Less is more.....

Regulating utilities is far from a straightforward task – and the job regulators do is open to continued media, public and Government scrutiny.

So, it is very interesting, and somewhat against the grain of developments over recent years, that the Government has just closed its call for evidence, before consulting, on Ofgem’s powers, with a possible view to reducing them.  The Government is also conducting a far broader review of Ofwat’s role and powers.  Getting the right balance in the regulators’ duties deserves a level of consideration that has been lacking in recent years.

In the early days of regulation, a number of commentators saw regulation as a simple task: “to mimic the operation of a competitive market”.  The architect of our modern system of regulation, Professor Stephen Littlechild was keen to point out the misnomer, as the reason to have network regulation was “precisely because such markets do not operate in the same way as more familiar commodity markets.”[1]

The regulators’ original duties were by necessity, not overly simplistic, but were not unnecessarily elaborate either - and gave regulators a clear guide.  Put simply the original primary duties in the case of the gas sector were to ensure the supply of gas where it was economic to do so; and to encourage the necessary investment was undertaken by ensuring that the provision of gas services could be financed (by earning a ‘reasonable return on their capital’[2]). 

Secondary duties covered: protecting the interests of consumers; providing incentives to be efficient; protecting the public from dangers; and allowing for competition. 

These seemed a sensible basis for regulatory decision-making.  The modernised duties following the Utilities Act of 2000 with the merger of Offer and Ofgas into Ofgem, put the customer first (as it also did for electricity and water) with the principal objective being to “protect the interests of existing and future consumers” - with a greater emphasis on promoting competition.  Again, this was relatively straightforward to interpret, whilst allowing Ofgem a reasonable amount of latitude, within a robust appeal regime -provided for by the Competition and Markets Authority. 

Since this point, successive Governments have sought to ‘help’ regulators by giving them greater powers and duties potentially takes them further away from their core purpose – making the already very difficult job of being a regulator even harder.

It has proven too tempting when Government has encountered immediate problems or were prescient enough to foresee problems over the horizon - to simply add more powers to regulators or extend their remit and duties.  New duties relating to net zero and growth are the most recent examples of new duties being given to Ofgem.  It is difficult to see that the complex set of duties and responsibilities that have been placed on regulators by Government over time are more likely to deliver the right outcomes for consumers and society. 

It is perhaps no surprise given the increase in scope provided to Ofgem that it has grown from around 300 staff from its beginning (in 2001-02) to over 1,800 today (albeit that over 600 people work on Government funded schemes like E-Serve). Over the same period Ofwat’s staff numbers have increased from 219 to 322[3].  

There are two points to make in encouraging Government to seize this opportunity to simplify Ofgem’s duties (and in due course, Ofwat’s too).

First, when new duties have been introduced, they have not elicited the outcomes that Government - and the general public might have expected.  A real example of this is the resilience duty that was given to Ofwat.  One would be hard pressed to say the water industry is more resilient now than it was in 2015 when the duty was first introduced.

A reason such duties may have not ‘bitten’ is because of a lack of precise Government guidance.  Whilst there are Strategic Policy Statements (SPS’s) for water and energy, they lack precision.  For water, the SPS gives Ofwat a broad latitude – and certainly what was expected in relation to resilience would appear to have been missed – where the guidance simply refers to Ofwat needing to “challenge the water industry” to plan, invest and operate in a way to satisfy the needs of current and future customers.”  The equivalent SPS for energy was not produced until May 2024 - when provision for it was made by the Energy Act of 2013 – and again it is broad in nature.  There is a lengthy description of the regulatory regime, but little in the way of specific ‘asks’ or requirements.  In contrast, far greater clarity in the guidance has been provided in the telecoms sector to Ofcom, by the Government.

Second, and most importantly, more duties simply obfuscate what is already a complex job for regulators.

Ofgem arguably does not need a growth duty - or indeed a net zero duty - to ensure sensible decision-making.  The growth duty was arguably implicit in the duty relating to the financing of investment, and so it creates unnecessary confusion; and other critical organisations like the National Energy Systems Operator (NESO) have a primary duty to help Government meet the net zero target.

Simplifying Ofgem’s (and other regulator’s) duties would be consistent with the Government’s broader objectives of removing ‘red tape’ to drive economic growth.

So, perhaps the time is ripe to consider what we want our regulators to do and what we want them to focus on.  We should not hesitate to remove duties and powers that at the end of the day don’t help protect consumers. 

If Ofgem were simply carrying out its duty to protect consumers - which for gas is around 23 million homes as well as hospitals, businesses and industry, all connected to a world class network – this would provide a suitable basis for regulating the sector.  Continued expenditure to maintain assets, and investment in new technologies to reduce our methane/carbon emissions (key tenets of Cadent’s RIIO-3 plan) could be allowed for - and the continued delivery of efficiencies could be incentivised.  This would yield as good, if not better outcomes for UK consumers and wider society.

Sometimes, less is indeed more.

[1] See ‘Privatisation, Competition and Regulation’ Occasional Paper 110 IEA, by Stephe C. Littlechild (2000).

[2] This additional emphasis relates to the water sector, where this is made more explicit.

[3] Numbers taken from Ofgem and Ofwat Annual Reports for 2001-02 and 2023-24.