Select Committee on Constitution Minutes of Evidence

Examination of Witness (Questions 202-219)




  202. Good afternoon, Sir Christopher. Thank you very much for being with us. I think that some members of the Committee will be familiar to you?
  (Sir Christopher Foster) Yes.

  203. Thank you for the paper that you have put in. It provides us with a very good prompt for quite a number of questions we would like to put to you this afternoon. Before we put those questions, are there any points you would like to make before we get underway?

   (Sir Christopher Foster). Very briefly, if I may. I do believe, as I understand the purpose of this Committee, that it is extremely timely. It does seem to me that the position of regulators, particularly utility regulators, is ambiguous and rather seriously needs redressing. I am absolutely delighted that this Committee is looking into that matter. My own views on this will probably come out better in response to questions.

  204. Perhaps I could start with the point you have made in terms of what does need to be done. One of the points you make in your paper is particularly in terms of safeguarding the independence of regulators. Could you give us some idea of what you think is inadequate with the present arrangements?
  (Sir Christopher Foster) There is no question in my mind—because I was myself involved in setting up, in various capacities, independent regulators—that it was intended they should truly be independent and therefore not subject to ministerial direction, though certainly open to ministerial guidance. Guidance which presents in itself no difficulties whatsoever since, in those days, guidance was something which a regulator, like others, was supposed to listen to, take seriously and note, but not necessarily to act on if he felt that his duties lay in some other direction. There were problems even in those days with this notion of independence. One problem was that some, but not all, economic regulators were also social regulators. There were various social constraints on what they had to do, which I would be more than happy to discuss further should you want to do so. There was an uneasy relationship to some extent between their economic duties and their social duties. It does not seem to me to be obvious that their social duties should be independent. I think that there are various questions on what the nature of the relationship should be on the social side. It does not seem to me that the arguments for it being independent are as strong as they are on the economic and commercial side, where I believe that the right overview is not one of dependence but one of appeal or review, and probably to some body which is either quasi-judicial or, I would argue, actually judicial.

Baroness Gould of Potternewton

  205. I was fascinated by point 6 that you make, which is, "To some extent my views on accountability are covered . . .". I would like you to elaborate a little on the point about what you would see as real accountability, which would actually be a backstop and a support for the regulator. However, I am even more fascinated by your second sentence, which is, ". . . to distinguish between accountability and responsibility". I wonder whether you can elaborate on that?
  (Sir Christopher Foster) Let me try, because I realise how thorny this issue is and how many experts there probably are around this table—one or two at least I can certainly identify. Accountability I take very straightforwardly as giving an account. It seems to me perfectly proper and very sensible, should Parliament want it, that a regulator should come along to a parliamentary committee, or wherever, and give an account of why he has done what he has done. That seems to me perfectly sensible and a really rather good discipline upon him. But what is it that a regulator is responsible for? He is responsible for a decision, or a whole series of decisions, some of which I suggest are economic, some social, and some where it is not always totally clear which of the two they are. They are very definite decisions they have to make, however, which affect the livelihood, the profitability, and the behaviour of all sorts of people. In terms of the responsibility of that decision, my own view is that it is not sensible to say that he is responsible for that decision to Parliament. Insofar as he is carrying out social policy, yes, he is in some sense responsible to a minister. I would expect him to be so, and no doubt he would be perfectly prepared to give an account to that minister. The appropriate arrangements seem to me to vary very greatly: from the exceedingly complex in the case of the railways, to the rather simple and very limited issues that arise with British Airways or with gas or electricity. When it comes to the economic decisions regulators take, I do believe strongly that the appropriate responsibility for these, and therefore their accountability which should flow from this, should be to some other economic body, such as to the Competition Commission. In the case of the railways those arrangements are incomplete, for reasons which are partly historic. It seems to me, however, that in every single case there should be a right of appeal to some body. What we have at the present is a patchwork quilt. Whereas normally with RPI minus "X" decisions there is a right of appeal to some body like the Competition Commission or whatever, there are innumerable other decisions of an economic kind which have considerable effect, or can have considerable effect, on people's livelihood and profit for which there is no right of appeal. That I believe to be in principle wrong. I also begin to believe, with the passing of time, that there may be a stronger case for bringing in the courts to exercise judicial review; not purely on procedural matters but indeed, if there is any doubt, to some extent on the merits of a particular decision. Insofar as I can maintain the distinction, however, there seems to me to be all the difference in the world between the appellate route, which is quasi-judicial or judicial, and the ministerial route which is political and social.

  206. You said at the very beginning that accountability is to give an account. Can you say what you would expect as a result of your having given account?
  (Sir Christopher Foster) Shame.

  207. How would you expect Parliament to respond?
  (Sir Christopher Foster) I would not suggest that it should be your shame, but it should be the regulators. As I see the point of it, there are occasionally decisions which hit the headlines, which puzzle people. You wonder why they have been made. It seems that accountability to the media is very incomplete and partial, and not much help to anybody more often than not. If an impartial, sensible body would be prepared to summon the regulator and say, "Please explain the process you went through to reach the decision you did", you are not overruling him— you may, in the end, disagree or not disagree— but simply requiring him or her to give their reasons as to why they took the decision they did take. One can go further. It is not simply individual decisions. Is there any coherence in the policy that the particular regulators are following? In my judgment, in the early days the coherence was considerable in most cases. Bryan Carsberg was enormously talented; Stephen Littlechild was extraordinarily talented, as was Ian Byatt. You can see that their policies at least had a coherence they found it very easy to explain to a body such as this one. I worry slightly more about the coherence of some regulators these days, though I have to confess that I am more distant from them than I used to be. I think just the simple business of saying, "Tell me your policy. Give us a reasoned account of where you think you are getting and why", would be of enormous value. Much more, if I may say, than any quantitative measurement of their performance.

Lord Holme of Cheltenham

  208. You chose to define accountability in one sense that the word is used, as a narrative—"I will come and tell you what I have been doing". Of course, accountability normally is used in another sense, or additionally is used in another sense, where there is a stewardship—"I will hold you to account for what you are doing and have done". That is different from the narrative, "I will come and tell you what I am up to", which is really indistinguishable from consultation. I want to be clear that you are saying that you would put Parliament in the box of, "I'll tell you what we are up to", rather than, "We are", in the other sense, "accountable to you". May I ask another question of you at the same time? The distinction you are drawing between economic and social issues is obviously the dilemma of modern regulation. One of the reasons this Committee is looking at the whole issue is that, here are regulators put in the arena in which ministers, I suppose accountable to Parliament, were historically put: in trying to balance economic and social issues rather than saying, "There are two tracks here and different things happen on each track". If I may give an example, the current Ofcom Bill—the communications Bill which we are considering—does not give the straightforward brief to promote the interests of consumers through competition; it is balanced with social issues. That is increasingly true of regulation. Regulators find themselves having to qualify economic objectives the way that ministers have always had to qualify economic objectives by social goods of one sort and another. The ability to say, "This part of my job is economic and this part is social" is very difficult when the judgments they are often being asked to arrive at have those two strands intertwined. That makes me slightly sceptical of your differentiation policy of saying, "This will go through this route, and this through another route". It gets back to the issue of saying that, given you are making these balanced decisions, to whom are you accountable for them?
  (Sir Christopher Foster) Two very difficult, excellent questions. The first is the easier, I think. I believe in this particular case that a narrative is as good a form of accountability as any. I think that targetry—like other forms of numerate accountability—is not easy in this instance, though perfectly appropriate and proper in many other instances. There are quantities that you can reasonably ask for in this regard. There is something about the health of the industry and how that has changed under their surveillance that is very important. I think that they should be prepared to give quite a lot of numbers on how they believe the industry has improved and how the consumers have benefited from what has gone on—for which of course they will only be partly responsible, because presumably the industry has some say in its own future. I think that these sorts of another kind of figure narrative are tremendously important. I certainly think that is right. There are other indications of how long people have to wait for decisions—waiting lists and things of that kind—which would add value to the narrative. That said, however, I still believe in the particular case of regulators that it is the narrative, adorned by figures, which is probably the important thing. I spent a large part of my career in an accountancy firm and I would be more than willing to trumpet the case for figures in many circumstances. The second question is a much more difficult one. My immediate instinct is to say that this is one of the places we have gone wrong. What was just about true of all the privatisations was that they did make a pretty clear distinction between the social and economic, in the sense that firms in the industry—those which were subject to regulation—in broad terms were encouraged to maximise their profits, subject to some RPI-minus constraint as a check upon excess profitability. They had certain social constraints upon their ability to do so, whether it was a requirement that they ran unprofitable services in Northern Ireland and the Shetlands, or whether it was that they provided payphones. There were a number of things which were, in a sense, constraints, which they had to run with moderate efficiency, or try to. Indeed, one of the early regulatory triumphs, I think, was Bryan Carsberg actually pushing BT into running payphones profitably for the first time ever, after years when they had assumed that it was a fact of life that payphones could not be run profitably. Actually, in that particular case, economic and social regulation worked marvellously hand in hand. A more complicated case, which Lord MacGregor knows more about than I do, is the railways, where the judgment was taken that in fact it was for the Department, using first OPRAF and now the SRA, to negotiate various social contracts with different companies to run subsidised services. When that had been defined in the contract, then they had the privilege of making as much money as they could. Those are all fairly clean distinctions between economic opportunity and social obligations. I hope that Lord MacGregor will not mind my saying that I think, since his time, they have gone rather woefully wrong in relation to the railways. Everybody seems to be doing not the job for which they were set up but some other job. However, that is a separate issue. The point I am making is that it is, to my judgment, utterly wrong for a regulator to be asked to strike a balance between the social and economic. He has certain social duties; he has certain social constraints. When I come to the SRA, my own view is very much what I think Lord MacGregor intended—not to take words out of his mouth. In the first instance it was the job of OPRAF, as it then was—the franchising office—to negotiate contracts with the railways on behalf of the Department. They were directly responsible to the Department and, in a sense, they were under political direction. That was a delegated responsibility to them. Now we have a body out there whose independence I do not understand. I do not understand quite who they think they are acting for or with, or on whose behalf. It is that kind of muddle which I honestly believe the regulators should be protected from. They are then becoming quasi-political figures, and I do not honestly believe that that is a sensible job for a regulator

Note by Witness: Under the British system, striking a balance between social and economic considerations has always been a matter for ministers.

  209. One conclusion I might draw from what you are saying is that regulation would be better if there was a primary objective qualified by other considerations, so that the primary objective is clear. I am sure that you would acknowledge, however, that, maybe sometimes because of political confusion in setting up the regulator and maybe because the questions are very difficult—and I will take Ofwat, which you did not mention, as an example—it is not always possible, even if desirable, to have a primary objective. If I take the issue of water, you have at least three issues coexisting. One is the need to attract investment into the industry and therefore produce an adequate rate of return to attract investors, and that might be thought of as the major objective if one approached it from an economic perspective. At the same time, however, there is clearly a political wish that consumers should have low water prices and there is an ecological and environmental wish that water should be clean and safe. Those three objectives are laid upon Ofwat to grapple with and to try to pursue a way through them. So, rather agreeing with you that it would be better—and I think that is true of the current Ofcom Bill—if there were a primary objective qualified by other goods, is that always possible?
  (Sir Christopher Foster) Again, I think that Sir Ian Byatt, in difficult circumstances, handled the situation with good perspective when he set up this kind of tripartite negotiation—between the Environmental Agency, acting on behalf of the environment, and the Department and himself, on behalf of the industry—doing some horse trading until they got some sort of compromise between profit, environment and water quality. I personally do not think that is ideal. I think that ideally it would have been someone's job to set down and say what the water quality constraint was, what had to be achieved, and change that from time to time—but only on some clear understanding of who paid for any improvements in water and that it was not simply a charge on the profits of the industry, come what may, and that somebody else had a similar responsibility to determine what the environmental standards would be. Then it would be much easier for the regulator to act as an economic regulator. What Ian Byatt did in the circumstances was as good as could be expected because, at least to some extent, he institutionalised the conflicting forces. It was absolutely clear whose job it was to say what the environmental standards should be, what the water quality should be and what the health of the industry should be. It took it into the open in a reasonably transparent form, away from political fudge—which I think is a great danger in these situations. Not because one minds political fudge but, if you are to run a business, you really do need some clarity as to what are the threats to your profits. If somebody suddenly comes along and makes an inexplicable decision which means that you have to raise water quality at very considerable cost and you have had no ability to make representations about it, that does undermine the water companies' ability to run their business. It is this openness in those circumstances that one needs. A regulator who has turned into somebody who, either of his own wish or under political pressure, fudges answers, results not simply in bad administration; it makes it far harder to run a business, or indeed to work out what the trade-offs are between money, environmental quality, safety—and whatever other constraints there may be.

Lord Lang of Monkton

  210. I want to ask, as Lord Holme did, a question about social and economic issues, relating to point 11 in the answers you sent us. Sir Christopher, where you say, "On economic and some other issues I believe they", that is the regulators, "should be independent of the Government. On most social matters I believe their relation should be arm's length". Can you specify precisely what you mean by the difference between "independent" and "arm's length"? On the social matters, can you give us some feel for how you perceive which social matters should be at arm's length? Are you relating this to a generic obligation to take account of social issues in a decision, or of specific social matters referred to you, either in terms of your remit or by Government ministers?
  (Sir Christopher Foster) It is an interesting lead-on from the previous question, I think. Again, it comes down to this point that I do believe that the social obligations upon the regulator should be explicit. Whoever is the source of them, they and the industry need to know what these are. If they are changed, they need to go through some transparent and public process, in which it becomes clear that people discuss the effect on the financial health of the industry and what is reasonable by way of payment. The situation in which, as I have said before, social obligations are increased or altered without sufficient public debate is bound to undermine the financial confidence of that industry. I suppose in a sense that is what I mean by arm's length regulation. I mean that there should be some public process through which a regulator goes, or a minister goes, when they impose obligations or alter obligations. Almost irrespective of what it is, I see a social obligation as a contractual obligation. It is something which is imposed by way of contract constraint upon the regulator and upon the industry. It therefore should be capable of being written down with some precision, so that people know what it is they are needing to do. The railways' case is the most complex of the lot, as far as I know, because indeed there are a great many social judgments that need to be taken into account when deciding what railway services are to be run and subsidised by the state. I cannot see how the decision in such a case can be other than ministerial. After all, it is very substantial public expenditure. The minister will say, "Yes, I am prepared to go to the Chancellor and ask for money in order to do this, that and the other on the East Coast line". That is a very important decision, which only he can take. In order to know what it is he is subsidising, however, he may require a regulator to work out the options; to work out what are the possibilities; to make some detailed investigations of cost; to make sure that the public is not going to be taken for a ride over expenditure, and so forth. That ought to be the job of the SR (Dr Thatcher) I do believe that the original concept of franchises of definite duration, with alteration at the end of the franchise—and, when the franchise came up for renewal, OPRAF coming up with a very clear idea of what the investment bill attached to the renewal would be—was absolutely the essence of a proper process. But what we have is a rare old muddle. There are lots of other reasons why it is a rare old muddle but, to my mind, it is not regulation; it is something very much more muddled. Again, there are many reasons why, but it has proved impossible for the industry to run with normal financial disciplines as a consequence of this muddle. When the social obligation is something fairly tiny—at least, I think something fairly tiny—like payphones in relation to the whole cost of BT, I suspect that one can be very much more by and large. Nevertheless, the principle is the same. BT is running payphones, in certain areas at least, unprofitably as a social obligation. That should be a contractual obligation with a very clear price tag attached to it, somewhere along the line.

Lord MacGregor of Pulham Market

  211. I would like to follow this up a little further in two directions, and perhaps I ought to declare an interest as a director of some regulated companies. I am looking first at your paragraph 5 but, following up this point about social matters as distinct from economic, obviously it was much simpler in the early stages, when the main role of the regulator was to create competition and to avoid monopoly power abuse, and a lot of that was economic. Some of the social issues actually involve politics at the end of the day, and political and ministerial decisions—and that is where we get into a muddle. In order to understand exactly how you divide it, perhaps I could take the question of the postal regulator at the moment. He seems to be under a great deal of criticism and pressure because he has not sufficiently taken into account the impact of public sector jobs and the impact on rural post offices, both of which are acutely political issues. It looks as though this is leading, in some senses, to his being moved from his position. On the other hand, he has the responsibility of trying to get the postal services into a good commercial shape. The first question, therefore, is how would you make the distinctions there and what would you expect the postal regulator to have to do? The other point is rather different, so I will come on to that later.
  (Sir Christopher Foster) Let me first declare that I have no recent knowledge at all of this industry. Many years gone by I spent some time considering these problems, but they are changed. I think that you have there an impossible situation, to be honest. Once you start regulating the inputs to an industry, the jobs, and make that a matter of public concern, that lands you in an impossible situation. If a firm is to make a profit, whether regulated or not, it really does have to control its inputs. If it cannot do that, then it is not in any meaningful sense a private regulated industry at all. I think that is absolutely right. If you impose certain obligations about the number of deliveries, or any other obligations, that seems to me again to be a matter of contract. It is something which needs to be spelled out fairly clearly by the Government, with a very clear appreciation of what the financial costs are likely to be—again, so as to enable the regulator to allow the industry to make enough profit to meet those social costs as well. Basically, because it is a contract, my belief in the end is that it ought to be regarded as a proper contract, and a contract which is justiciable in the courts if necessary. One would hope never to reach that point, but if someone who has a franchise, who has a post office, feels hard enough done by—because they feel the contract is being altered against their wish or in a way which is adverse to their financial position—they ought, as a final resort, to be able to take the Government to court over it. Again, there should be a clear understanding that if the Government—and it is perfectly reasonable for it to do so—wanted to change the nature of the contract by putting more things in or taking them out, that should be regarded as basically a matter of contract which, in the end, would have recourse to the courts in order to decide the issues. One hopes that if that were possible, then one would not get recourse to the courts; everybody would be sensible and one would get a good situation. I am not sure, Lord MacGregor, if that does—

  212. It does to some extent. It also brings me back to paragraph 5, on the "rights of appeal against regulators' decisions". I think that in the post office case you are saying that the contract, eventually, should be very clear on issues like social constraints and so on, and all those other sorts of issues which are essentially political.
  (Sir Christopher Foster) Yes, I do believe that.

  213. The other question I want to ask you is this. It is the opportunity for the regulated industries to appeal against the regulator's decision, because the regulator has enormous independent powers. Talking to regulators so far, in this area they have tended to put the emphasis on judicial review, as being something they would always bear very much in mind when they are making their decisions. That, however, is largely about process and whether they have consulted widely enough, and so on. I wondered if you had anything further in mind. You were talking about a further right of appeal to the courts. For example, take the Financial Services Authority: it has enormous influence now, including heavy demands for compensation and so on. Do you think that just simply rests with the FSA, subject of course to judicial review, or had you something else in mind?
  (Sir Christopher Foster) No, I do not believe it should rest just with the FS (Dr Thatcher)

  214. Or any other regulator, I mean.
  (Sir Christopher Foster) Or any other regulator. Just to elaborate on that very slightly. Bryan Carsberg in particular started off excellently, if I may say so, by being very procedurally aware. One of the hallmarks of Oftel from the very earliest days was that he had a very clear sense of procedure. He must have had excellent advice from somewhere on all sorts of things about fairness, access, making quite sure that everybody saw the final judgment in draft before, and so on. I am sure that he got legal advice of the kind of thing that was really necessary. If there is any question of a regulator not conducting the right process, then indeed judicial review is the obvious remedy. However, that is ordinary British judicial review. It is when you go beyond the question of proportionality—which, as you know, is creeping into British courts—towards merits, I can see an argument for saying that it would not be a bad start to introduce the American habit of requiring regulators in this instance, to be prepared to be subject to judicial review on the merits of their decisions. I think that proportionality is not a bad way of starting; that, whatever they do, whatever decisions they give, those decisions should be proportional, not disproportional, to the relevant evidence; that therefore, if they decide that they are going to impose a cost upon an industry—which they often do—the extent of that cost should not be disproportionate to the offence or whatever else it is the industry is said to have committed. That is very important as an ex post facto back-check on what the industry and the regulator have done. I think that is absolutely excellent, though, again, one always hopes that it would not be used very often. Appeal is a different matter. I do come back to this point that there should be a much wider right of appeal. Of course there are drawbacks there. I am sure that regulators hate it because it can take a lot of time. They may say, "People will appeal everything. We will be completely bogged down and never get to the end of things". Judicial review is about the only branch of the law, though others here may have more expertise than I have, in which you have to apply to the courts in order to say, "Will you make a review of this matter?" and they can say "No, that's frivolous" or "beside the point" or "sort it out yourselves", whatever it may be. I think that there is something to be said here in relation to a right of appeal. It is perfectly sensible for someone to appeal to a super regulator in the first instance, and for that super regulator to say, "No, it's like something else we have dealt with recently and we don't really see the case". However, I do believe that, virtually without exceptions, regulatory decisions should be appealable against.

  215. Who is the super regulator?
  (Sir Christopher Foster) This comes back to my distinction. It could be the Competition Commission for a great many economic regulators. I do not know what is sensible in relation to the FS (Dr Thatcher) I have to say that I have not investigated what would be a sensible body there. It might indeed be to the courts in that case, at a high enough level. On the social side, if it is interpretation of a contract—which I believe it should be in most cases—then that sounds to me to be something which ultimately, perhaps after a process of mediation, could well go to the courts. If it is a muddle—which I fear too much regulation is becoming—one is in great difficulties, because only politicians are supposed to sort out muddles. In that way you find very often that the situation will move from a regulator behaving like a politician to a politician trying to discipline a regulator—I am not sure with any happier outcome, or not one that strikes me anyway.

Lord Jauncey of Tullichettle

  216. I would like to raise two matters with you, Sir Christopher, if I may. First of all, I have a note of your saying that it would be utterly wrong to ask a regulator to strike a balance for an economic or social matter or consequences. You said that a moment ago.
  (Sir Christopher Foster) Yes.

  217. I take it that I have you noted correctly there?
  (Sir Christopher Foster) Yes. As soon as you say it like that, I think that maybe there are one or two exceptions or a number of possibilities; but, in general terms, I do agree. That is my position.

  218. Assuming that a regulator has to make a decision which involves both economic consequences and social consequences, how would he arrive at the decision, given that he is not, if you are right, in a position to strike a balance? In short, how do you incorporate the social consequences into a regulator's decision if it is not for him to strike the balance?
  (Sir Christopher Foster) Let me respond, postulating, as I think you do, that it is a less-than-ideal world from my standpoint. I can imagine it in two ways. One is the Ian Byatt way, as I understand it, which is for the regulator to say, "I have taken this decision, and I have cut into the profitability of water companies to this extent for environmental reasons. I have discussed it with the Environmental Agency. They tell me that all the things they want done will cost so much. I have accepted those cost figures. Those are the improvements in the environment which will occur from this, and I have been persuaded that this is a reasonable extra imposition to put upon the water companies". I think that is perfectly reasonable; it is transparent. To a rather limited extent it could be challenged, if his facts are plainly wrong or the Environmental Agency's facts are plainly wrong. It is open and above board. It is not just in the regulator's mind that the balancing is done. However, I would prefer that he went further. If I were to think of the perfectly dreadful situation of the railways, I would say that the regulator should at some stage have said, "I am under enormous pressure to spend more money on safety. I have consulted a great many experts on this matter. They tell me that what I am being required to do is to spend money which implies I am ready to spend £100 million or even £200 million to save a single human life. I have noted that the same amount of money could save many more deaths on the road. Furthermore, I could buy an infinite number of kidney machines, so that there would be no problem of renal failure because of lack of kidney machines. On that basis, I am not prepared to accede to this request. I believe the railways should not be quite so much safer than the roads or more life-saving than the National Health Service. I believe a fair and sensible compromise would be of the following order, which I can defend by comparison with similar circumstances elsewhere". Those various lines of argument have the great advantage of being open, above board, rational and defensible. What I dislike is the sense that you do not know with the SRA—if I dare say so—what trade-offs they are making between their different objectives. One of the reasons I am so keen that a body like that should be accountable to a committee such as this is that you might tease out of them precisely what reasoning processes they have gone through.

  219. Given that example you have just given, surely the regulator is just doing what you say you do not want him to do? He is balancing the economics of the matter against the social cost.
  (Sir Christopher Foster) But you did drive me to the second-best. I did say, "in the less-than-ideal situation you postulated". My own belief is as I first explained, and I will not repeat unless you want me to. In the less-than-ideal situation where a regulator is forced as an individual into a judgment of that kind, where he as a person is balancing these different considerations, I argue that in that situation the best is that it should be transparent, in one or other of the ways I have suggested. I hope that is consistent with my earlier position, which is what I would say is the first-best position.

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