Citizens Advice response to the Ofgem working paper about energy price cap operating cost review benchmarking
We believe that the operating cost review should not be done in isolation but alongside other potential changes that will impact consumer outcomes. These include the potential introduction of targeted financial support, often referred to as a social tariff, the treatment of acquisition tariffs and any reform of the retail price cap.
These all will affect any trade-offs between competing objectives and so, at a minimum, the assessment of these trade-offs needs to be tested against different scenarios. For example, the introduction of a social tariff would be expected to improve consumer price protection and so would affect assessment of the potential trade-off between price protection and enabling competition.
Notwithstanding this, we have a number of observations on the suggested approaches to benchmarking and their high-level assessment:
● The reasons for using lower quartile costs appear to remain valid and so clear evidence is required to move away from this approach.
● The key tradeoff is between the primary objective of protecting consumers and promoting sustainable competition. A better understanding of the impact on competition of a looser price cap is needed to resolve this remaining trade-off.
● Across all approaches, efficiency should be expected to be improving over time. The process for updating the operating cost allowance, once set, should include an ongoing efficiency reduction.
● We support approaches which pass through benefits to customers with smart meters, where these are fair and proportionate.