The Government is considering extending a new economic Growth Duty to Ofwat which would see the water sector regulator required to “have regard to the desirability of promoting economic growth” when carrying out core functions.

The Growth Duty – which is set out in the 2015 Deregulation Act - currently applies to over 40 non- economic regulators, including the Environment Agency.

The Government has now launched a new consultation on extending the duty to economic regulators Ofwat, Ofgem and Ofcom to ensure they give “full consideration to economic growth” in their decision-making processes.

The consultation paper says the UK is home to world class regulators who protect consumers, protect competition and help drive forward progress in their sectors.

Launching the consultation, the Earl of Minto Minister of State for Regulatory Reform said:

“This government has set out a clear goal – to become the world’s best regulated economy. It will mean we will develop world-leading businesses and create strong foundations so the economy can thrive. This government is also committed to boosting growth and easing the cost of living and this consultation seeks views about how we can increase growth in the sectors regulated by Ofgem, Ofwat and Ofcom, which need further investment to deliver better outcomes for today’s consumers, as well as tomorrow’s….

“In the decades since privatisation, we have seen the UK’s approach to regulating the sectors regulated by Ofgem, Ofcom, Ofwat successfully deliver competition, infrastructure investment and consumer protection. We can be rightly proud that since privatisation, over £450 billion of private sector investment has enhanced our energy, water, and digital infrastructure.”

“Without investors, growth cannot happen”

Commenting on the need to attract and retain investors, the paper warns:

“Maintaining investor confidence in our regulatory regime is key, and this also means stability of the regulatory regime. Without investors, growth cannot happen and should it become more difficult to attract investors then this could result in the need to increase the rate of return offered to investors, which pushes up bills for consumers.”

The consultation document says the energy, water and communications sectors account for around four per cent of the UK’s GDP, and over thirteen per cent of total UK private sector investment.

"We face investment challenges to efficiently deliver the infrastructure needs of current and future consumers"

“Given their economic importance, we want to explore how Ofgem, Ofwat and Ofcom, as the regulators for these sectors, can best contribute to future growth,” the paper states, explaining:

“Given the size of these sectors and given that they are foundational parts of the economy that affect the costs of doing business in many other sectors, the government is committed to driving economic growth and efficiency in the sectors regulated by Ofgem, Ofwat and Ofcom. This is particularly important in the current economic context of high inflation, and businesses and consumers struggling with high prices and the cost of living. In the long run, productivity gains are a significant part of what determines the UK economy’s capacity to grow sustainably without generating inflation.

“However, we face investment challenges to efficiently deliver the infrastructure needs of current and future consumers of energy, water and telecoms, and ensure that these investment needs consider intergenerational fairness for consumers. We want these sectors to strive for maximum efficiency over a sustained period. A well-regulated system will deliver efficient outputs from its inputs, and thus drive economic growth and productivity. Hence it is through efficiency that it is possible to minimise bills for current consumers, bills for future consumers and protect the environment and consumers. Applying the Growth Duty to these regulators would help create an efficient system delivered through good growth-focused regulation... “

Ofwat’s Outcome Delivery Incentives for PR24 “can unlock significant financial outperformance rewards for companies and their investors”

According to the consultation paper, Ofgem, Ofwat and Ofcom already help to deliver growth in their sectors.

Referring to examples of Ofwat’s existing pro-growth activities, the paper cites Defra’s Strategic Policy Statement for Ofwat which sets out the government’s expectations of Ofwat and industry “to deliver significant investment to improve our water environment and explore opportunities for growing some (sic) of nascent markets within the water sector…...We welcome the sector’s work to deliver against this expectation and this consultation is exploring whether extending the growth duty would facilitate even more pro-growth activity.”

It also points out:

“To further encourage growth and investment, Ofwat has also increased the number of Outcome Delivery Incentives for Price Review 2024, which can unlock significant financial outperformance rewards for companies and their investors.

Growth Duty would require regulators to be “mindful of the economic consequences of their actions”

The paper says that whilst the Growth Duty promotes economic considerations in decision making, it is not the (Government’s intention) to undermine environmental or consumer protection.

However, the duty would require the economic regulators to be “mindful of the economic consequences of their actions and that any regulatory action taken is considered and proportionate.”

Regulators have “key role in improving the attractiveness of their sector to investors”

The paper states:

“We believe regulators have a key role in improving the attractiveness of their sector to investors, bringing new products to market by encouraging innovation and ensuring competition to deliver the best service to consumers. The growth duty is not intended to require regulators to pursue growth at the expense of necessary protections, but to ensure that they give due consideration to the potential impact of their activities and decisions on economic growth.”

“When taking regulatory decisions, the regulators must comply with their duties. For these regulators, there are competing pressures of raising investment, minimising bills, and ensuring that costs are shared fairly. An effective regulator will set a strategy that strikes the right balance between competing pressures, informed by an understanding of what approach might lead to maximum growth.

“In assessing how to promote economic growth, these regulators will continue to deliver on the objectives that are already reflected in their existing duties, such as competition….

“These regulators also affect economic growth by the way in which they regulate. The approach to regulation and the behaviour of these regulators sets a regulatory environment in their sectors. A good regulatory environment emerging from the attentive and responsive stewardship of an effective regulator can create the conditions for business confidence and investment, sensible risk-taking and innovation, and proportionate and streamlined regulation.”

The paper points out that “there are many ways that regulators can demonstrate their regard to growth in the way that they foster a good regulatory environment”, including:

• showing speed and agility in decision making
• supporting businesses by providing regulatory certainty
• supporting resilient new entrants to the market
• supporting existing businesses to innovate and change their business model
• responding quickly to wider changes in their sectors

Referring to the Price Reviews conducted by Ofwat, Ofgem and Ofcom, the paper says if the growth duty was extended to these regulators, it would not apply to current price reviews or previous decisions.

“Without investors, growth cannot happen"

Commenting on the need to attract and retain investors, the paper warns:

“Maintaining investor confidence in our regulatory regime is key, and this also means stability of the regulatory regime. Without investors, growth cannot happen and should it become more difficult to attract investors then this could result in the need to increase the rate of return offered to investors, which pushes up bills for consumers.”

The Government is seeking responses to the following consultation questions:

1. Do you agree that Ofcom, Ofgem and Ofwat should be included in the scope of the growth duty specified in the Deregulation Act 2015?
2. What additional guidance would be beneficial to support effective implementation of the growth duty?
3. How would you envisage a regulator’s actions changing as a result of a growth duty? Please outline any benefits you can foresee.
4. How do you foresee the growth duty interacting with existing statutory duties? Please provide examples.
5. Is there any evidence that this will add significant costs to regulators or business? If so, why and what would those costs be?
6. Are there alternative or additional means by which we could improve growth outcomes in these regulated sectors?

The paper says that responses will be most useful if they are “framed in direct response to the questions posed, though further comments and evidence are also welcome.”

In the coming months, the Government also intends to consult on further reforms to economic regulation – and “will also consider other mechanisms through which Ofgem, Ofcom and Ofwat can help deliver growth.”

It also intends to consult on revised statutory guidance that “assists regulators in fulfilling their responsibilities under the growth duty, both at a strategic and operational level, including the proper consideration that must be made before allocating resources, setting enforcement policies, and making sanctioning decisions.”

Deadline to submit responses to the consultation is 11:59pm on 17 August 2023 - click here to download the consultation document.

Click here to access the consultation website