The Chancellor tells us that he, too, is committed to a target of reducing regulation, by 25% by 2030,[1] just like his predecessor, and echoing the ambitions of all those who came before them from at least 2010. It’s a nice, neat number, and the chances of the current approach achieving it are zero – unless, of course, the word “regulation” is redefined to measure whatever might be 25% less than the measure used now.
It is not that this is a silly idea. Britain is drowning in regulation, and there can be little doubt that regulation is contributing to the country’s poor economic growth. To increase economic growth requires a reduction in the costs of energy, in the cost of capital and in the cost of labour – and in regulation. Since the first three are going badly – the cost of energy, in particular, is inflated by regulation – cutting regulation back has a lot going for it.
But it is not what we are doing. On the contrary, the underlying political economy points to regulation growing wherever it is not constrained, and this government is adding whole new layers on top.
Why regulation keeps growing
Regulation is not static: it has an inbuilt dynamic towards its expansion. Every regulatory body wants a bigger budget, and every time something goes wrong there is a knee-jerk reaction to regulate. In a politically risk-averse world, regulation gets added, but rarely subtracted. Years ago, I named this the “dangerous dogs theorem”. A dog bites a child, there are horrific pictures in the tabloids, and action is demanded. A Dangerous Dogs Act follows. It needs implementing. That means defining dangerous dogs, demands for licensing dog owners, and then perhaps even an Office of Dog Regulation, to issue licences, monitor compliance, deal with amendments to the licence as other dogs are deemed dangerous too. Now imagine that this terrible incident is not followed by any other dog attacks. It turns out much better than imagined. Would anyone repeal the Dangerous Dogs Act? Of course not, for fear that, having repealed the Act and cut back the regulation, another attack happens. Better to be on the safe side. That’s why the statute book gets bigger and bigger. Governments keep adding new things to do, but they rarely, if ever, have a reverse gear.
Regulation has a demand as well as a supply. On the demand side there are lots of beneficiaries of regulations. There are the companies that make money from monitoring and enforcing regulation, from contracts to run speed-awareness courses to contracts to monitor water companies and advise companies and governments on Special Administration. They want more and more rules creating more and more opportunities. Accountants do much better if the tax code gets bigger and bigger, and lawyers thrive on more and more intervention. Dominant firms like lots of costly regulation to keep entrants out. Banking and financial services regulation is a classic example. It keeps competition out and keeps cosy oligopolies in business.
Regulators increase the demand for regulation. They intervene, find more and more things to worry about, and tell ministers that, unless they have a bigger budget, and more powers, bad things might happen. They like bigger budgets and bigger organisations to run, with more and more employees.
The result is that there is no queue of demands from regulators to repeal the laws that underpin their activities, few large companies demand less sectoral regulation, and it would be hard to think of a regulator who has asked the Treasury to radically cut their budgets.
All this means that regulatory policy has to lean into the wind of regulation to even hold the line.
It has been getting bigger and bigger
Since the last election in 2024 and the new 25% target to reduce regulation, we have had quite a bit of performance politics. At the Davos meeting in January 2025, Rachel Reeves provided a classic example when she boasted that she was taking a tough line on regulation, illustrating her determination by telling the audience how she had sacked the chair of the Competition and Markets Authority (CMA). At DEFRA, Steve Reed, told the world via TikTok and X that he was taking an axe to OFWAT, which he blamed for the sorry state of the water industry.
Reeves was also determined to crack down on government spending, including the major administrative activities. She announced the setting up of an Office for Value for Money in the Treasury. Ever heard of it since then?
What has happened is a significant rise in regulation and more proposals to add yet more layers. In Reed’s case, abolishing OFWAT turned out to be anything but a cut in regulation. Instead, a new super-regulator is to be created combining bits of the Environment Agency (EA) and the Drinking Water Inspectorate with OFWAT. This isn’t necessarily a bad idea, but there is no suggestion that it will do less. On the contrary, Reed and his successors at DEFRA have embraced the idea of introducing supervision of the water companies, one team of supervisors for each, and continuing with the existing periodic reviews and the econometric modelling. Beyond doubt this will be a very large increase in regulation.
Supervision sounds like it is “taking back public control”, but in fact it opens the door wide open to capture. That is why the water companies love the idea. A problem shared, a risk understood, means the supervisors will have to get more and more involved, and as they do so the great informational advantages of the companies will come to bear. No longer rules which all must follow, but each to have its own special treatment. Laughably, the great virtue of this supervision extension to water is because, it is claimed, it has worked so well in banking and finance.
In energy, regulation has spun out of control as the outcomes get worse rather than better. DESNZ owns the sole share in the National Energy System Operator (NESO). NESO combines running the system operations, advising on policy and net zero, and taking on functions like capacity modelling, which were once the job of the Department. Not that this stops the Department doing the same stuff as NESO. NESO is a public corporation to get around the constraints on civil service salaries. Therefore it needs a licence as a monopoly and OFGEM has the job of regulating NESO as a result. OFGEM has to second-guess NESO and do lots of the same stuff too because it also has a duty to further the net zero objective. Instead of abolishing OFGEM when NESO was set up and transferring the network regulation to a cross-utility body (as recommended in the “Cost of Energy Review”[2]), new regulators need regulating. Perhaps we might add an OFDOG, a watchdog and regulator of all the regulators?
Some of this is straight out of Yes Minister. It is amusing, like Yes Minister, but it is also extremely costly and damaging to delivering the outcomes. And so it has turned out. There are now thousands of people regulating the electricity and gas industries where once there was a small office in the Department of Energy covering the Central Electricity Generating Board, the Area Electricity Boards, British Gas, the National Coal Board, and looking after North Sea licensing. Now there is a major industry in place – one area of the economy where there definitely is growth.
Adding up all the regulators and tracking the change in the numbers and the increase in functions over the last couple of decades would make a good, and sobering, doctoral thesis topic. But public regulators and regulatory bodies are the tip of the iceberg of costs in the water, energy and other regulated sectors. Why? Because the regulators have an interface with the regulated, and the companies devote more in costs to complying, influencing and engaging with their regulators. Companies like Thames Water spend millions on regulation.
In the Thames Water case the current mess is super expensive. Armies of lawyers and consultants advise the bondholders that control company and its beleaguered board. OFWAT spends millions on monitoring what Thames is up to, and this is before we get into the proposed formal supervision. The latest contract on offer by OFWAT is for an estimated £13 million to monitor Thames. Add all the other companies to be supervised, assume the companies themselves spend two to three times as much as OFWAT, and it does not stretch the imagination much to come up with possibly £100 million for OFWAT costs and say £300 million for the companies. Not far off half a billion on regulating – a half billion that does not fix a single burst pipe.
None of this is going to deliver a 25% reduction in regulation. The trajectory is up, ever up. Incrementalism won’t work. Specific measures at best hold specific lines, but usually not for long. If the government really wants to reduce regulation by 25%, it needs to start by stopping adding more and more. It needs to have a moratorium on the sorts of major expansions like the water supervision model. How about having a ten-year plan to do no more extra regulation for the rest of Parliament, and say none for the next ten years after that? How about binning the water supervision proposed in the Cunliffe Report?[3]
This is not just about simplistic rules like one-in, one-out, and when that does not work, one-in and two-out. It is the overall regulatory burden that has to go down, not a process of ranking all new and existing regulations as if they are equivalent in cost and economic impact.
Radical reform is what is needed if a significant difference is going to be made, reducing the cost of energy, capital and labour. There are several steps in a radical programme which go beyond simply stopping adding yet more, a massive achievement though this would be.
Here are some of the necessary steps.
Step one: radically reduce and consolidate the number of regulators
OFWAT, OFGEM and the ORR all carry out network regulation. They each separately calculate the cost of capital, do efficiency and other modelling, assess capital programmes, and do the accounting and monitoring.
This duplication adds very little. There are sector- and indeed company-specific issues, but most of this is generic. A single network utility regulator could combine all of the above, and with a radically reduced workforce. It would be a technical body, doing technical analysis and modelling. OFWAT and OFGEM could be closed down. The CAA and OFCOM and the ORR could be slimmed down.
There was an opportunity to do just this back in 2000, but the proposal for a single utility regulator got squashed in a blitz of lobbying, and because of the immediate ambition to create OFCOM. Regulated monopolies feared that capturing a general network regulator would be much harder, just as capturing the CMA is so much more challenging.
Step two: end the duplication between regulators in each sector
As government has discovered the necessity for system planning and system regulation, it has begun the process of establishing new system regulators misleadingly called system operators. Energy is the prime example, though catchment planning and regulation are coming in water.
Adding a new planning and regulatory body should mean that the existing regulators can be pruned back – and hard. In the energy case, the bizarre outcome has been to add NESO to the context of both DESNZ and OFGEM and then to make OFGEM the regulator of NESO. Two becomes three, but the arithmetic increase in bodies has led to a geometric overload of regulation.
End the regulation of NESO by OFGEM and, as above, break up and close OFGEM.
In water, Reed’s ill-thought-out plan to abolish OFWAT and create a super water regulator by merging it with the EA provides an opportunity, in the context of a general utility network regulator, to fully close OFWAT. Instead, the opposite looks likely. “OFWAT is dead; long live even bigger OFWAT” seems a more appropriate way of looking at what will happen, armed with the great expansion of supervision discussed above.
Step three: separate out operational functions and administration tasks from regulators
Regulatory bodies accumulate all sorts of operational functions, and end up being a dustbin for administrative tasks, like licence administration, which governments come up with and then seek someone to run them.
The EA is a classic example. It is supposed to regulate, investigate, prosecute, advise government on policy matters, and at the same time run a very large workforce doing flood defence. Operational activities should be hived off and flood defence, for example, passed to the private sector. System regulators can and should decide what is to be done, but they should not do this. It is not only inefficient and confusing for the boards of these regulators – and distracting, too, whenever there is an operational difficulty – but it also combines very different areas of expertise.
Flood defence should be split out of the EA, and NESO should not be the system operator doing day-to-day dispatch of power stations. It, like the EA, should stick to its knitting.
Step four: move to system planning and regulation
The creation of NESO is an attempt to plug a huge gap left by the privatisation of utilities. The attempt to commoditise and split up the functions of the privatised companies, and move towards competitive provision, left out almost every aspect of the systems in which they are set. The planning functions in the nationalised industries for the industries as a whole were simply washed away.
Abolishing system planning and system regulation does not make the problems go away. In many respects it makes matters much worse. Take electricity: much of the generation is in the wrong places because the project developers have no incentive to locate in the right places from the system perspective. The grid and the renewables have not been co-planned and their roll-out integrated. The result is that Britain has an increasingly dysfunctional system. Wind generators, for example, are constrained off (paid for generating electricity that no one wants and cannot get to market), and Britain’s electricity is amongst the most expensive in the developed world. This should be recognised as a disaster for industry and households.
The high cost of energy is a major “blocker” to economic growth. This is partly the result of very badly designed regulation.
Reforming and restructuring NESO and creating water catchment planners and regulators is a critical part of regulatory reform.
System regulation should radically reduce the costs of regulation. The system planner comes up with maps of the assets and their state of maintenance, and sets out how the policy objectives can be met. A digital catchment map would be published on the system regulators’ websites, for all to see, comment on and simulate alternative ways of achieving the objective. The system regulator would then set out the agreed plan and again everyone can see on the digital map how it is going.
Next the system regulator asks for bids to do the various works. It opens up the market to much more competition, and that should reduce the costs of carrying out the works. In principle, the regulator only needs to know the price and be able to make sure that the contractor delivers. This is a world away from the mass of detailed information that goes into periodic reviews and the assessment of the companies’ business plans.[4]
Step five: sort out what the functions are of the sponsoring departments
In energy, DESNZ shadows NESO and oversees OFGEM’s activities. HMT shadows DESNZ. OFGEM regulates NESO, which is owned by the Secretary of State.
In the old, nationalised days, a very much smaller Department for Energy did the modelling and shaped the energy mix, granted licences and did the necessary supporting policy analysis. Now DESNZ does all this, overlapping with NESO and OFGEM. And it gives guidance to both.
This is a muddle, with large duplication and a consultants’ paradise. Each second-guesses the other.
It is actually worse. On top of all this are the Climate Change Committee (CCC) and the National Infrastructure and Service Transformation Authority (NISTA), both doing analysis too.
DESNZ has a big staff. It could easily absorb back several of the core policy functions and at the same time reduce its headcount.
Step six: stop the propaganda, lobbying and politicking
Since privatisation, there has been a large increase in propaganda and lobbying both by government departments and by the regulators. They now spend lots of money on “corporate relations” departments and PR consultants. DESNZ pays significant sums to “influencers”; NESO is accused of having corporate relations people in the control room in a semi-emergency tightness of capacity event and a risk that the lights may go out. This is getting out of control.
An immediate analysis of the total corporate relations and PR consultancy spend by regulatory bodies and by the sponsoring government departments should be conducted. The default should be to bring this to zero unless there is an overwhelming national emergency or other urgent need to communicate with customers and the public.
On the company side, once the government and regulators are in the spinning and PR business, they can get in on the act too. Think of the propaganda from Thames Water’s creditors claiming enormous costs to HMT if it is put into Special Administration and bloated numbers for the costs of nationalisation. In this murky world, the companies try to gain more leverage by paying independent think-tanks and charities to come up with answers that suit their case. The repeated claims about the costs of nationalisation come to mind.
None of this benefits the customers. It adds costs and diverts resources from the day job of fixing the leaks and sewerage works and rolling out the network investments in energy. It is literally an enormous waste of money by the regulators and government, on the one hand, and by the companies on the other, with customers as the ultimate losers.
Step seven: radically reduce consultancy spending
Remarkably, as the headcounts have been expanding, the resort to consultants has been increasing. Faced with a tricky question – like whether to put Thames Water into Special Administration – the sponsoring department hires consultants to advise it on all this. When it comes to monitoring Thames, OFWAT resorts to consultants. Legal questions are deferred to law firms, rather than in-house lawyers.
Why? Because this enables the regulators and government to distance themselves from advice, and because, in the case of the regulators, it can be billed directly to the companies – as in the case of OFWAT’s monitoring of Thames Water. Presumably supervision will go this way too.
This becomes a vicious spiral of regulatory costs. The departments and the regulators get hollowed out of expertise, the sort that government departments held onto and nurtured in the nationalised days. The industry experience and capability of civil servants to handle collapses and, indeed, Special Administration frays, in ways that would have been inconceivable in the pre-privatisation world.
It also adds cost on the side of the regulated. If the government and the regulators hire private consultants and lawyers, with their higher costs, then the companies need to do so as well. A cost spiral results. Thames Water again reflects this – literally hundreds of millions of pounds have been spent by the company and its investors already, just to try to head off Special Administration. These costs may fall themselves, but the costs and risks of doing business in the regulated utilities ultimately land on the cost of capital and hence customers.
Step eight: radically reduce regulatory risk to lower the cost of equity and debt
It was acknowledged from the start that privatisation would result in a higher cost of capital for the privatised companies in order for them to be incentivised to get costs down and do investment more efficiently.
As Britain has some of the highest costs of capital investment (CAPEX) in the developed world, this was a seemingly attractive proposition. To date it has not turned out as well as expected. Of the great capital investment projects in Britain, HS2 in the public sector has very high costs, now getting close to £1 billion per mile. The Hinkley and Sizewell C nuclear reactors are close to £50 billion each, which translates into around £16 billion per GW. The privatised Heathrow Airport estimates, as an opening projection, that a new runway will cost around £45 billion. The National Audit Office suggests that the costs of the grid expansion by the privatised National Grid will turn out to be very high, as costs overrun. Water treatment works’ storage costs look like being very high, as do the pipe replacements.
This is all a big drag on the economy and on economic growth. It cannot all be put down to regulation, but it does have a very big regulatory component. Government has been increasing the regulation of labour, and government controls planning generally. It also sets targets, of which the net zero 2030 target is perhaps the greatest example of choosing a timetable that will maximise the costs of delivery. There is a lot of regulation that lies at the heart of these world-leading high costs. Bad and inconsistent policy causes high costs which lead to lower growth. In the HS2 example, the classic mistake was made at the outset: announce a grand project with no idea of how to do it or what it might cost. It is a great white elephant.
Some of these uncertainties and the politics of infrastructure systems make these cost impacts inevitable. The increased cost of capital arises because government and regulators seek to place these uncertainties onto companies and hence raise their political and regulatory risks, which in turn raises the cost of equity (and sometimes even the cost of debt).
All of this is further exacerbated by the way in which the regulation of the cost of capital has unfolded. Regulators use a weighted average cost of capital (WACC), which is an average between the cost of debt and the cost of equity, and they calculate the cost of equity using the capital asset pricing model (CAPM). This is a terrible regulatory mistake, and it has directly led to widespread financial engineering and whole-company securitisation. Thames Water is the classic example of the consequences. It is hard to underestimate the resultant damage to economic growth.
On the cost of debt, it should be close to the government borrowing rate, because the companies’ regulatory asset bases (RABs) are accounting numbers representing past investments not yet paid for by current customers. An easy win on reducing the costs of regulation is to clarify exactly what the commitment is to honouring the RAB.
This leads to the split cost of capital, not the WACC, and opens up the possibility of making the RABs tradeable.[5]
Regulatory uncertainty can be further reduced by appeals mechanisms. Currently the CMA performs this function for regulated utilities in the first instance. The existing utility appeals process works reasonably well, and in doing so is a reassurance to investors and hence reduces the cost of equity. To date very few companies have actually appealed, which means that the pressure on regulators and companies to do their respective jobs properly is working. A good speed limit is one where nobody speeds and nobody gets fined. Ditto for an appeals mechanism. Crude regulatory reforms, like curtailing or reducing appeals mechanisms, can be counterproductive.
A reform package to meet the 25% reduction in regulatory costs
None of the above is beyond a reforming government to carry through. What it needs is an overarching regulatory structure fit for the purposes of now rather than those of 1990. It needs to lift the ambition to ensure that the great utility networks which are the cornerstones of the economy are properly maintained and enhanced. That requires a major investment programme to rebuild the water networks and the electricity networks, and significant airport, rail and communications investment. Current regulation is a serious drag on this objective. By all means, set some bold objective to reduce regulation, but it would be more convincing if the objective came with some serious proposals to achieve it. Current policies will increase regulation, not reduce it by 25%.
[1] HMT (2026), “Chancellor John Healey’s Growth Speech 2026”, 7th September.
[2] Helm, D. (2017), “Cost of Energy Review”, 25th October.
[3] Independent Water Commission (2025), “Independent Water Commission Final Report”, 21st July 2025, chaired by Sir Jon Cunliffe.
[4] Helm, D. (2019), “The systems regulation model”, 12th February.
[5] On the split cost of capital, see Helm, D. (1994), “British Utility Regulation: Theory, Practice, and Reform”, Oxford Review of Economic Policy, 10:3, pp. 17–39; and it is later more clearly defined in Helm, D. (2006), “Split Cost of Capital, Indexed Cost of Debt and Longer Periods – A Reply to Critics”; and Helm, D. (2008), “Tradeable RABs and the split cost of capital”, 2nd January. See also Helm, D. (2009), “Utility regulation, the RAB and the cost of capital”, 6th May. Helm, D. and Tindall, T. (2009), “The evolution of infrastructure and utility ownership and its implications”, Oxford Review of Economic Policy, 25:3, pp. 411–434. Ofwat and Ofgem (2006), “Financing Networks: A discussion paper”, February, referred to above, tries to rebut my arguments. Helm, D. (2026), “The regulated asset base – the concept, tradeable RABs, the split cost of capital, and pay-as-you-go versus pay-when-delivered”, 16th June.
