What Exactly are the Sectoral Economic Regulators FOR?

(by Catherine Waddams) Two recently announced reviews risk that we shall be given different answers for different regulators.  A particular danger is that some regulators may be left with decisions over which they have neither specialist expertise nor political legitimacy.

The two reviews (Ofgem and Ofwat) announced by government (DECC and DEFRA) raise a series of important questions, some the same for both, some interestingly different. The range of questions ranges from the deeply fundamental to more operational outcomes.  Most fundamental is the issue raised in both reviews about the government’s objectives for independent economic regulation and the boundary of responsibility between Government and the regulator. The regulators were modelled on pure economic regulation, but over the years since their first inception nearly a quarter of a century ago, the introduction of government guidance, particularly on social and environmental issues, has left them making decisions which are more appropriately left to Ministers.

The Conservatives recognised this in their manifesto where they pledged that “Ministers will be unambiguously responsible for determining energy policy and delivering an Annual Energy Statement to Parliament to set a clear direction for energy policy”, a continuation of a trend which we had already seen in the dying days of the previous government with the new emphasis of regulator’s duties in the Energy Act 2010. This is good news for determining policy and implementing it IF ministers are prepared to confront the necessary uncomfortable trade-offs between competing objectives in a rational way, something which few governments have done in the past.

Too often the regulators have been used as convenient scapegoats to take the blame when things go wrong, while politicians take the credit when events turn out better. It may be easier to promise to take appropriate decisions in opposition than to deliver on the promise in Government. The Lib Dems said little about regulators and structures before the election, but they did promise some detailed intervention in energy tariffs which are difficult to reconcile with a competitive market, so indirectly raise similar issues of regulatory responsibility and decision making.

Answers to the fundamental questions about the relation between each regulator and government should be similar to ensure consistency – and will have implications for the other ‘Ofs’ – Communications, Rail Regulation and the Civil Aviation Authority.  In this sense co-ordination across the sectors is important, even if the detailed format of regulators and the implementation strategies in different sectors are different.  Perhaps the Better Regulation Executive in the Department of Business Innovation and Skills will be able to ensure this coherence.  The Treasury also has a strong interest, in particular in ensuring that the regulatory system can deliver the substantial infrastructure investments which are urgently required in the next ten years across the sectors (more than half a trillion pounds according to Helm, Wardlaw and Caldecott), as well as wanting the best value for money from the regulators. These outcomes are important consequences of the review, but should not obscure the fundamental nature of the questions being asked, or their importance for the long term future of these institutions in determining both the business wealth of the economy and the affordability of basic services for households.

The Next Generation Utilities Forum has provided an opportunity for some debate on these issues.

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