ITC explores transport charging mechanisms

Towards better charging mechanisms: what can transport learn from the utilities?

The Occasion

How we should be charged for travel and the transport infrastructure we use are increasingly important issues for policy makers. With a wide range of reforms being mooted, the ITC is asking whether transport can learn valuable lessons from other industries, particularly the utilities, about improving existing charging mechanisms. Key issues worth exploring include the extent to which charges should be cost-reflective, how responsive charges should be to market demand, and the impact of public subsidies. Moreover, in what ways do different charging mechanisms affect the behaviour of us: the users/customers?

In order to debate these issues the ITC invited a number of leading experts from the utilities and transport worlds to its Spring Discussion Evening on 1st May 2013. Simon Linnett, ITC Chairman and Executive Vice-Chairman of Rothschild chaired the discussion and welcomed a distinguished panel of speakers comprising: Alistair Buchanan CBE, Chief Executive of OfGem; Stuart Siddall, Chief Financial Officer of Thames Water; and Ramsay Dunning, the Group General Manager at Co-operative Energy.

Summary

Demographic Change and Transport in Britain – key issues highlighted by the speakers:

• Alistair Buchanan focused on mechanisms of charging in the energy sector. He explained the various elements that constitute energy charges, including generation (the largest component), networks, environmental charges, and supply. The new regulatory framework had moved from an inflation-based (RPI-x) charging model towards a model that placed more emphasis upon incentives for companies to invest and provide value (termed RIIO, or Revenue=Incentives+Innovation+Outputs). Subsidies, he noted, were now widespread across the energy market as a result of policies to alter the sources of energy generation, to the extent that a market in subsidies was becoming apparent. He added that the regulator faced a difficult balancing act between ensuring good standards of service for the public, thereby improving confidence and trust, and avoiding heavy interference in the market.

• Stuart Siddall explored charging mechanisms used in the water sector. Unlike in energy, most water customers received services from regional monopolies, requiring strong regulatory oversight. He explained that the regulator Ofwat uses an inflation-linked approach to the setting of wholesale prices. Significantly, most residential water charges are not usage-based because only a minority of customers currently have a metered supply. Mr Siddall noted that water companies apply their charges uniformly across what could be a large service area, but competition was driving significant change in the water sector and the Thames Tideway project will test these hitherto uniform charging mechanisms. He added that subsidies for the water industry were much more limited than for energy; however, because public policy currently encourages behavior shifts towards lower water usage this results in compensatory payments to companies. One oddity of the industry was the problem of free-riding, since customers could not have supplies turned off for non-payment.

• Ramsay Dunning spoke to participants on the benefits he believed the co-operative model offered in its charging policy. He stressed the simplicity of the Co-operative’s mechanism of tariff structures, which many customers found attractive. Equally important, he added, were good customer service and effective communication for building trust from customers, particularly when price rises became necessary. In addition, he pointed out that Co-op’s membership model had helped to develop customer confidence that they were not being exploited.

Key issues raised in the discussion:

• Public trust and confidence in charging mechanisms are essential. Attendees noted the importance of winning over a sceptical public if charges were not to be seen as exploitative. A particular challenge in transport was reform of roads governance if new methods of paying for road use were to be introduced. Drawing from the experience with water companies it was suggested that good management, equity and social responsibility were all helpful in building trust. Others pointed to evidence that membership-based ownership models, such as mutuals or co-operatives, were good at winning trust, even when charging more than their rivals.

• Beware giving Regulators conflicting objectives. A key problem was identified where regulators were sometimes expected to reconcile conflicting ends, such as keeping customer charges low and at the same time meeting frequently expensive environmental obligations. Their independence and interests could often, therefore, appear compromised. It was accepted that government has a critical role in building public trust and not overburdening regulators.

• Monopolistic suppliers face particular challenges winning trust in their charges. A number of attendees noted that regional monopolies often existed in transport, especially with road and rail, and that in this respect water was probably the utility that offered the best point of comparison in its mechanisms. In such monopolistic situations a conflict was identified between the need to protect users from exploitation, and the need to attract international investment.

• Can we learn from charging practices and operations in Europe? Some guests suggested that we could learn from utility regulation and charging practices in Europe, particularly the way in which some cities and localities combined transport and utility provision. Others pointed out that this would require far greater local revenue raising powers than presently existed, and that European regulators had seen a great deal of tinkering and interference in their independence.

• How can charging mechanisms be made attractive for international investors? A number of guests pointed out the need for charging mechanisms to provide attractive incentives for international investors. There was widespread agreement that the UK did currently provide an attractive environment for overseas investment in its utilities and infrastructure, as a result of its stability, strong rule of law, and good regulatory systems.

• Simplicity is a virtue. It was noted that customers were often baffled by complex charging systems, which left them suspicious whether they were getting the best deal. Recent calls to streamline complicated rail and energy tariffs were cases in point. In addition, it was observed that customers like to see clearly and intelligibly how their payments are being spent, and the links between charges and delivery.