Back in August 2014, the nascent Competitions and Markets Authority (CMA) investigation into the workings of the energy market released its 4 theories of harm – the elements of the market that were perceived to encapsulate its biggest weaknesses and which were to be thoroughly investigated on their watch.
Now, 6 months later, the CMA have updated their theories with their initial findings and for good measure have added a new, telling theory of harm
CMA Theory of Harm 1
“Opaque prices and low levels of liquidity in wholesale electricity markets create barriers to entry in retail and generation, perverse incentives for generators and/or other inefficiencies in market functioning”
CMA Theory of Harm 1 Updated
The CMA’s initial conclusion is that it is true that “opaque prices and low liquidity in wholesale electricity markets distort competition in retail and generation”
But they have also concluded that the framework regulation within which the market operates is at fault revealing:
“The market rules and regulatory framework distort competition and lead to inefficiencies in wholesale electricity markets”.
So as a broad-brush conclusion one could say that yes, wholesale electricity markets don’t function as well as they should but that this isn’t simply market manipulation by dominant players but a fundamental flaw in the market design.
1-0 to the suppliers on the basis that they aren’t the sole cause of market inefficiencies as some had hoped
CMA Theory of Harm 2
“Vertically integrated electricity companies harm the competitive position of non-integrated firms to the detriment of customers, either by increasing the costs of non-integrated energy suppliers or reducing the sales of non-integrated generating companies”
CMA Theory of Harm 2 Updated
“Our analysis suggests that the Six Large Energy Firms (the Big 6) generally hedge further forward than independents but that external product availability is good enough for independent firms to match the Six Large Energy Firms’ hedging strategies”
The CMA appear to have dismissed the concerns that vertically integrated suppliers, those owning the retail (supply arm) and generation assets, have a competitive advantage.
2-0 Ofgem fall further behind as their bête noire, vertical integration, is dismissed by the CMA
CMA Theory of Harm 3
“Market power in generation leads to higher market prices”
CMA Theory of Harm 3 Updated
“Market power in electricity generation leads to higher prices”.
A seeming slam dunk from the CMA
2-1 Ofgem claw one back
CMA Theory of Harm 4
“Energy suppliers face weak incentives to compete on price and non-price factors in retail markets, due in particular to inactive customers, supplier behaviour and/or regulatory interventions”
CMA Theory of Harm 4 Updated
“Energy suppliers face weak incentives to compete on price and non-price factors in retail markets, due in particular to inactive customers, supplier behaviour and/or regulatory interventions”.
The CMA conclude exactly what they initially expected:
Apathy, poor supplier self promotion and bad regulation are the root cause for a sub optimal market.
2-1 No winners here as Ofgem and the suppliers end up in the dock
New entry: CMA Theory of Harm 5
“the broader regulatory framework, including the current system of code governance, acts as a barrier to pro-competitive innovation and change”.
The CMA’s filibuster, the very people calling for their investigation end in being a new theory of harm – poor regulation, bad governance, sub optimal implementation, minimal innovation and a lack of commercial acumen.
3-1 the suppliers with a late and unexpected winner
So there we have it, Ofgem had high hopes of a unanimous guilty verdict on all counts for the suppliers, the CMA, independent and fully focused deliver a shock result for the regulator to digest.
However with the CMA investigation now going into extra time everything is potentially still to play for.