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Government backs Ofgem's request for consumer compensation powers

Powers introduced under the new Energy Bill will allow the regulator to compensate consumers when energy companies break the rules.04 Dec 2012

The introduction of consumer redress powers in the recently-published Bill, which will implement the Government's proposals for electricity market reform (EMR), follows a request by the regulator, Ofgem, and a consultation in April.

"Ofgem has been campaigning for consumer redress powers, with banking by consumer groups, and we welcome the Government's decision to grant us these new powers which will help Ofgem to better protect consumer interests," said Sarah Harrison, senior partner for enforcement with the regulator. "These powers will allow us to direct compensation to consumers who have been adversely affected by licence breaches."

Ofgem currently has the power to fine energy companies up to 10% of their annual turnover for regulatory breaches. Those requirements are principally set out in the Electricity Act 1989, Gas Act 1986 and regulated company licenses, and include rules on sales practices and complaint handling.

Companies can voluntarily choose to compensate consumers that lose out as a result of their wrongdoing. The Energy Ombudsman can also force the firms to pay consumers up to £5,000 if it deems complaints about "energy bills, sales activities, problems arising from switching supplier or with the supply of gas and electricity" to be legitimate. Consumers may also seek redress for some aspects of wrongdoing, such as breach of contract, through the courts.

Energy law expert Matthew Collinson of Pinsent Masons, the law firm behind, said that the new powers proposed in the Bill were "much broader" than simply a power to grant compensation.

"As the Bill stands, Ofgem would be able to require regulated businesses to take any steps Ofgem considers necessary to remedy breaches of the regulatory framework or to prevent them from happening again," he said. "This can include, but is not limited to, awarding compensation of up to 10% of the regulated business' turnover, although the 10% limit also includes any penalties imposed as distinct from compensation."

However, he added that it was likely that the amount of any compensation awards would need to be balanced against the "clear need" for companies to invest more in power infrastructure.

"This will be a question for Ofgem in framing its statement as to how it will exercise these new powers, which it will be required to publish and comply with if the Bill is enacted in its current form – as with much of the Energy Bill, the devil remains in the detail," he said. "Despite being filed under 'Miscellaneous' in the 'Supplementary' chapter of the Bill, the evolution of these powers is potentially significant and should not be lost amongst more headline-grabbing elements of the Bill such as contracts for difference and the capacity mechanism."

The Energy Bill (195-page / 788KB PDF) is intended to deliver certainty for investors and protect consumers. It proposes a new system of financial incentives designed to ensure that low-carbon forms of electricity generation can compete fairly in the marketplace, backed with a 'capacity market' aimed at ensuring that consumers continue to benefit from reliable electricity supplies at an affordable cost.

Alongside the new Bill, Ofgem published a report setting out a range of possible options for the Government to take in relation to the security of the UK's gas supply. The report concludes that disruption to consumer gas supplies remains "highly unlikely", but warns that increasing dependency on international markets could ultimately have consequences both for security of supply and energy prices.

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