Adapting regulation in a Fast-changing World

I presented at the Regulatory Policy Institute’s Westminster Conference on 2 May. The theme of the event was Is there a need for a new social licence for utilities to operate?

The third session, which I participated in, was chaired by Dr Tony Ballance, Director of Regulation and Strategy at Severn Trent Water. It also featured Hannah Nixon of the Payments System Regulator and Sheldon Mills of the Financial Conduct Authority. It focussed on what the debate around public services meant for regulators and the regulatory framework.

My remarks concentrated on how the regulatory framework in energy had already been adapted over several years to cover social and environmental guidance (SEG), but it remained incomplete and in need of modernisation. The first intervention of this type was provided for by the Utilities Act 2000, and initial guidance was issued to the then recently established GEMA in 2002. It had been subsequently updated, most recently in 2011, but has been in stasis since then and in its current form, the guidance was out of date and incomplete.

The proposed Strategy and Policy Statement (SPS) for Ofgem legislated under the Energy Act 2013 had been designed to incorporate a wider specification of policy, strategic priorities and outcomes sought, and was to last for five years or until there was a general election. The changes also included a requirement on the regulator to produce an annual report provided to the secretary of state by the regulator setting out how its work programme supported the implementation of the SPS and how this contributed towards meeting the desired policy outcomes. These proposed arrangements had merit.

Although DECC had consulted on a draft statement, it had been shelved in the run-up to the 2015 general election. This situation contrasts with the position in the water sector where an SPS had been adopted in 2015 and subsequently reissued in 2017. The outcome was that in the energy sector the 2011 SEG remains in place, and Ofgem’s most recent report under it was issued in December 2018. I argued that the energy sector needed to revert to an SPS that was appropriate for today’s smart, flexible energy system, and which could also make explicit social charter expectations and what was expected from licensees.

I also explained why a more streamlined structure around clear policy priorities, principle-based regulation and governance rationalisation, advancing ideas on how these issues could be brought together under a reworked model.

There existed a great opportunity to give effect to this new structure as part of the on-going joint review of energy code governance initiated by BEIS with Ofgem’s support. After a pause following the third phase of Ofgem’s Code Governance Review, which had picked up remedies advocated by the Competition and Markets Authority (CMA) following its energy sector investigation, this latest review was launched last November. There seemed to be a high level of agreement across the energy sector that further reform is needed, and the CMA itself had concluded that code governance in the energy sector was having an adverse effect on competition.

Workshops on change options were held back in February. BEIS and Ofgem had made clear that officials are considering several options. At the micro-level wide-ranging process had been advanced, but there was growing support for substantial reform of the codes system. At the other extreme, more radical interventions were being proposed that included moving away from the codes system.

In different ways, the debate recognised that an increasing range of external social, technological, economic and political factors are influencing the power sector and its development. In my view, the system architecture also needed to recognise new interfaces and procedures necessary to allow the inclusion of new business models and multi-party interactions beyond incumbent players, with specific regard to the needs of smaller players often active across other sectors.

The opportunity should be taken at the same time to rationalise code structures as 11 codes, six code administrators and five delivery bodies were clearly excessive. Elexon’s recent proposals (see p15) were in the right ballpark here and should be considered very seriously.

An initial consultation was due shortly, with the government aiming to present proposals in the energy white paper promised for later this year. It was probable that this would return to proposals to licence code administrators and give Ofgem wider powers to intervene in code governance but with the establishment of an independent adjudicator. All of these had merit.

Nigel’s presentation is below and in next week’s Energy Spectrum (issue 665).