Customer Involvement in Economic Regulation

Regulators want to ensure effective evidence-based consumer representation.  Unfortunately, however, it is surprisingly difficult to achieve this end.

  • You cannot expect the general public to get involved in a consultation process
  • And most consumers will say, quite reasonably, that they want high quality, lots of choice, good service - and low prices. 
  • But there are clear trade-offs between these attributes. 
  • And it is near impossible for regulators to get consumers to rank these attributes when they are faced with hypothetical choices.  It is very hard to design reliable surveys.  Focus groups can offer deeper insights, but they are expensive and may not be representative of the wider population.
  • Representative bodies, too, often have a very narrow perspective.

Turning to consumer representation, it is generally recognised that, although regulators are pretty good at understanding companies' likely responses to regulation, they do not know enough about how consumers respond to information about prices, quality etc., nor how much customers would be willing to pay for improved service quality etc. This makes it difficult for regulators to construct detailed price controls which inevitably have to prescribe what service has to be provided for a particular price. There is also a good deal of (what is known in the trade as) 'regulatory asymmetry' which takes three main forms:

  • The first arises out of the distribution of regulatory resources. The regulated firms deploy huge and expensive resources as they tackle issues which could add or subtract 10s or 100s of millions of pounds from their profits. In contrast, the two main consumer bodies (Consumer Focus and Which?), and even the specialised consumer bodies such as the Consumer Council for Water, have only tiny numbers of staff and are easily out-gunned when commenting on lengthy technical consultation documents.
  • The second asymmetry arises out of the utilities' monopoly of information (aka information asymmetry).
  • And the third factor - perhaps not exactly an asymmetry - is that regulatory policy has to be implemented by the industry who in effect become an agent for the delivery of that policy. This inevitably leads to the larger companies having a big say in how regulatory, environmental and social objectives are delivered - and certainly a much bigger say than the consumer bodies.

This leads to quite a dilemma for regulators. They would generally prefer to act as even-handed arbitrator between consumer representatives on the one hand and utility companies on the other hand, receiving contrasting submissions and making quasi-judicial determinations based on those submissions. But this would disadvantage consumers as the regulated industries would inevitably have much greater power and influence. In practice, therefore, the regulators generally see themselves as representing consumers - or at least the wider public interest - against industry opposition.

One partial solution is 'constructive engagement', first used by the Civil Aviation Authority in setting landing charges etc. - when they asked the airports and the airlines to agree as much as they could (for instance about the need for new investment) in advance of the regulator finalising the price control. It didn't work brilliantly in practice but it was a brave attempt and at least led to sensible and helpful information exchange.

The very complex Gas and Electricity Code Modification processes - in which the industry and consumer representatives take the lead in agreeing changes the the rules regulation of these industries - can perhaps be seen as another form of constructive engagement.

But these techniques only work if the customers (such as the airlines) are very powerful or the issues relatively uncontroversial. In most other cases it is inevitably necessary for the regulators' staff to ensure that the customer's voice is properly heard by decision makers.

This important subject has been the subject of some recent high quality academic thinking, exemplified by the paper Working with Customers to Improve Regulation published by Oxford's Smith School of Enterprise and the Environment in 2017. The authors:

'... discuss ways in which regulators could refine the current regulatory approach, and suggest a new framework for improving customer engagement. [They] identify three ways in which this framework might improve the efficiency of customer engagement as currently practiced:

  • first, by introducing economic efficiency explicitly as a yardstick for evaluating customer engagement;
  • second, by providing firms and customer groups with direct incentives for good customer engagement; and
  • third, by making greater use of field experiments and revealed preference techniques to provide more robust estimates of customer preferences.

The outcome of this new engagement process is an evidence-based business plan that not only incorporates what customers want, but also how these needs can best be met by regulated firms. '

The UK Regulators Network have published a useful reference tool for regulators, government, consumer groups and regulated companies. Click here to read it.

Martin Stanley

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