Regulatory No Man’s Land

In the latest of a series of articles exclusively for Utility Week members, Maxine Frerk – former Ofgem executive and a member of Utility Week’s editorial board – asks whether the regulators have responded quickly and decisively enough on the implications of the coronavirus outbreak. As well as assessing whether their reassurances go far enough, she examines which parts of the regulatory programme could safely be put on hold.

With the country in lockdown over Covid-19, it is hard to think or indeed write about anything else. From a regulatory perspective, the big questions are what this means for utilities companies’ current obligations and for the policy landscape going forwards. In both cases, perhaps inevitably given the speed of change, there are still large question marks.

From as far back as the end of February I was talking to network companies who were putting in place contingency plans and separating out control centres, recognising the risks to their operations as this situation took hold. That was when there were less than 20 cases in the UK and before the prime minister started talking about hand washing.

On 13 March Ofgem said it was working closely with government to ensure consumers were protected and that they expected industry to take this seriously. It was made clear that all regulatory requirements remained in place for all licensees.

On 16 March the PM gave his first daily briefing. At this point the government strategy was still one of herd immunity.

On 19 March Ofgem again reiterated government’s leading role and said that industry had agreed measures to maintain supply and protect customers. At this point chief executive Jonathan Brearley said the regulator would be “pragmatic” in its approach to compliance and that companies “should not be afraid to do the right thing for their customers” and more specifically, “where companies can demonstrate that compliance issues result from prioritising efforts to protect customers and security of supply we will take account of this in any decision”. A similar statement was issued by Ofwat.

On 23 March the PM announced we were moving into lockdown with an end to all non-essential contact.

On 27 March Ofgem issued an update pointing to the government guidance and the commitments given by suppliers around protection of vulnerable customers. It also confirmed that it was pausing publishing any new policy documents other than those legally required while it reviewed its forward work programme.

While the spirit behind Ofgem’s comments on compliance is clearly right, the challenge for companies is that it remains very unclear what this means in practice. For all licensees there will be a range of obligations that will be hard for them to meet in the current situation.

One example that has attracted some attention is the smart meter rollout obligations. Suppliers were wanting to pull back from installations, responding to the public mood and concerns about employee safety, before 13 March but were seemingly being told by the department for business, energy and industrial strategy (BEIS) that the rollout should continue. The obligation on suppliers is to “take all reasonable steps” so there is flexibility in the regime but it is unclear how Ofgem will apply that test if companies are going beyond government guidance.

On the networks side, the companies have agreed with government that they will cut back on planned works and focus resources on emergencies. What is not clear is how Ofgem will then treat a reduction in asset health indices or poor performance on other metrics such as reinstatement. This applies in particular where penalties or incentives are hard-wired into RIIO with no room for discretion.

Ofgem cannot be expected to set out at this stage precisely how it will deal with each particular obligation. Its promise to be pragmatic is probably as good as the companies will get but it then comes down to trust. Hopefully alongside these short official statements there are some grown up conversations happening around what it means in practice.

Perhaps the biggest risk here lies in the fact that Ofgem is closely following government’s lead. At one level that is right – government has the relevant information on the virus and access to experts that Ofgem does not. However, Ofgem cannot tell companies that they are responsible for managing the risks to their employees and their customers – but then not support them if they consider they need to go further than government guidance would suggest. That is where the “pragmatism” has to come in.

For example, on 16 March Ofgem finally postponed the RIIO2 oral hearings – the day before they were due to start and following significant representations from senior management in the companies who felt the risks that they were being asked to take by attending the hearings were inappropriate. In at least one company the senior team had stopped any face to face meetings a week earlier but were still expecting to have to come together for the oral hearing. The reason for Ofgem’s slowness to move on this was almost certainly down to the need to stay in line with the government policy at that time – which finally shifted on 16 March.

At present the companies – like most of the country – are intent on doing the right thing. The networks have a strong safety culture (who else do you know that always reverse parks and holds the handrail on the stairs?). Ofgem should be clear that it will respect their judgment on how to balance the safety requirements for their staff and customers, provided they can clearly articulate the basis for those judgments. The Ofwat equivalent statement talks about requiring companies to demonstrate how their operations have been impacted by the coronavirus and how they made their decisions – which seems much closer to what is required. The risk otherwise is that compliance is judged with the benefit of hindsight.

The other lacuna is on the policy front. While Ofgem put out a statement on 31 March (to meet its legal obligation) stating that its draft Forward Work Programme still represented its best view, it has also signalled that it is, rightly, doing a wider review. It acknowledged that its regulatory processes place resource requirements on the companies. It specifically talked about looking at how it would run its consultations.

However, absent a timescale or clear process, or indeed any sense of how fundamental that review might be, there is something of a regulatory vacuum.

Ofgem is right to focus on the urgent matters of consumer protection related to the crisis. There are some programmes that really won’t harm from being delayed. For example, the fact that Ofgem has agreed to the ESO’s request to delay elements of the Targeted Charging Review (TCR) until April 2022 will be a cause for celebration in a number of quarters and sensibly brings the timing into line with other changes.

Steps to improve competition (such as the faster switching programme) could also safely be delayed without any short-term customer impact. On the other hand, the RIIO price controls have a set timeline that they have to meet. Having participated in an Ofgem RIIO2 working group recently where everyone was continuing to debate the niceties of different forms of uncertainty mechanism without mentioning Coranavirus, it did seem rather surreal. But that work does need to continue. However, Ofgem should be clear – even if government plays it down – that the economic impacts of the virus creates a whole new set of uncertainties for RIIO2 that need to be considered.

The category of projects that is perhaps most problematic is those associated with decarbonisation which Ofgem had only recently signalled as a priority. Given the threat of climate change it is right that this strand of Ofgem’s work continues. While the level of industry engagement may have to be scaled back, the Ofgem team should use this time wisely to continue their thinking on these critical issues.

In the context of de-carbonisation Ofgem has talked about the need for agile and adaptive regulation. The current crisis will put that to the test.