New Thinking: The CMA on governance Part 1: Codes

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New Thinking: The CMA on governance Part 1: Codes

Matthew-photo tinyThe CMA on governance Part 1: Codes

Matthew Lockwood, IGov Team, 10 July 2015 

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Not surprisingly, most of the initial reaction to Tuesday’s provisional findings by the Competition and Markets Authority (CMA) on its energy market inquiry has focused on overcharging of sticky customers and on a ‘safeguard’ tariff as a remedy. However, buried deep at the bottom of the document are some interesting arguments about the governance of the regulatory framework for energy. One is about the transparency of regulatory decision making (especially the relationship between DECC and Ofgem) and the other is about the governance of energy industry codes. We are looking at these issues over two separate blog posts.

The more straightforward of these is codes. Industry codes provide the detailed rule book for how markets and networks operate commercially and technically. They are a crucial but often overlooked element in the system of energy governance. As identified in IGov research on network governance, in the EPG’s original submission and oral evidence to the CMA, codes are highly problematic because there is often a wide gap between the goals of high-level policy and what is possible according to the codes. For example, while promoting sustainable development is part of Ofgem’s remit, this goal is absent from objectives for almost all codes. At the same time, the arrangements for code governance make it hard for new, smaller actors to get changes through the modification process, while large incumbents dominate.

The CMA provisional findings document raises concerns about complexity and governance problems, arguing that:

‘existing governance and modification arrangements can lead to inconsistent or delayed outcomes, and create material burdens on parties, in particular smaller ones, which could undermine their incentives to promote changes’.

It takes the view that despite the reforms following the 2008/09 Code Governance Review there are still problems. The CMA’s central concern appears to be the limited ability of Ofgem to influence the process of changing codes in ways needed to support competition or innovation that will benefit consumers (they cite the example of Project Nexus in gas).

Interestingly, in the hearings held with the CMA, both DECC and Ofgem acknowledge that they have concerns about codes governance (Ofgem has also recently consulted on whether the current arrangements are working). In their evidence Ofgem said that they think the central problem with code governance is that it may be preventing innovation and adoption of new business models, and that is difficult for new entrants to get views heard and accepted through a modification. They also argued that current arrangements ‘reinforce tensions between incumbents and new entrants rather than alleviating them’. Like CMA, Ofgem also noted the problems they have faced in trying to introduce major changes to codes, despite the creation of the Significant Code Review process (citing the electricity balancing SCR as an example).

The CMA does not propose any potential reforms in its findings. In giving evidence, Ofgem suggested a the idea of more proactive code administrators who would do the scoping work and consult industry on proposed modifications, citing the case of Australia, where the Energy Market Commission plays such a role.

Many actors now seem to take the view that code governance is dysfunctional and the time is ripe for a rethink. The question is how thorough-going and fundamental that rethink will actually be. At IGov we are working on a systematic analysis of codes and code governance, and will publish this analysis and some options for reform shortly. We also plan to hold a workshop to discuss the issues in the autumn.

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