Select Committee on Constitution Minutes of Evidence

Examination of Witnesses (Questions 533 - 539)




  533. Mr McCarthy, welcome. We are most grateful to you for being with us. Our normal practice in instances of more than one witness is to invite both of you just to identify yourselves for the record.

  (Mr McCarthy) I am Callum McCarthy, the chief executive of Ofgem and chairman of the Authority. My colleague is John Neilson, who is the managing director responsible for customers and supply.

  534. Indeed, and a familiar face to me since he has been at two meetings I have addressed in the past two days. Thank you very much. Is there anything you would like to say to us in opening before we put questions to you?
  (Mr McCarthy) No. I think we have submitted an attempt to set out our position. The only thing I would say is that we do take questions of accountability and legitimacy extraordinarily seriously because they are fundamental to our reputation.

  535. Thank you very much. Obviously most of our questions will relate to the points you made in your paper about accountability. Before coming on to accountability, could I just begin with one question. It was just touched upon in the earlier evidence but it also relates to a point you make in your own paper, that is who regulators actually represent. We have heard different views so far and Clare Spottiswood when she was before us said that regulators represent UK plc. The Electricity Association say that regulators are ultimately instruments of government, not representatives of the public. In your evidence you say that Ofgem is neither an instrument of government nor a representative of public opinion. So that is what it is not. Who do you see yourself as representing, because I almost take it from your paper that you see yourself not so much as representing a body but the Act of Parliament which establishes the regulator?
  (Mr McCarthy) I do not regard Ofgem, the Authority - I will use the two expressions, if I may, interchangeably—as representing anybody at all. We are a body charged with particular statutory duties and given statutory rights. The principal objective we are given is to protect the interests of consumers, present and future, wherever appropriate by promoting competition. There are also other duties and responsibilities. That is the absolute bedrock which justifies our actions. The only other thing which is terribly important for our legitimacy is the professionalism, clarity and effectiveness with which we discharge those duties.

  536. That would also establish the distinction between you and say Energywatch, because they are a consumer voice, but you are a freestanding body who has to have regard to the interests of the consumers but its future is determined in the light of the functions bestowed by statute?
  (Mr McCarthy) Yes. There is some degree of overlap between our duties and the duties of Energywatch, which we try and organise tidily, but I do regard ourselves as having a fundamentally different responsibility. For example, Energywatch has one of its principal objectives getting the name of Energywatch known by the general public. Ofgem and the Authority has no such objective at all.

  Chairman: Thank you very much.

Lord Holme of Cheltenham

  537. Given that you have rooted your mandate, your charter, very firmly in the statute and the founding statue, which must be right, of course by definition appeals to parliamentarians. The question I would like to ask really is about additional considerations or duties laid on you (for instance, the recent social and environmental obligations) because clearly your job then becomes one of making trade-offs between various goods, economic goods, primary competitive goods but other economic considerations with social and environmental. At that point you are inevitably acting in a role that historically Ministers acted, trying to make accommodations between the various demands and needs of society. Sometimes those are not added by primary legislation. Looking across the regulatory field, sometimes they are guidelines, sometimes they are additions from a Minister. I have two questions really. One is, do you think there is a proper form in which any change to the regulator's duties should be passed to you? Secondly, in making these accommodations and trade-offs between different goods do you feel that you should have tighter guidelines of what weight to give to various considerations rather than being put in this quasi-ministerial position? So there are two halves to the question.

  (Mr McCarthy) Could I say that my concern to base our actions on the statue, if I could just go back to your second point, is not simply because we are in a parliamentary evidence session mode; I believe it for reasons that are fundamental and democratic as well as other things. If you take the first question, the question of social and environmental guidance or other duties, the first thing I think it is quite important to say is that there is a view that these are, as it were, novelties. That is not the case. The responsibility to have regard to the needs of those on low incomes has been something which has long been in the legislation and Ofgem, before the passing of the Utilities Act which gave the Government a plan to give social and environmental guidance, had developed a social action plan. We would not have done it unless there was a statutory basis for it. Coming to the question of changing duties, I think it is terribly important that there should be absolute clarity in the statute about what the framework of duties should be and one of the important things about the recent social and environmental guidance which was made possible by the Utilities Act was that it was not actually introduced until November last year. That is something which we have to have regard to but we balance that social and environmental guidance against the other statutory duties that are very firmly established. The idea that because we have been given guidance on a particular feature it is an absolute direction, is not the case and I think it is very important that it should not be the case unless Parliament decides that it wants to give Ministers or Parliament a power to give regulators specific directions, which I think it would be a great mistake. So there is that very constrained means of changing things at the moment. It is the case that certainly for Ofgem, and I think for other sectoral regulators, our objectives do require a degree of balancing. For example, one of our principal concerns is quite simply to keep the lights on. We have a requirement in relation to security of supply and often we have to take that into account against other questions. So there is that balancing. The things which are relatively easy for us to balance are questions which are, as it were, technical questions about the industry—how do you ensure that you have competition without impairing investment, how do you produce a price control which still enables the companies to raise finance. The issues which I find very difficult and believe are inappropriate for a non-elected group of members within an Authority to take are some of the basic, particularly environmental questions, because the environmental questions are essentially a transfer of wealth between the present generation and future generations and I think that whereas the Authority has all sorts of expertise in some areas it has got no legitimacy to make a decision on whether, for example, nuclear power is a fundamental solution to the Kyoto problems or whether it is a deeply noxious and poisonous form of energy. We have got no expertise because that is essentially a political judgment. I think it is very important that we are not charged with making those judgments.

  538. Thank you. That is very helpful. Where additional duties are laid upon you, the phrase "have regard to" of course implies that that is a qualification to the primary duty as laid out originally and generally those are economic. Do you think that in general with regulation there should be multiple considerations, a clear hierarchy, a clear sense of priorities? I am really repeating my first question in the sense of coordinating the way in which you deal with these difficult questions.
  (Mr McCarthy) I think the greater the clarity in the statute as to the hierarchy of objectives the easier our job is. I was amused listening to the previous witnesses referring to the Monetary Policy Committee. In one respect the Monetary Policy Committee—and it is only one respect—has a very easy job because it has one single objective. The thing that often makes the Authority's decisions difficult and have to be weighed carefully is that there can be conflicts between the promotion of competition and ensuring security of supply and there are things that we have to weigh all the time.

  Lord Holme of Cheltenham: Thank you.

Lord MacGregor of Pulham Market

  539. That is very much in the same area that I wanted to ask my question and you have nine-tenths answered it, I think, but can I just tease it out a little bit more. Going back to your memorandum to us, in paragraph 8 you referred there to the need for a clear hierarchy of duties for the regulatory organisation and in fact you do refer to the Monetary Policy Committee and the fact that their number one objective is a clear inflation objective. Then you go on to talk about it being much more difficult when there are multiple objectives and you then make the point you have already made that you strongly support the Government's position, saying that "environmental and social policies with significant costs are for Government to introduce by legislation, not for regulatory initiative." You then say, in paragraph 11: "There is a third thing Government could do, which is to make the social and environmental guidance more focussed." Could I just be clear that your ideal position would be for Government or Parliament not to set the regulator in an area like yours with the duty to look at a lot of environmental and social issues. Your ideal position would be to focus on clear and more simple objectives such as you had in mind, I think, in paragraph 8 but that if Parliament did put them in you want them to be much more precise so that you have got guidance from Parliament. Is that what you are really saying?

  (Mr McCarthy) I am not sure if I would use the word "precise" because I think one of the dangers of guidance is that it becomes too specific and end-use specific. I do think it is terribly important to try and give a sense of hierarchy. For example, the White Paper—which was something we found very helpful because it was, I hope not disrespectfully, described as politicians doing the job they are paid to do, namely making political judgments in a way which is quite inappropriate for us to make - established very clearly that environmental issues were going to be much more important in terms of energy policy. That seems to me an entirely appropriate decision for the Government to take. It would be very helpful if the revised environmental and social guidance could do something like saying, "We would like you, in terms of decisions which have environmental effects, to look at them with the particular overall objective of trying to reduce carbon emissions." If that was a priority it would be helpful to have it. What would be unhelpful would be to have precision in the sense of, "We think you should do so much for CHP, so much for energy efficiency," and so on.

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