U.K. Starts Energy Market Probe; May Split Utilities

U.K. competition authorities will conduct a full investigation of the energy market to determine whether the six biggest utilities are unfairly profiting from their market power.

The industry regulator Ofgem asked for the probe, which is due to publish its final recommendations at the end of next year. The report may recommend splitting power generation businesses from units that supply consumers and businesses.

The decision reflects concern that natural gas and power customers are being short-changed by the companies, whose profits have more than quadrupled since 2009. With the next election less than a year away, energy has become a touchstone subject on Britain’s political agenda, with all parties criticizing suppliers for being quick to put up prices when wholesale costs rise, and slow to cut them.

“This will help rebuild consumer trust and confidence in the energy market as well as provide the certainty investors have called for,” Ofgem Chief Executive Officer Dermot Nolan said in an e-mailed statement.

The regulator asked the Competition and Markets Authority for an investigation. It said there’s increasing consumer distrust of suppliers and uncertainty about the relationship between the generation arms and supply businesses of the Big Six, which consist of Centrica Plc, SSE Plc, Electricite de France SA, RWE AG, Iberdrola SA and EON SE.

Opposition Remarks

Ed Miliband, leader of the opposition Labour Party, has pledged to freeze energy prices if he wins the election in May. Prime Minister David Cameron’s government has promoted measures to make it easier for customers to change tariffs and suppliers.

All of the Big Six welcomed the inquiry. Keith Anderson, Chief Corporate Officer of Iberdrola’s ScottishPower unit, said it “provides a real opportunity to clear the air.”

“We want an energy market that is trusted by customers, and we believe that an in-depth and thorough review by an independent and respected authority can help to achieve this,” Centrica CEO Sam Laidlaw said in a statement.

The probe “will be an important opportunity to demonstrate the competitiveness of the energy market, address any issues of public concern and deliver good outcomes for consumers and a stable framework for investors,” SSE CEO Alistair Phillips-Davies said.

Utility Response

E.ON UK CEO Tony Cocker and EDF CEO Vincent de Rivaz said their companies have been calling for such a probe since 2011.

“It is hoped that with this process we can all take another step along the road towards ensuring clear outcomes and restoring confidence,” Cocker said.

Ofgem proposed in March to refer the industry for an investigation, saying that competition between suppliers “is not working as well as it could.” Today’s referral follows a consultation about the planned measure.

“Today’s announcement is the first step in a journey that will go a long way to reinstall trust into the industry and ensure that the realities of the energy market are made public,” RWE Npower CEO Paul Massara said in a statement. “British consumers deserve a full, comprehensive, vigorous and politically unbiased investigation, as only then will everyone involved be able to rebuild confidence in energy in the U.K.”

The Competition and Markets Authority said it must publish its final report by Dec. 25, 2015. The agency will “shortly” appoint independent panel members and publish a timetable setting out the stages of the investigation, according to a statement on a government website.

Not Defensive

“We will approach the investigation with an open mind, and will not be defensive,” EDF’s de Rivaz said. “This inquiry should help identify where the market can work better for customers.”

The CMA can take actions including ordering companies to divest assets, breaking them up, recommending that the government adopt new laws, making recommendations to Ofgem or imposing price caps, according to Trudy Feaster-Gee, a competition lawyer at Leeds-based law firm Walker Morris LLP.

The agency may invite the companies to an initial meeting and ask for information, including background about corporate structure, business plans, minutes from board meetings and supplier details, Feaster-Gee said. The CMA often collects customer and operational data and may ask companies to complete questionnaires, and visit sites, she said.

Probe Direction

“There will be quite a lot of emphasis on the financials, on timing and strategy for dealing with price rises for power and gas and how they feed those price increases to their customers,” Lambros Kilaniotis, a competition lawyer at Reynolds Porter Chamberlain LLP in London, said. “It will be fairly exhaustive. It will be fairly expensive for the companies involved.”

“It’s fair to say it’s going to be one of the more complicated and wide-ranging of the market references of the past few years,” he said.

They may recommend remedies, though they don’t have the authority to levy monetary penalties and their remit doesn’t include punishing individuals or companies, he said.

“This is not about investigating EDF or Centrica,” Kilaniotis said. “This is about investigating the market as a whole, whether you’re large or whether you’re small.”

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