The National Infrastructure Commission is calling on the government to deliver “real policy changes rather than the promise of further reviews” for the economically regulated utilities sectors.

Sir John Armitt, Chair of the National Infrastructure Commission (NIC) was commenting on the publication by the government of a policy paper in response to the Commission’s 2019 study on regulation, Strategic Investment and Public Confidence.

The NIC study highlighted that, whilst the current system of regulation had generated significant investment over the past decades, it was increasingly facing new challenges that it was not designed to address.

According to the Commission, while the government’s paper moves forward with action on some of the NIC’s recommendations, it falls short of fully endorsing the recommendations or agreeing to make the necessary policy changes.

The NIC recommendations included updating regulator duties, setting a long-term strategic framework for regulators, and exploring the role of increased competition in strategic investments.

Sir John Armitt said:

“We welcome the fact that government has set out publicly its thoughts on the future of economic regulation.

“Among other things the government has now committed to issuing additional strategic guidance for regulators, reviewing their duties, and exploring increased competition in strategic investments. These commitments reflect the thrust of the Commission’s recommendations in these areas.

“Nonetheless, it is now over two years since we made these recommendations to government. We recognise that there have been significant issues in the regulatory space, not least for consumers facing rises in the price of energy, but this is a missed opportunity to ensure all regulators are straining every muscle to help achieve net zero and deliver for consumer interests. We need real policy changes rather than the promise of further reviews.”

The Commission’s 2019 report made eight recommendations to strengthen and update the regulatory framework for economic infrastructure, and to improve public and political confidence in it. They included:

• Government should introduce legislation by 2021 to ensure that, where currently missing, Ofwat, Ofgem and Ofcom have duties to require them to ensure their decisions promote the resilience of infrastructure systems and help achieve the net zero goal; and also require them to collaborate with each other to avoid contradictory regulation
• Government should introduce legislation, ahead of the next price controls, to remove any barriers to the use of competition in the provision of strategic enhancements to water and energy networks
• The government should set out a long term strategic vision for each of the regulated sectors, through strategic policy statements, within the first year of each Parliament, to support lasting plans and stable funding.

Government sees competition as most reliable means of promoting growth, efficiency, and innovation in regulated sectors

The policy paper, in which the government outlines its strategic priorities for the utilities sectors, was accompanied by an open letter from The Rt Hon Kwasi Kwarteng MP, Minister at the Department for Business, Energy & Industrial Strategy to the Chief Executives of Ofgem, Ofwat, and Ofcom.

He told the regulators that “the government will ensure the UK is the best regulated advanced economy in the world” and that new regulatory principles set out in the paper are focused on promoting growth and innovation.

“We therefore want to use this opportunity to set out our overarching ambitions for the three major utilities across three outcomes: promoting growth; delivering a fair deal for consumers; and fostering sustainability. We also expect the UK Regulators Network to continue playing a critical role in facilitating greater collaboration across the sectors where appropriate.”

For the design and delivery of infrastructure, the government continues to see competition as the most reliable means of promoting growth, efficiency, and innovation in the regulated sectors.

Commenting on the water sector, the Business Secretary said that Direct Procurement for Customers has the potential to create new opportunities for investors, promote innovation and drive down overall net costs for consumers.

According to Kwarteng, the government believes Ofcom’s formal market review process has proved particularly effective in unlocking competition in their sector. The government would like to see Ofwat undertake a similar, high-level stocktake by Spring 2022, to identify both opportunities and barriers to unlocking more competition in strategic investment. Where appropriate, this will feed into a forthcoming consultation on economic regulation due at some point in 2022.

The National Infrastructure Strategy had committed the government to maintaining a clear and enduring economic regulatory framework for investors and businesses that could support growth by enabling the major investment needed over the decades to come for the benefit of present and future consumers.

“In turn, it is essential that regulators ensure that efficient and necessary investments and innovation are incentivised by a reasonable return, subject to the normal risks inherent in markets” he added.

He acknowledged that the regulated sectors are different and require distinct approaches; however, he went on to say the government believes there are areas where “greater regulatory consistency could be beneficial in promoting a transparent environment for companies and investors.”

The government also expects the regulators to work together on common challenges in setting the periodic cost of capital and via the UKRN’S newly established Weighted Average Cost of Capital (WACC) taskforce, to work towards alignment where clear benefits can be identified. 

Other expectations set out in the letter include:

Fairness

The National Infrastructure Strategy committed to taking a long-term approach to investment. The government would like regulators to work together, through the UKRN, to jointly consider effective means to support long-term investment within and across sectors that delivers improved outcomes for consumers overall. They should aim to identify opportunities where the facilitation of greater coordination and investment across sectors could help to minimise costs or improve services across the whole system.

Fostering sustainability

The Green Industrial Revolution - the government sees supporting this transition as an important task for regulators, “particularly where the market will not”

Infrastructure investment -the government expects the regulators to play a critical role in encouraging competition and innovation to secure the new infrastructure investment needed to meet the net zero target, as well as supporting the decarbonisation of existing infrastructure.

“We encourage the UKRN to play an active role in sharing net zero best practice - including on how to accelerate the deployment of existing technologies and advance the innovation of new ones - promoting a whole-systems approach where appropriate,” the letter says.

Click here to download the Government's Economic Regulation Policy Paper  

Click here to download Strategic Investment and Public Confidence