Utility Regulator Chair Bill Emery: effective regulation drives change

Utilities need to prove how they are improving efficiency rather than asking the regulator to justify its decisions, according to Bill Emery.  The Utility Regulator’s Chairman talks to Owen McQuade about best practice in regulation and the drivers for change in enterprises.

“In regulation, you are attempting to apply the pressures that would exist in a truly competitive market to the players, and that can be quite uncomfortable,” Bill Emery remarks.  The new Chairman of the Utility Regulator notes that the RP5 process has taken “a long time” and that utility regulation in Northern Ireland has been through a “very busy period” with all three major enterprises in electricity, gas and water being reviewed around the same time.

“It brings a huge amount of difficulty on what is a small department with reasonably limited resources, having to do a job which is unusual in the UK context of overseeing more than one sector,” he comments.

Utilities will regularly object to the regulator’s decisions but he sees this as all part of the job.  “In one respect, if the pips aren’t squeaking, then there’s something wrong with the regulation,” Emery notes.  “In a competitive environment, very few companies are comfortable and it’s not the aim of a regulator to make the life of executives and owners of utility companies comfortable.  They’ve got to be challenged.”

Appointed as Chairman on 1 July, Emery was previously Chief Executive of the Office of Rail Regulation (covering Great Britain) and worked in the Office of Water Services (in England and Wales) for 15 years.

From his long experience of regulating water in England and Wales and rail across Britain, he finds that a regulator “should be shifting the burden on to the enterprises to demonstrate that they are efficient, are performing well and can stand true comparisons with their peers in similar sectors, and have processes that are up to the mark with the best elsewhere.”

Most utilities have tended to focus on the characteristics which they claim are unique to their own operations.  His view, though, is that “there’s very little unique about utilities”.  Emery adds: “Maybe the bricks are arranged in a slightly different way but they actually are very similar enterprises, whether they are working in Northern Ireland or Britain or in any other part of the industrialised world.”

Fair comparisons can therefore be made and the regulator has a duty and responsibility to “challenge the enterprise to address those gaps and address them reasonably quickly.”  Likewise, the owners and managers are “stewards” of the networks for the longer term and must have proper plans to maintain them.

To encourage that, the regulator pushes metric or process benchmarking “right the way through” and scrutinises “enablers” such as asset management and health and safety excellence.  The key is to see whether the utility is “really delivering what they should be doing” because, he emphasises, “customers in Northern Ireland deserve that from the enterprises that have the privilege and responsibility to serve them.”

Information flow

One of the major imbalances between utilities and regulators is that the company has, in the first   instance, all the information.  When NIE was first regulated, it delivered its data to Utility Regulator Douglas McIldoon in a pallet whereas he only had three reports as an evidence base.

Asked how that can be overcome, he surmises that companies often confuse quantity with quality: “I think that they’ve clearly got a lot more data in the companies.  Too often, that is not quite the same as saying: ‘They’ve got information they really need in the way that they need it to enable them to make a compelling case for what they are wanting to do.’”

If the right information is not forthcoming, the regulator has to move on.  “Too often,” he says, “there is an assumption that the regulator has to justify what they’re doing.”  In reality, he thinks the regulator has enough work in proving the hypothesis that there’s scope for improving efficiency.  “It’s then really over to the regulated enterprise to demonstrate that there isn’t and that’s quite difficult.”

Many observers have questioned whether there was more scope for efficiency in the premium paid by ESB for NIE.  His answer is forthright and demands that the utility meets the highest bar.

“There’s bound to be more scope,” he insists.  “If they cannot demonstrate proper, continuous benchmarking of all their processes within their business against the best of the people across the world, and the metrics stand up to demonstrate that they are right up there in the top 10 per cent of enterprises, then there is going to be  scope for more efficiency.  The issue is more about the pace of that, given all the other things they’ve got to do.”

Regulated enterprises, he notes, are given more time to adjust than those in “the harsh real market” where they would be forced to cut costs or improve the service when customers leave quickly.  A regulator must always keep in mind that “this service needs to continue” and that can limit the pace at which enterprises respond.

Best practice

A good regulator, in his opinion, needs to listen and “be quite expert in what they’re doing.”  Importantly, the regulator must stand back and see the ‘big picture’.  Trying to second guess management is a “regulatory trap” and falls outside the regulator’s role.  It is, though, important to be informed about the enterprise (and how it compares with others in similar circumstances or elsewhere) so that the “potential gaps” can be spotted.

“You’ve got to be thorough in the way you’re doing it” and visibility and transparency are “very crucial.”  After 25 years of development, those Better Regulation processes are “part and parcel” of regulation and the key question is: “How do you create the environment where people understand what you’re doing?”

A regulator has to be lean and mean.

“This is not a game where you’re going to make a lot of friends but you’ve got to be in a position where people do respect you as a regulatory office,” he comments.  If that respect is not there, enterprises ultimately will not address the gaps in performance, demand or customer service highlighted by the regulator.

Emery comes to the post after 21 years in rail and water regulation and found his last post “really fascinating.”

“You got caught up in the railways and grow yourself [into] a railway anorak,” he quips.  The industry is unlike any other utility as it moves people around and they’re experiencing the process: “That brings an immediacy to it that’s not there in the other sectors.”

In an unusual arrangement, the Office of Rail Regulation was “overseeing the game” (i.e. the arrangements between Network Rail and the network operating companies) and also regulating Network Rail.  The franchisees are regulated by the Department for Transport and the Scottish Government.

“The main lesson in dealing with Network Rail,” he states, “was getting them to understand what top quality asset management really was because they hadn’t got it and pushing them to really look at and commit to excellence in that.”  He expects that will be the office’s long-term legacy.

Emery repeats his warning about getting drawn into the “minutiae of the issues” within a company, a risk which naturally increases when too much information was moving in the system.

“The level of information flowing through from the railways enterprise back to the regulator and into the Government was phenomenal and the difficulty of that was that you didn’t want it,” he explains.

“It was actually getting you into the day-to-day [business] when, as a regulator, you were wanting to set the long-term agenda and get the company to deliver on that, and not get him to try and share his problems with me: ‘I don’t want to know. I want you to solve them.’”

Emery spent the first 15 years of his working life as a water engineer, and had the opportunity to look at the industry on a wider scale when he moved to Ofwat in 1990.  Asset management and the “real power” of comparative competition were the two main learning points.

He thinks that the national productivity studies in the 1980s missed a “critical step” by not validating and certifying the baseline information and day-to-day data.

Corporate change and consolidation, the signs of success in water privatisation, were “a little bit more sexy” than the “really basic regulatory ethic” of establishing a reliable database and a form of comparative competition, that then could be used in regulatory decisions.

First impressions

Looking forward in Northern Ireland, the Utility Regulator’s priorities are to make sure that energy enterprises implement government policies, respond to the European agenda for electricity and see “whether we can really make progress on the gas side across the island.”

On water, he asks whether there is “a way through” from the unusual “half-way house” of an enterprise that is still a non-departmental public body but being regulated by a regulator.  The Utility Regulator must also consider where it can make the necessary steps to help Northern Ireland Water “really deliver what it could do for the consumers in Northern Ireland.”

Some of the lessons from the last set of reviews are around “being clearer about the timelines and sticking a lot more closely to them”.  In NIE’s case, this improvement depends on “the assumption that they will pick up the baton we’ve thrown down and not seek to challenge it.”  Since the time of the interview, NIE has rejected the Utility Regulator’s decision; it plans to take the case to the Competition Commission.

The involvement of government in the regulated sectors is “quite close” but this is “not unrealistic.” Northern Ireland has a full-scale model of government operating in an area with the size of Birmingham or Manchester, without the strong local government that is found in Great Britain.  That adds “interest and complexity” to the regulatory role but is also a potential distraction for enterprises as they balance political engagement with everyday delivery for customers.

As an outside observer, he has has been impressed by the work ethic within the Utility Regulator and its coherent corporate strategy.  Furthermore, “as always in utilities,” he finds that the people working across the sector are “really committed” to public service.  “It doesn’t really matter whether it’s in public corporations or whether it’s in privatised sectors,” he notes.  “There is still a service culture.”

Profile: Bill Emery

Bill Emery is also non-executive Vice-Chair of the Centre on Regulation in Europe, which aims to improve regulation across the continent, and is also a senior magistrate on the Sheffield bench. While at Ofwat, he monitored the performance of regulated companies, the delivery of investment programmes, the comparative competition regime, and the planning and technical aspects of price reviews.  Living in a conservation area near Sheffield city centre, he enjoys “quite a bit” of gardening and DIY. Bill is also renovating an old yacht and does “a bit of sailing when I get time to do it.”