On 7th March, Sustainability First and Frontier Economics held a joint event on 'Future thinking on utility regulation and fairness.' We had some great speakers including Cathryn Ross, Director of Regulatory Affairs at BT Group, Alistair Philips-Davies, CEO of SSE, and Adam Scorer, CEO of National Energy Action. Cathryn shared a personal perspective drawing on her wider regulatory experience, including as previous CEO of Ofwat and Director of Markets and Economics at the ORR. Her speaking notes from the evening form the basis of this guest blog.
It is worth pausing and recognising the extent of the debate about future utility regulation explicitly – we have the NIC's review of economic regulation, we have the HMT review of regulation and innovation, we have the work Jason Furman and Diane Coyle and others are doing to look at competition in the digital economy, we have Andrew Tyrie's recent letter to Greg Clarke proposing changes to the remit and powers of the CMA, not to mention the various exercises recently completed or in train resulting in the publication of strategic policy statements by government to
All of which individually are raising some pretty challenging questions about what regulation is for, the efficacy of different elements of the regulatory tool kit, and the relationship between economic regulators are related parts of the institutional firmament, such as government, competition authorities, consumer bodies etc.
But all of which taken together, I think, add up to a pretty fundamental existential re-evaluation of the post privatisation institutional framework by which we seek to ensure that the interests of privately owned providers of certain key public services (and I like the idea of the 'foundational economy' that is used in Sustainability First's paper 'Circling the square' paper) are aligned with those of customers and wider society.
On one level… that's no surprise. It's been 25-30 years since most of these frameworks were put in place. Nothing lasts for ever and the world moves on. It wouldn't be surprising if we needed to do a bit of housekeeping.
But in the current UK context – as the Sustainability First paper puts it, in our 'disrupted world' - we need to recognise that this existential re-evaluation of regulation is absolutely central to some of the big questions of our age – about the type of economy and society we want to be, about the distribution of power, the allocation of value between different groups in society and across generations, and about the levers we are prepared to use to get us to being that economy and society.
Substantive agreement on the challenges
I should say before I get into the substance that I'm very largely in agreement with the paper.
I very strongly believe that regulators have an important strategic leadership role to play in helping the sectors they regulate to recognise the need for and navigate through change.
I very strongly believe that regulators play a critical role in the governance framework that helps to both articulate the interests of customers and society and align the interest of private providers of
services with those interests.
And that as such, regulators should focus on creating frameworks that inform, enable and encourage the delivery of outcomes that matter to customers and society.
Trivial? Maybe – it seems obvious to me.
But even these beliefs do pose some significant challenges to the regulatory status quo.
In part this is because people's experience of those outcomes doesn't align well to the traditional regulatory way of doing things.
- As the paper points out – there is no such thing as the average customer, and people do care deeply (albeit more with their citizen hat on than their customer hat) not only whether everyone is getting better off but about who is getting more better off than whom. In other words, distributional effects – which regulators have studiously avoided for years – matter.
- And again, as the paper points out, we don't actually compartmentalise our lives into being a water customer or an energy customer or telecoms customer or a financial services customer – we just want all these things that are simultaneously very important and rather tedious to work, to be easy to deal with and give us the peace of mind that we're getting a good deal. Which of course – the good work that goes on under UKRN notwithstanding – isn't how regulators are set up to think about things, either in terms of their statutory duties, their institutional set up or their expertise.
- A further part of the challenge from an outcomes focussed approach comes from the fact that outcomes are the products of systems that extend well beyond the regulator's remit. It requires not only a high degree of systems thinking, but a willingness and capability to work in a more collaborative, co-creative way with a diverse group of stakeholders. Which – even if you know it is the right thing to do – isn't easy when you start thinking about your next review by the NAO or appearance in front of the PAC or on the Today programme.
But even if we can agree on the relevance and validity of the challenges, it doesn't make them any easier to solve. And I just want to highlight a couple of particularly crunchy issues that any reevaluation
of regulation in this context will have to deal with.
The first is the role of competition.
From the privatisations of the 1980s and 1990s through to the early 2000s there was a strong policy consensus in relation to privatised sectors that competition would play an important part in that alignment of interests between customers and society and the companies that served them. Competition would deliver more of what customers wanted, more efficiently, and it would unleash innovation. There was – for the most part - a strong alignment between what we thought competition would deliver and the problems we were trying to solve at privatisation.
And in that context – as the paper points out – most of the economic regulators have statutory duties that strongly focus on the promotion of competition.
There is absolutely no doubt in my mind that competition has delivered very considerable benefits.
But two things have happened in recent years.
• The first is that we are increasingly aware of – and intolerant of – some of the things competition and markets don't do well, in particular in relation to distributional issues.
• The second is that, in many privatised sectors, the problems we were trying to solve at privatisation are not the problems we need to solve today. There are some sectors, energy is one and telecoms is another, where the biggest challenges facing the UK today are ones that require epoch-shifting investment. Competition might deliver that investment, and might bring benefits in terms of efficiency and innovation. But there are other policy approaches that could deliver that investment with greater certainty and potentially lower
cost, albeit potentially with fewer dynamic benefits. It is no coincidence that in the water sector, where the problems we were trying to solve at privatisation were much more ones of getting massive investment at lowest cost, competition was eschewed in favour RAB-based regulation of monopoly.
My personal view on all this is that competition has delivered very considerable benefits and should have an important role to play going forward.
But there's no doubt we are moving towards a more nuanced position, a more mixed economy, where regulators who might once have taken the promotion of competition as their clear primary purpose, need to adopt a more multi-factor approach. But there are trade offs and those trade offs need to be recognised.
And the difficulty of the debate itself about these issues is linked to the second crunchy question that I want to draw out before I finish which is about how well our regulators in their current form are equipped both to participate in the debate and to implement whatever new policy consensus emerges.
There are several challenges here.
- The first is one of statute. Most regulators statutory duties are focussed around the protection of the consumer interest and the promotion of competition, and they are focussed very much on their sectors. So, it isn't always easy for regulators to take account of the interests of human beings, rather than telecoms customers, water customers or energy customers. And it isn't always easy for regulators to take account of wider societal and citizen benefits (Ofcom being an exception to some extent because of its different duties).
- The second is one of expertise and path dependency. Regulators have looked after the interests of consumers in their sectors and have promoted competition for decades… we shouldn't under-estimate the extent to which even thinking this stuff through requires a different knowledge base, skill set and indeed mindset.
- A third challenge – possibly the most serious – is one of legitimacy – the legitimacy of the regulators themselves.
- There isn't a clear bright line here. As a regulator you make decisions that have profound distributional implications all the time, for example every time you allocate cost. But there is a reason that regulators have historically shied away from getting involved in explicit transfers between different groups of customers – such matters are normally decided on by governments who have a very clear legitimacy to do so as a result of the democratic process.
- I think the reality of the future is that regulators will simply have to get more involved in these matters – you can see that they are doing this already. But as they do so, they need to part particular attention to their legitimacy.
- The strategic policy statements regulators now get from government are important and helpful here.
- Regulators can also improve their legitimacy by developing their knowledge and expertise and by collaborating with others who have longer inhabited these spaces.
- And – in my view – as regulators take on a wider and more complex role the checks and balances on them and their work will play an increasingly important role in maintaining their legitimacy. Independence is only as good as accountability, and the ability of regulators to be held to account by appeal processes, CMA oversight, the NAO, select committees and indeed organisations alike the Climate Change Committee and the NIC, is only going to increase in importance as their role grows.
Conclusion – a final thought
I just want to finish with a thought on timing.
I'm instinctively very much of the 'evolution not revolution' school – especially given the impact that regulatory risk has on investment and the cost customers pay for that investment.
And the paper makes a powerful point when it says that with everything else going on at the moment, throwing all the regulators up in the air and doing something radical is probably not what everyone needs. And then of course there'd be the challenge of finding the bandwidth to do that, and do it well, right
And yet the more I listen to the debate we're having the more I'm struck by how fundamental some of these questions actually are. They aren't in 'tinkering at the edges' territory – they go to the
heart of what regulation is for, what regulators need to look like, and how they should work.
And the more I'm struck by the urgency of the debate.
And in that context – if we have got to the point where far reaching change really starts to look inevitable – the balance of advantage seems less obviously in favour of evolutionary change. It could begin to look more in favour of moving quickly towards a redefined vision for regulation and an institutional and legislative framework that everyone could have confidence were designed to deliver it.
Paradoxically, were we to get to that tipping point where people believe that the status quo is unsustainable, it is possible that radical change – if done holistically, with real clarity of thought, and focus on execution – could create more stability and certainty. Which is after all critical if we are going to meet a lot of the challenges these sectors are facing today, especially those that require massive investment programmes.
I'm not sure we are there. And there's certainly a high bar to get over before you believe radical change, and especially structural changes, with all their attendant cost and disruption, are worthwhile.
But I do think it is worth keeping under review.