becomes obvious that a supplier is too reliant on CCBs it may not be possible to ring fence them without causing its failure).”
The charity further raises concerns about Ofgem’s proposal to introduce a requirement in the FRP that if suppliers breach any of the reporting triggers, they must also notify Ofgem 28 days before extracting funds from the business “unless essential to its operation”. This same requirement would apply if suppliers breached the minimum capital requirement.
Hall said: “In our view, in circumstances where suppliers are breaching the triggers set out in the FRP they should not be able to extract cash from the business full stop.
“Either the FRP has teeth or it does not, and, noting the extractive activities of some of the management teams of failed suppliers, we are not comfortable with leaving the door open to any extraction of cash where businesses are showing signs of failing.”
Despite the concerns raised, the charity does support Ofgem’s proposals to ringfence Renewables Obligation (RO) payments, which is another major source of contention in the sector.
Responding to the Citizens Advice comments, an Ofgem spokesperson said: “We consulted widely on plans to ringfence credit balances and listened carefully. Instead of a complete ban, we’re setting a threshold to avoid suppliers overly relying on these credit funds.
“Should suppliers not comply with our financial resilience rules, we are leaving open the chance to instruct individual suppliers to ringfence customer credit balances.
“Much of the feedback and analysis concluded that completely ringfencing credit balances would remove a large piece of working capital that would keep prices down for customers. Customers can still request their credit balance back from their supplier at any given time.”