CMA Provisional Energy Market Findings: Does protecting the weak (even temporarily) make them stronger?

(by Catherine Waddams) In its provisional findings on the energy market, the UK’s Competition and Markets Authority (CMA) focuses on weak consumer response – but one proposal, to introduce a protective tariff for those who do not switch, might prove counterproductive.

The energy regulator, Ofgem, has been seeking to address weak consumer response for several years and, as the CMA points out, some of these efforts have had unfortunate consequences for competition; for example, the non-discrimination clauses, as CCP anticipated and confirmed.[1] The CMA is now proposing how to correct these ‘Adverse Effects on Competition’ and many of its proposals seem very sensible, including the establishment of an independent price comparison site by the regulator, as recommended many years ago by CCP.[2] Analysis for the CMA confirms other findings of different groups of consumers,[3] and CCP work has shown that different expectations of potential gains explain why some consumers are more active than others. Even among consumers who have been active in entering a collective switching auction, only a minority of those who were offered a better deal switched supplier.[4]

As a competition authority, it is not surprising that the CMA wishes to encourage the market to work better by stimulating more consumer activity rather than imposing a regulated price; it anticipates that smart meters may help in this and consults on how these can be made most effective. But in the meantime, they propose a default tariff to protect those who, despite encouragement, are not engaging in the market. They recognise that there needs to be headroom for such a tariff, to encourage companies to continue to offer good deals to those who are active; the protection therefore needs inevitably to be somewhat above the best deal on the market, so protection is, in a sense, partial. But there is a real danger that it may disengage even more consumers, who will feel that the authorities are looking after them, and so there is even less reason for them to follow what can seem a boring and tedious road to switching suppliers. It is a bit like having half an umbrella – if consumers think it will keep them dry, they may not use adequate precaution against the rain, and take a financial shower as a consequence. But the CMA is clearly overall taking a long-term view in a market which has resisted many previous attempts to improve its functioning; these findings, proposed remedies and consultation provide a welcome opportunity to contribute to the debate by the deadline at the end of the month.

[1] See Hviid, M and Waddams Price, C, ‘Non-Discrimination Clauses in the Retail Energy Sector’ (2012) 122 The Economic Journal 236-252; Waddams Price, C and Zhu, M, ‘Pricing in the UK Retail Energy Market, 2005 – 2013‘ (2013) CCP Working Paper 13-12.

[2] Garrod, L, Hviid, M, Loomes, G and Waddams Price, C, ‘Assessing the Effectiveness of Potential Remedies in Consumer Markets‘ (2008), a report for the Office of Fair Trading.

[3] Waddams Price, C, Webster, C and Zhu, M, ‘Searching and Switching: Empirical Estimates of Consumer Behaviour in Regulated Markets‘ (2013) CCP Working Paper 13-11.

[4] Deller, D, Giulietti, M, Jeon, JY, Loomes, G, Moniche, A and Waddams Price, C, ‘Who switched at the Big Switch and Why?‘ (2014) a report for Which?.

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