Ensuring regulatory certainty should not rule out “radical change” to the framework that utilities operate in, Ofwat’s former chief executive has said.
Cathryn Ross spoke at the launch last week (7 March) of a new report by Sustainability First on regulation, which suggests that although an overhaul of utilities regulation is “well overdue” it should not maintain existing structures.
The thinktank’s paper entitled Circling the square: Rethinking utilities regulation for a disrupted world, says that regulation must adapt to cope with growing challenges like climate change.
Ross said: “I don’t think that the importance regulators place in delivering certainty and stability should necessarily mean we shy away from radical change if we get to a point where it is clear that what we have is not sustainable.
“It is better to come out with a really clear vision that obviously addresses the issues of the day and if that is radical so be it.”
Failing to address underlying issues could render regulatory certainty “illusory”, Ross said. “I don’t think the point about stability necessarily leads to tinkering around the edges.”
Ross, who left Ofwat at the end of 2017 to take up a role as director of regulatory affairs at BT Group, said regulators should no longer shy away from thorny decisions that may redistribute resources from one set of customers to another.
As an example, she cited her decision not to mandate social tariffs in water because she did not believe that it was a regulator’s job to transfer resources from one group in society to another.
“It’s not true that regulators have never and should never be involved with distribution issues,” she said, adding that the post-privatisation consensus that competition is the best way to deliver investment in utilities is breaking down.
“The biggest challenges facing us today are the ones that require genuinely epoch shifting investment. Competition might deliver that investment but there are other policy approaches that can deliver that innovation with greater certainty and potentially lower costs.”
While competition has delivered “very considerable benefits”, Ross said there is “no doubt” that the utilities are moving to a “more nuanced” environment in which regulators will now need to adopt a “much more multi factored approach”.
She was backed up Alistair Phillips-Davies, chief executive of SSE, who told the event that the industry should not be “afraid” to embrace “radical change” if such an approach is required to tackle big challenges like the drive to cut greenhouse gas emissions to 80 per cent of 1990 levels by 2050.
He also said that Ofgem could do more to prevent “inappropriate” operators being allowed to operate and that the regulator had yet to find the “right balance of risk or reward” in its review of the RIIO2 network regulation.
Sarah Deasley, a director of Frontier Economics which hosted the event, said that given the scale of social, technological and environmental change since privatisation, it is “not surprising” that a review of regulation is needed now. She said: “A review is definitely very timely and also very challenging.”