UK's Labour party proposes regulatory reform to secure gas and electricity price freezes

by King & Spalding

In the UK, political campaigns for the next general election in May 2015 are gaining momentum. At a recent Labour party annual conference, Labour's leader, Ed Miliband pledged that gas and electricity bills would be frozen for all UK households and business for 20 months if Labour wins power. To honour his pledge, a Labour Government would have to rush in emergency legislation through the House of Commons that would freeze prices until January 2017. Labour estimates a price freeze would cost energy firms in the UK £4.5 billion.

Regulation of Gas and Electricity Supply

Gas and electricity prices in the UK are not regulated, and instead are determined by the competitive supply market. However, the UK's Competition Commission and the Financial Conduct Authority (until recently the Financial Services Authority) have an oversight role in ensuring that there are no abuses by energy suppliers which could lead to price distortions.

The Office of Gas and Electricity Markets (Ofgem), the UK Government's regulator for electricity and downstream natural gas markets, is tasked with ensuring that the UK's gas and electricity wholesale and retail markets are competitive. Ofgem's authority does not extend to price regulation.

Gas and electricity suppliers in the UK are subject to a level of regulation pertaining to their conduct and the terms and conditions of supply, including with respect to marketing to consumers, resolution of disputes, and the ability of consumers to switch suppliers and billing.

Gas and Electricity Markets

The UK gas and electricity supply markets opened up to full competition in the 1990s. Today there are about 20 energy suppliers in the UK. However over 90 percent of domestic energy is supplied by the Big Six: (i) Centrica; (ii) SSE; (iii) E.ON; (iv) EDF Energy; (v) RWE Npower; and (vi) Scottish Power. The Big Six also hold the biggest market share in the commercial gas and electricity markets.

The UK gas and electricity markets are amongst the most competitive and liberalised in Europe. Despite recent price hikes, gas and electricity prices in the UK's domestic and commercial markets remain lower than many of the major economies in Europe including France, Germany, Spain and Italy.

Labour's Proposals

If Labour wins the May 2015 general election it will push through emergency legislation to impose a 20-month price freeze on domestic and commercial gas and electricity bills. During that period, the Labour Party would implement sweeping reforms to the sector which include:

  1. Reducing the power of the "Big Six" energy companies to increase competition in the sector;
  2. Replacing Ofgem with a regulator that is more consumer-friendly and has "more teeth";
  3. Energy companies would be required to split generation and sales;
  4. Gas and electricity would be sold in an "open pool" allowing other companies to enter the market to boost competition and keep prices down; and
  5. introduction of a simple new tariff structure to replace the existing range of tariffs offered by energy companies.

Industry's Reaction to Proposals

Energy companies have predictably reacted badly to Labour's proposals. Major concerns have been raised that they would lead to a lack of much needed investment in infrastructure, leading to power cuts. Comparisons have been drawn with California, where alleged price fixing led to an electricity crisis and widespread black-outs. Energy companies have also warned that jobs may be put at risk. Industry experts fear that energy suppliers may inflate prices in the run up to the election as they don't want to take a chance on the voting outcome.

 Nina Howell
 +44 20 7551 7543

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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