Utilities Policy 14 (2006) 208e217

www.elsevier.com/locate/jup

Sustainable development duties: New roles

for UK economic regulators
Gill Owen*
Centre for Management under Regulation, Warwick Business School, University of Warwick, Coventry CV4 7AL, United Kingdom
Received 28 August 2005; accepted 3 December 2005

Abstract

When the utility regulators were established in the UK their primary duties and roles were focused on economic regulation e setting price
controls for monopolies and promoting competition where possible. The increasing emphasis in government policy on sustainable development
has led to pressures on the regulators to pay greater attention to social and environmental concerns alongside economic ones. Ofwat and Ofgem
now have duties to contribute to the achievement of sustainable development. Why and how did this change come about, what impact will it have
on how the regulators deal with sustainable development and on the nature of regulation?
Ó 2005 Elsevier Ltd. All rights reserved.

Keywords: Sustainable development; Energy; Water

1. Introduction regulation establishing the water and energy regulators gave

When the utility regulators were established in the 1980s
their primary purpose was to develop competition where pos-
sible and to act as a surrogate for competition (by setting limits
to the prices that could be charged) where it was not feasible
(such as in cases of natural monopoly) (Baldwin and Cave,
1999). Alongside this was the duty to ensure that companies
could finance their functions thus placing some limits on
how far regulators could bear down on prices. In the debate
about what constitutes ‘‘good regulation’’ (Baldwin and
Cave, 1999) some have stressed the need for regulators to stick
to their original mandate of economic questions to retain their
independence, remain accountable and help preserve stability
and certainty e they should not concern themselves with issue
of distribution, or environmental damage, for example (e.g.
Foster, 1992). Others, however (e.g. Prosser, 1997) note that
the UK regulators were not given solely economic objectives
when they were first established and that a mixed set of goals
is an inevitable part of the framework. For example, the
* Tel.: þ44 2476 523697; fax: þ44 2476 524965.
E-mail address: gill.owen@wbs.ac.uk
them duties to take into account the interests of specific groups
of consumers, such as the elderly and disabled and those who
live in rural areas; plus duties requiring them to take into ac-
count the effects on the environment of the activities of the
utilities that they regulate. Nevertheless, it was always clear,
until the change of government in 1997 that the primary duties
were economic and that other social and environmental duties
were subordinate. However, the Labour Government, elected
in 1997, signaled its intention to review utility regulation
and in early 1998 began to consult on proposals for change
(Cm 3898, 1998), that have eventually culminated in the spe-
cific duties relating to sustainable development that are the
subject discussed here.
This article examines the evolution of environmental con-
cerns during the 1990s in energy and water regulation and
the process by which the regulators were given sustainable de-
velopment duties. Some of the questions that are considered
include: the boundaries between regulation and politics;
whether these new duties signal real or merely symbolic
change; how trade-offs between competing objectives are
made; what this UK experience teaches us about how sustain-
able development considerations may be internalised into
utility regulation. The article will focus mainly on the

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doi:10.1016/j.jup.2005.12.001
 G. Owen / Utilities Policy 14 (2006) 208e217
environmental issues, although the sustainable development
debate also includes concerns about social issues (e.g. Ernst,
1994; Dubash, 2003; Haselip et al., 2005; Owen, 2004),
such as protection of the interests of low income and disadvan-
taged consumers.
2. The 1990s e environmental issues emerge
2.1. Setting the context
The term ‘‘regulation’’ can be defined in a number of ways,
but the central concept is that of the state setting rules to con-
trol the behaviour of businesses and individuals to achieve
public policy (socially desirable) goals (e.g. Majone, 1996;
Baldwin and Cave, 1999). When the UK decided in the
1980s to privatise the utilities that had been nationalised in
the 1940s, it might have opted for the long established system
of utility regulation in the US where private sector monopolies
had existed for many years. However, the UK rejected much of
the US model, opting for the RPI-X regime as an alternative to
US style rate of return regulation and rejecting the US model
of regulatory commissions, which were seen as too legalistic
and cumbersome. UK regulation is therefore much more dis-
cretion based than that in the US and Europe (Wilks and
Wright, 1987; Moran, 2003) e and this links back to the Brit-
ish system of ‘‘club government’’ (Marquand, 1988; Moran,
2003) which was distinguished from Europe ‘‘in the extent
to which law was marginalised. the degree to which regula-
tion was a matter of co-operation between insiders rather than
of open adversarial conflict’’ (Moran, 2003, p. 34).
Although Stephen Littlechild (the architect of the RPI-X
formula whilst an academic and later the first electricity regu-
lator) tried to create a narrow formulaic task (Moran, 2003, p.
105), right from the beginning the regulators were given
discretion to exercise judgement over a range of duties.
Some social and environmental obligations were included in
the original privatisation legislation, inserted in the face of gov-
ernment resistance largely due to lobbying by non-governmental
organizations working with sympathetic MPs and Lords to
secure amendments. Furthermore, universal service obliga-
tions and restrictions on disconnection go back as far as
1899 (Prosser, 1997, p. 305).
Regulators in the UK have thus had some social and envi-
ronmental duties since they were established, but there were
two specific episodes during the 1990s that focused debate
on the role that the regulators should play in delivering the
Government’s environmental objectives. The first was in the
energy field and the second in water and these are dealt with
in the early part of this section. In the latter part of the section
a more recent example from energy is examined.
2.2. The gas and electricity regulators and the
Government’s climate change policy
The Acts that established Ofgas and Offer included duties
to promote the efficient use of gas and electricity. Initially
this was interpreted as setting standards on information for
209
customers. At that time prices to end consumers were con-
trolled by the RPI-X formula, but gas or electricity purchase
costs could be passed through 100%. Energy conservation ad-
vocates said this created a disincentive to investment in energy
efficiency. The Association for the Conservation of Energy
(ACE) (an energy conservation industry funded lobbying orga-
nization) argued for a system similar to that used by the Reg-
ulatory Commissions in the US, where utilities were required
to compare the costs of supplying more units of energy with
the costs of saving units. In 1990 Ofgas commissioned ACE
to produce a report which concluded that the price formula
was ‘‘an active disincentive operating on British Gas to under-
take gas conservation and efficiency investments which could
provide the least cost gas services to consumers’’ (Brown,
1990, p. 33). The House of Commons Energy Select Commit-
tee, in its March 1991 report, also concluded that ‘‘any aspects
of the tariff systems which bias utilities against energy effi-
ciency measures should be rectified’’ (HC 91-I, 1991, p. xxv).
In 1991 Sir James McKinnon, the then Director General of
Ofgas, introduced the ‘‘E’’ factor to allow the costs of ap-
proved energy efficiency projects to be passed through to
gas customers and make it profitable for British Gas to invest
in schemes that might result in less gas being used. McKinnon
envisaged that around £50 million a year might be spent on
these projects (though he set no specific limit). The Govern-
ment saw this as a potential means of helping it to meet new
environmental targets envisaged since the publication of the
White Paper on the Environment (Cm 1200, 1990). The Con-
servative Manifesto to the 1992 general election contained the
pledge: ‘‘Together with British Gas and some of the Regional
Electricity Companies, we will establish an independent Energy
Savings Trust to promote energy efficiency’’ (Conservative
Party, 1992, p. 11).
In the Second Year Report on the Environment White
Paper, the Government set out the role for incentives like
the E factor. ‘‘.it is unlikely that information programmes
by themselves will realise the full scope for savings. finan-
cial incentives to consumers to improve their energy efficiency
provide the way forward’’ (Cm 2068, 1992, p. 53). However,
public expenditure constraints meant that the money would
not come from the taxpayer. Instead, the Government viewed
the energy utilities as ‘‘well placed to deliver such incentives’’
(Cm 2068, 1992, p. 53).
The Trust was established in November 1992. In evidence to
the Environment Select Committee, in May 1993, the Govern-
ment indicated that the Trust could contribute savings of 2e3.5
MtC (one quarter of the Government’s target agreed at the Rio
Convention on Climate Change) (HC 328, 1994). By this time,
OFFER too had indicated that it would allow the costs of
approved energy efficiency projects as part of the revised sup-
ply price formula e up to £100 million over four years under
the Energy Efficiency Standards of Performance Scheme
(EESOP). The Trust calculated that, to achieve the climate
change target, it would need to spend £1.5 billion by 2000.
In the meantime, however, Clare Spottiswoode, the new gas
regulator had been appointed and had begun to raise some
concerns about the E factor. On 25 January 1994 she made
210 G. Owen / Utilities Policy 14 (2006) 208e217
these concerns public at the Trade and Industry Select Com-
mittee. ‘‘The E factor was introduced with a very specific re-
mit, it was to encourage British Gas to look at saving energy
where it was economic to do so.(where) it was going to be
cheaper than. developing a new North sea gas field. It
was not introduced in order to deal with the Government’s
CO2 remit. and yet it is being hijacked into that, in my
opinion’’ (HC 185, 1994, paragraph 93).
Spottiswoode’s main concern was the ‘‘assumption that the
regulator would just take on that Government policy and fund
it. I have two problems with that. Firstly, it actually requires
raising taxes on gas consumers generally and I feel personally
uncomfortable about that, because Ofgas is not accountable in
that way. Secondly, raising taxes is actually a Parliamentary
decision, not a regulatory decision, and I think it wrong that
an individual should have the power to raise the kind of mon-
ies that they are talking about.’’ (HC 185, 1994, paragraph
92). Spottiswoode ended the schemes approved by McKinnon
after their pilot phases and rejected all schemes proposed to
her. Rather than up to £50 million per annum, as envisaged
by her predecessor, less than £2 million was spent by the
time the formula ended in March 1997.
It was clear, from Counsel’s opinion, that Spottiswoode was
acting within her powers of discretion. The electricity regula-
tor, Professor Stephen Littlechild, Director General of OFFER,
took a rather different view but he too did not provide funding
on the scale that Ministers had hoped, citing his view that to
raise more substantial amounts, ‘‘would raise issues more ap-
propriately dealt with through general fiscal policy rather than
through price control mechanisms proposed by a regulator’’
(Offer, 1994, p. 33).
Littlechild continued the EESOP scheme from 1998 to
2000. In 2000 Callum McCarthy then re-introduced a similar
scheme for gas suppliers and the joint gas and electricity
EESOP scheme ran from 2000 to 2002 to act as a bridge to
a new obligation for energy suppliers that the Government
was introducing under the Utilities Act. The Act established
the Energy Efficiency Commitment (EEC), under which the
Government (rather than the regulator, Ofgem, whose role is
now implementation and administration) sets all energy sup-
pliers energy saving targets that they achieve through subsidis-
ing measures such as insulation, low energy lighting and
efficient appliances. EEC-1 ran from 2002 to 2005 and was
set on the basis that suppliers may need to spend up to
£3.60 per customer per year to achieve the targets. The new
EEC from 2005 involves roughly a doubling of the targets.
2.3. Paying for water quality
When the water industry was privatised in 1989 it inherited
a legacy of under-investment in sewage treatment and disposal
and water quality. Part of the rationale for privatisation was to
enable this to be funded not by the taxpayer but by the water
consumer and private capital. The initial price limits for the
companies allowed an increase in average water bills of 5%
a year over the RPI. During the early 1990s yet further obliga-
tions were announced as a result of EC or UK legislation.
In his paper, ‘‘The Cost of Quality’’, issued in August 1992,
Ian Byatt raised his concerns about the escalation in water pri-
ces. The paper was issued as part of the Periodic Review, lead-
ing up to new price limits from April 1995. Byatt was
particularly concerned about the implications of the EC Urban
Waste Water Treatment Directive (UWWTD) ‘‘whose costs
appear to have escalated dramatically from earlier estimates
made in 1990. .Improvements in the quality of drinking water
and the water environment are beneficial. But they cost
money e which many customers can ill afford’’ (Ofwat, 1992, p. 4).
Ofwat subsequently worked with the National Rivers
Authority (NRA), Drinking Water Inspectorate (DWI) and
the water companies, based on guidance from the Department
of the Environment, to clarify existing and potential legal
obligations. In July 1993, Byatt published a further paper,
containing revised costings, which he called ‘‘Paying for Qual-
ity: the Political Perspective’’. In his Foreword, Byatt
explained: ‘‘My purpose in preparing this report is to seek
from the Secretaries of State for the Environment and Wales
a clear perspective on new obligations and their implementa-
tion, as a basis for setting revised price limits. .I need clear
guidance from them on the new obligations that companies are
likely to face and the time scales for achieving them’’ (Ofwat,
1993, p. 4). Byatt made his views on increases in water
charges very clear: ‘‘I do not believe that customers e busi-
ness customers as well as domestic customers e will regard
the increases in bills set out in this report as affordable. .Dif-
ficult decisions will be required’’ (Ofwat, 1993, p. 5).
The response from the Secretaries of State came in October
1993. Firstly, ‘‘.we think that it will not be necessary for
price limits for the period 1995e2000 to anticipate possible
future tightening of standards.’’. Secondly, Byatt was
advised to undertake further reappraisal of the investment
programmes proposed by the companies to ensure that they
were necessary and made use of available efficiency improve-
ments. Thirdly ‘‘there must be a question about whether in the
light of new obligations agreed since 1989 it is right to pro-
ceed, or to proceed according to the original timetable, with
all the discretionary environmental and non-environmental
spending which may have been included in those pro-
grammes’’. The essential message was that ‘‘we believe that
there will be scope for significantly lower bill increases than
those set out in ‘Paying for Quality’’’ (Department of the
Environment & The Welsh Office, 1993, p. 4).
Byatt therefore, set much tougher price limits for the water
companies when he reviewed them in 1994. Whereas the ‘‘K’’
factors (which specify the amount relative to RPI that prices
can rise or have to fall) set for the 1990e1995 period, ranged
from þ3 to þ10, the ‘‘K’’ factors for 1995e2005, ranged from

2 to þ3.5.
2.4. The development of NETA
Another interesting case study of how a regulator and
government deal with sustainable energy issues is the develop-
ment of the New Electricity Trading Arrangements (NETA).
Since electricity privatisation in 1989, electricity trading was
 G. Owen / Utilities Policy 14 (2006) 208e217
based on a pool in which wholesale prices were set centrally.
The pool system had been subject to a number of criticisms,
the chief one being that it produced wholesale prices that
were higher than necessary. The review process that led to
NETA began in October 1997 when the then Minister for En-
ergy invited Offer (as it was at the time) to consider how a re-
view might be undertaken. Offer’s proposal for terms of
reference (Offer, 1998a), a first proposals paper (Offer,
1998b) was accepted by the Government in October 1998
(DTI, 1998). It was agreed that detailed proposals would be
developed jointly by Offer and DTI with participation of the
industry and customers.
The objectives of the review as set out by Ofgem (as it had
by then been renamed) included establishing trading arrange-
ments that ‘‘are compatible with wider Government policy, in-
cluding on environmental and social issues’’ (Ofgem, 1999,
p. 17). In addition the Government White Paper identified
some issues where further consideration would be needed
that included: ‘‘appropriate consideration of CHP, renewables
generators, small embedded generators’’ (Ofgem, 1999, p. 17).
In July 1999 Offer produced detailed proposals for NETA. The
paper was upbeat about the prospects for CHP and renewables
under NETA suggesting that most such plant would benefit
rather than being harmed (Ofgem, 1999, p. 8).
The NETA was introduced in England and Wales in March
2001. Under NETA the majority of electricity is traded through
bilateral contracts (between generators and purchasers e
energy suppliers or large energy users) where prices are
agreed between parties and on power exchanges. About 2%
of electricity is traded through the NETA balancing mecha-
nism operated by the National Grid Company to ensure sys-
tem security e for example, where too much or too little
electricity might otherwise be traded relative to demand.
Since the introduction of NETA there have been substantial e
30e40% e falls in wholesale prices, although the extent to
which this was caused by NETA is disputed. Helm (2003)
cites a number of other factors, including the introduction
of full competition in electricity supply and excess generat-
ing capacity. Although there may be dispute over the
source of the price falls, it is large users that have mainly
benefitted e smaller businesses and households have seen little
impact. The Public Accounts Committee found that ‘‘wholesale
prices have fallen by around 40% since 1998 and reductions for
industrial and commercial customers have been consistent with
this fall. But domestic reductions have been much smaller and
only 1% to 3% since NETA was implemented in 2001’’ (HC 63,
2003). The Committee Chairman, Edward Leigh, said that
‘‘domestic electricity consumers have got a very poor deal
from the New Electricity Trading Arrangements’’.
Whilst NETA so far does not seem to have benefited most
household customers very much, it has had a negative effect
on renewable and CHP generators (Mitchell and Connor,
2004), for several reasons. Firstly, the fall in wholesale prices
has affected all generators. Secondly, they have generally
suffered greater falls in prices because they are considered un-
predictable forms of generation (wind doesn’t always blow
and CHP generators vary the amount of electricity they sell
211
depending upon on-site demand). Thirdly, many such genera-
tors are small in scale and do not have the benefits of being
able to balance one generating station against another like
the bigger generators. Renewable generators have been pro-
tected from the worst effects of NETA by the introduction of
the Renewables Obligation e this raises the value of renew-
able supply and hence the price they can get for their output.
However, CHP has been badly hit e power exports from CHP
generators have fallen by 61% (Newbery, 2002) and the mar-
ket for new CHP has virtually halted e there were 90% fewer
installations in 2001 than in 2000 (CHPA). NETA has also
been criticised by Helm (2003) and Newbery (2002) as largely
benefiting large integrated suppliers/generators at the expense
of smaller players and new entrants.
NETA was developed as a joint initiative of DTI and Ofgem
but, as Helm (2003) has pointed out, Ofgem was in the lead as
‘‘the complexity of the issues (and the lack of expert re-
sources) closed off much of the necessary scrutiny by the
DTI’’ (Helm, 2003, p. 319). This reliance on Ofgem is recog-
nised in DTI. Thus, although the likely impact on CHP, renew-
ables and other small generators was considered at the start of
the NETA process, this painted what must now be regarded as
an overly rosy view e in particular it suggested that ‘‘aggre-
gators’’ would emerge in the market to enable smaller and
intermittent generators to pool their output to participate better
in the market (Ofgem, 1999, p. 142). In fact this has not hap-
pened e an outcome that perhaps might have been expected if
more thought had been given to the lack of incentives for such
aggregators. Ofgem’s preoccupation was what it saw as the po-
tential economic benefits of NETA, with environmental con-
siderations taking a back seat. Whether the Government
would have wanted the policy changed if it had been given a
more negative assessment of the prospects for CHP and
renewables is debatable e given the other benefits that were
expected of NETA it may well have decided that these should
prevail over environmental considerations. The NETA example
shows that traditional economic regulatory objectives e in this
case getting more competition into the wholesale electricity
market e were given greater attention and were of greater
priority than environmental ones.
3. The development of new duties for the regulators
3.1. Proposals to change the focus of regulation
The examples discussed in Section 2 highlight some areas
where conflicts between government environmental goals
and the roles of the regulators have arisen, due to the focus
of the regulators on economic concerns. Attempts to counter-
act the priority given to economic concerns could be made: by
changing the duties of the regulator; by giving the regulator
guidance or directions; or by the government taking compen-
satory action elsewhere (Baldwin and Cave, 1999). As we
have seen, in the energy efficiency case, the government
passed specific legislation with the regulator being required
to administer the scheme but not take key policy decisions.
212 G. Owen / Utilities Policy 14 (2006) 208e217
In water, the procedure that has evolved is that the environ-
mental regulators provide advice on the environmental re-
quirements; the economic regulator provides advice on the
costs of meeting them and the government decides where to
strike the balance. In the case of NETA, the Government has
looked for external solutions to the problems faced by CHP
and renewables, rather than change NETA itself, other than
at the margins (Mitchell and Connor, 2004).
Issues of accountability, how far regulators should be regu-
lating for the broader public interest, and whether they should
be subject to ministerial guidance, were the subject of consid-
erable debate in the lead up to the 1997 general election (e.g.
Veljanowski, 1993; Corry et al., 1994; Hain, 1994; National
Consumer Council, 1997). The Labour Government, elected
in 1997, signaled its intention to review utility regulation
and in early 1998 published proposals for change (Cm 3898,
1998). The primary motivation was concern that the price
limits set for many of the utilities had been too generous to
shareholders at the expense of customers. However, there
were also concerns about accountability of the regulators
and the need to clarify the respective responsibilities of the
regulators and government. The third area of concern was
that social and environmental considerations were not being
adequately addressed. In responses to the consultation a num-
ber of organizations with environmental interests recommen-
ded that the regulators should be given duties related to
sustainable development (e.g. CHPA, 1998; Environment
Agency, 1998).
This section will outline the history of attempts, in the
period 2000e2004, to give the energy and water regulators
sustainable development duties.
3.2. The Utilities Act 2000
The outcome of the review of regulation was the Utilities
Act 2000, which, in the end, dealt only with energy regulation,
leaving communications and water regulation to other Bills e
e.g. the Water Act 2003 (see below). The Utilities Act abol-
ished Offer and Ofgas and created Ofgem (also known as
GEMA e the Gas and Electricity Markets Authority) and
introduced a new primary duty ‘‘to protect the interests of
consumers.. Wherever appropriate by promoting effective
competition’’ (Utilities Act, 2000).
In the Lords stages of the Utilities Bill, Lord Ezra (Liberal
Democrat) and a number of others, proposed adding the words
‘‘in the context of sustainable development’’ into the primary
duty to protect the interests of consumers. Lord Ezra referred
to the Government’s draft social and environmental guidance
to Ofgem which said that ‘‘The Government intends that the
regulatory system should make an appropriate contribution to-
wards achieving sustainable development’’ (Hansard, 2000,
13.06.2000, Col 1565).
Responding for the Government, Lord McIntosh of Haringey
said that ‘‘the Bill is not an energy policy Bill; it is a utilities
Bill. It deals with economic regulation. It is right that the
authority’s general duties should have an economic focus
generally concerned with price and quality of service to
consumers. However, we recognise that the way in which
the authority exercises its functions can have significant con-
sequences for the environment and for society as a whole.
The authority should weigh such considerations properly in
the balance’’ (Hansard, 2000, 13.06.2000, Col 1568). These
matters were, according to the Minister dealt with the provi-
sions for the Secretary of State to issue guidance to the au-
thority on social and environmental matters and subsidiary
duties to ‘‘have regard’’ to the effects on the environment.
The Bill also made clear that the definition of consumers
included future consumers.
‘‘However, it would be wrong for the general duties of an
economic regulator to be amended in the way that the amend-
ments propose. .If we incorporate the social and environ-
mental considerations into the principal objective, we
remove the priority afforded to the interests of consumers. It
would leave the authority uncertain as to how it should
respond if pressed to take measures which, in the interests
of the environment, are neither in the long nor the short-
term interests of consumers.’’(Hansard, 2000, 13.06.2000,
Col 1569).
In the face of this opposition Lord Ezra agreed to withdraw
his amendment. In closing he commented that this had been
‘‘surprisingly, to me at any rate, a difficult issue. I should
have thought that as the Government feel so strongly about
sustainable development they would have welcomed the op-
portunity to put it in the Bill’’ (Hansard, 2000, 13.06.2000,
Col 1570).
3.3. The Water Act 2003
The idea of a sustainable development duty for Ofwat
dates back to 2000, when the Environmental Audit Commit-
tee criticised Ofwat’s environmental record ‘‘Ofwat (should)
seek to ensure that its own statements do not ‘‘demonise’’
environmental and quality investment by portraying it as
the key upward pressure on prices without equally emphasis-
ing the customer and public benefits which it delivers’’ (HC
597, 2000). This built on concerns that had arisen due to
a polarization of some of the key players in the water policy
network with the consumer groups and Ofwat being seen to
be focused on lower prices at the expense of the environment
and environmental groups and the Environment Agency (the
government’s environmental regulator) in favour of environ-
mental improvements with little regard to the costs to con-
sumers. The Committee recommended that ‘‘The Director
General of Ofwat should be directly accountable for ensuring
that Ofwat makes a positive contribution to the Government’s
sustainability agenda’’. Ofwat said in its memorandum to the
Committee that it believed that a sustainable development
duty better rests with Government rather than the economic
regulator and that Government could further the cause of sus-
tainable development through the use of economic instru-
ments for pollution control. In questioning, Sir Ian Byatt
said ‘‘ I do not feel that things would be radically different
if it were to be in legislation. It is up to Parliament’’ (HC
597, 2000).
 G. Owen / Utilities Policy 14 (2006) 208e217
Philip Fletcher was appointed Director General in August
2000. In its response to the Committee’s report, in January
2001, Ofwat said ‘‘A provision for Ministers to issue social
and environmental guidance which Ofwat must have regard
to is set out in the draft Water Bill. This combined with Of-
wat’s duties under sections 3 and 4 of the Water Industry
Act 1991 would allow Ofwat, and the companies, to continue
to make an appropriate contribution to the attainment of sus-
tainable development without the necessity for an additional
duty’’ (Ofwat, 2001). However, when the Water Bill was pub-
lished in February 2003 it did contain a specific duty relating
to sustainable development. A change of view had by then
clearly come about at Ofwat (perhaps accepting the inevitable)
with Philip Fletcher saying ‘‘we support this move’’ (Fletcher,
2003).
The Water Act makes the duty to protect the interests of
consumers central for the Regulatory Authority. As in the Util-
ities Act, ‘‘consumers’’ includes future as well as existing con-
sumers. The Act will establish Ofwat as a regulatory authority
like Ofgem with a Chairman, Chief Executive and several non-
executive directors. Subject to the requirement to protect the
interests of consumers and ensure that companies can finance
their activities, the Authority is required to exercise and per-
form its powers and duties in the way it considers is best cal-
culated ‘‘to contribute to the achievement of sustainable
development’’ (Water Act, 2003). The Authority must also
take account of social and environmental guidance from the
Government. The changes brought about by this Act will be
implemented in 2006.
3.4. Sustainable development duty for the
energy regulator
In February 2003 the government published its Energy
White Paper, as the outcome of a review begun in 2001
(DTI, 2002). In his foreword to the White Paper, the Prime
Minister stressed the goal of moving towards a ‘‘new low
carbon economy’’ and achieving a ‘‘truly sustainable energy
policy’’(DTI, 2002, p. 3). One might have assumed therefore
that giving the energy regulator a sustainable development
duty now would have been a simple and uncontroversial
matter.
Following the failure to secure a sustainable development
duty for Ofgem in the Utilities Act, a further attempt was
made in late 2002/early 2003 (concurrent with the early stages
of the Water Bill), through the private members’ Sustainable
Energy Bill, introduced by Brian White MP (Labour). White
sought, amongst other things, to give Ofgem a subsidiary
duty to ‘‘have regard to achievement of the sustainable energy
policy’’ (HoC Bills, 2003); this was again opposed by the gov-
ernment. White agreed to withdraw this clause as the govern-
ment agreed to support an amendment to require Ofgem to
conduct environmental impact assessments of all major pro-
posals. The Sustainable Energy Act received Royal Assent
in October 2003.
A cross-party group of members of the House of Commons
and House of Lords (supported by some environmental
213
organizations) however, decided that the Energy Bill 2004
(whose main focus was nuclear energy issues) provided one
more opportunity. The Government again spoke against at-
tempts in the House of Lords (where the Bill was introduced)
to introduce a duty for Ofgem similar to the Ofwat (see Sec-
tion 3.3). The government was then defeated in the House of
Commons Committee stages, when several of its own MPs
voted for an amendment that would achieve such a duty for
Ofgem. When the Bill went back to the Lords for the report
stage, the Minister, Lord Whitty finally conceded: ‘‘I am fa-
miliar with the precedent in the Water Act 2003. It is difficult
to argue with it. I tried earlier, but I am not sure that I con-
vinced myself, and I clearly did not convince many noble
Lords or Members below. We should have a similar provision
in relation to the Secretary of State and GEMA in this Bill.’’
(HoL Hansard, 2004, 15.07.2004, Col 1382). The Energy Act
2004 requires Ofgem to contribute to the achievement of sus-
tainable development.
3.5. Possible explanations for the different
approaches in energy and water
The reluctance to give Ofgem a similar duty to Ofwat has
been attributed to various reasons. Sustainable development
could be viewed as more central to Ofwat given that its major
task is setting price limits, determined to a large extent by en-
vironmental requirements. So the need to consider the social,
economic and environmental balance is fundamental. In en-
ergy there is a much greater role for competition in supply
and generation and expenditure in the monopoly parts are
not primarily driven by environmental requirements. However,
energy use has major environmental impacts e particularly
climate change e and as we have seen, in the case of NETA,
promoting competition is not necessarily compatible with
reducing emissions. And, if the centrality of environmental
issues was the key criterion then it is perhaps difficult to
understand how a sustainable development duty might be con-
sidered more relevant to the Strategic Rail Authority than Of-
gem. The Transport Act 2000 requires the Strategic Rail
Authority to exercise its functions ‘‘in the way best calculated
to contribute to the achievement of sustainable development’’
(Transport Act, 2000, Part IV, Railways, Clause 207).
Another explanation lies in the institutional arena e the dif-
ferent attitudes of the two regulators and fact that energy reg-
ulation is handled by the DTI whereas water regulation is dealt
with by DEFRA. DEFRA’s predecessor was also responsible
for the Transport Act. The prevalence of departmentalism
and lack of ‘‘joined up government’’ (e.g. Kavanagh and
Richards, 2001) can help to explain different approaches by
departments. ‘‘Departmental pluralism’’ (Richardson and Jor-
dan, 1979) describes the tendency of departments to reflect
primarily their sectoral interests and objectives in policy for-
mation leading to the ‘‘pathology of departmentalism’’
(Richards and Smith, 2002) that can militate against policy
objectives that are either cross-governmental or seen as the
preserve of another department. So whereas successive envi-
ronment departments have seen themselves as the champions
214 G. Owen / Utilities Policy 14 (2006) 208e217
of environmental policy objectives, the DTI’s objectives are
more economic e e.g. industry ‘‘sponsorship’’ and promotion
of competition.
In the case of the regulators, although Philip Fletcher orig-
inally maintained the stance taken by his predecessor, his atti-
tude changed and by late 2002 he was saying that he would
support such a duty. In contrast, Callum McCarthy, who was
head of Ofgem until October 2003 remained opposed e for
example in Ofgem’s written submission to the Environmental
Audit Committee (HC 881, 2003, Appendix 17). There is no
evidence that this attitude changed with the appointment of
Alistair Buchanan (Chief Executive) and Sir John Mogg
(Chairman) in October 2003. In the case of the SRA there
was no predecessor body and so no regulator whose views
had to be accommodated. The views of the regulators are
clearly key as they are not passive recipients of changes in
their roles and duties. As Moran (2003, p. 111) notes, lobbying
by Oftel and Ofwat got them removed from the 2000 Utilities
Act. Ofgem had a member of staff working specifically on the
Utilities Bill and also had two Labour members of the House
of Lords as non-executive advisors on its Management Board,
one of whom spoke against the proposal to insert the sustain-
able development duty.
4. Discussion and analysis
4.1. Will a sustainability duty make a difference?
The Energy Act 2004 and Water Act 2003 give Ofgem and
Ofwat sustainable development duties. It is therefore worth
asking whether they are likely to make any difference. Clearly
this will only become apparent with time but we can consider
what factors may affect the impact of the changes.
The UK Government says that ‘‘Sustainable development
involves meeting the following objectives at the same time:
 social progress which recognises the needs of everyone,
 effective protection of the environment,
 prudent use of natural resources, and
 maintenance of high and stable levels of economic growth
and employment’’(Cm 4345, 1999).
However, this does not indicate how trade-offs should be
made when two or more of these objectives are in conflict
and therefore this raises questions about how it is to be applied
in the context of regulation when choices have to be made
(e.g. lower prices versus higher levels of environmental
protection).
Firstly, it is worth considering what, if anything, the duty
adds to the provision of guidance and the requirement (on
Ofgem) to undertake environmental impact assessments. In
debates on the Sustainable Energy Bill, Andrew Robathan
MP (Conservative) asked ‘‘can the Minister explain whether
new clause 2 will address the major mistake that Ofgem
made in the implementation of NETA? The whole idea of
NETA should have included an environmental impact asses-
sment.There should also have been an assessment of the
impact that NETA would have on CHP and renewables’’
(HC Bills, 24.06.2003, Col 72).
Replying for the Government, energy minister Stephen
Timms said: I take the hon. Gentleman’s point. He is abso-
lutely right, it was not intended that there would be a damaging
impact on CHP. Putting the proposal in place will be a defence
against undesirable environmental impacts although one can-
not guarantee what will happen, as we cannot predict the
future. I commend the new clause to the Committee’’ (HC
Bills, 24.06.2003, Col 72).
However, Ofgem did assess the impact of NETA on CHP
and renewables e the problem is that its results were not borne
out in practice. Clearly, such assessments will always be sub-
jected to the possibility of error, but a specific duty on sustain-
able development might have led to a more cautious
assessment of the prospects for CHP and renewables, as if
the assessment was wrong then Ofgem might have been con-
sidered to have fallen down on a duty. Failure to take effective
action in respect of a duty would be more capable of legal
challenge than any shortcomings relating to use of environ-
mental impact assessments or following guidance. Moreover,
a duty to conduct an assessment in itself does not require
any change in policy. Requiring regulators to have regard to
guidance, in the absence of relevant duties, will also have lim-
ited impact. These indeed were the arguments put in favour of
the duties by members of both Houses during debates on the
Bills. Adding a specific duty does therefore seem to add some-
thing that guidance and environmental impact assessments
alone would not cover.
Secondly, there is the question of what it adds to other rel-
evant duties. Ofgem and Ofwat’s primary duty is to protect the
interests of consumers, but this includes future as well as ex-
isting ones. They both have duties in respect of low income
and vulnerable customers. It could therefore be considered
that the duty adds very little if anything e though if this is
the case then it seems strange that the government should
have resisted it so strongly for so long in the case of Ofgem
and why they bothered to introduce it for Ofwat. It seems rea-
sonable to assume therefore that having the sustainable devel-
opment duty should at least encourage regulators to look at
whether they can meet social and environmental objectives,
as well as economic ones. Ofgem also has to have regard to
the effect on the environment of generation, transmission, dis-
tribution and supply of electricity and transportation and dis-
tribution of gas e the sustainable development duty might
now ensure that this has more impact than to date.
Despite the foregoing, there is a risk that the sustainable de-
velopment duty is mainly symbolic. Although a duty in theory
should make regulators take the issue seriously, as it is subsid-
iary rather than primary there will be continued dependence
upon ‘‘a regime where the regulator is sympathetic’’ as one of-
ficial interviewed during this research put it. Compared to
her predecessor and her successor, Clare Spottiswoode, for ex-
ample, was considerably less sympathetic to allowing energy
efficiency programme costs to be charged to customers. In
a system of independent regulators with considerable discre-
tion about how to balance a range of duties, the extent to
 G. Owen / Utilities Policy 14 (2006) 208e217
which social, environmental or economic considerations are
paramount in their decisions is up to the regulator. Neverthe-
less these secondary duties may still have an effect for a num-
ber of reasons. Firstly, there is the ‘‘legal comfort’’ factor.
Regulators are creatures of statute so such a duty could allow
a ‘‘sympathetic regulator’’ to give more consideration to sus-
tainable development issues than he/she would feel able to
do without such a duty. Secondly, now that we have moved
away from single regulators to boards, a duty should provide
a clearer locus for non-executives to raise the issue and expect
to see it considered in rather more detail than would be the
case in the absence of a duty.
Thirdly, a duty should enable others (notably parliament) to
make the regulator accountable e to explain how they have
taken the issue into account and spell out where the different
elements e economic, social and environmental e raised
conflicts. As we have seen, conflicts have and will continue
to occur. Where meeting environmental goals (for example)
would seriously compromise economic goals (for example),
regulators should make this explicit, giving the government
the opportunity to decide how to proceed. To date this has hap-
pened in some of the examples given in this article, but on an
ad hoc basis. A duty should make this an expectation. It will
provide regulators with a clear framework to highlight areas
where achieving the three aspects of sustainable development
would be difficult and hence where the government should act.
A sustainable development duty should thus particularly assist
the transparency and accountability of the decision-making
processes in the regulator.
If we look at the above examples and consider whether
a subsidiary sustainable development duty would have made
a difference one would have to say that it probably would
not e the attitude of the regulator as to how to balance the
duties would still have been key. In the context of regulatory
boards however, the duty may have more impact as decisions
are not being taken by one person e although clearly the ex-
ecutive directors will still have considerable influence over the
process, given that the non-executives are part-time and very
busy people. On balance, therefore, having these subsidiary
duties is probably likely to get the regulators to take fuller ac-
count of environmental considerations than they would with-
out them, but it remains to be seen how much real
difference they will make. Despite the Government’s defini-
tion that suggests the different objectives of sustainable devel-
opment should be met at the same time, regulators are likely to
continue to be faced by hard choices. The existence of regula-
tory discretion to balance duties and the fact that the primary
duty is economic may still lead the regulators to focus more on
economic than on environmental impacts where such choices
have to be made.
4.2. Regulatory/government boundaries
As Moran says, the changes brought in by Labour post
1997 speeded up changes that had started before e almost
from the beginning of utility regulation e to impose broader
obligations (sometimes by the regulators sometimes by
215
government) and issues ‘‘the initial attempt to create an area
of silence around these social issues failed’’ (Moran, 2003 p.
113). Prosser points out that the legislation governing the reg-
ulators contains goals that are ‘‘mixed and include irretriev-
ably varied rationales, economic and social’’ (Prosser, 1997,
p. 24). Foster is critical of this tendency ‘‘even if one political
generation puts economic efficiency first, the passing of time
and new exigencies of state make it likely that there will even-
tually be political interference that will subvert the primacy of
that end’’ (Foster, 1992, p. 408). Foster and other who share
his view consider these mixed goals for regulators as inappro-
priate and that regulation should be concerned solely with eco-
nomic questions e e.g. setting RPI-X and encouraging
competition.
The energy efficiency and water examples above illustrate
how economic regulators have to deal with environmental
questions on an ad hoc basis and the conflicts that can arise
in meeting economic and environmental objectives. They
show that the tensions emerged through a combination of
the regulators’ having a broad range of duties and considerable
scope for discretion in interpreting them, the ideological
preferences of the regulators and pressures exerted from
others within the policy process and policy networks who con-
sidered that the regulators should do more on environmental
issues.
The actions taken by regulators in these examples put pres-
sure on governments to take policy decisions to clarify how
these conflicts should be resolved (in the case of water), or
to take the decision making outside the remit of the regulator
(in the energy efficiency example). The energy efficiency ex-
ample, in particular, raised the question of accountability
and whether action to tackle social and environmental goals
should be the responsibility of utility regulators or govern-
ment. The energy efficiency example also illustrates how
external pressures (from energy conservation advocates) con-
tributed to getting the regulators involved e a key context
for this being reluctance on the part of government to fund in-
centives for energy efficiency e and how political pragmatism
led the government also to see the regulators and the compa-
nies they regulated as a source of funds and a way of avoiding
pressure on taxation revenues.
In the water example, the regulator himself initiated the de-
bate, spurred on by the fact that environmental requirements
are a key driver of water investment needs and therefore the
price setting process e hence environmental choices could
not be ignored. In contrast, the NETA example illustrates
that Ofgem could concentrate on what for it was the key
issue e introducing competition into the generation market e
and that (in the absence of any strong pressure to do other-
wise) the potential environmental impacts could be treated
as a side issue. In this case the Government can be viewed
as having concurred (in its support for NETA) or perhaps of
being ready to accept (or unable to challenge) the view offered
by Ofgem of the prospects for CHP and renewables. Although
organizations promoting CHP and renewables raised their
concerns these were dismissed by Ofgem and the DTI at the
time.
216 G. Owen / Utilities Policy 14 (2006) 208e217
The duties that Ofgem and Ofwat now have are subsidiary
ones and it is therefore perhaps worth asking whether a primary
duty be more likely to internalise sustainable development into
regulation? Even if sustainable development were made the
primary duty, the very nature of the concept means that a bal-
ance has to be struck between social, economic and environ-
mental considerations: it is not always possible to satisfy all
three equally. This takes us back to the exercise of regulatory
discretion in achieving the balance. Moreover, making sustain-
able development the primary duty of the economic regulator
would broaden the role considerably e in effect the regulator
could end up taking broad energy or water policy decisions
that might be considered to be more properly the job of gov-
ernment. (Although it might be said that they often end up do-
ing this by default in the absence of expertise in government
departments e as happened over NETA.) These duties are
probably as far as it is reasonable to go in broadening the
role of regulators without breaching appropriate political and
regulatory boundaries.
5. Conclusions
The energy and water regulators in the UK started with pri-
marily a clear economic function (although they have always
had some social and environmental duties), but a number of
areas of conflict between their economic goals and environ-
mental policy arose during the 1990s as this article has shown.
The introduction of sustainable development duties for Ofgem
and Ofwat represents a further development of what to some is
seen as an undesirable development that will subvert what
should be their main goal e economic. However, an alterna-
tive view is that mixed goals are an inherent feature and in
these sectors where environmental impacts are large, that
must include environmental goals. These new duties should
help to clarify this mixture of goals. Whether the new duties
will in practice make much difference to what the regulators
do remains to be seen.
Acknowledgements
I would like to thank a number of people for their com-
ments on drafts of an earlier paper on this subject: Ted Cantle,
Dieter Helm, John Hobson, Derek Osborn, David Sigsworth,
and Peter Vass; plus Martin Cave and Catherine Mitchell for
comments on this article. The paper has also benefited from
the very helpful comments of two anonymous referees. This
article develops and updates some of the themes tackled in
a report published by Sustainability First (Owen, 2004).
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