When the utility regulators were established in the UK their primary duties and roles were focused on economic regulation – setting price controls for monopolies and promoting competition where possible. The increasing emphasis in government policy on sustainable development has led to pressures on the regulators to pay greater attention to social and environmental concerns alongside economic ones. Ofwat and Ofgem now have duties to contribute to the achievement of sustainable development. Why and how did this change come about, what impact will it have on how the regulators deal with sustainable development and on the nature of regulation?
When the utility regulators were established in the 1980s their primary purpose was to develop competition where possible and to act as a surrogate for competition (by setting limits to the prices that could be charged) where it was not feasible (such as in cases of natural monopoly) (Baldwin and Cave, 1999). Alongside this was the duty to ensure that companies could finance their functions thus placing some limits on how far regulators could bear down on prices. In the debate about what constitutes “good regulation” (Baldwin and Cave, 1999) some have stressed the need for regulators to stick to their original mandate of economic questions to retain their independence, remain accountable and help preserve stability and certainty – they should not concern themselves with issue of distribution, or environmental damage, for example (e.g. Foster, 1992). Others, however (e.g. Prosser, 1997) note that the UK regulators were not given solely economic objectives when they were first established and that a mixed set of goals is an inevitable part of the framework. For example, the regulation establishing the water and energy regulators gave them duties to take into account the interests of specific groups of consumers, such as the elderly and disabled and those who live in rural areas; plus duties requiring them to take into account the effects on the environment of the activities of the utilities that they regulate. Nevertheless, it was always clear, until the change of government in 1997 that the primary duties were economic and that other social and environmental duties were subordinate. However, the Labour Government, elected in 1997, signaled its intention to review utility regulation and in early 1998 began to consult on proposals for change (Cm 3898, 1998), that have eventually culminated in the specific duties relating to sustainable development that are the subject discussed here.
This article examines the evolution of environmental concerns during the 1990s in energy and water regulation and the process by which the regulators were given sustainable development duties. Some of the questions that are considered include: the boundaries between regulation and politics; whether these new duties signal real or merely symbolic change; how trade-offs between competing objectives are made; what this UK experience teaches us about how sustainable development considerations may be internalised into utility regulation. The article will focus mainly on the environmental issues, although the sustainable development debate also includes concerns about social issues (e.g. Ernst, 1994, Dubash, 2003, Haselip et al., 2005 and Owen, 2004), such as protection of the interests of low income and disadvantaged consumers.
The energy and water regulators in the UK started with primarily a clear economic function (although they have always had some social and environmental duties), but a number of areas of conflict between their economic goals and environmental policy arose during the 1990s as this article has shown. The introduction of sustainable development duties for Ofgem and Ofwat represents a further development of what to some is seen as an undesirable development that will subvert what should be their main goal – economic. However, an alternative view is that mixed goals are an inherent feature and in these sectors where environmental impacts are large, that must include environmental goals. These new duties should help to clarify this mixture of goals. Whether the new duties will in practice make much difference to what the regulators do remains to be seen.
