As economic regulators we like to assert our independence from Government. In matters of price setting this independence is essential to maintaining the legitimacy of the process in the eyes of both customers and those who make capital available to the industry – whether private investor or Government.
But changing the governance framework of a regulated industry is more than just an economic process. Indeed, I would go as far as to say that it is essentially a political process. This requires there to be an effective multi-lateral dialogue including all interested parties.
Key political considerations, the answers to which could change the design of market arrangements would include:
• Are we prepared to tolerate some customers losing out when the new market arrangements are introduced?
• Do we consider that averaging of charges (ie the same tariff in any water company area for the same class of customer) should be maintained?
• Should companies that decide retail is not a core skill be allowed to exit the market?
There are many more such questions.
Whether or not we, as economic regulators like it, we have to accept that changing the governance of an industry is a highly political process.