Energy and Climate Change Committee - Minutes of EvidenceHC 645

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Oral Evidence

Taken before the Energy and Climate Change Committee

on Tuesday 10 September 2013

Members present:

Sir Robert Smith (Chair)

Ian Lavery

Mr Peter Lilley

Albert Owen

Christopher Pincher

John Robertson

Dr Alan Whitehead

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Examination of Witness

Witness: Mr David M Gray, Chair of Ofgem candidate, gave evidence.

Q1 Chair: Good morning, Mr Gray.

Mr Gray: Good morning.

Chair: Thank you for making yourself available for this pre-appointment hearing. Before we start, I should declare my own interests in the oil and gas industry, and in particular my shareholding in Shell as it would be relevant to your work.

Could you start by introducing yourself to the Committee and telling us a bit about your professional background?

Mr Gray: I was finding it slightly difficult to hear you there. I have hearing aids that sometimes don’t pick up things.

Chair: I have a bit of a croaky voice.

Mr Gray: If you think I haven’t heard everything, please just tell me again.

Thank you for inviting me here. I am very pleased to be here. I think there is a very important job to be done as Chair of Ofgem and I would like to do it. You asked for a bit about my professional background. I have been in the energy sector in one way or the other for most of my career, normally in some sort of financial advisory role, then as a regulator. I have been a regulator in various forms for the last 10 years, initially at Ofgem, more recently looking at the aviation and water sectors, which has given me quite a wide perspective on how the process of regulation works and how the issues transfer or don’t transfer across sectors. I think my time in stockbroking and investment banking has given me a good understanding of how private sector companies actually work and the motivations that they might bring, which are sometimes not quite what you would expect from studying the economics textbooks, so the experience of the market from that side is useful to me. I think I bring quite a wide range of background and knowledge to this job if I am confirmed in it.

Q2 Chair: What motivated you to go for the job?

Mr Gray: Various people have asked me why I want the job, normally in the sense of, "Why on earth do you want the job?" rather than why, but I think it is easy. As I said, I have been in the sector for most of my career and the thing I have learned, particularly in the last 10 years looking at regulators and working as a regulator, is the need for a strong independent voice for the consumer in what is a very complex and fast moving sector, and I think I can do that. My experience has just built up over the years to put me in the position to do it and it is an important job that I would like to try to do.

Q3 Chair: When you were thinking about the job, obviously you looked at Ofgem and its work to date. Is there anything they have done to date that you think could have been improved upon?

Mr Gray: I think you can always improve on things. There are some things they have done very well; the regulation of energy networks is one; an increasing focus on enforcement and on bringing issues that might affect the consumer into the public gaze is another. Anybody who looks at the level of consumer trust in the energy market at the moment would have to accept that it must have been possible to do something better along the way. Consumer engagement in the market and trust of the companies is probably the most difficult, potentially contentious area that Ofgem has to look at at the moment.

Chair: Various colleagues have themes of questions they would like to pursue.

Q4 John Robertson: Welcome. I am going to ask you a couple of questions about your experience in the private sector. How will that experience with the private sector help in your role as Chair of Ofgem?

Mr Gray: I think it is the point I made about understanding the motivations of companies in the sector. I have looked at companies from the outside as an investment analyst advising people on investments, and I have looked at them from the inside as an adviser in corporate finance. I think that has given me an understanding of what makes these companies tick and what their motivations are. It is quite important to understand that if you are regulating them. I have found there is a tendency among economists to assume that everything should work to the textbook, and in practice it sometimes doesn’t; other things are more important to them. So I think that that experience is important.

The other thing I have learned over the years is the importance and the limitations of markets. Markets can be very effective things and they can also go wrong, as the financial markets have shown very clearly in the last six or seven years. I come to the job with a practical man’s experience of what a market is as opposed to a theoretical one.

Q5 John Robertson: Your recent work experience with Pitkin and with Halite is largely in the energy production and storage sector. Ofgem is principally responsible for energy generation and distribution. Do you think there is a gap in your experience, or do you think you can fill in there?

Mr Gray: Over the years I have advised companies that have been involved in all aspects of the industry. There are some I know more about than others, but my recent experience reflects things I was particularly interested in and therefore keen to get involved in when the opportunity came up rather than things that have been a specialisation through my career.

Q6 John Robertson: Are you still chair of that company?

Mr Gray: Of Pitkin?

John Robertson: Yes.

Mr Gray: Yes, I am.

Q7 John Robertson: Do you see that being a problem with your new job?

Mr Gray: No, I don’t think so. I can see that there is the risk of a perception of a conflict because it is an energy company. In practice, I think the real risk is quite limited because it is an upstream oil company which develops exploration projects and operates in the Far East and South America, and there are no activities in the UK or Europe, so the overlap with Ofgem is pretty well zero-but there is a perception point as well: it is an energy company, Ofgem is an energy regulator, so I have to be very alive to the risk of perceived conflict. I have discussed that with DECC and the Cabinet Office and was proposing to put some safeguards in place, an exchange of letters with the company to set out the problem and a review of the position with officials at DECC after a period to make sure that there has been no difficulty.

Q8 John Robertson: There are a large number of small and medium enterprises in the development of renewable energy. What experience do you have of working with SMEs?

Mr Gray: Not much directly, but when I was at Ofgem I was in contact with such people because they had issues with getting access to the grid and they needed to talk to us about it. Also recently I did a review of Ofwat for DEFRA and the Welsh Assembly Government and one thing that struck me, and I was quite surprised about, was the depth of feeling coming from SMEs about the prospect of competition in the water sector and their nervousness about it because of the experience they had had in the energy sector. So I have had a lot of contact with such people. It is not a sector I can claim to have worked in.

Q9 Albert Owen: On the interest that you have as the chairman of the petroleum company, the perception is that Ofgem is an independent regulator. Why do you feel the need to remain as chairman of another company?

Mr Gray: I think it is very helpful in a role such as the Chair of Ofgem to retain some direct involvement with other companies. The way I look at it at the moment is I think involvement with the CAA will give me an interesting perspective on another regulator and involvement with Pitkin will give me the sort of hands-on commercial sense of how companies make a decision.

Q10 Albert Owen: But you have that experience already. You bring that experience to the job. My question is, why do you need to continue it when you admit there is a perception and the Cabinet Office and DECC are of the opinion that this could lead to further conflict in the future and you may have to step down? Why not come clean in the beginning and say, "I want to head this, I want to give leadership and I want to maintain its independence, so as a consequence I am willing to give up being chairman of the petroleum company"?

Mr Gray: DECC have told me that they don’t perceive a conflict at the moment. I do take your point, but that is the starting point.

Albert Owen: But it is an energy company.

Mr Gray: If there had been a clear conflict in reality I would, of course, have stepped down from it. One answer to the question is that I was brought in as chairman a year ago and there are some things that I needed to get on with doing, which are not finished yet, and I would be disappointed to have to leave in the middle of that process. It would not be an entirely simple decision just to stand down from that job and therefore, given that I think it will be helpful to me as well, I would prefer to keep it going. But I do understand that Ofgem takes absolutely priority in terms of calls on my time and attention, and that if the conflict perception does show any signs of being an issue then I would have to do something about it.

Q11 Albert Owen: At what point do you think that could happen in the future? What would be different that your company would be doing where the conflict comes in? I am trying to be as objective as I can here. The issue for many people, including myself, is that the new head of Ofgem, the independent regulator, is also the chairman of a private company. You have said that one of the reasons that you don’t want to give it up is because you have work to do and you want to see that through. I think that in itself clouds the whole thing. I would put to you clinically that it would be better to step down before you take the role on rather than muddling through afterwards and finding out there might be some conflict later down the line. I understand the rules, I understand the Cabinet Office have spoken to you, but I think it would be a principled thing to do now.

Chair: One of the conflicts that they saw potentially was, say if the company decided to apply for licences in the North Sea where obviously the gas market in the UK would be relevant to the interest, that kind of thing would definitely trigger-

Mr Gray: I think that would make it more difficult, definitely. Again, Ofgem does not regulate the upstream oil and gas business, but I take your point and I take DECC’s point.

Q12 Albert Owen: You did not quite reach the second part of my question. At what point do you think that you would come to the decision that you should voluntarily step down? What would the company be doing differently?

Mr Gray: If Pitkin were to operate in the UK that would probably be such a decision point.

Q13 Albert Owen: But there again one of the issues in a political debate on profits and prices is that prices are controlled globally. This is a company that is operating in a part of the world that could affect global prices.

Mr Gray: Yes, but it is a small company. It is a specialist almost technology company. It develops geological projects. It has a very small staff of expert geologists and geophysicists. It is not in a position of having any impact on or really any interaction with the energy market.

Q14 Mr Lilley: Do you have a vision for what Ofgem may become over the next five years, and if so what is it?

Mr Gray: I know what I would like it to be, which is a highly respected and trusted regulatory body, one in which consumers have faith. To achieve that it needs to get the industry into a position in which consumers have more faith, because I think that the two go together. If we are talking about the vision and high-level outcomes that I would like to achieve, it is that restoration of a degree of more confidence in the market. I think one has to be realistic. Energy bills are never likely to become uncontentious, but I would like to see more trust in the process.

Q15 Mr Lilley: What do you think the biggest challenges will be over the next five years?

Mr Gray: I think there are three areas of challenge. One is to carry on doing the basic monopoly regulatory business of networks. We are still doing a sequence of price controls and making sure that the network business is regulated in a way that allows the companies to respond to the new demands from renewable energy and so on. That is important. The second area is trying to make the supply market and the generation market work better, or at least trying to make them work in a way that gives people more faith that they are working as proper markets. That clearly is a challenge. In among all of that there is a challenge in maintaining a sufficient perception and reality of a stable regulatory regime so that you leave the industry in a position to attract the necessary investment. To me, those are the three things: basic network regulation, improving the market and attracting investment.

Q16 Mr Lilley: Ofgem has a high-profile board and you will be its leader. Do you have any experience of leading a high-profile board or anything analogous?

Mr Gray: No, I don’t. The company that I am chairman of is a small company. It is useful experience, but it is not the same sort of thing. I have sat on the board of the CAA for nearly four years now. I sat on the board of Ofgem under John Mogg for five years, and I have advised boards of large quoted companies. So it is territory that I am familiar with, but the simple answer to your question is, no, I don’t have experience of that.

Q17 Mr Lilley: What will be or what is normally your leadership style and how do you get colleagues to do your bidding and give their best?

Mr Gray: I have always been consultative by nature. I like to talk to people and I like to try to get agreement on issues rather than take a personal view and drive them through. I have found it works better. It gets better decisions and it leads to a more harmonious approach. That is my style and that is what I will try to do on the board and more widely with stakeholders.

Q18 Mr Lilley: To some extent you have touched on this already, but given that you will have responsibility for Ofgem’s credibility, do you see any current threats to its reputation and how would you mitigate them?

Mr Gray: I think there are always threats. I was quite taken aback to wake up to the radio last week on BBC’s Energy Day and hear the views that were expressed from the consumer poll about the level of dissatisfaction and the striking figure that 70% thought that the industry should perhaps be nationalised. There are clearly challenges there, and that sort of thing is a risk to the regulator’s reputation. I don’t think you should look at it, though, as a regulator, in terms of risks to your reputation. Your reputation will follow if you are doing the right thing and if you are getting the right outcomes for consumers. So the risks, basically, are not getting it right, and I have highlighted the main areas in which I think Ofgem needs to get it right.

Q19 Christopher Pincher: Mr Gray, hello. In answer to Peter Lilley’s question about challenges facing Ofgem, you said that improving the market is important. Can you tell us what you think are the three big challenges facing the energy market at the moment?

Mr Gray: I think establishing a better level of consumer engagement with the market is a challenge. It is relatively easy to exercise choice if you are buying petrol or going to a supermarket. It is clearly more difficult if you are thinking of changing your energy supplier. It is more akin to the difficulties of changing supplier in financial services. People are not comfortable with it, so it is establishing a degree of comfort with the prospect of changing supplier. I would not be fixated by the rate of switching. What is really necessary is that people need to feel able to do it and that that willingness to do it exercises an influence on the market.

I think there is another challenge in fitting the Government’s policies for stimulating investment in generation and in the forms of generation it wants into the market, which requires some thinking about. There are some things that are very much in Ofgem’s remit-I suppose the project to improve liquidity, which is important in many respects for new entry and for the new contracts for difference mechanisms and so on. I had not thought of a list of three but I think those would probably be where I would start.

Q20 Christopher Pincher: A pretty good three. The first example you gave was improving consumer comfort with switching their energy supplier. Currently, 55% of consumers do not even bother looking to switch. What would you regard as a successful hit rate for your tenure at Ofgem if you could see X number of consumers looking more comfortably to switch their energy supplier?

Mr Gray: I have thought about this and I am not sure I know the answer, to be honest. I know that Ofgem is thinking about it in terms of how they would measure the success of their retail market reforms. I would like to see what comes out of that work. As I said, I do not think it is just a quantitative measure such as how active is the market, how much switching is there, because you could have a market that was working quite well if the suppliers were aware that people would switch if they stepped out of line. So it is not just a volume thing. I think it requires some real consumer research and some taking of the pulse of the market somehow to see if things are improving. There are other things you can do that are much more tangible, such as making sure that the measures to make bills simple and to make information available have some effect, but in the end the outcome you are looking for is a feeling and it is difficult to measure a feeling directly. You have to look for its effects.

Q21 Christopher Pincher: The Financial Times had an editorial recently in which it said that Ofgem has two objectives, "One is to ensure consumers get a fair deal by policing the suppliers and the second is to ensure the lights stay on". Given that you have said that you believe that Ofgem should present a strong independent voice for the consumer, do you think that the first of those two examples is more important than the latter and do you think that they are mutually exclusive?

Mr Gray: No. I think that if you look at what is in the consumer interest generally it is obviously important that the lights stay on, and hence my emphasis on investment and a regime that is conducive to investment. We need that. If that was not the case then I think people would be worrying rather more about that than about whether the market is working effectively. But there is always a pull between security of supply, Government policy objectives, particularly on climate change, and the cost to the consumer. Those three things are never going to be lined up pointing in exactly the same direction, but security of supply and climate change are aspects of interest to the consumer and in the consumer interest, so I think Ofgem has to balance those things. I find it difficult to choose one of them and say, "That is more important" in the way you are asking me to.

Q22 Christopher Pincher: What about gas storage? You know that the Government announced a couple of days ago that it takes the view that more of the same in the gas storage market is appropriate-there should not be any intervention-and yet Alistair Buchanan said that we face a capacity crunch. He said, "No new nuclear, no new clean coal, no new carbon capture this side of 2020, so we’ll lean on gas and gas will account for 60% of our power station needs instead of 30% as it does today. In order to get hold of gas we’re going to have to go shopping around the world. Just at the time that we are going tight on power stations, the world is going to get tight on energy gas prices so you have got a double squeeze." Do you think, therefore, that the Government’s gas storage strategy, which is to leave it to the market and not intervene, not push for more storage capacity, is a sensible policy?

Mr Gray: I think it is important that we have adequate gas storage capacity. I was, as you will have seen, a director of a gas storage company and that was because I thought it was an interesting area where things needed to be done. It is not clear to me, even with that experience, whether active Government intervention is necessary to encourage storage investment. There is a range of projects out there, some of which I think could be economic under the existing rules and others might not be. I would want to watch carefully and see if over the next two or three years there are signs of gas storage investment actually coming through and if necessary revisit it.

Q23 Christopher Pincher: I have heard from some companies like Stag Energy that they are concerned at the announcement. I am not making an argument for intervention per se. I am simply saying that there are concerns. How would you reflect on those concerns?

Mr Gray: There are other things that can encourage investment in storage. The thing that should encourage investment in storage is companies feel that they need it in order to serve their customers. There are things that Ofgem is doing, such as a review of the cash-out arrangements that should increase the incentive to be confident you can supply by increasing the penalties for being short. At one level that is an incentive for investment in gas storage. There are all sorts of forces that I think should lead supply companies to be interested in having storage and, as I say, it is an open question in my mind as to how much of it will come forward without a direct incentive. I think some will and then I would like to see the scale of it.

Q24 John Robertson: One of the important things to this Committee is our electorate as Members of Parliament: these are the people we answer to. You are going to have to deal with members of the public, the layperson, the person who does not really understand the technicalities of the business, and also you are going to deal with the companies who do understand the technicalities. Somewhere along the line you are going to have to marry the two of them. What experience do you have in doing that?

Mr Gray: I have limited experience in a direct sense of understanding the views of members of the public. You can see my CV; it has not been something I have done very actively. I don’t think that is the only answer to the question, though. I have worked at Ofgem, and when I was there I looked at the ways we used to get consumer views into the thinking process of the organisation. When I arrived that was very limited and I thought we were very vulnerable to assuming that we knew what the consumer thought and I was very keen for more to be done to try to make sure that we knew.

I also had 12 months of looking at the water industry. I described it as a review of Ofwat, but the other aspect was a review of consumer representation in the water industry and the Consumer Council for Water. I spoke to a lot of the consumer representative bodies in that and heard what they think. I regard it as very important to understand what the issues are, what people are worrying about, to get expert input into it. Input from people such as yourselves is obviously about as good as it can get because you are in contact with your constituents, who are consumers, all the time.

Q25 John Robertson: Ofgem did not come out too well in our last report, and part of the problem was transparency. That would suggest to me there is a lack of communication between Ofgem and the general public. How are you going to rectify that problem?

Mr Gray: I think you are talking about two different aspects of transparency. I think Ofgem is a transparent organisation in the way that it makes its decisions and deals with stakeholders-consumers in particular.

Q26 John Robertson: But it is your job to make sure that everybody else is transparent. You are the regulator at the end of the day.

Mr Gray: Absolutely, but the point that you as the Committee raised in the report was about transparency of the companies of information on profits and so on, which I think is a particular aspect of it. I will answer that, but before doing so I would like to make a more general point, which is that I think it is really important that regulators are transparent in everything they do, in how they make their decisions, how they explain them and how they deal with stakeholders.

If you turn to the point at issue, which was the extent of transparency that should be imposed on the companies, I don’t think I can give you a definite answer as to what I think on that yet. I have read your report. I have not heard Ofgem’s response in detail. I know they are developing a response. But I can tell you how I would look at a question like that and I would try to take it back up to its higher principles level. There are four things I would say. First of all, transparency as to how the companies operate is a good thing in principle. There is also a point about how you use advisers. Regulators use advisers a lot, specialist consultants, to fill in gaps in expertise or areas where they just can’t afford to have it in-house. You use advisers for advice. You don’t farm out decision-making to them, so it is not necessarily unreasonable for a regulator not to take up the recommendations of an adviser. The reasons they might not are ones of either policy or proportionality.

Q27 John Robertson: I am much more interested in how you are going to communicate all that to me as a layperson. As an ordinary member of the public, I need to have a certain amount of faith in my regulator, because at the end of the day they are the people I hope will support me. Communication is a two-way street, so you need to listen to what people are saying and then, of course, you have to communicate the reply. I don’t think Ofgem have been particularly great at that, so how are you going to improve it?

Mr Gray: I think on this issue clearly they were not. It is not very helpful to have them coming before you and their adviser coming and saying something different. I don’t know what went wrong there. But coming back to my point about how I would look at it, the things that might persuade you against full transparency would be, first of all, if you think the cost on the companies is disproportionate, and secondly if you think that going too far might have negative impacts on your other objectives. There is a level at which if you impose complete transparency on companies you inhibit the competitive process. So that is how I would look at it. I would start from your viewpoint, which is clear, that transparency in this area is a good thing, and I think Ofgem did work well to start providing more information on where the profits are, how companies make them and so on, and it is a fair question to ask whether they should go further. I thought the way you put it in the report was exactly the right way to put it, which was that Ofgem should look at the overall impact, the overall effect in terms of the consumer benefit relative to the imposition on the companies, and that is what I would do. I don’t feel ready to give you an answer as to exactly how I personally would respond to your criticisms. I would like to see what Ofgem has to say first.

Q28 Albert Owen: I would like to go back to some of the points that Christopher Pincher made with regard to the consumer role. On your website you say that one of your primary aims is to protect the interests of the British gas and electricity customers. A key part of the remit is to champion consumers’ rights. What experience do you bring to this and how would you use that for the organisation to be seen as an independent champion of the consumer?

Mr Gray: You started by talking about one of our duties, or part of our duties. Actually it is very much the primary duty. If you look at the hierarchy of things that Ofgem is required to do, protecting the interests of consumers is the primary duty. The others are subsidiary to that, and either flow from it or put it in context. So it is absolutely the case that that would be my main focus. Sorry, I didn’t quite catch the second half of your question.

Q29 Albert Owen: What experience can you bring relating to consumer rights from the energy sector? What do you think you would bring that adds to that?

Mr Gray: What do I bring? As I said, I bring some experience of the consumer side of things, but I have not worked actively in consumer bodies. I was therefore very pleased to find that there are two excellent consumer representative type non-executive directors on the board in David Harker and John Howard. As I said earlier, I was pleased to see that Ofgem has developed its work in getting consumer views into the organisation through its Consumer First Panel, through specialist groups to advise it and through interaction with the consumer representative bodies such as Citizens Advice, Which? and Consumer Futures.

Q30 Albert Owen: You mentioned earlier about a recent poll and the lack of confidence that people have and the feeling it should be nationalised. Do you have concerns about, for instance, the strength of the Big Six in the market share? Do you think that in some way clouds it and the consumer feels that there is a dominance there and that you as the regulator is a bit of a poodle?

Mr Gray: I think one of the most striking things about the market is the sheer concentration of the market in the Big Six. It is not unusual to have six major players; it is very unusual to have such a small segment of the market occupied by anybody else. It is literally just 2% or 3%. Therefore, from the consumer standpoint your choice is only one of the Big Six really, whereas you ought to have a choice of one of the incumbents relative to an up-and-comer or somebody who does something slightly different at the margins to meet your particular requirements. I think the sheer concentration of the Big Six is a problem. People do not see a big difference between them. They are just large energy companies. One of the aspects of getting more engagement and more trust in the market would be if we can encourage more new entry, more new avenues for people to get involved.

Q31 Albert Owen: Will you give that priority?

Mr Gray: I think it is implicit in the things I have said and in what Ofgem is doing in retail market reform but, yes, to be clear, I would.

Q32 Albert Owen: If I read your CV correctly, you were involved in the industry at the time of privatisation of the gas industry.

Mr Gray: I was. I was a stockbroker in those days, and I was involved in marketing the issue to institutional investors.

Q33 Albert Owen: Something I have raised a number of times with your predecessor and with Secretaries of State and Ministers is consumer rights for those people not on the mains gas network. Would you, as head of the organisation, like your organisation to have a wider remit to include them? Would it be possible? The reason I mentioned your background at that time is because it was quite obvious at the time of privatisation who the regulator was going to look after, but times have changed. We hear now about the dual fuel and that people on both mains get a bonus, whereas people not on the mains don’t get it. What is your view on that, and how would you take this forward? Do you think the regulator should have a wider remit?

Mr Gray: At the risk of appearing to duck the question, I think it is-

Albert Owen: Well, everybody has, so you wouldn’t be the first.

Mr Gray: Okay, I will try to do a little better than that, but I think it has to be a policy decision for Government because the legislation within which Ofgem operates talks entirely about the passage of gas through pipes and electricity through wires. I forget the exact wording, which was presumably explicitly meant to exclude what you are talking about. Therefore, it would need a change in the regulator’s duties.

Q34 Albert Owen: But only because those were not nationalised at the time so they couldn’t-

Mr Gray: Having said that though-and this is not an area in which I would claim to be an expert-if there are issues with off mains customers and the ways they are supplied that Government feels would be improved by regulation, I see no reason why Ofgem should not do that. I do not think it is for Ofgem to try to extend its area outside its legal remit, but it is part of the domestic energy market and it would be a feasible approach to look at it.

Q35 Albert Owen: But it is something you feel you could do? That is interesting.

Mr Gray: It is a difficult area to have great effect in because it is a relatively small market, a relatively small number of players. It would have some of the issues of the wider energy market, more so, but if Government wanted Ofgem to see what it could do to improve that I-

Q36 Albert Owen: But in many areas a lot of the customers and the population is not on the gas mains. There is a huge percentage in certain areas.

Mr Gray: It is very high in some areas, and that is because of the cost of extending the mains system.

Q37 Albert Owen: My argument is that those customers do not get the same champion representation from an organisation like yours.

Mr Gray: No, and I think it would be a perfectly reasonable approach to policy to ask the regulator to do that. I don’t think it is for Ofgem to take it under its own initiative though.

Q38 Dr Whitehead: A lot of Ofgem’s activity is very much involved with and influenced by what goes on as far as EU policy is concerned. What experience do you have of dealing with EU institutions, particularly with energy-related directorates?

Mr Gray: I have some. When I was at Ofgem initially, I watched us go from being what I thought was quite an ineffective organisation in Europe-Ofgem’s style was to go over to Brussels and tell people how it should be done, and basically rub feathers up the wrong way when they got there-to the position now, where I think John Mogg has been very effective in making Ofgem more effective in Europe. It is not just a point of academic interest; it is of real value to UK customers, because we need access to gas from Europe and we need that market to work properly in a liberalised fashion to allow us to get to it. So it has been an important process and I think it has gone from being an Ofgem weakness to an Ofgem strength over the last 10 years.

I have also been on the Civil Aviation Authority board for nearly four years. Europe is even more prevalent there, because there is a European regulator and so the duties of regulation are split between the European body, EASA, and the national regulatory authorities. I have had experience of seeing how that plays out in what is quite a complicated landscape. I have never worked in Brussels, I have never been involved with the Commission, but I have watched two regulators dealing with Europe over the last 10 years and seen a lot about why it is important and how it can be made to work.

Q39 Dr Whitehead: What would your view be of how Ofgem now might exercise a role in a European energy market that has a number of different calls for liberalisation, centralisation, Europe-wide transmission networks, interconnection and so on? What are your thoughts on how Ofgem might be best placed to represent the UK’s interests in that respect?

Mr Gray: Partly as a result of the work that has been done by Ofgem, I think the general thrust of European policy on energy markets is helpful. It is towards liberalisation and access to the gas networks, the transmission network, which as I said we need to be able to access for import purposes, and it is about liberalisation and improvement of competition generally in the market. So I would expect what Ofgem is trying to do in the main to be compatible with and in line with what the Commission is trying to do. There are certain things that now under legislation are specific requirements for the national regulator in energy to do. There is a need to make sure that Ofgem’s activities are compatible with both the Government here and the pressures coming from Europe. But as I say, I think that broadly speaking they are in line and I would see Ofgem’s role as being to try to maintain that position, trying to make sure that the thrust of European policy and scenarios that affects us is still moving in a way that is compatible with what we are trying to do in our domestic market.

Q40 Dr Whitehead: From the point of view of the UK, Ofgem will work, and does work, very closely with DECC, but is independent of ministerial control. How would you see the line that clearly Ofgem will have to walk along as far as that relationship with DECC and independence of DECC influence is concerned? How do you see that developing over the next few years?

Mr Gray: I have quite a simple view on independence. I think it is extremely important that the regulator is independent and, when it needs to, makes its decisions independently on the basis of the statute governing it, but equally I see absolutely no reason why that should prevent a regulator from working closely with Government. One of my observations on Ofwat was that I thought it was not particularly good at working with the other players more generally, not just Government but Government agencies in the form of the Environment Agency and the Drinking Water Inspectorate. I do not see a conflict as long as both sides understand what are the specific areas in which the regulator needs to make independent decisions. That does not have to have any disruptive influence on a constructive relationship with Government.

Q41 Dr Whitehead: Do you think that understanding is sufficiently developed at the moment?

Mr Gray: I think so, yes. When you get into processes in practice people get irritated with each other, but I think the relative responsibilities in most areas are reasonably clearly set out. I think there is more that could be done. I have seen, for instance in the area of Ofgem’s E-Serve activities, which are implementing schemes for Government, that they have drawn up a new memorandum of understanding, which I think is quite useful. As a document, an MOU is just a statement of intent, but I think the process of drawing it up has been very helpful between Ofgem and DECC in clarifying that understanding of who has exactly what role and what can be expected on both sides, and that approach is applicable more widely.

Q42 Dr Whitehead: Do you think, conversely, the Chair of Ofgem should attempt to have a hand in or influence Government energy decisions?

Mr Gray: Definitely if asked, and I would hope to be asked, because I think Ofgem can provide valuable technical expertise in policy development, but I think it has been very clear in recent years that the Government expects a distinction to be made between policy that is for Government and the fulfilment of duties that is in various respects for the regulator. It is a good example of my point about independence. It does not need to stop you being involved and if you are prepared to be involved constructively I would expect you to be asked for advice. I would expect myself to be asked.

Q43 Dr Whitehead: How would you go about being asked? You said you would be interested in, or you think it would be a good idea to have, some form of role in terms of Government decisions, if asked. Presumably, you would proactively wish to be asked under those circumstances.

Mr Gray: No, I think what I meant was I would like to be sufficiently actively in touch with Government to understand what their issues were and to see if there are areas where we could offer any help, offer anything constructive. I am not going to be knocking on the door saying, "Please, can I help?"

Q44 Dr Whitehead: In the Energy Bill there is, as you know, the intention to develop a strategy and policy statement for Ofgem, which possibly at first sight appears to be a piece of legislation that attempts to shape or might attempt to shape what Ofgem does and how it works. How do you think that might impact on Ofgem’s independence, and do you have any views on how that might play out once the legislation is finally on the statute books?

Mr Gray: I think there is a risk that that sort of approach can lead to a conflict with independence, but it is a risk that I think is capable of being handled. To put my own position in perspective, in my review of Ofwat I recommended that DEFRA should produce a clearer statement of policy to set a context for the activities of Ofwat and the other agencies involved in the sector. One of the messages that came through to me most clearly was the need for clarity about what Government was trying to achieve and what the role of the individual bodies was in respect to that process. So, clarity of policy aided by a national policy statement is a very good thing. If it goes to the stage of trying to impose answers on a regulator that the regulator would not otherwise take, given its statutory duties, there would be an issue. It is in this area where I think it is in principle a constructive idea, as long as used properly.

Q45 Chair: If we could just finish on wider interests. What do you see the seven principles of public life meaning to you in principle?

Mr Gray: They are about how you do the job, the attitude of mind you bring to the job and the attitude of mind you want to see, in effect, in practice in your organisation. I think they provide a very good starting point for a value statement or whatever for an organisation. I read them with some interest when I looked at the pack for the recruitment. I have seen it before. It is always there as part of your briefing for this kind of public job, and in many ways the principles are a statement of the obvious. They are about honesty, integrity, openness and so on, but they are a very valuable reminder of how someone in an organisation in a public position should behave, and I would want them to be built into how Ofgem thinks and behaves.

Q46 Chair: We have already touched on the issue of interests. What advice did DECC give you to deal with any potential conflicts?

Mr Gray: Coming back to the specifics of the other activities I have?

Chair: Yes.

Mr Gray: DECC said that they did not think that there was a conflict, either with remaining with the CAA or with Pitkin. They gave me advice, as I mentioned, about how to deal with any perception issue that comes up in the case of the oil company, but I think broadly they were comfortable with my activities.

Q47 Chair: Finally, can you give us a cast iron guarantee that you have no interests that conflict with this position, and that if anything changes in your existing interests that could be construed as a conflict you will immediately resign from those interests?

Mr Gray: I can give you a guarantee that I don’t have any direct ownership interests in companies I regulate. I do have a shareholding in Pitkin, which I disclosed to DECC. I have money that is managed for me by my bank that may or may not at any given time have some interest in the utility sector, but I do not know the details of that and would not want to. So, no, I have no direct investments and therefore no direct conflicts of that sort. If anything came to light that was a problem of a sufficient scale then, yes, I would stand down if necessary.

Q48 Chair: Thank you very much. Do colleagues have any last questions? Thank you very much for your time and helping us with our deliberations. The Committee will now move into a private session, so I ask the public to leave. We will be back in touch, Mr Gray.

Mr Gray: Thank you. If I am confirmed in the role, I would be happy to come back and continue the discussion on the basis of some more hands-on knowledge of what Ofgem is actually trying to do, as opposed to my thoughts on it.