Ofgem’s warning to Scottish Power last week – to improve their customer service in the next three months or be faced with a selling ban – is a bold move. It’s a big statement from the much-maligned energy regulator that it’s accepting market forces have failed to provide the incentives needed to ensure good behaviour from the big energy companies. Instead, it’s stepping in with a large stick.
Now I’ve heard many arguments for deregulation, for less interference and for the market to ‘be allowed to work itself out’. All of these, unsurprisingly, from senior representatives of the Big Six (Scottish Power, SSE, E.on, Npower, British Gas, EDF), who argue that unintended consequences of regulatory action cause more harm than the issue the regulation meant to address.
At a recent conference, Sara Vaughan, E.ON’s strategy and regulation director claimed it is now spending 70% more on mandated projects than in 2012 and pointed to the 435 page-long energy supplier licence conditions as a symbol of the overregulation they face. This, she argued, hampered innovation, tied resources up in bureaucracy and inane box ticking, and stopped suppliers becoming customer centric as they were forced to become regulation centric instead.
At the same conference, Dermot Nolan, Ofgem’s still-new CEO, stated clearly he’d like to see regulation moving towards a principal-based, rather than prescriptive model, a goal which this latest move seems to contradict.
So why have Ofgem chosen to flex their muscles now, and in this way? In its announacement, senior partner Sarah Harrison stated, ‘In a properly functioning market we would expect companies to compete keenly on service.’ Emphasis there on ‘properly functioning market’.
Given its precarious position in the industry, with suppliers calling for it to be defanged and Labour’s populist claim that it’ll be abolished in favour of a stronger, harsher regulator, Ofgem is doing its level best to show that it is essential in representing customers’ interests, and that it can do so effectively.
Following similar action in June, warning Npower to reduce customer complaints or face a telesales ban, this latest salvo highlights a move away from the fines and negative rhetoric Ofgem once relied on to keep suppliers in line. By threatening its customer acquisition, Ofgem isn’t endangering Scottish Power’s livelihood, but it is undermining its competitiveness and their reputation in a time of falling profits and negative press. Couple this with the fact that public slapdowns such as this always cause a surge in customers switching away from the guilty party and the potential consequences are even more severe.
Scottish Power will undoubtedly be scrambling to resolve complaints and answer the phones, just as Npower reformed its billing and services in a mere two months after receiving Ofgem’s ultimatum. But what does it say about our biggest energy suppliers if, when threatened financially like this, they can sort out in a matter of months what they have failed to do in the last three years of public scrutiny and customer dissatisfaction? Does this simply reinforce the argument that the market is fundamentally broken?
Labour’s argument that suppliers who misbehave should have their licences withdrawn is patently impractical: the smallest of the Big Six has at least 5 million customers who would need to be switched somewhere else. The argument that competition should play out is also flawed: energy customers are notoriously ‘sticky’, whether because they can’t be bothered, mistrust the purported savings of a switch or, most damagingly, because they are disillusioned with the energy industry as a whole and so think one supplier is as bad as any other.
So could this new kind of regulatory action be the answer? It’s not the sweeping, complicated reforms of the Retail Market Review, which ironically claimed to make the energy market ‘Simpler, Clearer and Fairer’ by cutting down the number of tariffs companies could offer, which in turn reduced choice. Nor is it a conclusive move towards light-touch, free market regulation, which Nolan admitted is only possible in a healthy market.
Rather, Ofgem is going for clear specific goals for individual companies, with the aim of cleaning up customer service, one mess at a time. Many may be clamouring for more drastic actions but, given their current tightrope act, Ofgem is probably choosing the most sensible, albeit cautious, path: straight down the middle.
The regulator’s actions now will determine its fate should Labour win the next election and the messages it sends out will have an impact on the ongoing Competition Review, which will have the power to recommend the breakup of the Big Six. For the energy juggernauts, their next moves in the face of the regulatory and public criticism will either prove they are able to adapt and grow in the customer-centric market or bring about their demise at the hands of the Competition and Markets Authority.
Whatever the outcome, Ofgem is treading a very fine line - but at least it’s moving in the right direction.
Vicky Lim is a conference producer at Marketforce, specialising in energy, utilities, and customer experience. She is currently working on Smart Metering Forum, The Future of Utilities and the 20:20 Customer Experience Summit. Check out her projects here.