The government has revealed plans to hold a “thorough review” of economic regulators’ duties, including those of Ofgem and Ofwat, to ensure they remain fit for purpose.
The Department for Business and Trade (DBT) said the expansion of their duties over time has made it harder for regulators to manage priorities and trade-offs as tensions arise.
It said Strategic Policy Statements can provide a “helpful legislative steer” but regulators must still independently determine how to balance their duties.
The review was one of number of announcements in a wide-ranging consultation on regulation, which also included proposals for the water sector to adopt same price control appeal process as the energy sector.
Alongside this more general consultation, the department also released a more specific follow up consultation confirming its decision to proceed with proposals from July to extend the growth duty contained within the 2015 Deregulation Act to economic regulators, including Ofgem and Ofwat.
The government has already introduced a new net-zero duty for Ofgem as part of the Energy Act, which became law in October. A senior Ofgem director recently conceded that the new duty would “strengthen” its efforts to decarbonise the energy system, despite the regulator previously dismissing it as unnecessary.
In its wider consultation, DBT said these developments will leave economic regulators with four key duties: protecting current and future customers; promoting economic growth; ensuring effective competition; and delivering decarbonisation and protecting the environment.
The department said how these duties are balanced is “fundamental” to independent regulation, protecting decisions from political intervention, protecting markets and ensuring stability. It said a lack of clarity can lead to “inconsistency” in decision-making.
DBT said the review will establish “exactly what outcomes the government wants to see from economic regulation.” It said the government is seeking to “better organise regulator duties, including whether they can be rationalised (e.g. where multiple environmental and sustainability duties exist), focus them back of delivering economic outcomes and make the regulatory framework easier to navigate: a review into this would therefore also consider how economic and non-economic duties interact.”
One of the most notable examples of tension between regulators’ duties has emerged in relation to funding decisions by Ofgem and Ofwat and the immediate impact on consumers bills.
DBT said many investors, companies and industry experts have suggested that “the levels of investment that regulators allow do not align with the levels of investment others consider necessary.” Although regulators argue it is necessary to present a strong challenge to companies’ investment proposals to minimise bills, the department said industry figures argue that this can lead “underinvestment and poorer outcomes.”
The consultation therefore proposed to hold a “robust assessment” of infrastructure needs across energy networks and the water sector to support regulators’ decision-making and hold them accountable.
“The government recognises the importance of regulatory independence in delivery investment,” it explained. “However, regulators being held sufficiently accountable and subject to effective scrutiny is also important.
“The government does not look to tell regulators the specific levels at which they should set allowances for infrastructure investment. However, in the context of significant investor and industry concerns raised, the government regards a robust independent assessment of infrastructure needs as necessary for investor assurance.”
When reporting on funding decisions, the consultation proposed that Ofgem and Ofwat should include comparisons to figures issued by other public bodies, such as the Climate Change Commission and the National Infrastructure Commission, as well as “future figures outlined in the infrastructure needs assessment.”