Memorandum by Clare Spottiswoode
What are the legal bases for regulators; what
are the nature of their powers and how do they exercise them;
how could their powers be revoked; from where do they obtain their
financial and administrative support?
1. Regulators are creatures of statute.
But the legislation rightly allows the regulator a degree of interpretation
and judgement. This means that regulators have considerable power
but they don't have the full democratic legitimacy of Government.
2. Regulators were created to be independent
of Government, and this is generally accepted as being a key attribute
of a successful regulatory system. Independent regulation is the
norm wherever new regulatory systems are set up.
3. However, the combination of power and
independence from Government means it is essential that the scope
of regulators' powers is carefully defined, and that appropriate
checks and balances are in place.
4. Powers can only be revoked by legisation,
unless regulators themselves decide to withdraw from some aspects
of regulation. Although there has been some withdrawal as competition
has become embedded in some areas, I believe that there is a real
case for a regular Regulatory Impact Assessment (RIA) on the Regulatory
Offices themselves. As the office would be its own judge and jury
on this, there is also a case for an outside body, perhaps a specialist
Select Committee, to have oversight of the RIA.
By whom and how is the continuing need for regulators
measured; how is their role changed or ended?
5. Regulators' roles have evolved significantly
since their inception. In the early years consistency was not
necessarily a good thing as regulation needed to developlearning
both from other regulatory bodies, and from the differing approaches
of successive incumbents. The ability to rectify mistakes, or
change when the original approach was not working, was important.
Different styles could be seen as being more appropriate for different
stages of evolution. The UK was a world leader in this type of
regulation, and therefore there were few lessons at that stage
to be gleaned from overseas.
6. Some years in, competition was introduced,
first into Gas. This was a very disruptive innovation which required
new rules and new types of institutions. Inevitably this was a
huge task requiring much care and planning, and attention to the
proper balance of property rights, and losers and gainers.
7. Changing the rules so extensively was
only acceptable if it had the backing of Government legislation.
However, the original impetus for change came from the Monopolies
and Mergers Commission (MMC), and then the Regulatory office provided
the main engine for ideas, policy and guiding the industry through
the complex processes to ensure competition was an eventual success.
8. Competition not only changed the industry
itself, but also the regulatory office, its tasks, and the skills
it needed. It also brought the opportunity for regulation to step
back and stop being involved in certain areas completely.
9. Given that the UK will continue to benefit
from further "disruptive innovation" in regulated industries
it is important that the system continues to encourage the possibility
of change, rather than ossifying structures and procedures. It
is particularly important that Regulators are not tied to precedent,
just as the Competition Commission is not tied to precedent. However,
departing from precedent should not be done lightly, and needs
good justification, and appropriate appeals mechanisms so that
decisions can be challenged.
Examples of possible innovations still to come
Telecoms, where true competition
has yet to develop;
Environmental permit trading will
require significant changes in the workings of the energy markets,
and there will be gainers and losers in the process; and
Water competition could be introduced
but only with major changes to the current arrangements, and almost
certainly unacceptable variations in cost to customers depending
on where they live. But overall competition in water would deliver
large reductions in costs.
10. There are areas where rule based regulation
is clearly good and where stability of rules is necessary (e.g.
technical codes, contractual provisions). Property rights need
to be clearly understood and respectedparticularly where
money is invested for many years in capital projects.
11. There is always a tension between innovation
and changing rules, and stability and precedent. Companies need
stability, particularly where long term investment decisions have
to be taken. The UK needs innovation in the Regulatory area as
much as it does elsewhere, if the economy is to thrive.
Who are the members of the regulatory bodies;
how are they appointed; are they adequately representative; do
Nolan principles operate?
12. The approach seems satisfactory. Though
some have commented to me that I would never have got through
a Nolan process. It is sometimes suggested that committees, and
particularly Nolan principled ones, tend to "play safe".
In regulation the safe choice is not necessarily the right choice.
Some people did not consider my appointment a "safe"
choice. If a "safe" choice had been made, would we now
have competition in energy?
13. There has been significant debate about
the merits of an individual regulator vs. a board. Board structures
work very well in the corporate world, and I agree with the Hicks's
recommendation of not only separating out Chair and Chief executive,
but also that the Chair is not the previous CEO. Does this same
model work for Regulators? It is not so clear cut.
14. Regulatory jobs are semi-academic and
there are a number of complex issues which are difficult to get
to grips with unless one is full time in the job. The real power
on detail will always lie with the full time person. If that person
is the Chair, the CEO effectively becomes a COO, and it is not
clear what advantage one is getting from splitting the rolesthe
Chair will, in effect be equivalent to the current DG. If the
Chair is part-time and comes from a purely business background
it is unlikely that that Chair will ever get to grips with some
of the technical detail. The Chair is more likely to understand
the issues if the Chair (like David Currie) has some economic
academic background. As discussion about NETA shows, the technical
issues can be critical to good decisions and it would be difficult
to contribute appropriately as a Chair without understanding these
15. The same questions arise of how far
Non-Executive Directors can contribute if they do not understand
the technical issues, however NED's can valuably bring a broader
perspective even if they cannot contribute on every issue. NED's
and Chairs can also be a valuable conduit for getting questions
raised within the boardroom providing a useful challenge to the
16. I am agnostic on whether boards enable
organisations to be more or less bold, or more or less likely
to make good decisions. It depends on the dynamics of any particular
board. What clearly causes committees to become a sclerotic is
when the board has to have "representatives" of various
interest groups rather than choosing individuals for their respective
skills and talents, and their ability to add to the rest of the
17. I sometimes think the real heart of
the argument about individual regulators vs. a multi-person regulator
is really about the distaste of giving so much power of discretion
to an individual. It is not about what organisational structure
is most likely to take the best decisions. Excess power vested
in one individual becomes more of a problem the more discretion
the regulator has. As the regulator is expected to decide and
adjudicate in areas that go beyond the economic arena, the level
of discretion increases.
What are regulators set up to achieve; to what
extent do regulators achieve their purposes without adverse consequences;
how is their effectiveness assessed?
18. A simplistic definition of the respective
roles for Government and regulators is that regulators' jobs are
about the economic efficiency of their industry and creating wealth
for the country, while the Government's role is to redistribute
that wealth (for social, environmental or other police reasons).
A regulator with the right technical and economic strengths should
be well placed to design and deliver that redistribution (examples
include Permit trading, enforcing standards of service for disabled
customers through licence conditions).
19. If the role is defined as economic efficiency,
and if the industry structure is not providing that efficiency,
by definition the regulator has to be instrumental in changing
the structure (with appropriate checks and balances). There will
then be losers as well as gainers.
20. The Government's view of the role of
the regulators has probably changed over the years. In the early
years, although the Secretary of State and the regulator had the
same duties, the functions were clearly differentiated. The regulators
were economic, and were not expected to be involved in other areas
unless this could be done without affecting significantly the
main role of creating an efficient industry. This is much less
clear cut these days. regulators do appear to be expected to be
an arm of Government policy, which inevitably brings them into
the political arena. The Government publishes "guidance"
to regulators as to how to deliver some of the Government's policy
21. Guidance is a good way in theory to
deliver policy through the regulatory system. The deeper this
guidance goes, the more conflict there is likely to be between
the original efficiency goals, and broader policies with complex
alternatives which regulators are not necessarily best placed
(and don't have the democratic legitimacy) to adjudicate.
22. For example, location charges disadvantage
power generators which are far from demand centres. Renewable
generation tends to be in less populated areas, and therefore
any location charge is likely to disadvantage renewable generation.
Who should adjudicate this dilemma? The regulator, the Government,
or some combination? Is it for the regulator to decide how much
to subsidise renewables, or for the regulator to decide not to
introduce location charges (which has wider incidence than just
renewables). [In fact in this decision it is not clear that a
RIA would support location charging anyway, so the problem might
partially resolve itself]. These issues are still far from resolved.
23. My personal view is that regulators
should go back to the original approach. The office should be
for economic regulation, and the Government should take responsibility
for making environmental and social policies. Where these conflict
with what the regulator is doing (as in the location charge dilemma
above), the Government should decide how to resolve the conflict,
consulting and giving its reasons as it makes that decision.
24. Government override of the regulators'
decisions in these circumstances would be very uncomfortable for
the regulator, but at least it would be clear who was to take
the decision, and the effect of the decision on the various interested
parties would have been part of the process and the debate, and
so would be in the public domain.
25. Unlike in other spheres, there is no
shareholder to hold the office to account, and no electoral process.
There are a series of ad hoc Select Committee investigations
and National Audit Office investigations, but there is no focal
point for an institutional ownership of the effectiveness of the
office. As suggested elsewhere, there is a strong case for a (House
of Lords) specialist committee to provide this institutional ownership.
To what extent are regulators both prosecutors
and juries on an issue; what rights of appeal are there against
decisions made by regulators?
26. The judical review system was chosen
deliberately with the intention of not duplicating the American
approach where lawyers predominate, costs are high, and changes
in structure very difficult to achieve. It was intended to give
some redress to the power balance between a tiny regulator with
limited resources and a large monopoly company with huge sums
of money to spend on lawyers and appeals. Many regulatory bodies
are no longer the minnows they once were. But the absence of numerous
legal disputes is a healthy aspect of UK regulation.
27. However the judicial review system deliberately
does not address the merits of the case. This can be unfair, and
it should in principle be possible to appeal all key regulatory
decisions, not just licence terms. To avoid the legalistic approach
we see in the US, and to ensure that the appeal system incorporates
the relevant skills, appeals should be taken by the Competition
Courts. The use of the Competition Commission could be extended
from licence condition decision to any significant policy decision.
28. If the ability to appeal key regulatory
decisions was made available, it would be very important that
frivolous actions were deterred. One way to ensure this would
be if the Appeals Courts regularly went beyond the bounds set
by the original position of the regulator or the Company. This
would mean that there could be a real cost of making an appeal.
29. The cost of appeals should not be allocated
by regulators, but decided by the appeal body.
30. The regulators are by their creation
both prosecutors and juries, as they both investigate and enforce
licences. This is why a credible appeal mechanism is so important.
31. When I received the MMC's reports, it
was in my power to decide how to implement the MMC recommendations
(and indeed I had the theoretical ability to ignore themas
was done on one occasion elsewhere). That has now changed for
some situations but not all. It is very uncomfortable to be in
a position where you are making a decision where the other party
has no redress. I feel strongly that it is important for regulators,
as well as the counter-parties, that there is ultimate recourse
to an appeal system.
How are the regulators held to account by Parliament;
what other accountability do regulators have to auditors, Government
departments or other public bodies?
32. Regulators' accountability to Parliament
should be strengthened. Select committees can be very effective,
but there are often a number of different committees with an overlapping
interest, and it is not unusual for them to come out with different
33. There is a strong case for a single
select committee on regulation as the focal point for institutional
accountability. It would be desirable for this to be a committee
of the House of Lords, where members may have a professional background
in the relevant areas, and where politics is less of a driver.
34. In my view there are not enough checks
on the costs of the regulatory body itself. It is in practice
very difficult not to give the regulator the budget they request.
I found that the pressure on my office was for all questions to
be answered. This means heavy work loads and growing budgets,
but it does not necessarily mean effective regulation. It certainly
does not lend itself to proper priority setting, or to "efficient,
targeted and proportionate" regulation. There is a case for
a RPI-X budget for regulators, and a RIA of the office itself.
35. This budget (and associated work plan
with priorities) could be reviewed periodically by a Select Committee,
and the regulator could offer up the activities it would have
to abandon/postpone to meet the reduced budget. With help, a committee
should be able to ask penetrating questions. The industry and
consumer bodies would be able to comment on those areas to be
abandoned, and once agreed would have to accept that that area
was no longer covered by the regulator. I personally would have
How are regulators accountable to those whom they
regulate; what is the impact of regulation on the economy; how
transparent are their methods of working?
36. Whilst consultation has become something
of an industry, it is very important for the legitimacy of the
system. Its purpose should be to approve the decision making process,
although in practice this has not been wholly successful as demonstrated
by the decision of some organisation to opt out because of the
expense involved. The larger ones put a lot of energy and effort
into the process, and therefore tend to benefit more than they
37. At times industry feels that the consultation
process is not genuine, that the decisions have been made earlier,
and whatever they say will make no difference. Often they feel
that the questions being asked are too far down the decision making
process, and what they really wanted was an input into the questions,
not feedback on a process which already has its own momentum.
38. The new Ofcom has a huge task in how
it will address consultation. The volume of documents produced
by all the existing bodies which Ofcom will supplant is enormous.
Ofcom may, in finding better solutions to consultations for its
situation, help other offices find a better way.
39. We consulted at Ofgas by mixing methodspaper,
industry meetings, smaller sessions. The office was open to anyone
with a legitimate interest in our decisions. We would put opposing
views in the same room so that we could hear the arguments and
the counter-arguments clearly. The key is making people feel they
will have an opportunity to contribute, that when they do contribute
they will be listened to, and given a fair hearing. Explaining
why a different route has been taken from the one they wanted
is therefore very important to this process.
40. At present regulators suggest licence
changes. These suggestions may have come from outside the regulatory
body, for example from companies or consumer groups. There is
no mechanism for Companies to suggest licence changesfor
example, for removing out-of-date licence conditions. Giving this
ability to Companies should not be done lighty, and should be
only given for material substantive issues. But I believe it should
be considered. The Competition Commission is well placed to adjudicate,
as it does on any current proposed licence changes that is not
agreed between the parties.
How are regulators accountable to the public other
than through Parliament; what opportunities do the public have
to express concerns to regulators; how do regulatory bodies relate
to their associated consumer watch-dogs?
41. Clearly the activities of regulators
are followed by the press, sometimes intensively. This provides
42. The consumer watch-dogs provide a very
valuable service, but I have always felt there was a tension between
the regulatory bodies and their consumer watch-dogs that is institutional.
43 Both organisations have a consumer remit.
Both have significant resources applied to dealing with customer
complaints. Although there is agreement on how to allocate this
responsibility on a day to day level, there is some tension, and
always will be, about the boundaries of what each body is responsible
44. The regulatory body has the legal powers
to implement licence conditions and other consumer issues, and
it has the policy tradition and staff and customer duty to think
these through. It tracks the way in which companies adhere to
their licence conditions, which means that the organisation is
always very close to such issues as mis-selling, billing problems,
customer transfer problems. So is the consumer watch-dog.
45. If the consumer watch-dog wants to get
noticed, it is tempting for it to go head-to-head with the regulator
in a public spat, although thankfully this approach is rarely
46. Different watch-dogs take different
approaches to their remit. energywatch has a tradition of looking
after the interests of the less well off and disadvantaged customers,
where as the water customer watch-dog uses its remit to cover
all customers. If the watch-dog is not covering all customers,
particularly small business, the Regulatory body tends to naturally
fill in the breach.
How effective is public consultation by regulators;
what opportunities do the public have to contribute; to what extent
do the public make use of these opportunities?
47. It is very difficult to get the general
public involved. Most consultation papers are on technical detail
that are of no interest to the general public. Usually the involvement
comes through committed consumer groups such as energywatch and
the Consumers Association.
To what extent do the needs or concerns of the
public guide the work of regulators; are regulators instruments
of Government or representatives of the public?
48. Regulators are representatives of UK
plc. Just as with the Competition Commission, I believe they should
not have a public interest duty. They should not be instruments
of public policythat is for democratically elected Governments.
Sometimes what they do may be unpopular. Many competition actions
can be unpopular in the early days. Nonetheless, it is very important
that regulatory offices remain legitimate in the eyes of the public
and the industry.
How independent are regulators of Government;
what factors do or might compromise their independence?
49. I was surprised at how independent I
was allowed to be. The Minister for most of my time at Ofgas took
that independence very seriously.
50. Choosing a career Civil Servant as head
of a regulatory body could compromise the appearance of independence.
51. Using mechanisms for "guiding"
policy that are not public would compromise independence.