Why an annual energy review?

Annual reviews into the state of competition in energy seem like a damp squib, but may just be a way of ministers getting around their lack of power to probe the market, says Tim Briggs.

Two weeks ago, the energy secretary stood at the dispatch box and announced a modest range of measures aimed at addressing concerns about rising energy bills. One of these was the introduction of annual reviews of the state of competition in the energy markets.
The oral statement, the accompanying press release and the Annual Energy Statement published the same day, were all notably short on detail as to the nature of these annual reviews. We were told only that: “The assessment will be undertaken by Ofgem working closely with the Office of Fair Trading and the Competition and Markets Authority, when it comes into being. The exact metrics for the review will be a matter for the regulators but I will be asking them to look in depth and across the energy sector at profits and prices, barriers to entry and consumer engagement.”
For those of us who had expected the government to grasp the nettle and trigger an 18-24 month market investigation by the Competition Commission, this announcement came as something of a damp squib. Why had the government declined the invitation extended by key industry players – most recently Tony Cocker, chief executive of Eon UK – to refer the matter to the Competition Commission? At least that would have been perceived as a substantive response to Ed Miliband’s radical policy of imposing a 20 month price freeze on energy companies. At face value, this announcement looks likely to satisfy no one.
However, there may be more to this than meets the eye. Perhaps it is after all the start of a journey that will lead inexorably to the Competition Commission (or the CMA, as it will become). Is the reference to an annual review just a red herring?
The starting point for this thesis is to look at how the proposed annual reviews fit within the existing statutory framework for investigations in the energy sector. It is not a particularly good fit.
Ofgem has various functions under the Electricity and Gas Acts (including licence modification functions) that enable it to keep activities in the energy sector under review. It has wide-ranging information-gathering powers that it can call on.
In addition, Ofgem has powers to investigate infringements of competition law and to make market investigation references to the Competition Commission. It holds those powers concurrently with the Office of Fair Trading (OFT).
The OFT, by contrast, has no powers or functions under the Electricity and Gas Acts. It has a general function of keeping under review information about matters relating to the carrying out of its functions – including relating to competition law enforcement and market investigation references. The OFT relies on this general review function to conduct quasi-formal “market studies” and other actions, including calls for evidence.
Ofgem and the OFT have extensive powers of investigation (including dawn raids) under competition legislation where they have reasonable groaunds for suspecting an infringement of competition law and so opening a formal investigation. While “reasonable grounds” is a relatively low threshold, in view of the detailed Retail Market Review which Ofgem has conducted since 2011 (and the Energy Supply Probe before that) and in the absence of significant new evidence, it would be surprising if Ofgem were able to conclude that it had such reasonable grounds. Political consternation at rising energy bills is not of itself a sufficient basis to form a reasonable suspicion of competition law infringement.
In view of the above, on what basis will Ofgem and the OFT conduct their annual reviews of the state of competition? We do not yet know, but it would be surprising if the authorities did not seek to make as much use as possible of their formal information-­gathering powers. There will be political pressure on the energy companies to co-operate with the review whatever its legal basis, but the authorities will have greater confidence that the information provided to them is full and complete in circumstances where there are sanctions for non-­compliance with an information request. That would point to Ofgem leading the review principally on the basis of its Electricity and Gas Act powers. Fortunately, Ofgem is generally permitted to share with the OFT information it has obtained under electricity and gas legislation.
But that is where the proposed annual review does not ring true. What is the point of Ofgem conducting a further review immediately following the conclusion of its Retail Market Review? Would Ofgem be able to justify further licence modifications on the basis of its statutory general duties when it had not concluded they were necessary only a few months earlier?
It seems far more likely that the review by Ofgem and the OFT is intended to form the basis of a market investigation reference to the Competition Commission. That at least would result in a detailed review by an expert body that has the experience and powers to remedy any concerns it identifies, including in principle the restructuring of the energy industry.
But if that is the government’s intention, why did the secretary of state not just refer the matter to the Competition Commission? The answer may lie in a legal technicality. Ministers have limited scope to make a market investigation reference to the Competition Commission.
Neither are Ofgem nor the OFT unconstrained in their ability to make a market investigation reference. They need to have reasonable grounds for concluding that any feature, or combination of features, of the energy markets prevents, restricts or distorts competition. The review announced last month will give Ofgem and the OFT until the spring to try and assemble the evidence they need to demonstrate they have such reasonable grounds.
And what of the “annual” competition review? It may be a cynical thought, but once the Competition Commission or CMA has commenced its market investigation, lasting at least 18 months, will anyone remember the call for an annual review?
Tim Briggs, consultant, Herbert Smith Freehills LLP