21 Nov 2012

(by Catherine Waddams) The Department of Energy and Climate Change yesterday published a discussion paper which virtually duplicates the consultation document published by Ofgem four weeks ago as part of its Retail Market Review (a few days ahead of the original schedule because of the prime minister’s surprise announcement that all consumers would be put onto their supplier’s cheapest energy tariff). Yesterday’s discussion paper was intended to clarify the prime minister’s announcement, but even this is still somewhat obscure (the paper talks about ‘our ambition’ and ‘all customers will have been placed on the cheapest tariff’ without specifying the mechanism for achieving the objective). While the government’s discussion document explicitly supports and builds on Ofgem’s proposals, it invites responses by January 4th., while response to the Ofgem consultation document are due in by December 21st. It will be interesting to see whether respondents change their views over Christmas, or perhaps as a result of their New Year resolutions. But why is a government department replicating the actions of its supposedly independent agent?

Quite apart from the merits of the increased intervention in retail energy markets which both discussion and consultation paper propose (and which other blogs have and will address) why should the government consult on almost identical proposals to those of the regulator, almost simultaneously? On the positive side, DECC’s discussion paper provides welcome recognition that decisions on social interventions (for example helping vulnerable consumers) are better made by elected government than appointed agencies, even if the agencies are crucial in designing and delivering appropriate mechanisms. The government anticipates taking powers to enforce switching to the lowest tariff for each provider in the Energy Bill, which will be published in the next few days. But unlike measures to help vulnerable consumers, which can act with the grain of the market, such direct intervention will have major consequences for the way the market operates, and as many commentators have noted, these are likely to stifle competition. Is the government giving the regulator notice that the competition route, at least in the domestic market, is a dead end? If regulation is seen as a better alternative, wouldn’t it be better to transfer to such a process sooner rather than later?

Rather than clarifying the prime minister’s proposal, the government’s move seems to raise more confusion, and to blur seriously the division between government and regulator which was reaffirmed by this government in the BIS principles of regulation only in April 2011. Such intervention will increase perceptions of government involvement in a highly politicised area, leading to reduced investor confidence. At a time when so many in the industry are calling for investor certainty in this and other infrastructure industries to encourage the necessary investment expenditure, this is a retrograde step. Avoiding such governmental intervention was a justification for the privatisation programme and the establishment of the current regulatory system, so it is particularly startling to see the independence of the regulator undermined by a conservative led and allegedly pro industry government.