UK: Regulation of the Gas and Electricity Industry

Last Updated: 23 April 2002
Article by Sanjeet Johal

The Gas Act 1986 created the Office of Gas Supply (OFGAS), the independent Government watchdog for the gas industry, to secure that all reasonable demands for gas were met, to secure effective competition in the gas industry and to protect consumers both in terms of prices and in terms of the quality of services. The Office of Electricity Regulation (OFFER) had a similar role to play with regard to the supply of electricity.

As a result of the ever closer interaction between gas and electricity companies, OFGEM (the Office of the Gas and Electricity Markets)was formed in June 1999 and now regulates the gas and electricity industry in England, Scotland and Wales. In Northern Ireland responsibility lies with the Office for the Regulation of Electricity and Gas (OFREG).

OFGEM’s aim is to bring choice and value to all gas and electricity customers by promoting competition and regulating monopolies and everything that OFGEM does is designed to promote and protect the interests of gas and electricity customers. It does this by attempting to create conditions which allow companies to compete fairly, and which enable customers to make an informed choice between suppliers. It also licences and monitors the gas and electricity companies and takes action where necessary to ensure compliance.

OFGEM’s main tasks are to:

  1. Promote competition in all parts of the gas and electricity industries by creating the conditions which allow companies to compete fairly and which enable customers to make an informed choice between suppliers; and
  2. Regulate areas of the gas and electricity industries where competition is not effective by setting price controls and standards to ensure customers get value for money and a reliable service.

OFGEM is governed by the Gas and Electricity Markets Authority and its powers are provided for under the Gas Act 1986, the Electricity Act 1989 and the Utilities Act 2000. The Authority determines strategy and decides on major policy issues. It is made up of non-executive and executive members. The Authority may regulate its own procedures and has adopted Rules of Procedure to provide for this.

Competition in Supply

The substantive provisions of the Competition Act 1998 (the Act) came into force on 1 March 2000 and OFGEM, together with the Office of Fair Trading, will enforce the Chapter I and II prohibitions. Chapter I prohibits agreements between undertakings, decisions by associations of undertakings or concerted practices which have the object or effect of preventing, restricting or distorting competition in the UK or any part of the UK and which may affect trade within the UK; Chapter II prohibits conduct by one or more undertakings which amounts to the abuse of a dominant position in a market in the UK or any part of the UK and which may affect trade within the UK.

There are two EC directives which are directly related to the electricity and gas industries. These are the EC Directive concerning common rules for the internal market in electricity (96/92/EC) and the EC Directive concerning the common rules for the internal market in natural gas (98/30/EC) which address a number of issues:

  1. the role of public service obligations in a competitive market;
  2. open, non-discriminatory and transparent rules of access to electricity and gas networks;
  3. transparency of vertically integrated electricity transmission or distribution companies and gas transportation companies, for example through separate accounts;
  4. the interaction of electricity networks across the EC; and
  5. the possibility of making special provisions for undertakings adversely affected by long term take or pay contracts when competition is introduced.

Since 1999 all customers in Great Britain have been able to choose the company from which to buy their gas and electricity supply. The competitive market has brought considerable savings. The average gas customer on a standard tariff can save up to £60 a year by switching from British Gas to a competitive supplier, and in electricity, savings vary between £20 - £35, depending on the area in which they live.

Generation

The New Electricity Trading Arrangements (NETA) were introduced in March 2001 and allow companies to contract competitively with each other in forwards and futures markets. In its first few months of operation, wholesale prices were 20-25 per cent below those seen under the previous system.

Generation costs make up a large proportion of a typical bill, so by introducing competition to this area OFGEM is creating the opportunity for even lower prices for customers.

Main Priorities

OFGEM has outlined six priorities in respect of protecting and advancing the interests of consumers through the regulation of the gas and electricity industries. Within these there are various projects and areas of work which aim to deliver these priorities.

  1. Social and Environment Action
  2. Regulation of Monopoly Businesses
  3. Efficient Trading in the Wholesale Electricity and Gas Markets
  4. Managing the move to Competitive Supply Markets
  5. Work on Industrial Structure and Competitiveness
  6. Work to Develop OFGEM as an Efficient Regulator

Although OFGEM is principally an economic regulator, it is also required to have regard to the environmental effects of its work and of the industries it regulates. The Utilities Act 2000 introduced a new principal objective and new duties into the Gas and Electricity Acts. OFGEM’s duty is to carry out its functions in the manner best calculated to protect the interests of consumers, wherever appropriate by promoting effective competition.

Energywatch

Energywatch (The Gas and Electricity Consumers Council) is the independent consumer organisation set up by Parliament in November 2000 with the merger of the Gas Consumers Council and OFGEM’s regional offices to protect the interests of all domestic, commercial and industrial energy consumers.

Energywatch is funded by a grant from the Department of Trade and Industry (DTI), which is derived from the licence fee that energy companies have to pay the government, and it is therefore accountable to the DTI for the work that it does and the money it spends on behalf of consumers.

Energywatch provides advice and information to gas and electricity consumers, represents their views and is the first port of call for customers who have not been able to resolve complaints with gas or electricity companies. Energywatch is able to refer complaints to OFGEM for possible enforcement action if it considers this necessary.

In addition, Energywatch has responsibility for the management of the OFGEM Price Comparison Services code of practice. Currently there are five companies that have signed up to the code.

A Memorandum of Understanding sets out how Energywatch and OFGEM work together to ensure the protection of consumers’ interests.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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