Utilities regulation ‘struggles’ to keep up with pace of change

An overhaul of utilities regulation is “well overdue” but should not maintain existing structures, according to a new discussion paper from thinktank Sustainability First.

The paper, entitled Circling the square: Rethinking utilities regulation for a disrupted world, says that regulation must adapt to cope with growing challenges like climate change.

It says that “short term affordability is frequently given precedence over environmental goals” by utility regulators partly due to the existence of separate environmental regulators.

The underlying principle of post-privatisation regulation that it should concentrate on a single or principal “market failure” of excessive pricing increasingly looks “over-simplistic”, says the paper.

“Government, regulators and consumer groups can each show a short-term bias towards putting off price increases at the expense of the long term.

“Regulators can struggle to keep up with the pace of change or show sufficient ‘flex’ to adapt to emerging social/scientific evidence.

“The systemic risks and interdependencies that environmental and climate issues bring will require greater cross-sector and inter-company co-operation and collaboration than today.”

The paper, which will be submitted to the National Infrastructure Commission’s review of regulation, proposes a new social contract to address concerns about the legitimacy of utilities regulation by promoting accountability and transparency.

Concrete steps include:

• The government issuing regulators with more explicit and consistent guidance, such as strategic policy statements, with a pledge not to interfere once it has done so
• Clearer and more transparent alignment of economic, social and environmental goals within regulatory decision making
• Agreeing a set of basic criteria and principles to assess more fundamental future options for regulatory change
• Developing a “sustainable licence to operate” for the utilities sectors
• Giving parliament and its select committees a clearer role to hold both government and regulators to account on delivery of the strategic goals of utility regulation
• Reforming regulatory and company boards to include consumer and employee champions on boards and/or elected representatives

But the paper stops short of advocating, at least in the short term, a “radical structural change” of the current regulatory structures, such as merging the existing regulators into a “super” multi-utility regulator.

It says: “Although many of the proposals for regulatory redesign may in time have real merit, it may be premature to introduce them now.”

Instead the authors advocate greater consistency and collaboration where appropriate via augmented cross-regulator arrangements.

Sharon Darcy, director of Sustainability First, said: “Many options for radical change have been put on the table, including the creation of ‘super’ multi-utility regulators and a move to systems regulation.  Many of these proposals for radical regulatory redesign may in time have real merit.

“However, change which isn’t sufficiently future proofed against a full range of public interest outcomes not only brings the costs of disruption but also risks new rigidities in the system and further failure for the utility landscape.”

The NIC is seeking views on how the current utilities regulation system is working and whether it has “systematically failed or succeeded” in several key areas.

The deadline for responses to the call for evidence is Tuesday 12 April.