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Infrastructure blog

How to align government policy with regulation of utility companies

05 May 2020

ICE's latest policy paper examines how long-term government policy and the regulation of utility companies can be better aligned.

How to align government policy with regulation  of utility companies
Is long-term planning and delivery of some of the UK’s core economic infrastructure networks being hampered? Image credit: Shutterstock

Almost half of the UK’s infrastructure is financed and delivered by the private sector - and paid for by consumers - under the Regulated Asset Base (RAB) model. In 2018, the total RAB value across UK infrastructure stood at £160 billion, with the vast majority of this centred on the electricity, gas and water sectors. Generally, the regulatory approach taken so far has worked, leading to significant infrastructure improvements and better outcomes for society.

New demand drivers

However, the system is increasingly facing challenges that have become more prominent in recent years, such as a net-zero greenhouse gas emissions target, climate change resilience, a nationwide housing shortage and rapid advances in technology. On top of this, the Covid-19 pandemic presents further challenges, with utilities likely to be under pressure to keep prices down to reduce the burden on consumers in the years to come.

ICE’s 2018 and 2019 State of the Nation reports revealed a growing consensus that short-term regulatory periods are preventing strategic, long-term planning and delivery of some of the UK’s core economic infrastructure networks.

The future investment needed to meet these challenges will ultimately be funded by consumers, so the system needs to deliver both greater flexibility for strategic infrastructure and tangible outcomes for the paying public. One way to do this is through greater utilisation of direct procurement models, allowing for competition in the market and for strategic investment outside of price control periods to deliver improved economic, social and environmental outcomes.

In our paper, ICE is calling for government to outline clear, long-term and strategic policy objectives that allow better alignment between regulatory, industry and policy activity. This can provide regulators, industry and consumers with greater clarity on long-term strategic priorities, setting out the landscape for investments required both within and outside price control periods.

The role of utilities

An emphasis also needs to be placed on the regulated utilities themselves to improve processes. While good practice is taking place in some cases, there is little consistency in companies’ reporting methodologies. This means regulators can make determinations based on unreliable data, so it’s important to align these methodologies to provide a more solid evidence base.

In addition, by making Environmental, Social and Governance (ESG) reporting more forward-looking, companies can identify and address risks early and collaborate to tackle shared challenges across their sector and on a systems basis.

Regional infrastructure strategies

Regulators are understandably keen to ensure that consumers do not pay for unnecessary expenditure on speculative infrastructure enhancements. This is particularly true in the case of the housing market and the infrastructure required for new housing.

ICE has previously called for the creation of regional infrastructure strategies, which include housing, involving a variety of stakeholders in order to ensure a joined-up approach to regional infrastructure provision.

It is vital that relevant utility companies are core participants in developing these evidence-led strategies, with regulators also involved in order to better understand the investments required and enable fuller evaluation of allowed expenditure for price control periods.

Read the full paper

  • David Hawkes, head of policy at ICE