Ahead of the curve, the charity Sustainability First were talking a few years ago about a new, wider definition of the public interest and they are now leading a project called “Fair for the Future” aimed at helping companies better address the politics of fairness and the environment and developing a straw man “Sustainable Licence to Operate”.
For the gas and electricity distribution networks this is part of a journey that I would say a number of them have been on for a while.
It seems to me they do generally have a strong public service ethos. When staff are out in heavy storms trying to restore supplies, the companies aren’t doing it on the basis of a calculation around overtime pay versus incentive payments but because they understand they have a responsibility to the communities they serve. At least one GDN has described itself as like a fourth emergency service, dealing swiftly with safety calls when there is a potential gas leak.
On top of that the RIIO framework has created incentives to encourage a stronger focus on vulnerable customers and decarbonisation – albeit some of these may not survive into RIIO2 as Ofgem looks to tighten the screws.
The risk is that companies end up so focused on what the regulator wants that they lose sight of what society would expect a responsible organisation to do.
Part of Ofgem’s rationale for this is responding to public concerns that companies should not be profiteering from their monopoly position. And certainly, perceptions around outperformance are one of the issues networks are having to deal with – with some having made “voluntary” contributions to share some of their RIIO1 gains with consumers (beyond what the regulatory regime already requires).
But that focus on rates of return that comes through strongly in RIIO2 misses some of the wider mood music.
Looking beyond utilities, consumers are voting with their feet where companies don’t behave in what can be seen as a socially responsible way.
This can be not paying taxes, single-use plastics, unwanted “hugs” in the workplace, abuse of customer data or fat cat bosses’ bonuses. This gets reflected in suggestions such as Theresa May’s idea a few years ago of worker representatives on boards, or other changes to corporate governance. And among investors there is a resurgence of interest in socially responsible investing looking at environmental, social and governance performance as a guide to long-term prospects.
The risk with RIIO2 is that the companies end up so focused on what the regulator wants – or at least what the regulator is willing to provide financial incentives for – that they lose sight of what society would expect a responsible organisation to do. If Ofgem is out of touch with that wider zeitgeist then the networks should not be simply playing to its tune if they are to regain the legitimacy that they need.
Ofgem has talked about a stronger consumer voice in RIIO2 but it’s not clear what emphasis that voice will ultimately be given in Ofgem’s decisions.
However, the companies should be in no doubt that listening to consumers is vital – not because the regulator says so but because that is what society expects.
Rachel Fletcher understands that, with talk of gold standard corporate governance and financial transparency, and the citizen interest in seeing water companies acting in the wider interests of society and the environment.
With talk again of merging regulators, the energy networks would do well to listen to her.
Maxine Frerk is a director, Grid Edge Policy. A previous senior partner networks at Ofgem, she is also an associate with Sustainability First and chair of SGN’s Consumer Engagement Group
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