For the latest of our 12 Days of Christmas series as we approach issue 600 of Energy Spectrum, we spoke to Alistair Buchanan, Partner and UK Chairman of Power and Utilities at KPMG. Alistair joined KPMG in 2013, following ten years as CEO of Ofgem. It marked a return to the firm where he started his career.
Alistair spoke to Cornwall Insight on how government and regulator do not need to be in conflict, why he turned down a third time as Ofgem CEO and how the industry can improve its relationship with consumers.
Where were you and what were you up to in 2005?
I was Chief Executive of Ofgem and we had just completed the 2004 distribution price controls and were preparing for the next transmission price control. One of the big issues we were looking at, at the time was the Beauly-Denney transmission wire across Cairngorms, ensuring that consumers were getting value for money for that line. We were also setting up the offshore wind regime, based around OFTOs, which was a very big project. Smart meters were just kicking off at the time too. Quite a lot was going on.
What trend or development within the energy sector have you found most surprising?
A positive trend has been the global focus on incentive-based regulation. In many jurisdictions, there’s a sense from regulators and policy makers that companies needed to be incentivised.
I’m surprised that we’re not further forward on battery technology. I know everybody talks about it now as “the coming thing,” but it has been the coming thing for quite a long time.
What have you found most disappointing?
I would say without doubt the toughest theme in the sector has been the way it has become a feature of politics. In 2005, the average household was paying dual fuel of about £600-650. Then it rose to peak in 2013 at about £1,400; it’s now down to about £1,100-1,200. If you look at it, a large chunk of that increase in price from 2005 to the peak was driven by global wholesale prices. Another large chunk has been that in your bill in 2005, under 1% was a green charge, but by 2013 10% of your bill was a green charge.
These are two really significant elements of the bill, out of the control of the various players, that has created this huge increase for the families and led to huge politicisation of the sector.
What are your thoughts on the way the government has gone about implementing its price cap? Should it come from Ofgem, as they have said?
One of the things that was really successful towards the end of my time as a regulator was that the government introduced its thinking on implementing the strategic policy review statement for the sector.
It was useful for me as a regulator because it reflected the fact that government, which is elected, creates the umbrella of strategy. Underneath the umbrella, the regulator is independent and has to move within the general policy goal. Certainly, when I left, I felt a lot more confident that government and regulator could work together. But it was never properly implemented.
You would have to ask today’s government and today’s regulator whether they think they’re achieving that. The framework is in place to do so. Government and regulators don’t need to be in conflict.
What are you working on at the moment and how could it affect the industry?
There are two projects that I’ve been working, both overseas.
In the state of Victoria in Australia, we were invited to introduce the RIIO model. They’ve slightly changed it, so they’ve called it the PREMO model and that is being introduced in 2018. It’s very exciting that we’ve helped to introduce a brand new approach to regulation there.
The other big overseas project just beginning is that we were hired to help the Ministry of Energy and Department for International Development on a joint project between India and the British Government on looking at changing regulation and market structure in India.
I think that both the Australian project and the Indian project are taking lessons from the UK, rather than perhaps giving lessons to the UK. But, in time, I think the UK will be wanting to see what lessons it can take from there.
Why was it the right time for you to return to KPMG, where you started your career, and leave Ofgem?
I’d done two terms at Ofgem, that’s ten years, and it’s enough to give most people grey hairs. It’s quite a tough job, as it should be, because of the fact it’s in the public eye all the time. It was a very enjoyable job too and they very kindly offered me a third-term. But I felt two terms was enough and, partly, I think you might get stuck in your ways. It’s quite good that somebody else or another team should come in and look at things afresh. I have no regrets about doing two terms then moving on.
I started my life at KPMG; it’s one of the major consultancy financial services firms, all of which I’ve spent my non-Ofgem career in, and it just seemed a logical thing to do.
What do you think the key energy policy changes are going to be? How do we go about solving them?
One of the key challenges for regulators across all the utilities at the moment is threefold.
The first is that they have to remember they are creatures of statute, created by law. Their power and their authority comes from the law and from Parliament. They have to be very careful they don’t wander too far away from that. All regulators need to look and really understand what their statute is.
The second links to that, and it is that you need to do upfront consultation as a regulator. I sense that in some instances there’s been a decision already made before consultation. Again, people need to be very, very careful they allow an independent consultation process and then take their view. On a few occasions, potentially, there’s been newspaper articles or interviews on the Today programme where it might appear that a decision has been pre-judged.
Third, it’s really, really important for regulators, who have to have trust and have to be seen to be independent, to be really aware of the danger they are putting themselves in if they start to pre-judge and pre-comment too widely, certainly if it’s too far away from their brief.
Regulators need to look at themselves quite carefully, if I’m honest.
What New Year’s Resolutions are needed to make the sector a better place to work in and better contribute to policy goals?
One of the things that has struck me, and is something we need to do a bit of work on this, is the reaction of consumers towards the banking sector has noticeably improved. We need to spend a bit of time looking at some of the other sectors that have been deeply unpopular. We need to try and address what other sectors have done, maybe in political terms, policy terms, regulatory terms, or companies treating their customers a different way.
We need to look at whether there are some tricks that other sectors have adopted that have led to an improvement in the consumer-industry relationship.
What do you think the comment in the 2020 Christmas Issue of Energy Spectrum will be?
One might be smart meters not having been fully rolled out; the second might be the price cap staying longer. They might be the kind of areas the newspapers and the leading articles like yourselves might be looking at.
Obviously, the other area is you might well be writing about post-Brexit issues. That could be looking at what’s happening on a particular interconnector project or what our relationship with Brussels like on a particular project.
What’s the best piece of energy advice you’ve received?
One of the wisest areas of energy advice that I was given was that, there was perhaps a general perception that network companies didn’t have a relationship with their customers. What’s become self-evident is that some of the network companies really do have outstanding relationships with their customers.
One of the most interesting areas for me was that we generally look at the Big Six, First Utility and Ovo, as the providers of customer service but I actually think the network companies, in some instances spectacularly well, have really driven a new relationship with consumers.
Because it’s networks, where men and women go out and mend the wires and poles when storms come, it’s a very important one. This is because it ties your reliability and the supply of electricity in bad weather between the customer and the company. It’s often overlooked as to how important that is.
How does Energy Spectrum help you in your day-to-day work?
I like Energy Spectrum because it’s quite challenging. I think a lot of spokespeople on the sector feel challenged by potentially not getting work they want, or don’t want to go into public to give a difficult opinion. I really value Energy Spectrum because of that. Nigel’s always been fantastic at this, and you’ve got other writers like Peter Atherton. He was a city analyst when I was a city analyst; he’s fantastic as well. I really value the fact that there is a major periodical spokesmen in the sector that is willing to be quite radical and to say things that others won’t say.