The regulation of some industries like telecoms, energy and other network or utility industries is of huge economic, social and political importance. But what should the relationship between the government and utility/network regulators look like?
HPS are providers of consultancy services to both National Grid and Network Rail, both highly regulated businesses so are well versed in the challenges these industries face with their regulators. It can be important to remember that utility regulation is a poor substitute for a properly functioning competitive market.
But the principal purpose of utility regulation is to limit the economic harm that could occur if these naturally monopolistic industries were not regulated. Without regulation the behaviour of utility industries would most likely end up with inadequate investment and reduced innovation as well as higher prices and poor services to customers.
Economic regulators of network and utility industries consequently aim to align the interests of the three key stakeholder groups: the providers of capital, the companies themselves, and their customers. Regulators often seek to influence companies’ behaviour through persuasion and publicity. It is often necessary to impose price controls and associated conditions but HPS know it is better to encourage market mimicking behaviour through incentive regulation rather than direct interventions.
It is important that legislators should not impose regulation without first considering (a) whether the market will not provide an optimal outcome and, if not, (b) why not? That way is it possible to consider the best way to address the market failure using tools which might include targeted exemptions from taxation, or targeted taxation.
HPS has much experience in offering consultancy services to highly regulated businesses we know utilities crave predictable regulation, unexpected interventions will all too often lead to underinvestment by firms. http://www.regulation.org.uk/utility_regulation-homepage.html