Why the failing energy sector is a lesson for all regulators

With references to Ofgem being “incompetent”, to criticism of its “negligence” and “systemic failure to effectively regulate”, the House of Commons BEIS’ Select Committee’s latest report[1], on Energy pricing and the future of the energy market doesn’t pull any punches, writes Zoe McLeod, Sustainability First's Policy Director. 

But while it’s Ofgem’s turn in the spotlight, there are important lessons to be learned, and a warning, for all regulators and governments who oversee them. Time and time again, consumers and the environment are being failed by poor monitoring, slow enforcement and weak protections with often the most vulnerable worst impacted. This benefits no-one and leaves good companies tarred by the same filthy brush.  

The cross-party Committee calls for Ofgem to improve “its regulatory oversight, its decision-making processes, the use of its enforcement powers, and the quality of its governance.” With this we agree. A number of other regulators should also follow suit.

 

‘Permissive culture’

However, to effectively deliver these kinds of improvements and the outcomes current and future consumers need, requires not just new skills and frameworks, as the Committee demands, but systemic culture change.

And that’s the real challenge for regulatory leaders and those overseeing them.

 

1. Regulators’ values need updating to align with their duties. In particular consumers and the environment should be at the heart of their decision-making, rather than competition , which is a means and not an end in itself.

The report highlights the damage caused by a focus on competition for competition’s sake and on easing regulatory burdens without due consideration of the consumer impact. It talks of the “permissive” culture encouraged by “the body politic”. 

Stakeholders reference Ofgem’s failure to take action against suppliers who “openly and repeatedly flouted” a whole host of rules, including on accurate billing, debt collection, self-disconnection, smart metering, and customers having access to phone lines.

But this ‘permissive culture’ is not the preserve of Ofgem. It is well recognised that companies across sectors consciously chose to breach rules or not meet performance targets set by regulators because penalties and consequences are not a sufficient deterrent.  

 

2. Regulators need to raise their expectations at least in line with current consumers’, preferably in line with future consumers’

The report notes that former Ofgem CEO Dermot Nolan “ardently defended the regulator’s record on enforcement and compliance”. The current Chief Executive, Jonathan Brearley asserted too that “our record on enforcement is stronger rather than weaker”. Yet the Committee found that despite the powers at Ofgem’s disposal, it consistently and frequently failed to enforce its rules against suppliers in breach of their licence conditions, even when evidence was directly reported to the regulator[2].

This mismatch in expectations about ‘what good looks like’ between stakeholders and regulators in different sectors is key. While recognising the significant variation between the best and worst performing companies, the UK Regulators Networks’ (UKRN) scorecards (2021), for example, reported that satisfaction across the essential services of water and sewerage, energy, and telecoms are “generally high” as scores are in the seventies out of hundred.

However, overall these sectors were in practice, still at the bottom of the league table, below leisure, retail (non-food), retail (food), banks and building societies, insurance, tourism, automotive, public services and other services. In fact, the only sector they beat was transport[3]. Others might think that is not good enough. 

As the Competition and Markets Authority (CMA) energy market investigation[4] highlighted, it has particular legitimacy implications for regulators and government should their expectations be out of touch with consumers. 

 

3. To be ‘in touch’ requires a culture of engagement and of listening. It also requires openness to, and a diversity of challenge.

Too often the warnings of consumer advocates and civil society are not listened to, and regulators close the stable door after the horse has bolted. It took for example more than a decade for Ofgem to introduce a licence condition[5] to ensure that customers in debt were put on repayment plans that are realistic and sustainable following a litany of predictably failed voluntary approaches[6]. Debt protections are still not, according to the Committee, delivering the required protections.  

In truth, over the last few years, regulators have been steadily improving how they engage. Nonetheless, important non-commercial interests remain underrepresented in decision-making. 

Both executive and non-executive teams need greater diversity not just in terms of class, ethnicity, disability and sexuality, but perhaps more importantly, in terms of perspectives and values. 

Regulators also must have open-learning cultures with decision-makers at all levels genuinely embracing constructive healthy challenge. 

 

4. We need not just faster but more proactive monitoring, compliance and enforcement 

This means taking a precautionary approach, anticipating detriment and taking action before it happens. It involves properly monitoring markets and swiftly nipping issues in the bud before they become widespread. Ofgem has historically been reluctant to do this, but it would benefit everyone in our future retail market.

Not investing money in monitoring, compliance and enforcement is a false economy at our expense – pushing the cost of bad regulation onto customers. Not just directly as is the case with the estimated £96+ per customer price tag[7] for the collapse of the energy market, but indirectly through lost time, mental health and knock-on financial impacts. Citizens Advice estimated that the cost of poor customer service in the UK in 2015 was at least £22.9 billion (after deducting compensation), or £446 per adult UK resident, amounting to two per cent of consumer spending[8].

 

5. Value and retain experienced staff 

Ofgem has, at 22% in 2021, a relatively high annual turnover of staff[9]. In practice, large companies run rings around inexperienced employees who work for the regulators, who can also lack the confidence to make bold decisions in the interests of consumers. Consultancies are packed to the rafters with ex-regulators now working on behalf of companies or hired back to work for regulators at greater expense.

Regulators’ boards need to ask themselves an honest question. Why did these experienced, passionate, public service minded individuals leave, and what can we do to get the best of them back? Hint. It’s not just about the money.

Radical action is needed to change the culture in Ofgem. But any reorganisation must result in more, not less experienced employees, if the regulator is to be effective and rebuild trust and confidence. 

 

6. Ensure workforce knowledge and skills are fit for a sustainable future

The Committee in its report recommends “that Ofgem upskills its workforce to ensure it has the appropriate expertise to implement provisions above in an effective and proportionate manner.”  In practice all regulators need to upskill their workforces to ensure they have the knowledge and skills to meet the needs of a data driven, smart, sustainable, and net zero future. This will likely be a future where consumers have higher environmental, ethical and customer service expectations. 

Ofgem’s proposed decisions in its recent draft determination for Electricity Distribution RIIO2 price control, on energy network losses, reputational regulation for its Environmental Action Plans and the potent greenhouse gas SF6, alongside the delay in incorporating the up-to-date cost of carbon, would seem to indicate that Ofgem ‘just don’t get it’. There is a need for more consistently strong environmental expertise[10].

Again, Ofgem isn’t alone here. Sixty two percent of respondents to Sustainability First’s snapshot survey of 110 policy makers, regulators and companies in public utilities said that their approach to sustainability needed to change. Our Sustainability Principles project aims to help decision-makers transparently make trade-offs in complex decisions (or at least think about them), and shape norms and behaviours. It recognises that culture is often more powerful than strategy or process.  


The need for systemic culture change and radical reform

On balance the House of Common’s Energy pricing and the future of the energy market report on the energy supply market collapse is hard hitting and stark. It should be a wake-up call for regulators everywhere and the departments that oversee them. The most recent former Ofgem CEO appears to be painted as the scapegoat of the piece. But to blame one individual underplays the important role of the ‘permissive’ culture in the regulator, and a focus on ‘competition for competition's sake’ that was hard wired in Ofgem long-before he arrived, and actively encouraged by internal leadership and successive governments.  

The House of Commons BEIS Select Committee has asked Ofgem to provide a strategy to address failings and to report annually on progress. To maximise its impact, we encourage the Committee to also consider how it can monitor leadership’s progress in addressing the systemic cultural weaknesses in the regulator. This might include for example, a parallel ‘view from the ground’ progress report from consumer and environmental organisations such as Citizens Advice, or monitoring progress against the six areas we outline above.   

Ultimately of course it is Government that sets the direction of its regulators and in practice influences the political atmosphere in which they orbit. We await the long-overdue energy Strategy and Policy Statement with some trepidation. BEIS and Ofgem are at a crossroads. They can continue to tweak around the edges of a failed energy system, pretending things will all be fine when the cost of living crisis is over, and return to switching supplier levels and the number of companies operating in the market as a measure of success. Or they can learn the clear lessons from the past - the current energy system isn’t working – at least not for consumers, nor yet for the environment. It's time for bold thinking and to shake up regulation. That is, new structures that radically change our energy market so that the needs of people, the environment and communities are genuinely at its heart. Let this be the era when toxic businesses die. And the start of a new future, where we trust our utility companies to help us all thrive. 

 

[1] https://publications.parliament.uk/pa/cm5803/cmselect/cmbeis/236/report.html

[2] Energy pricing and the future of the Energy Market (parliament.uk)

[3] Performance Scorecards | UKRN: the UK Regulators Network

[4] Energy market investigation - GOV.UK (www.gov.uk)

[5] Ofgem strengthens protections for customers struggling with energy bills this winter | Ofgem  

[6] Debt Review report: key Principles for taking ability to pay into account (ofgem.gov.uk)

[7] Energy pricing and the future of the Energy Market (parliament.uk) p.3

[8] Final_ConsumerDetriment_OE.pdf (citizensadvice.org.uk)

[9] Microsoft Word - 24 May additional info letter (parliament.uk)

[10] https://www.sustainabilityfirst.org.uk/images/ED2_Business_Plans_Ofgem_call_for_evidence_final.pdf

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