88. Scrutiny has the power to affect regulatory
outcomes. However, it is indirect, and has to be complemented
by the third element of the accountability process, which is the
possibility of independent review, whereby regulatory decisions
may be formally overturned or varied.
89. Independent review encompasses judicial review
and a statutory appeals process. Regulators are bound by statute
and must abide by any secondary legislation derived from it.
They are also subject to ministerial guidance, where this is authorised
by legislation. They are also bound by European Union law and,
as a consequence of the Human Rights Act 1998, must exercise their
powers in a manner consistent with the rights protected by the
European Convention on Human Rights.
90. Regulators must also observe the principles
of administrative law and must not act irrationally: that is,
they must not make a decision that no reasonable regulator could
have made. Therefore, in the absence of any other remedy provided
by Parliament, those who are adversely affected by a regulator's
decision can, if they believe the decision infringes their rights
under administrative law, apply to the Administrative Court for
judicial review. Judicial review is available as a residual remedy
for enforcing the legal duty of regulators.
91. Unlike judicial review, which is always available
as a residual remedy, a right of appeal exists against a regulatory
decision only when Parliament has provided for this. Legislation
is needed not only to create the right to appeal but also to establish
the body to hear it, the nature of the process and the grounds
on which an appeal may be brought.
92. On judicial review, there is some international
consensus. The OECD summed it up thus: "the availability
of judicial review of administrative decisions can be seen as
the ultimate guarantor of transparency and accountability and
is likely to improve the effective quality of the decisions made
during administrative review".
Clearly judicial review is seen as a feature of effective accountability
although it is, by its nature, essentially negative and narrow.
The availability of pursuing such action is important in regulation,
given that a regulator both advances the case and makes the decision
and, as Professor Prosser described it, is seen as "acting
as prosecutor and jury on an issue".
93. The value of an appeals system is generally
agreed. Sir Christopher Bellamy, Chairman of the Competition
Appeal Tribunal, referred us to three important features of an
appeals system: "First of all, the scrutiny of the appeals
system or perhaps even just the existence of an appeals system
should improve the quality of decision making and I have the subjective
impression that that has happened. Secondly, the existence of
a system and its operation should increase confidence in the system
as a whole ... Thirdly, it is a safeguard against regulatory capture,
regulatory inertia or regulatory timidity which with the best
will in the world may creep into any regulatory system from time
94. However, we have heard much evidence that
traditional judicial review has not provided an effective protection,
based as it is on ultra vires and a restricted definition
of reasonableness. We have received evidence that whilst judicial
review is seen as important in the context of challenging regulatory
decisions, it has little role to play in challenging the merits
95. British Energy told us that: "Judicial
review to us is a sledgehammer, it creates an uphill struggle
on the part of the regulated body to prove that the regulator
was completely unreasonable or stark raving mad, it makes it a
difficult process coming from the regulated body. If one goes
back to the human rights legislation, the basic principle is that
there should be some sort of appeal on the merits, rather than
whether it was totally unreasonable".
The Electricity Association concurred.
96. The consumer bodies were concerned that they
had few appeal rights at all against a regulator who was overly
favouring the regulated company.
They were particularly concerned if regulated companies should
have their appeal rights improved from the current position, as
this would further highlight the weakness of their own position.
However Postwatch did recognise that legal actions between two
public bodies was not something to be encouraged.
97. Nevertheless, regulators have told us of
how effective a discipline fear of judicial review is on their
actions and decisions. The first telecoms regulator, Sir Bryan
Carsberg, told us that: "No regulator wants to have decisions
overturned through judicial review. It seemed a matter of good
management and prudent behaviour to consider the danger and to
take steps to avoid it".
Professor Stephen Littlechild, the first electricity regulator,
also questioned the idea that judicial review is an ineffective
remedy: "I was judicially reviewed three or four times
I won some and I lost some. Again it was a very thorough investigation.
I think what this means is that anybody potentially adversely
affected has a real, practical possibility of challenging what
the regulator does, and there is evidence that parties have challenged
and have won".
98. We have also heard evidence that the position
is changing. The development of human rights legislation is having
a general impact on both the ambit of protection to aggrieved
parties afforded by judicial review generally, as well as having
affected the statutory position in recent legislation whereby,
for example, the Communications Act 2003 incorporated a European
Directive which allows appeals to an independent tribunal, and
appeals on the merits of the case.
We have been told that this can be traced to Article 6 of the
European Convention on Human Rights.
We have also been told that there has been a judicial reinterpretation
in relation to the substance of appeals, which is being welcomed
by Parliament: "There is also a move by Parliament to increase
the scrutiny by the court or tribunal of the merits of the decision.
The origin for this is found in the Competition Act 1998 under
which the Office of Fair Trading and the sector specific regulators
in their own areas are subject to an appeal broadly on the merits
to a body now known as the Competition Commission Appeals Tribunal.
The origin of that is that the Court of First Instance in Luxembourg,
which hears appeals from the European Commission, has adopted
a set of procedures which is closer to an appeal on the merits
or a re-hearing than just judicial review".
99. But we note that the evidence of concern
can also be about not extending the right of appeal too far such
that it could distort the public purposes of good regulation.
Ofgem noted that "all of Ofgem's decisions are subject to
some form of appeal
Ofgem believes that very careful consideration
needs to be given to any proposal for change ...".
Philip Fletcher, the water regulator, was concerned that companies
should not have the opportunity through more extensive appeal
mechanisms to 'salami-slice' issues in decisions which were essentially
an overall package.
The DTI told us that "it is not obvious that a change in
the current system is necessary, or even desirable".
100. If there are those who are concerned that
increasing the rights of the regulated to appeal decisions might
create game-playing to undermine effective public regulation,
we note two countervailing influences. The Competition Appeal
Tribunal has told us that the right of appeal is balanced by the
right of the Tribunal to be able to strike out appeals for which
there is no proper case.
Also, we have been told that where further rights of appeal against
regulators' decisions are granted to regulated companies, then
consideration should also be given to extending the rights of
appeal by consumers and other interested parties against the decisions
of regulators, who are meant to be protecting their interests.
The regulated companies accept the need for a balance, as we heard
from Innogy plc: "An effective appeal process is a
key element in promoting regulatory accountability. Such a process
should provide an important incentive to regulators to ensure
good decision-making, thus reducing uncertainty and promoting
greater confidence in the regulatory framework. At the same time,
it should also maintain a balance between stakeholders and filter
out nuisance appeals".