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Rt. Hon. Margaret Beckett - Former Secretary of State for Trade and Industry (May 1997 - Jul 1998)"UTILITIES 2000" Conference |
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Can I first thank you for inviting me here today. I am delighted that UNISON, in association with the IPPR, have arranged such a conference. The way that we regulate our utilities is an important matter for all stakeholders, including the employees that UNISON among others represents, and indeed is important for the UK economy as a whole. There has of late been much discussion about the future of regulation in the utility industries. I welcome this debate. It is vitally important that we get it right, because these are industries of unique impact and importance. The goods and services they control or provide are the essentials certainly of civilised life in an advanced economy, and in the case of water almost of life itself. In addition these public utilities, gas water, electricity and telecoms are major employers, and have major effects upon economic growth, as well as the quality of life and the environment. As they provide essential services to business and industry, their performance and the quality of the service they can offer is a key element of our international competitiveness. And the public too, expect and need from the utilities a secure supply of their services, which they expect to be available on fair and affordable terms to every household. Whoever owns them, however they are run and controlled, they must be run in the interests of the public. At the same time we recognise that there is always going to be a creative tension between their need to provide what is in many ways a public service and their need at the same time to remain competitive and efficient companies. There is something else which makes these utilities unique. They occupy variously a place on a spectrum between operating in a free market with open competition and operating in monopoly or near monopoly conditions. And though each is in transition in some way as competition develops to a greater or lesser degree, the implications of this mix of market conditions means blending together a mix of competition and regulation. As some commentators have said in the past privatisation without adequate regulation and an adequate competition policy is a recipe for disaster. Our approach to the governance of the utilities to avid this problem by encouraging and stimulating competition where possible, and providing regulation where necessary. COMPETITION As a Government, we are firmly committed to promoting competition not only in the utility industries, but in the economy as a whole. We believe fair competition is essential to creating a thriving economy. Securing markets against competitors is itself an incentive for innovation as well as efficiency and service improvement. Success against the competition also creates prospects for the creation of new employment which is sustainable over time. And the process of capturing these markets means it is generally the most effective means of delivering lower prices and rising standards of service. Without a decent framework of competition firms can simply pass on costs to the detriment of consumers. We are committed to acting, and not just talking, about competition. As part of our commitment we will shortly be introducing new, more effective competition legislation. This new competition bill, announced in the Queen's speech, will give the competition authorities tough new powers to tackle anti-competitive behaviour across the economy as a whole. This means strengthened competition provides the bedrock of our approach to the utilities. But as I mentioned earlier, the degree to which competition is either theoretically possible or practically realised, and the circumstances in which either competition or regulation operates is changing all the time. There have been some achievements and some changes less easy as yet to assess. The combination of competition, regulation and the introduction of new technology in the utilities since privatisation has, in most areas, brought benefits in the form of lower prices for consumers. Taking as an example the telecommunications industry, business and residential customers have all benefited from lower prices although amongst residential customers, the largest benefits have been enjoyed by the highest-consuming households. There is now a much wider choice of operator. There are also many innovative new services being offered via the telephone. Price cuts have also been achieved for industrial gas and electricity customers, as competition has been introduced. In many other areas, however, competition has not yet developed as fully as it could. We are embarked upon action to change this too. In the coming months, the domestic gas and electricity markets will progressively be opened up to competition. For the first time, many consumers will have a choice of service provider. Early signs from the initial gas pilots suggest considerable price reductions should follow competition although there are real and genuine concerns about some of that experience, especially practices like doorstep selling. As competitive markets extend to domestic customers throughout the country, we hope to see them deliver the prospect of better service, and innovative supply arrangements tailored to customers' needs as well as lower prices. As John Battle has already made it perfectly clear we expect companies and regulators alike to deliver what they have undertaken and promised. We therefore expect competition to be introduced on time and with high standards of service. In particular we expect to see fulfilment of the expectation that billing systems will work well and work robustly. REGULATION Although competition is now developing in some parts of the utility industries, there is still some way to go in others. Realistically, it may never be achieved where there are areas of natural monopoly such as the electricity grid networks, or the gas pipelines as this would involve duplication of these networks. Other ways must be found to encourage efficiency and consumer responsiveness, as well as to manage the relationship between competitive suppliers and a monopoly distributor. For the foreseeable future, there will be a continuing need for effective and fair regulation. While there have been achievements in regulating these utilities we have also seen the emergence of various concerns. Some bear no relationship to the course of regulation itself but stem quite straightforwardly from the aftermath and practical effects of the path to privatisation. Others flow from external changes which affect the capacity effectively to regulate, such as the impact of cross-utility mergers and re-structuring. There have been too concerns about the profit levels for these types of business, about service quality, investment shortfalls, and the social implications of some commercial decisions - particularly for low income and disadvantaged consumers. Concerns have also been voiced about executive rewards and how far the regulatory system has regard to sustainable development, including environmental issues And, of course, there have been some questions and concerns about the role of the regulator, as well as about the circumstances in which he or she operates. The balance of accountability and independence as well as the scope of regulation in different industries have all come under scrutiny. In consequence, some 13 years after the first regulatory regime was put in place, I believe it is now time to take stock. That is why I am today taking this opportunity to announce an inter-departmental review of the regulation of the utility industries. That review will in particular focus on the gas, electricity, water and telecommunications industries. My colleague, the Deputy PM, will be looking separately at transport issues. The review will look at whether changes are required to the existing system. Some of these issues which have generated discussion are clearly a matter for regulation, for example shortfalls in agreed investment plans. Others such as executive rewards are, in the first instance matters for companies themselves. In taking forward the review we will need to have concern for defining the limits within which the regulators should legitimately be expected to work. The review will also look at whether the current system of price regulation delivers over time, the greatest benefits to consumers while maintaining proper incentives for innovation and investment, and an adequate return to shareholders. While the review will consider the formula for determining prices it will not spend time on rate of return regulation as such, which we do rule out. This is well tilled ground, but it would be wrong not to take a further look at the balance of arguments for profit sharing while such a review is under way. Let me stress first that apart from my anxiety to see consumer interests addressed alongside those of shareholders, I believe that there is a genuine case which should be considered for saying that such a formula might increase the predictability of the system in ways which could be helpful to companies and not just to customers. I am certainly anxious however that we consider fully the practicalities of such a proposal. It is also now time to take stock of the regulatory experience as a whole, and identify whether there are general principles which can be transferred from one sector to another, and - where possible - to identify best regulatory practice. So while the review will concentrate on the regulation of gas, electricity, telecommunications and water, it will also consider whether there are lessons to be learnt from this and other regulatory experience to help the development of regulatory principles of general application. The DTI will lead this review, in conjunction with other Departments, and will report as soon as possible. If it is concluded that change should be contemplated, we will publish a consultation paper setting out not only the options, but the reasons underlying the case for change. The timing of any changes will obviously depend upon the precise nature of what is proposed, as well as other Government priorities. We will of course aim to minimise instability and uncertainty in that process. When in Opposition we undertook extensive consultation on utility regulation issues. It was a very useful and enlightening process, and I am grateful to all those - including many of you here - who contributed to that process. In addition, a large number of other organisations and commentators have produced reports on the future of regulation. The review will in no sense starts with a blank sheet of paper or without an understanding of the variety of views already on record. It will - naturally - take all such reports into account including the conclusions and recommendations recently made by the Public Accounts Committee, the Trade and Industry Committee, the Environment Committee, the UK Round Table on Sustainable Development the Hansard Society and the CBI. The list is a long one. This work has already identified many of the key issues and provides a helpful and well developed starting point. The views of regulators - with their breadth and depth of experience - will likewise be important. But can I stress now that though of course the review team will take representations over the next few months, the main opportunity for regulated companies, customers and others to comment will come with publication of a consultation paper rather than at this preliminary stage. I would like to conclude this section of my speech by saying something about the windfall tax. As you know, in his Budget speech on Wednesday, my colleague the Chancellor, will be announcing details of the one-off windfall tax on the privatised utilities. This will be used to help the young and long-term unemployed off benefit and into work. I mention it merely to stress that the windfall tax, and the review I have announced today are completely distinct issues. The windfall tax is about the past. The focus and purpose of this review is to look to the future. ENVIRONMENT Regulation and competition should not, however, be pursued in isolation. There are other shared priorities. One such is sustainable development, including environmental protection and energy efficiency. As our Manifesto made plain, this Government is committed to putting concern for the environment at the heart of policy making. Environmental considerations should not be simply an add-on extra, but should inform policy discussion from the outset. It is essential for instance that the utilities make a full contribution to ensuring that CO2 emissions are reduced. There are, however, important questions for the review to consider about what, if any, obligations in this area should be placed on the utilities through the system of economic regulation. Alternatives such as green taxation or public expenditure measures may be more suitable. CONSUMER AND FAIRNESS ISSUES One of our general objectives must of course be to secure a long term stable framework for utility regulation. This means that all those involved should have the confidence, over time, that the system will fairly balance different interests. But I am convinced that there cannot be stability until the framework is, and is seen to be, fair by all the interest groups involved - especially the consumer. Satisfied consumers are the key to regulatory stability. The balance between the returns to shareholders, and those to consumers, from efficiency gains is a part of this debate. So too is making sure the consumer voice is heard. Consumers need an effective voice. They also need effective guidance since the opening up of traditionally closed markets to competition may prove confusing for many people. We have to ensure that consumers are in a position to make informed choices. The review will need to look at the role of consumer representatives in helping to ensure that consumer needs are properly addressed. Different models for consumer representation were adopted for the different utilities at the time of their privatisation. One model was to have consumer committees located within the regulatory body. This model was adopted for the electricity, telecommunications and water industries. Another model, adopted for the gas industry, was to establish an independent consumer representative body, neither funded nor appointed by the regulator. Opinions differ about which model is the more effective and whether either is entirely satisfactory. The review will look at what works best in practice, or whether some third model needs to be considered. Given the increasing integration of the utilities sector, the review will also consider whether there is a case for a parallel merging of consumer bodies to produce a more effective consumer response and avoid duplication of effort. There have been a number of other proposals for strengthening the voice of consumers in regulation which the review will consider. For instance, how can we ensure that the duties of the regulators give more emphasis to the consumer? What about appeal mechanisms? Should parties other than just the regulated companies, such as consumers and competitors, have rights to appeal? When no right of appeal exists, it is all the more important that regulators' decisions are soundly based. This places a strong onus on the regulators to consult, explain and justify decisions to consumers, both before and after major price reviews, and wherever significant changes are contemplated. I welcome the moves that all the regulators have made in this respect. The review will look at the best practice in this area, and consider whether it should be applied more widely. The review will also look at the quality of service targets set for the regulated companies, and at the arrangements for, and levels of, compensation for consumers if these standards are not met. Where competition remains inadequately developed, and where consumers do not have adequate choice, effective disciplines to ensure that quality of service targets are met, and perhaps enhanced, are an important consumer safeguard, and vital if the regulatory system is to win and maintain widespread acceptance. A reduction in quality of service is, after all, a price rise by another name. Employees play a key role in delivering these quality targets. Successful firms have shown that a key to their strength is their ability to harness the skills and commitment of all of their employees, from managers to front line workers. Commitment to training and good employment practices are crucial to this. The Government is playing a full part in the promotion of good basic standards with our commitment to a minimum wage and to encouraging firms to take up the Investors in People standard and other good employment practices. I am very concerned about how low income consumers fare in their dealings with these essential utilities. One issue for the review to consider is how regulatory arrangements can best help Government meet its concerns in this area. John Battle has recently highlighted the issue of fuel poverty. Low income households can spend well over 10% of their weekly income on energy, compared to around 4% for middle income households. Moreover, those households who find it hardest to pay their energy costs are often the most costly to supply. Many of the poorest gas-consuming households do not have a bank account, leading to their automatic exclusion from Direct Debit Schemes. With cost reflective pricing, charges for direct debit customers can sometimes be significantly less than the charges for pre-payment customers. We must ensure that competition provides a better deal for all consumers, including the poorest. John has asked the Directors General of Gas and Electricity Supply to give him their views on pre-payment customers following the opening of their respective markets to competition. A new duty on regulators to consider the needs of low income consumers could be seen as a logical extension of the existing obligation of most of the regulators to take account of the needs of the elderly and the disabled. Regulators may often be well placed to achieve these social objectives. However, against this must be balanced the argument that regulators should be concerned primarily with economic regulation, and that the achievement of social policy objectives is a matter for Ministers, and not unelected regulators. It will be clear to you, as it is to Government, that there is a balance to be struck between these differing economic, social and environmental objectives. The review will look at how the present framework of economic regulation can sensibly be used to meet these wider policy objectives without undermining its job of securing lower prices and higher standards for consumers in general. INSTITUTIONAL FRAMEWORK A strength of the present regulatory system is undoubtedly the concept of independent, arm's length regulation. But after 13 years of regulation it surely makes sense to examine whether the balance between Ministers and regulators is right. Markets are dynamic, technologies converge and the balance between regulation competition shifts. We have to take account of this when considering the case for change. We shall be looking at areas in which the institutional framework may need to evolve. One possibility is the merger of Offer and OfGas into a single regulator tasked to deal with both aspects of the energy industry. Within any particular regulatory office, questions also arise about the best method of taking decisions. Some have argued that the way the present regime operates depends too much on the particular person who happens to be the regulator. On the other hand, the need for speedy decisions, and for decisions which track dynamic markets, argue for quick and decisive regulation. The review should therefore consider alternative structures for the regulator, including Panels, Boards or non-executive advisers. Such approaches, as long as they do not lead to delays, offer the potential to increase the legitimacy of the regulatory process. It is time to take stock to see how the existing framework can be updated, modernised and refreshed under the guiding principles of transparency, consistency and predictability with enhanced accountability. Transparency because we all have a right to understand what is happening in such key industries and why. Consistency to deliver good decision making despite the dynamism of markets and technologies, or the changes competition brings. Predictability for the sake both of the smooth operation of the industries themselves and to allow a sound basis for long term planning both elsewhere in industry and for individual families. And accountability because these industries provide essential services for all consumers. CONCLUSIONS Our objective is to set a long term stable framework for utility regulation which is and is seen as fair by all the interests involved, particularly by consumers. We want to deliver value, quality and choice to consumers while giving managers enough incentive to innovate and improve efficiency because markets, technologies and skills never stand still. The whole theme of this conference as I hope of this speech is the important part the regulated industries, and the telecoms, electricity, gas and water industries in particular, play in our economy, and in our lives. The challenge for Government is to ensure fairness and efficiency in these industries, to reduce uncertainty and above all, to ensure that the many, not just the few, receive from them the quality of service they expect need and deserve. That challenge faces all who work with or in these industries. It is a challenge we must not fail to meet for the sake of our economy and of our quality of life. |
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Other speeches by Rt. Hon. Margaret Beckett - Former Secretary of State for Trade and Industry (May 1997 - Jul 1998)
(the following are available from the archive) |
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