Tantalus and Other Myths of the British Energy Market

Energy Market Insights (NERA Economic Consulting), Issue 10, 2014

9 Pages Posted: 14 Apr 2014

See all articles by Sean Gammons

Sean Gammons

NERA Economic Consulting

Frank P. Maier-Rigaud

IESEG School of Management (LEM-CNRS), Department of Economics and Quantitative Methods; ABC economics

George Anstey

NERA Economic Consulting (UK); Marsh & McLennan Companies - London Office

Date Written: March 1, 2014

Abstract

The “Big Six” energy firms currently face the prospect of political and regulatory intervention that is unprecedented in the more than 15 years since Britain’s 27 million households have been free to choose their gas and electricity supplier. In his September 2013 party conference speech, Ed Miliband pledged to “reset the broken energy market” with a two-year price freeze from 2015. As recently as February 2014, Energy Minister Ed Davey wrote to Ofgem and the Competition and Markets Authority to attack profit margins in the gas retail businesses of the “Big Six”, suggesting radical measures, such as “a break-up of any companies found to have monopoly power to the detriment of the consumer”.

Since the Energy Supply Probe in 2007-2008, regulatory pressure has been increasing on the sector, prompting DECC and Ofgem repeatedly to intervene to “fix” the market. A key plank of the government and regulatory thinking that lies behind these interventions is that the “Big Six” vertically-integrated suppliers control the market and frustrate competition. Another is that only an increasingly complex and prescriptive set of rules and regulations surrounding their conduct can ensure fair outcomes for consumers.

In practice, the case that the market is broken and needs fixing is based on scant evidence and a series of poorly justified arguments — one might even call them myths — that pervade the public debate on the energy market. Ahead of the imminent release of the tripartite Competition Assessment, this article reviews some of the evidence on the extent of competition in the market, focusing on those aspects that have attracted greatest public attention. At its heart, competition is a process, rather than a particular market outcome. Constraints on competitive behaviour (“conduct remedies”) are alien to that process, and have a poor track record in the British energy markets. That record cautions that regulators should avoid using short-term and limited evidence to justify interventions with far-reaching consequences for competition.

Keywords: market investigation, sector inquiry, energy, EDF, ScottishPower, Centrica, CMA

JEL Classification: K21, K23, L40, L50, L95

Suggested Citation

Gammons, Sean and Maier-Rigaud, Frank P. and Anstey, George, Tantalus and Other Myths of the British Energy Market (March 1, 2014). Energy Market Insights (NERA Economic Consulting), Issue 10, 2014, Available at SSRN: https://ssrn.com/abstract=2424163

Sean Gammons

NERA Economic Consulting ( email )

50 Main Street, 14th Floor
White Plains, NY 10606
United States

Frank P. Maier-Rigaud (Contact Author)

IESEG School of Management (LEM-CNRS), Department of Economics and Quantitative Methods ( email )

Socle de la Grande Arche
1 Parvis de la Défense
Paris, La Défense Cedex, 92044
France

ABC economics ( email )

Berlin, 10115
Germany
10115 (Fax)

HOME PAGE: http://www.ABCecon.com

George Anstey

NERA Economic Consulting (UK) ( email )

15 Stratford Place
London, W1C 1BE
United Kingdom

Marsh & McLennan Companies - London Office ( email )

15 Stratford Place
London W1C 1BE
United Kingdom

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