Utility Week

UTILITY WEEK | 18TH - 24TH JANUARY 2019 | 11 Also speaking at Congress, Ofgem chief executive Dermot Nolan agreed, arguing that there had been a "fundamental shi" in the way regulation is talked about. "The whole idea of regula- tion being a narrow activity no longer holds true in the public eye. The narrative has changed – different outcomes are not perceived as acceptable now in a way they were ten years ago." Regulators must display an increased sensitivity to the broader public mood, Nolan told Congress. "The regulator needs to be able to explain their decisions." The minefield of 'value judgment' To enter the fairness arena is to enter a slippery world of value judgements, in which regulators' decisions will have a significant impact on companies' entire business models. Ofgem's concerns over what it perceived as a grey area sur- rounding its remit with respect to fairness were on display during its tussle last year with government over whether it had powers to introduce the now launched market-wide cap on standard vari- able tariffs (SVTs). Energy UK flagged up the risk of equipping regulators with tough powers without a mechanism for appeals against their decisions on the level of the cap. And one industry regulator pointed out: "If you are given that kind of power, there needs to be some correlating protection." Would innovation be at risk? There are widespread concerns about the risks thrown up by a focus on fairness, and whether an overly prescriptive regime on returns will give utilities less scope to innovate and invest. Economic Insight's Thompson identified two main models reg- ulators could adopt, one based on giving companies incentives and the other specifying the rate of return they can achieve. Regulatory models based on incentives pose drawbacks, he said: "If you incentivise the wrong outputs, we will end up pay- ing for services we don't want." But there are pitfalls surrounding the rate of return model too, he said. The "slightly lower" returns can be politically appeal- ing to politicians and organisations that want to avoid headlines about high profits. However, the drawback is that firms don't have incentive to minimise costs and innovate." Control vs freedom Many fear that easing competitive pressures could lead to worse customer outcomes overall if companies are no longer under pressure to beat one another on price. One industry regulator said: "While it may look tough, there is a question over whether such moves could undermine customers' confidence in the market." And policymakers must recognise there could be a trade-off between the desire to protect consumers, through mechanisms like the price cap, and delivering the best innovation, Waddams told Congress. "Customers will end up paying more if we rely on regulators rather than the market." The system will only work as long as due processes are in place, added Stuart Cook, managing director of consultancy Com- plete Strategy and a former senior partner at Ofgem. "When you start messing about with that, you start scaring the horses." Ofgem's Nolan acknowledged that this is one of the big chal- lenges the regulator faces. But a balance can be struck between the interests of investors and consumers, said Ofwat's Fletcher. Indeed, the public legitimacy of regulation underpins investment certainty, she said: "Expectations are shiing and if we don't respond and show consumers that we are taking them seriously we will be probably have an unstable framework for investors." The full premium report is available to Utility Week members on utilityweek.co.uk. Visit: https://bit.ly/2M6o3uG Twenty-five per cent feared it would result in poorer service, with the same number believing it could lead to less investment in services. Nineteen per cent thought it would slow down efforts to tackle issues and prob- lems, with 14 per cent feeling it might impact efforts to address climate change through decarbonisation of the networks. In terms of renationalisation prefer- ences, over one-quarter (27 per cent) would prefer to see energy distributors renational- ised first. Twenty-three per cent wanted to see national, publicly-owned energy com- panies set up, followed by 20 per cent who would prefer water and wastewater provid- ers selected initially. The largest number of respondents, however, at 29 per cent, remained unsure about what part of the industry should be renationalised first. Survey Snapshot: l Over half of respondents are satisfied with their utility suppliers. l Satisfaction levels were highest for water suppliers. l Respondents felt water suppliers offered best value for money. l Water suppliers were seen as the most trustworthy of the utilities sup- pliers, followed by electricity and then gas. l Most respondents felt that rising prices were the largest contribut- ing factor leading to mistrust in utili- ties providers. l Around one-third of respondents felt government was best placed to manage utilities services, with around one-quar- ter undecided. l Around one-third of respondents would be more likely to vote Labour based on their policy of nationalising utili- ties; over half said it would make no difference to their vote. l The main benefits of nationalising utilities are perceived to be the provision of cheaper and bet- ter services. ☛ Harris Interactive analysis This research demonstrates, contrary to what many might believe, that the majority of consumers are not greatly dissatisfied or do not greatly mistrust their utility suppliers, suggesting that the service they currently receive is reasonably good. It is also clear from the research that, despite supplier efforts to persuade their customers otherwise, price remains king. • First, it is intrinsically linked to trust, with rising prices cited as the number one reason for undermining trust. • Second, the number one benefit of nationalising utilities, selected by half of consumers, is cheaper services and the major concern of nationalisation is "it costs too much and we can't afford it," albeit that this was only selected by a third of consumers. • Third, and interestingly in the context of the push towards renewables, over half of consumers are not prepared to pay more for their electricity to speed up the transition. Energy suppliers in particular have done a lot of work to communicate to customers and wider consumers what exactly makes up their final bill but this message has not cut through. Further education is needed and perhaps it is time for government and regula- tors to re-double their efforts so that people are more aware of this. Nationalisation will almost certainly be on the agenda at the next general election and a huge education programme will be required here too on the pros and cons, so that con- sumers can have a fully informed view. Mark Brenton, head of energy research, Harris Interactive

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