- May 14, 2018
Utilities regulation aims to create stability and consistency, protecting the interests of both consumers and investors alike. But what effects do ever increasing regulations have on utility companies? How do they lower their prices without taking a hit to their profit margins?
Before privatisation in the 1980’s, the Utilities sector in the UK was run by nationalised monopolies, and demonstrated a record of under investment and poor performance. Since privatisation, the Utilities industry has become one of the most rigorously regulated industries in the UK, with the aim to improve performance, encourage competition and limit the economic harm that can result from monopoly abuse.
In truth, these regulations tend to favour the lesser known brands, which benefit from advantages such as being exempt from the Energy Company Obligation imposed by Ofgem on the ‘Big 6’ energy companies. These benefits allow smaller emerging companies to reduce their prices, which when coupled with generally higher standards of customer service can create a much more attractive proposition for the end user.
In February this year Centrica announced they would be cutting 4000 jobs by 2020, atop the 5500 already shed since 2015. This announcement comes after a 17% fall in profits in 2017 and a loss of around 823,000 customers between July and October the same year. Although the customer exodus has slowed, in the first 4 months of 2018 another 110,000 customers switched to different suppliers. Making things worse still, they imposed an ‘above inflation’ price hike of 5.5% earlier this year, meaning customers’ costs will continue to increase, most likely promoting more to switch supplier. This poses the question, are they just going round in circles?
The reason given for these aggressive cost saving plans was the announcement of the Government’s proposed price cap on Standard Variable Tariffs; the poor value tariffs that most households are on – the biggest intervention by the government since privatisation, as well as ‘tough competition’ from emerging energy companies.
Although taking out heads and taking out costs go hand in hand, aggressive headcount reduction without adequate preparation can lead to a depleted, demotivated workforce which will inevitably lead to a slip in service levels. A common trap that companies fall into all too often is a failure to highlight the issues that are keeping costs high within their operation. These issues can become embedded in the way the company operates, with a “That’s what we’ve always done” mentality becoming prevalent.
What is necessary is an objective step back to gauge areas where underlying issues are, enabling an increase in capacity, ultimately allowing resources to be reallocated effectively. Only by doing this can headcount be reduced, without having a negative effect on output enabling utilities to cut costs and deliver those important cost savings to customers.