Utility regulation as we know it in Great Britain has been one of the most effective public policy innovations of the past 30 years. It has generally delivered good value for consumers and has had a positive impact on competitiveness, productivity and economic growth. But there are indications now that the fitness for purpose of the regulatory regimes is being called into question against the backdrop of the international struggle to secure essential energy resources while simultaneously controlling climate change.

The perceived importance of this is reflected in the renewed interest in nuclear power as a long-term solution to the UK's energy needs, and the way in which the decarbonisation of the UK economy is becoming an urgent priority at every level of government. The implications are likely to be significant for future regulatory policy across the whole utility sector, particularly in transport and water. But they have the most acute impact on the jurisdiction of the energy regulator, Ofgem, over the gas and electricity industry, where the over-arching imperatives of security of supply and carbon reduction come together under the heading of sustainable development.

Regulators should not be like generals, always fighting the last war and never ready for the next one. It is not obvious that regulatory duties designed to give effect to the policy objectives of the past will be able to deliver the radically new objectives of the future. That is why the idea that Ofgem's statutory remit may need to be revised has been a recurring theme of much recent comment on this year's Energy Bill, soon to be scrutinised in the House of Lords.

To understand why such change might be needed, we must begin with the history and practice of Ofgem's remit. When gas and electricity were privatised, the Conservative government of the 1980s endowed Ofgem with a set of primary duties consistent with its own free market ideology. The structure of this remit clearly indicated that the principal regulatory priority in both industries was to promote competition in production and supply. After a dozen years of regulation on that basis, these priorities were significantly adjusted by the Labour government in its Utilities Act 2000. This set out new duties for Ofgem that prioritised social and consumer-related issues.

The Act established the new priorities within a legal framework that was both more complex and less transparent than the one that had existed at privatisation. Its centrepiece was a mission statement, described as Ofgem's principal objective – to protect consumers' interests, wherever appropriate by promoting competition. There were also additional provisions containing a bewildering variety of social, economic and environmental needs and interests that Ofgem had to consider, or was able to take into account, in regulating the industry to protect consumers. Further embellishments were soon introduced, such as new duties, under the Energy Act 2004, in relation to sustainable development and the principles and practice of better regulation.

Since Ofgem is a creature of statute and must operate within the parameters set by Parliament, this baroque legislative structure has implications for the clarity and integrity of its regulatory focus. More importantly, like any mission statement, it needs to be reassessed from time to time to see if it is still fit for purpose. If it is not, there is a risk that Ofgem will lead the energy industry in a direction that is not consistent with national policy objectives, or else will be reduced to a role on the sidelines while central government sets the real agenda.

The government should, of course, have the major role in setting long-term UK energy policy. That is why Parliament, under the energy legislation, has given the Department for Business, Enterprise, and Regulatory Reform (Berr) legal duties similar to those of Ofgem. But Berr is not a creature of statute, and many of its functions lie outside the legislation. In practice, this allows it a flexibility, unavailable to Ofgem, to observe and respond to changes in global realities and to the shifting national priorities that follow them. So, if Ofgem is to have an agenda that conforms to the national energy policy now being pursued by government, its priorities may need to be reset by
Parliament to reflect this.

The key output from gas and electricity regulation within the UK, for the foreseeable future, must be the development of a secure and sustainable system of energy supply. It is hard to overstate the importance of getting this right. The linked questions of supply security and of responding to climate change have become the major strategic issues, reflecting the general requirement for a fully sustainable industry that is able to deliver clean and renewable supplies of energy on a long-term basis. This change of emphasis means that Ofgem's duties must be properly targeted to ensure that energy regulation supports the significant investment now needed in low carbon technologies and overall system resilience.

What would such a revised regulatory remit look like? This year's Energy Bill does not deal with the issue, and so in this respect at least is a missed opportunity. But further energy legislation is certain to be needed soon, particularly to ensure UK legal consistency with new European requirements. It would therefore be sensible to start a public debate now about the essential ingredients of any statutory revision of Ofgem's role and duties.

The starting point must be the principal objective itself – the mission statement for energy regulation. There is a need, in particular, to evolve the narrow concern for consumer protection into a broader concept that encompasses the collective interest of the citizens of Great Britain (the whole community) in the maintenance of secure and sustainable energy supplies at reasonable cost. Such an approach would be consistent with the incalculable social value of energy in today's world. It would also sit more comfortably with the emerging shape and direction of energy policy across Europe under the Lisbon Treaty.

A reformulation of the remit in those terms would, of course, need to specify what is meant by a secure and sustainable energy supply for the benefit of citizens. So the drafting would need to capture certain key principles. One of them is that the concept of citizens must include both existing and future citizens. Another is that the idea of a "secure" energy supply must include both the physical security and economic security of the supply. A third principle would be that a "sustainable" energy supply is a supply of gas and electricity that is delivered in the manner most likely to minimise adverse social and environmental impacts, in particular by contributing to the reduction of greenhouse gas emissions within the meaning of the Climate Change Act 2008.

At the same time, consideration needs to be given to the role of competition as the main implement of energy regulation. Ofgem's track record as a promoter of both upstream and retail energy competition is good, and the benefits of those achievements should not be understated. Market-based policies would normally be expected to deliver superior outcomes. So there needs to be continuing recognition of competition in gas and electricity markets as one of the best means of achieving energy policy goals in terms of economic efficiency and minimising the impact on final prices.

Since market mechanisms are most likely to optimise the delivery of carbon and security goals, it would be sensible to rank competition alongside other factors, such as the timeliness and sufficiency of new investment. This would facilitate a stronger interaction and integration of regulatory activity with the wider portfolio of policy instruments for the energy sector. In legal terms, it would also confirm that competition should be promoted as a regulatory priority if this would positively support the new principal objective of a secure and sustainable energy system.

Any restructuring should also retain some other elements of continuity with Ofgem's current remit. In particular, the matters to be taken into account in pursuing the principal objective should still include efficiency, economy and consumer protection (particularly in relation to vulnerable groups). But some of its existing duties would need to be strengthened, for example to emphasise that investors should be able to recover their long-term investment costs as part of being able to finance their activities. And the addition of new matters, such as having to take account of the reliability and proper functioning of industry operations and the adequacy of research and innovation, would merit consideration.

The political premium now attached to a safe and sustainable system of energy supplies is evident both in the government's new national security strategy and in the implied requirement of the European Union's new climate change package for at least 40 per cent of the UK's electricity generation to come from renewable sources by 2020. Time is of the essence, as we lawyers say, and no government, whatever its political colour, will be able to avoid dealing soon with the question of Ofgem's remit. This year's Energy Bill may have missed the boat, but the next Energy Bill cannot afford to do so.

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For further information about this published aticle, contact Kathryn Hobbs on +44 (0)121 213 2397, Alexa Highfield on +44 (0)121 213 2396 or Amie Ryalls on +44 (0)121 213 2360

This published article may contain information of general interest about current legal issues, but does not give legal advice.