Stakeholders and the ‘British Model’ of utility regulation

During the 1980s and 1990s Britain underwent an economic transformation which saw many of its key nationalised industries privatised and opened up to competition. Network-based industries, in particular telecommunications, gas, water and electricity, presented particular challenges as these sectors had natural monopoly features, requiring the creation of a regulatory structure with the aim of protecting consumers from monopoly power. In 1983 a model of regulation was proposed by the economist Stephen Littlechild which later became known as price-cap, or incentive, regulation; this was subsequently applied to the water and energy sectors. This approach limits the prices that network companies can charge for their services, e.g. the price charged to an electricity generator for connecting to a transmission network. The idea behind this was that this would provide price stability, enabling investments to be made, whilst incentivising the company to operate their networks efficiently; as if they operated more efficiently than the regulator’s expectations they could retain cost savings as additional profits. One of the attractions of the model was that it eschewed what were seen as the negative aspects of US-style stakeholder-based regulation, which has historically involved protracted and highly legalistic regulatory hearings. US regulatory commissions have traditionally conducted ‘rate-of-return’ (RoR) regulation, through which a utility submits an investment proposal to a regulatory commission, which is then scrutinised, and if approved, is included in the ‘rate base’ on which investors earn a specified return (Joskow). In the British case, this RoR approach was deemed to be cumbersome and overly bureaucratic. The incentive approach, based on clear economic principles, it was thought, would be a simple affair which would cut down on bureaucracy and the need for extensive stakeholder dialogue. However, over the past decade there has been somewhat of a sea change with regards to the role of stakeholders in the regulatory process. Since 2010 a concerted effort has been made in Britain to encourage and incentivise regulated companies to engage directly with their customers through a process known as customer engagement (CE). Given its increasing prominence in the regulatory framework for energy networks, the purpose of this paper is to take stock of customer engagement as a regulatory approach and to examine how various stakeholders involved in the regulatory process (the regulator, distribution companies, members of Customer Engagement Groups (CEGs) and sector analysts) have experienced it and judge its importance in future price control reviews. Through desk-based research and stakeholder interviews, we trace the introduction and evolution of CE within the regulatory framework for energy systems (focusing on gas and electricity distribution) from 2010 to 2020, and review how it has been perceived and implemented by the regulatory agency and the regulated network companies. Reflecting on the experience of CE, and drawing on a range of stakeholder perspectives, we identify several challenges and opportunities for CE going forward.