For many years regulators, companies and industry commentators have debated how best to involve customers in the complex series of interactions that a price review entails.
We are no exception to this, seeking to place customers at the heart of decision-making at each of our last two price reviews. While no approach will work on every level, a move away from direct negotiation towards the regulated company taking ownership is, in my view, the best way forward.
There are some who believe that direct negotiation (whereby customer and company agree the level of charges) is the only game in town. Customers, they argue, should be given the information they need in order to negotiate with the regulated company and ultimately agree price increases.
The Customer Forum: A regulatory innovation
Our alternative viewpoint stems from our experiences working with the Customer Forum, a body first established at the 2010-15 price review to act as a ‘conduit for customers’ views’.
This regulatory innovation undoubtedly brought many benefits, including lower prices than would have been possible under a traditional approach and the introduction of new customer satisfaction measures.
However, as the process developed some inherent limitations were exposed. These became even clearer at the following review (2015-21), when a second iteration of the Customer Forum was in place.
- First, whether by intention or design, it can be difficult for any customer representative body to avoid straying into areas of policy making. Yet policy is not a matter to be determined either by regulators or by customer representatives, in whatever form. In Scotland we are fortunate to have very clear governance arrangements in place, which ensure that it is Ministers who determine the long-term objectives for the sector, and the principles of charging that should apply. This framework brings clarity about roles and responsibilities – we as regulator act as the ‘bean counter’, determining how much it will cost to deliver those ministerial objectives. But this clarity can be challenging for those who would rather a degree of latitude in order to modify policy.
- Secondly, the direct negotiation model ignores the asymmetries of information that characterise regulation. In spite of our best efforts to ensure that a company provides comprehensive, well-defined and accurate information in a transparent way, the regulator will never have as much information as the company itself. This asymmetry comes into play too when providing information to the customer representative. Attempting to overcome these asymmetries can be difficult. Indeed, at our last review there was a sense that the Customer Forum was almost starting to negotiate with us, rather than with Scottish Water, about the information we were providing.
So, a difficult balance to be had between empowering and informing customers, addressing the information asymmetry and changing the dynamic of the negotiation process; the negotiated settlement is not necessarily the panacea it might first appear.
There is a third problem, perhaps more fundamental than any other. At previous reviews, although there were good discussions, and a general consensus was reached about the challenges the industry faces, there remained enduring concerns among some Forum members about affordability. In particular, some found it hard to agree the price increases that will be necessary if the sector is to deliver the level of investment required to address those challenges.
This becomes even more evident at a time of economic uncertainty and elevated inflation, when customer representatives may find it very hard to agree to price increases.
Transparency with customers
We come up here against a clear dichotomy: if you ask customers if they want an economically and financially sustainable service, providing high-quality water and waste for today and in future, they naturally give an overwhelmingly positive ‘yes’. Yet this may well mean an increase in charges. So the question becomes: who is going to be clear about that to customers?
The picture is made even more uncertain if the regulated company, or any sector stakeholders for that matter, are tempted to shy away from the truth about how much work is required to try to address and mitigate the impacts of climate change, and how much this is likely to cost. While we in the sector have a responsibility to make strategic choices that looks after the interests of future customers as well as those of today, it is sometimes easy to lapse into shorter-term tactical decision making. It can be tempting too, for a regulated company to ‘hide’ behind the regulator, placing the onus on them as the ‘bean counter’ for increases in charges.
Admittedly, charges going up is never going to be a popular message yet one we have a responsibility to deliver if we are to ensure the future sustainability of what are genuinely essential services. And as custodian of the assets, Scottish Water has perhaps the greatest onus here.
Candour + analysis = confidence
So how might we make it easier for these difficult conversations to be had, and for messages to be shared with customers and communities in a more transparent and open way? These are the questions we asked ourselves at the last Strategic Review of Charges. Drawing from the conceptual framework provided by Ethical Business Regulation and Ethical Business Practice, we set out to put elements in place to promote more collaborative discussions between us and Scottish Water.
In essence the new approach requires Scottish Water to be clear to its customers, communities and other stakeholders about how much work needs to be done, and at what cost, to meet their expectations. The company will need to take ownership of its future strategy and explain the potential choices available to its customers. Promoting open discussion in this way places the onus on Scottish Water itself to remove the asymmetries of information that have been problematic at previous reviews.
Becoming directly answerable is the best way for Scottish Water to build the confidence of its customers and communities. This confidence will be based on both the candour of its approach and on the quality of the evidence and analysis it provides.
A long journey ahead
Scottish Water taking ownership in this way changes completely the dynamic of economic regulation away from the traditional ‘parent/child’ relationship. This isn’t going to happen overnight; after all, there are some highly engrained behaviours in place, built up over 20 years of regulation.
As such we know that this level of transformation will take time to plan and to implement, and we are only at the very early stages on what will undoubtedly be a long journey. But we believe it’s a journey worth making. The goal is that over time Scottish Water will be able to say, hand on heart, that it has met its commitment to ensure that all decisions were taken "as though customers were in the room".