Public Control of UK Utilities Is a Minefield, Hutton and Haldane Warn

Two months after Andy Burnham came to power promising greater "public control" over the UK's utilities, the government has still not clarified what the phrase means — and the delay is already costing money. Utility bond issues that would have financed investment are being deferred, and their costs are rising, according to Will Hutton, journalist and political economist, and Andy Haldane, president of the British Chambers of Commerce and former chief economist of the Bank of England.

Writing in a joint analysis, the two argue that uncertainty over "public control" is imposing real costs on the affected companies and on the UK government itself. Thames Water, they note, is in a state of suspended animation, in part because no one knows what its ultimate ownership and regulatory structure will be. Because public ownership has not been ruled out, its potentially significant cost adds to the pressures in UK government debt markets.

Burnham's stated aims were to cut what is described as the "privatisation premium" paid by consumers for public services and to improve their quality. The plight of the stricken Thames Water, the authors write, exemplifies the scale of those problems. Beyond stating that public control may not necessarily mean public ownership of the companies, the government has offered no real clarification. One option under discussion is a network of regional political bodies to hold water companies to account — but such a step would not, by itself, confer the control needed to meet the prime minister's objectives, Hutton and Haldane argue.

The governance trap

Good governance, the authors write, typically involves an appropriate balance between incentives and expertise. For public services, that means incentives aligned with the interests of customers — the general public — combined with the expertise to deliver services effectively. Both of the conventional models fail that test, in their view, each from the opposite direction.

The privatised model fails on incentives. Thames Water is owned by a consortium of investors, including highly leveraged hedge funds. That structure has no shortage of high-quality financial expertise, the authors concede. But this "highly 'innovative' (and leveraged) financing structure is singularly ill-suited to a low-risk public utility; investor incentives are horribly misaligned with the public good," they write.

Full nationalisation fails on expertise. The company's incentives would be aligned, by statute, with the public good. But without commercial discipline and expertise, "there are fewer reasons to expect it to be run expertly and efficiently." Past experience — from British Rail to British Steel to British Leyland — demonstrates this risk, they write.

The conclusion the authors draw is that "public control" should mean governance structures with aims aligned with those of the general public — not necessarily a central ownership or operating role for the public sector. "This erroneous belief is costing the UK (and the utilities) dear, and needs dismissing once and all," they write.

A middle path

The alternative Hutton and Haldane propose is to turn utilities into public-benefit companies, with a primary constitutional objective of delivering high-quality services and profitability subordinate to that broader aim. The structure could be introduced within the current ownership and licensing regime, they argue. While not immune to potential legal challenge, it would in principle not require expensive compensation to shareholders, who already priced in a level of regulatory risk when investing.

The government itself could take a special or "golden share" at a nominal cost of £1 — the type used to keep BAE Systems, Rolls-Royce and latterly Royal Mail in domestic ownership.

These companies would go beyond existing "benefit" or B Corps, which are obliged to display high standards of social and environmental performance, transparency and accountability. Instead, utilities would face more demanding governance requirements tailored to their needs. Some could be taken off the shelf: Ofgem already requires energy companies to comply with certain international environmental standards. Alternatively, stakeholders could work together to develop industry-specific standards.

Several enhancements could strengthen the regime. Utilities could be required to have a minimum fraction of their shares publicly listed and traded, which would help transparency and market discipline. The authors note that publicly quoted utilities have tended to outperform the alternatives across all metrics. Executive pay could be linked to public-benefit outcomes. Each utility could be required to create an independent customer group whose views would be incorporated into all dimensions of company decision-making; there is good evidence across the utilities that customer involvement improves outcomes, they write.

The change would also require what the authors call "a paradigm shift" in the culture and architecture of regulation, which currently alternates between regulatory capture and mutual distrust and "has palpably failed." Public-benefit utilities would be constitutionally obliged to want the same outcomes as public-interest regulators, and open-book accounting would become routine as both sides prioritised delivery of high-quality public services.

The clock is running

Hutton and Haldane put the stakes in blunt terms. A public-benefit structure would, in their judgement, achieve a much better balance between public-good incentives and operational expertise at a much lower cost for consumers, investors and the government. "It would be measured in single pounds rather than hundreds of millions," they write.

The immediate priority is clarity. There is an urgent need, they argue, for the government to spell out its intentions before uncertainty imposes further costs on fragile utilities and public finances alike. Burnham, they note, won power by daring to be different. Daring to be different — within practical bounds — should also inform his approach to public control of utilities.