Is it time to re-examine the regulatory model?

With questions being asked over the UK’s infrastructure by the Treasury, green groups, the National Infrastructure Commission (NC) and citizens’ groups, pressure for public ownership from the Labour Party and calls for local authorities to have a bigger role, the regulatory structure has come under more pressure than at any time since utilities were privatised three decades ago.

Think-tank Sustainability First has tried to bring the consumer viewpoint into that debate with the launch of a discussion document – Circling the Square: Rethinking Utilities Regulation for a Disrupted World.

Speaking at a launch of the document, Cathryn Ross, previously chief executive of water regulator Ofwat, noted that between the Treasury’s review of innovation and the National Infrastructure Commission’s consultation on regulation it added up to “a pretty fundamental existential re-evaluation of post-privatisation institutional arrangements”.

Adam Scorer, chief executive of fuel poverty charity National Energy Action, noted that ‘essential’ meant two things: both the ability to access a service like energy supply and the ability to buy enough of it to meet your needs. “Optimising access to markets is not the way you achieve social justice for people who can’t access those markets,” he said.

When it came to building a new regulatory framework, he agreed that markets had their place but warned over a setting up a new regime where, “you leave the poor and vulnerable so far outside the scheme that you need a policy intervention” so market functions were later distorted.

James Richardson, NIC, said technology, social changes and the environment were “three big drivers of change in the regulatory system”.

He asked, what is the definition of fairness? “You shouldn’t use utility regulation as a wedge for changing social organisation,” – a point echoed by Scorer, who said there was an inevitable challenge about where responsibilities lie between the market, government and the regulator, he said, and social policy had to be funded from government. Richardson noted that technological change had been good for the environment – the cost of delivering a low-carbon system in 2050 looked much lower than it did at the time of the Sterne report, for example. But some things about new technology were “bad for fairness” and new rules may be needed. Ross noted regulators’ past focus on ‘average customers’, but said, “there is no such thing as an average customer. Distributional effects matter to customers – and have been ignored”.  In the era of Google and Facebook and the disaggregation of customers, di regulators have the right tools?

Sustainability First director Sharon Darcy spoke about some of the broad choices on regulatory structure. Was there still a space for sector-specific regulators, or would it be better to cover several utilities (but which?) and split the regulators by functions – eg consumers, data, networks, etc?

“We need a vision and a roadmap”, not just evolutionary steps, Darcy said. Sustainability First’s new document, Circling the Square: Rethinking Utilities Regulation for a Disrupted World, addresses that issue.

The document points out that “the basic arrangements for utility regulation remain little changed since privatosation”30 years ago and it is “well overdue an overhaul”.

It says that regulation “fundamentally out of step with consumers’ lived experience. It is “rigid, siloed, cyclical, focused on the non-existent average customers and on price”. The customer experience, in contrast, is dynamic, cross cutting, cumulative, individual and collective, not only interested in price.  In addition, regulation is mainly negatively framed around failures and individual detriment.

Regulation has drivers for change, it says: short-termism; climate change and resilience; technology; legitimacy (narrow economic regulation is at odds with underlying politics); and social compacts (fairness).

The group does put forward proposals for evolutionary change but it also makes more radical proposals: negotiated agreements with consumers and other stakeholders; merging regulators or using a reformed CMA; de-merging regulators into functional or geographical roles; remove economic regulators and replace them with ‘system regulators’; and think radically about the structure of government departments and the role of officials.

 

Interdependence and resilience

Launching a scoping consultation on resilience in infrastructure the NIC said Services such as utilities, transport and telecommunications are becoming increasingly sophisticated and interdependent. While this has enabled efficiency improvements and better delivery,
it may also mean infrastructure systems are more vulnerable to threats or hazards and disruption could have wide reaching impacts. The role of the National Infrastructure Commission includes considering what action government should take to ensure that infrastructure can cope with future changes, disruptions, shocks and accidents.

The key outcome from the resilience study is expected to be a framework to consider resilience across economic infrastructure, for application during the next National Infrastructure Assessment.

The scoping consultation closes on 1 April and will be followed by a more detailed consultation reporting on 2020.

Further reading

Public Accounts Committee: sector regulators are failing consumers

Circling the Square: Rethinking Utilities Regulation for a Disrupted World

National Infrastructure Commission: resilience study scoping consultation 

Encouraging innovation in regulated utilities

 

First published in the April 2019 issue of New Power Report

 

 

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