The future of regulation: a response to the National Infrastructure Commission’s call for evidence.
The regulatory framework for the energy, water and telecoms sectors has evolved in a piecemeal fashion since the privatisation and liberalisation of these sectors in the 1980s and 1990s. The challenges of today and tomorrow, in particular those of tackling climate change and the rise of big data, are ones that were simply not envisaged when the current regulators were created. We also have the opportunity to learn from the successes and failures of the past.
There have been some calls for the aggregation of regulators. We think the case for this is strongest in retail regulation, if one thinks that these services may, or should, be bundled in future. But it does not appear to us that this is imminent, or that the benefits of bundling are so profound that they would justify immediate steps to merge the regulators. The case for a single infrastructure regulator is weaker. Price controls are often portrayed as a mechanical, almost scientific discipline but in practice this masks the considerable use of discretion and judgement in setting their parameters. Shaving as little as 0.5% off the WACC of the major regulated sectors would save consumers £1bn/year. In our view, the benefits of competition between infrastructure regulators is currently likely to exceed any economies of scale that could be delivered by their merger.
Notwithstanding those views, we think there would be value in reforms that encourage more joined up regulatory thinking across these three sectors. This report reaches four specific recommendations on how we think the regulatory framework for utilities should evolve.
Our first recommendation is that the statutory definition of vulnerability should reflect that this can be driven both by enduring characteristics but also by transient circumstances. Current legislative definitions of vulnerability rely on the demographic characteristics of the consumer. While these are useful indicators, they are a crude match. In practice, many consumers holding none of those characteristics can find themselves vulnerable at some point in their lives because of their personal or financial circumstances. A more nuanced definition of vulnerability that takes into account transient circumstances as well as static underlying characteristics should be adopted.
Our second recommendation is that there should be a duty on these regulators to collaborate. They currently do so informally through the UKRN, but our perception is that it is probably insufficient to meet the challenges ahead given its limited resourcing and lack of statutory mandate. Short of requiring the merger of regulators, a duty to collaborate on matters of common interest could be beneficial in ensuring joined-up thinking on the challenges ahead.
Thirdly, either the UKRN, or the NIC itself, should be obligated to consider the cumulative impact of infrastructure investment on consumers, and to periodically refresh this analysis. As far back as 2013 the National Audit Office was highlighting that nobody knows by how much new investment in infrastructure will increase household bills and whether they will be affordable. That problem remains. Without a holistic picture of the overall strain that overhauling our infrastructure will put on households, it will be impossible to judge the impact on overall affordability and on who may benefit most or least from this transition. This task should be paired with an obligation to provide recommendations on how to mitigate any problems the assessment identifies. In turn, the government should be obligated to respond to these recommendations, in much the same way it has to respond to recommendations from bodies like the Committee on Climate Change.
Finally, we think the government should legislate for the creation of an independent statutory consumer advocate for telecoms at the earliest opportunity. In the other sectors covered by this consultation, and in many other sectors too, the existence of a statutory advocate provides a powerful consumer voice into the development of new policies and markets, counterbalancing industry views and providing evidence and insight to improve regulatory decision making. Despite being essential services, no such representation exists in the telecoms sector. That gap needs to be filled.