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12 | 1ST - 7TH MAY 2015 | UTILITY WEEK T he futures of the organisations that shape the way utilities are governed and run is uncertain. Ofgem is already dead on its feet, if the Labour Party has its way. And Ukip has said it would disband the Department of Energy and Climate Change (Decc) as part of a cost-cutting exercise in Whitehall. There are fears, at least among some Liberal Demo- crats, that Defra could also be scrapped. Ofwat faces the least uncertain future, but even the water regulator could see signifi- cant change, with any new government look- ing to make further public sector cutbacks to address the deficit, and the possibility of new powers being bestowed upon it. The mantra is clear – at least from the major parties – the civil service and public sector will have to do more with less. There will always be a need for water and energy regulators. There will be financial cuts as austerity drags on, and further efficiency savings are demanded. What the streamlined regulators, whatever they are called, will be told to do will depend on the next government – and to some extent on EU law, as discussed on page 15. As for government departments, energy and climate change are issues far too important for them not to have dedicated ministers and it is likely they will remain in an independent department. That said, rumours have circulated that these roles could be pushed into the Department for Business, Innovation & Skills and Defra. Defra looks "worryingly vulnerable". In March, the Efra Committee warned that the department had been "hollowed out" as a Analysis C ompetition should drive the best deal for consumers by pitting companies against each other, leaving them to fight for business and offer great deals. Regulation aims to mimic these forces in monopoly industries where competition is not practicable – such as energy distribu- tion, transmission, and water. However, the worlds of regulation and competition can cross, with some competi- tion being encouraged in regulated sectors. This helps to keep incumbents on their toes and also provides the regulators with a refer- ence point in terms of costs and charges. Within water, new entrants are plumbing in new developments, while in energy, more is being done to encourage competitors to take on the incumbent distribution network operators. This is an example of competition and regulation working in tandem, helping to provide the best outcomes for consumers. Economic regulation, setting how much the monopoly companies can earn, is the bread and butter work of Ofgem and Ofwat. But there are different schools of thought as to how prescriptive the regulators should be. In the past, the regulators have shown a firm hand. But this has led to criticism that companies take a "tick box" approach to running their businesses, focusing on pleas- ing the regulator, not the customer. Consequently, we have recently seen Ofwat and Ofgem proclaim that they will increasingly adopt "principles based" regu- latory approaches. At Utility Week Live (see page 6), Ofwat senior director for customers and casework Richard Khaldi said the regulator has to "be there as a backstop". Ofgem's senior partner for business development, Sarah Harrison, agreed that allowing the companies more flexibility around how they chose to act in the best interests of customers is what the regulators should be doing. However, just as the regulators want to step back, the political pendulum is swing- ing towards intervention. Labour goes hardest with this idea. The price freeze and a compulsory national social tariff for water are backed up with plans to give Ofgem more power, and a duty, to get involved in the market, forcing suppli- ers to bend to its will. The Conservatives and Lib Dems, while favouring competition in energy, still want increasing influence for the government and the regulator. Contracts for difference, the Energy Company Obligation, and smart meters are all political interventions in the sector – interventions the regulator will have to oversee. The Competition and Markets Authority (CMA) investigation, just by the fact Ofgem Regulation vs competition Even the Tories are not convinced that free markets will deliver without some govern- ment prompting, says Mathew Beech. O ne of the most remarkable changes in utility regulation has been the move away from the principle of independ- ent regulation, where the promotion of markets is a central strand, to one where politicians see intervention and direction as essential. It would be easier to contextualise such developments had we had five years of Labour control, but this change has occurred under a Conservative-led govern- ment, which seemed in the energy sector to lose faith in free markets. Some may blame Liberal Democrat control of the Department of Energy and Climate Chance (Decc) for this directional change but the Conservative Party in this election campaign has shown it is not averse to regulatory interventions: think recent announcements on rail pricing. Labour has even more interventionist, if sometimes confusing, plans for energy. The headline energy price freeze had to become an energy price cap as energy prices fell. This is an example of a populist policy that had to be adapted in response to the reality of a dynamic market. Pronouncements on the role of Ofgem are equally confusing, with Labour want- ing to both give that regulator new powers while simultaneously planning to abolish it. Add to this the party's intention to create a National Infrastructure Commission and an Energy Security Board and both companies and regulators may find they spend the next five years talking only to government. What of other regulated sectors? Both Labour and Conservatives are willing to set rail prices, and Labour mentions the introduction of a compulsory social tariff for water in its manifesto. Much of the current direction of water policy is about opening up the existing busi- nesses to competitive forces. The progress that has been made on developing the retail market for non-household customers along with Ofwat's recent green light to acquisi- tion and merger in the sector send a strong pro-market signal from policymakers, regu- lators and companies. It isn't clear which approach will win the battle between regulation and competition. Are interventions just populist gimmicks to win elections or are we seeing a permanent directional change? Michelle Lewis, director, McQuillan Viewpoint What's the role of regulation when politicians decide that they know best? In the balance: what next for Ofgem, Ofwat, Decc and