At a time when the confidence of the office of gas and electricity markets (Ofgem) to allow market forces to prevail appears to be at an all time low, the recent decision by the Competition Appeals Tribunal (CAT) to uphold its finding that National Grid acted in breach of competition law must be a welcome victory for the regulator.
The endorsement of the CAT should be taken by Ofgem – and other sectoral regulators such as Ofwat – as support for intervention in markets rather than relying on increasing levels of regulation.
Indeed, the view could be taken that if the challenge to make greater use of competition law provisions is not taken up, there could be merit in separating the competition function from the regulatory function of the regulators.
In the context of the electricity market, there can be no doubt that Ofgem has over the past few months encouraged increased regulatory intervention as a substitute to competition law. Somewhat ironically, the vehicle for seeking to introduce regulatory changes is in a number of areas National Grid in its capacity of system operator for the electricity transmission network!
In February 2008, Ofgem found National Grid had abused its dominant position in the market for the provision of domestic-sized gas meters, in breach of both UK and EC competition law. As a result, National Grid was fined £41.6 million and ordered to bring the infringements to an end by agreeing changes to the terms of the contracts with the gas suppliers. Significantly, this was the Ofgem’s first competition law infringement decision.
Perhaps unsurprisingly given Ofgem’s relative inexperience and the size of the fine, National Grid appealed the decision to the CAT. In what may be described as a resounding victory for the regulator, the CAT stated “the main finding of abuse set out in the Decision was…undoubtedly right.” Going forward, this should give Ofgem the confidence to be bolder in enforcing competition law.
It is hoped that both the market for the supply of gas meters and consumers will benefit from the terms of this decision.
The ability of other meter suppliers to compete with and win business from National Grid should be improved when the contracts between National Grid and five of the six big gas suppliers – accounting for approximately 22 million meters – are amended to remove the foreclosure effect and essentially provide the gas suppliers with greater flexibility to procure their meters from competitors of National Grid.
This could lead to significant cost savings for gas suppliers which should ultimately be passed to consumers and also to increased product innovation for example with the earlier introduction of smart meters.
The success of this decision for Ofgem is perhaps tempered slightly by the fact that the level of fine was reduced quite significantly to £31 million, representing a 28 per cent reduction.
Interestingly, the reduction was given as a result of Ofgem's “prior knowledge” of the offending provisions contained in the “gas meter contracts”. This knowledge was, to some extent, imputed from ongoing discussions that took place between the regulator and National Grid in 2002 at the time when Ofgem was introducing competition into the market for the supply of domestic-sized gas meters and in so doing, ending the utility company’s monopoly in that market.
During that time, National Grid effectively sought approval from Ofgem on the proposed terms of the contracts. The fact the regulator had failed to stop National Grid in its tracks by advising the terms would breach competition law was considered to merit a significant reduction in the fine.
The CAT was at pains to stress the ex-post and ex-ante functions should not be looked at in silos and so, it was not appropriate for Ofgem to “ignore” information received in the regulatory context in its competition law analysis.
While the CAT was keen to make clear this does not serve as a precedent, it does provide useful authority to businesses that there could be real value in raising the awareness of the competition authority of business activities which may be considered to pose a competition law risk. Such action would, however, not remove or sanitise away competition law risk.
Ofgem and other sectoral regulators should take confidence from the CAT's decision to uphold the Authority's original finding and seek to rely, to a greater extent, on the application of competition law, instead of introducing additional, unwarranted, regulation.
At a time in our energy markets when it is critical to encourage new investment to achieve security of supply, it is the view of many that the most effective way of encouraging such investment is to intervene as little as possible in the normal commercial operation of those markets.
Joanne McDowall is a lawyer specialising in competition and regulation law at leading UK law firm Shepherd and Wedderburn LLP.