Negotiated Settlement and Consumer Engagement: UK Experience and lessons for Australia


David Havyatt

Stephen Littlechild, the original developer of the CPI-X approach to incentive regulation (Littlechild 1983), has over the last decade encouraged UK regulators to consider the possibility of a negotiated settlement model of economic regulation (Doucet and Littlechild 2006, Littlechild 2008, 2010, 2011).

A number of regulators in the UK have utilised versions of consumer engagement as a part of their economic regulation process. Bush and Earwaker (2015) provide a very useful overview of many of these efforts with a particular focus on water.

The most significant of all these has been the regulation of Scottish Water by the Water Industry Commission for Scotland. Three reports provide a comprehensive
review of the Customer Forum that was the centrepiece of this work (Littlechild 2014, CFWS 2015 and Bush and Earwaker 2015). Interest in the role of consumer engagement in regulation has spread to Australia (Biggar 2011, Mountain 2013, ENA 2014, Henley 2015 and SACOSS 2015).

Following a rule change request from the Australian Energy Regulator (AER), the National Electricity Rules were amended by the Australian Energy Markets
Commission (AEMC) which creates an obligation on the AER to consider the extent to which capex and opex forecast includes expenditure to address the concerns of any electricity consumers to the extent those concerns have been identified by the DNSP in the course of its engagement with electricity consumers. The rule also includes a requirement for the DNSP to report on its consumer engagement.

The AERs Better Regulation program introduced a suite of changes in response to these rule changes. This included guidelines or networks consumer engagement
as part of revenue proposals (AER 2014).

To develop Energy Consumers Australias understanding of the UK situation the author interviewed a number of participants and analysts in the UK on a study trip in February 2016. These interviews were particularly helpful in understanding the processes, especially in Scottish Water. The available written reports are very thorough, but the interviews provided the opportunity to test conclusions reached from the reports.

The author also benefitted from additional analysis of the UK situation (Lodge 2016, Heims and Lodge 2016) and presentations conducted by Frontier Economics
in Sydney on the implementation of RIIO-ED1 by Ofgem. (Huggins 2016, Wilson 2016).

The paper commences with a discussion of the field of negotiated settlement and consumer engagement as concepts and identifies why they have become of such interest to regulators in the UK and Australia.

This is followed by a specific focus on the Customer Forum for Water in Scotland as the case of Scottish Water is a stand-out example. Then differing approaches
by Ofwat, Ofgem and the Civil Aviation Authority (CAA) are discussed.

The paper concludes with an attempt to position consumer engagement within a framework of economic regulation and includes recommendations for regulators.

David Havyatt’s full paper can be read here.