Should regulators engage consumers in decision-making? Lessons from UK water regulation

Eva Heims and Martin LodgeEva Heims and Martin Lodge

The idea of ‘consumer engagement’ has become a central theme in UK economic regulation. Regulators are demanding it, regulated companies are claiming to be pursuing it – but nobody quite knows what ‘it’ (i.e. consumer engagement’) might actually represent. So what does research on consumer engagement tell us?

In our recent Policy & Politics article on Customer Engagement in UK water regulation, we argue that the idea of consumer representation in UK utility regulation is, of course, not particularly new. The ‘old’ age of publicly owned utilities was characterised by a range of consumer representative bodies. While some managed to survive into the age of privatisation, the key emphasis has been on relying on regulatory bodies themselves to play a consumer representation function since the 2000s. But since the late noughties, putting the consumer at the heart of regulation has become a central theme in UK utility regulation and water regulators in the UK have recently experimented with different mechanisms of customer engagement.

So where does the idea for consumer engagement in utility regulation come from? And what can we learn from the Scottish and English experiences? One of the main triggers for the growing attraction of consumer engagement strategies is the exhaustion of existing regulatory instruments. Increasingly, questions have been asked as to whether price reviews offer a valuable regulatory strategy as industries have adapted to regulatory requirements, regulators have become overwhelmed by methodological demands, regulatory relationships have hardened, and the value of benchmarking information has become exhausted.  Regulators take note! Introducing novel ways of challenging companies to stretch themselves further when devising their business plans can encourage different, less institutionalized discovery processes.

Scholars and regulators alike can also learn from the significant differences in the approach to customer engagement in water regulation in Scotland and England and Wales. The Scottish experience – involving the publicly owned Scottish Water – was characterised by a substantial delegation of authority to a ‘Customer Forum’ under a tripartite agreement between the regulator (WICS), the consumer representative body (Consumer Focus) and the regulated company (Scottish Water). During the process, the Customer Forum and Scottish Water effectively negotiated an agreement on the company’s business plan, and the regulator largely accepted this agreement. In England, ‘customer challenge groups’ were established at the level of each privately regulated company, with an additional consumer representative panel engaging with the water regulator, Ofwat. The English regulator was less willing to delegate decision making to the various customer groups. In the end, Ofwat made only very timid use of the possibility to ‘fast-track’ the price review for companies that presented business plans based on extensive customer engagement. It is difficult to assess the outcome of these different approaches. However, regulators can learn from the Scottish experience which was hailed as a success: WICS was not only willing to give its customer body considerable influence, the regulator also supported the Customer Forum with detailed and targeted information at crucial points in the process. Other regulators may want to take this into account when designing customer engagement processes.

But whatever the merits of these different approaches, before extending the scope for negotiated settlements more generally, a number of questions need to be confronted:

One question is about the institutional status of consumer engagement. As noted, the English version placed consumer engagement at the level of the regulated firm in contrast to Scotland’s tripartite agreement. The latter potentially offers greater commitment on behalf of all interested parties in supporting the process and eventual agreement, but may be seen as uncomfortable for those interested in consumer advocacy rather than negotiation. It also requires institutional resource commitments across all parties that may not always be available.

For regulated firms, there are concerns about biases in decision making (short-term over long-term horizons, domestic over business consumers). These tensions will always be present in negotiated settlements. Decision making led by detached econocratic regulators has often been seen as a solution to these problems in the past. Firms require safety nets as any agreement might be vulnerable to over- and under-performance, often due to reasons outside of the control of the different actors that are part of the engagement process. Such mechanisms require careful specification, potentially involve independent monitoring and include hard-wired review provisions to avoid gridlock.

Finally, there is also the question of legitimacy. It inevitably remains questionable how a number of high profile individuals can be said to represent ‘the consumer interest’ in all its diversity. This suggests that customer representation is about ensuring that regulated companies consider their different customers. There is no silver-bullet for regulators in this respect, so regulators need to be aware that despite all its potential advantages, customer engagement also opens the door to new tensions that they will inevitably be called upon to resolve.

Eva Heims is Lecturer in Public Policy at the University of York and a Research Associate of the Center for the Analysis of Risk and Regulation (carr). Martin Lodge is Professor of Political Science and Public Policy at the LSE and Director of carr.

If you enjoyed this blog you may also be interested to read Marketing practices and the reconfiguration of public action by Clive Barnett and Nick Mahony

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s