16 June 2011

UK water utilities and regulation

I attended (and spoke at) SBGI's utility regulation seminar on 9 June in London.*

I was interested to see the regulators and regulatees in the same room, each side presenting their case for serving the public -- the real customers who were not in the room.

(The UK has one of the most open utility sectors in the world; most utilities are privatized. Ofwat regulates the 25 water/sewage companies in England and Wales. Ofgem regulates natural gas and electricity. There's more, but I don't get it all.)

Several themes emerged:
  • Some politicians are pursuing policies that customers do not want. This causes regulators to impose costs on customers (and companies) that are unpopular.
  • Companies want financial security from regulators, but that security can be tricky to negotiate and detracts from good performance.
  • One-size-fits-all regulation is not delivering efficiency, but regulators prefer it.
  • Regulators are struggling to reduce their reliance on output-based performance indicators (in favor of outcomes), but they are still in love with asking companies for "well-justified business plans" and then pretending that they can hold companies to those plans.**
With the brilliant exception of Alistair Buchanan (head of Ofwat Ofgem), I was disappointed with regulators' statements: most platitudes could not be turned into manageable or measurable action.

One summary: "Government has two attitudes towards policy: complacency or panic."

Presentations from the seminar are here.

In addition, I made recordings of several presentations:

Regina Finn (chief executive, Ofwat): talk [21 min 8MB MP3] slides [PDF]

Tony Ballance (director of strategy and regulation, Severn Trent): talk [17 min 7MB MP3] slides [PDF]. Severn Trent is a large water/wastewater utility (about 8 million households).

Tony Smith (chief executive, Consumer Council for Water) talk [19 min 7MB MP3] slides [PDF]. CCW represents consumers in front of the utilities and regulators.

I spoke on "bad ideas and rad ideas" for water regulation. In my talk [17 min 7MB MP3] slides [PDF], I spoke against regulation targeting returns on capital (CapEx ROI) or "stakeholders" (too subjective) and called for more market incentives, via all-in-auctions and performance insurance.

After my talk, one audience member asked Hannah Nixon (Ofgem) if they were looking into alternatives such as mine. She fobbed off that question, saying that "there are many factors to consider, these things can't be rushed, etc."

The lowpoint (or reality check?) of the seminar was when Regina Finn said (paraphrasing): "We don't need to do cutting-edge regulation; we can just wait to see what Ofgem does and adopt what works."***

This response (as well as the general silence in response to my question of which international practices UK regulators admired), left me feeling that regulators are not as interested in advancing customer interests as much as punching the clock.

I address this problem in Part II of my book, of course, but it was sad to see it front and center in one of the "most dynamic" regulated utility sectors in the world.

Bottom Line: Regulators serve customers when (1) they feel like it or (2) they are pushed. Utilities have a stronger incentive to serve customers (they need to pick up the phone in the customer service department AND get paid), but poor regulatory incentives can lead them off track.

* SBGI (formerly the Society of British Gas Industries) has members from all regulated utilities.
** Ofwat's guidance document for annual reporting grew from 90 to 900 pages over 20 years. Companies spend massive resources filling them in (and responding to exact incentives), but few people know what to do with the data. That process is going to end (yay!), but the replacement is still standards-driven. FYI, prices are set every 5 years, after 3 years of negotiation!
*** One of her staffers responds to my critique with "I think the comment you refer to was in response to a question about the water sector learning the lessons from energy, specifically in terms of retail markets and Regina was suggesting that we were in a good position in the water sector because we are somewhat behind energy and can learn from the process they went through. If you have a look at the publications on our website you’ll see that we’re exploring some interesting (cutting-edge?) approaches for the future. The challenge is getting political support in the face of opposition in some areas from companies." To this, I said "I think she should have emphasized more of the water-specific innovations that Ofwat is pursuing and less of the "we're watching what energy does" conventional wisdom that I've heard, oh, 20 times :) So, it's not like I don't admire what Ofwat's done. It's just time to take ownership of progress and good policy. Politicians need to be told the same ("we know what we're talking about, now get with it")"

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