The Commission's recommendations to government:
Clear, proportionate and realistic resilience standards set by government
Government should introduce a statutory requirement by 2022 for Secretaries of State to publish:
- clear, proportionate and realistic standards every five years for the resilience of energy, water, digital, road and rail services
- an assessment of how existing structures, powers and incentives enable operators to deliver these standards or where changes are needed.
Regulators should introduce obligations on infrastructure operators to meet these resilience standards by 2023.
Stress testing of infrastructure sectors
Regulators should require a system of regular stress testing by 2024 for energy, water, digital, road and rail infrastructure operators, to ensure that infrastructure operators’ systems and decision-making can credibly meet resilience standards for infrastructure services.
Regulators should introduce obligations by 2023 on infrastructure operators to require them to participate in stress tests and to require remedial action in case of failure of stress tests.
Infrastructure operators should develop strategies to ensure services meet resilience standards in the long term
Energy, water, digital, road and rail infrastructure operators should develop and maintain strategies to ensure infrastructure services can continue to meet resilience standards in the long term. To ensure this, regulators should:
- introduce obligations by 2023 on infrastructure operators to require them to develop and maintain long term resilience strategies (where there is no current requirement)
- set out, in future price reviews, how their determinations are consistent with meeting standards of resilience in both the short and long term.
A clearer strategic framework for the long-term investment needs of the country
Forward looking regulation, by independent regulators, remains the best approach to balancing the needs of consumers and investors, whilst incentivising efficiency. However, this should be embedded in a clearer strategic framework for the long-term investment needs of the country:
- The government should introduce legislation by 2021 to fulfil its previous proposal that regulators have regard to endorsed recommendations from the Commission
- The government should set out a long-term strategic vision for each of the regulated sectors, through strategic policy statements, within the first year of each Parliament, to support lasting plans and stable funding.
Regulatory frameworks should reflect the devolution of powers within the UK
Regulatory frameworks should reflect the devolution of powers within the UK:
- Ahead of the next price controls, regulators should put in place formal mechanisms, such as advisory committees, to ensure they have regard to the strategic vision set out by devolved administrations, where devolved and reserved powers interact
- In future price controls, regulators should demonstrate how they have taken consideration of the strategic vision of metro mayors and relevant local government, within devolved powers, where this has material impacts for network investment
- Regardless of specific devolved powers, regulators should engage with the views of elected representatives, alongside other sources of insight into consumers and the public’s preferences.
Updating regulators’ duties
Regulators’ duties need to be coherent, covering price, quality, resilience and environment. Government should introduce legislation by 2021 ensuring that, where they are currently missing, Ofwat, Ofgem and Ofcom have duties to require them to seek to:
- Ensure their decisions promote the resilience of infrastructure systems
- Ensure their decisions are consistent with, and promote the achievement of, the government’s legislated greenhouse gas emissions targets, currently achieving net zero greenhouse gases by 2050
- Collaborate with other regulators, where relevant, to avoid contradictory regulation and promote efficient outcomes for consumers on cross-sectoral issues.
Using competition to support innovation
The use of competition should be enhanced as the most reliable means of supporting innovation, particularly where there is rapid technological change:
- Regulators should focus ‘standard’ periodic price controls on the maintenance of existing networks and marginal enhancements
- Ofcom should continue to promote infrastructure competition for fibre and mobile networks
- Government should introduce legislation, ahead of the next price controls, to remove any barriers to the use of competition in the provision of strategic enhancements to water and energy networks
- For future price controls, Ofwat and Ofgem should separate consideration of strategic enhancements from the ‘standard’ periodic price control. Ofwat and Ofgem should develop tendering processes for strategic enhancements, with a clear, public justification required where tendering is not used
- Government should ensure that regulators have the resources they need to carry out competitive tenders for transformational investments.
Regulators should address financial risk and corporate governance issues
Regulators should be more proactive in addressing financial risk and corporate governance, to ensure that rewards reflect performance and risks that are genuinely taken by investors:
- In future price controls, regulators should take direct account of information asymmetries in assessing the weighted average cost of capital and total expenditure allowances, ‘aiming off’ to ensure a fair outcome for consumers and investors
- In future price controls, regulators should introduce outperformance sharing mechanisms to allow consumers to share in the benefits that equity investors achieve from high gearing, where companies have gearing levels which significantly exceed the level assumed by the regulators
- For natural monopoly companies, regulators should evaluate the case for an absolute cap on gearing
- For firms with a natural monopoly, regulators should ensure executive salaries are demonstrably linked to long-term performance for consumers and the public.
Prevent companies from engaging in price discrimination that does not provide an overall benefit to consumers
Regulators should be able to prevent companies from engaging in price discrimination that does not provide an overall benefit to consumers:
- Regulators should require companies to report annually on which groups of customers are paying more for the same service; companies should be required to publicly justify their price discrimination policies or rectify them
- Regulators should be able to require companies to change their price structures where price discrimination cannot be justified by benefits to consumers
- Government should introduce legislation, by 2021, to replace the current court-based enforcement of consumer law with an administrative compliance and enforcement model, subject to appropriate scrutiny by the courts.
Closer attention to distributional consequences for customers
Government and regulators cannot rely on a flawed assumption that market design and distributional consequences can be separated. For future regulatory proposals with significant distributional consequences:
- Regulators should publish an analysis of the distributional consequences for consumers and businesses of their proposals, and of the impact of possible mitigations for significant adverse effects
- Regulators’ boards should be given the power, by 2021, to seek explicit guidance from ministers on strategic policy direction and distributional choices, against a menu of feasible options provided by the regulator and within a fixed three-month period
A stronger role for the UK Regulators Network
The UK Regulators Network should have a stronger role, supported by an independent chair:
- By the end of 2020, the UK Regulators Network should appoint an independent chair
- By the end of 2020, the government should review data sharing powers by regulators to ensure they can develop a ‘whole customer view’
- By the end of 2021, regulators, with the support of the UK Regulators Network, should develop joint data sets to enable whole customer analysis
- By July 2021, the independent chair of the UK Regulators Network should publish a business plan setting out how the network will support collaboration on the achievement of common goals; coordination to avoid contradictory regulation and inefficiency; data and knowledge sharing, including supporting the regulators to improve their data management capability; improved performance reporting by regulators.
Government should commit to decarbonising road freight by 2050
Government should commit to decarbonising road freight by 2050, announcing plans by the end of 2021 to ban the sale of new diesel powered HGVs no later than 2040. To support this:
- government should, in conjunction with distribution and transmission network operators, prepare detailed assessments of the infrastructure required to enable the uptake of battery electric or hydrogen HGVs, including the refuelling requirements at depots and key rest areas on major freight routes. For battery electric, these assessments should include enhancements to distribution networks alongside alternatives to reinforcement, such as energy storage. For hydrogen, these assessments should cover the production, storage and distribution of hydrogen, including any dependency with the decarbonisation of the heating supply system.
- Ofgem, as part of the next energy distribution price review (RIIO‑ED2) starting in 2023, should include a clear requirement for distribution network operators (in partnership with the freight industry) to map out the infrastructure upgrades and opportunities for alternative solutions, such as energy storage, required to enable large scale freight van charging at depots.
A full strategy for rail freight to reach zero emissions by 2050
Government should undertake detailed cross‑modal analysis, using a corridor‑based approach, of the long term options for rail freight’s transition to zero emissions, including low carbon rail services and the scope for road based alternatives. It should then publish, by the end of 2021, a full strategy for rail freight to reach zero emissions by 2050, specifying the investments and/or subsidies that it will provide to get there.
Local authorities should include urban freight within their infrastructure strategies
To help manage peak time congestion on the urban transport network, local authorities should include a plan for urban freight within the infrastructure strategies they are developing. These plans should review local regulations to incentivise low congestion operations, consider the case for investments in infrastructure such as consolidation centres, and identify the land and regulatory requirements of new and innovative low congestion initiatives.
New planning practice guidance on freight for strategic policy making authorities
Government should produce new planning practice guidance on freight for strategic policy making authorities. The guidance should better support these authorities in planning for efficient freight networks to service homes and businesses as part of their plan making processes. This new planning practice guidance, which should be prepared by the end of 2020, should give further detail on appropriate considerations when planning for freight, such as the need to:
- provide and protect sufficient land/floorspace for storage and distribution activities on the basis of population and economic need, with particular consideration for the floorspace requirements for last mile distribution and consolidation centres;
- support the clustering of related activities within a supply chain, minimising the distance that goods must be moved and maximising the potential for efficient operations;
- maximise the potential for freight trips to be made at off peak times; and
- accommodate deliveries and servicing activity at the point of delivery.