'Good chap' regulation is simply not the answer - UK - News - The Independent

'Good chap' regulation is simply not the answer

The regulator is there to make sure the private sector utility monopolies do not abuse their power by over-pricing. In each industry affected there is one regulator, acting alone and directly accountable to no one, who sets a price cap every five years. This limits the price increase allowed, usually to some rate lower than inflation. Yet the most obvious result of this system has been huge profits (and executive remuneration) for the privatised utilities.

The problem is that the system, devised by the electricity regulator Stephen Littlechild, is bound to give that result. To set the price cap, the regulator tries to assess the situation facing the company over the next five years and, in particular, what sort of investments they will have to make. But this information has to come largely from the regulated firm itself, which naturally has an incentive to emphasise the problems and costs it will have to face.

After the price cap has been set, it is almost inevitable that the firm discovers it can do without some of the investment previously thought essential, or finds there is even more room for efficiency savings. The result is the recurring headline of massive profits for the privatised utilities.

Yet, as many firms have recognised, this is not in the long-term interests of the firms and their shareholders. If the system is not seen to be fair, there will be pressure for change. This is exactly what happened in electricity when, only months after making his announcement of price caps, Professor Littlechild decided he had been too weak and announced he would tighten them further. The result is "regulatory uncertainty", with damaging consequences for long-term planning.

There are several reforms which could restore confidence in the system. Since the regulator is always going to lack information, the price cap must be augmented with a "clawback" mechanism. This should say that once firms have earned a reasonable rate of return, anything above that is shared, fifty-fifty, with consumers. This would retain the vital incentive for firms to maximise profits and make efficiency gains, but assures consumers that they will get their fair share of these.

It is high time we deserted the idea of personalised regulation. Professor Littlechild does not have to argue his views with anyone before announcing what is a virtually unchallengeable ruling. Replacing the single regulator with a panel would ensure internal debate and better decision-making, and would avoid the instability inherent in what is termed "good chap" regulation.

Because every decision the regulator makes has enormous implications for the lives of so many people, the regulatory body should contain people with backgrounds in these areas. It also needs to be far more open to public scrutiny.

We must scrap industry-specific regulators and replace them with a single energy regulator. At present, investors' decisions are made as much upon guesses about whether Clare Spottiswoode (the gas regulator) or Stephen Littlechild is the softest touch, as upon the underlying fundamentals. This change is urgent, for combined gas and electricity companies are now emerging.

Dan Corrie

The writer is editor of the report from the Institute for Public Policy Research, 'Profiting from the Utilities - new thinking on regulatory reform', pounds 9.95 plus 50p p&p from IPPR (0171-379 9400).

Life and Style
tech
Arts and Entertainment
Robin Thicke's video for 'Blurred Lines' has been criticised for condoning rape
music
News
Paper trail: the wedding photograph found in the rubble after 9/11 – it took Elizabeth Keefe 13 years to find the people in it
newsWho are the people in this photo? It took Elizabeth Stringer Keefe 13 years to find out
Arts and Entertainment
Matt Damon as Jason Bourne in The Bourne Ultimatum (2007)
filmMatt Damon in talks to return
PROMOTED VIDEO
Have you tried new the Independent Digital Edition apps?
News
ebooksAn unforgettable anthology of contemporary reportage
Arts and Entertainment
Evil eye: Douglas Adams in 'mad genius' pose
booksNew biography sheds light on comic genius of Douglas Adams
News
peopleThe report and photo dedicated to the actress’s decolletage has, unsurprisingly, provoked anger
Life and Style
Bono and Apple CEO Tim Cook announced U2's surprise new album at the iPhone 6 launch
tech(but you can't escape: Bono is always on your iPhone)
Sport
FootballFull debuts don't come much more stylish than those on show here
Arts and Entertainment
While many films were released, few managed to match the success of James Bond blockbuster 'Skyfall'
filmsDaniel Craig is believed to be donning skies as 007 for the first time
Arts and Entertainment
Fringe show: 'Cilla', with Sheridan Smith in the title role and Aneurin Barnard as her future husband Bobby Willis
tvEllen E Jones on ITV's 'Cilla'
News
i100
Sport
Tim Wiese
sport
Life and Style
Kim Kardashian drawn backlash over her sexy swimsuit selfie, called 'disgusting' and 'nasty'
fashionCritics say magazine only pays attention to fashion trends among rich, white women
Arts and Entertainment
TVShows like Agents of S.H.I.E.L.D are little more than marketing tools
Arts and Entertainment
Hit the roof: hot-tub cinema east London
architectureFrom pools to football pitches, rooftop living is looking up
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs General

Project Manager with some Agile experience

£45000 Per Annum: Clearwater People Solutions Ltd: Our client based in Chelmsf...

Data/ MI Analyst

£25000 - £30000 Per Annum: Clearwater People Solutions Ltd: Our client are cur...

KS1 Teacher Cornwall

£23500 - £40000 per annum: Randstad Education Plymouth: Randstad Education Ltd...

Corporate Communications Manager - London - up to £80,000

£60000 - £80000 per annum: Ashdown Group: Corporate Marketing Communications M...

Day In a Page

Mystery of the Ground Zero wedding photo

A shot in the dark

Mystery of the wedding photo from Ground Zero
His life, the universe and everything

His life, the universe and everything

New biography sheds light on comic genius of Douglas Adams
Save us from small screen superheroes

Save us from small screen superheroes

Shows like Agents of S.H.I.E.L.D are little more than marketing tools
Reach for the skies

Reach for the skies

From pools to football pitches, rooftop living is looking up
These are the 12 best hotel spas in the UK

12 best hotel spas in the UK

Some hotels go all out on facilities; others stand out for the sheer quality of treatments
These Iranian-controlled Shia militias used to specialise in killing American soldiers. Now they are fighting Isis, backed up by US airstrikes

Widespread fear of Isis is producing strange bedfellows

Iranian-controlled Shia militias that used to kill American soldiers are now fighting Isis, helped by US airstrikes
Topshop goes part Athena poster, part last spring Prada

Topshop goes part Athena poster, part last spring Prada

Shoppers don't come to Topshop for the unique
How to make a Lego masterpiece

How to make a Lego masterpiece

Toy breaks out of the nursery and heads for the gallery
Meet the ‘Endies’ – city dwellers who are too poor to have fun

Meet the ‘Endies’ – city dwellers who are too poor to have fun

Urbanites are cursed with an acronym pointing to Employed but No Disposable Income or Savings
Paisley’s decision to make peace with IRA enemies might remind the Arabs of Sadat

Ian Paisley’s decision to make peace with his IRA enemies

His Save Ulster from Sodomy campaign would surely have been supported by many a Sunni imam
'She was a singer, a superstar, an addict, but to me, her mother, she is simply Amy'

'She was a singer, a superstar, an addict, but to me, her mother, she is simply Amy'

Exclusive extract from Janis Winehouse's poignant new memoir
Is this the role to win Cumberbatch an Oscar?

Is this the role to win Cumberbatch an Oscar?

The Imitation Game, film review
England and Roy Hodgson take a joint step towards redemption in Basel

England and Hodgson take a joint step towards redemption

Welbeck double puts England on the road to Euro 2016
Relatives fight over Vivian Maier’s rare photos

Relatives fight over Vivian Maier’s rare photos

Pictures removed from public view as courts decide ownership
‘Fashion has to be fun. It’s a big business, not a cure for cancer’

‘Fashion has to be fun. It’s a big business, not a cure for cancer’

Donatella Versace at New York Fashion Week