Regulation: Softly, softly or punchy, punchy?

This week saw a (very) comprehensive response from Ofwat to criticisms from the four companies referring its price review determinations to the Competition & Markets Authority (CMA).

This process was always going to be an unwelcome distraction to both regulator and regulated when there were so many other priorities at the dawn of the price control period. Now there is the added complexity of Ofwat establishing its position on regulatory commitments during the response to a pandemic.

In its submission to the CMA, Ofwat has maintained its tough stance. It says that while the appellants have tried to frame their objections as evidence of a failure to fulfil statutory duties, the truth is they simply don’t agree with the regulator’s decisions. Unsurprisingly, Ofwat is standing by its determinations and repeating its mantra that what is lacking is a willingness to find efficiencies.

This uncompromising attitude has been apparent during other Ofwat communications of late. A blog from chief executive Rachel Fletcher last month warned water companies that the public would be watching their responses to coronavirus carefully. She listed a series of important questions for the sector including whether they are “planning to deliver their promises on the environment or looking to get out of them at this time?” Shortly after the blog was published, this sentence was edited to end on “environment”.

Since then, Ofwat certainly cannot be accused of being indecisive. It has acted swiftly in making a series of code changes to protect both the retail market and wholesalers. The speed of this response, and the fact that the concerns of wholesalers seem to have been taken on board, appears to have been welcomed across the board.

I mentioned last week the contrast between the fast action on the water retail market and the lingering debate over whether the energy supply market should be expected to shoulder the burden of bad debt on behalf of the wider industry.

Ofgem is yet to make its position clear on this matter (at least in public) but there are growing calls from suppliers for the wider industry to share the pain – and seemingly some acceptance of that from networks.

This will be a delicate situation for Ofgem to approach and is to a certain extent is dictated by government’s position on supporting the market. Interestingly, it seems that these discussions have awoken in the department for business, energy and industrial strategy (BEIS) a new-found interest in the complexities of energy supply. Sources tell Utility Week that civil servants’ knowledge of the sector has increased exponentially in lockdown. It will be interesting to see how this affects the industry-regulator-policy maker dynamic going forward.

Returning to the theme of communicating, Ofgem appears to have so far taken a less confrontational approach than Ofwat – a fact that has not gone unnoticed among companies. The sense is that Ofgem has got its message across that it is willing to be flexible and trust companies to do the right thing if some obligations are relaxed. In contrast, Ofwat has been keen to remind companies of their existing responsibilities.

As one Utility Week source put it: “There is a feeling that with Ofgem, there is an adult relationship – acknowledging that there are things at play here that are bigger than all of us and that we all have a part to play. Whereas with Ofwat, they see themselves as the adults and the sector as some recalcitrant teenager.”

As with so many of the strategies being employed at speed during the response to coronavirus, we will not be able to gauge their effectiveness for some time to come.

What is certain is that a willingness to put aside previous differences and act collectively on the huge challenges presented by coronavirus will be an essential part of the sector’s role in rebuilding the UK economy.