What’s the hardest job in energy? Right now, it just might be running Ofgem, the regulator everyone loves to hate. The organisation, currently suffering strained relations with its political masters, its regulatees, the media and an increasingly hostile public, is looking for a new boss. Alastair Buchanan is to step down as chief executive in June when his second five-year term comes to an end.
His successor will take the throne at a crucial moment. Labour has sworn to abolish Ofgem if it gets into power in 2015. True, Ofgem has been threatened before and survived relatively unscathed. But this time there are other prickly issues to deal with too. Aside from saving its own neck, the regulator has less than two years to sort out the supplier market, bring forward smart metering and implement Electricity Market Reform (EMR). It’s the mother of all
turnaround jobs.
Before the new chief executive can be appointed, a new chair to replace Lord Mogg must be found. Mogg stands down in October and the recruitment process is under way. Industry sources suggest interviews have already taken place, but a Department of Energy and Climate Change (Decc) spokesman refused to provide any information on the timetable for the appointment. Ofgem watchers will scrutinise the choice of chair for clues as to the direction of travel and the likely colours of a new chief executive, whose appointment the chair will oversee. It’s a big job: expect a big hitter.
Both the new chair and chief executive will find an Ofgem very different to that created in 2000, when predecessors Ofgas and Offer were merged. “It is becoming increasingly complex over time,” says an industry insider who was a key figure in regulation at the time of privatisation. “In the Energy Bill, the government has set out a series of objectives that Ofgem has to work towards, and it will be required to set out what it is going to do to achieve them. It’s making Ofgem the creature of government, which is diametrically opposed to what was originally envisaged. There has been a dramatic 180 degree turn on the role of regulation.”
One of the first tasks of the chief executive will be to work out exactly what their role is in this new landscape. As prime minister David Cameron made painfully clear with his intervention in retail market reform last year, the days of independent economic regulation are over.
How did it come to such a pass? Ofgem is subject to the prevailing national mood, which is rolling back on independent regulation across the board. This has hit Ofgem particularly hard because of its own behaviour, under Buchanan. One source close to the regulator tells of how relations with Decc became increasingly strained from the mid-2000s. Some pro-market big hitters within the regulator – notably economist George Yarrow – quit as Buchanan took an increasingly interventionist stance against the background of rising gas prices and mounting government pressure. Buchanan is widely thought to have jumped before he was pushed, for example, in deciding to “probe” the energy supply market.
According to the source, this souring of relations culminated in Buchanan’s team refusing to brief Decc civil servants on what was in the controversial Project Discovery prior to its release to the press. The result was fury in Whitehall, in what the source calls a typical example of “political tone deafness”.
The new chief executive will be appointed by the new chairman, who having just been appointed by Decc, will be on message with the department’s agenda. It seems bound to be a politically motivated appointment, so the individual should at least start on good terms with ministers – though that could change by the time of the next general election. However, relations with Whitehall, important though they are, will not be the biggest of the new chief executive’s problems.
Thornier by far are issues around policy. The appointee will have the unenviable task of implementing EMR, a programme that many respected sources argue is doomed to failure. Michael Pollit, assistant director of the Electricity Policy Research Group, summed it up neatly in the notes to his Beesley lecture on EMR in November 2012. “Summary of talk. Question: will it work? Answer: no.”
Retail market reform is also bound to fail, say the pundits. Worryingly, it stands in fundamental contradiction to smart metering, the other big customer-facing initiative Ofgem will oversee. One insider says: “I think the retail policy is going to be a failure. It operates on the assumption that customers are the problem and need to have it made simple for them. I don’t think customers are going to change, so this will simply reduce competition and remove attractive offers from the market. There is then the problem of making this consistent with smart metering, which depends on smart, informed customers making decisions.”
The new chief executive will have to make some big decisions very quickly. Ofgem has the power to refer the supplier market to the Competition Commission, and many believe it should have done so years ago. There will also be the small matter of the day job. Ofgem has ballooned into a 650-people organisation, with about half of its role falling outside its regulatory remit. It has taken on additional duties including sustainable development, social programmes, programme administration and wholesale market monitoring. Thus it has become a complex and varied organisation that will require a seasoned manager just to keep the wheels turning.
Who has the experience, skills and guts to take on such a job? While most sources are reluctant to name names, a few options are being discussed privately. “We just want someone who knows the industry, who knows what they’re doing,” says the chief executive of a major regulated business. One such individual would be Iain Osborne, director of supply at Ofgem from 2001 until 2004, then chief executive at the Northern Ireland Authority for Utility Regulation (now called the Utility Regulator). Currently he is group director of regulatory policy at the Civil Aviation Authority, and his name is being touted in several quarters.
Other suggestions arising from a straw poll of industry bosses include Catherine Waddams, a well-known academic based at the University of East Anglia’s Centre for Competition Policy – although Waddams is believed to have previously declined a seat on the Ofgem board. Inevitably, the outspoken economist and utilities specialist Dieter Helm’s name has been bandied about. Alan Sutherland, chief executive of the Water Industry Commission for Scotland, has been mentioned. And internally, there’s the current markets partner, Andrew Wright.
Ultimately, the appointment seems bound to be governed by politics. Whether that will result in the best outcome for the industry and its customers remains to be seen.
This article first appeared in Utility Week’s print edition of 3rd May 2013.
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