Examination of Witness (Questions 140
WEDNESDAY 26 FEBRUARY 2003
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
(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.
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
(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
(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 Agencythe
Strategic Rail Authority. Does that not seem to be a rather retrograde
step if it is desirable that the Regulator should be in touch
(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
(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,
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 Commissionthe
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
(Professor Prosser) One could put it