Examination of Witnesses (Questions 900
WEDNESDAY 9 JULY 2003
900. So you would look at it from the point
of view of effectiveness and, in order to deliver that, that requires
the regulator to have that degree of independence, and therefore
what you are getting at is, how do you balance independence with
(Sir Derek Morris) Indeed. It is often thought that
in some sense they must be in tension or even irreconcilable,
and one only has to look outside this area at the Monetary Policy
Committee. I do not think anyone questions its independence and
I do not think anyone questions its accountability. How you do
that in this field is a matter, obviously, we might come to later.
901. Yes; we are talking about balance,
as you say, rather than anything else. Just focusing on your role
as a Competition Commission, your role is very distinctive; in
other words, I would not see you in the same light as we see the
other regulators, and that is something that comes across in your
evidence, so if we are looking at accountability, whereas with
the others we ask whether they are accountable and who they are
accountable to, there is to me a prior question here, which is,
to what extent should you be accountable given that you have got
a distinct position? Do you have to look beyond that?
(Sir Derek Morris) Yes, I believe that the Competition
Commission should and must be fully accountable. If I might unpack
what that means, I do think that there are three different and
equally important levels of accountability. The first, to give
it an epithet, would be transparency. People have to know what
you are doing and how you have done it, and in trying to explain
that and being forced to explain it there is an element of accountability.
Vis-a-vis the Competition Commission that comes through a number
of routes, the most obvious of which, one often forgets, is that
every single decision of the Commission has to be published as
a report with sufficient explanation so that the reader can understand
that decision. That is an important element of accountability.
There is quite a lot that goes on during the course of the inquiry
before the report is published. Particularly in the regulatory
field, there is a lot of to-ing and fro-ing of information and
modelling and discussion of evidence with the parties. We have
hearings with all the main parties and many third parties as well.
In principle we never refuse a hearing to anyone who has a legitimate
interest and requests one. On some occasions those hearings, if
we think it would help, can be held in public. We also do a considerable
amount with the press because with the best will in the world
most members of the public are not going to read our reports,
so we work through the press to explain them. That is one important
tier of responsibility. The second is more penetrating. It is
not just transparency. It is actually being questioned, if you
like grilled, on what you have done and how effective have you
been in doing it. The decisions cannot be changed but you can
be cross-questioned. There, fairly obviously, the role of the
select committees is paramount. In the new regime I would expect
that I and my successors would be subject to that, and rightly
so. That may be on individual cases; it may be more on the overall
role that we play. The third level is where, of course, the decisions
can be changed, and that is in our case through judicial review
and to the High Court. That is a very thorough process. We know
that particularly at the moment because we have just been through
a very major judicial review on our mobile phones judgment. It
is thorough in itself but, more important and I think often missed,
in a report there may well be (no exaggeration) 400 or 500 individual
bits of argument, reliance on evidence and so on, and in judicial
review anyone of those may be subject to a huge spotlight. You
may have many economists and lawyers crawling over one sentence,
one paragraph. It is a bit like water under the door: if there
is the slightest crack you will be found against. That is a very
powerful further accountability. Finally, just to put that in
context in the regulatory regime, what that means is that you
have the regulators who consult. They have provisional findings,
they go on to their final decisions. Then companies can fully
assess that and if they do not accept the decision they can come
to us for in effect a full re-hearing, and then beyond that there
is thorough judicial review, and that to my mind as a broad principle
is a pretty powerful set of accountable institutions.
Lord Lang of Monkton
902. Sir Derek, first can I apologise; I
think I have to leave before the end of the session, but I will
be reading your answers to the questions. Can I pursue this question
of accountability in relation to any inhibiting factors that affect
it? It seems to me that if you have no power to conduct inquiries
on your own initiative that is an inhibiting factor on accountability.
Do you feel that you are inhibited in any way?
(Sir Derek Morris) It is true. We operate
under about 15 different Acts, many that go outside regulation,
but the characteristic of every single one is that we can never
choose our own cases. I do think that there is an argument for
more symmetry as to who could bring a case to us. At the moment,
of course, it is the regulated companies who, if they dispute
a licence modification, will bring it to us. I can think of particular
examples where one might have hoped that third parties could have
instigated an appeal to us.
903. Do you feel that this makes you essentially
reactive? Do you feel that if you had a power to be proactive
you would be better placed to hold to account those who you might
think ought to be held to account but cannot be by you because
nobody brings a case to you?
(Sir Derek Morris) Could I half agree with that? I
believe we should stay, purely in this context, reactive. We should
never have a role in deciding what comes to us any more than an
individual judge or jury does, but I do think there could be advantage
in terms of the overall accountability of the regime if parties
other than the regulated companies themselves might be able to
bring a licence modification to us. We would still be reactive.
904. You are also inhibited because on grounds
of commercial confidentiality you cannot always explain yourselves
as fully as you might like to. Is this a factor that inhibits
you and the process of accountability?
(Sir Derek Morris) It has not particularly in the
past, partly because, up until two weeks ago, under the Fair Trading
Act regime excisions were the responsibility to the Department
of Trade and Industry, but we advised. We tended to err on the
side of protecting confidentiality and I do believe there have
been some reports in the past that I will not say were incoherent
but were beginning to get a little difficult to understand because
of those excisions, and that is a public detriment. In recent
yearslet me put it this waywe have drafted our way
round that. We have found ways of drafting reports such that nothing
needs to be excised on the grounds of commercial confidentiality.
As at the moment, therefore, I do not see it as a problem, but
I do believe it is going to be a much more severe problem for
us in the post-Enterprise Act regime. This is more in the competition
field, and that is because because we are now determinative, but
it reads across to regulation, we are no longer writing a report
such that a minister can decide whether to accept our recommendation
and, if not, perhaps she will wish to vary it, but simply explaining
to the world what (subject only to judicial review) is our definitive
and final decision. I think that means there is going to have
to be more disclosure and there will be more cases in which the
tension that you have described leads to some commercially sensitive
material having to appear in order that the decision can be explicable.
905. Sir Derek, I think I heard you say
under your second heading of accountability that you liked being
grilled. I have never met anybody who liked being grilled.
(Sir Derek Morris) I said it was right
that we should be.
906. Are you grilled enough? Does Parliament
grill you enough? Should there be another parliamentary body that
grills you? Have you any thoughts on that?
(Sir Derek Morris) I have appeared several times in
front of various select committees. I would say overall in the
six years or so that I have been Chairman that I have been summoned
to appear less than I had anticipated. In that sense this particular
type of accountability has been fairly light.
907. Do you think it should be much heavier,
and do you think there should be a special grilling body?
(Sir Derek Morris) Particularly in the regulatory
field the issuesI am sure you have discovered thiscan
be immensely complex, very difficult indeed. I think this type
of accountability is difficult to exercise unless the body is
really quite expert itself. That does mean a certain amount of
continuity. I think it must mean a certain level of expert staff
who advise. I think that without those it is inevitably going
to be a bit difficult to make this type of accountability very
effective. I think it will also be much more effective if there
is a clearer distinction than there is at the present time between
those matters which I would call policy and are the responsibility
of the Government and those issues which are more implementation
and which I regard as the proper preserve of the independent regulator.
There is a much bigger debate there which perhaps I should hold
908. If there were to be a special regulatory
select committee on regulation, (a) you point out what an incredibly
complicated field it is, and (b) it follows that you would want
continuity on the committee and, (c) you think it would be essential
to have an expert staff, and without (b) and (c) frankly it would
(Sir Derek Morris) Yes.
909. Is there anything you want to add to
that as a caveat? Quite a lot of people have said about regulation
in general that they think a select committee would be the answer.
In fact, one witness actually said one in the House of Lords.
I do not know if that was to cheer us up or not. Is there anything
else you would like to say about that? I really think it would
be very helpful.
(Sir Derek Morris) If, for example, a select committee
wanted to have a clear understanding of how the Commission, through
a series of its reports over, let us say, the last three or four
years, had dealt with and implemented a particular broad issue,
for example, a very key one in the regulatory field is the cost
of capital, in order to assure itself that we had behaved in a
correct manner, that we had been thorough in our analysis, that
we had been reasonable in our judgments and so on, I do not think
that is possible without considerable expert advice. I could in
the next five minutes go off into the most abstruse issuesI
assure you I shall notwhich are critical to an understanding
of whether we have dealt with those issues properly or not, and
a committee would need, just as the members of my Commission need
from our staff, detailed expert support. I do not see how it can
really work without that.
910. Given the nature of the regulatory
regimeswe are not talking about a single oneit would
actually be quite extensive because the rules that govern the
regimes themselves differ quite significantly.
(Sir Derek Morris) That is true, they
do. One thing that we believe we have provided is what I call
consistency without rigidity, a high degree of predictability,
but best practice does develop, different industries do have different
considerations, and hence I think the objective is, as I say,
consistency without rigidity. It would be immensely time-consuming
to start from a position of not having been involved in many of
those cases to get to a point where you could say, "Have
you actually done as much as you should have done to ensure that?".
911. How are you funded?
(Sir Derek Morris) Could I ask the Chief
Executive to answer that?
(Mr Foster) We are funded from the DTI vote. I have
joint responsibility with the DTI accounting officer, Robin Young.
We the two accounting officers for the £25/27 million that
we receive annually from the DTI.
912. Does that mean that a reference to
you costs the person or the organisation making the reference
(Sir Derek Morris) I think the answer is, it varies.
In the regulatory field typically the costs go to the regulator
who will then recover those from the industry. There have been,
however, some quite controversial issues in regard to that. It
is perhaps best if I give an example to make the point. We recently
had two water companies dispute their licence agreements which
controlled their prices. It came to us and I will not say we fully
backed the companies but our findings were some long way away
from the regulator's, in which case it was manifestly clear that
it was reasonable for the companies to have brought that case
to us. The Act is very clear, that price must allow for "the
reasonable costs of the enterprises". These were, subject
to checking that they were not in themselves hugely inflated,
"reasonable costs", in which case, as a matter of law,
we had to allow for those costs in the price control. Normally,
this would be a rather de minimis point. It so happened
that both of these companies were relatively small and the costs
of having come to us in the dispute were not insignificant. Therefore,
they got those costs in the price control and the regulator, Ofwat,
was understandably concerned that this might open the flood gates
because anyone could dispute anything and as long as it was not
declared totally unreasonable it would be a costless exercise
for them. There are now measures that are being proposed for the
forthcoming Water Bill that effectively would give us the power
to allocate costs in the light of and to the degree of the reasonableness
of the case brought.
913. Would you regard it as odd if that
dispensation to allocate costs was restricted only to the water
(Sir Derek Morris) Yes.
914. And it will therefore be applied throughout?
(Sir Derek Morris) Not necessarily, because, as it
happens, this arose in the water industry. It could have arisen
elsewhere but it has not. Again, as it happens, there is the intention
to have for all sorts of other reasons a new Water Bill, so there
was (a) the problem and (b) the opportunity to correct it. I do
not know that this has been identified, except as a generally
theoretical problem, vis-a-vis any other sector, and there is
not, except, I suppose, in telecommunications, an opportunity
to correct it in other sectors.
915. Is the general philosophy therefore
that the complainant shall have recourse to the customer in order
to get the money back?
(Sir Derek Morris) In as far as the costs are regarded
as reasonable and can therefore be recovered in the price control,
it is the customer who bears those costs, that is correct.
916. Even if the complainant has been at
fault? You have such a wide remit I am not familiar with the law
in all cases. Talking in generalities, if a complainant was found
by you to have done something to the disadvantage of the customer
that it was up to you to stop them doing, would it not be very
odd if they then had recourse to the customer to pay for being
(Sir Derek Morris) There are two cases. One is where
they bring an appeal to us and we dismiss it, in effect, and regard
their having brought it to us as unreasonable, in which case we
would not need to include those costs in the price control; therefore
the companies would not recover those costs and they would be
borne by the shareholder. The problematic one is where a company
brings an appeal to us, we do not accept it, we dismiss it, but
we none the less consider that it was reasonable for them to bring
it. In those cases at the moment the customer as a matter of law
will bear the costs, but that will change in that it will become
a matter of discretion for us and we might, of course, partition
the costs in some way. It will be a matter of discretion for us
in the water industry after the Water Bill has been approved.
As far as I know, and I will check with my Chief Legal Adviser,
there is nothing in the same vein occurring in any other regulated
industry at the moment.
(Mr McHenry) No, that is correct.
The Committee suspended from 5.54 pm to
6.03 pm for a division in the House
917. Can you tell me, Sir Derek, whether
the cost regime is regarded as a filter or a deterrent, in other
words, whether the effect of either the amount or the allocation
of costs has impacts on the number of references made?
(Sir Derek Morris) I do not believe to
date that it has. Because of the particular case that I described
just before the break there is a serious concern on the part of
the water regulator that it might but there is a move to address
that. It is very difficult to estimate whether this could be a
problem in other sectors. Obviously, it could be, but it is of
some relevance that it has not actually occurred to date.
918. In the water industry the concern is
that it might encourage large numbers of new applicants, is it
(Sir Derek Morris) Exactly.
919. I was thinking of asking whether the
cost was a deterrent so that justice available was denied because
it was too expensive?
(Sir Derek Morris) I see; I am sorry, I misunderstood
that part. It is often said that appealing a disputed licence
modification to the Commission is "the nuclear option",
is the phrase; it is extremely expensive. I am a little bit sceptical
about that. To some extent the cost to the companies concerned
is within their own discretion. We perhaps in a moment will talk
about fast track solutions but at the moment, if a company (or
companies) come to us, almost invariably they will dispute virtually
every part of the licence modification and the analysis that underpins
it. They will dispute the investment plans, the cost levels, the
cost of capital, the financial side, etc. They will typically
deploy large numbers of lawyers and economists on that and, as
we get into the case, they will demand, perfectly reasonably,
huge amounts of information about our thinking and our analysis
and they will subject all of that to further analysis. Very rapidly
it becomes, from their point of view, quite major. It must be
a decision for them how much they spend and how thoroughly they
dispute a price control. If a company and a regulator were to
come to us and say, "Here is the price control, but the point
that the company does not accept from the regulator is the depreciation
regime", we will say, "That is where the dispute is",
and they will appeal to us on that. While as a matter of law we
could say, "Sorry; we are going to look at absolutely everything",
in practice, of course, we would focus purely on the depreciation
regime, so we now can deal with cases very much more quickly than
we did and at very much less cost to the parties and to ourselves,
but it does require that there is agreement on what the dispute
is and that we get that focused. The great concern from the regulators
is, to coin a phrase, cherry-picking, that a company will look
and say, "All this is beneficial to us. That is a problem.
We will dispute that", and I think it is very much the regulators
who have said, "If you want to question this price control
it is a package, and if you unpick one bit of it then the whole
thing is back in the melting pot".