The closing stages of a thorough investigation

After 21 months of thorough scrutiny we’re now entering the closing stages of the most extensive investigation into the Great Britain energy market in recent times.  
 
We’re expecting to see the publication of suppliers’ responses to the CMA’s Provisional Decision on Remedies in the next week or so and with the investigation now focused on engaging more customers in the retail market, we’re at a crucial point.
 
SSE welcomed the CMA inquiry from the outset and almost two years on we welcome its focus on doing things better for customers. We’re fully behind the vast majority of remedies proposed in this far-reaching enquiry. Rolling back some RMR rules to encourage innovation and individualisation makes sense in the new, smart, energy world. Extending Midata to allow customers access to tailored information on price comparison websites and improving the governance of Industry Codes and the relationship between Ofgem and DECC will all ultimately make life easier and simpler for customers.  
 
But we mustn’t lose sight of the fact that the market has changed dramatically since the inquiry started almost two years ago. More than 30 suppliers are now competing vigorously on price, products and customer service. There’s also an unprecedented pipeline of technological change with Smart Meters, Midata, Project Nexus and faster switching to name a few.
 
Supportive as we are of the majority of the CMA’s remedies, there are, however, a small number of areas which SSE believes need revisiting ahead of the Final Report in June.
 
Firstly, several of the more extreme remedies have been proposed based on their assessment of ‘customer detriment’, despite this analysis being seriously flawed. SSE has challenged this finding throughout the market investigation because the CMA’s much-reported £1.7 billion overcharging figure is, in the CMA’s own words, “far in excess of” the reported profits for 2014 for all suppliers combined (in fact it is nearly double the level of net reported profit). The CMA’s two main technical economic approaches were both flawed. One (the ‘direct approach’) calculated ‘detriment’ by measuring the gap between the tariffs of large suppliers and two other suppliers, one of which was loss-making; so hardly an appropriate benchmark. The other, (the ‘indirect approach’) assumed an unrealistically small ‘competitive margin’ of 1.5% but even so, still found limited detriment from profit above this level. Instead the bulk of the detriment in this approach was deemed to arise from inefficiency although no concrete examples were provided. If consumers are to have confidence in the inquiry and its outcome, the CMA’s flagship interventions must be based on accurate and credible evidence.
 
Secondly, the much-trailed pre-payment meter (PPM) price cap risks undermining competition. We support measures to help vulnerable customers but Ofgem data clearly shows that PPM is not a proxy for vulnerability – just 25% of vulnerable customers pay by PPM, with the vast majority preferring to pay via credit or direct debit.  
 
The current version could have adverse consequences for vulnerable customers as it discourages low standing charges and far from increasing competition, price caps can lead to customers believing they are ‘protected’ which could dissuade engagement – that’s why they’re being phased out across European markets. In the face of increased switching and more small suppliers actively competing for PPM customers, a price cap seems counter-productive.
 
As it stands, the current remedy design is impractical, incomplete and very complicated. It needs to be linked to a wide range of tariffs not just discounted Fixed Term, it should fully factor in all costs not exclude key variables like the Capacity Mechanism; it must include additional costs for serving PPM customers and must have a sensible approach to wholesale costs that manages the volatility of the market rather than being based on a single day as is currently proposed. If it is to be introduced, it is important that these changes are made.
 
Finally, like many consumer groups, we are concerned that the proposed database for ‘disengaged’ customers could see them bombarded with unsolicited communications which evidence already suggests are likely to be ineffective. Their concerns must be addressed in the final design. As the first energy supplier to end cold calling and to back Which?’s “Calling Time on Nuisance Phone Calls” campaign, we know customers do not appreciate unsolicited approaches and encourage the CMA to revisit this.  
 
It’s been a lengthy and probing inquiry and the CMA has produced a meaningful and substantive package of remedies which should increase the competitive market framework and benefit GB customers.
 
But there is still work to do and at SSE, we’re keen to see that the details and implementation are workable. Only then will a lasting settlement that benefits customers be achieved. It would be a shame if the good work and genuine improvements from this two-year investigation are overshadowed by one or two remedies that engage headline writers more than customers.

SSE's Response to Provisional Decision on Remedies can be viewed here.

About the author

Dr Richard Westoby Director of Retail Economics

Richard Westoby was an Economic Advisor with the Department of Energy and a Senior Economist at British Gas before joining the Electricity Industry in 1989. He is currently SSE’s Director of Retail Economics where his responsibilities include pricing, forecasting, business intelligence and aspects of smart metering and fuel poverty policy.

Read more articles by Dr Richard Westoby