Aligning long-term government policy and the regulation of utility companies

ICE has released a policy paper examining how the defined regulatory periods governing utilities can be made more flexible and strategic in order to effectively plan and deliver the UK’s core economic infrastructure networks.

Almost half of the UK’s infrastructure, chiefly water and energy, is financed and delivered by the private sector, and paid for by consumers, under the Regulated Asset Base (RAB) model. This regulatory model has generated significant investment and improved performance over the past decades, but is increasingly facing new demand drivers. These include achieving net-zero greenhouse gas emissions, adapting and becoming more resilient to climate change and extreme weather events, contributing to efforts to address the nation’s shortage of housing, as well as rapid advances in technology that have the potential to transform infrastructure networks.

Given the increasingly complex and holistic long-term solutions which are necessary to tackle these challenges, the regulation of economic infrastructure needs to be more flexible and strategic in its nature. An emphasis also needs to be placed on the regulated utilities themselves to improve processes and, crucially, it is vital for the government to outline a stable, long-term vision for the UK’s infrastructure networks to allows regulators, companies and their investors to better evaluate, drive and deliver strategic investments that address core challenges.

This paper, which has been informed by a roundtable of ICE Fellows and other experts, makes four recommendations:

• In order to account for housing growth and ensure that appropriate infrastructure and network enhancements are in place to enable and support it, utility companies should be core participants in developing evidence-led regional infrastructure strategies. It is important that regulators are also involved in the development of these strategies in order to better evaluate final determinations for price control periods.
• The use of direct procurement models that deliver large-scale infrastructure projects should be further explored and utilised in order to allow for strategic investment, outside of price control periods, that delivers improved economic, social and environmental outcomes. This should form the basis of open and transparent competition, ensuring all options for significant improvements and enhancements to infrastructure networks can be considered, while opening up new possibilities for innovation and enabling new investors to enter the market.
• Regulated utility companies should align their Environmental, Social and Governance (ESG) reporting to a common standard to allow better decisions to be taken by regulators, allowing investment options to be identified that deliver wider social and environmental benefits and better value for money for consumers.
• The government – via its National Infrastructure Strategy – should outline clear, long-term and strategic policy objectives that allow better alignment between regulatory, industry and policy activity. This would provide regulators, industry and consumers with greater clarity on long-term strategic priorities, providing the context for future price reviews and the investments required both within and outside price control periods.