Issue link: https://fhpublishing.uberflip.com/i/961476
ALTERNATIVE OPTIONS While many significant regulatory disrup ons are today emana ng from exis ng regulatory bodies and their evolving frameworks, it must be acknowledged that there is also increasing scope for these ins tu ons themselves to be irrevocably disrupted in the near to mid-term future. Labour's pledge to rena onalise u li es – including energy supply, energy networks and water networks – has created the scope for a radically different future for the sector. One which would unwind almost 30 years of work to make private ownership and compe ve markets deliver cost effec ve and reliable u lity services. Details have so far been scant on how Labour's rena onalisa on plans would work in prac ce, but a January report on alterna ve models of ownership suggested a blend of na onal state, local and community ownership for the Na onal Grid and other sector infrastructure. The boards running the companies would be split between state appointees, local and devolved administra on government nominees, consumer, and employee representa ves. Despite the protesta ons of shadow Chancellor John McDonnell, it's likely rena onalisa on would be costly. The Social Market Founda on (SMF) published a report in February seeking to quan fy how much taking back control of water companies would cost. It concluded that this could cost government £90bn. The SMF es mates that the government would have to pay £100bn to meet the industry's investment needs over the next 25 years. THE DISRUPTION: PRINCIPLES-BASED REGULATION What's the deal: In 2014 at U lity Week's Congress event in Birmingham, Ofgem chief execu ve Dermot Nolan announced that the regulator was embarking on a change process in its approach to regula on which would see prescrip ve rules binned in favour of "principles-based" frameworks. Se ng out his stall, Nolan envisaged a smaller license for energy suppliers, gravita ng around the idea of "trea ng customers fairly" rather than compliance with specific processes or requirements. He said, in the new world of principles-based regula on, the onus would be on companies to interpret whether their products, pricing and customer service arrangements lived up to the ideal of fair treatment. Nolan's vision was broadly welcomed by industry leaders and has since manifested in a number of key areas – such as changes to energy marke ng rules. It has also been embraced at Ofwat, where the regulator has been clear it expects companies to operate in the spirit of transparency in order to build trust with their consumers. Why it ma ers: A complete transi on to principles-based regula on would be a radical shi , with big implica ons for the risk exposure of u li es, enforcement measures and service diversifica on. While most u li es are in favour of a move away from prescrip ve rules and market interven ons that can have unintended consequences – like the notorious four-tariff rule under RMR – leaving good prac ce open to interpreta on poten ally also increases the scope for disagreements between companies and their regulators. Ofgem has been keen to counter such concerns and stand firm by its convic on that a principles-based approach is best. Recognising the concerns of cri cs however, it has also more recently emphasised that a blended approach is no doubt required, with hard rules to outlaw defini vely nega ve behaviours and principles to encourage crea ve thinking about how to achieve posi ve consumer outcomes. CONCLUSION U lity Week Live's survey shows that concerns about the impact of populist poli cs on regulatory stability abound. The apparent growing urge for poli cians to intervene on behalf of consumers and voters is disrup ng not only the energy retail market, (where it has resulted in price caps and legisla on for wider price regula on), but also water companies and energy networks, which have tradi onally been more sheltered from consumer-facing issues. Responses to the survey show that the confidence of u li es professionals in the effec veness of new regulatory regimes, such as PR19 and RIIO, to con nue delivering the outcomes the sector needs while responding to heightened poli cal pressure, is not high (4.8 out of 10 on average). Though it is notable that there is (marginally) more confidence in the RIIO regime to accommodate the scale of change facing networks in the next five to 10 years, than there is in the PR19 framework. In the face of this disrup ve environment, the best course of ac on, says Richard Khaldi, water sector expert at PA Consul ng Group, is not to resist change, but rather see this me of regulatory uncertainty as a call to arms: "Companies must focus on driving value from disrup on and not be passive par cipants. They should push the regulator to adapt the regulatory regime to accommodate the new business models needed to deliver for customers going forward. Companies should be demanding of their regulator just as customers are demanding of the companies." I N A S S O C I A T I O N W I T H NETWORK / 37 / MARCH 2018