Ofgem sparks competition enquiry to break up 'big six'

27th Mar 2014 07:31

- Ofgem refers Big Six to CMA- CMA's powers include possible break-up of firms- Ofgem announces increased penalties UK energy regulator Ofgem has referred the 'big six' energy companies for a full-scale competition investigation that could see them broken up.Ofgem said the energy firms' bumper profits and recent price rises had intensified public distrust and it had to refer the industry to the Competition and Markets Authority (CMA) "to clear the air".A 'State of the Market' assessment released by the two organisations on Thursday stated that there was "continuing uncertainty over whether the vertical integration of the large energy companies is in consumers' interests", which implied a break-up could be on the cards. Ofgem said the CMA's more extensive powers would be able to address any long-term structural barriers to competition and properly determine whether there should be more separation between the largest companies' supply businesses and generation businesses.This report followed the Wednesday's announcement by SSE that it would freeze electricity and gas prices and split its retail and wholesale businesses.FTSE 100 company SSE is one of the UK's six largest energy suppliers, including Centrica-owned British Gas, German-owned Npower, French-owned EDF, Spanish-owned Scottish Power and German-owned E.ON, which together control roughly 95% of the country's energy supply market.Thursday's report pointed to retail profits from the 'big six' had increased from £233m in 2009 to £1.1bn in 2012, "with no clear evidence of suppliers becoming more efficient in reducing their own costs".The report cited "possible tacit co-ordination" between the companies in setting prices, due to the timing and size of price announcements plus new evidence that prices rise faster when costs rise than they reduce when costs fall.While the CMA investigation takes place, Ofgem has set in place reform plans beginning in April that it hopes will make the energy market "simpler, clearer, and fairer" and easier for consumers to shop around for better energy deals.As part of this, Ofgem on Thursday issued a letter setting out that it will substantially increase the level of penalties it imposes. Ofgem Chief Executive Dermot Nolan said: "A market investigation will once and for all clear the air and allow the CMA to ensure that there are no further barriers to effective competition. An investigation would reassure consumers and complement Ofgem's reforms for a simpler, clearer and fairer energy market. "The CMA has powers, not available to Ofgem, to address any structural barriers that would undermine competition. Now consumers are protected by our simpler, clearer and fairer reforms, we think a market investigation is in their long-term interests."By law Ofgem must consult with stakeholders, including the six companies, before making a final decision on a referral to the CMA for investigation.British Gas owner Centrica put out a statement on Thursday morning that said it was likely to recommend the investigation. Chief Executive Sam Laidlaw, said: "Anything that clears the air and helps rebuild trust in the industry must be a good thing. Britain's energy market is highly competitive and we believe that a full independent review by a respected regulatory authority would demonstrate precisely that.OH