Levels of trust between utility regulators and operators around the world are improving, claims a survey released in September, though the report also warns that trust remains a fragile commodity which can easily be broken.
The report, “Building Trust in Regulation”, produced by KPMG International in conjunction with the Economist Intelligence Unit, examines the level of trust between regulators and operators across five utility sectors – power, telecoms, water, transport and post.
KPMG’s research found that a net 32 percent of regulators feel that trust between the two parties has improved in the past year, where a net 18 percent of operators share that view. However, many participants noted the fragility of that trust and see significant detrimental consequences should this improvement not continue.
Commenting on the results, David Thomas, KPMG’s global head of communications regulation and a partner in the United Kingdom firm, said: “Trust between regulators and operators in any industry is something more than a ‘nice-to-have’. Any breakdown in trust can have a very real and detrimental effect on an operator’s bottom line and on its future growth aspirations. Although disagreements between operators and regulators can often dissolve into some form of blame game, there is no need for finger-pointing here. This is often indicative of two groups both needing to learn to understand and trust each other more.”
One issue which both operators and regulators do agree on is how to build trust into the relationship. At 46 percent, the single most popular response for both groups was the building of rapport between senior executives on both sides. Beyond that, operators would like to see this greater understanding replicated at the more junior management levels, whereas regulators are more concerned with issues such as the ease of information transmission between the two sides.
However, in agreeing on the importance of the “tone from the top”, both sides accept the importance of the individual over processes and frameworks. As Thomas points out, “Once appropriate institutional arrangements are in place, human beings are unquestionably at the core of operator-regulator relationships and are foundational factors in building trust in regulation.”
Thomas added: “The survey shows that there are a number of areas in which the interaction between operator and regulator works poorly; areas where trust between the two parties is evidently strained. With this in mind, operators remain adamant that regulators must achieve a greater appreciation of business operations and risks while the regulators want operators to gain an improved knowledge of regulatory and policy objectives.”
“The development of real trust between the two will depend, to a large extent, on the development of mutual understanding. That means operators really taking time to understand the role of regulatory policy in securing a better outcome for the sector as a whole – something that a previous KPMG survey* suggested was more difficult than it would seem. For regulators, really understanding the business models of the operators in their own markets is key. This would help in avoiding what might be called ‘cut and paste’ regulation; trying to replicate regulation which works elsewhere but without taking into account local market conditions. This can be highly damaging, especially in developing markets. Adopting a more tailored approach to new regulation might just inspire trust from the outset.”
Other key findings from the survey include:
Thirty-six percent of the 168 operators surveyed stated that regulatory uncertainty has had a direct, negative impact on their revenues. In addition, 30 percent claimed the same uncertainty had caused a cancellation or postponement of planned investment.
The effect of the uncertainty on revenue is felt most strongly in the postal and telecoms sectors (46 and 44 percent, respectively, seeing a negative impact) with water operators the least affected (just 7 percent). The impact is also greater in the developing markets (40 percent) than in the developed markets (33 percent).
Building Trust in Regulation
Reference:* “Bringing Regulation into the Boardroom” (2007), KPMG in the U.K. (.pdf)