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Critique of CMA direct benchmarking analysis

In the course of its energy market investigation, the CMA used the results of its direct benchmarking analysis in support of its provisional decision on remedies. The analysis estimated overcharge by the six large energy firms by comparing their average weighted tariffs to direct debit tariffs of Ovo Energy and First Utility, after adjusting for differences in cost to serve by payment method. The CMA also used the same methodology to estimate the basis for the level of the proposed prepayment price cap.

As part of our work for ScottishPower, Oxera reviewed the CMA’s analysis using data made available by the CMA, particularly with a view to establishing whether the benchmark used in evaluating the tariffs charged by the six large energy firms was a fair benchmark price that could be expected to prevail in a well-functioning market. Oxera’s analysis found that the benchmark used by the CMA did not adequately consider factors such as the low profitability of benchmark companies and exemptions from social and environmental obligations granted to them. Once appropriate adjustments to the CMA’s benchmark analysis were made, Oxera found that there was no longer any evidence of overcharge by the six large energy firms during the benchmark period.