Select Committee on Constitution Minutes of Evidence

Memorandum by Peter Vass MSc(Econ), CPFA, Director of the Centre for the study of Regulated Industries, University of Bath


  My experience is as follows:

  Graduate in economics (BSc and MSc) from University College London; entered the Government Economic Service 1970-76 (Ministry of Transport and Department of the Environment); qualified as an accountant 1976-81 (at Essex County Council, then Technical Officer, Treasurer's Department); secretariat of the Chartered Institute of Public Finance and Accountancy 1981-90 (Head of Technical and Research); Senior lecturer in Accounting and Finance, University of Bath School of Management 1990-date; Director of the Centre for the study of Regulated Industries (CRI) at the University of Bath (1991 to date). Specialist author on regulation (in particular the economic and accounting methodologies for regulation and the regulatory framework—legitimacy, institutions and governance) and editor of the annual CRI Regulatory Review.


  1.  (i)  Acts of Parliament. In the case of the utilities, this was part of the overall Acts which privatised the regulated industries (water, energy, transport and communications).

  (ii)  The nature and extent of the powers granted depend on the functions of the regulator (the objectives of the legislation). So, for example, utility regulators may set price controls (e.g., for a natural monopoly business such as electrical transmission) or act as competition authorities (e.g., in a competitive business such as gas supply). The regulators may exercise their powers by proposing (or, contingently, enforcing) changes to an operator's licence, collecting information and monitoring compliance, and enforcing compliance or levying penalties.

  (iii)  Act of Parliament.

  (iv)  Typically, the regulated companies pay for the costs of regulation through, for example, licence or registration fees. There is usually an additional safeguard in that the regulators' budgets have to be approved by the Treasury. Administrative support is usually provided through an associated office, so, for example, the Director General of Water Services has a "non-ministerial" government department (NMPD), the Office of Water Services (Ofwat). The staff might comprise civil servants on secondment, directly appointed staff or temporary staff and consultants.

  2.  (i)  The Government. Evidence may come from reviews occasioned by specific "crises" or from periodic re-examination, and from a variety of Government and Parliamentary sources, including the sponsoring departments (e.g., DTI, Defra, DTR), HM Treasury, the Cabinet Office (e.g. Better Regulation Task Force and Regulatory Impact Unit), Select Committees, the National Audit Office, the European Commission and the OECD.

  (ii)  Act of Parliament.

  3.  The members of the regulatory bodies are appointed by the Government. In general the appointments are determined on the basis of merit and the expertise necessary to carry out the specific functions. Utility regulators have typically been appointed for five years and cannot be removed except for exceptional circumstances (e.g., incapacity). Regulators are not intended to be representative. Nolan principles are expected to operate. The utility regulators' legal powers have been vested in individuals (the director generals) but are progressively being replaced by boards (i.e. Authorities), as with the Gas and Electricity Markets Authority (GEMA) through the Utilities Act 2000. Questionably, this is seen as a defence against over-personalisation of regulation and arbitrary use of discretion.

  4.  (i)  Regulators are set up to achieve particular objectives determined by Government policy and sanctioned by Parliament. In general, economic regulators are established to control the abuse of monopoly power and to set appropriate output standards, such as the availability of reliability of supply. Other regulators set standards. Certain standards are set by the Government or the European Union and Commission, notably environmental standards.

  (ii)  The regulators' actions may result in adverse consequences for some parties, but, overall, regulation is expected to be beneficial. This means that the benefits of regulation (as well as for specific regulatory policies) should outweigh the costs. As an example, regulators may provide incentives to improve efficiency and control the abuse of monopoly power by introducing competition, but the resulting cost-reflective tariffs may "unwind" cross-subsidies, thereby disadvantaging previous recipients of those cross-subsidies.

  (iii)  Effectiveness is not simply assessed by a single measure. The process of regulatory impact assessments (RIAs) is, however, a growingly important feature of regulatory accountability and a means to assessing performance, focusing on the "cost-benefit test" referred to in 4(ii) above.

  5.  (i)  The regulators have responsibility to make a case for the exercise of their powers and then to determine the appropriate regulatory outcome. In this sense they are judge and jury (unlike inspectorates). However:

  (ii)  These powers are constrained, most notably in the case of the utility regulators by the right of the regulated companies not to accept the regulators' proposed changes to their licences following a periodic review, and as a consequence for the matter to be reviewed or determined by the Competition Commission (known as "appealing" to the Commission). Judicial review is another safeguard (a good example being the High Court and Appeal Court cases heard in respect of the Northern Ireland regulator and his 1997 review of distribution and transmission price controls). Judicial review in relation to the "reasonableness" of the decision is generally judged to be a weak defence against arbitrary regulation (since the courts do not question the "wisdom" of the decision, only whether it was so unreasonable as to be "irrational"). However, the development of a body of "better regulation" principles (see, for example, the Better Regulation Task Force's five principles of good regulation—Transparency, Accountability, Proportionality, Consistency and Targeting—published by the Cabinet Office in 1998 (amended 2000)) and the associated RIA procedures, along with the general development of human rights' legislation and higher general expectations of public accountability, make it likely that judicial review will progressively develop towards tests that require a regulator's decisions to have been reasonable.

  6.  (i)  The regulators' annual reports are typically laid before Parliament, and the Select Committees and the PAC carry out inquiries.

  (ii)  The National Audit Office audits and carries out value for money studies of the regulators. In general, regulators are expected to consult on their proposals and to give reasons for their decisions.

  7.  (i)  The respective outputs of 6 above provide the means of accountability.

  (ii)  Regulation imposes costs but the benefits, say in improved efficiency or higher standards, should be expected to yield a net public benefit, allowing for the costs.

  (iii)  In general, regulators' consultation documents demonstrate a high degree of transparency.

  8.  (i)  Public consultation and through associated consumer forums.

  (ii)  The primary opportunity is afforded by the formal consultation procedures.

  (iii)  The relationships are growingly supported by "memorandums of agreement", although there may be friction due to duplication of objectives, if not roles. An example from the utilities is that both the consumer bodies and the regulators have, in substance, a primary duty of consumer protection.

  9.  The regulators' "inputs" into the consultation process can be judged effective, but knowledge and engagement may still not be widespread among the general public. Representative bodies in practice act as surrogates for consumer involvement.

  10.  (i)  Regulators have regard to the needs and concerns of the public, but in the context of their functions, powers and their duties. So, for example, an economic regulator may not seek to regulate to correct for environmental damage or inequitable market outcomes where those are more properly the province of Government decision, for which ministers should be held to account. One problem may be that regulators are given, or acquire over time, a rather long and undifferentiated, and possibly conflicting, set of duties. This may contribute to a mismatch between public expectations and the role of a regulator in practice. This may contribute to a "fudging" of accountability between "independent" regulators and the Government and its ministers.

  (ii)  Regulators are instruments of Government. Parliament and Government are the representatives of the public.

  11.  (i)  Utility regulators, in particular, are considered to be "independent" of Government, but their discretion is bounded. Where appropriate, sectoral regulators are expected to harmonise their approaches, and there are formal mechanisms for achieving this.

  (ii)  Regulators' independence would be compromised either by regulators who show themselves to be incapable, by virtue of inadequate expertise, experience or partiality, of carrying out their functions well (thereby undermining public confidence in the regulatory system) or by Government ministers seeking to overturn the established "regulatory settlement" in favour of greater ministerial discretion and involvement, but without this change having been properly established through a new regulatory framework, duly endorsed by parliament. The current regulatory framework seeks to provide a good foundation for effective public regulation, balancing the policy role of Government with technocratic functions more suitably placed in the hands of "independent" regulators. Different regulatory institutions can focus on specific market or conduct failures (compare, for example, the economic regulators with the Environment Agency), and the consequential "unbundling" of the regulatory state has been judged to have improved accountability.

Peter Vass

January 2003

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