CMA on governance: Ofgem to cost-out Decc policy decisions, drive industry change

The Competition and Markets Authority (CMA) has set out plans for a stronger role for Ofgem in scrutinising government policy and driving through industry change, saying that systemic problems with industry governance have caused “very substantial” detriment for customers.

The Authority said in new proposals to improve competition in the energy market that it was concerned over regulatory decisions that were taken when the Department of Energy and Climate Change (Decc) threatened to take action if Ofgem did not.  It gave two examples -  a restriction on tariff numbers and a prohibition on regional price discrimination – that it said had not benefitted customers at all.

But it also raised concerns over broader policies – such as policy measures on climate change and the rollout of smart meters – saying that decision-making on such policies had to be transparent and robust and that points of difference between Decc and the regulator should be apparent.

The Authority said the relationship between Decc and Ofgem had to be ‘recalibrated’ to reinforce Ofgem’s independence and allow it to publish opinions on the cost of government policy.

It wants the regulator to have its role as customer champion defined more strongly in primary legislation, compared to recent changes that have required to take account of other issues like sustainability.

Ofgem would be required to publish opinions on all draft legislation and policy proposals that could have a material effect on the energy market. A team within Ofgem would produce an annual  ‘state of the market’ report covering:

  • the evolution of energy prices and bills over time;
  • the profitability of key players in the markets;
  • the social costs of policies and distributional impacts arising from them;
  • the impact of initiatives relating to decarbonisation and security of supply.

It also proposed a new financial reporting framework for suppliers that would make clearer the profits from different business units.

Ofgem will also have a bigger role in pushing through industry change through administration of the codes governing the industry.  The CMA highlighted some changes that had taken years of even decades to process, and said it was ‘surprised’ that some processes fundamental  to industry reform were “loosely governed under  industry codes” and had no role for Ofgem.

It said Ofgem should be more proactive by setting a ‘Strategic direction’ for change, and should have powers to initiate code modifications and take ‘substantive control’ of important modification proposals.

The CMA also said that the regulator should not soften on plans to roll-out smart meters to customers by 2020, saying it was “vitally important” it said it expected Ofgem to use its powers to impose penalties on companies that fail to meet targets.  It also wants the regulator to push ahead on plans to move the industry to half-hourly charging and settlement, so customers can take advantage of new tariffs (see more about this issue).


See more:

A new framework for the energy industry?

More debate on industry codes

Gearing up for changes in code administration

A one-stop code shop?