Response to Ofgem’s Future Retail Market Regulation
Published On: 31st March 2016
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Gemserv’s experience and understanding of the regulation and governance of energy markets is extensive. Many of our people come from the industry it serves, people that have a deep and comprehensive understanding of the regulated energy sector and practical experience of the regulated businesses that operate within that market. We therefore trust that our response will provide Ofgem with useful insight and an objective perspective as it moves forward to remove unnecessarily prescriptive regulation, i.e. to deliver licences that are shorter, more accessible and clearer.
Our assessment is that energy supply licences are already (to some extent) a mix of broad-based, narrow-based and prescriptive rules. It is only in recent years that licences have become more prescriptive in nature, driven ostensibly by environmental policy and consumer detriment concerns – SLC 31D (white label tariffs) is a case in point. Our analysis is that, by concentrating on those Standard Licence Conditions (SLCs) that are still prescriptive, and assessing those in terms of key criteria, it could be possible to reduce licences by around 50% by volume. This of course depends upon the level of risk that Ofgem is prepared to take and the need to ensure that the exercise is not simply a ‘lift and shift’ of obligations into other places, such as within codes.
We have responded to Ofgem’s specific questions in Appendix 1, focusing on the overall principle based framework (where we can add most value) rather than commenting specifically on SLC 25. In summary, we make four key points:
We agree with Ofgem’s approach, one that recognises there is a place for broad and narrow principles, as well as prescriptive rules. The challenge is where and how to strike that balance and the need to ensure consistency of application. We offer an assessment approach to help.
Prescriptive rules should be focused where there is a need for organisations to come together in order to support common/shared services and outcomes, or where the risks are simply too great (e.g. consumer harm).
An incremental approach to more principle based regulation is necessary so that behavioural adjustments can be made by energy companies and for Ofgem to equally adjust its methods to reduce the risk of negative customer impacts. Ofgem’s proposed phased priority based approach is therefore a good way forward to help build trust and confidence.
We agree with Ofgem that developing the appropriate framework is important. A greater shift to principle based regulation should be assessed against agreed policy areas and clearly defined criteria. Criteria will help avoid the potential for regressive harm to energy market interoperability and to customers themselves. Moreover, it will strike an appropriate duty of care with respect to market interoperability and investor confidence.
We agree there is room to deliver licences that are shorter, more accessible and clearer and importantly, an opportunity to facilitate greater levels of innovation and facilitation of new business practices. However, there are clearly risks with any change, especially one of such significance.
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