Into the unknown: navigating principles-based regulation in unpredictable times

On 1 August our latest update to the Energy Supplier Compliance Portal went live and included changes to the compliance landscape seen during May, June and July this year. Among other developments, Ofgem’s final proposals as part of the second phase of its Supplier Licensing Review (SLR) are reflected in this latest update, as well as new protections for prepayment meter (PPM) customers at risk of self-disconnection. These changes introduce new principles and Standard Licence Conditions (SLCs), as well as changes to existing SLCs.

On 25 June 2020, the regulator published its statutory consultation outlining final proposals of its SLR. While it intends to take forward many of its policy proposals, Ofgem has opted to withdraw prescriptive requirements for suppliers to protect 50% of customer’s credit balances and 50% of environmental scheme costs. Instead, it will introduce a Financial Responsibility principle for suppliers to take action to reduce potential mutualisation costs in the event of their failure. Still, the regulator has said that it may consult separately on prescriptive requirements in the future. Suppliers must also serve their customers efficiently and effectively, and identify and mitigate likely consumer harm.

While the changes are expected to promote a consistent approach among suppliers, the sharing of good practice by Ofgem and indeed, suppliers themselves, is likely to become the norm. In its final proposals for protecting PPM customers from self-disconnection, Ofgem cites good practice examples such as tailoring the frequency of checking customers usage to identify those most in need of support. For example, the regulator notes that some suppliers use 14-day non-vend reports for customers registered on the Priority Service Register, compared to 28-day non-vend reports for the rest of their customer base. Ofgem’s final proposals on self-disconnection also set out requirements around financial support for PPM customers. Suppliers will be required to offer emergency and friendly-hours credit to all PPM customers, with the regulator leaving it up to suppliers to determine the appropriate amount on a case-by-case basis. Ofgem has said that it welcomes further sharing of good practice, including in relation to providing alternative timely support where it is not technically feasible to offer credit functions.

New principles such as the requirement for suppliers to be financially responsible and have sufficient operating capacity to serve customers effectively and efficiently can be compared to the Standards of Conduct (SoC) (Standard Licence Condition 0/0A in the supply licences), which require suppliers to treat customers fairly. We have seen [EB1] several compliance cases and enforcement action with reference to this overarching requirement, alongside other more specific breaches.

Ofgem’s SLR will introduce further obligations, including a requirement to be open and cooperative with the regulator. This is a message that Ofgem has repeated in its compliance and enforcement work in recent years, where there is an expectation that suppliers self-report to the regulator instances of non-compliance, or likely non-compliance, as soon as they are identified. Taken together, Ofgem’s SLR proposals should create a more level playing field for consumers (and the wider industry) by formalising the minimum acceptable standards a supplier should meet.

In the run up to the next update, due to take place in November, we will be incorporating good practice with respect to the electricity and gas supply licence obligations. As the regulator is the ultimate decider on what is and what is not compliant, we will set out lessons learned from previous compliance engagement and enforcement, information from Ofgem’s licence guides, as well as trials and research undertaken or commissioned by the regulator. We also include good practice recommendations from those who work closely with Ofgem and are positioned to advise the regulator based on its own research and interactions with consumers, for example Citizens Advice.

As part of the August update we ran our biannual webinar on key compliance developments in the year to date, notably those discussed here. We also looked ahead to planned changes during the next six months such as Ofgem’s microbusiness proposals and programme milestones on Faster Switching and Half-Hourly Settlement. The webinar can be accessed via the Energy Supplier Compliance Portal. If you are interested in a free trial of the online portal, please contact e.bill@cornwall-insight.com

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