OREANDA-NEWS. March 14, 2016.  Remedies proposed this week by the Competition & Markets Authority (CMA) to increase competition in the GB energy market suggest regulatory risks for the sector are easing and pressure on supply margins will be lower than under the CMA's original proposals, Fitch Ratings says. The proposals cover England, Scotland and Wales but not Northern Ireland,

The key change from the CMA's provisional findings in July 2015 is the decision to drop proposed price caps for 70% of domestic customers on the default standard variable tariff. Instead price controls are only planned for four million households that use prepayment meters. As well as affecting a much smaller number of households, these controls will only be temporary until utilities complete the installation of smart meters around 2020.

We believe that the substantial fall in wholesale gas prices since the CMA investigation was opened in June 2014 has lowered the risk of regulatory change, as the big-six energy companies have responded by cutting tariffs. This has restored some customer trust in energy suppliers from the low point in 2013, when the Labour Party proposed a 20-month freeze on all tariffs.

The rollout of smart meters with billing based on actual, rather than estimated, consumption, should gradually improve customer trust. But while the risk of significant regulatory changes has receded, it has not disappeared and there is the potential for even recent regulatory initiatives to be changed or scrapped. This is demonstrated by the CMA's decision to remove the four-tariff limit on energy suppliers that was only introduced in 2014. Regulatory risk could revive if there was a sharp rebound in gas prices, potentially pushing up energy tariffs.

Other remedies proposed by the CMA include the introduction of a database allowing competitors to contact customers who have been on default tariffs for three years or more with cheaper deals, and ending supplier termination fees, which prevent switching.

Centrica (A-/Stable) and SSE (BBB+/Stable) are the most exposed of the big-six energy companies to any regulatory change. UK residential supply accounted for 23% of Centrica's EBITDA and 17% of SSE EBITDA in FY15. Supply margins are volatile, reflecting wholesale gas costs, the level of consumption and the growth of independents (2016 market share 15.5% versus 2.6% in 2013). But the remedies proposed suggest less pressure and higher visibility of supply earnings in future.

After a consultation period, the CMA is due to publish final recommendations in June.