No-one ever buys a product or service just because it is inexpensive. At the very least, we expect that it will be delivered to us within a reasonable time, and will not harm us. In regulators' jargon, we endeavour to maximise PQRS - an appropriate combination of the price that we are charged (P), the quality of the goods etc. being sold (Q), the range of products and services made available (R), and the associated service that is offered to customers (S).
In an unregulated market, we choose the combination of P, Q, R and S that best suits us at a particular time. We sometimes choose to shop in a large supermarket, and we sometimes pop into our local store. We sometimes shop in Harrods Food Hall, and sometimes in Lidl. We sometimes have an expensive meal in a posh restaurant, and sometimes we drive through a McDonald's.
This fundamental fact poses real problems for those involved in utility regulation. Put positively, if market failure requires the imposition of regulation, then someone has to decide what quality, range and level of services should be provided, and at what cost. Put negatively, it is no use forcing prices down if the regulated company is allowed to provide a poor service to its customers.
This is an important issue for, amongst others:
- the water regulator which has the unenviable task of requiring water companies, such as Thames Water, to spend £ Billions to reduce water leaks and sewage discharges - with huge consequences for water bills;
- the energy regulator which requires licensees to provide electricity of a certain voltage and frequency; and to pay compensation for missed appointments; and
- the communications regulator which requires Royal Mail to meet certain prompt delivery targets.
It also turned out to be a vital issue in the regulation of the health service in the UK, where the Francis report on the dreadful events at the Stafford hospital noted that '... no effective consideration was given to the potential effects of cost savings and staff cuts on patient safety and quality. The Healthcare Commission had little by way of financial expertise available to it, and Monitor [the economic regulator], likewise, little clinical resource. The impact of one on the other does not seem to have been fully appreciated.' Mr Francis therefore recommended that 'There should be a single regulator dealing both with corporate governance, financial competence, viability and compliance with patient safety and quality standards for all trusts'.
More generally, however, the trade-offs between price and non-price outcomes are better decided by elected politicians than by unelected regulators. The extent to which water bills, for instance, should be increased to pay to reduce water leaks and sewage discharges is a (small p) political decision. It is also much better for politicians to resolve the tensions between the needs of present and future consumers - such as whether current consumers should pay more for their gas and electricity so as to facilitate investment in green/renewable technologies which will benefit future generations.