Utility Week

UTILITY WEEK | 25TH -31ST JANUARY 2019 | 7 What is fair? W e seem to be on the cusp of a new era in utility regulation. The discussion around the pos- sibility of nationalisation has set compa- nies thinking about what they need to do to respond and, at least in water, Rachel Fletcher at Ofwat has developed a new rhetoric that focuses on a much broader view of the customer interest, talking about a new "social contract". Ahead of the curve, the charity Sustain- ability First were talking a few years ago about a new, wider definition of the public interest and they are now leading a project called "Fair for the Future" aimed at helping compa- nies better address the politics of fairness and the environment and develop- ing a straw man "Sustain- able Licence to Operate". For the gas and electric- ity distribution networks this is part of a journey that I would say a number of them have been on for a while. It seems to me they do generally have a strong public service ethos. When staff are out in heavy storms trying to restore sup- plies, the companies aren't doing it on the basis of a calculation around overtime pay versus incentive payments but because they understand they have a responsibility to the communities they serve. At least one GDN has described itself as like a fourth emer- gency service, dealing swily with safety calls when there is a potential gas leak. On top of that the RIIO framework has created incentives to encourage a stronger focus on vulnerable customers and decar- bonisation – albeit some of these may not survive into RIIO2 as Ofgem looks to tighten the screws. Part of Ofgem's rationale for this is responding to public concerns that compa- nies should not be profiteering from their monopoly position. And certainly, percep- tions around outperformance are one of the issues networks are having to deal with – with some having made "volun- tary" contributions to share some of their RIIO1 gains with consumers (beyond what the regulatory regime already requires). But that focus on rates of return that comes through strongly in RIIO2 misses some of the wider mood music. Looking beyond utilities, consumers are voting with their feet where companies don't behave in what can be seen as a socially responsible way. This can be not paying taxes, single- use plastics, unwanted "hugs" in the workplace, abuse of customer data or fat cat bosses' bonuses. This gets reflected in suggestions such as Theresa May's idea a few years ago of worker representatives on boards, or other changes to corporate governance. And among inves- tors there is a resurgence of interest in socially responsible investing looking at environmental, social and govern- ance performance as a guide to long-term prospects. The risk with RIIO2 is that the compa- nies end up so focused on what the regula- tor wants – or at least what the regulator is willing to provide financial incentives for – that they lose sight of what society would expect a responsible organisation to do. If Ofgem is out of touch with that wider zeitgeist then the networks should not be simply playing to its tune if they are to regain the legitimacy that they need. Ofgem has talked about a stronger consumer voice in RIIO2 but it's not clear what emphasis that voice will ultimately be given in Ofgem's decisions. However, the companies should be in no doubt that listening to consumers is vital – not because the regulator says so but because that is what society expects. Rachel Fletcher understands that, with talk of gold standard corporate governance and financial transparency, and the citizen interest in seeing water companies acting in the wider interests of society and the environment. With talk again of merging regulators, the energy networks would do well to listen to her." Regulation Maxine Frerk Director, Grid Edge Policy. A previous senior partner networks at Ofgem, she is also an associate with Sustainability First and chair of SGN's Consumer Engagement Group As an industry, it's important that we address this societal shi and project our legitimacy more clearly and compellingly. The listed com- panies, for example, already have high levels of employee share ownership and make significant returns to the pension pots of working people. At Pennon, 75 per cent of shareholders are UK pension funds, social enterprises and employees. We publish an annual tax strategy and are accredited with the Fair Tax Mark, which helps build trust and transpar- ency. At South West Water, our 'New Deal' PR19 submission, based on our biggest consultation ever, uniquely includes offering customers a stake in the business (based on our outperformance) and a greater say in how we are run. It builds on our existing, independently chaired Water- Share scheme, which shares our success with customers, either through lower bills or more investment. Aer all, our customers shape our plans and help us to deliver them, so it's only right they should have more opportunity to get involved and hold us to account. In addition to offering a customer shareholding that could grow over time, we will hold a customer AGM and quarterly pub- lic meetings, and invite voting on WaterShare panel membership. We also plan to spend more than £1 billion and reduce bills by 14 per cent, so the average bill in 2025 will be less than it was in 2010. Aligning interests in a bal- anced and fair way and moving from customer engagement to empowerment is the right thing to do. It's too important to get wrong." "The water industry's societal responsibilities are under the spotlight and the beam is getting brighter… we need to recognise that the context in which we operate has changed, and respond accordingly." "The risk is that companies end up so focused on what the regulator wants that they lose sight of what society would expect a responsible organisation to do." "

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