For Ofgem, it’s a matter of principle

And so to this week’s Utility Week Congress in Birmingham, where the future role of regulation is at the centre of debate. The conversation begins with Ofwat chief executive Cathryn Ross reflecting on the experience of PR14, now drawing to a close, which has overtly sought to remove the regulator from the dialogue between water company and customer. Ofwat has instead required companies to develop the best business plan they can, in consultation with their customers, and then put that forward to the regulator. While this approach has suited some companies more than others, it has certainly brought about a culture shift across the sector.

Now Ofgem is seeking a similar shift in its fraught regulation of energy suppliers. The energy regulator’s chief executive, ­Dermot Nolan, told delegates that Ofgem wanted to see a move over the next couple of years from prescriptive, intrusive regulation to a principles-based approach, centred on the principle of treating customers fairly.

This may or may not be a response to the criticism that has been aired in the early stages of the Competition and Markets Authority (CMA) inquiry, to the effect that Ofgem’s market interventions have themselves had negative consequences for consumers. It certainly learns from financial services, where the Treating Customers Fairly regime is well established, and is a world away from such interventions as the Retail Market Review, and detailed regulation governing the layout of an energy bill.

While there are necessarily significant differences in the regulation of monopoly and competitive sectors, the trend is the same. Both Ofwat and Ofgem are seeking to end prescriptive regulation, encourage companies to think deeply about what is in the best interests of their customers and take a mature and responsible approach to delivering that. In energy, the CMA inquiry would presumably set down some guidelines and recommend any necessary structural changes to the market.

It’s hard to argue with the direction of travel. Principles-based regulation is a sensible approach that encourages competitive and customer-centric behaviour. It can also create uncertainty and confusion among businesses more used to ticking regulatory boxes.  As congress chairman and CMA member professor Jon Stern pointed out, the regulatory regime must find a balance between predictability and flexibility. This will be the work of Ofwat and, perhaps more challengingly, of Ofgem over the months and years ahead.