Utility Week expert view: Karma Ockenden

“Regulators don’t exist in a vacuum: their jurisdictions can overlap; their duties can be outside economics; and they are affected by political and public opinion”

Academic experts and regulators past and present gathered in London last week to look back at the 30 years of regulation since the 1983 Littlechild Report advocated price cap regulation and the RPI-X model – and to look forward to what happens next.

First, the key features of British utility regulation were hammered out. These came to include: RPI-X regulation of privately owned assets; independence from government; a focus on consumers; a preference for competition and markets; and support of light-handed regulation.

There was a relatively rosy period when all this ticked along pretty nicely. But after the financial crisis of 2007/08, pressures began to mount. These relate particularly to higher prices and affordability; public and political confidence in utilities, monopolies and markets; gaping investment needs; and climate change-related challenges.

So the model adapted. Social and environmental as well as pure economic goals were factored in, and regulators’ duties extended to touch on the likes of sustainability and resilience.

The watchdogs in turn responded to these developments with various innovations, including: tweaking RPI-X; menu regulation; shifting the focus to outcomes rather than outputs; and most recently, incentivising customer engagement.

But that’s all old news. The interesting thing is where regulation goes from here. Further change seems inevitable and three important issues stand out.

First, fingers crossed, there will be more emphasis on empowering customers. Ex-regulator and consultant Stephen Littlechild would like to see what he calls the “single buyer model” – where regulators make all the decisions – replaced by more customer/company negotiated settlements on the grounds that these produce better outcomes with less costly processes.

Those who doubt customers’ abilities to make such important decisions should peek at a paper out last week from the “Regulatory Conduct Authority” (which Littlechild describes as “a little regulatory mischief and entertainment on April 1”). It suggests “behavioural economics shows that some errors made by regulators are persistent and predictable” and that “behavioural biases can cause regulators to misjudge important facts or to be inconsistent”. Japes aside, there is a serious message: if customers are fallible, so are regulators. Or as Littlechild notes: “If behavioural economics offers a generally plausible picture of consumers but not of regulators, where is this regulatory phone box into which the imperfect consumer Clark Kent steps, to emerge as Regulatory Superman?”

Back to reality and Wics is the only utility regulator anywhere near taking the plunge on a negotiated settlement so far; its recent draft determination for Scottish Water is consistent with a deal struck between the company and consumer representative the Customer Forum. But while Ofwat and Ofgem fast-tracked a disappointingly small number of companies in recent price control processes, they have at least put more emphasis than ever on customer engagement.

What could follow from empowering the consumer? Shorter price review periods, for a start. Littlechild says three-year deals are palatable for customers and companies. Wics’ draft determination for Scottish Water is instructive here: the 2015-21 control has a mid-point review in 2018, so to some extent comprises two three-year periods.

A second key issue for the future of regulation concerns the independence and autonomy of regulators. There needs to be acknowledgement that regulators don’t exist in a vacuum: their jurisdictions can overlap with those of other parties; they now have objectives and duties that take them outside the strictly economic sphere; and they are affected by (and will respond to) outbursts of political and public opinion. Specifically, the relationship between government and regulator needs to be thought through. According to economic regulation specialist Chris Bolt, there are three ways this could go: either regulators work together to reclaim ground lost to politicians; they give up any claim of independence and become government ­agencies; or they muddle on “in good British fashion”.

The last two options are dangerous. Perhaps we need to distinguish more clearly between regulatory autonomy and regulatory independence. The University of Bristol’s Tony Prosser says regulators are not autonomous, because the government will always play an ultimate role. But they should be independent, “to keep the government honest”.

Finally, going forward there will be movement in the long-standing debate over whether sectoral regulators have the right balance of ex ante and competition powers – or more specifically, whether they use these levers wisely. We should start to see the scales tip more in favour of competition powers since the Competition and Markets Authority (CMA) opened for business on the first of this month and since the UK Competition Network (an alliance of UK sector regulators and the CMA) was set up to promote the use of competition powers across all sectors.

Little chance, then, of a dull moment.