The CMA energy market investigation, the well-functioning market, Ofgem, Government and behavioural economics

Abstract:

The GB retail energy market, and Ofgem's regulation of it, have been controversial. In 2014 Ofgem asked the CMA to investigate. Its Provisional Findings of July 2015 take a similar approach to that of Ofgem since 2008. Both find weak customer response allowing unilateral market power, and support various regulatory interventions. The specific characterisation of the CMA's benchmark well-functioning market, with its requirement that firms have efficient costs, seems attributable to Ofgem. Possible reasons for similarities include Ofgem's involvement in the process before the CMA reference, policies of previous Governments including an initial strategic Steer to the CMA, and the increasing influence of behavioural economics especially via the OFT. Now the present Government has put in place a new Steer, without emphasis on consumer behavioural issues and with strong emphasis on deregulation rather than regulation. Experience and thinking about behavioural economics also continue to evolve.

The paper discusses implications for the CMA.