The role of Ofgem
44. In our July Report we expressed surprise
that Ofgem had decided to conduct its own inquiry into the energy
markets, having stated only a matter of weeks before that "Britain's
competitive market in energy is working".
We nevertheless welcomed Ofgem's investigation and adjusted our
own inquiry accordingly. Our inquiry revealed that many aspects
of the market were not working effectively. While we are pleased
the regulator agreed with our assessment in many cases, we are
concerned that it appeared to require our inquiry to goad it into
action. We are particularly concerned that until recently Ofgem
appeared indifferent to the concerns of smaller business consumers.
45. When we asked the Minister's view on the
regulator's recent performance, he stated:
I think it is fair to say that certainly among our
many Members of the House there have been some concerns expressed
about Ofgem and some issues around confidence in Ofgem [
I very much hope that Ofgem will be able to restore the level
of public confidence that it needs to have. I think there is every
indication in terms of the way in which it has dealt with this
particular probe that it will achieve the level of confidence
the public need. I would not for a moment say that, at least among
MPs, it can hold its hand on its heart and say it is where it
ought to be. I hope as a result of this probe it will get there.
46. We were pleased that the
regulator's initial findings report and suggested recommendations
sought to address many, though not all, of the concerns set out
in our earlier Report. Indeed, its probe raised some issues that
had not come to light in our inquiry. For this we give Ofgem credit.
However, it is clear that in 2008 the regulator has been slow
to respond to rising concern over the functioning of the energy
markets. We hope that in 2009 and onwards, the new Energy and
Climate Change Committee will not have to take the lead in setting
the regulator's agenda as we have found ourselves doing on too
47. We also express concern
that the new consumer representation processes and the plethora
of bodies involvedConsumer Direct, companies' complaints
procedures, the Energy Ombudsman, Consumer Focus and Ofgem itselfare
opaque. Moreover, they risk reducing Ofgem's awareness of issues
of concern to consumers, such as the recent complaints about direct
debits. Ofgem and Consumer Focus will need to have close and frequent
contact. Otherwise, the combination of a regulator which often
needs to be prompted to take action, and a lack of effective procedures
for bringing shortcomings to the attention of the regulator, will
be a recipe for poor representation of consumer interests.
48. However, we also believe that if Ofgem is
to regulate the UK's gas and electricity markets effectively,
then it must have the means with which to do so. Alistair Buchanan
told us "the Enterprise Act or the Competition Act is quite
often a very clumsy toolusing a sledgehammer to crack what
may be a big or a small nut".
Accordingly, the regulator told us it is pursuing the possibility
of acquiring a "market abuse power".
This would place a condition in companies' licences that prohibited
conduct that amounts to an abuse of a position of substantial
market power in the wholesale gas and electricity markets. Ofgem
is able to adjust companies' licence conditions as it sees fit,
though they can appeal to the Competition Commission (CC). The
regulator sought this power in 1999, but it was rejected by the
CC. A recent evaluation
by the Commission stated: "the CC's decision not to support
the introduction of the market abuse licence clause in 2001 seems
well-justified by subsequent market developments in Great Britain.
Equally, however, Ofgem's view that such powers can be necessary
in some circumstances also seems to be supported by subsequent
the Government now investigates whether Ofgem should have additional
powers to guard against market abuses, particularly in the wholesale
electricity markets, and how these powers might be granted.