Wednesday, 27 July 2011

Who do utility regulators work for?

I just noticed another regulator getting uppity, this time Ofgem slapping British Gas for poor complaints procedures to the tune of 2.5 milliom.

When a company has a whole or partial monopoly for an essential utility, water, power grid, rail network etc, but has its primary responsibility of profitability towards its shareholders there is plenty of scope for poor service and inflated prices. This was the inherent folly of privatisation and created the need for close regulation. But ignoring how we got here, and ignoring the failing of the regulators, I want to know what is the point of levying a fine on a utility company?  Who gains and who loses?

It’s not as though the company cares or is significantly affected. It’s possible a few low level employees might get office or tool budgets squeezed, some infrastructure improvements or repairs might get delayed, but how does that help anyone?  You can be very sure that a fine won’t significantly affect the shareholder profits and you can be absolutely sure it won’t affect management bonuses.

The only source of revenue to such a company is the customer, so when regulator fines are levied all money has to come ultimately, albeit indirectly, from the customer.  It is either a part of every customer’s bill, hidden away in, and inflating, the company running costs or it manifests as even worse service.

Regulator fines have minimal effect on the utility company owners or top managers and are therefore no more than a particularly pernicious type of hidden taxation on the innocent victims, the hapless customers. So the customer suffers the bad non-compliant service then has to stump up the fine! It’s a type of group punishment, equivalent to handing out a school class detention because a teacher has broken the rules.

The only fair way to regulate such companies would be make the owners or management take responsibility personally for poor management. If the board members were personally fined, even a relatively small sum each, or open to court action for damages and loss caused by poor service, or a levy were placed directly on the share dividends, you can be sure compliance would soon be a priority. I can’t see it happening.

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