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Legal and regulatory frameworks and sustainability in utilities

Following the publication of the Ten Point Plan for a Green Industrial Revolution and the National Infrastructure Strategyat the end of November, the past few weeks have seen a surge in interest in how well the duties of regulators, and their guiding strategic policy statements, enable essential service sectors to respond to 21st century challenges.

The next year will be a crucial time in determining economic regulation for the decades ahead.

It is therefore timely that we are today publishing the results of analysis that Slaughter and Mayhave been doing for Sustainability First over the past year, setting out what the legal and regulatory framework in selected utilities currently looks like in terms of sustainability.

Slaughter and May, with input from Sustainability First and other experts, have produced three sector notes (for energy, water, and telecoms) considering the extent to which the legal and regulatory regime could place constraints on the pursuit of sustainability issues in each.

This has been against a background framework note that defines sustainability in public utilities for the purposes of the project. This identifies six different dimensions: management of long-term intergenerational issues; people-centred services and localism; preserving the environment/reducing emissions; allowing short-term flexibility; ensuring investment in innovation; and achieving collaboration.

The full set of Slaughter and May notes can be found on our website.

Current Frameworks in Utilities

Our conclusion from these notes is that there is scope within current legal and regulatory arrangements for more to be done to encourage sustainability initiatives. This flexibility could be vital if limited government bandwidth were to deter more fundamental change.

The barriers identified to companies pursuing sustainability initiatives aren't necessarily legal ones. The most significant barrier, in energy and water, is related to funding and incentives through the regulatory framework. And it is this area where scope for change within the existing framework is greatest. Price control processes are key here, but beyond these the notes highlight areas – common to both water and energy – where steps could be taken to increase emphasis of sustainability: from sustainability-related targets and greater transparency in decision-making, to building expertise on sustainability issues and engaging in international dialogue on them.

Changes to the regime which could better lead to more sustainable outcomes were also identified. The sector notes found that, if there were desire for legislative reform, consideration could be given to whether sustainability goals could be made more prominent by amending the general duties of regulators, and the relevant Secretary of States, to this end.

The Past is Not Necessarily a Good Guide to the Future

The pace of change - whether that be technological, climatic, etc. – we are witnessing in the 21st century, is unprecedented and the future uncertain. This places unique challenges on decision makers today, including regulators and policy makers in infrastructure and utilities, that may require adopting new and forward-looking approaches. Decisions made today will have consequences not only for current but also for future generations, and this needs to be taken into account.

As a result, we need to think carefully about whether the current legal and regulatory regime is fitfor the future and examine the ways it both enables, but also limits, the extent to which companies and decision-makers can take bold actions for sustainability.

Sustainability First has been thinking about these issues for some time (for example, our March 2019 Discussion Paper on regulation). This work with Slaughter and May is an essential underpinning to our analysis of policy and regulation and key contribution to our current Fair for the Future programme.Fair for the Future is revisiting our earlier work and exploring what more could be done to facilitate the achievement of sustainability objectives.

Taking a Strategic Approach

Slaughter and May make a number of important observations of possible shifts within the current system. However, the wider landscape is clearly changing. The Treasury's November Response to the National Infrastructure Commission's Regulation Study: Strategic Investment and Public Confidence has highlighted some of the areas that the Government will cover in a regulatory policy paper next year. These include the benefits of a cross-sectoral strategic policy statement to complement sector specific statements and the consideration of new duties in the round on the environment and net zero and collaboration and resilience. However, the response notes that the government does not support the creation of new mechanisms for regulators to seek government views, such as new powers for regulator boards to seek explicit guidance from ministers. It highlights the issues that remain for regulators to decide, such as the design of price controls, whilst expressing support for moves to consider whether more major strategic investments can be removed from price control processes.

In Sustainability First's view, now is the time to take a more strategic approach. In order to embed sustainability across the utilities sectors - themselves complex systems part of wider economic, social and environmental contexts - we need to see a systems-level response.

Although changes to regulatory duties and strategic policy statements are a necessary part of this, they are not sufficient to make the changes we need to see if we are to meet the challenges of the 21st century. The flexibility in the current system is important. However, Sustainability First would note that it may take a brave regulator to take a stance in favour of some sustainable outcomes, such as intergenerational benefits, if Ministers were determined to focus on protecting short-term consumer interests. It may also take a brave company to pursue bold sustainability initiatives or collaborative activity, without knowing the stance of the regulator in the next price review.

Questions Sustainability First will continue to explore include: How can the voice for the long-term be institutionalised in policy/regulation? Is there a case for making changes to government strategic direction statements or duties, and what impact could they have? How best to secure long-lasting culture change in regulators (and regulated companies)? How to value sustainability as a core aspect of essential services?

Two particular areas of importance that Sustainability First will be addressing are, firstly, the need for the voice of customers/citizens to be embedded and formalised, and secondly, how we work back from desired outcomes in 2050/2100 to determine actions which are needed or highly desirable today against a backdrop of deep uncertainty. These papers will be published in the coming weeks.

We will conclude our work on Fair for the Future with a paper aimed specifically at the implications of the purposeful business agenda for policy and regulation. The paper (to be published early 2021) will take a strategic approach, building on work undertaken over the past three years, and make recommendations for redesigning the policy and regulatory framework to deliver on outcomes for fairness and the environment.

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