Examination of Witnesses (Questions 533
- 539)
WEDNESDAY 21 MAY 2003
MR CALLUM
MCCARTHY
AND MR
JOHN NEILSON
Chairman
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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