Fairness in utilities: The implications of public purpose

There is a common consensus around the need for greater public value creation within utilities. But, as Sustainability First’s Martin Hurst sets out, this requires a much more supportive culture from regulators, founded on endorsement and encouragement from policymakers.

The extent to which short term shareholder returns should be the main focus of corporate strategy has been questioned increasingly over the past few years. Even mainstream players such as Larry Fink – chair of Blackrock, the major investment fund – now accept that a wider focus on purpose, and specifically on Environmental, Social and Governance (ESG) factors, is a long-term driver of shareholder value.

Nowhere is this truer than in public utilities. These sectors deliver “essentials of life”: water, energy and digital access. They are core to answering the long-term challenges of net zero, climate resilience and protecting nature. In a post Covid-19 world they will be more than ever under the spotlight as deprivation increases and the focus increasingly falls on achieving a “fair transition”. And where utility companies are monopolies, a focus on public value and service is important for them to maintain their licence to operate and justify their continued existence in the private sector.

Sustainability First’s three-year project, Fair for the Future, has mapped the disruptive climate of risks and opportunities behind the case for public purpose orientated utilities and set out what companies need to do to move in this direction (and how progress can be measured).

Our major new Report, Regulation for the future: The implications of public purpose for policy and regulation in utilities, now analyses what the public purpose agenda means for regulators and policy makers. Our in-depth research explores what government actors can do to encourage a stronger focus on purpose in energy, water and comms companies, in the process helping to drive value creation and resilience for all stakeholders.

We are encouraged by a number of recent moves by policymakers and regulators in this area including new Ofwat thinking on public value, Ofgem’s approach to adaptive regulation and government statements about new statutory duties and strategic policy statements.

However, we are concerned by the continued adversarial relations between regulators and some companies – as exemplified in RIIO2 and PR19. Equally, the continued tendency from government and regulators to push back long-term issues and to underplay the legitimate expectations of the next generation is a major obstacle to net zero, climate resilience and preserving the natural environment. In our view, a series of one-shot games will not deliver for people or planet.

We do not absolve companies from the responsibility to act themselves, and argue strongly that regulators cannot impose public value: ownership for the agenda in companies needs to sit across the organisation – not be nested in regulatory affairs or PR. But whilst companies need to show leadership, it is important to recognise that they don’t operate in a vacuum. Public value cannot be fully delivered without a much more supportive culture in regulators, founded on endorsement and encouragement from policymakers. Thirty years since the design of the current regulatory system, it now requires more than incremental change.

Key recommendations in the report include:

1. Trust, culture and principles: A comprehensive package of measures is urgently needed to create ‘an infrastructure of trust’ and fundamentally different culture on all sides. Government, regulators and companies need to work hard to build safe spaces for mature discussion of difficult issues. A new set of ‘Sustainability Principles’ for economic policy and regulation is needed to create the appropriate values and norms for purposeful business.
2. Who pays for welfare: Government needs to urgently clarify how it sees the balance going forwards between the welfare system and utility company support for people in fuel and water poverty and who cannot afford to access broadband, now and in the future. The debate of who pays – bill-payers or tax-payers – cannot be ducked any longer.
3. Citizen interests: Policy and regulation in utilities needs to move from a focus primarily on consumer interests to also include citizen (and future citizen) interests. All parties need a significant reappraisal of the role of place, local democracy and communities in utilities, particularly where these are place-based anchor institutions in a local area.
4. Price reviews: Regulators should only do those things through formal price reviews which cannot be done well through other routes. They should take those parts of company business plans which are high on social/environmental content – particularly if hard to monetise – and relatively low on bill impacts – out of the price review process (where this is based around comparative competition, outcome incentives and econometrics).
5. Adaptive planning: A fundamentally new process of ‘adaptive planning’ is needed – with future thinking and scenarios at the heart of infrastructure investment plans and plans which deliver over multiple price control periods.
6. Regulatory duties: at a minimum Ofgem, Ofwat and Ofcom should all have net zero statutory duties. Ofgem and Ofcom should also have climate resilience and adaptation duties, in the same way that Ofwat currently has.
7. Strategic Policy Statements: Government should widen its use of Strategic Policy Statements to regulators, including to: ensure that long-term issues are not deferred unnecessarily; require improved liaison with Local Authorities and directly elected mayors; and direct more strategic inter-regulator working on systems issues, such as climate and resilience, and common issues, like culture and governance – where there is an opportunity to more widely leverage the work of the Financial Reporting Council.
8. Climate adaptation: Government should further develop its net zero and fairness agenda, to cover climate change impacts and wider resilience needs.
9. Stakeholder engagement: There remains a strong role for formal company level independent groups and wider company stakeholder engagement (although the remit needs to focus more on purpose, local/community engagement and fairness and culture). Taking some issues to regional or national level – via regulators and policy makers as appropriate – and using deliberative forums such as citizens’ assemblies is also necessary.
10. Third-party assurance: Regulators should institutionalise a significant role for third party and risk-based assurance, concentrating instead on the things only regulators can do well, thereby deescalating at least part of the current regulator/company tension.