The odd couple: Will a new Strategy and Policy Statement help sort out the relationship between government and Ofgem?
Matthew Lockwood, IGov Team, 18 August 2014
Back in 2011, shortly after coming into power, the Government did a review of Ofgem – some may remember that the Conservatives were unhappy with the regulator, and their 2010 manifesto promised reforms to make it focus more on government policy. That review basically said that the guidance given by the previous government to Ofgem over the 2000s had not been effective, and a clearer statement was needed to ‘provide more clarity about the roles of Ofgem and Government, the strategic context for Ofgem’s independent regulatory role’. This was to be called the Strategy and Policy Statement (SPS).
Following the 2013 Energy Act, DECC has now come up with a draft SPS for consultation. The statement is intended to lay out:
- the Government’s strategic priorities and other main considerations of its energy policy;
- the policy outcomes to be achieved as a result of the implementation of that policy; and
- the roles and responsibilities of those who are involved in implementation of that policy.
The draft lays out three strategic priorities for policy in the near term: helping households and businesses take control of their energy bills and keep their costs down; unlocking investment in the UK’s energy infrastructure that will support economic growth; and playing a leading role in efforts to secure international action to reduce greenhouse gas emissions and tackle climate change.
The policy outcomes are defined in terms of a competitive GB and EU market framework, and energy network infrastructure, with sets of more detailed desired outcomes in both areas, which include social and environmental outcomes.
The draft SPS does make a more explicit and detailed statement of the government’s aims in the energy sector than was there before in the form of guidance. However, these aims aren’t new, and arguably won’t signal any major change of direction to Ofgem. So will this new approach work?
It’s worth stepping back and thinking about the context for the SPS. As Michael Moran recounts in his excellent book, the British mode of regulation was set up with a high degree of discretion in the relationship between government and energy regulators (and this has not been fundamentally changed in practice by the introduction of a US-style board structure in the form of GEMA in 2000). Indeed, the 2011 DECC review noted that the specification of Ofgem’s duties has been “intentionally broad to allow the regulator flexibility”.
Discretion does indeed provide flexibility for the regulator. But it also has some other consequences. One is simply that the personality and approach of individual regulators can have a significant influence on the main thrust of regulation during their reign: for example one interpretation of history might be that Littlechild was fundamentally less interested in regulation and more in its gradual withering away, Clare Spottiswoode and Callum Mcarthy wanted to drive out costs and Alistair Buchanan saw his objective as being how to get investment, allowing ‘benign oligopoly’ in markets and generous settlements for networks.
A second is that the ability of the government to press new policy objectives on the regulator is limited by the latter’s independence and discretion – an effect sometimes described as ‘regulatory inertia’. This is, of course, why the SPS is now needed.
However, a third consequence (as noted by the Energy Networks Association at the time of the 2011 review) is that Ofgem has by and large been left to interpret how to manage trade-offs between policy objectives (i.e. in the familiar trilemma of cost, security and decarbonisation), in the way it chooses. Since trade-offs between policy lie at the heart of politics, this means that in the UK, the line between delegated and non-delegated decision-making still leaves a considerable amount of politics to the regulator. In practice, Ofgem has prioritised cost (in line with its historical remit), while different governments at different times have prioritised cost, security and decarbonisation. While this arrangement can look dysfunctional, it can also of course be useful for elected governments, who can place blame for unpopular decisions or even incompetence, on others (the so-called blame-avoidance function of delegation).
In my view, the biggest problem with the new draft SPS is that it leaves this last issue unresolved. In the sections on the roles and responsibilities of GEMA and the government, the draft SPS effectively maintains the status quo in which the regulator is left to resolve trade-offs and tensions between priorities and between outcomes and their detailed elements. GEMA is also left with managing the biggest and most political trade-off of all, that between ‘existing’ and ‘future’ consumers, the latter being the language used to represent the imperative of doing something about climate change by decarbonising the energy system. The SPS says that “The Authority must carry out its functions in the manner which it considers best calculated to further the principal objective”, the principal objective being, of course to protect the interests of those existing and future consumers.
Ultimately, government should be taking on the task it is leaving by default to Ofgem. It should be prioritising, rather than just listing strategic objectives, and where there are difficult trade-offs, it should be indicating more clearly the manner in which those trade-offs should be resolved. Unless the SPS is changed to do that, I do not think it will make any real difference. The alternative scenario, which is most likely in the event of Labour(-led) government in light of their green paper, is a more fundamental re-setting of the government-regulator relationship.