Bottom Line: Ofgem probe is for all the wrong reasons

 
Elizabeth Fournier

THE UK’S regulatory authorities are supposed to be independent. Ofcom, Ofwat, Ofgem – all were set up to oversee our utilities markets and protect the interests of consumers. After yesterday’s referral of the energy market to the new Competition and Markets Authority (CMA) for a full-scale investigation, many will no longer see Ofgem as objective, regardless of its protestations to the contrary. Under constant pressure from electioneering politicians, the energy body has given in – pre-empting the results of its own retail market review, much of which hasn’t even been implemented yet.

Its reasoning is weak. Ofgem cites retail profits rising from £233m in 2009 to £1.1bn in 2012 as a key reason for concern, along with declining consumer confidence in the sector.

They should have looked more closely. As analysts at Morgan Stanley point out, return on common equity is just five per cent across the industry for the vertically integrated businesses. And while the regulators are crunching the numbers, the reforms that are already coming into play will mean that competition in the market will already be better two years down the line, when the CMA eventually reports back.

In the meantime, investment will crumble as unnerved firms slash capex. That £330bn target for investment over the next 16 years – forget it. If Ofgem wanted to clear the air, it could have done so yesterday by drawing a line under this mess and letting politicians fight it out. Instead, it appears to have let public pressure influence what should have been an independent decision.

ENERGY REFORM IN THREE KEY NUMBERS
1 £330BN
The amount that the UK energy industry needs to invest by 2030 to achieve carbon emission targets, according to the LSE

2 18 MONTHS
The time Ofgem said yesterday it could take to conduct its probe into the UK’s energy market

3 43 PER CENT
The proportion of the UK public that Ofgem says distrust energy firms to be open and transparent

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