Energy Regulator Faces Blow From CMA Report

By Mark Kleinman, City Editor

Britain's energy sector may be beset by excessive regulation which acts as a barrier to new market entrants, competition watchdogs will say later.

Sky News has learnt that the Competition and Markets Authority (CMA) is likely to label the energy industry's regulatory framework as an ongoing "theory of harm" that requires further investigation.

The development, which will be included in an issues statement published by the CMA, will represent a blow to Ofgem, the energy regulator.

A source close to the competition body said it would say that myriad regulatory codes in the electricity market may be making it difficult for smaller suppliers to compete.

The CMA document will also say that the governance of those codes may be acting as a barrier to innovation and change by energy providers.

While the statement will not present formal conclusions by the CMA, the ongoing designation of industry regulation as a key focus will embarrass Ofgem at a time when its leadership is under intense political pressure to shake up the energy market.

Labour has vowed to freeze prices for 20 months if it wins the General Election in May, a pledge which sparked fury among suppliers.

The CMA document, known as an annotated issues statement, is expected to focus on the standard dual-fuel and SME markets as areas of concern ahead of its proposals for remedial action later this year.

A Whitehall insider said on Tuesday that the CMA's work to date would conclude that dual fuel customers of the big six energy groups' standard tariffs could save between roughly £160 and £235 annually if they switched to the cheapest fixed tariff.

Those six companies - which include British Gas, Npower and SSE - earn 12% more revenue per customer on standard than fixed tariffs, the CMA is expected to say.

This fact is likely to prompt further analysis of whether customers' loyalty is being exploited by the major suppliers.

This week, the Government launched a campaign with the slogan "Power To Switch", which is designed to encourage consumers to shop around to find cheaper energy deals.

Crucially for the big six suppliers, the CMA is said to have concluded that their average profit margin across gas and electricity is 3.3%, with gas being the more profitable of the two.

A Whitehall source said the watchdog had not reached a decision on whether these margins were excessive.

In its original assessment last year, the CMA said it would examine a number of areas of concern, including the issue of vertical integration, which relates to companies which both generate power and supply it to customers; whether generators have the ability to manipulate prices; and whether incentives to compete are too weak.

A source close to the regulator said the CMA appeared to be transferring its area of focus away from generation to the retail market and the industry's regulatory for the next phase of its inquiry.

It is also likely to take an implicit swipe at the Government by referring to the potentially adverse impact of social and environmental costs on competition.

An industry insider said the Government's Electricity Market Reform programme to incentivise investment in low-carbon electricity generation would also come in for criticism over the way contracts had been awarded.

Ed Davey, the Energy and Climate Change Secretary, sparked a row last year when he hinted that Centrica, the owner of British Gas, could be broken up in the wake of the CMA inquiry.

The competition authority is said to be planning to report that 40% of Centrica's domestic gas customers have been with the company for at least 10 years - a fact that may be seized upon by critics of the way the market operates.

All six of the major UK suppliers have announced price cuts since the turn of the year following pressure from Matthew Hancock, the Business and Energy Minister.

The CMA declined to comment on Tuesday.

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