Name: Video 7-5 Conservation with Regina Finn on reforming UK water regulation
Uploaded: 2017-01-30T20:21:57.763Z
Duration: 49 min 23 s
Description: Watch this video about Video 7-5 Conservation with Regina Finn on reforming UK water regulation for Session 7 in Water Supply and Sanitation Policy in Developing Countries Part 2: Developing Effective Interventions.

Welcome Regina, the first question I would like to ask you is how did you first

become interested in regulating utility.

>> Well, I was really lucky enough to be involved in, back in the late 90s,

in the liberalization of telecoms markets in Europe.

I was working in the Irish Civil Service in the Department of Communications.

And what fascinated me about that was

the interplay of opening up monopolistic markets to competition.

And the interplay of that competitive market, how it could deliver for

consumers with regulation and the need to regulate

where monopoly markets remained or where competition wasn't going to happen,

as was the case with fixed-line telecoms networks.

So that was absolutely fascinating and got me hooked on that interaction.

And on learning how markets,

along with regulation can deliver good outcomes for consumers,

on trying to get that balance right, because that's really, really tricky.

So that was really fascinating and from there, I moved on to regulating

electricity, and gas, and post, and all sorts of things before moving on to water.

>> Okay, and so what brought you into the economic regulator thing,

then the Wales Ofwat?

>> Well, at the time I was heading up the energy regulator in Ireland.

So that was an economic regulator for the gas and

electricity networks, a fascinating sector, really really enjoying it.

And I was approached, Ofwat was changing its structure,

it was changing to a board structure with a chief executive.

It had been run by a single director general before then.

And I was approached to consider the role.

And, what's not to like?

Absolutely, be a fantastic role to consider.

So I thought it was a sector that I haven't yet

regulated which is always really interesting.

It's fantastic to be able to take some of the frameworks and the lessons

you've learned in other sectors and then apply them to a new sector.

So that was really attractive opportunity.

And also the fact that it's something that touches so many people's lives everyday.

It's such an essential issue, and it seems to me like a fantastic opportunity.

>> Mm-hm. So you mentioned that obviously,

because it was water it was interesting because it affects everyone's daily lives.

But was it the fact that, as we saw in early videos in the MOOC,

that it was changing from the director general, which was sort of

at that time to this board structure which would have more people involved and

a sort of, maybe, a changing perception of the regulator for the sector.

Was it a sort of turning point?

Was that what appealed to you about becoming the first chief executive?

>> Well, partly, yes, because a lot of m career has been in

setting up new organizations or establishing new regulatory regimes.

So, there was an element of set up or start up,

which I always find incredibly attractive.

I think it's really exciting.

And the opportunity to come in and change the structure of the organization.

But also, by asking me come in,

they were clearly asking somebody to take a fresh look at the regulatory landscape,

somebody who wasn't from the UK, and somebody who wasn't from the water sector.

I found that quite exciting, as well.

>> Was there an explicit expression that they wanted someone from outside

the water sector or what was the situation?

>> Not necessarily.

I think though, that the search for

somebody to have the roll up at a heart as its specification quite a wide range.

And clearly, somebody could have come from the water sector, but

at the challenge there with having somebody come from within the sector was,

and it's always very hard to look completely afresh at something that you

yourself have been doing for a long time.

And indeed the UK was changing its model,

all regulatory structures across the utility sectors,

Ofwat was the last one to move to this chief executive and board structure.

And one of the advantages of that new structure was seen to be that it

brought a more diverse set of views and

a wider range of inputs and therefore greater challenge.

Whereas when these organizations are run just by one person, and I know because

I've done that too, it tends to become quite embedded in that one person's views.

So this was to allow for a more diverse cooperate government of the regulators.

And as I said Ofwat was the last of UK regulations to move of that structure.

So, it was my opportunity to make that work.

>> Okay, great.

And so what were the main challenges you face coming in this, kind of you

mentioned, the set up mode and you know, the change of the structure zone.

What were the main challenges you face, initially then in your new role in Ofwat?

>> Broadly they were in two buckets, and one was about the overall sector and

the regulatory regime and moments about the organization.

So, and organizationally,

naturally if your organization wasn't used to having a governing board, it was used

to be able to help its decisions made by a single director general.

There's quite a lot of corporate governments that need to

change in an organization, and the style and the way decisions are made.

And how people reason their decisions, and get decisions made quickly and

efficiently is very, very different.

So explaining that to the organization, changing the way we worked,

changing the way decisions were made and making that work well,

that was one set of challenges.

And, which was really, you know, it was fantastic experience, really, really good.

The other challenge, I'd say, stems from what we've just been talking about.

The fact that when you've been doing something the same way for

a long time, which the water sector had for 25 years and very successfully by

the way in terms of the economic regulatory regime, is very, very hard for

anybody in that sector to look at it and imagine that it might be done differently.

So in taking a fresh look at the challenges that the UK water sector

was facing, and in taking a fresh look at how of what regulated and

was that fit for purpose.

That was very very challenging for the whole sector and

people found it difficult.

People who'd been there a long time doing things a certain way,

find that quite challenging and quite upsetting.

So engaging people and not debate and winning hearts and

minds around need for change was probably the other big challenge.

>> Mm-hm, okay I think will come back to that challenge aspect a bit more.

One thing I'm curious about as you said, you know people get used to a certain way

of doing things, certain institutions in any water sector.

There are probably people, I imagine,

at the point that you became a Chief Executive in 2006,

that had been there before privatization even, in the public sector.

And they might have thought, after privatization,

well at least now it's settled, and we won't have any more big change.

Did you encounter those kind of people and those kind of personalities in your role?

>> Well certainly, I think of all the utility sectors that I've regulated at

water was the slowest to change, so there is certainly a lot of

people there who have been there a very long time, very, very committed.

Really good, committed people who absolutely wanted

to do the right thing and deliver to the best of their ability.

And they were used to doing it in the way that the industry was structured.

Very much an engineering led solution, led way of doing things.

Similarly, there were people in Ofwat who had been there

right from the beginning of privatization.

And they were also very much committed to doing the right thing, and

used to doing it the way they've been doing it for a long time.

So in general, I think you find that in this situation both the business,

the firms, the companies, and the regulator.

And have people who are incredibly committed and

very very much wanting to do the right thing.

And find it very difficult to think that there might be a better way than the way

they've been doing it for 20-odd years.

And that's a very natural human trait, very, very normal.

I did find that it was probably very strong in the water sector.

>> And you mentioned, coming in and having a board structure for the first time in

Ofwat, gave a chance to bring a greater diversity of opinions, and so on.

I also remember I did some research in the water sector some time back in

England and Wales.

And there were a lot of sort of civil engineers in the water companies,

a lot of economists in Ofwat, the economic regulator.

Did you manage or did you want to change, and

did you manage change the kind of skill sets in Ofwat at all?

>> Yeah, absolutely.

It was really very, very necessary to change the skill sets not least

because the challenge that we faced was a need to modernize and reform regulation.

So there were two aspects of that.

One was the skill sets of the teams within the organization.

But the other was yes, this mix of skills on the governing party, the board itself.

So what we had the opportunity to do was make sure that we had people on

that board.

You had consumer-facing experience, so experience of consumer service,

which is something the industry wasn't great at.

People who you had economic experience, which is kind of necessary as economic

regulation, myself in particular, legal backgrounds, business backgrounds.

So knew about running businesses, not just water businesses, but other businesses.

And financing expertise because a big,

big issue in utilities like this is clearly getting

low-cost finance into the sector to ensure that we can keep overall costs down.

So it was possible to get a much more diverse mix at the board level, so

that decision making at that level have that

kind of such a different perspectives brought that was really powerful.

And then we did have to look at the skill set within the organization as well, and

that involved quite a bit of work and change as well.

>> Okay, and I'd like to ask you, thinking about your whole time now in Ofwat,

coming into the role of chief executive,

what surprised you the most during your whole term there?

>> Probably, two things.

One thing that surprised me was that the culture of the water sector and

the regulator in the UK was quiet dependent.

The firms looked very much to the regulator to tell them what to do.

And I'm used to quiet a lot more dynamic marketplaces where the firms need to be

looking to their consumers to find out what their consumers want and

deliver that.

So I found that focus on doing what the regulator wanted quite surprising.

It was a culture that had grown up between the firms and

the regulator over the years.

It's not something I blame anybody in particular for,

it's the way it panned out.

And then the flip side of that was I found it surprising that people found

that hard to see.

That I didn't see and didn't very easily guess why I wanted to

get the water companies to focus on their consumers rather than the regulators.

So I think that was probably quite surprising.

I think the other thing that surprised me, and very pleasantly again,

as I say is that, the dedication and the commitment of everybody in the sector,

were really, really wanting to do the right thing.

Okay, there might have been differences of views about what the right thing was, but

everybody really wanted to do the right thing at the end of the day, and

that was a really positive thing.

>> Okay, and so you, I mean,

I noticed that myself when doing research on England and Wales actively.

That everyone would talk about Ofwat and what Ofwat wanted, and so on,

particularly in the early post-privatization days.

There are other regulators that we've again seen in this MOOC.

There's the Environment Agency, the Drinking Water Inspectorate,

which are kind of drinking water quality and environmental quality regulators here.

Was the same relationship between the water companies and

those regulators there?

Or was it just Ofwat, do you think?

>> No, I think that there was a general culture of dependency.

So the industry, as you know, has a big environmental role.

So the water companies play a big role in ensuring that we keep our

environment clean.

And that wastewater disposal is done in a clean way, and all of that.

So there's quite, quite a big environmental angle.

The companies were very dependent on the environment agency to tell them

the shopping list of environmental things that they, the water companies,

would then deliver.

And there was no role for the consumer voice in that, which I found strange.

I thought that wasn't a good thing.

Similarly, they would rely on the drinking water inspectorate to very much tell them

very precisely, what is was that they needed to do to get a pass on the report.

Cheat, so to speak.

So it was quite endemic, I think, in the whole sector.

And I remember, I mean,

I had a lot of engagements with the environment agency about this.

And my colleague there at the time, the chief executive,

he similarly wanted to try and change the culture to a more risk-based culture.

Where water companies took much more responsibility for delivery of a clean

environment rather than being told to build a particular scheme.

So building a scheme might or might not get you the clean environment.

And it was easier for the water company to say,

well, the environment agency told me to build that scheme.

And Ofwat told me that that would be funded from customers' bills.

And then I will have done what I was supposed to do.

Whereas, what I felt was, it was much more important to achieve good outcomes for

the environment or the consumer.

And how the water company did it should very much be something that

the water company figured out, not be told what to do by a regulator.

>> Okay, and again, thinking about your kind of whole time at Ofwat,

which part of your role did you enjoy the most?

>> I loved the whole [INAUDIBLE].

I absolutely loved the stepping back and looking fresh at the sector.

Looking at the challenges of the future and developing a whole new strategy for

Ofwat.

And indeed, for the sector overall, which we called sustainable water.

But that level of thinking afresh and looking at how to best

deliver in the future and develop both a new strategy,

and then an entire new work program around that.

That was really, really fascinating.

That strategic work including the engagement that we had with the sector and

the industry, the consumers, the environment regulators, and

all of the other players, the politicians.

And so I really, really enjoyed that, and

then I suppose after that, that was the long hard struggle winning hearts and

minds around to our new strategy, which took a bit longer.

>> So when you came into Ofwat as the chief executive, you've mentioned you

wanted to take a fresh look at the sector, look at the challenges it faced, and

sort of design a regulatory system that was fit for purpose.

One of the things about that, that we've mentioned in our other sessions in

the MOOC is talking about the complexity that built up over time.

And how the regulation process and the instruments of it were quite complicated,

and quite difficult to understand, even for people in the sector, but

let alone for water customers, say.

How did you kind of deal with that sort of built up complexity and bureaucracy,

that had built up since privatization?

>> Well, I think when we looked at this at the sector, and

looked at the challenges facing the sector, we then look at the fact that

those challenges were very different from the challenges of the past.

The existing regime had been built for those challenges of the past.

And yes, it had a set of complex processes around it, but even more

interestingly than that, there were a lot of processes And data gathering and

analysis that were originally a good idea for the original model.

And we're no longer delivering any value whatsoever to anybody.

And again, that's what I meant about sometimes it's quite difficult if you're

in that process and system to see that it's no longer delivering value.

Also, we find that a lot of the complex processes and

systems were not only difficult to explain to people but

in fact, were driving perverse behavior.

So they were actually getting the wrong outcomes rather than the right outcomes.

So to give you an example, first of all, of the processes that weren't of any use,

there was a thing in the regulatory [INAUDIBLE],

the June return, which essentially was every June, every single water and

waste-water company filled out a very, very, very large spreadsheet of data and

information and sent that in to Ofwat.

And then, a team in Ofwat spent a lot of time synthesizing all that into a lot of

statistics, which the industry then looked at and said, that's very interesting.

The statistics were of no use in delivering good outcomes for consumers.

They didn't drive behaviors in particular.

They were measuring things that were no longer relevant, and it was just creating

a whole industry, an unnecessary industry within the firms and within the regulator.

So there was a lot of resistance when I decided we didn't want to do that anymore,

because a lot of people's jobs were doing that.

It wasn't that there weren't jobs there for them,

it's that they were doing a job that wasn't delivering any value anymore.

So that's one example of a thing that we wanted to stop.

Another way that the existing tools had become cumbersome and

not very useful was the system was originally designed

at least to encourage investment into the water sector, because the UK water

sector was in a bad state in the time of privatization, and there was no money.

So inward investment was essential.

So the regulatory regime was designed to reward capital expenditure, and

it treated capital expenditure, CAPEX, and operating expenditure, OPEX,

separately had different sets of incentives around them,

because capital expenditure was desirable.

We were now at a stage when 2006, the water industry, we had delivered

quite lot of capital expenditure and the network was in quite good condition and

problems from the past had been largely resolved.

But yet, the very complex models that were design to drive incentives and

drive behavior, actually favored capital expenditures.

So all of the engineers in the water companies wanted to build more

engineering care.

Perfectly understandably, because that's what they were incentivized to do.

Whereas with the network in a decent condition,

sometimes the best solution was not a capital expenditure solution.

Pouring concrete, emitting more carbon,

being environmentally damaging, may not be the best way to do things.

There could be more environmentally friendly

solutions based around operating expenditure.

But yet, there was a huge complex set of incentives built

around the way CAPEX was treated.

So our job was to try and dismantle that and

change the incentive properties of what the companies were seeing.

>> Mm-hm.

So you've mentioned you've wanted to change the emphases of the water companies

from focusing on what the regulator wanted to focusing on what customers wanted.

In that process, Ofwat mainly communicates with the wider public in England and

Wales on the issue of water prices as the economic regulators and

has pricing regulation.

What road is there?

We'll come back to the company,

where, what road is there, for Ofwat to communicate with customers.

The fact that it regulates prices, how does it do that?

And does it do well?

>> Well, when I joined Ofwat, and

again perhaps this culture dependency had grown up and the industry.

Tended to wait until prices were changed every year, and

then wait for the media storm about that and then get the regulator to go out and

tell everybody about it, as opposed to them telling their own customers

about their price changes because that was quite a lot easier.

So it was quite a culture of the regulator communicating

every year whether there was a change up or down or what size of change and prices.

And that was embedded and that took a while to change.

That in my view is not the role of the regulator.

The company should be talking to the customers about their prices and

price changes.

I don't think although we may have to do it, because there would have been a gap.

And the regulators are going to have to explaining that is the best way for

the regulators to interface with consumers.

I do think that the regulator don't need to interface with consumers and don't

need to know what consumers want and know what good consumer outcomes look like.

Because if the regulator doesn't know that and doesn't have that knowledge,

the regulator may well be regulating for what the regulator wants

which is not necessarily the same thing as what the consumer wants.

But I think that the history of Ofwat going out and

telling everybody about price increases has changed.

We did manage to change that focus over time, and

I don't think that was the best use of the regulator's communication with the public.

>> And sort of, I remember one time I saw you on national television here in the UK.

He was defending again on the issue of price rises on

a consumer protection rights program called Watchdog.

And you were being grilled quite intensely, I seem to remember,

by a particularly notorious presenter about the issue of prices and

why as the regulator you should defend that.

I mean given that you said the emphasis you wanted, away from that.

Was that a fair thing for you to have to do as the economic regulator, or?

>> Well, I think that as I say, in the absence of the company's having been,

to be fair, encouraged or perhaps even allowed to do it in the past.

It wouldn't have been fair enough to answer those questions from

the broader public.

So yes, it was fair to expect us to answer those questions I think, at that time.

I think that it would've been much better coming from the company who

could explain to its customers why things were happening with its prices.

I do think in the absence of that, I was perfectly willing to try and

help explain what was happening, because I do think, as I think you've said before

there was a huge lack of understanding about the water sector and how it worked.

And for something quite so critical and so central to everybody's lives.

And I did think then and I still think now that consumers are understanding

more about it and engaging more with it overall is a good thing.

So from my point of view, I wasn't unwilling to go and

try to explain that I did feel, and

still feel, the companies weren't playing sufficient role on that stage.

But I do think it is fair to hold regulators to account.

I think it is perfectly okay to ask regulators to explain themselves.

It's not always the easiest thing to do.

But yes, I'm perfectly willing to be held to account for what I'm trying to do.

>> Mm-hm.

And you mentioned putting customers more at the heart of the whole process from

the water companies having to focus on customers,

what sort of approaches did you suggest to them?

Or did you require them to do to actually consult with their customers and

to involve their domestic and their non-domestic customers in the investment

decisions, in the business planning?

>> Well, traditionally and

what I had required companies to do is consumer surveys.

Which is not a very interactive sort of way of engaging with consumers.

Really, it all depends on the questions you ask,

what the answers are you get back.

And the answers seem to consistently say that, consumers don't care about price,

they just want to be safe and secure.

Which wasn't borne out when I went on national TV and

got a grilling of price increases, as you know.

So we do alternatives to be a real step change here.

So what we required the companies to do when the last price reviewed was for

each company to set up a group called customer challenge group.

So that customer challenge group was not to represent the voice of the customer.

But what it was there to do was to challenge the company

on how it was engaging with its customers on the ground.

So each company had to, not just do surveys, but do focus groups.

Go out to the community, and actively engage

with its customers over what they wanted over the next 5 to 25 years.

And this consumer challenge group challenged them and held them to account

throughout the process as to how well they did that or not.

The really important thing about this was Ofwat said that consumer challenge

group will then when the company submits its business plan to get its prices set,

the consumer challenge group puts them into a report to he Ofwat regulator

telling of how well or badly the company had engaged with its consumers.

So not saying whether the challenge group thought the business plan was right or

wrong, but just saying whether and how well the company had engaged.

And if there was a clear line of sight from what its consumers said it wanted

back to its business plan.

And Ofwat committed that if companies did very well in that process,

they would get a lighter touch process and potentially greater opportunities

to outperform, that is make more money, make more profit over that period.

So there was a really big incentive in the process for the companies to make it work.

And the important thing about it was is they weren't just talking to one small

group representing consumers.

They had to go out and engage very, very widely and

be held to account by the challenge group.

>> And do you feel they now have kind of, do they have a sense of ownership over

that kind of customer engagement quality and the actual process itself now,

do you think?

>> I think it was the first step.

I think there's further to go.

But it absolutely produced a step change in the way,

certainly the company's told me, and I saw a step change in the way they engaged with

their customers on the ground.

And I do think that they've realized that Ofwat meant it.

That was the important bit, when you make a change to a regulatory regime.

It's very, very important to show that you mean it and

to stick by the decisions that you've made.

Otherwise, the firms don't believe that they're going to get the reward.

And therefore, they don't change their behavior.

So I think for a first time around,

it did drive a step change in the way companies engage.

I think the fact that Ofwat did stick by its guns and give two firms,

out of all of the firms, got the big enhanced process.

Because of how well they did this [INAUDIBLE] consumer engagement.

That companies now see it's for real.

So I hope that the next time around, they will go even further.

>> Okay, then I'd like to ask some questions now about the kind of,

some of the technical details of the economic regulation.

Because we've presented these in our other videos in the MOOC.

So the way that we've sort of tried to introduce the England and

Wales' case, a bit like when we talked about changing institutions and

privatization, is that the UK's a bit odd.

Because it has a different form of economic relation in the RPI

minus x price cap.

But I think from what you've said already, and certainly from what we showed in

our other videos, it's actually a mix of a whole lot of things.

There's a lot of data collection around capital spending, operational spending.

The price is a means for communicating with customers and

for companies to communicate with the public and so on.

But is it really as distinctive, perhaps, as it was originally intended to be?

Or has it become a kind of blend of maybe rate of return, a bit of price cap,

lots of other data collection?

What's your kind of overall view on the distinctiveness now, and whether

it perhaps needs to change to just rate of return regulation, or something like that?

>> Well, I think that the core principle underpinning UK economic regulation

of incentivizing firms to put their best business gaze forward,

to beat aggressively, as the phrase is, to become more efficient, and

then sharing those efficiency gains between the consumer and the firms,

and doing that iteratively.

I think that core concept is absolutely sound and remains at the heart of

utility regulation in the UK of water, of energy, and gas, electricity.

I think the networks, they all have that, and I think it is right.

And in my view, pure rate of return doesn't capture that efficiency challenge.

It doesn't capture the dynamic of the firm itself and

bidding in its own efficiency challenge.

The reason I think that's uniquely important to UK economic regulation is

because of the information asymmetry you have between the firm and the regulator.

The regulator never, ever knows what the firm knows.

And the regulator must always err on the side of caution because

if the regulator puts an efficiency challenge in that is too aggressive,

such that a firm goes under or not, not because the firm is inefficient or

badly run, but because the regulator made a bad mistake.

The consequences of that would be very, very bad indeed for consumers.

So if you don't have some incentive for the firm to reveal itself, what

the efficiencies are and things they can deliver, I think you get a worse outcome.

And that's what rate of return delivers.

So I wouldn't like to see UK economic regulation trend was rate of return.

Indeed, I've been doing a bit of work with colleagues in the US,

where the trend is the other way.

Where in the energy sector,

there's a move away from rate of return towards incentive based regulation.

And I think that's right.

The hard thing is,

how can you continue to get firms to bid in that really big efficiency game?

You will have found, I found when I joined Ofwat.

The water companies all told me they were efficient as could be.

They were really very, very efficient.

There's no more efficiency gains.

Funny how we found a lot more efficiency gains.

There's always more efficiency gains.

I think what has had to change is how you incentivize

the firms to reveal those efficiency gains.

So the system of regulation that our firm was overseeing,

the RPI minus x system of regulation had revealed quite a lot of efficiency and

driven those efficiencies through the system.

And done that quite well.

But it was reaching a law of diminishing returns.

It was getting to the point where those efficiency gains were getting

smaller and smaller.

So I think there's definitely a need then, to shift the incentives around

why it's worthwhile for the firms to find new efficiency gains.

And the combination of reforms that we built in were designed to do that.

So the focus on consumers and the rewarding of the business for

focusing on consumers meant it was in their interest to find more efficient ways

of delivering for those consumers.

We changed the way the capital and

operating expenditure was regulated to put them together.

And to allow a firm, even if it had modeled a cap-ex solution,

to find a more efficient solution and switch solutions within the period.

To give the firms much more control over what they

could do within the envelope that they were given.

So the change we made was that there was now more freedom for

them to outperform, as we would call it, so to get some of those efficiencies.

And to therefore keep some of those efficiencies and

then share them with the consumers the next time around.

It's a resetting of the incentives.

It is not a move away from the incentive based model.

>> And you mentioned there about the risk of the regulator taking it wrong.

And perhaps putting a company into that it ceases to be, or

it can't finance its functions.

And that might depend on the modeling accuracy and

the modeling approaches within Ofwat.

I don't want to go into too much detail.

But how do those kind of modeling approaches work?

Have you got proprietary systems and so on similar to the ones that were developed at

the time of privatization, or are they discussed more widely?

How does the actual modeling work in Ofwat?

>> So the modeling.

Yes, as you say, there were proprietary models which were used.

They became very complex and quite unwieldy over time.

And, as I say, they were delivering, because what you're doing is you're

putting data in from a large number of firms, and

you're trying to find The leading-edge firm or the upper quartile firm.

And then you're trying to set a target that lets all the other firms catch up

with that leading firm, because both the models got complex.

Because the spread between firms became narrower.

The models became even more complex try and

explain the differences between those firms.

What we tended find there was that a lot of firms would say well,

I look inefficient, but it's not my fault here as an explanatory variable.

It's because I've got lumping investment and

it looks like I'm inefficient just because it's in one year.

I have to spend a lot of money but I don't, in another year.

And then a lot of these explanatory adjustments will be made to the models

which stripped out even more of the gap between the firms.

So those models were becoming very big and

unwieldy but not delivering a lot of information at the end of the day.

We did change those models.

The models we moved to, so we moved again, they were capital and

operating expenditure models, of what now use the taught x model.

Which is still a model, and it's still complex, let's be honest about that.

However, it's also made fully available to all of the firms and which is published,

so it's more transparent in terms of the businesses being able to challenge it,

which is a good thing, because you can find errors.

If you got more people looking at your models, that's a good idea.

So there has been a step change in the last price review in order to make those

models.

While they still are complex,

because it's just in the nature of the thing to make them more transparent.

So that people can understand them better, and also so

that they can be robustly tested and challenged.

>> So was that around 2014, that change?

>> That was the 2014 price review, yeah, so that was a change in 2014 price review.

Those models were challenged at the competition and

markets authority in an appeal by one water firm.

And to be fair, the CMA criticized some of those models,

and I'm not surprised, no perfect models around.

Might expect that they will continue to evolve, but I think the big change and

the big benefit is that they're transparent, and

they're published for everybody to challenge and see.

>> Mm-hm, and again, in your whole time at Ofwat and

your knowledge of Ofwat's working sort of experience, how many times were

the kind of price determinations challenged by water companies?

Was it sort of a minority kind of case?

Or was it happening all the time, or- >> Well, the one year the price review

in 2004, which was the one before I joined, and

wasn't challenged by any company.

And every one since then has been challenged, and

every one before that has been challenged.

So there two firms appealed, the 2009 one, and one firm appealed, the 2014 one.

Those appeals, it's an interesting thing.

because on the one hand, if no business appeals, your price control,

you think, dear, I wasn't hard enough.

And one feels that one hasn't done the best for consumers.

On the other hand, an appeal is obviously very time consuming.

But actually, I think it's a good thing if the appeal is a genuine appeal.

I think it's not a bad thing because it keeps the regulator on their toes.

You know that the standard which you have to do your job is,

you've got to be able to stand over it and appeal.

So I think that's a good discipline.

Also, the firm, know that if the regulator genuinely makes a really maverick

decision, they have a root of appeal.

And I think that's a really a positive thing as well.

So, yes, there have been appeals, generally,

which makes me think, that's probably not a bad thing.

And usually, those appeals lead to interesting outcomes,

you learn new things through those appeals.

>> And again, so there are ten main companies and then ten or so

smaller companies.

So it's not sort of one or two or three out of those companies.

It's not like the whole sector appealing the process.

It's just to sort of challenge on the periphery but

as you say it's an indicator that you're maybe challenging hard.

And also, that you can learn something from the challenge process, it's good.

>> Absolutely, and I think that's a given, I mean,

if the entire ministry resulted and appealed on mass, we'd be really worried.

[LAUGH] So this tends to be a company specific issue.

>> Okay, so from what you said, I get the impression that you feel the economic

regulation approach is working well.

And as sort of particularly during your time as Chief Executive,

when you reformed it and you've set new kind of challenges and

on ways of working and so on, that you see, that will work well into the future.

Given all that, do you ever see, as some commentators sometimes bring up, and

it comes up in the press.

Should the privatized England and

Wales water industry go back into public ownership at some point?

Would that be a good thing from your point of view, or is it working fine as it is?

>> Well, from my point of view, I'm very conscious of this debate,

because it's happened in the UK.

But I'm from Ireland, where there's actually been a huge amount of

controversy over the structure of the water utility and its ownership,

which it is state owned.

From my point of view, the privatization of the UK water sector worked incredibly

well for what the UK wanted to achieve, which was very low cost finance for

a very large investment program that kept bills down.

I think it did that.

I think that's a positive thing.

That doesn't mean there aren't improvements that can be made.

In my experience, state run utilities, and they're regulating many of them,

are not as efficient as privately run businesses.

I do believe that privately run businesses are a good thing,

with a good regulation structure around them.

So my own view is that, it's not necessarily be a good thing for

these businesses to go back in to public ownership.

I think it will be costly.

And I think our experience is that the state is not great at running businesses.

>> Okay, so I'd like to close out with a few questions about what maybe the rest of

the world can learn from Ofwat and the UK's experience

with its water sector generally, particularly in England and Wales.

This comes up from time to time in all sorts of different venues.

I mean, what do you think from the kind of capacity that was built at Ofwat before

you joined.

And then the extra kind of approaches and

challenges you gave it in your time as Chief Executive.

What have you kind of learned from all that that you can transfer to other places

and outside the UK?

>> So I think one of the first learnings is the stepping back and

looking at the status quo.

And I know you've done that as part of this, around the world.

I think that's really, really important because what you do and

the way you regulate, has to be designed to achieve the good outcomes that you want

in the particular environment, or sector, or country that you're working in,

and it might be different from country to country.

As I said, sort of 25 to 30 years ago in the UK,

the objective was to get private finance to fund capital expenditure.

Now, the objective is to deliver a sustainable water service.

That if it was good outcome for consumers, it's robust environmentally and

financially in the long term.

It's a different objective.

So really understanding status quo and

what you want to achieve with your regulation, I think, is critical.

The second thing I would say is that, if

what you're looking to do is create a system that is looking for investment,

the UK economic regulator regime is certainly worth looking at and emulating.

And a reason for that, for example is, I share the platform with Moody's,

the investment and ratings agency.

And they said that they rated the UK water regulatory regime

as the gold standard of regulation.

Because of that, the firms in that sector could get very low cost finance,

which keeps costs down to consumers.

Which is a very important thing when consumers have to pay the bill,

particularly in low income countries.

So if that's a desirable outcome in a country you're looking at,

you'd do well to look at the stability and the transparency, and

the predictability that was built into the UK regulatory regime.

So, for example, if you were setting up a new regime somewhere and

you wanted to achieve that.

You might want to take as many elements as are useful from an existing regime that

people already say is the gold standard.

And use that to help you get to that gold standard to deliver

the sort of environment that will get you that investment.

I think that, that's really important.

I think the other thing that I would take, again, as we talked about earlier,

I think the incentive based approach is much more powerful than rate of return.

I think it's much more powerful that we're feeling, and

the efficiency gains that firms can make.

I think that's something else that is well worth exploring.

I think the strength in UK, in England, and Wales that we had, which

is not necessarily going to translate everywhere, is the comparability.

So if you've just got one firm to regulate which, for example,

I did when I was regulating the telecom's business in Ireland.

If you try and make comparisons to tele,

it can get more efficient by looking like somebody else.

It'll always tell you nobody's like me because I'm the only one in the country.

If you've got 20 or 30 companies and you can actually look across, and

find the best, and set a target based on that.

It's very, very hard for those businesses to challenge that,

because it is manifestly possible to achieve this level of efficiency,

because another firm has achieved that.

So if possible,

using those types of comparisons is something that's well worth looking at.

I mean, even here in the UK, there are moves to try and

do that on rail routes now, and because of the benefits of that comparability.

Then I supposed that the final thing would be,

in terms of the technical capability and skills.

Economic legal, engineering, all those skills that you need underpinning it.

Frankly, I hope, that we've delivered better transparency, and what Ofwat does,

as I said earlier, we've published all the models now,

all of the decisions are much more transparent.

And I hope that helps others look at challenge and

cherry-pick if they want, and use some of those things in their regimes.

I think that's a good thing.

>> One of the things that we mentioned as we've been discussing is the kind of

the problem with the information asymmetry.

And that the regulator never knows fully what the water companies know.

When combined with another problem, we've seen a lot in the two MOOCs that

we've done here on water, corruption is a big problem in the water sector worldwide.

So how would you approach say, you were given the challenge of setting up a water

regulator in a country where you knew the water sector was very corrupt.

So there would be additional problems in getting the information you wanted.

How might you approach that kind of challenge with your kind of Ofwat

experience and your other regulatory experience?

>> Yeah, I mean, I think of that as really, really challenging for

countries to have that problem.

Obviously, the UK is pretty law abiding and

the firms generally, do what they're asked to do.

Having said which, there is still a challenge of firms sometimes,

shall we say, lying by omission.

So then we didn't ask precisely the right question, so

that's why I didn't give you that piece of information, so it is still a challenge.

And indeed in the UK, when I joined Ofwat, shortly after I joined,

we had four investigations on firms for providing misleading information.

One of which was running parallel with the serious fraud office investigation.

And we fined those businesses 75 million pounds for what they had done.

So I think one of the first things is that,

you've got to be really firm on enforcement.

So if this happening, if you're being told lies, or

if the information is poor, the regulator must have the powers,

the independence, and the will to take enforcement action.

Otherwise, they won't be taken seriously.

I know that sounds heavy handed,

but frankly, you've got to send that signal very, very strongly.

And we had to do that in law abiding UK, so in less law abiding countries,

it's even more important.

I think that the other aspect part of that,

that is critical is, Trying to

ensure that the firms have the incentive to give you the true information.

So again, this goes back to how you design your incentive.

So if the incentives are there for the firm to provide misleading information,

because if they give you misleading information, they get a benefit.

What you need to do is take that away by fining them.

But at the same time, provide a benefit for revealing true information.

So that's what we did with the consumer challenge groups,

trying to incentivize the firms.

And through the Totex models, and I think yeah, technical term, but

we used menu-based regulation approaching in Ofwat.

And it was designed to allow firms to choose their own efficiency level, whether

they were going to be really, really super efficient and make a big efficiency gain.

In which case, they got more reward, or just be very conservative and say,

I can't do that.

I'm only going to have a little efficiency gain.

In which case, they didn't get as much reward.

But allowing them to reveal that true information and

building those incentives into system which is not an easy thing at all.

So in summary, I think two things in parallel strong,

independent enforcement, and incentives to reveal the right information.

>> Mm-hm, and another thing that we've sort of touched on here and

there throughout this MOOC and the other part MOOC that we've done,

is the importance of increasing the role of women in the water sector globally.

Now, one of the things I noticed when you first became Chief Executive,

that you're a woman.

And you're in a very male dominated sector.

We've mentioned the sort of traditionally male civil engineering dominated in

the firms, or it has been in the past.

How did you kind of find that?

How did you deal with that?

Were there any issues related to that?

>> Well, you're absolutely right. It's very, very male dominated.

For me, that was quite normal.

because I've been regulating energy and gas and even telecom businesses.

All of which traditionally, were heavy engineering and male domination, so

it didn't feel that different.

However, it was pretty extreme.

And back in 2006, there were no female Chief Executives of water businesses.

There are two now.

So that's ten years, two, not quite progress, I would say.

I do think that, in common with any other sector, it would be great to get more

women in senior management positions in the industry, and

it's very slow to do that.

There are some, but it's very slow to do that.

By contrast, my own management team at Ofwat was always at least 50% female, and

sometimes more than that.

I was fortunate enough also to have at least 50% females on my board.

Since I've left my successor, who I recruited to Ofwat, and

she did work for me, is a female.

And so the Chief Executive is a female.

When I left, first the price review was taken over by my deputy and

she was female.

So I think we led the vanguard in the regulator certainly having a high

proportion of female staff at senior management level.

However, the industry is not like that.

I think it's an incredible shame.

I think it's missing an awful lot of talent.

I'd love to see more women coming up the ranks and

joining those senior management teams.

But they seem like a lot of other aspects of water to be quite slow to change.

>> Mm-hm, so I'm sensing,

and I've seen this before in the way that you communicate in public venues and so

on, you have a kind of strong will to get things done and you like a challenge.

Which I think, the water sector in England and Wales, it sort of stepped up and

gave you that challenge, I think.

But do you have any tips for

the learners on this MOOC that might want to get involved in water regulation?

What kind of any particular disciplinary background?

Do they need to follow a particular path?

What's your sort of suggestion there for learners that might be interested in that?

>> Well, from my point of view, one of the big challenges in running

Ofwat was to get the right talent in the organization.

And that did involve people particularly with economics backgrounds and

financial backgrounds, so understanding financing which is so critical.

It was easier to buy in engineering expertise,

but you need embedded in the organization, the economic, financial, and legal skills.

So I'd say those three disciplines,

any of those three disciplines are actually quite good ones.

For, if somebody wants to look at economic regulation.

I don't think specific water expertise is necessary.

Very valuable, I mean, great, it would be an added string to your bow, but

it's not essential.

What is much more important is for people to be able to have a capability to

think conceptually, and apply frameworks to an industry.

And that could be water, or it could be gas, or it could be electricity,

or it could be telecoms, or it could be rail.

It could be lots of different things.

You can learn about the water specific issues, and you can buy that information.

And there's a lot of people in the industry with that expertise,

having the ability to apply brain to developing incentives for

businesses to deliver good outcomes for consumers using economic tools,

and obviously legal tools because they're there as well.

And financial frameworks, that's the skill set that you need to get.

And if you want to be in the sector demonstrating your ability to do that,

to think about something as a concept.

And then apply it practically is what your employer is going to find most valuable.

>> So I'd just like to thank you Regine for taking the time to come with us, and

for your wonderful insights about the England and

world's water sector and beyond.

>> Thank you very much for having me.

Video 7-5 Conservation with Regina Finn on reforming UK water regulation

Water Supply and Sanitation Policy in Developing Countries Part 2: Developing Effective Interventions

Meet the Instructors