Tony Thornton says competition will provide a more cost-effective code administration service than top-down regulation
Never before has so much effort been focused on the topic of code governance. The work of the Competition and Markets Authority (CMA) has really fuelled the debate. Respondents to the CMA have proposed a range of solutions to the issues around code governance, from further cross-code working to introducing a ‘super code administrator’. There has even been a proposal to shift code governance control under a public body.
The CMA’s provisional decision is likely to reinforce its proposed remedy 18a: the licensing of code administration. Gemserv’s proposal, as set out in our thought leadership paper, Transforming Code Governance Arrangements, delivers benefits without the need to introduce more top-down regulation.
Licensing of code administration represents a significant shift in the code governance framework. I recognise there are benefits of such an approach; for example, it may lead to greater consistency across codes and help drive accessibility. Perhaps more importantly for some stakeholders, it will also resolve the perceived power vacuum that exists for Ofgem to be able to direct industry change.
To be effective, it will ultimately need to solve the range of issues that are troubling energy companies, including how best to give smaller code parties a louder voice within the governance framework.
Three consequences are worthy of particular consideration:
• A shift in the balance for code administration accountability from market participants to Ofgem or code administrators;
• The increased complexity and associated cost;
• The risk of harming the development of effective competition in code administration.
It could be argued that code administration is already managed within a regulated environment, as energy companies hold licences which require them to be compliant with industry codes. Furthermore, the proposed reform of the significant code review process strengthens Ofgem’s powers to directly project-manage and control the timetable for developing and/or implementing code changes.
Current arrangements mean that industry stakeholders are at the heart of code administration practices. This allows for trade-offs between effective stakeholder engagement and the speed of decision-making. Accountability for the decision-making process is focused at the most optimum point where policy objectives and the operational effects take place.
“Under a licensing approach, code administrators could become less responsive to energy company requirements because of the licence framework”
Under a licensing approach, this will change. There is a risk the code administrator’s desire to comply with its licence obligations and ensuing service-level agreements (SLAs) could take precedence over the time available for effective engagement that might otherwise provide more optimal and cost-effective outcomes.
A licensing approach introduces new requirements on code administrators. These will include regulatory reporting, compliance with any price control formulas, internal compliance management and potentially ring-fencing of regulated and unregulated businesses. Aside from this complexity, it could mean that code administrators become less responsive to energy company requirements because of the licence framework.
The costs will ultimately be borne by consumers. The extent of these costs will depend, of course, on the shape and nature on any licensing framework. It is therefore vital that the drafting of the licensing framework minimises these additional costs.
It will be important for Ofgem to consider how any form of licensing is developed to ensure that competition principles are maintained, especially with regard to ensuring a level playing field for all those organisations that compete for code administration services. This is particularly relevant given that all code administrators will be from different commercial and regulatory positions.
The provision for full code administration contestability encourages the right code administrator behaviour. It ensures the pencil remains sharp when it comes to cost, performance, standards and innovation. This is because when code administration services are fully competitive, contracts are at risk of being lost in the event that a code administrator under-performs. This commercial focus provides an incentive to ensure code administrators do not become complacent; indeed, it encourages a highly responsive and agile service provider – unlike that of an institutionalised public body approach.
While I have reservations about the licensing of code administration, I believe it can work. There is the opportunity to develop the CMA’s proposed remedy in conjunction with proposals outlined in our paper, which builds on the cross-code governance framework that already exists.
Gemserv is keen to work with energy companies, Ofgem and the CMA to ensure that, whatever the outcome, code governance evolves for the greater good of the energy market and its customers.
Tony Thornton is head of transformation at Gemserv. See full paper, Transforming Code Governance Arrangements, here