Regulators go under the microscope

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A parliamentary select committee is to examine the role UK regulators play in promoting competition at home and abroad. Ofwat has already come in for criticism.

Ofwat will come under the spotlight when a new House of Lords committee asks how successful regulators have been in policing the companies under their authority, and what can be done to improve their effectiveness. In an initial response, Ofwat has already acknowledged its own disappointment concerning the promotion of competition.

The water regulator’s working methods will be scrutinised, as will the general impact of regulation on the British economy’s competitiveness abroad. As part of a process designed to yield a final report in November, the Select Committee on Regulators, chaired by Lord McIntosh of Haringey, will ask, inter alia, whether regulators are sufficiently independent from government to allow them full operational freedom of action. It wants to know whether their funding impacts on their independence, whether consumers have benefited from the privatisation of the former public utility monopolies, and how far the restructuring of markets by regulators has led to the development of better competition.

The questions – detailed by the committee itself – also concern scrutiny of the National Audit Office and its effectiveness in ensuring that regulators provide value for money. The clarity with which Ofwat requests information from companies will be examined, as will the question of whether companies are given enough early warning before enforcement action in order to allow for self-correction.

Particularly pertinent is the impact of regulatory restrictions on competition. The committee will examine the extent to which regulation affects investment levels, and the way in which regulators can improve market signals and incentivise longer term investment in regulated markets. Stakeholders have been asked to provide evidence of ways in which regulators can improve and sustain business confidence in regulatory decisions. The committee asks to what extent foreign ownership of UK companies presents specific and identifiable problems for the domestic regulatory framework.

Lord McIntosh, launching the call for evidence, said: “By the time we report around November 2007, we will have a detailed picture of where regulators stand at present, and what can be done to improve their performance for the benefit of all British consumers.”

In a written submission, Aquavitae, which provides retail water supplies to industrial and commercial customers, has complained of obstruction by the incumbent water companies, adding that actions by Ofwat have erected additional barriers to entry, whilst protecting incumbents. The company notes, for example, that “the rules for inset appointments are bureaucratic and time-consuming,” and even though Ofwat has lowered the threshold to those using 50 million litres a year or more, this still leaves 93% of the market outside the competition threshold. Aquavitae also highlights the fact that because the incumbent water companies are vertically integrated, they control the pipeline transport facilities that entrants must use to reach their customers.

Ofwat is also using the Efficient Component Pricing Rule to calculate network access charges, which provides little margin below existing prices for newcomers to enter the market. Aquavitae notes that no other British regulator seeking to promote competition uses the ECPR.

Ofwat, in a memorandum to the Lords’ committee, stated that it is reviewing its implementation, and that it is concerned to ensure both that the burden of regulation is proportionate to the benefits for consumers, and that it behaves in an open and transparent way.

Aquavitae says it has taken costly actions to open up the market by appealing to the competition authorities, noting that though the Competition Appeal Tribunal has severely criticised Ofwat and its regulatory regime, “Ofwat seems in no hurry to take those criticisms into account.”