BEIS promises review of regulators’ duties

The government has promised a review of utilities regulators’ statutory duties this year and to align the processes in the water and energy sectors for appealing against watchdogs’ decisions.

A policy paper on economic regulation, published on Monday (31 January) by the Department for Business, Energy and Industrial Strategy (BEIS), said a review of the utilities regulators’ statutory duties would be launched in 2022.

The exercise will consider recommendations outlined in a 2019 report submitted by National Infrastructure Commission (NIC) on economic regulation to government.

The paper said the review will also reflect the commitment in the government’s Principles for Economic Regulation, published in 2011, that it will take opportunities to simplify and clarify regulators’ objectives.

It added that the UK’s existing regulatory framework needs “updating and strengthening” in the face of emerging and long-term challenges it was not designed to address, such as net zero and increasing digitalisation.

The report also said the government intends to develop proposals that will align the processes between sectors for appealing to the Competition and Markets Authority (CMA) against regulatory decisions.

While in the water sector, the CMA is required to entirely redetermine regulators’ decisions, it only has to consider specific issues raised by appealing parties in energy.

These differences, which the report says are typically a “by-product of sectoral policy development”, create confusion among investors: “This lack of consistency has the potential to make it difficult for investors involved in multiple sectors to navigate the process.

“Increasing consistency will likely make the UK a more attractive prospect for investment.”

Areas under the spotlight in this review will be the uncertainty in the water sector caused by the full redetermination process for price controls, which may not align with the specific issues underpinning the appeal and can be “time consuming and delay investment”.

However, the report said this greater alignment between regulatory processes is unlikely to “fundamentally alter” the CMA’s wider role in the appeals processes.

The report said economic regulators are already working together in a taskforce supported by the UK Regulators Network (UKRN) to consider potential scope for achieve greater consensus on the approach to setting the Weighted Average Cost of Capital (WACC).

The aim of this exercise is to work “towards greater consistency, and towards a common methodology” when setting the WACC across sectors where differences remain with determining certain components, such as the risk-free rate: “Ultimately, this will encourage greater confidence in the price control process across sectors for consumers, businesses, and investors, and in turn, to help encourage sustainable investment.”

The government has also asked Ofwat to produce a bespoke review of competition for the provision of infrastructure in the water sector.

Alongside the review, the government has written to utility regulators setting out the government’s overarching priorities and highlighting opportunities for cross-sectoral collaboration via the UKRN, where these are relevant to the pursuit of their statutory duties.

Sir John Armitt, chair of the NIC, said that while the government had accepted some of his body’s recommendations, it had “missed” opportunities by not taking forward more.

He said: “It is now over two years since we made these recommendations to government. We recognise that there have been significant issues in the regulatory space, not least for consumers facing rises in the price of energy, but this is a missed opportunity to ensure all regulators are straining every muscle to help achieve net zero and deliver for consumer interests. We need real policy changes rather than the promise of further reviews.”