The roles of Parliament, Ministers
and independent regulators
33. The third aspect, alongside a broad definition
of regulation and consideration of the effectiveness of how regulation
has been carried out, is the inter-related responsibility of Parliament,
ministers and independent regulators. Each plays different parts
at different times - more or less independently, but is orchestrated
within an overall framework for an effective regulatory state
which achieves cost-effective outcomes for citizens, and operates
in the public interest.
34. Parliament sets the statutory framework embodying
the objectives to be achieved by regulation. It legislates, however,
for that regulation, in many cases, to be carried out by independent
regulators. The reason has been well summed up by the OECD: "The
key benefits sought from the independent regulatory model are
to shield market interventions from interference from 'captured'
politicians and bureaucrats".[18]
35. Independent regulators must therefore be
held accountable for their actions, but independence is not fixed
in stone, and Government and Parliament retain responsibility
to review regulation and ensure that the legislation remains fit
for purpose. It can therefore be expected that Parliament will
change the legislation from time to time. The DTI made reference
to this in its evidence: "The primary means by which the
regulators' role may be changed is through parliamentary amendment
of the duties specified in the statutory framework. The role of
regulators has been changed in this manner over time".[19]
36. The water industry regulator has provided
us with a clear example, which also illustrates the relationships
between various regulators. Standards of drinking water, and for
discharges of used water back into the environment, are the responsibility
of ministers, supported by the expert advice of the Drinking Water
Inspectorate (DWI) and the Environment Agency (EA) respectively
(whilst noting that the Minister's decision itself might reflect
the incorporation into law of a European Directive on the subject).
These two bodies advise Ministers but are not accountable in that
role for the Minister's decision, which is incorporated appropriately
into law. As regulators, however, they carry out functions of
inspection (monitoring) and enforcement where the standards set
by Ministers, and approved by Parliament, are not being met. The
regulators may have discretion as to when and how they exercise
their powers.
37. Once the Minister has set (or been minded
to set) certain standards, the economic regulator in England and
Wales (the Office of Water Services, supporting the Director General
or, as now, Authority, following the Water Act 2003) is responsible
for protecting customers' interests by controlling the abuse of
monopoly power which might otherwise be exercised by private sector
water service providers. His statutory duties include customer
protection, ensuring that all reasonable demands are met, and
the duty to ensure that the regulated water service providers
carry out their proper functions (for which they have been granted
a licence) and can finance themselves. His regulatory role is
independent of Ministers and set out in statute. The key regulatory
decisions relate to setting maximum price controls for each water
service provider for a period of years, typically five years.
This decision has, however, to allow the regulated companies the
financial wherewithal to maintain the quality standards set down
by Ministers. Environmental and quality regulation is therefore
incorporated as a constraint into economic regulation.
38. The balance between standards and affordability
is debated as part of the deliberative cycle of the periodic review,
involving the Department of the Environment, Food and Rural Affairs
(DEFRA), Ofwat, the Electricity Association (EA) and the industry.
The cycle has been formulated into an explicit timetable for submission
of draft and final business plans by the regulated companies.
This integrated and commendable approach developed from a challenging
debate on accountability for setting quality standards and the
implications for consumer bills, promoted by the original water
regulator, Sir Ian Byatt.[20]
His concern was whether ministers properly applied the cost-benefit
test in making decisions, and took accountability for it. "…
I thought it was important to start a proper debate on what I
called the cost of quality where I would say 'this is what quality
might cost'…Then I said: 'Of course the people who are making
the decisions on the quality are the ministers so please will
the ministers take notice of this and that I am making the decisions
on financing of functions. So whatever the ministers decide then
I will finance the functions'. I would sometimes do this in what
I regard as a relatively challenging way, 'Are you sure you really
want to spend the money in this way?' I would have liked to have
been able to challenge the European Union rather more than I was
able to do".[21]
39. The key development, therefore, was to formalise
the interrelationships, and hence the accountabilities, within
the regulatory framework as a whole. It showed how the regulatory
framework can evolve, and particularly where regulators, being
independent, thereby have the opportunity to identify and raise
a problem and achieve a change in the relationship; a contribution
which was noted by Sir Christopher Foster: "What Ian Byatt
did in the circumstances was as good as could be expected because,
at least to some extent, he institutionalised the conflicting
forces".[22]
40. The consequence of this unbundling of the
regulatory state has been to sharpen the accountabilities of specific
regulators, Ministers and Parliament in relation to their respective
roles and responsibilities, emphasising the interconnectedness
of the various parties within the regulatory framework as a whole.
If regulators are independent for a particular purpose, they nevertheless
still fall within the overall responsibility of Government and
Parliament for the regulatory system. It is independence within
Government, rather than independence of Government per se.
The Minister of State at the DTI, Mr Stephen Timms MP, captured
this when he said: "Inevitably there is an impact by regulators
on a range of government concerns. I do not think the regulators
exist in a vacuum outside government policy. Inevitably the decisions
of regulators do impinge on government policy; there is no point
trying to pretend that is not the case, it clearly is the case.
The best way to handle it is for government to be explicit about
what it is looking for from the regulators in those respects and
for the regulators to make their decisions in that context".[23]
41. One consequence of this, as we have seen
earlier from Sir Ian Byatt's evidence, is the increasing formalisation
of the relationships within the regulatory framework, constraining
or empowering the parties, one in relation to the other, as appropriate.
The development of ministerial guidance has been referred to as
a case in point in written evidence by the DTI: "In addition
the Utilities Review 1998 led to the establishment of an additional
process through which regulatory objectives may reflect government
policy objectives. The review led to subsequent legislation introducing
a duty on the energy and postal regulators to have regard to governmental
guidance on social and environmental objectives … similarly
water in the water bill".[24]
42. In practice, our Inquiry has concentrated
on the independent economic regulators. The scope of activities
of these regulators encompasses both regulatory and non-regulatory
activities and their independence from Ministers brings with it
additional important considerations for accountability. In any
event, environmental regulation and advice to Ministers is an
important aspect of utilities' economic regulation in practice,
and social regulation has also played an important part in the
debate on regulatory accountability and the role of ministerial
guidance.
43. Evidence and requirements related to the
effective accountability of these independent regulators therefore
provides a model for the accountability of regulators generally.
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