Inactive Customers and Unilateral Market Power: The CMA’s Energy Market Investigation
Published by The Brattle Group, Inc.
The United Kingdom’s Competition and Markets Authority (CMA) recently completed a lengthy and in-depth investigation into the effectiveness of competition in the electricity and gas markets in Great Britain (GB). The key driver of the investigation was a concern that domestic energy prices were too high and profits of the six large energy companies, which supply 90% of GB customers, were excessive. There was a perception that the large, in particular vertically integrated, energy firms adopted a “rockets and feathers” approach to pricing whereby their retail prices were deemed to respond immediately to wholesale price increases, but came down very slowly when wholesale prices fell.
The investigation found, however, that increases in energy suppliers’ costs during 2009-14 were largely driven by increases in network, social, and environmental obligation costs. Wholesale costs had remained relatively flat over this period and profit margins had fallen sharply in 2010, when many of the six large firms had incurred losses, but profits rose steadily thereafter. Notwithstanding annual variations in profitability, the CMA found that the average EBIT3 margins earned by the six large suppliers during the five year period exceeded what it considered the normal rate of return that would be expected in a competitive market. Furthermore, the wide range in prices paid by domestic customers and the low level of switching were found to give rise to an adverse effect on competition through what the CMA described as an “overarching feature of weak customer response which, in turn, gives suppliers a position of unilateral market power concerning their inactive customer base”.
In this article, we examine the key findings of the CMA’s energy market investigation.
