Select Committee on Constitution Minutes of Evidence

Examination of Witnesses (Questions 500 - 519)



  500. Fine. Thank you very much. Mr Latif, is it the same for you?
  (Mr Latif) Yes, absolutely.

  501. Thank you very much. Having read your evidence, since we are focussing very much on accountability, it strikes me that one can identify three levels and this fits in very much with the papers that you have put in. There is what you might call the low level, which is transparency, of requiring information to be in the public domain. The second level is that of answerability or, if you like, of scrutiny where there are bodies which can actually put questions to regulators and require answers. The third level is essentially that of challenge where there are other bodies which can overturn a decision of the regulator. The material you have put in fits in with those three levels but where there is a particularly common element in the two submissions is in that third layer, that challenge, because you both stress problems in terms of the appeal mechanism. Particularly on the Electricity Association side you make recommendations dealing with scrutiny and transparency. If I could start with the appeals process. Both organisations invite us to subscribe to the principle that there should be reform of the appeals process, you need a swifter and more effective appeals process. If the Committee signed up to the principle what form would the actual appeals mechanism take? In other words, how would you translate the principle into practice?
  (Dr Golby) If I could start and then hand over to my colleague. I think there are two specific levels here. One is an appeals process relating to the competition element of the role of Ofgem and the other and quite separate one relates to the regulatory element of that process. Maybe, Roger, I could ask you to pick up those two separate areas.
  (Mr Barnard) Thank you, yes. I think one has to answer that question by reference first of all to the sort of patchwork quilt or in less respectful terms the ragbag of review/appeals mechanisms which are currently available in the regulatory field generally, and when we are talking this afternoon we are talking specifically about Ofgem for most of the time but so much overlaps anyway with other areas of regulatory activity. You have got a de facto form of appeal by way of the triggering of references to the Competition Commission when the regulator brings forward licence modification proposals that the licence holder or holders do not wish to accept. You have then got in most of the statutes a rather attenuated form of judicial review in relation to enforcement procedures and financial penalty proceedings. You have got full blown rights of appeal on the merits to the Competition Appeal Tribunal where the regulators (in this case Ofgem) are exercising their jurisdiction or functions under the Competition Act or the Enterprise Act. Last of all, you have got good old traditional judicial review, the historically renowned way of keeping, if I can put it this way, the bureaucracy in check. There is no apparent logic to this patchwork quilt and I think one has to look at it in those terms and ask how, if one were starting from a bare sheet of paper again, would one want to structure appeals mechanisms in relation to decisions which are of enormous importance to licensees, to the economy, to society generally and to the environment. I think both industries that are appearing before you this afternoon would probably say the answer ought to be something like this. First of all, where a licensee is dissatisfied or cannot accept a price control review proposal from his regulator, then the existing route of triggering references to the Competition Commission is probably the best and most satisfactory means that you are going to find of getting a balanced judgment on what is essentially a complex economic decision. I think we would then go on to say that in relation to all other types of decisions by regulators—and they might be decisions in relation to the grant of a licence, decisions as to licence modifications, decisions as to enforcement orders or financial penalties—there should be rights of appeal by the licensee to a new animal called a RAT, a Regulatory Appeals Tribunal, which would span appeals mechanisms and rights of appeal in all those industries listed in the Competition Act as sectoral regulators. The advantage of that would be of course that one might expect a sensible and consistent body of case law to emerge quite rapidly in response to appeals to a body like that. Then last of all, let us not disturb the existing rights of appeal against regulatory decisions to the Competition Appeal Tribunal in relation to regulators' jurisdiction under the Competition Act.
  (Mr Latif) I have to say we agree with that. We have had this discussion before internally in terms of our two organisations and I cannot really add much more to that than Roger has already actually said.

  502. Fine. The point you are making is that although you are particularly concerned with Ofgem this would have general applicability in terms of regulated industries?
  (Dr Golby) Absolutely, yes.

  Chairman: Thank you very much.

Lord Lang of Monkton

  503. I wonder if I could just ask both the chairman and the president a rather general question. I am not quite clear what the impact is in regulation terms of representative industry associations. On the one hand, there is the danger that your members might have very strong grievances but either leave you to press their case as an association or they fail simply to make their case even to you because they feel that you will no doubt do the necessary. On the other hand, your relationship with the regulator could act as a rather bland filter between the coalface of the industry and the regulators. So do you think that your members' grievances are properly heard and understood by the regulators and do you think they are justified in most cases—you might like to give us some examples—or do you think that you have a danger of, not dumbing them down but muffling them slightly?

  (Dr Golby) Let me attempt to answer that first. The Electricity Association is a very broad church covering most of the companies in the sector. One of the issues we have recognised recently is the possibility of dumbing down, that we produce the lowest common denominator view to take to the regulator. As a result of that we decided some months ago to actually split the Electricity Association into three new bodies, one being a body that represented the generation part of the industry which has very specific issues in its own right, the second representing the infrastructure or the networks activity of the industry, both the electricity networks and also the grid operation of the gas industry, which has quite specific issues in its own right, and of course both of those networks are regulated monopolies and therefore they are quite specific. Then thirdly an association representing the retailing activity, the selling activity of the industry, again both electricity and gas. So we have seen a convergence of electricity and gas and a divergence of the activities into those three broad categories, which I believe fairly well mirrors the operation of Ofgem in terms of what it choose to regulate and what it chooses to allow to operate in the free competitive market. That is how we are responding to that dumbing down challenge and you are correct that there has been a number of occasions where individual companies have wished to dissociate themselves from a particular stance taken by the Electricity Association. We believe that the way I have described is the way forward to deal with that, with strong associations but with companies able to individually represent themselves, of course, as they have every right to with the regulator on a particular issue.
  (Mr Latif) I think that is the same for the Gas Forum. As you have probably seen from our response, the majority of our members agree with us but a few chose not to actually come on board, but we would reflect both views. I think it is incumbent upon us as a representative of the industry to reflect the various views there are in the industry. As you quite rightly say, if you do go to the lowest common denominator you do not really get any meaningful responses back. So what we allow is for our members to express themselves and where we would agree unanimously that becomes a very powerful communication tool but where we do not we actually reflect the actual balance of views. So people can judge which way they wish to actually go through with.


  504. I was going to pick up on the very point you have made because, as you have indicated in the addendum, there is a number of your members who felt that an appeals mechanism along the lines indicated would actually slow up the process and my introduce uncertainty, but I take it from your submissions that the majority of your members actually feel quite strongly than an appeals mechanism of the sort you propose is actually essential?

  (Mr Latif) Yes.

  Chairman: Thank you very much.

Lord Holme of Cheltenham

  505. I would just like to press that point first of all, my Lord Chairman, the fact that two very large companies, British Gas and ExxonMobil, both feel that the downside of appeal outweighs the benefits of appeal. I am not absolutely clear from your statement whether there are grounds for saying that British Gas feels the same as ExxonMobil. It seems in both cases to arrive at uncertainty being a problem in the case of British Gas because delays would lead to uncertainty. You talk about the incremental regulatory uncertainty introduced by such processes. Does that mean something different from delays? What is the problem?

  (Mr Latif) As I say, my Lord Chairman, I have to ask those companies to actually represent themselves in that view. We did not really actually go down to the level of depth of their uncertainty of our proposal in that respect but there is this view that it does bring undue delay to the process and also it brings uncertainty. The words, I think, probably mirror the same effect. I think they do mean uncertainty rather than anything else.

  506. So trying to understand your dissenting minority, their concern is that they would prefer to have the certainty of decisions which they may or may not like than the longer drawn out process of appeal, which may or may not result in a decision that they like?
  (Mr Latif) I think that is their argument, yes.

  507. I see. May I ask a supplementary. Just moving on from that, let us assume that the appeal decision which the majority of your members in both cases are in favour of. Let us assume there was a decent appeal mechanism in place. In the opinion of both bodies what would the implications of that be for the theme of this Committee, which is accountability? Would the presence of a proper appeals mechanism have the net effect of obviating or reducing the need for parliamentary and other accountability?
  (Mr Barnard) I think the answer, my Lord, and I suppose you would expect me to say this as a lawyer, is that in the end legal accountability is probably the only form of legal accountability which really matters to licensees who are on the receiving end of the jurisdiction of a regulator. It is an addition, a long-stop addition to increased political accountability, increased financial accountability and possibly increased public accountability, although that is a very elusive concept in our administrative system. It enables licensees to walk tall in relation to their regulator in a way that they cannot do at the moment.
  (Mr Latif) Yes. I think also in terms of accountability you have to have the Regulatory Impact Assessment to be a part of the actual accountability process. We believe the appeals process is the ability to be accountable. With these two in combination hopefully what will happen is that the actual companies will feel that the solution which is being arrived at has had the full participation of the members who are actually going to be impacted at the front end rather than at the end bit, where it comes to a solution and people will need to actually then start worrying about how they are going to implement it and what the consequences are. If you do the Regulatory Impact assessment at the front end you will find that people will then be able to assess on merit what the actual proposal is and the regulator becomes more accountable. It actually does its homework and produces evidence so that the members who are going to be affected by that change can actually either challenge the evidence or take it on board and say there is a greater benefit to having that change thrust upon them.
  (Miss Love) My Lord Chairman, in terms of the two members you have spoken about, British Gas and Exxon, in particular talking about regulatory impact assessments when we do not actually know what the framework is going to be for appeals, I think that is maybe where the uncertainty in terms of committing to this proposal is. If we could actually see what it might look like then we would be able to give a more informed judgment. As Mr Latif said, if we had Regulatory Impact Assessments we are hoping to keep appeals to a minimum by going through that process. I think that would give you a greater commitment from British Gas and Exxon.
  (Mr Barnard) One has to bear in mind also, I think, my Lord Chairman, the remarkably unlitigious nature of these two great industries thus far. One has to work inside these industries to know the extraordinary lengths to which directors will go to avoid legal confrontation with their regulators. It may be circular. One of the reasons for that may be the lack of credible appeals mechanisms. But I come back to my earlier point: if licensed industries cannot challenge their regulator in an appropriate forum with equality of arms then they are always the subjects of regulation; they are not equal partners in the process with the regulator.

  Chairman: Thank you.

Lord MacGregor of Pulham Market

  508. Would you like to say a bit more about the Regulatory Impact Assessments—how you see them developing, what objectives you would like to see them having, what impact you think they might have?

  (Mr Latif) I think it is wider than economics and they need to take the social aspect, the environmental aspect into it. I have to say that the FSA and the telecoms model, I think, requires them to do a wider assessment. We had a situation within the gas arena where shorter balancing periods were suggested and we went through a process where this was thrust as a way forward for the regulator to make the balancing more efficient. We went through years, I think, of uncertainty on this process. At the end it was the industry itself then which actually had to pay for an independent assessment to be carried out, which basically made the idea economically unsound. So if we had the basics of regulatory assessment across the economic, environmental and social then I think that would be a good framework.
  (Miss Love) I think ultimately in terms of our concerns if the Regulatory Impact Assessment was carried out from day one individual companies could understand what costs of capital, etcetera, they might have to employ to actually endure this proposal and it would give us a better opportunity to understand what we would have to pass on to customers and obviously a justification for that cost. Again, as I said earlier on, that would hopefully reduce the number of appeals because it would be obvious to parties involved in the process as to why the proposal was going ahead.
  (Mr Latif) Just on the actual balancing, in the study that was carried out the actual cost to the industry would have been between 1 billion and £3.5 billion and that is a substantial amount of money that would have had to have been recovered by the end consumer really. So that assessment was not carried out in the initial stages.

  509. In a way the economic assessment can be more quantifiable and less judgmental in a sense than the social and environment.
  (Mr Latif) I agree.

  510. So where would you think the greater impact would come?
  (Mr Latif) We are torn between the fact that the Government then requires the environmental type of—I think there is a balancing act there which needs to be legislated for, I think, but there is a tendency—and I will let Paul talk about that—the green issues have come to the fore but when you do assessments currently it will be just on the economics.

  511. One view which has been expressed is that indeed the role of the regulator should concentrate on the economic impact and the competition impact and that the social and environmental considerations are more for the Government to deal with in other ways. I do not know if you would agree on that.
  (Mr Latif) Yes.
  (Dr Golby) If I could pick up that point, my Lord. I think it needs to be one or the other. I think where we are at the moment is most unsatisfactory, with an economic regulator, with environmental and other guidance given by the Secretary of State because that almost creates a double jeopardy situation. So I think this needs to be enshrined, maybe through primary legislation, to change the remit but a very clear framework for regulatory impact assessments so that we clearly know, frankly, where we are coming from.
  (Mr Barnard) My Lord Chairman, every regulated industry is in favour of impact assessments, like motherhood and apple pie. One needs to be careful how they are structured. We of course welcome the Government's proposal to give them statutory backing but I think we would say that the present form of the obligation in the Communications Bill currently before your Lordships' House is most unsatisfactory. If you are going to lay duties on regulating authorities to run proper meaningful impact assessments you need to specify quite tightly what those assessments are going to apply to. In Ofgem's case I guess they ought to apply to those things that are picked out in what is known as Ofgem's forward work plan. I use those words because they are embodied in statute already in the Electricity and Gas Acts. It is there that you see the plethora of regulatory projects going forward, none of which have been subject to meaningful or indeed any impact assessment. You need an obligation which specifies in quite tight terms what sort of costs and benefits an RIA should assess, including the cost of doing nothing. You need an obligation which requires the regulator to publish an initial impact assessment and then when he publishes his final impact assessment an obligation to say how it differs from the initial one backed up by a fair and accurate summary of the representations he received in response to the initial one. The regulators of course will say that all this is impossible, it is far too prescriptive. I would merely point out that the Department of Trade and Industry's own RIA in respect of the better electricity trading and transmission arrangements, which presumably Ofgem had a large hand, alongside the DTI, in producing, fulfils exactly that sort of prescriptive model that I have just outlined. So it can be done; do not let them tell you that it cannot.


  512. And it can be embodied in statute?

  (Mr Barnard) Yes, indeed. We have actually give the DTI some illustrative drafting of how that might be achieved, if you would like to see it.

  Chairman: That would be very helpful.

Lord Elton

  513. I probably misheard, Mr Barnard, but did I understand that RAT would be an addition to the pack, as it were, rather than a substitution for any of the existing route?

  (Mr Barnard) Regrettably, I suppose, yes, it would be an addition to the existing array of statutory tribunals.

  514. That would scarcely simplify matters, would it?
  (Mr Barnard) It depends what sort of simplification one is looking for. I painted earlier a picture of a patchwork quilt of rather inconsistent provisions for appeals, or more properly reviews or scrutinies that have been built up historically over ten to fifteen years of privatisation. They are complex. There is a complex variety of routes. It seems to me to quite considerably simplify things to say price control to the Competition Commission, everything else that a regulator does under his sectoral statute to a new Regulatory Appeal Tribunal, and everything that he does under competition law, as now, to the Competition Appeal Tribunal.

  515. Thank you. We have been looking and referring to guidance as well as the means by which Ministers effect what goes into the regulatory field and the lack of control, as you may see it, over this or influence. I do see that Section 14 of the Utilities Act 2000, which put a new section into the 1989 Act, does provide in fact for the draft of any guidance proposed to be issued under this section to be laid before each House of Parliament. Parliament then has the opportunity to consider and reject it if it wants to, or to consider it and let it through or simply to ignore it. Has there been any activity of significance in this field to your knowledge?
  (Mr Barnard) I think the Secretary of State issued draft guidance shortly after the commencement of the Utilities Act provisions, which amended both the electricity and gas legislation, and only recently has crystallised that into final guidance.

  516. November last year, to be precise.
  (Mr Barnard) Yes, indeed. It is, one might say, extremely innocuous stuff actually and I understand that there are pressures within government, perhaps from departments other than the DTI, to toughen it up

  517. What I was really intending to ask was whether you regard this potential area of activity as an area in which you could exercise some influence?
  (Mr Barnard) I suppose it depends really on what position you take in the great debate as to whether Ofgem should be a purely economic regulator or a regulator who is also subject to explicit social and environmental responsibilities. If it is to be the latter then I think one would want as a licensed industry to have some quite considerable influence on the form and contents of that guidance. With no disrespect to your Lordships' House or to the other House either, there is a feeling generally outside Parliament that procedures for passing and turning into law statutory instruments or other kinds of secondary legislation, whether under negative or affirmative procedures, do not offer a lot of protection to those on the receiving end.

  518. The difference between negative and affirmative is that affirmative procedure requires the instrument to be considered by Parliament and the negative only gets considered if parliamentarians think it should be. This falls into the latter and I wondered whether in fact you regarded that as a mechanism which you could use to bring the parliamentary interest into your area of activity? As regards the other place, in which I am no expert, it requires a constituent to approach a Member in order to get his interest, I would think, and the same is true in this House. I just wondered if this was a route which you considered fruitful. From what you have said so far I think you regard it as a dead end perhaps?
  (Mr Barnard) You took the words out of my mouth, my Lord. It is very difficult for citizens, industries, and others outside Parliament to modify the procedures or to modify the contents of secondary legislation. The sheer volume of secondary legislation which is made by Ministers is impossible to keep up with and parliamentary scrutiny, with all due respect, must be perfunctory; I do not see how it can be otherwise. Therefore, guidance to regulators which is made under those sorts of procedures is not a framework within which the industries can hope to contribute much by way of influence, control or challenge.

Lord MacGregor of Pulham Market

  519. The basic problem is the neither House can amend secondary legislation.

  (Mr Barnard) Indeed.
  (Dr Golby) That is correct. I think, my Lord, I will go back to an earlier answer that I think any change in remit here in terms of social, environmental obligations really, I believe, needs primary legislation to determine the remit properly as opposed to secondary legislation for the reasons we have just been discussing.

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