Over the last parliament, Ofwat – and more recently Ofgem – have started the shift towards outcomes-based regulation, a “lighter touch” regime than the prescriptive, box-ticking exercise that prevailed thus far.

It is intended to give utilities the freedom to deliver the best outcomes for consumers, and reduce costs at the same time.

In non-regulated spaces, competition is the driver for good quality service, with customers free to move to a supplier – of water or energy – that they choose.

However, politicians have taken issue with utilities, and their regulators, accusing them of failing to do enough for consumers. The result is the Competition and Markets Authority’s (CMA) investigation into the energy sector, and the potential remedy is either more regulation or more competition, depending on which camp you inhabit.

Labour is in the first camp and intends to regulate the market towards what it views as health. This includes forcing the regulator to make suppliers cut energy bills in line with wholesale costs, and threatening to remove licences should customer service remain poor – for either water and energy companies.

The Conservatives and the Liberal Democrats are in Camp Competition. By encouraging competition – by increasing liquidity and pushing up obligation thresholds – the market will have the freedom to thrive. Making switching easier is also a major part of their plans – enabled via smart meters, a policy introduced by then-energy secretary Ed Miliband in 2008.

The role of the state, whether it steps back and becomes more hands off, or whether it directly intervenes in the market, rests in the balance as we approach 7 May.

 

Regulation vs competition

Even the Tories are not convinced that free markets will deliver without some government prompting, says Mathew Beech.

Competition should drive the best deal for consumers by pitting companies against each other, leaving them to fight for business and offer great deals. Regulation aims to mimic these forces in monopoly industries where competition is not practicable – such as energy distribution, transmission, and water.

However, the worlds of regulation and competition can cross, with some competition being encouraged in regulated sectors. This helps to keep incumbents on their toes and also provides the regulators with a reference point in terms of costs and charges.

Within water, new entrants are plumbing in new developments, while in energy, more is being done to encourage competitors to take on the incumbent distribution network operators.

This is an example of competition and regulation working in tandem, helping to provide the best outcomes for consumers.

Economic regulation, setting how much the monopoly companies can earn, is the bread and butter work of Ofgem and Ofwat.  But there are different schools of thought as to how prescriptive the regulators should be.

In the past, the regulators have shown a firm hand. But this has led to criticism that companies take a “tick box” approach to running their businesses, focusing on pleasing the regulator, not the customer.

Consequently, we have recently seen Ofwat and Ofgem proclaim that they will increasingly adopt “principles based” regulatory approaches.

At Utility Week Live (see page 6), Ofwat senior director for customers and casework Richard Khaldi said the regulator has to “be there as a backstop”. Ofgem’s senior partner for business development, Sarah Harrison, agreed that allowing the companies more flexibility around how they chose to act in the best interests of customers is what the regulators should be doing.

However, just as the regulators want to step back, the political pendulum is swinging towards intervention.

Labour goes hardest with this idea. The price freeze and a compulsory national social tariff for water are backed up with plans to give Ofgem more power, and a duty, to get involved in the market, forcing suppliers to bend to its will.

The Conservatives and Lib Dems, while favouring competition in energy, still want increasing influence for the government and the regulator. Contracts for difference, the Energy Company Obligation, and smart meters are all political interventions in the sector – interventions the regulator will have to oversee.

The Competition and Markets Authority (CMA) investigation, just by the fact Ofgem felt the need to refer the sector in the first place, shows there are concerns about how effectively competition is working. Sticky customers, a lack of trust, and a belief that prices “go up like a rocket and down like a feather” are symptoms of a market that is failing to function, they say.

However, doing away with competition is not the solution, according to Michael Liebreich, chairman of Bloomberg New Energy Finance. He says direct intervention and regulation, such as in the Soviet Union, did not fail because of a lack of intelligence or planning, but because they lacked market forces and price signals.

Regulation and competition are both here to stay. However, the extent to which regulation and intervention encroaches into a free market is very much open to debate.

 

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