Examination of Witnesses (Questions 80-99)
MR STEVE
SMITH AND
MS SARAH
HARRISON
7 NOVEMBER 2006
Q80 Dr Turner: That sounds very useful.
It would be even better if you could force them to find a replacement
that was not a greenhouse gas?
Mr Smith: Indeed. We are assured
by our engineers that that is impossible, and actually what you
need to do is make sure that none of this stuff ever leaks.
Q81 Dr Turner: It always will. How
do you feel that this system places you in helping Ofgem to make
a contribution to what Stern is now going to require of all of
us?
Mr Smith: I think it helps us
in two ways. To be honest, I think we are probably different from
other government departments. Because we actually have the SD
duty, in some senses even in the absence of Impact Assessment,
whenever we are thinking of exercising any of our duties or powers
naturally SD is quite close to the forefront because it is one
of our secondary duties. For us what the IA process brings to
that, because we always have to consult on our Impact Assessment,
it really puts us on our mettle. We have to set out what we think
the impacts are. If respondents or people out there in the real
world think we have got it wrong, or we are not doing enough,
then it falls to us to set out quite clearly why we are proposing
to do something; and what we think the SD impacts are. If they
do not agree it gives them a route to come in and say, "Actually,
we don't think you're doing enough. We think you could be doing
more. We don't think you've thought about this aspect".
Q82 Dr Turner: Several of the memoranda
we have received suggest that Regulatory Impact Assessment are
more concerned with the drive for "better" regulation,
which of course most people see as less or easier regulation for
those being regulated. They see that there is something of a potential
conflict between that driver and the need for sustainable development.
What is your feeling about that?
Ms Harrison: I think it is right
to acknowledge that there are tensions but not necessarily conflicts.
I think better regulation is more dynamic than perhaps some people
consider it to be. It is not simply about deregulation; it is
about smarter and improved regulation to ease the burden on business
whilst ensuring the appropriate protection for customers. We very
much see it in that context. I think the process of setting out
and being required to set out all of these issues and noting,
if it is possible to do so, the tensions and testing them externally
through consultation really helps to identify where those tensions
are and give rising to helping us to consider possible ways forward.
It is not necessarily a conflict but I think it is fair to acknowledge
there are tensions.
Q83 Dr Turner: The National Audit
Office have had several things to say about Regulatory Impact
Assessments. They seem to doubt whether Regulatory Impact Assessments
truly affect policy decisions, or whether in fact they are more
often used as a post hoc means of justifying policy decisions
that have already been taken. How does your experience relate
to that?
Ms Harrison: I think it is probably
best to think about some examples. In answer to that question
Steve was talking about the process of the transmission price
control review, where we are using the Impact Assessment to think
about ways in which to incentivise the reduction of SF6. Another
example would be the way we set the price controls for the electricity
distribution networks in 2005. As part of that process we looked
at whether there was a need for an incentive to promote innovation.
There was a question about whether that really was something that
was going to be of value and use. We tested it through the Impact
Assessment process. We also additionally brought in some consultancy
to help look at that. The conclusion of all of that was that we
moved our position. We concluded that it was worth putting in
place an incentive on companies, known as the "Innovation
Funding Incentive" which is worth about £1-2 million
per company per year. What we have seen as a result of that interestingly,
and can share the detail with the Committee if it is useful, is
a real increase in response of the companies to their consideration
of R&D in part as a result of the new incentive arrangement
being put in place. That was a practical example of where a shift
in position as a result of the IA has also led to a shift in approach.
Mr Chaytor: That is a good response to
the critique. You have given us good examples of where things
have moved as a result of RIAs.
Q84 Mr Stuart: Another criticism
of RIAs is that they are tools of government; and they are an
intellectual Whitehall exercise far removed from events on the
ground and the key players affected by the policy. Do you think
there is any justice in that concern?
Ms Harrison: I have heard that
criticism and I think, again, I have to look at it in our own
context. We very much see IAs as the tool to set out policy proposals
and there is a framework for testing those. What makes that whole
IA process much more dynamic, which is how it should be looked
at, is not just in terms of the exercise on paper but the process
it gives rise to, which is the challenge from consultees; the
information input through the consultation process to make it
a really rich process, and therefore one that can properly inform
our decisions. I think if you apply it in that way then it will
not suffer from the criticism of being remote. I think it has
to be looked at in that way: it is not an end in its own right.
Q85 Mr Stuart: In your opinion, are
stakeholders sufficiently informed and consulted regarding the
process? Are there any areas of stakeholders who you feel could
be better acknowledged by RIAs?
Ms Harrison: Again, in our own
experience the consultation process, and indeed the process of
setting out policy proposals in the context of IAs and other consultations,
is really what our core business is. In terms of our consultation
process, pursued like a lot of the different measures, we make
sure we really do engage stakeholders, including those who have
environmental interests, those who have concerns in respect of
fuel poverty and those who have concerns with the breadth of our
work and consideration. That process is not just about written
responses. A typical policy development process that we would
pursue would have an IA as part of the paperwork, if you like,
but would very much be supported by seminars, by meetings, by
events, to really make sure we get the strongest, most effective
input.
Q86 Mr Stuart: That touches on Steve's
point about the fact that any of these exercises are bureaucratic
and meaningless if they are not accompanied by a culture of commitment
to genuinely make a difference. Do you feel that RIAs can at any
times be counterproductive? In other words, they allow someone
not to be challenged. Can you go through this process, especially
the sustainable development, with difficulties with monetisation?
Is there a danger that sometimes it becomes a way of not addressing
sustainable development in a more central way, in a way the policy
is made?
Ms Harrison: That is a difficult
one to answer. It is really abut the central point that Steve
and I have been making—it is about how you go about this
process, and what use do you make of it to your policy development
process. If you do not engage through the consultation process,
if you do not seek to really get the widest input from your stakeholders,
then there is a risk that that would be the case.
Q87 Mr Stuart: Do you ever find the
people with whom you deal do treat it as a paper exercise? Are
they able to tick the boxes without really challenging and innovating
and thinking deeply about how they do what they do more sustainably?
Ms Harrison: I do not think that
is our experience. As an organisation we get very good responses
from consultees to our proposals and through events we host as
well.
Q88 Mr Stuart: Is there any way we
can make the process more transparent?
Ms Harrison: Some of the measures
the Better Regulation Executive are considering in terms of the
way in which they are looking to develop the IA template and framework
are certainly about achieving greater accessibility, and that
in and of itself I am sure will help to contribute to getting
greater engagement. That is not the only consideration; there
are other aspects and we would support many but not necessarily
all.
Mr Smith: We went through our
own exercise in Ofgem of trying to improve the quality of our
product and what we put out, and as a result we redesigned all
our documents to try and make them more accessible. I think some
of what the BRE and the NAO are saying is part of the problem
with many RIAs—it is just the way they are constructed and
presented; they are not very accessible. Going to your point on
transparency, it is really delivering on some of the problems
there—short and simple, one-page summaries at the front
that anyone can pick up and actually understand what the thing
is asking them to do. Yes, I think there are things that can be
done in terms of clarity and accessibility of the document itself.
Q89 Mr Stuart: The NAO also sampled
a number of RIAs and they said that few of them included all the
social and environmental impacts that they might have been expected
to. Why do you think this might be? What can be done to improve
this?
Mr Smith: It goes back to what
I said earlier. I think it is difficult and, therefore, unless
there is really that commitment at the top of an organisation,
then it is just a natural human thing that, "This is going
to be hard and, therefore, let's not go there". It comes
back to making clear that it needs to be in there, but then having
that commitment right from the top. I think the NAO and BRE have
both suggested that you need to have the challenge. Part of my
role, because I have the environmental brief, is that I get to
see the Impact Assessment we do. If I see it and think that that
section is lacking or not really up to scratch then I will say,
"Go back to the drawing board". That does not always
make me popular, but you need to have someone in the organisation
whose role it is to do that.
Q90 Mr Stuart: The NAO said, something
to do with the scoping of the RIA, this takes us to a technical
level which precludes proper discussion of sustainable development.
Do you agree with that?
Mr Smith: I think it is inevitably
a risk. It is relatively easy for us as a reasonably small organisation
for me to have that role, but I could imagine in a big department
you have got lots of people who are detailed technical experts
and probably do not have expertise in this area. Unless there
is someone who is going to pull them back and push them onto that
route then it is probably quite natural that is going to happen.
Q91 Mr Stuart: Can you expand? I
am particularly interested in any ideas you have as to how the
system can be improved so that in other departments sustainable
development is fully addressed rather than being buried by technical
detail.
Ms Harrison: I would like to come
back to my introductory remarks which is what Steve's and my role
is, in my corporate affairs function and as a member of the Board,
which is to make sure that across the organisation on behalf of
the board the organisation is meeting its section 5A responsibilities;
and that the organisation is equipped to do that, by promulgating
advice and guidance and, wherever possible, supporting this with
training as well. Steve's role is in a similar vein but very much
from an environmental perspective and also as a board member.
In terms of the top of the organisation, we have got the commitment
to ensure these processes are pursued.
Q92 Mr Stuart: I suppose I was trying
to move away from your organisation. As you say, you are the regulator
per se; there are other organisations that do not see that as
their primary purpose and perhaps are less committed to trying
to find out ways, and you have worked on this, to be applied elsewhere.
Ms Harrison: One other practice
that we have pursued is the role of scrutiny; and external scrutiny
is very important. In our case we put a sample of our own IAs
out to external scrutiny and we took the product of that, warts
and all, in terms of the feedback. The feedback showed our practice
was good in some areas and less so in others. We also published
the outcome of that external review. That sort of scrutiny role
has an important place.
Mr Smith: That went through an
independent academic and that is something which big government
departments could do. We published the report we got back which
said, "Here's what you're doing well with your IAs. Here's
what you're doing less well". That is a simple thing people
could do which pick up and point out some of these problems.
Q93 Mr Caton: You have mentioned
some of the difficulties in both quantifying and presenting the
environmental impacts in RIAs. The central issue seems to be how
to present environmental impacts in a manner that can easily be
compared with the economic impacts. Government officials told
us that if the impact cannot be quantified it is often not included
at all. How can environmental impacts be presented on an equal
footing with costed economic impacts?
Mr Smith: We can give you examples.
Some of the SD issues we deal with are easier. In some senses
the carbon-related issues I think nowadays lend themselves much
more to monetisation and putting them on that equal footing. Where
they do not we use what we call "qualitative assessments";
so we use scoring out of 10 and things like that to try and develop
some ability to compare like with like. We do not just have the
problem in SD in our area, for example, when dealing with security
of supply and other things; not all issues there can be monetised
or can we do hard quantitative analysis. We have got quite good
in RIAs of doing qualitative analysis and saying, "Clearly
this is not good for the environment", or, "It's not
good for these reasons". We cannot quantify the cost of that,
but that has got to be weighed up against the benefits on the
other side. I do not think I can give you a precise answer, rather
than it is just putting effort into thinking about how to do a
qualitative assessment if you cannot actually do a quantitative
one.
Q94 Mr Caton: Could you expand a
little bit because I think that is very useful. You say carbon
monetisation is a runner—can you give us examples of other
sustainable development issues where you use other approaches?
Mr Smith: Possibly one of the
most difficult ones we deal with is the whole issue of visual
amenity with transmission lines and things like that. That still
exercises a lot of thought within Ofgem, because you can go and
do surveys of people who say to you, "I'd be willing pay
X not to have a line near my house", but you are always a
bit sceptical unless they are actually paying it! That is an area
where we have had to think about qualitative as well as quantitative
assessment.
Q95 Mr Caton: Are you confident in
your Impact Assessment that the environment is weighted as equal
to environmental impacts?
Mr Smith: I would say I am confident.
I think we have got better. I think probably going back a few
years I would not have been able to answer that way, but I think
a combination of the change in our duties and also some of the
hardening up of the scientific evidence in particular around carbon
has made us more confident. There is always that tension for us
because we are protecting customers' interests and worrying about
costs. That is that trade-off. As the scientific evidence has
strengthened we have got more confident in being willing to spend
money in essence on the customer's behalf to do things, to make
the network, for example, more sustainable.
Q96 Mr Caton: Continuing on the question
of carbon, the Environmental Industries Commission spoke to us
last week and they proposed a requirement for RIAs to assess the
impact of policies on carbon emissions, and for this to be included
on the summary sheet. From what you are saying, that is what you
are doing?
Mr Smith: Yes. To be honest with
you, because the energy industries are such major emitters, in
some sense you would think we were mad if we did not do that.
I guess from our perspective carbon is always at the forefront
of anything we are doing; but that is just the nature of the businesses
we deal with which are such major carbon emitters.
Q97 Mr Caton: Is there a danger,
concentrating on carbon, that you do not focus on other environmental
issues?
Mr Smith: Yes, there is a danger,
but I think we are alive to it. As I have said there other ones:
visual amenity; and the energy sector is a major emitter of airborne
pollutants—it is not just carbon—sulphur dioxide,
nitrogen oxides. I think there is a danger but I think we are
alive to it. I think the rigour of the process, because we have
to consult on things, also means that if we have missed something
we have got that safety value that people will come back and say,
"You've got to look at this impact as well".
Q98 Mr Caton: Are there any other
areas where you think that in future monetisation will be appropriate
in environmental terms?
Mr Smith: Nothing immediately
springs to mind in our areas. As I have said, with most of the
airborne pollutants we are moving towards the idea of trading
schemes and permits and things like that, which makes hard quantitative
analysis easier. Visual amenity I think remains the most difficult
because you can go and ask people what they would be willing to
pay but unless you actually ask them to pay it then you will always
be sceptical of the results.
Q99 Mr Caton: Do you think the urgency
called for in the Stern Review is going to affect the future shape
of RIAs at all?
Mr Smith: It goes back to your
earlier question, I guess. One would hope it would make more of
the IAs carried out within Government think about the whole carbon
issue. I was reading the evidence of the previous session and
I think Anglian Water and one or two others saying that carbon
was not always thought about. One would hope that the increased
awareness and with the Stern Report out there that it would push
it to the forefront of people's minds in a way that it has not
potentially done in the past.
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