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 involvedrelating 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 regulatora
perfectly reasonable basis for critical comment as part of the
process of accountabilityor 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 regulatorsand 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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