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Ofgem Under Attack Again

ofgem logoOfgem are under attack again. That in itself is not a surprising headline these days with the energy regulator seemingly at odds
with its own mission statement and calling in the Competition and Markets Authority to do a job many feel is their own responsibility.

This latest dissection of Ofgem’s thought patterns however is interesting in that its entire scope underpinned the thinking of Ofgem and not a few other organisations such as Consumer Futures (Citizens Advice) and the FSB (Federation of Small Businesses).

The ‘thinking’ was that the energy market would be a whole lot better if fewer tariffs were offered. Period.

Those not familiar with the energy market could be forgiven for being seduced by this policy of simplification, after all unnecessary complication tends to lead to problems. But was this ‘complication’ really unnecessary?

Simple economics

In direct discussions through 2013 it was difficult to get the proponents of simplified tariff structures to understand that simplification meant less choice and less choice meant more uniformity in pricing and uniformity in pricing meant greater risk aversion and greater risk aversion meant collective price increases.

In truth that is simple economics. However all too often simple economic principles are missed by those one would hope would be in a position to grasp such concepts.

Now though Ofgem have issued a mea culpa, and in doing so their merry band of backers in the push for simplification have lost their ‘protector’.

This admission of ‘failure’ only goes so far but we will hopefully see the back of this misguided policy and instead focus all of our energies on tackling the root causes of the problems in the energy market and not consumer choice.

Criticising Ofgem’s latest folly, Steven Littlechild, former head of the energy regulator explained:

“On the face of it, poor Ofgem seems to have had an unerring reverse-Midas touch. Every time it has proposed to intervene to improve competition, it has reduced rather than increased switching.”

Manyana, manyana

In their defence Ofgem claimed:

“It is too early to say what effect these new measures are having, but we have developed a rigorous approach to reviewing their impact and will publish an assessment of these reforms next summer”

However Dermot Nolan, Ofgem Chief Executive admitted:

“I actually think there is a strong logic to having four tariffs, there is almost an element of resetting the market, but what I want to make quite clear is I do not see that as a long-run solution

“I do not see a restriction of having four tariffs being set by the regulator … in the medium-long term, I really don’t. I do not think it’s the answer.

“Having said which, I support it now, I think it’s necessary to ensure people have a simpler set of choices and rebuild trust in the market.”

At its launch, Alistair Buchanan, another former Ofgem head, had optimistically claimed that the reforms, which he had crucially supported would be:

“The most far-reaching shake-up of the retail energy market since competition was introduced [and would] put an end to consumers being confused by complex tariffs [and] usher in a simpler, clearer, fairer and more competitive energy market for all consumers”.

It hasn’t and wouldn’t.

Perhaps Nolan was nearer the mark when he admitted that far from energy suppliers being the sole cause of the market’s ills that Ofgem themselves were just as culpable for presiding over the fall in customer trust levels and for their substandard policy decisions, saying:

“It has been mooted that maybe the problems in competition are worsened by regulatory interventions. I would like to see… that looked at by the CMA.

“If there are problems in competition that regulatory intervention has worsened I want that studied too, I want the CMA to give a view on that”.

In truth the CMA will provide a view whether Ofgem want it or not, indeed the regulator is not likely to come out of the investigation with honours, not least because of this latest foolish policy folly.