The shifting trajectory of economic regulation in the UK: three new regulatory updates

England and Wales

On 31 January 2022, the UK Government published three papers which have the potential to shape the UK regulatory landscape: (i) the Economic Regulation Policy Paper (the “Policy Paper”), which sets out BEIS’ commitment to updating and strengthening the regulation of utilities in the UK; (ii) Reforming the Framework for Better Regulation: Summary of Responses to the Consultation (“Better Regulation”), describing the feedback received in respect of the Government’s proposals to reform the UK’s regulatory framework; and (iii)  the Benefits of Brexit: How the UK is Taking Advantage of Leaving the EU, (the “Benefits of Brexit Report”) which includes five new regulatory principles underpinning the Government’s objective to refocus regulation.

1. Economic Regulation Policy Paper

BEIS’ Policy Paper comes off the back of a recommendation by the National Infrastructure Commission that the UK’s model of utilities regulation needs updating. Accordingly, BEIS states in the Policy Paper its intention to reform economic regulation in order to strengthen the existing framework for Ofwat, Ofgem and Ofcom (i.e., the utilities regulators). The Policy Paper focuses on the following four areas:

  1. Regulators’ Statutory Duties
  2. The Government commits in the Policy Paper to launch a review of utilities regulators’ statutory duties in 2022. This review has not yet been designed but will consider the National Infrastructure Commission’s recommendation that the regulators’ statutory duties need to be coherent, covering price quality, resilience, and environment. Ahead of the review, the Government will commission an analytical study exploring how regulators have been applying their duties, how new statutory duties have been introduced and accommodated and how the statutory duties are now functioning as a result.

  3. Clear Strategic Direction
  4. The Government notes in the Policy Paper that it sees merit in setting out high-level national policy objectives and reflecting these in a vision for the utilities regulators. The success of the UK Regulators Network (“UKRN”) in improving coordination across the regulators is acknowledged and it is noted that the Government expects UKRN to continue leading in this role. In parallel with the Policy Paper, the Government has also published a letter of strategic guidance to the utilities regulators which situates their role as economic regulators within the Government’s overarching priorities and highlights cross-sectoral opportunities for collaboration via the UKRN.[1] However, there are no commitments made in this part of the Policy Paper, rather the Government states that it will consider whether it should issue future strategic guidance to the regulators (and to which the regulators must have regard) to provide greater clarity and certainty on regulators’ status and role within the broader regulatory framework.

  5. Greater use of Competition
  6. The Government commits in the Policy Paper to exploring the role of increased competition in strategic investments. The Government states that it will work closely with regulators in the coming months to identify possible opportunities where Government action could facilitate enhanced competition for investment into strategic priorities. The Government has already asked Ofwat to produce a bespoke review of competition for the provision of infrastructure in the water sector; and whilst not a firm commitment to doing so, the Government will also consider the merit of commissioning Ofgem to produce a review of competition with a view of driving strategic investment in the future.  Of course, legislation to enable further competition in energy networks (CATOs) has been long-awaited and Ofwat has already developed the “direct procurement for customers” or “DPC” model in addition to the “Thames Tideway model” . 

  7. Promoting Transparency and Consistency
  8. The Policy Paper flags two priority areas where the Government believes that greater regulatory consistency is required: (a) price control methodology; and (b) regulatory appeals.

    1. Price control methodology
    2. The Policy Paper notes the divergence in the regulators’ approach to setting price controls, and in particular in determining certain components of the Weighted Average Cost of Capital (“WACC”), such as the risk-free rate. The Government acknowledges that the regulators, via a taskforce supported by the UKRN and along with input from the CMA, are now working to consider whether greater consensus on setting the WACC can be achieved. The Policy Paper confirms that the Government expects that the regulators should work towards alignment where clear benefits can be identified.  This appears to be a direct response to the conflicting outcomes on the WACC in the CMA’s final determinations for PR19 and RIIO-2, both of which took place in 2021.[2]

    3. Regulatory appeals
    4. The Policy Paper acknowledges the lack of consistency in the appeals processes of the regulated utilities sectors and notes the desirability of increasing consistency in this area. The Government therefore states as a commitment in the Policy Paper that it will work with stakeholders, regulators, and the CMA to develop proposals that will align the appeals processes between sectors more closely and consider any wider issues with the current processes. It is worth noting that the Government has confirmed that it is unlikely to develop proposals to fundamentally alter the CMA’s role in the appeals processes more widely or deviate from the current merit-based model. This is a helpful confirmation for industry, given the widespread concerns that arose from Lord Tyrie’s suggestion in 2019 that there was a strong case for the CMA giving up its role in respect of regulatory appeals.[3]

2. Reforming the Framework for Better Regulation

Between 22 July 2021 and 1 October 2021, the Government consulted on reforming the framework for regulation. It received 188 written responses to this consultation, as well as taking feedback from stakeholders through a series of engagement events, which together have been summarised in the Reforming the Framework for Better Regulation paper.

The responses do seem to have informed Government thinking on regulatory reform, notably the proposed re-introduction of 'One in X Out' as a means of regulatory offsetting which, as noted in the Benefits of Brexit Report, has now been abandoned.

The Government notes that most respondents (71%) welcomed some degree of reform to the UK's regulatory framework, although this often came with qualifications.

There was strong support for:

  • having an earlier point at which proposals for regulation are scrutinised by an independent body, and asking departments to demonstrate that standards have been considered as alternatives to regulation;

  • greater responsibility being delegated to regulators, and this being balanced with increased accountability to parliament;

  • maintaining an independent body to scrutinise regulatory proposals

  • regulators being asked to survey those they regulate;

  • deep dives being undertaken to review the effectiveness of individual regulators, and

  • the baselining of regulatory burdens.

On the other hand, most respondents did not support:

  • a re-introduction of 'One in X Out' as a means of regulatory offsetting, and;

  • proposals to streamline impact assessments

3. Benefits of Brexit Report

Within its Benefits of Brexit Report, the Government sets out five new regulatory principles which it states underpin its objective to refocus regulation primarily on delivering growth and innovation. The five new regulatory principles are summarised as follows:

  1. A sovereign approach”: to be achieved by diverging from the EU in certain key sectors to give UK businesses a competitive advantage; repealing certain retained EU legislation; taking a more holistic approach to regulation, basis assessments of regulation on criteria and metrics that underpin the UK economy; and reviewing how the power, discretion and accountability awarded to regulators can best serve the UK’s interests.

  2. Leading from the front”: encouraging outcome-focused and experimental activity from regulators working collaboratively with businesses, using test-beds and sandboxes to support innovation and the co-creation of future industries.

  3. Proportionality”: prioritising non-regulatory options where possible and keeping the administrative costs of regulatory compliance as low as possible.

  4. Recognising what works”: analysing regulatory interventions; revising or removing regulation where it does not achieve its objectives or does so at unacceptable cost; and holding governmental departments accountable for implementing necessary changes to regulation.

  5. Setting high standards at home and globally”: bringing together governments, standards bodies and industry to influence rules, norms and standards; and engaging in regulatory diplomacy in areas that most affect the UK’s long-term strategic advantage, economic security and competitiveness.

In addition to these five regulatory principles, it is worth noting that the Benefits of Brexit Report also states the Government intends to review retained EU law and amend, replace, or repeal all such retained EU law that does not align with the UK’s priorities.

4. Comment

Whilst they contain few wholly new proposals and much of the detail is subject to further development or consultation, these three papers demonstrate the Government’s intention to focus on – and indeed refocus – economic regulation.  They also provide a helpful indication of the Government’s thinking on some key areas of regulatory policy that have been the subject of industry debate over the last few years, including changes to regulators’ duties, reform of the regulatory appeals system and the extension of competition for strategic investments.  In general, it is clear that the Government has listened to considered industry feedback, for example, in respect of the role of the CMA in regulatory appeals and the “One In, X Out” approach. 

We look forward to seeing more detail on the proposals during the course of 2022.  It seems that there is finally the momentum – and available parliamentary time – for legislative change to occur.