Evidence from the Electricity Association
1. The Electricity Association (EA, or we)
welcomes the Constitution Committee's decision to conduct an inquiry
into the workings of regulation, looking in particular at the
accountability of government-appointed regulators, their scrutiny
by Parliament, their accessibility to the public, and their responsibility
to the citizen. The EA believes that these issues have significant
implications for the effective functioning of the British economy.
It is pleased to contribute this evidence to the Committee's inquiry
on behalf of all categories of licence holder in the electricity
2. We are aware that the issues of concern
to the Committee are relevant to the regulation of numerous important
industrial sectors, including the utility companies, the broadcasting
media, and the financial and service sectors. However, given the
EA's role as a trade association for the electricity supply industry,
our evidence will focus on the position and activities of the
Gas and Electricity Markets Authority and its executive arm, which
operates under the name of the Office of Gas and Electricity Markets,
otherwise known as Ofgem. (In the rest of this paper, the terms
"Authority" and "Ofgem" are used interchangeably
except where noted.)
3. The Authority, as the principal regulator
of the gas and electricity industries, has general supervision
and control over one of the largest (by value) and most essential
(by function) sectors of the British economy. In this role, it
exercises significant power in relation to companies and individuals,
and this is clearly evidenced by the sheer volume, importance,
range, and scale of the decisions that it regularly makes.
4. The Committee's questions are addressed
below in the order in which they were set out in its call for
evidence. This response includes our covering letter.
What are the legal bases for regulators: what
is the nature of their powers and how do they exercise them: how
could their powers be revoked: and from where do they obtain their
financial and administrative support?
5. The Authority has a statutory basis.
It was established, under the Utilities Act 2000, as the combined
successor to the former separate offices of the Director General
of Gas Supply (under the Gas Act 1986) and the Director General
of Electricity Supply (under the Electricity Act 1989) Its primary
function is to regulate the activities of the licensed entities
within the gas and electricity industries in Great Britain in
accordance with its principal statutory objective. That objective
is to protect the interests of the consumers (respectively) of
gas and electricity, wherever appropriate by promoting effective
competition, and with regard to the need to secure that all reasonable
demands for supply are met and that licensees are able to finance
6. Ofgem is a non-ministerial government
department whose functions (see section one of the Utilities Act
2000) are performed on behalf of the Crown: its employees are
civil servants. Its statutory powers, under the amended gas and
electricity legislation, are a patchwork of executive functions
(such as the power to issue licences or modify their conditions),
legislative functions (such as the power to make statutory instruments,
in some cases without ministerial consent), and judicial functions
(such as the power to determine disputes or impose financial penalties).
7. In performing those functions, Ofgem's
accountability to Parliament or citizens is, at best, blurred
and indirect. A Key reason for this is the broad discretionary
nature of the statutory framework for utility regulation, a characteristic
that it shares with the wider British administrative system, of
which regulation forms an expanding part. That is why the EA believes
that the weak political accountability of regulators needs to
be counter-balanced by a more effective framework of legal accountability.
This concern is amplified in other parts of this paper.
8. Regulatory powers, being endowed by statute,
can only be changed or revoked by subsequent legislative intervention.
There are no institutional mechanisms to enable government to
determine whether regulation should be withdrawn from a particular
industry or sector, in whole or in part.
9. If, conversely, the Committee's question
about the revocation of regulatory powers springs from a concern
about the terms of appointment of regulators, it should be noted
that a significant mark of their protected status is the limited
statutory power of dismissal which applies to their office. In
Ofgem's case, the members of the Authority are appointed for five
years, there is no limit on the number of terms for which they
may be reappointed, and they can only be removed on the grounds
of incapacity or misbehaviour. However, although the criteria
for dismissing members are laid down by statute, the law is silent
on the criteria for their appointment.
10. Ofgem's costs (and those also of the
Gas and Electricity Consumer Council) fall within the general
class of public expenditure, where they are funded by the Exchequer
through the parliamentary vote procedure. This expenditure is
then recovered under the price control arrangements as a pass-through
element in the network charges levied on suppliers by monopoly
licence holdersthe transmission and distribution companies
in electricity, and the transportation companies in gas. The costs
of regulation are therefore borne, ultimately, by the general
body of gas and electricity consumers.
11. While these costs have stabilised to
some extent in recent years, they increased in each year of the
previous decade at a rate well in excess of inflation, and remain
high by comparison with the costs of energy sector regulation
in Europe. There is no direct incentive on Ofgem to reduce its
costs, and little evidence that standard Whitehall reporting requirements
or the scrutiny of the Treasury and National Audit Office have
been particularly effective in constraining its expenditure.
12. The EA believes that the whole framework
for the financial accountability of energy regulation is insufficiently
transparent, and requires fresh thought. It seems wholly inappropriate,
for example, that Ofgem is under no legal duty to publish annual
accounts, and that its service delivery agreement with the Treasury
says nothing about the desirability of reducing the real costs
By whom and how is the continuing need for regulators
measured: how is their role changed or ended?
13. In principle, the role of those regulators,
such as Ofgem, which are creatures of statute should be changed
or ended only by new primary legislation. This may indeed be the
case in relation to fundamental changes or regulatory policy that
are instigated by government. Under the Utilities Act 2000, for
example, the responsibility for gas and electricity regulationpreviously
vested in two separate statutory personalities (see paragraph
five above)was transferred to a new corporate body, the
Authority. At the same time, the primary legal duties of those
persons, including the requirements to promote competition and
ensure that licence holders can finance their activities, were
subordinated to a new and over-arching objective of consumer benefit.
14. In practice, however, the discretionary
nature of utility regulation which we have noted above means that
quite large incremental changes can take place in the role of
regulation without explicit legislative intervention. Ofgem, in
particular, tends to claim that most of its work is mandatory,
and that large parts of the energy market are no longer subject
to regulation. However, even a glance at its corporate plan will
reveal that much of the work is obviously discretionary. Ofgem
appears to have no disciplined review process to work out which
measures will be effective in protecting customers in both the
short and longer term. At the same time, the energy marketdespite
the recent removal of gas and electricity supply price contolsremains
heavily administered, and virtually no rule change can take place
there without Ofgem's approval.
15. Moreover, the ubiquity and intrusiveness
of the regime are part and parcel of a more general growth of
regulatory pressures in recent years. In addition to regulation
by Ofgem, the gas and electricity industries are also now subject
to regulatory intervention of one kind or another by the Department
of Trade and Industry, Office of Fair Trading, Competition Commission,
Financial Services Authority, Gas and Electricity Consumer Council,
and Health and Safety Commission. Nor can the industries ignore
the growing impact of European Commission requirements, which
are mostly binding on and directly enforceable within member states.
16. The Cabinet Committee system incorporates
a Ministerial Panel for Regulatory Accountability, consisting
of the Chancellor of the Duchy of Lancaster, the Secretary of
State for Trade and Industry, the Chief Secretary to the Treasury,
and the Minister of State at the Cabinet Office. It is required
by its terms of reference to tackle cases where progress to regulatory
reform is blocked, and to call ministers to account for new regulation
and their performance in addressing the burden of existing regulation.
This body seems ideally placed to take a strategic overview of
the UK regulatory system, including measuring the continuing need
for regulators and regulatory intervention.
Who are the members of regulatory bodies: how
are they appointed: are they adequately representative: do Nolan
17. The Authority is a body corporate which,
by law, must comprise a chairman and at least two other members
appointed by the Secretary of Statewho is required to consult
the chairman about the appointment of the other members. We have
already noted (see paragraph nine) the entrenched status of Authority
members, and the failure of government to give statutory guidance
on qualifications for membership, or to establish a mechanism
for scrutinising candidates prior to appointment.
18. In its present form, the Authority's
members include Ofgem's three managing directors (of regulation
and financial affairs, competition and trading arrangements, and
customers and supply), as well as Ofgem's chief operating officer,
who are all civil servants. However, these executive members are
outnumbered by the Authority's non-executive members, so the composition
of the Authority actually exceeds the current good corporate governance
principle that 50 per cent of board membership should be non-executive.
We welcome this, and have seen no evidence that Nolan principles
are not applied to the appointment of members.
19. As to "representativeness",
while this is always an elusive concept in the British administrative
system, we note that the present non-executive members of the
Authority do seem to bring a broad and balanced level of experience
to the table, reflecting a wide rage of business, energy sector,
social, financial, and academic expertise and interests. A more
important issue, however, is the actual role and influence of
these members in the Authority's work. We address this point at
paragraphs 37-38 below.
What are regulators set up to achieve: to what
extent do regulators achieve their purposes without adverse consequences:
how is their effectiveness assessed?
20. As we have already noted, Ofgem's principal
statutory objective, in carrying out its functions, it is to protect
the interests of gas and electricity consumers. All other issues
and considerationsincluding even the duty to promote competitionare,
as a matter of law, secondary to the enhancement of consumer benefit.
In Ofgem's case, therefore, the old idea that the aim of regulation
is to balance the different interests of the relevant stakeholders
in the regulated sectorconsumers, producers, shareholders,
employees, new market entrants, and so onis only relevant
to the extent that such a balancing exercise can be shown to serve
the interests of consumers.
21. With such a broad mission, underpinned
by wide legal discretion, it is inevitable that achievement of
the purposes of regulation may have some adverse consequences.
For example, since the ground-breaking privatisations of gas and
electricity, Ofgem's approach has been a narrow focus on the inefficiencies
of monopoly networks, where the remedy has been to sweat the assets
and other inherited resources, and a more recent emphasis on the
need for new arrangements for gas and electricity trading and
more competitive market structures in generation and supply.
22. While these policy tools have served
consumers better than the old pubic sector methods, they have
also produced relatively higher costs of capital for the monopoly
operators and inherently unstable markets at both the wholesale
and retail level. These adverse consequences may now be an obstacle
to the reinvention of energy policy that is necessary to deal
with the emerging new imperatives of environmental protection,
networks investment, and longer-term security of supply.
23. There is currently a number of layers
of parliamentary and political oversight of Ofgem's activities:
the Treasury, National Audit Office, Public Accounts Committee,
Environmental Audit Committee, Select Committee on Trade and Industry,
and Better Regulation Task Force. While all of this may generate
an impression of accountability, the downside is a lack of any
real institutional "ownership" of the task of measuring
Ofgem's effectiveness. Ofgem does not measure its own effectiveness
in any robust way, and has not usually published regulatory impact
assessments of its major projects, despite government recommendations
that it should.
24. All utility regulation is complex and
difficult, and, in view of the economic and social significance
of these industries, it is important that there should be some
focused and co-ordinated mechanism, preferably at parliamentary
level, for assessing regulatory effectiveness in the round. This
is a task that could be taken forward by the new cross-sectoral
Select Committee that we advocate at paragraph 34 below.
To what extent are regulators both prosecutors
and juries on an issue: what rights of appeal are there against
decisions made by regulators?
25. The whole of the regulated utility sector
suffers from the absence of effective rights of appeal against
regulatory decisions. This is unacceptable, because any public
authority, such as a sectoral regulatorno matter how competent,
well informed, and properly motivated it may bewill sometimes
make decisions or pursue policies that are flawed or mistaken.
26. The problem of the lack of adequate
mechanisms for ensuring that regulators' decisions are properly
scrutinised, in an appropriate legal forum, is particularly acute
in the field of gas and electricity regulation. This is because
the Authority, in regulating the sector, makes decisions in a
range of different rolesas policy setter, law maker, arbiter
of disputes between various parties, and enforcer of certain legal
27. Sometimes the Authority must enforce
and/or arbitrate on laws that it has itself made (and can remake).
It will in other cases be required to perform, in relation to
the same subject matter, a mixture of roles akin to those of investigator,
prosecutor, and judge. Moreover, the Authority, while frequently
exercising its discretion within a framework of statutory duties,
is at other times required to function in a capacity in which
those duties have no place.
28. In short, as well as being substantial
in both scale and effect, the role of the Authority is also complex,
because it involves a range of different types of legal activity.
It is not characterised by the separation of functions that, for
the reason of ensuring good process and the protection of fundamental
rights, is common to most other examples of law-making, adjudication,
29. In these circumstances, adequate scrutiny
of the Authority's decisions by means of an appropriate appeals
mechanism is both necessary and desirable. Most of those decisions
are currently challengeable only through judicial review, since,
in relation to most of the Authority's functions, there are no
specific statutory rights of appeal. As is well known, the judicial
review process falls far short of a form of appeal on the merits
of a decision. It is mainly a suitable means of challenging procedural
failures or errors of law, but not of reopening substantive decisions
on their merits.
30. The EA believes that this aspect of
regulatory accountability requires reform more urgently than any
other. It is true that gas and electricity licensees are sometimes
able to trigger references to the Competition Commission (a de
facto form of appeal) by rejecting proposals from Ofgem for new
or amended licence conditions with which they disagree. However,
this right has been restricted by the Utilities Act 2000, and
is no longer available to licensees who are in a minority of objectors
falling below a certain threshold set by secondary legislation.
Also, with the exception of references where the subject matter
is a broad economic condition, such as a price control or market
abuse measure, the Commission is an inappropriate forum for resolving
most issues of dispute between the gas and electricity industries
31. It is sometimes claimed that providing
new rights of appeal against regulatory decisions would increase
investment uncertainty and so raise the cost of capital. We acknowledge
that the cost of capital is increased by real, or perceived, regulatory
risk. However, it is strongly arguable that risk itself is most
likely to be increased by the absence of appropriate appeals mechanisms,
leaving companies exposed to potentially unfair or erroneous regulatory
decisions that are very difficult to challenge. Where appeals
do prove to be necessary, uncertainty would be reduced by a swift
and effective appellate processthe opposite of that presently
provided by the options of Competition Commission references and
32. The EA therefore supports the recent
conclusion of the Better Regulation Task Force that "there
should be a well publicised, accessible fair, and efficient appeals
procedure" against regulators' decisions. We strongly recommend
the Constitution Committee to endorse this principle when it reports
the conclusions of its inquiry. In the case of gas and electricity
regulation, the implementation of the principle would immediately
ensure that Ofgem can be held accountable for its actions and
decisions in the only way that really matters in the end.
How are regulators held to account by Parliament:
what other accountability do regulators have to auditors, government
departments, or other public bodies?
33. We have already noted the various layers
of parliamentary and political oversight to which Ofgem's (and
other regulators') activities are subject (see paragraph 23 above).
It is worth adding here, however, that these do not, in our view,
add up to a coherent system for securing the accountability of
regulators to Parliament. Ofgem, which has no established formal
accountability to Parliament, is no different from any of the
other utility regulators in this respect. Parliament needs an
ongoing, effective means of measuring regulators' performance,
and should be given greater powers to do so.
34. It might be possible to achieve this
through a Select Committee for Regulatory Accountability, dedicated
to the purpose and with a specific remit from Parliament to monitor
the interface between government policy and regulatory practice.
Monitoring at this cross-sectoral level, perhaps tracking the
work of the existing government panel mentioned at paragraph 16
above, is particularly important, since utility regulators such
as Ofgem now exercise powers and duties for which ministers would
previously have been answerable to Parliament and the public.
We would expect the existing layers of oversight to be rationalised
and reduced as a result of this new committee's role.
How are regulators accountable to those whom they
regulate: how transparent are their methods of working: what is
the impact of regulation on the economy?
35. Ofgem is not ultimately accountable
to the companies that it regulates. Under the Utilities Act, the
customer has been placed at the centre of regulation, diminishing
in law the interests of licence holders. Despite this, Ofgem has
made greater and more sustained efforts in recent years to engage
with the industries' concerns, and its listening and communication
channels have improved. As we have noted above, however, there
is a lack of credible appeals mechanisms for holding Ofgem accountable
in law for its decisions, and a longstanding reluctance on Ofgems's
part (though this may be changing now) to justify projects and
policies by publicly setting out their costs and benefits in the
form of a regulatory impact assessment.
36. Such assessments make the facts and
assumptions behind regulators' proposals more transparent, help
to facilitate consideration of possible alternative options, and
are a crucial part of any good regulatory process. We therefore
welcome the government's proposal, in its recent Energy White
Paper, to provide statutory backing for regulatory impact assessments
through primary legislation.
37. We should add that Ofgem's internal
governance arrangements compound its lack of accountability to
those that it regulates. Essentially, the Authority is the board
of Ofgem, and certain matters are reserved for decision by it
alone under its rules of procedure. Reserved matters include the
Authority's work plan, the policies behind price control proposals,
the setting of financial penalties, enforcement proceedings, and
the making of statutory instruments. These are all fairly high-level
items. By default, therefore, the scope of non-reserved functionsthat
is, matters which are delegated to Ofgem as the Authority's executive
armis very wide.
38. The practical effect of this is that
it is exceptionally difficult for licensees (even when acting
collectively) to get their own strategic concerns presented to
the Authority (as distinct from Ofgem), or to appear before it
to articulate a case on specific issues. Furthermore, no Authority
agendas or minutes are published, and industry contact with members
is not encouraged. In the absence of transparency regarding its
proceedings, it is impossible to establish to what extent the
Authority, rather than Ofgem, determines strategy and major policy
issues at other than the most superficial level. In short, the
accountability of regulators to those being regulated may actually
be diminished under the board-type structures now favoured by
39. Regulation of such a vital sector as
energy supply inevitably impacts the wider economy. The implicit
energy required to procedure the goods and services that we consume
is very great, and the sector is a key driver of industrial and
commercial progress. Stricter regulation of core activities may
lead groups to diversify into non-regulated activities, both at
home and abroad, for example, or make it difficult for the core
businesses to raise substantial capital sums for infrastructure
40. The risk of major economic effects from
regulation is particularly acute where the regulator's primary
duty is to promote consumer welfare, since this may incentivise
an ongoing shift of economic value from the regulated firms to
the consumer, reducing their market capitalisation below the regulated
How are regulators accountable to the public other
than through Parliament: what opportunities do the public have
to express particular concerns to regulators: how do regulatory
bodies relate to their associated consumer watchdogs?
How effective is public consultation by regulators:
what opportunities do the public have to contribute: and to what
extent do the pubic make use of these opportunities?
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?
41. Our impression is that Ofgem is more
accessible to the public than many other government departments
and public bodies. Its website, for example, is well designed
and informative. Ofgem also sponsors public workshops, and issues
a constant stream of consultation papers, decision documents,
reports, and press releases.
42. However, this is not the same as being
accountable to the public, and it would also be incorrect to say
that Ofgem's consultations are particularly effective, either
for the pubic or for licensees. With only rare exceptions, the
procedures do not achieve what the courts have defined as the
essence of consultation, namely the extending by a pubic authority,
with an open and receptive mind, of an invitation to other parties
to provide advice about its proposals at a formative stage, before
its mind has set.
43. The best opportunity for the public
to express particular concerns to Ofgem is through the statutory
consumer watchdog, the Gas and Electricity Consumer Council. This
body has a broad remit to keep itself informed of consumer views,
to resolve their complaints against licensed gas and electricity
companies, and to provide advice and information to the Authority
and government about the interests of consumers. Ofgem has a duty
to consult the Council about the Authority's forward work programmes,
and both bodies are jointly required to draw up a pubic memorandum
which sets out the arrangements for co-operation between them.
44. Ultimately, utility regulators are instruments
of government, not representatives of the public in any practical
sense. This is because government sets the policy framework for
regulation and enshrines it in legislation. In the case of energy
regulation, in particular, this is only to be expected, because
of the overriding importance of gas and electricity supplies as
a precondition of modern life. The roots of energy policy are
always political, requiring choices that only governments, not
markets, can make and calling for elements of national co-ordination
and strategic planning. Ofgem therefore represents the public
only in the sense that society as a whole, in relation to this
sector, is a stakeholder whose interests must be protected above
How independent are regulators of government:
what factors do or might compromise their independence?
45. It is desirable, in principle, for regulators
to be independent of government. In Ofgem's case, the legislation
seeks to give effect to this by providing only very limited powers
of intervention to ministers: they are able to veto licence modifications,
and can also give guidance to the Authority on its social and
environmental responsibilities, but they cannot direct the performance
of its functions. However, ministers have concurrent duties and
objectives under the legislation, and, in addition, as we have
noted above, the Authority's functions are performed on behalf
of the Crown.
46. In practice, therefore, it seems unlikely
that Ofgem, or any utility regulator, can operate fully independently
of government. What utility industries do, and how they are regulated,
will always be political issues, because they affect such a large
number of citizens and voters. The inter-dependency of regulation
and government should be explicitly recognised in sectoral statutes
in the form of specified grounds for ministerial intervention,
subject to both transparency of process and rights of appeal.