With customer engagement, technological innovation and regulatory uncertainty all on the rise, these are ‘interesting times’ for utility companies. Utility Week reports from this year’s congress.

Regulation and customers. These two fundamental building blocks define the utilities industry, shaping the way companies are structured, the way they compete, the returns they are allowed to make and the way they approach improvement.

But in today’s industry conditions, the relationship between regulation and customers has come under unprecedented stress. It has become prominent in political debate and is susceptible to vigorous forces for change emanating from shifting societal and environmental interests as well as new technologies. This has made the interplay between regulation and customers unstable.

The upshot is that utility companies – which stand in the middle of the regulator-customer dynamic – have been hit by price caps, downward pressure on returns and new rules to mitigate any negative impacts from technological innovation on social equity.

This was the context for presentations and debate on the first day of Utility Week Congress 2017.

Talk of regulatory change is often accompanied by complaints from companies that regulatory uncertainty makes it impossible for them to plan and invest for the long term. But although some time was given over to this well-worn argument at Utility Week Congress, Ofgem chairman David Gray made an early move to quash such mutterings, insisting that “most businesses don’t have certainty. They live in worlds of uncertainty and they deal with it… I think in the utilities industry, to pretend that you can provide certainty, just because you have regulation, is a non-starter”.

Instead, Gray suggested, there should be more active and open dialogue between regulators and companies, about the ways in which markets and consumer interests are changing. He said this would help both businesses and regulators move away from trying to pursue long-term “no-regrets” bets and instead develop mechanisms for making frequent incremental changes, or to “trying-out” new ideas.

Gray’s comments reverberated in later sessions where the urgent need for a cultural revolution in utilities, so that “fast failures” are accepted as a positive characteristic of innovative business, was identified by speakers from water, energy and technology firms.

Some speakers suggested that organisational leaders need to be more proactive about demonstrating their appreciation of failures as learning opportunities if this cultural revolution is to take hold. Steve Robertson, chief executive of Thames Water, admitted this is a challenge he is currently tackling in his company, whose prominent recent failures on leakage and pollution earned the firm record fines.

A more “principles-based” approach to regulation across energy and water should allow greater opportunity for testing new ideas for services or operational efficiencies, while the launch of a regulatory “sandpit” by Ofgem was welcomed as a positive way of testing the accessibility of the energy market to new business models and technologies.

In the drive to enable utilities innovation and market transformation, however, speakers did not forget the needs of vulnerable customers. Prescriptive moves from Ofgem and Ofwat to ensure that customers less able to engage in markets are protected, were universally welcomed. And there was agreement that regulators and companies alike must remain alert to the potential for new strains of vulnerability to arise as markets adapt to the demands of water scarcity, decarbonisation, digitisation and more.

Price caps

Long-running uncertainty about the nature of the price caps which have loomed over energy suppliers for months was blown away over the course of the two days of Utility Week Congress 2017.

On the first day, Ofgem revealed its plan to extend the existing price cap for prepayment meter customers to one million additional vulnerable customers  this winter. As day two got underway, the government published its draft bill for a wider energy price cap, covering all default tariffs.

Speakers representing suppliers weren’t shy of addressing these developments at Utility Week Congress.

Eon UK chief executive Michael Lewis set out his belief that a market-wide cap carries more risks of creating long-term detriment than promise for consumer benefits. He insisted that a blanket cap “will reduce customer engagement in the market; it will reduce choice and it will reduce the opportunity for new innovative competitors to come into the market”.

He stressed: “We don’t have a price problem in the UK market. What we have is an engagement problem”. And it the engagement problem that Eon has moved to overcome by bringing an end to the use of standard variable tariffs (SVTs) as default tariffs for customers with smart meters. It is also encouraging the rest of its domestic customers to take on fixed price deals. He welcomed Ofgem’s decision – in tandem with its price cap announcement – to allow suppliers greater flexibility in the type of tariff customers are rolled on to when their fixed price product comes to an end.

Fellow speaker Angela Hepworth, corporate policy and regulation director at EDF Energy, agreed that more work on engagement, rather than price caps, should be the priority. In the face of government resolve to see a blanket cap, however, Hepworth said it “should apply to all suppliers; it should be time limited; it should be set at a level which as far as possible retains the competitive dynamic in the market; and it must enable suppliers to recover their reasonably incurred costs”.

The government’s draft bill, published after Hepworth spoke, does provide for some of these requirements, including a preliminary plan to remove the cap in 2020. However, offering regulatory experience from outside the sector, Jonathan Oxley, group director for competition at Ofcom, warned that, once a regulator “goes in, it is very hard to get out”.

View from the speakers

Steve Robertson, chief executive, Thames Water

“We need to be realistic about the efficacy of water transfer as a solution to water scarcity in its own right…  The issue for me in terms of water transfer is that if we don’t look at it in conjunction with storage, when you actually need that water, it won’t be there.”

Mel Karam, chief executive, Bristol Water

“The gap between the technology available and the capability of utilities is increasing and we’re not catching up yet.”

David Gray, chairman, Ofgem

“The way consumers interact with the market changes, so the way we protect them will need to change too.”

Professor John Loughhead, chief scientific adviser and director general, BEIS

“Innovation will be key in reducing costs and other barriers.”

Heidi Mottram, chief executive, Northumbrian Water

“Is unfair that people don’t think of the water industry as natural innovators. The industry’s modesty doesn’t help either. We’re innovative for the environment and customers.”

Jonson Cox, chairman, Ofwat

“I’m not hearing issues about the price of water, service levels, or operational performance. I’ve not heard anything on that. What I hear about is distrust of offshore structures, distrust of high leverage, distrust of very high dividend payout ratios, and inevitably distrust of management pay.”

Patrick Erwin, policy and markets director, Northern Powergrid

“No one expected solar to get delivered as quickly as it has.”

Peter Haigh, managing director, Bristol Energy

“Customers are savvy and expect more. Trust has to be earned and it’s hard. As a start-up we had some problems with customer service at first and it wasn’t as good as we knew it was capable of being.”

Steve Mogford, chief executive, United Utilities

“What strikes me is that utilities tend to live in a state of fearful anticipation more than any other sector, questioning what will happen next.”

Frank Mitchell, chief executive, SP Energy Networks

“The biggest challenges lie ahead of us in the next 10 years and are not behind us.”

Stephen Bird, managing director, South West Water

“If you can engage with customers in the slickest and most efficient way, the better it will be.”  

Duncan Burt, head of system operations, National Grid

“The hardest challenge will not be systems or processes but the people.”

Key Points

1.    Digital technologies are reshaping customer relationships and challenging the way markets are regulated.

2.    Communications between utilities and regulators must be more transparent.

3.    There is no static definition of what “good” competition looks like in energy supply – constant changes in the market’s commercial dynamics generate new sources of potential consumer detriment.

4.    Localism will dominate utility business models in the future.

5.    Climate change will define future approaches to infrastructure resilience and resource management.

6.    Utilities and their regulators need to do more than talk about creating innovation cultures, and demonstrate real belief in “fast failure” as a positive organisational attribute.