Policy and Politics: Should regulators engage consumers in decision-making? Lessons from UK water regulation

Policy and Politics: Should regulators engage consumers in decision-making? Lessons from UK water regulation

Eva Heims and Martin Lodge

This section of Discover Society is provided in collaboration with the journal, Policy and Politics. It is curated by Sarah Brown.

 

The idea of ‘consumer engagement’ has become a central theme in UK economic regulation. Regulators are demanding it, regulated companies are claiming to be pursuing it – but nobody quite knows what ‘it’ (i.e. consumer engagement’) might actually represent. So what does research on consumer engagement tell us?

In our recent Policy & Politics article on Customer Engagement in UK water regulation, we argue that the idea of consumer representation in UK utility regulation is, of course, not particularly new. The ‘old’ age of publicly owned utilities was characterised by a range of consumer representative bodies. While some managed to survive into the age of privatisation, since the 2000s the key emphasis has been on primarily relying on the economic regulators themselves to perform a consumer representation function. But since the late noughties, putting the consumer at the heart of regulation has become a central theme in UK utility regulation and water regulators in the UK have recently experimented with different mechanisms of customer engagement.

So where does the idea for consumer engagement in utility regulation come from, especially at a time when wider consumer representation issues in UK regulation are arguably witnessing pushback in respect of organisations and finances? And what can we learn from the Scottish and English experiences?

One of the main triggers for the growing attraction of consumer engagement strategies is the exhaustion of existing regulatory instruments. Increasingly, questions have been asked as to whether price reviews offer a valuable regulatory strategy as industries have adapted to regulatory requirements, regulators have become overwhelmed by methodological demands, regulatory relationships have hardened, and the value of benchmarking information has become exhausted. Regulators take note: introducing novel ways of challenging companies to stretch themselves further when devising their business plans might encourage different, less institutionalized discovery processes that might provide new insights. Being able to legitimize decisions by relying on ‘consumer engagement’ might also reduce the vulnerability of regulators and regulated industries to political and public pressure.

Scholars and regulators alike can also learn from the significant differences in the approach to customer engagement in water regulation in Scotland and England and Wales. The Scottish experience – involving the publicly owned Scottish Water – was characterised by a substantial delegation of authority to a ‘Customer Forum’ under a tripartite agreement between the regulator, Water Industry Commission for Scotland (WICS), the consumer representative body (Consumer Focus) and the regulated company (Scottish Water). During the process, the Customer Forum and Scottish Water effectively negotiated an agreement on the company’s business plan, and the regulator largely accepted this agreement. Overall, the process was perceived to be a success by all involved parties who were of the view that the outcome of this price review would have been much different without the involvement of the Customer Forum. The language and framing of the business plan was said to have changed from highly technical to being more readily understandable to a lay audience. Secondly, Scottish Water switched its use of the Retail Price Index (RPI) to the Consumer Price Index (CPI) which was seen as more meaningful to customers but also reflected related moves in the UK. Lastly, participants – including Scottish Water – suggested that the agreed price cap of CPI-1.8 over the period 2015–2021 had gone beyond all expectations, and, most of all, had been tougher than WICS had regarded as feasible at the outset of the process.

In England, ownership patterns vary. So-called ‘customer challenge groups’ (CCGs) were established at the level of each regulated company, with an additional consumer representative panel engaging with the water regulator, Ofwat (Office of Water Services). The English regulator was less willing to delegate decision making to the various customer groups and only provided some high-level guidance to water companies about the envisaged nature and role of these customer groups. As a result, the different customer challenge groups varied considerably in their organisational structures and their members. While some water companies put them on a highly formalised footing (including timetables and deadlines), others allowed their customer challenge groups processes to develop in a less structured way. There were also considerable differences in the agendas that different CCGs pursued.

In the end, Ofwat made only very timid use of the possibility to ‘fast-track’ the price review for companies that presented business plans based on extensive customer engagement. It is difficult to assess the outcome of these different approaches. However, regulators can learn from the Scottish experience which was hailed as a success: WICS was not only willing to give its customer body considerable influence, the regulator also supported the Customer Forum with detailed and targeted information at crucial points in the process. This information helped the members of the Customer Forum to better understand and contextualise the information provided to them by Scottish Water.  The information notes that the Scottish regulator provided to the Customer Forum included, for example, comparative benchmarking of Scottish Water and water companies in England on key dimensions, which assisted the forum’s members in their judgement about what they could reasonably demand of the company. Other regulators may want to take this into account when designing customer engagement processes.

But whatever the merits of these different approaches, before extending the scope for negotiated settlements more generally, a number of questions need to be confronted:

One question is about the institutional status of consumer engagement. As noted, the English version placed consumer engagement at the level of the regulated firm in contrast to Scotland’s tripartite agreement. The latter potentially offers greater commitment on behalf of all interested parties in supporting the process and eventual agreement, but may be seen as uncomfortable for those interested in consumer advocacy rather than negotiation. It also requires institutional resource commitments across all parties that may not always be available, as occurred in the case of the now disbanded Consumer Focus in Scotland.

For regulated firms, there are concerns about biases in decision making (short-term over long-term horizons, domestic over business consumers). These tensions will always be present in negotiated settlements. Decision making led by detached econocratic regulators has often been seen as a solution to these problems in the past. There are also differences as to whether private institutional investors welcome negotiations with customer representatives, or whether they prefer the comfort of dealing with technocrats in regulatory offices. In addition, firms require safety nets as any agreement might be vulnerable to over- and under-performance, often due to reasons outside of the control of the different actors that are part of the engagement process. Such mechanisms require careful specification, potentially involve independent monitoring and include hard-wired review provisions to avoid gridlock.

For regulators, the challenge is one of delegating statutory functions. Cynics might suggest that delegation could be a convenient avenue for blame-shifting. In the end, however, regulators remain still in charge as they may or may not ‘accept’ agreements between firms and customer representatives. Yet, differences remain concerning the extent to which regulators are ‘minded’ to accept such agreements. Furthermore, providing bespoke intelligence to customer representatives requires change in standard operating procedures away from those associated with ‘traditional’ price reviews.

Finally, there are also challenges for customer representation. The question of legitimacy is not easily ignored as it inevitably remains questionable how a number of high profile individuals can be said to represent ‘the consumer interest’ in all its diversity, especially in areas where customer preferences are unstable and information sparse. This suggests that customer representation is about ensuring that regulated companies consider their different customers, rather than making trade-offs between interests of ‘citizens’ and ‘consumers’. This raises the question whether it is possible and desirable to separate the representation of the potentially different interests of ‘citizens’, ‘consumers’, and ‘customers’ to align with different stages of the regulatory process.  Inevitably, tensions exist between those emphasizing advocacy activities and those interested in representation and negotiation, and it remains unclear whether such tensions can be resolved through smart organizational design of consumer engagement.

At one level, therefore, consumer engagement is unlikely to attract much opposition. Perhaps, then, its time has come in UK utility regulation. The ‘natural experiment’ in English and Scottish water regulation offers valuable insights into different institutional arrangements and their dynamics. Moving beyond experimentation during an initial negotiation round and towards a more institutionalized set-up for further price reviews will require open debate about these considerable challenges facing the various parties. There is no silver-bullet for regulators in this respect. Regulators need to be aware that despite all its potential advantages, customer engagement also opens the door to new tensions that they will inevitably be called upon to resolve.

 

Eva Heims is Lecturer in Public Policy at the University of York and a Research Associate of the Center for the Analysis of Risk and Regulation (carr). Martin Lodge is Professor of Political Science and Public Policy at the LSE and Director of carr.

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