House of Commons - Trade and Industry

Select Committee on Trade and Industry First Report

DECISION-MAKING AND LEGITIMACY

Accountability

151. Most of our witnesses, while accepting that the regulators must be independent, laid great stress on the need for them to be accountable, but there was less agreement as to whether they are accountable to the right extent and to the right authority.

152. Both OFFER and OFGAS set out the ways in which they believe themselves to be accountable: to the Secretary of State, who appoints and may dismiss them and who must submit their annual reports to Parliament; to Parliament through the Secretary of State and through its Committees (including, since their activities are subject to scrutiny by the Comptroller and Auditor General and Parliamentary Commissioner for Administration, the Public Accounts Committee and the Select Committee on the Parliamentary Commissioner for Administration), and to the courts, mainly through judicial review.[347] They also suggest a more general accountability to those who may be affected by their decisions.[348]

153. The former Minister for Energy, the Rt. Hon. Tim Eggar, MP, urged the strengthening of parliamentary accountability by the setting up of a Select Committee on Regulated Industries. He pointed to the contradictory recommendations which have in the past resulted from different committees considering the same question and felt that the new committee, which he proposed should be a joint one of both Houses with, perhaps a small, permanent, secretariat in addition to the Clerks, would "allow Parliament to develop expertise and raise the level of national debate in this crucial area".[349] Others who commended the possibility of a Committee included the NGC, who suggested that the accountability of the regulators might be improved by "some form of dedicated Select Committee which crossed departmental boundaries and with a specialist staff at its disposal";[350] the EIUG who wrote that "a Select Committee on regulated industries should be established to make the regulators more accountable";[351] and the GCC, who felt a Select Committee would be in the public interest[352] and suggested a permanent Sub Committee of the Trade and Industry Committee. Notes of caution were sounded by other witnesses. PowerGen "would not object ... although this approach would not reflect the usual way in which Select Committees scrutinise the activities of Government Ministers and their Departments and its work could duplicate or cut across the work of the existing Departmental Committees";[353] and Eastern Group felt that such a Committee would be one way of proceeding but should not, if set up, interfere with the day-to-day conduct of business.[354]

154. When we asked the regulators whether they would be in favour of a specialist Select Committee their responses varied according to how the Director General in question viewed the future of regulation. The Director General of Telecommunications, who believes that telecommunications is substantially little different from other products, argued that a wider perspective was preferable, believing that it was not appropriate to have a committee for particular parts of the economy, even though they shared some structural similarities. He felt "it would be better for this Committee on Trade and Industry to have the opportunity to vet issues across the whole economy and sometimes the regulated industries ... I can imagine a committee only for the regulated industries would tend to lose sight of where we are going which is to have these sectors the same as the rest of the economy".[355] The Director General of Water Supply said that Select Committee scrutiny should mirror the regulatory structure, and that "while it is thought sensible (and I actually believe it is sensible) to have individual industry regulators, I think it might be preferable for Parliament to operate on that basis".[356] The DGGS thought that "different Select Committees can come up with different views and, if you had a regulatory Select Committee, other Committees would still call us for their own various purposes ... so ... there are positives and negatives to it".[357] OFFER "would be content to work within whatever framework of accountability Parliament wished to put in place", but commented that "alongside the advantages of specialisation there are advantages in a Select Committee being able to consider and compare both regulated and unregulated industries".[358] The Director General of Electricity Supply for Northern Ireland gave as his personal view "that it would be in the interests of customers if regulators were in some measure answerable to and in some measure further empowered and legitimised by the scrutiny and authority of a Parliamentary Committee".[359] The rail regulator felt that "the differences between the regulated industries, reflected in the role and approach of individual regulators, would need to be taken into account"[360] but would want his office to come within the terms of reference of any such committee as was established, as well as remaining within those of the Transport Committee.

155. We are not convinced of the need for the creation of a specific Select Committee to scrutinise the work of industry regulators nor that its creation would be of benefit. There would be considerable difficulties in establishing a precise remit for such a Committee. For instance should such a Committee be restricted to the work of OFGAS, OFFER, OFREG and OFWAT, or should OFTEL and the Office of the Rail Regulator be included or even the Office of the National Lottery or the Civil Aviation Authority? A wide remit would have the benefit of enabling the Committee to have access to much comparative information, but we doubt the usefulness of this, given the wide variety of regulatory structures and the great differences which exist between the industries regulated. Moreover, we do not accept that a Select Committee on Regulated Industries would increase the accountability of the regulators; no witness presented evidence to explain why accountability would be greater if a single specific Committee scrutinised the regulators' work than if, as at present, the regulators can be called to account by a number of different Committees.

156. More fundamentally, however, we believe that the creation of such a Committee could undermine the whole operation of the present Select Committee system which largely reflects the structure of Government departments. Any Select Committee would inevitably have constantly overlapping terms of reference with other committees. For instance, we do not see how the Transport Committee could effectively monitor the work of the Department of Transport without scrutiny, from time to time, of the Rail Regulator. This Select Committee has undertaken inquiries into regulatory matters and has taken oral evidence from OFWAT, which is outside our normal purview. Members are consequently becoming better informed in these areas and, provided that sufficient resources are made available to Committees, there is no reason why this important function cannot be carried out on an individual departmental basis except where there may be an overlap. We recommend that the current system of monitoring by parliamentary select committees should remain unchanged.

Regulatory Transparency

157. The transparency of a decision is the extent to which the way in which and the reasons why it has been reached are clear. Our witnesses were united in expecting that the regulators' decision-making should be as transparent as possible, both in respect of the principles applied and of the decisions reached.[361] Lack of transparency was a common complaint[362] but the consensus was that, although there is still room for improvement, and the energy regulators are still not as open as OFWAT and OFTEL,[363] they are now more open about their decision-making process and publishing more information than in the past.[364]

Reasons for decisions

158. The DTI saw no need for a statutory obligation on the regulators to publish reasons for their decisions, saying "in practice there are limits to the extent to which regulators, like any public authority, can refuse to give reasons; for example, in judicial review proceedings a court may decline to uphold a decision if the regulator is unable to explain it sufficiently to show it has been taken properly".[365] Despite this contention the Government took power in the Gas Act 1995 to compel the DGGS to consider representations and give reasons for regulatory decisions specified by order but "explained at the time, that this was intended as a fall-back power; given the DGGS's open, pro-competitive, and consultative approach to decision-making, the Government did not foresee a need to use this provision".[366] We reiterate the recommendation of our Eleventh Report of 1994-95 that the Government impose a duty on the DGES to give reasons for his decisions.[367]

159. The regulatory process in the United States is characterised by extensive litigation, and we should not like to see that happen in the UK. The current DGGS, who expressed more concern about the possibility of being submitted to judicial review than did the DGES, explained that one reason for early reluctance to give reasons was that legal advice had been "that if you gave your reasons you were more likely to be judicially reviewable ... I think, now, the legal advice has changed ... in the early days regulators were quite wary of giving a lot of reasons, and also they were concerned that it might give the companies additional ammunition next time round ... none of us act that way these days".[368] She explained that she had challenged the consumer groups to tell her if they believed she had not given adequate reasons.[369] The Director General of Telecommunications was aware of the possibility of "mischievous challenge becoming the order of the day, particularly by dominant companies who just want to delay things"[370] but believed that "their [the US] history of challenge does not flow from transparency as such; it flows from something else in that society".[371]

160. The Director General of Telecommunications believed that almost all business should be transacted in public.[372] He explained also that he publishes a management plan, covering the next 18 months or so. "That gives the industry in particular but also the Consumers' Association and people like that the opportunity" to react.[373] We recommend that all regulators publish forward plans.

Consultation methods

161. OFFER and OFGAS both told us that they attach great importance to consultation. According to OFFER "it has been the DGES's policy to consult widely on the main issues which fall within his responsibility, and to do so in advance of any formal consultation period required under the Act ... He will invite interested parties to comment by a specified date on the issues raised in the consultation paper. He has issued over 40 consultation papers since the beginning of 1995, covering such topics as price control reviews, proposed mergers and takeovers, preparations for the competitive electricity market in 1998, and aspects of customer service".[374] OFGAS wrote "OFGAS publishes consultation papers and invites responses from all interested parties before any significant decision is taken".[375] Other witnesses were generally of the view that consultation, if not already adequate[376] was improving[377] though there were occasional complaints of excessively tight timetables.[378]

162. Regulators are increasingly holding public meetings or hearings (the Director General of Telecommunications defined meetings "as where one listens and absorbs and hearings are where one structures the meeting so that there is an exchange of arguments between key players").[379] OFWAT and OFTEL already hold or are planning such hearings.[380] OFFER had been impressed by the telecommunications hearings, and had held its own hearing on the NGC's price control.[381] Professor Littlechild thought the practice was valuable, saying it gives others "a chance to put questions".[382] The holding of a public hearing is not, of course, a guarantee that the public will avail itself of its right to be informed - we heard in the United States that not all were well-attended - but nonetheless we welcome the move towards such hearings as potentially leading to greater transparency of the regulatory process. We welcome the increase in consultation by these and other means which the regulators told us they were undertaking.[383]

163. Other methods are also used by the regulators to open up the process of their decision-making (as OFGAS described it). We are pleased that the regulators are increasing the extent of their consultation and we encourage them to continue.

164. The resources available to the regulator can be effectively expanded by bringing to bear on the information provided the knowledge and experience of similar companies. A number of witnesses made this point to us strongly as an argument for the publication of the greatest possible amount of the information provided to the regulator, subject only to constraints of commercial or other confidentiality.[384]

Consumer representation

Consumer representative bodies

165. The Gas Act 1986 and the Electricity Act 1989 both provide for bodies to represent consumers and take part in the investigation of complaints. Other bodies such as the Consumers' Association, the NCC[385] and various charities also have a role to play which, as the GCC said, becomes increasingly important as consultation increases.[386]

Consumer bodies: structure and relationship with regulators

166. The GCC is a national, levy-funded, independent statutory body; the Electricity Consumers Committees are regional bodies, represented nationally since 1993 by the ECCCG, which are part of the regulator's office and staffed from it. Both reflect the pattern of the industry as it existed before privatisation but, while the GCC is trying to re-organise itself to reflect the emerging gas industry,[387] the ECCCG is largely content with its current structure. The GCC (and the National Consumer Council)[388] felt its independent status gave it greater freedom to criticise the regulator than was available to the ECCCG,[389] a view not shared by the latter.[390] When we asked the Director General of Telecommunications which of the two models of consumer representation he preferred, his comment was "I think too much is made of the difference".[391] We would not favour a merging of the consumer representative bodies even in the event of the offices of the regulators being merged. We recommend that in any restructuring of the regulatory system after 1998, the Government consider also how to establish the most effective means for handling consumer complaints, taking account of the changing nature of the competitive markets for energy.

Resources of consumer representative bodies

167. We heard evidence as to whether the consumer representative bodies were adequately resourced to carry out their functions. The ECCCG made no suggestion that they needed more money, although some other witnesses thought that they should have increased funding in order, for instance, to carry out more research work.[392] The GCC, whose workload has quadrupled in recent years, has recently been under financial strain. The problem is now being addressed, partly through a review of the Council's structure and grant-in-aid conditions and partly through a licence change which makes it possible for British Gas to fund an overflow complaints facility.[393] We recommend that the Government, after consultation with the Directors General, the companies concerned and the consumer organisations, produce a three-year plan for the resourcing of these bodies. Appeals

168. There are various methods by which certain interested parties can appeal against decisions made by the energy regulators. Where a licensee does not agree with licence modifications proposed by the Director General, and the Director General wishes to proceed with the modifications, the matter is referred to the MMC. If a licensee objects to an enforcement order (an order requiring compliance with licence conditions) issued by the Director General, the licensee may use a special legal appeals procedure. Furthermore, any decision taken by the Director General (except those in relation to enforcement orders) is subject to judicial review.

Judicial Review

169. Judicial reviews of regulatory decisions may be applied for by any interested party on the grounds that the regulator has acted unreasonably, improperly or outwith his legal powers.[394] Many companies see judicial reviews as a limited option, particularly in the light of the narrow grounds on which they can be sought,[395] although Amerada Hess disagreed and called judicial review "the ultimate sanction ... the ultimate right of appeal".[396] In practice there have been few judicial reviews.[397]

Appeals to the Monopolies and Mergers Commission

170. Many witnesses agreed that the MMC had a valuable role to play in arbitration of major disputes, such as those over price controls, between the regulators and regulatees. Scottish Hydro-Electric told us that their overall experience with the MMC was constructive and that they found the MMC to be businesslike and practical.[398] However, several pointed out that there were also negative sides to an MMC referral. The TUC, for instance, told us that MMC inquiries were costly (Scottish Hydro estimate that their referral cost them £2 million),[399] lengthy, and complex.[400] Eastern Group told us that referrals were also expensive in terms of the implicit time commitment from senior management and that they could also have a detrimental effect on share price.[401] Indeed, Dr Dieter Helm told us that companies see reference to the MMC as the "nuclear option".[402] We recommend that the Government ensure that the MMC be adequately resourced to allow appeals, where appropriate, to be dealt with more speedily.

The need for an additional appeals mechanism

171. Many witnesses stressed the need for an intermediate appeals mechanism which could deliver speedy decisions on matters where a reference to the MMC would be unwarranted, and would avoid most of the drawbacks inherent in MMC inquiries. National Power, for instance, told us that there is a need for "a streamlined, issue-specific appeals procedure",[403] and South Wales Electricity (SWALEC) that "there is a need for a rapid and straightforward appeals mechanism to cover judgements which do not merit the weight of a MMC investigation".[404] Various mechanisms for such appeals were suggested. Eastern Group proposed reviews by the Office of Fair Trading (OFT),[405] and the EIUG referral to a new Utilities Commission.[406] However, despite the weight of evidence, we are not convinced. As ScottishPower pointed out "the current appeals process via the MMC is onerous and therefore encourages regulation by consent rather than arbitration".[407] The ECCCG agreed, stating that "we are not in favour of an appeals procedure beyond that which exists with the MMC ... if you had another appeals procedure, you would probably never get decisions".[408] Furthermore, appeals to the MMC on lesser matters, need not involve full-scale, six month investigations, as the Director General of Water Services pointed out.[409] We do not favour the creation of a separate fast-track appeals procedure.

172. Nevertheless, there is one aspect of procedures for licensee appeals that does concern us. There is, at present, no mechanism by which companies can appeal against a regulator's decision not to modify licence conditions. British Gas argue that such a procedure is essential, and that it will become more so as competition in energy markets is extended. We recommend that the Government, in consultation with the energy regulators and licensees, consider the need to enable licensees to appeal against decisions not to amend licence conditions and ways in which such appeals could be conducted.

Customer appeals

173. Appeals to the MMC follow disputes between the regulator and the licensee; there is no formal mechanism through which customers can force a review of a regulatory decision, except in the narrow range of cases where judicial review may be appropriate. The Chemical Industries Association (CIA), Scottish Hydro-Electric, ICI, the EIUG and others all supported the proposal that there should be an extension of the rights of the customer to appeal.[410] The EIUG argued that the absence of a threat of appeals from customers had encouraged the regulator to take a less strict approach to price controls than might otherwise have been the case and that granting customers the right to appeal would encourage the regulator to pay more attention to customer interests.[411]

174. There are, however, inherent problems in extending the right of appeal to consumer groups. Allowing individual consumers to appeal would "almost guarantee appeals against any regulatory decision" which is clearly impractical.[412] Even filtering appeals through consumer representative groups, as some witnesses suggested, could significantly reduce the speed of regulatory decision-making.[413] Customer appeals could also be counterproductive; by increasing uncertainty for regulated companies and thus raising the cost of capital; such appeals might result in higher prices to consumers in the long term.

Relationships between the regulatory offices and the Director General of Fair Trading

175. There is inevitably an interaction between energy regulation and general competition law.[414] The energy regulators can act concurrently with the Director General of Fair Trading (DGFT) in some functions under the Fair Trading Act 1973 and the Competition Act 1980. The Minister told us that "the reason for the concurrency is to make sure that there is no gap which falls between them".[415] However, Mr Eggar told us that there was a lack of clarity and the potential for conflict inherent in the duties of the regulators and those of the OFT.[416] In practice both the energy regulators have signed concordats with the DGFT which set out how each will act in matters where they have overlapping duties.[417] The concordats provide that, where the principal effect of action is on competition in the electricity or gas markets, the relevant regulator will act, with the DGFT acting in all other cases. Nevertheless, as the DGES told us, there is always liaison between regulatory offices in such matters. While there have been few problems with this system to date, we recognise that there is potential for conflict given the differences in statutory duties between those of the energy regulators and those of the DGFT.

347 Ev. p.251, 277. Back

348 Ev. p.277. Back

349 Ev. p.72. Back

350 Ev. p.43. Back

351 Ev. p.109. Back

352 Q.388. Back

353 Ev. p.32. Back

354 Ev. p.208. Back

355 Q.701. Back

356 Q.862. Back

357 Q.919. Back

358 Ev. p.299. Back