The major political parties have proposed radical shake-ups of the UK’s economic regulators after the next general election. Megan Darby looks at what’s gone wrong
A regulator’s ultimate objective is to put himself out of a job. So goes the political maxim. Yet in energy, Ofgem is increasingly intervening in the competitive market, under political pressure. Meanwhile, the water sector is making some progress towards increased competition, starting from far behind and with a fair amount of foot-dragging.
None of the utilities is going far or fast enough for Conservative MP John Penrose. In a paper called We Deserve Better published last week, he proposed a liberalising agenda to empower customers and loosen the hold of economic regulators. The “big regulator” model is failing, he says, and it’s time for the “big consumer” to rise up. Most radically, Penrose proposes handing over responsibility for regulating competitive sections of the market to the Competition and Markets Authority. The remit of Ofgem and Ofwat would be pared back to the network monopolies.
“Why do we have economic regulators still in place, fiddling around trying to pretend that they are the consumer, when we could have consumers instead?” asks Penrose.
Manifesto pledge?
The idea has been circulated before, but the timing of this paper suggests the Tories are weighing it up for their next election manifesto. It may also be seen as an attempt to seize back the cost-of-living agenda from Labour, which has pledged to scrap Ofgem and replace it with a “tougher” regulator that would force energy companies to pass on savings to customers.
Shadow energy secretary Caroline Flint described Penrose’s proposals as “tinkering at the margins”.
“After a number of high-profile mis-selling scandals – and with more investigations ongoing – the idea that consumers would benefit from even lighter regulation would strike most people as bizarre,” she said.
Endorsements
Penrose got a more sympathetic hearing at a Regulatory Policy Institute conference in London on 26 April. Veterans of privatisation Stephen Littlechild and Sir Ian Byatt endorsed his aims and welcomed a rethink of the way the sector is regulated.
However, there was a degree of scepticism over how liberal a regulatory regime could be achieved in practice, given the public and political pressure to intervene.
Part of the rationale for Penrose’s plan is that shifting to competition regulators would limit the opportunity for political meddling. Whereas economic regulators can place conditions on the market to try to prevent harm to consumers, competition regulators only get involved after something has gone wrong. That puts a barrier between independent regulation and public pressure, he says.
The wind is blowing in the opposite direction, however, with the Energy Bill placing obligations on Ofgem to carry out government policy. Even prime minister David Cameron could not resist getting involved last October when he pledged to force energy companies to put customers on the cheapest tariff.
Frontier Economics director Phil Burns is not convinced that restructuring the regulators would make much difference. “Political interventions over customers that do not switch, the number of tariffs and ‘bamboozled’ customers have arguably driven Ofgem to go further in terms of interventionist measures than a competition authority would have seen fit,” he says. “Against this context, such institutional change would probably have a limited impact on outcomes today.”
Meanwhile, the aspiration to empower consumers is hard to disagree with. Yet there is a risk of raising false hopes, warns Sir Ian. Many of the factors underlying price rises are determined by policy, he says. Customers are increasingly given a say through consultations, but their influence may realistically be limited to customer service matters.
This article first appeared in Utility Week’s print edition of 3rd May 2013.
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