Archived Threads - October 2008

‘Infrastructure and the City’

18.00 for 18.30 on Tuesday 28th October at Indepen

Our speakers at October’s CHEFs event will take as their starting point the fact that London’s new Mayor wants to champion the capital’s business at home and abroad and to “use his office to make sure international investors continue to see London as an attractive place to do business”.

Since we first thought about this topic, the world has changed. The financial sector, keystone of the City’s economy, is under threat. Business in general is uneasy about the future and thinking carefully about investment. Funding for the Olympics is looking increasingly problematic. So what will all this mean for London’s infrastructure? Against this background, how does the capital make clear what infrastructure it needs? To what extent can infrastructure providers meet that need, and can regulators ensure the right investment takes place at the right time?

Steve Norris, Board member of both the London Development Agency and Transport for London, opens the discussion. Michael Roberts, Chief Executive of the Association of Train Operating Companies, will tackle the topic from the point of view of the rail industry. The ensuing discussion will be chaired by John Dickie, Director of Policy and Strategy for London First.

‘Politics and sustainable policy making don’t mix’

18.00 for 18.30 on Tuesday 9th December at Indepen

In our December CHEFs Event, David Blunkett will tackle the question of the balance between political short-term expediency and policy making for the long term. Our work with utility companies, looking at regulatory risk, has identified that the risk has become increasingly political as regulatory decisions take the Government’s social and environmental policy into account as well as the economics.

Ministers’ sights are getting shorter and shorter ahead of the next General Election (at the latest in June 2010). At the same time, utilities are being asked to address issues such as climate change – not least a recently increased target of 80% reduction in greenhouse gas emissions by 2050 – and security of energy supply. Such issues require decision makers to adopt much longer time horizons than the next ‘musical chairs’ of the political scene.

Given this backdrop, how best can companies manage regulatory risk and engage politicians? We hope to gain insight into how the Government is addressing policy making in the run-up to the election and to investigate whether there are ways of achieving a meeting of policy minds in this period. Is there scope for better alignment between the approaches of companies (and their investors) and Government that will result in improved public policy and better outcomes for all?

Promoting innovation in regulated industries: pushing water uphill?

(Members’ roundtable)

Our next Members’ event will tackle the issue of innovation in a regulated environment. Competition requires constant innovation or else someone will eat your lunch. But can a regulated framework provide the incentives for continuous improvement?

Being able to answer ‘yes’ to this question is assuming greater importance. Government sees innovation as key to future economic prosperity and quality of life. Among other things, it has created the Commission on Environmental Markets and Economic Performance to consider how the UK could make the most of the transition to a low carbon, sustainable economy by driving investment and innovation in environmental markets. BERR and the Department for Innovation, Universities and Skills are looking at ways in which regulators can promote innovation, as well as the steps needed to ensure they do not hinder it.

Day-to-day experience suggests it is not easy to say ‘yes’. A report for UK Water Industry Research, for example, concluded that misalignment of expectations between water companies, regulators and Government is limiting the sector’s ability to exploit its innovative capacity. This is in part due to the conservative, risk-averse business models of the water companies. These, in turn, reflect the fact that the economic regulation system insufficiently rewards innovation.

There is a case for arguing that, at present, regulatory incentives and methodology mean that regulated organisations can succeed by not innovating. The incentive régime will usually cap the upside benefit arising from any innovation but not any downside. It can also impose penalties for poor performance. Why would companies take the risk of innovating and introducing change? As for regulatory methodology, the specification of either inputs or outputs, or both has the same unintended effect. By its very nature specifying inputs restricts innovation and, on outputs, if the regulatory target is to answer a customer query within x days, where is the incentive to innovate to reduce the number of complaints?

The roundtable will, among other things, consider the following questions:

Outputs from the discussion might include a contribution to the Government’s forthcoming consultation on the regulatory promotion of innovation.

Some Indepen spadework

Indepen has been exploring – and will continue to explore – a number of relevant topics in advance of December’s CHEFs with David Blunkett and we anticipate picking up some of these threads in the discussion there and at future events. We have investigated the balance between political, regulatory and company drivers, and transparency and consistency in the application of regulation. We have considered leadership capabilities in regulated utilities and discussed regulators’ and companies’ understanding of consumers and their expectations. (Earlier editions of Threads have given the flavour of discussions at events held on these last two topics.) We will also be looking at the question of incentivising investment in a changing policy environment, at a Members’ event in November. Some of the spadework for that comes next.

Incentives, penalties and enforcement

Over recent weeks, we have held a series of discussions about the relative roles of incentives, penalties and enforcement in regulation. We have been gathering people’s practical experiences of these three elements and trying to establish whether there are options for better alignment between them.

The questions we have been asking people to consider are:

We have also talked to people about the details of any penalty or other enforcement action with which they have been closely involved, to gather some real-live case studies of what happened and why, and whether the action led to any changes.

A number of issues are beginning to emerge. First is the question of whether the incentives régime is sufficient to cause companies to improve the way they do things. Indeed, can innovation be inhibited because of concerns about incurring penalties? As noted above, why try something new and risk a fine?

Some have questioned whether there is a meeting of minds between regulators and companies over the regulatory régime, both in terms of how its incentive properties operate and of where accountability rests. This may be partly due to their differing viewpoints, but it may also come down to a lack of awareness, within the company, of the régime.

Then there is the effectiveness of penalties themselves. What impact does a regulator’s decision have on a company? What is the significance of the level of the penalty compared to reputational and other non-financial pressures? How is the relationship between them affected by different company ownership and corporate governance models? What actions do companies take as a result of the regulators’ decisions and how are they monitored?

Further questions have arisen concerning the process of levying penalties – for example the length of time it can take and the effectiveness of the appeals mechanism.

If you have particular experience of a regulated industry – or indeed, if you are a regulator – and would like to contribute to our on-going discussion, do let us have your views. What do you think about the relative roles of incentives and penalties? Do the themes above strike a chord with you? What would you add to them? And do you have examples of penalties or other enforcement action from your own industry that we could include in our case studies? See the foot of this page for contact details.

Efficiency in regulated industries

In September, Indepen hosted a seminar to explore the issue of efficiency. The event was unique in being sponsored by the Chief Executives of the UK economic regulators, via the Joint Regulators Group (JRG).

Indepen supports better regulation and public policy and in doing so we believe that there is value in promoting cross-regulator discussion of the challenges that they all face. In some earlier work, we had identified that academics and regulators held different views of best practice, so we determined that academics should be included in the discussions. The seminar not only brought together eight economic regulators, covering twelve sectors, but also three of the leading academics in the field.

In preparation for this groundbreaking event, Indepen interviewed the eight regulators to understand and document the approach to efficiency taken by each of them. Based on our findings, we prepared an issues paper and structured the seminar to cover three main topics: the choice of comparator data, the assessment technique and how to ensure credibility. The agenda included presentations from regulators and academics and lively round table debate.

The seminar was viewed extremely positively by both regulators and academics and we are in dialogue with the JRG about further events of this nature, with the aim of promoting better regulation and sharing best practice.