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UTILITY WEEK | 13TH - 19TH MAY 2016 | 13 Policy & Regulation Analysis L ike football referees making controver- sial decisions, sector regulators oen attract flak – sometimes fairly, some- times not. For a particularly tricky issue, polarised views develop. At present, some telecoms players are pleading with Ofcom to compel BT to divest its cash-generative Openreach business, while BT itself is deter- mined to retain it. With the first utility regulatory body, Oel, being set up more than 30 years ago, it is opportune to review how the three lead- ing utility regulatory bodies – Oel (now Ofcom), Ofgas/Offer (now Ofgem) and Ofwat – have performed. Oel was established at the time of the c51 per cent privatisation of BT in 1984. Compared with modern-day price regula- tion, its priority was remarkably straightfor- ward – applying an RPI-X number to BT's retail charges. To ensure competition for BT, Mercury (owned by Cable & Wireless) was set up; within a few years, it had effectively disappeared. For today's Ofcom, telecoms regulation has become increasingly complex, especially because European Union issues, such as roaming charges, have to be addressed. On fixed-line telephony, regulating an all-pow- erful BT is challenging, with the Openreach arguments particularly difficult, especially since BT is pivotal to rolling out broadband. Perhaps the solution lies in emulating what the electricity industry undertook for the highly successful National Grid: float- ing Openreach as an independent company. Such a scenario would worry BT sharehold- ers – how would the dividend be financed? And how would BT's pension obligations be met: the company's pension fund is cur- rently running a £5.6 billion net deficit. Rightly or wrongly, Ofcom feels it cannot ignore such legacy issues. Ofcom has rattled its sabre over Open- reach, and largely to head off calls for a divestment, BT announced last week a mas- sive £6 billion investment over the next three years in high speed fibre. Ofcom is also required to set a fair price for BT's competitors using the last mile of its cable (similar challenges have arisen in the water, electricity, post office and railway sectors). Add in the highly complex mobile telephony market and it is no surprise that telecoms regulation has become difficult. It is a messy picture, but Ofcom oen appears to be both off the pace and techni- cally challenged in regulating such a fast- moving sector. With the privatisation of British Gas in 1986, Ofgas was set up. Its sole client was a truculent British Gas, whose then chairman, Sir Denis Rooke, held an ill-concealed dis- dain for its activities. Nonetheless, the 1990s was dominated by the epic battle over the appropriate financial return for the monop- oly Transco gas business. Ofgas's director general, Clare Spot- tiswoode imposed a 20+ per cent cut to Transco's base revenues – to the unmitigated fury of British Gas. Subsequently, British Gas demerged and its sum-of-the parts valuation soared. Unintentionally or otherwise, Spot- tiswoode had simultaneously delivered both major gains to shareholders and substantial price cuts to customers. In time, Ofgas was subsumed into the rebranded Ofgem, which also included the electricity regulator, Offer. The latter was set up during the electricity privatisation pro- cess of the early 1990s under the leadership of professor Stephen Littlechild. Offer's responsibilities were wide-rang- A tale of three regulators Nigel Hawkins runs over the CVs of the telecoms and energy regulators to chart how they – and the industries they oversee – have dramatically changed over the past 30 years. ing. They included the promotion of compe- tition in generation, a policy subsequently overtaken by events as government-awarded contracts for differences (CfDs) – not the mar- ket – now underpin generation investment. While Ofgem has many technical issues to resolve, its periodic price determination responsibilities remain key, especially for National Grid and SSE. Indeed, bar recent unforgiveable blunders with rail regulation, Offer's price-setting for the electricity dis- tribution companies in 1994/95 constituted utility regulation's darkest hour. The 7 March 1995 U-turn saw utility share prices plunge; it remains an object lesson on how not to regulate. With few electricity companies now pub- licly quoted and with generation projects effectively driven by CfD awards, the neu- tered Ofgem is no longer the sector ring- master. Instead, the Treasury makes the key decisions, such as on Hinkley Point C, and the Department of Energy and Climate Change attempts to implement them. Since the establishment of Ofwat in 1989, water regulation has tended to avoid dramas. The fact that technology developments have been minimal helps. In the first decade, much of the invest- ment backlog was cleared and Ofwat's founding director general, sir Ian Byatt, was then able to impose substantial price cuts. Thereaer, as the strong share perfor- mances of Severn Trent, United Utilities and Pennon all demonstrate, the water compa- nies have done pretty well. However, the last periodic review under Cathryn Ross was very thorough and pro- fessional, even if a vast amount of data was needed to establish some straightforward numbers – the five-year investment cost and future price changes. Importantly, too, outside the railways, serious regulatory mishaps are nowadays rare. Decisions by Ofcom, Ofwat and even the neutered Ofgem are now more predict- able, partly because they lack the immediacy of the football pitch. Nigel Hawkins, director, Nigel Hawkins Associates Fact file Oel was set up in 1984 when BT was privatised. Ofgas was set up in 1986 when British Gas was privatised. Offer was set up in 1989 in preparation for the privatisation of the CEGB in December 1990. Ofgem was set up in 1999 to take over from Offer and Ofgas, providing a single regulator for the energy industry.