Move to "Principles" Regulation for the Retail Energy Market

United Kingdom
  • On 18 December 2015, Ofgem published a consultation on the future of retail market regulation, setting out its commitment to rely more on general principles than detailed rules. Ofgem considers that this will protect consumers’ interests by:
    • focusing efforts on good consumer outcomes and more effective and comprehensive consumer protection;
    • creating room for innovation, so suppliers can be more flexible in how they meet the needs of customers; and
    • putting a much greater onus of suppliers, especially senior management, to treat consumers fairly.
  • Ofgem’s initial focus is the domestic retail supply market, where concerns around supplier behaviour and the volume of prescription are particularly acute. Ofgem stated that the applicability of the approach to other parts of the retail market (for example, non-domestic suppliers, Third Party Intermediaries and Non Traditional Business Models) will be considered at a later time.
  • Ofgem wishes to see supply licences that are much shorter, more accessible and clearer about what is expected of suppliers. It proposes to analyse the supply licences in stages, so that key areas can be prioritised and lessons can be learnt as the project progresses. The reform of Standard Licence Condition 25, governing sales and marketing activities, has been chosen as the priority for reform because:
    • removing the prescriptive elements may help suppliers to innovate; and
    • the condition already contains a set of principles that suppliers must follow, as well as over five pages of prescriptive rules that relate only to face-to-face activities, meaning that Ofgem will be able to go through the process of assessing whether its policy objective can be carried out by existing principles without the need for prescription.
  • Other areas that Ofgem mentions that it will be considering include how best to ensure consumer protection in light of the Competition and Markets Authority’s proposed removal of the “simpler choices” Retail Market Review rules and its approach to effective billing.
  • It is interesting to note the influence of financial services regulation in this consultation (both in terms of the move to principles-based regulation and the specific measures that Ofgem is considering, such as a training requirement in advance of becoming a licensee to ensure the spirit of the principles-based rules is understood) and in the Department of Energy and Climate Change’s recent consultation on amending Ofgem’s enforcement powers (which borrows ideas such as powers to commission special audit reports and to “seize and sift” documents). This may in part reflect the alignment of the regulation of energy market abuse with the regulation of financial market crimes as a result of REMIT.

Next Steps

  • Interested parties have until 11 March 2016 to respond. Ofgem aims to publish its response to the consultation and a statutory consultation on the modification of Standard Licence Condition 25 by the end of June 2016.
  • Ofgem will be sending invitations to consultation workshops, and setting up a series of working groups, in due course.

Further Information

To view Ofgem’s consultation on The Future of Retail Market Regulation, please click here.

To view DECC’s consultation on Strengthening Enforcement in Gas and Electricity Markets, please click here.