Select Committee on Constitution Minutes of Evidence

Supplementary memorandum by the Competition Commission

  In his evidence to the Committee, the Chairman of the Commission suggested (but did not elaborate on the view) that scrutiny by Select Committees would be assisted, and accountability thereby increased, if there were a clearer distinction than at present between the policy setting role of government and the duties placed on independent regulators to implement policy. This issue is usually tangential to the main functions of the Competition Commission (though not necessarily always so) and the following elaboration is therefore put forward just as a possible suggestion, for consideration by the Committee.

  As mentioned by the Chairman at the Hearing, in relation to the MPC, matters are clear. The government sets policy, in terms of a target inflation rate; and an independent MPC is accountable for its performance in seeking to achieve that target via the instrument of interest rates.

  Though more complex, broadly the same situation now applies in relation to competition matters. Government sets policy in terms of specific competition rules to be applied in merger and market investigations, and the OFT and CC, as independent bodies, will be fully accountable, in the ways described by the Chairman at the Hearing, for the implementation of that policy.

  Arguably, the same approach should apply in the field of economic regulation, and it is likely that this was the original intention. Newly privatised companies had potentially very powerful market positions and independent regulators were given the task of preventing exploitation of those positions, through higher prices or lower quality of service, until such time as competition emerged to discipline the exercise of market power.

  More recently however it has become clear that numerous other policy objectives are involved—relating to a range of environmental issues, health and safety, security of long-term energy supply, externality issues such as congestion and various equity issues such as location-specific pricing. A fairly typical response to the identification of such other objectives as these has been to add statutory duties reflecting them to the responsibilities of the independent regulators.

  There are manifestly, however, trade-offs between many of these objectives and between each of them and the original, basic productive and allocative efficiency duties of the regulators. The existence of trade-offs between a multiplicity of objectives, we suggest, is what critically distinguishes the regulation field from competition policy or monetary policy. (There are of course trade-offs between competition and other objectives but the government, via the Enterprise Act, has explicitly isolated competition policy responsibilities as appropriate to independent competition authorities, leaving it to other policies and other instruments of policy to address other issues).

  Once a trade-off between different objectives exists, it is irredeemably a policy matter as to the optimal point in the trade-off. A logical framework is then for expertise to be used (eg in Whitehall or possibly via an expert independent regulatory body) to identify the trade-off relationship (such and such an environmental or health improvement will cost so much etc). Ministers can then make a fully informed policy decision as to the optimal choice. Regulators can then be charged with implementation, with appeals to the CC, and regulators directly answerable to Select Committees for their performance in achieving this.

  No doubt elements of this exist at present. Indeed at the initial stages of privatisation there were policy guidelines set by Government setting some of the trade-offs at the time. But as markets have become more liberalised the need for guidance on further trade-offs has become apparent and that it is the regulator who is having to grapple with these. It sometimes appears:

    (i)  that regulators are in effect making such trade-off decisions; or

    (ii)  that different regulators make separate decisions, for example on safety standards and on allowable costs so that the inevitable cost-benefit trade-off is not properly assessed;

    (iii)  that understandable concerns then arise that unelected, independent regulators are "making policy decisions" and hence proper democratic accountability has been diminished; and

    (iv)  reverting to the Chairman's initial point, this is likely to make it very difficult for a Select Committee, however well resourced, to evaluate the performance of a regulatory office and hence hold it accountable.

  As an illustration, operations of the rail network involve considerations not only of efficiency but also environmental issues (reduced pollution), externalities (reduced congestion), equity (allocation of costs), safety and the fiscal burden. The extent to which any or all of these can be addressed depends on charging, in particular track access charges, which are set by an independent regulator and, if disputed, are referred to the Competition Commission for determination. Unless the trade-offs have been quantified, and government as a matter of policy has determined the optimal point in those trade-offs, then to some extent important policy matters will have fallen to independent regulators to determine. If a Select Committee were then to disapprove of a regulator's decision it could be quite difficult to determine whether this reflected a degree of ineffectiveness by a regulator—a perfectly reasonable basis for critical comment as part of the process of accountability—or policy matters about which reasonable people can and frequently do disagree.

  We had also wanted to comment on a point which arose in Professor Prosser's evidence in which he proposed that appeals on disputed licenses should be handled by the Competition Appeal Tribunal on their merits rather than by the Competition Commission.

  It needs to be born in mind that issues may be wide ranging, forward looking and require detailed analysis of the economic/business issues in addition to the legal aspects eg prospective investment plans, levels of efficiency, financial ratings etc. The Competition Commission is well set up to do this as it has wide expertise not just among the Commissioners but also in its professional staff which include economists, accountants, business advisers, and lawyers. This has allowed the staff to carry out detailed investigations of problematic areas such as cost of capital.

  The CAT is a highly capable legal body, but as currently constituted it has rightly a small legal staff and no professional staff in the areas of economics, accountancy etc. It is geared to assess facts and form conclusions on past conduct rather than future conduct. In contrast the Commission has 150 staff, whose professionals are recruited widely from the private sector, public sector and regulators—and is able to investigate likely future economic scenarios. The Commission would have found it quite impossible to get under surface of economic business issues which can arise in the case of disputed licenses without such a range of skills. Substantive review by a Tribunal would therefore not bring about as effective accountability.

Robert Foster
Chief Executive, Competition Commission

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