Abstract
In 2016, the UK Competition and Markets Authority (CMA) found that “weak customer response” enabled incumbent UK energy retailers to set higher and discriminatory prices to residential customers. The CMA estimated the associated higher prices constituted a customer detriment in the range £1.4 bn to £2 bn per year. Although the CMA recommended against a price cap on most domestic energy tariffs, the size of the detriment and public concern about “rip-off energy tariffs” nonetheless led the Government to impose a price cap as from January 2019. This paper examines the CMA’s calculation of customer detriment and suggests that it is inconsistent with CMA Guidelines and unprecedented with respect to its nature, magnitude and policy impact. Alternative more realistic calculations suggest that any detriment would have been nearly an order of magnitude lower, so that a price cap was inappropriate. This raises a number of questions about the CMA’s approach.
Highlights
Following concerns about rising energy prices and about its own regulatory policy, the Office of Gas and Electricity Markets (Ofgem) in 2014 asked the Competition and Markets Authority (CMA) to review the UK energy market.1 It specified five issues for particular examination, including “weak customer response”
The CMA found that weak customer response gave the six large suppliers market power which they used to engage in price discrimination and make excess profits
“10.27 We have based our assessment on the principle that a competitive benchmark price in the domestic retail energy markets should fulfil the following criteria: (a) it should be reflective of the prices charged to active/engaged customers; (b) it should be reflective of the costs of an energy supplier which has reached an efficient scale and which is in a steady state; and (c) it should generate revenue that is consistent with a normal return.” (p 605)
Summary
Following concerns about rising energy prices and about its own regulatory policy, the Office of Gas and Electricity Markets (Ofgem) in 2014 asked the Competition and Markets Authority (CMA) to review the UK energy market. It specified five issues for particular examination, including “weak customer response”. Following concerns about rising energy prices and about its own regulatory policy, the Office of Gas and Electricity Markets (Ofgem) in 2014 asked the Competition and Markets Authority (CMA) to review the UK energy market.1 It specified five issues for particular examination, including “weak customer response”. In its Final Report, the CMA (2016) found “an overarching feature of weak customer response” in the domestic (i.e. residential) retail market which had an “adverse effect on competition” This gave market power to the six large former-incumbent suppliers, enabling them to engage in price discrimination against less engaged customers (elsewhere called a “two-tier market” or a “loyalty penalty”) and to make excess profits and/or to operate inefficiently. Further background on the UK energy sector, and discussion of the CMA’s ‘indirect approach’, are available elsewhere.
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