Select Committee on Constitution Minutes of Evidence

Examination of Witness (Questions 140 - 159)



  140.  Is that not a matter which could be sorted out fairly easily? Why does it have to go at the moment to the other part of the Competition Commission? Is that by statute?

   (Professor Prosser) It is by statute. It would require statutory amendment, my Lord.

  141.  That will not be a very earth-shaking event, will it?

   (Professor Prosser) I entirely agree with that, my Lord. I suspect the reason why there has been some reluctance to do it is that the reporting arm of the Commission has been seen as having a sort of over-arching economic expertise, which is a way of providing some unified principles of economic analysis which the regulators would use, but perhaps we no longer need that, perhaps that groundwork has already been established. Another means of achieving it would be perhaps to permit the utility regulators to refer questions to the Competition Commission's reporting arm, rather like a preliminary ruling from the European Court of Justice.

  142.  Submitting the whole matter to the Commission, is that right?

   (Professor Prosser) Indeed, yes.

Lord Lang of Monkton

  143.  Professor Prosser, in your paper to us you conclude that there is a need for a generic Regulatory Reform Act because of the inconsistent legal requirements applying to different regulators. Presumably this is in part because they have come on in succession to each other and there has been a learning curve and also because they have been focused on the specific needs of the industries which they regulate. Would you not be concerned that a tidying up Act of that kind might also impose a uniformity that would blur and reduce the effectiveness of their focused purpose at present, and how would you avoid that?

   (Professor Prosser) I think it would depend very much on how the Act were to be drafted. I think something that has emerged over recent years, even within Government, has been a recognition that there are some generic principles of good administration. These should not affect the substance of the decision. Clearly the Rail Regulator undertakes very different work from the Water Regulator, for example, but to take a specific example, if one looks at the Better Regulation Initiative, there is the guide to written consultation procedures which, for example, suggests that 12 weeks is the minimum period needed for effective consultation. If you look at the utilities statutes that are based on the Telecommunications Act 1984, 28 days is provided for consultation at the end of the decision-making process. If one is confined to procedural issues of that kind I think one can get a generic approach which avoids that problem of imposing too uniform a framework on regulators with very different tasks.

  144.  Would you not also see the opportunity being taken, if not at your instigation then perhaps by Parliament, to introduce new elements to the legislation? I notice, incidently, that there is a reference in our papers to a call for "the same sort of decision-making as US utility regulation, but without the associated procedural protections", in other words you think there are shortcomings in the present arrangements. That is an example of one thing you would want to see introduced. Do you see other areas where new elements would be introduced to the legislation?

   (Professor Prosser) On the issue of US procedures, what I would be very reluctant to see introduced would be the sort of adversary hearing which tends to dominate much United States regulation, with the employment of large numbers of barristers to present the case and the formal legal procedure. What I would want point to, however, is the requirement of American legislation that there be consultation and reason-giving when rules are made, rules meaning major policy decisions, and that is very much the sort of thing which I would like to see introduced. I think there are probably some other generic principles of good regulation, for example, in terms of the time taken to make decisions and the quality of explanation which is given for decisions. We have seen some improvement in that. The Utilities Act 2000 requires reasons to be given for the first time for major decisions. It is really extraordinary, it seems to me, that the earlier legislation did not require reasons to be given for, for example, price control decisions. The Water Bill introduced last week will extend similar requirements to the Water Regulator. We are seeing improvements here and I think we are already getting some pattern of generic requirements. My fear is that they will still tend to be limited to certain regulators because the legislation happens to require it in that case rather than applying across the board.

Lord Fellowes

  145.  You mentioned good administration. Would you think that encompasses some sort of uniformity in a consulting body appointed probably by the regulator him or herself? To take an example, I think the head of the FSA is both Chairman and Chief Executive, formally entitled both of those posts. Others seem to like to have a consulting body, others have a board. Do you think good administration should perhaps try and regulate that a bit to give some sort of uniformity so that people using the services of the regulator feel that they know what the process is going to be?

   (Professor Prosser) In one sense I think we are moving rapidly there already because the Commission model has really now won in that there is legislation now before Parliament or about to be introduced into Parliament to turn all the utility regulators into commissions. I think the Railway and Transport Safety Bill makes the Office of the Rail Regulator a corporate commission. The recent Water Bill proposes turning the Water Regulator into a form of commission. OFCOM will be a commission. So we are seeing that as the solution to the problem that you have raised and I think in a sense that goes beyond the question of whether you separate the chairman from the chief executive. Through having a commission model you are getting a range of views to permit debate and that seems to me to be an important advance.


  146.  If I could look at one other aspect of relationships that regulators have: as I mentioned earlier, you have legal accountability, political accountability and a duty to explain. In your paper you focus on the legal accountability: you mention there are problems there in terms of the duty to explain, which has been touched upon, that there have been various changes that have been brought about to ensure broader, and perhaps more consistent contact which takes place under that third relationship. I wonder if I could focus on the second, which is the political accountability, the relationship to Parliament itself. You mention in your paper that several departmental select committees have undertaken inquiries and of course there is actionability through the Public Accounts Committee and the work done by the NAO. Do you think that is sufficient? Should there be more consistency on Parliament's part in scrutinising the work of regulators?

   (Professor Prosser) Parliament has done a lot already. Perhaps the question that might be considered is whether there should be perhaps a joint committee on regulatory affairs that would examine the work of each regulator as its speciality and perhaps it could also be involved in, for example, the scrutiny of Deregulation Orders. I think that has advantages and disadvantages. The advantage is, again, the development of a generic approach to regulation. The disadvantage is that, for example, the investigations by the departmental select committees of the House of Commons have been good at locating the work of a regulator within the general framework of policy. For example, energy policy is clearly a matter in which the regulator plays a role as well as the department, and I think the advantage of having a subject committee there is that those can be examined together. I think the case is actually arguable on both sides. I think I would just come down on the idea of a generic Regulatory Affairs Committee, given that so much work on regulation and deregulation is already being carried out by both Houses.

  147.  And presumably one could argue that they are not mutually exclusive in the sense that departmental committees could look at it in a more substantive sense but a committee looking more at it in procedural terms might have more agility?

   (Professor Prosser) Indeed. I assume that the National Audit Office and the Public Accounts Committee would continue to undertake their value for money examinations which have been very valuable at drawing out general principles.

  148.  Indeed. That would be a good example of where you could have the two types of committee operating because you can get overlap between what the Public Accounts Committee is investigating and what a departmental select committee is looking at.

   (Professor Prosser) Indeed. The effect of liberalising electricity markets is an example where precisely that has happened.

  149.  Clearly there is more that Parliament could do even though, as you stressed in your paper, there is quite a lot that has been done and if I read your paper right, you give credit to Parliament for the work that has already been carried out. So in a sense it is building on that good work already. Is there more that could be done? You have outlined, coming to the third relationship which is a duty to explain and consultation with bodies external to the regulator, that changes have taken place, and there is some degree of consistency in practice. Are there further changes that would be desirable there as well? How connected are regulators with consumers? There are links with bodies often where the regulators themselves are appointing the members of the bodies. Can we be sure that regulators are hearing the authentic voice of consumers? They may not be required to act upon them but they need to hear them. Are they actually hearing consumers' voices rather than particular consumers' voices?

   (Professor Prosser) That is always a very difficult issue because it is extremely difficult to consult consumers except through their representative organisations and I think that is probably what one has to be content with in the end. Again, I see the move towards independent consumer councils appointed by the Secretary of State rather than by the Regulator as being an improvement because it seems to me that the consumer organisations are essentially there to act as consumer advocates, to present the consumer case as strongly as possible, to make sure that it is not neglected in the pressure from industry which will no doubt be bombarding the Regulator with views and information. The task of the Regulator is, firstly, to balance the various views which have been put forward, to balance the range of interests; and secondly, as John Swift stressed in his paper, to appeal to some form of broader public interest above that and it seems to me that there is danger if one confuses the two. There was reluctance, I know, by the Water Regulator to support the model of independent consumer representation because he felt that if he appointed the consumer representatives he could involve them in confidence in negotiations on price control. I can see that argument and I think that that involvement worked quite well, but it is outweighed by the advantages of independence.

  Chairman: Thank you very much.

Lord Jauncey of Tullichettle

  150.  Mr Swift in his paper and in evidence today told us about the various rail consultative committees which he visited and how useful and helpful they were to him. He then goes on in his paper to explain that they had been taken away from the Rail Regulator and transferred to an Executive Agency—the Strategic Rail Authority. Does that not seem to be a rather retrograde step if it is desirable that the Regulator should be in touch with consumers?

   (Professor Prosser) The danger is that perhaps those committees will come to represent views that are more acceptable to Government than to the Regulator, given that the Strategic Rail Authority is very different from the sort of utility regulator which you are discussing now, it is really an arm of Government which dispenses Government funds. I think that there are dangers in that the Secretary of State in making the appointments could choose acceptable views, but certainly the evidence in practice I think has been that the consumer councils in rail have remained ruggedly independent. One sees them quoted regularly criticising the reductions in service by the Strategic Rail Authority, one has seen that this week.

  151.  But the fact that they could become the responsibility of the Strategic Rail Authority, does that not really remove them from the regular contact which they would have had previously with the Rail Regulator?

   (Professor Prosser) I think that is up to the Rail Regulator. I do not see any problems with the Rail Regulator having frequent meetings to get their views. The earlier danger was perhaps that they could become creatures of the Regulator rather than independent representatives of consumers.

  Lord Jauncey of Tullichettle: I see. Thank you.


  152.  Just following on the point about that link before coming on to another question. One could strengthen the input from consumers without in any sense jeopardising the independence or integrity of the regulators.

   (Professor Prosser) Yes.

  153.  So one could see a strong case for trying to beef up the consumer input side because it would not prevent the Regulator standing back and determining what is best in the public interest because of that distinction that you drew.

   (Professor Prosser) Yes, I think that is right. One needs very strong consumer representation and the model, for example, under the Utilities Act seems to me to ensure that by having that degree of independence and again a very vociferous consumer body there.

  154.  If I could move on to another question but one that we have put very consistently to our witnesses and that is the choice between an individual as regulator and a board. Do you have any particular views on that? Also, given the nature of the changes that are taking place centrally, whether there is not a case for more consistent linkage across regulators. You heard Mr Swift say that there was more consistent interchange now, contact between the regulators themselves. Is there a case in any sense for formalising that sort of contact?

   (Professor Prosser) On the first question, I strongly believe that a board is preferable, which is very much the model we are ending up with. I think the reluctance early on to set up boards was due to a fear that they would become bland and would not take brave decisions. Postcomm is a board, Postcomm has been heavily criticised, particularly by the Royal Mail, of course, but I do not think it has been criticised as lacking in initiative, I think the criticisms have been the reverse. That is a board yet it has managed to take radical action to open up the postal markets. I do not think there is the danger of inertia, so to speak, or regulatory timidity that is sometimes associated with a board. On joint working, I think a problem which occurred early on was that there was a limited degree of joint thought between the utility regulators on matters of economic principle. That was where the Competition Commission in its reporting role was able to provide a more consistent approach. As I mentioned earlier, I think that probably is not the best model for an appeal, but there could be other means of involving the reporting arm of the Competition Commission in answering questions such as developing the most appropriate principles for the determining cost of capital. I think that is probably where joint working would be best. In terms of merger, we have OFCOM, and the merged Energy Regulator. I think post and rail and water remain rather sui generis. I do not see scope for further mergers there, though the reference to common principle seems to me to be important.

  155.  If I could just come back to your first point about the desirability of boards over individual regulators. You said there was a clear case for boards but then justified it in a negative sense by saying that they have not fallen foul of the criticism that there would be inertia. What is the fundamental benefit of a board? What can a board do that the individual regulator cannot do? There is no reason why the individual could not be radical in the sense of reports. What is the fundamental benefit that would make the decision decisive in favour of boards?

   (Professor Prosser) I think one can see that positively and negatively. Positively, there will be a degree of debate before decisions are taken. The members of the board, though they are not appointed to represent interest groups, tend to come from a range of different backgrounds and I think that is valuable because it means that ideas and proposals are better tested through debate there. The negative advantage so to speak is that there is less danger of a maverick regulator. We have been fortunate in that I do not think we have had any examples so far in terms of individual regulators but there was that potential danger.

  156.  Since in practice there has not been a problem with individuals, nevertheless we are moving from individuals to boards, so presumably the justification is in terms of the positive advantages?

   (Professor Prosser) Yes.

Lord Jauncey of Tullichettle

  157.  So far as individual regulators and boards are concerned, are we not really shutting the door after the horse has bolted, because I gather that the only utility regulator who sits alone is the Rail Regulator and I think you told us a moment ago that there are proposals that he should be converted into a board, is that not right?

   (Professor Prosser) That is correct, my Lord.

  158.  I think it is government policy at the moment to have boards for all the regulators.

   (Professor Prosser) It is government policy. Assuming that the current legislation is passed unchanged, there will be no individual regulators by next year. Even the Director General of Fair Trading under the new Enterprise Act 2002 will become head of a corporate Office of Fair Trading. Rail will become a corporate board. Water, assuming the Water Bill is passed (it was only published last week) will become a Commission—the Water Services Regulatory Commission. In that sense I think the battle has already been won by the proponents of boards, yes.

  159.  It rather sounds like floreat bureaucracy.

   (Professor Prosser) One could put it that way.

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