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Ofgem finds its teeth in battle with National Grid

2 June 2009

At a time when Ofgem's confidence to let market forces prevail appears to be at an all time low, the recent decision by the Competition Appeals Tribunal (CAT) to uphold the regulator's finding that National Grid acted in breach of competition law must be welcome.
The endorsement of the CAT should be taken by Ofgem - and other regulators such as Ofwat - as support for intervention in markets rather than increasing regulation.
Indeed, the view could be taken that if the challenge to make greater use of the provisions in competition law is not taken up, there could be merit in separating the regulators' competition and regulatory functions.
In the electricity market, there can be no doubt that Ofgem has over the past few months encouraged increased regulatory intervention as a substitute for competition law. Somewhat ironically, the vehicle for seeking to introduce regulatory changes is in a number of areas National Grid, in its capacity as system operator for the electricity transmission network.
In February 2008, Ofgem found National Grid had abused its dominant position in the market for domestic gas meters, in breach of UK and EC competition law. National Grid was fined £41.6 million and ordered to bring the infringements to an end by agreeing changes to the terms of contracts with the gas suppliers. Significantly, this was Ofgem's first competition law infringement decision.
Perhaps unsurprisingly given Ofgem's relative inexperience and the size of the fine, National Grid appealed against 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." This should give Ofgem the confidence to be bolder in enforcing competition law in the future.
The ability of other meter suppliers to compete with and win business from National Grid should improve when the contracts between National Grid and five of the six big gas suppliers - accounting for approximately 22 million meters - are amended to essentially give gas suppliers greater flexibility to procure their meters from competitors of National Grid.
This could lead to significant cost savings for gas suppliers that should ultimately be passed on to consumers. It could also spur product innovation, with the earlier introduction of smart meters, for example.
The success of this decision for Ofgem is perhaps tempered slightly because the fine was reduced to £31 million. The reduction was made as a result of Ofgem's "prior knowledge" of the offending provisions in the "gas meter contracts". This knowledge was, to some extent, imputed from 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 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 say that the terms would breach competition law was considered to merit a reduced fine.
The CAT was at pains to stress that the ex post and ex ante functions should not be looked at in silos. It was not appropriate for Ofgem to "ignore" information received in the regulatory context in its competition law analysis.
Although the CAT was keen to make it clear that this does not set a precedent, it does provide useful authority to businesses that there could be value in raising the awareness of the competition authority of business activities that may be considered a competition law risk. Such action would not, however, remove or sanitise away competition law risk.
Ofgem and other sector 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 extra, 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 to encourage such investment is to intervene as little as possible in the normal commercial operation of those markets.
Joanne McDowall is a lawyer at UK law firm Shepherd and Wedderburn specialising in regulation and competition.
Source: Disconnector

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