I have met with a number of companies over the past several weeks. One area of discussion concerned the suggestion that more focused regulation of retail services could lead to better outcomes and that this could represent an alternative to retail competition.
It seems to me that this would take regulation in a new and potentially undesirable direction. Do we really want the regulator defining the level of customer service that should be provided to customers?
It is conceivable that, with the engagement of customer representatives, a view could be reached on the minimum levels of service a household customer could expect. It may also be possible to establish the maximum levels of service that households would be prepared to pay for in the medium to longer term.
However, it is more difficult to determine similar minimum service levels for non-household customers. It would be even more difficult to develop a robust understanding of the aspirations of many of these non-household customers. Experience from the retail market in Scotland suggests that these customers want a more tailored service. It cannot be assumed that customers know all of the services that are or could be available. They certainly will not have an understanding of the potential costs and benefits of different services to their business. It is therefore difficult to see how the regulator could ever gain an appropriate level of understanding of the aspirations of many non-household customers in order to set regulatory targets.
The tailored services that are offered in Scotland are likely to be available from a range of different suppliers. Coming to a view on retail price caps would be difficult if judgements have to be made about the efficient cost of these services as well as their appropriateness for individual customers.
Regulating the appropriate level of retail costs would be even more problematic. It would require the regulator to take a view on the appropriate level of bad debt for each regulated company. It would also require consideration of an appropriate level of receivables for a company to run. If the regulator was to take decisions in these two areas, it would require qualitative judgement on customers' ability to pay. Such decisions are likely to be controversial and regarded as subjective. It is also not clear that requiring such decisions from a regulator would be consistent with lighter touch regulation.
What is the alternative to regulating retail? In a retail competition framework, there is a need only to protect those non-household customers who choose not to exercise choice and not to take advantage of the new services that become available. The ‘default’ tariff and level of service does this. There is, in my view, no need for any further regulatory intervention unless the return being earned by the incumbent in an area became unreasonable.