Office of Gas & Electricity Markets

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Gas & Electricity Markets Authority

GEMA (Gas and Electricity Markets Authority) was established in 2000 to regulate the gas and electricity industries in Great Britain. Its principal objective is to promote effective competition, thus protecting the interests of consumers. OfGem is governed by GEMA.[1]

OfGem (Office of Gas and Electricity Markets) is the govt regulator for the electricity and downstream natural gas markets. It was formed in 1999 by the merger of the Office of Electricity Regulation (OffER) and Office of Gas Supply (OfGas).[2] See also Privatisation Policy/Electricity.

Legal rights: Thatcher's Electricity Act 1989 gave consumers minimal rights. OfGem was set up to promote "effective market competition", which would then automatically lead to consumers' interests being protected. The privatisation policy fantasised visualised that OfGem would "wither away" as effective market competition replaced any need for the state.

Price Caps: During the transition to a perfect free market, OfGem was permitted to cap prices by means of a formula known as "RPI - X".[3] This meant that energy companies could only raise their prices by the increase in the Retail Price Index (RPI), minus a percentage calculated by OfGem to reflect how much in efficiency savings (X) could be made, but also potentially allowing higher prices for investment.[4]

The theory was that the regulator would "wither away" as effective market competition replaced any need for state intervention, but during a transition period prices would be capped through the RPI–X formula. Minimal consumer rights were inserted into the Standard Electricity Supply Licences given to electricity companies.[5] For example, under Condition 27, a consumer cannot be disconnected unless all reasonable steps have been taken to let them pay bills (including a pay as you go meter), and pensioners may not be disconnected at all in the winter. However, this hasn't even come close to eliminating the extra deaths from cold weather (estimated at ~23,200 people in 2018/2019) from fuel poverty.[6] In practice, there has never been the possibility of abolishing govt involvement and, in law, there has been consistent recognition that energy remains a public service that is the responsibility of the state, whether owned by private shareholders or not.[7]

When energy companies go into insolvency, often indebted to the govt, they can be put into administrative receivership allowing that creditor greater control over the insolvency process.[8] Under the Standard Electricity Supply Licence, Condition 8, OfGem can impose a duty on energy companies to be a supplier of last resort.[9]

Timelines

  • 2000: GEMA: the Gas and Electricity Markets Authority was established to regulate the gas and electricity industries. Its principal objective is to promote effective competition, thereby protecting the interests of consumers. OfGem is governed by GEMA.[1]
  • Jun.1999: OfGem:
    OfGem-Office-of-Gas-and-Electricity-Markets-1999.svg
    the Office of Gas & Electricity Markets was formed as a non-ministerial govt department by the merger of OffER and OfGas.[10] It is funded by an annual licence fee levied on the licensed companies it regulates. ofgem.gov.ukArchive-org-sm.svg
  • Apr.1996: Privatisation: the gas and electricity markets were opened up to competition.[11]
  • 1989: OffER:
    OffER-Office-of-Electricity-Regulation.svg
    the Office of Electricity Regulation was a non-ministerial govt department established under the Electricity Act 1989. It was responsible for monitoring the activities of all licensed generators, transmitters and suppliers of electricity. Offer's remit was to promote competition in the generation and supply of electricity; to ensure that all reasonable demands for electricity were satisfied; to protect consumers' interests on prices, security of supply and quality of service; and to promote the efficient use of electricity. OFFER's statutory responsibilities covered England, Wales and Scotland.
  • date?: ... The Gas Consumers Council and the Electricity Consumers' Committees will also be merged.ref
  • Aug.1986: OfGas:
    OfGas-Office-of-Gas-Supply.svg
    the Office of Gas Supply was at the centre of the framework of regulations established under the Gas Act 1986. OfGas's chief responsibility was to monitor British Gas as a public gas supplier and, in particular, to protect the interests of British Gas's customers. A secondary function was to consider customer complaints; this was divided between OfGas and the Gas Consumers Council.[12] ofgas.gov.ukArchive-org-sm.svg
  • Jan.1984: GCC: the Gas Consumers Council was established as a licensing regime by the Gas Act 1986, which abolished the British Gas Corporation and established British Gas plc. The Act also established OfGas (Office of Gas Supply), as a regulator for the industry.[13] The GCC was abolished in Dec.1986.[14]
ToDo: link, link, link, link

Articles

  • Dec.09.2020: Ofgem backs down in battle over energy bills for households. Energy network companies will be allowed to charge households more than initially planned in the next five years after the regulator conceded ground in a battle over spending and profits. Also, the companies kept open the option to appeal to the competition watchdog and demand a more generous deal. OfGem said that companies should be allowed to deliver higher returns to investors. In the Water Industry, water companies appealed to the Competition & Markets Authority after OfWat proposed cutting their returns. The CMA sided with them, proposing a level of returns higher than OfGem is proposing. Emily Gosden, The Times. See also Consumer champion comes up short.
  • Dec.16.2018: UK householders pick up bill for bust energy firms. Watchdog criticised as bills rise by £80m to cater for 500,00 customers left in lurch by failed companies. Taxpayers face an £80m bill to cover the costs of transferring 500,000+ customers from bust energy firms, raising questions over whether the regulatory regime is fit for purpose. Citizens Advice said the costs of the unpaid renewable subsidy payments and supplier of last resort scheme would “inevitably be passed onto bill payers”. “OfGem’s review of supplier licensing must ensure that those firms who are unprepared or financially unsustainable are no longer able to get into this market.” OfGem said “To help raise standards, and to minimise the impact of supplier failure on the market, Ofgem has proposed new tests for suppliers wanting to enter the market.” Adam Vaughan, The Guardian.
  • Mar.08.2018: Ofgem must hold its nerve in contract talks. Yesterday, OfGem launched its consultation on the next set of price controls for energy network companies. Last year, we published detailed analysis which found that energy network companies are making £7.5bn in excess profits during the 8 years of the current price-control period. The causes of these excess profits are complex, but all stem back to the price controls that OfGem put in place from 2013. In short, key decisions went in the network companies’ favour — leaving consumers to foot the bill. OfGem has now signalled its intention to fix the problem for the future. Central to this is setting the cost of equity — the amount network companies pay their shareholders — at the lowest rate ever proposed for energy networks in Britain. We can expect energy networks to do everything in their power to protect the status quo and their excessive profits. In the face of what could be fierce and sustained opposition, OfGem needs to hold its nerve and see through these changes. Gillian Guy, Citizens' Advice, The Times.
  • Mar.06.2018: Tory MPs set to rebel over ‘rip‑off’ energy price cap. The govt is pursuing an absolute limit on prices set by the regulator OfGem, despite pressure from backbench Tories led by John Penrose for a relative cap, on the difference between a supplier’s most and least expensive deals. Sources suggested that the decision to introduce an absolute cap meant that loyal consumers stuck on default tariffs will lose out when the wholesale price falls. Amendments are being drawn up, with sources claiming that they are attracting support in parts of the Tory party "where there is ideological opposition to interventions in free markets". Penrose warned: "If the cap is set by a committee of regulators every 6 months, and wholesale prices fall, the gap... will get worse and because a price level has been officially blessed by the all-knowing Ofgem, it would embed and legitimise high prices". Sam Coates, The Times.
  • Feb.27.2018: Get ready for more energy price rises, warn industry analysts. Consumers have been warned to brace for a new round of energy price rises within weeks because suppliers are under pressure to pass on increases in wholesale costs. Bulb, one of the fastest-growing small suppliers, said it had seen wholesale costs rise by 11% since Jul.2017. Industry sources and analysts said they expect bigger players to break ranks shortly and announce price rises for millions of households. Robert Buckley, an analyst at Cornwall Insight, said that with the govt introducing legislation this week for a price cap for 11m households by next winter, the political stakes were very high for companies considering an increase. The previous round of price rises started with EDF in Dec.2016, followed by npower in Feb.2017 and 3 of the other Big Six suppliers shortly after. Utilita has also sent out letters this week warning of a price rise from Apr.01. New figures have also revealed the Big Six’s dominance of the Energy Market is weakening. According to OfGem, small and medium challenger suppliers now supply 21% of electricity customers and 22% of gas customers, up from 16% for gas and electricity at the end of 2016. Adam Vaughan, The Guardian.
  • Oct.12.2017: Theresa May's energy price cap could last until 2023. PM vows to fix ‘broken’ market as bill says regulator OfGem should limit electricity and gas suppliers’ most expensive tariffs. The energy bills of 11m households will be capped for up to 5 years, which the Conservatives claim could save people up to £100 a year. The draft energy bill compels OfGem to change the licence conditions so that energy suppliers are forced to cap electricity and gas prices. An existing, limited cap for 3m vulnerable households on standard variable tariffs – due to be extended to a further 1m in Feb.2018 – is set at £1,031, based on typical energy use. Citizens Advice welcomed the govt’s move to legislate. Richard Neudegg, head of regulation at uSwitch.com, said: “The proposal for a widespread price cap verges on negligence by the govt. They are sending out completely the wrong message by suggesting that a price cap will improve the retail energy market.” Ed Davey, Liberal Democrat MP and former energy minister, said competition would be harmed and prices would climb up to the cap. Michael Lewis, chief executive of E.ON, said: “A price cap ... will reduce engagement, dampen competition and innovation.” Adam Vaughan, The Guardian.

Energy Consumers’ Missing Billions. Research found that consumers are overpaying for energy networks by £7.5bn over the current 8-year price control. The report explains how this happened, what must be done to return this money to consumers, and how to avoid these problems in the future. If network companies fail to act, then govt must. Citizens Advice, Jul.12.2017.

References

  1. ^ a b Appointment to the Gas and Electricity Markets Authority. Press Release, Gov.uk, Jan.12.2011.
  2. ^ Who We Are: Gas and Electricity Markets Authority. OfGem. Accessed Mar.03.2019.
  3. ^ Electricity Act 1989. Maximum prices for reselling electricity. Legislation.gov.uk, Jul.27.1989.
  4. ^ "How We Happened to Sell Off Our Electricity", James Meek, London Review of Books, Sept.13.2012.
  5. ^ Standard conditions of electricity supply licence. Gas and Electricity Markets Authority, OfGem, Sept.30.2020.
  6. ^ Excess winter mortality in England and Wales: 2018 to 2019 (provisional) and 2017 to 2018 (final) Office of National Statistics, Nov.27.2019.
  7. ^ A Foster and others vs. British Gas plc. On the nature of a public service. Case C-188/89, EUR-Lex, Jul.12.1990.
  8. ^ Insolvency Act 1986. Sections 72C and 72D, and Schedule 2A, paras 9 and 10. Legislation.gov.uk, Jul.25.1986.
  9. ^ Supplier of Last Resort: Revised Guidance 2016. See also Citizens Advice Good Practice Guide: Supplier of Last Resort. OfGem, Oct.21.2016.
  10. ^ Sharp focus on fuel firms. via The Free Library, Coventry Evening Telegraph, Jun.17.1999. Original archived on Dec.08.2020.
  11. ^ Office of gas supply: Giving Customers a Choice. The Introduction of Competition into the Domestic Gas Market. National Audit Office, May.12.1999.
  12. ^ Records of the Office of Gas Supply, relating to the regulation of the gas supply industry from 1986. The National Archives. Accessed Jul.12.2019.
  13. ^ Gas Act 1986. Legislation.gov.uk, Jul.25.1986.
  14. ^ Gas privatisation: Gas Consumer Council establishment. The National Archives, Sept.28.2016.