Memorandum by Professor Stephen C Littlechild
The introduction of privatisation, competition
and regulation represented three significant changes in the UK
public utility sector. Surprisingly, perhaps, regulation proved
as controversial as the other two changes, and continues to attract
interest with a view to assessing the need for further changes.
I argue in this paper that in general the introduction and operation
of regulation has been successful in the UK; that more recent
developments in policy have not necessarily been conducive to
improving or maintaining this record; and that it would be preferable
to avoid undue intervention or further changes in the regulatory
framework. Most of the illustrations reflect my experience in
regulating the electricity industry, but the arguments are intended
to apply more generally.
The initial arrangements for utility regulation were
developed in the context of the various privatisations, and were
refined somewhat from one privatisation to another. Given the
siginificant change in policy, these arrangements needed to be
carefully considered, so as to protect the interests of customers
while still appealing to investors.
On the whole these arrangements have functioned
well. There were initial difficulties, attributable in significant
part to the post-Vesting industry structures and to the opening
price controls set by Government. However, a succession of National
Audit Office (NAO) reports has shown the reductions in prices,
increases in investment and improvements in quality of service
that have been achieved over the last decade or so. There have
also been greater increases in competition in energy and to some
extent in telecommunications than could have been expected beforehand.
In terms of process, regulators have consulted
widely with all interested parties, and given increasingly detailed
explanations of their decisions. The possibilities of appeal to
the Competition Commission (formerly the Monopolies and Mergers
Commission) and of judicial review have been used effectively
and not excessively. Parliamentary Select Committees and the National
Audit Office have effectively held regulators accountable for
their actions. There has been no shortage of informed critical
attention by the media and the financial community. Although the
transition from nationalisation to competitive markets, with regulation
of the monopoly networks, has not always been smooth, the regulatory
framework seems to have balanced predictability and flexibility.
Investors have continued to supply the necessary funds.
In my experience, the UK example is increasingly
respected overseas. In particular, the success of "independent
regulation" is admired with some envy, particulary in developing
countries that do not have such developed alternatives or complements
to regulation by government itself.
Over time, the practices of the utility regulators
have evolved, and the regulatory framework has changed in various
ways. Some of these changes reflect revised statutes, others changes
in government policy, yet others changes by Parliamentary and
other bodies. Not all of these changes have necessarily been conducive
to more effective regulation, but the framework has so far proved
The Utilities Act 2000 followed an extensive
government review of utility regulation. This concluded that the
regulatory framework was broadly satisfactory but that certain
changes needed to be made. In the course of its passage through
Parliament the originally envisaged changes were modified somewhat.
I comment here on three aspects.
(a) Boards versus individual regulators
The Utilities Act merged the regulation of gas
and electricity, though I do not comment on this here. The Act
also replaced an individual regulator for each by an Authority
consisting of several members, some executive and some non-executive.
It is perhaps too soon to evaluate the effect of this particular
change, but some remarks about Boards generally versus individual
regulators may be helpful.
A Board may be useful in deflecting attention
from the personality of an individual regulator, and in reducing
pressure on him or her, though it would be surprising if personalities
were no longer a subject of comment. It is not clear that a Board
will increase predictability and consistency of regulatory actions:
these will now depend on the views of several people rather than
one, the weight of opinion may vary from one issue to another,
and membership of the Board will in practice change more frequently
than the identify of a single regulator. It seems likely that
policy will be more reactive and less pro-active, and probably
less innovative, insofar as several people will need to be convinced
of the need for change. A Board is likely to slow down decision-making,
insofar as several people (many not full-time) will need to understand
and be convinced of the acceptability of a proposed policy or
action, and requests for clarification or further justification
may delay decisions somewhat. If non-executive members of a Board
have short-term contracts, being appointed or reappointed every
one or two years, this could both undermine consistency and compromise
the independent regulation that five-year appointments of individual
regulators were intended to secure.
(b) Reordered duties of the regulator
The Utilities Act change the duties of the regulator.
Originally, the primary duties in electricity were to promote
competition, to secure that reasonable demands were met, and to
secure that licensees could finance their licensed activities.
Subject to these, there was a duty (among others) to protect the
interests of customers. Now, the principal objective of the Authority
is to protect the interests of consumers, where appropriate by
promoting effective competition. Subject to this there are duties
(among others) with respect to meeting reasonable demands and
Two aspects of this change seem relevant here.
First, the duty to promote competition is downgraded: it is no
longer absolute, competition now has to be justified as being
"appropriate" and "effective". This could
limit the development of competition and introduce a greater element
of uncertainty and subjectivity into regulatory policy.
Second, the role of the regulator as an adjudicator
of the interests of customers and investors seems now to be more
compromised by making the promotion of the interests of consumers
the primary duty. To a greater extent than before, the regulator
is required to be both prosecutor and judge. It also seems difficult
to reconcile this change in role with the simultaneous creation
of an independent consumer body (Energywatch) whose duty is also
to promote the interests of consumers.
(c) Duties to consult
The Utilities Act placed more explicit duties
on the regulator to consult with others including other regulators,
and to explain actions taken. This may have been in response to
early concerns about regulatory practices. However, regulatory
practice had already evolved significantly in the light of experiencefor
example, in terms of the number and stages of consultation during
a price control review, and in terms of the detailed calculation
and explanation of proposed controls. It is thus doubtful whether
the additional obligations had a significant effect in practice,
though they may have reinforced the need to document compliance
I do not sense any demand for more consultation
than is already carried out. Indeed, interested parties have expressed
some concern about the frequency and extent of consultation papers,
because of the workload that they imply. As for residential and
other small customers, regulators took steps some years ago to
afford facilities for public debate, and to provide the opportunity
to ask questions leading up to price control reviews. This was
a worthwhile innovation, but the response was not overwhelming.
Other countries have reported similar experience. 
Government has adopted a more active policy
towards the utility sector than was the case after privatisation.
The previous Government took the view that Goverment ownership
and intervention in the running of the utility industries had
contributed to the relative lack of efficiency and customer responsiveness.
A key aim of privatisation was to introduce competition where
possible, and it was the job of the regulator both to promote
such competition and to take appropriate action where competition
was unlikely to be sufficiently effective. Government took the
view that customers would be best protected, responsibilities
would be most clearly defined, and regulators most clearly accountable,
if Government minimised the extent of political intervention in
the utility sector. It was not unusual for Ministers to reply
to enquiries and Parliamentary questions with the phrase "that
is a matter for the Director General".
Present policy is to take a more active role.
To illustrate from the energy sector, there have been the following:
Modification of the regulatory framework
via the Utilities Act, as already noted.
Explicit obligations on the regulator
to take account of Government Policy guidance on social and environment
Government decisions to carry out
investigations jointly with the regulator (eg opening of the competitive
market in 1998, New Electricity Trading Arrangements or NETA).
Government investigations that were
previously carried out by the Director (eg into the level and
nature of retail competition, into the restoration of supply after
the storms of late 2002).
Modifications of the wholesale trading
framework by statute rather than within the existing regulatory
framework (for NETA in England and Wales and prospectively for
BETTA, its extension to GB).
Provision within this new statutory
framework for Government rather than the regulator to specify
the details of trading arrangements.
Intention to develop a more explicit
fuel policy, including a view on diversity and security of fuel
Previously, the Secretary of State and the regulator
had the same duties but different functions. Several factors ensured
a workable consistency of policy, including a mutual awareness
of the policy considerations impacting on each other's office,
and the ability of the Secretary of State to veto a licence modification
proposed by the regulator. This veto could have been onerous and
would tend to work against the interests of the customers of the
utility services. However, I suspect that it was seldom used or
threatened. For the most part the spheres of action of the government
and regulator were generally quite distinct.
Now, in contrast, there seems in practice to
be considerable overlapping of government and regulatory actions.
This may have implications for the working relationship between
Government and regulator, for the allocation and evaluation of
responsibilities between the two entities, for the accountability
of both entities, and for regulatory independence.
Regulators are periodically required to appear
before various Parliamentary Select Committees and are subject
to investigations by the National Audit Office. These are significant
components in the process of holding regulators accountable for
performance of their statutory duties. In my experience regulators
take these investigations very seriously, in terms of the time
and resources devoted to answering written requests for information,
preparing for appearances and answering oral questions, supplying
additional material and justifications where required, and responding
to the formal reports at the end of investigations. Regulators
also take very seriously the deliberations of these bodies when
considering their future policy. This applies both in terms of
the specific recommendations in any report, and more generally
in terms of the regulator ensuring his or her ability to justify
actions taken in the event of a subsequent inquiry.
It has sometimes been suggested that a standing
Parliamentary committee be created for the utilities. This would
subject the utility regulators to regular reviews, and over time
would acquire increased specialist knowledge of the utility industries
and regulatory policy. As I recall, regulators had no objection
to this, if Parliament considered this the most effective way
to discharge its remit. However, my understanding is that it was
widely felt that Select Committees were most effective, and most
responsive to the interests of their members, if they retained
the flexibility to investigate whatever issues were of most concern
at the time, wherever this might be, rather than constrain themselves
to one area that might or might not require regular investigation.
There is merit in this more flexible approach,
for several reasons. First, as noted, investigation by a Parliamentary
Committee is burdensome in terms of regulatory time and resources,
and not lightly to be imposed in the absence of good reason. Second,
the investigating Committee might not find much new to say, and/or
could be drawn beyond its area of main expertise. Third, repeated
review could blur accountability as between the regulator and
Committee, with the Committee's judgment increasingly being substituted
for that of the regulator.
Some of the negative as well as positive aspects
of this more regular monitoring arrangement are or might be reflected
in the evolving relationship between regulators and the National
Audit Office. On the one hand, the NAO reports into the utilities
have hitherto been informed, careful and responsible. They have
presented a balanced albeit limited picture of the achievements
of the utility industries and their regulators. They have presented
a useful counterbalance to other reports that may reflect politically
charged issues. On the other hand these investigations have undoubtedly
been burdensome on the regulators. As the number and regularity
of the NAO reports have increased, they have gone beyond an "audit"
of what has happend, to (eg) an analysis of what kinds of price
controls might be most appropriate in future. It is not clear
that this is where the NAO's strength lies, or that it pushes
forward regulatory thinking. There is also the danger that if
investigation became too frequent and routine it could lead to
regulatory offices informally checking policy with NAO officials
in the course of implementation in order to prevent criticism
in a future report. This could blur accountability.
Regulatory budgets have increased over time.
In the energy sector, this seems to reflect a variety of factors,
including transitory issues like the creation of Ofgem and the
installation of the New Electricity Trading Arrangements; pressure
to carry out price controls with increasing thoroughness; an increasingly
active government: and the costs of promoting and monitoring competition.
Replacing detailed regulation by effective competition
would tend to give more weight to the needs or concerns of the
public as reflected in their views as utility customers, relative
to the views of the regulator. Accordingly, there has been discussion
of whether regulators should or could cut back their activities
as competition develops. To a greater or lesser extent, regulators
have tended to reply that competition is not yet sufficiently
developed to do so. In my view, regulators might be more pro-active
both in promoting such competition and in withdrawing from detailed
regulation of increasingly competitive markets. (To its credit
Ofgem has now promoted sufficient competition to remove all retail
price controls on gas and electricity.)
If changes is legislation were envisaged, it
would be possible to consider transferring responsibility for
newly competitive markets from the sector regulators to the Office
of Fair Trading. This could be conducive to a more pro-competitive
and less interventionist approach. On the other hand, there is
merit in avoiding further disruption to the regulatory framework.
As it happens, the ways in which competition could be promoted,
and detailed regulatory involvement reduced, are to a great extent
within the present ability of the sector regulators to carry through
without the need for additional regulation.
A final issue is the extent to which the needs
or concerns of the public guide the work of regulators in setting
price controls for access to the network monopolies. While regulators
have done a conscientious and effective job of setting price controls,
two limitations of the process might be noted. First, the regulator
has to judge, amongst other things, what level of investment in
quality and security of supply customers would prefer, given the
implication for price. In electricity, consumer committees gave
some valuable assistance in this matter (which is no longer available
since the restructuring of the regulatory framework), and regulators
consult widely with all interested parties. Nevertheless, the
ultimate decision on what to propose is that of the regulator.
Second, the need to explain and implement a uniform framework
for many companies within an industry tends to reduce the scope
for relating each control to the circumstances, needs and preferences
of each set of customers. It also tends to reduce innovation.
It seems to me that there would be scope for
regulators to "devolve" certain aspects of the network
price control reviews to discussions between companies and customer
representatives in their areas. How these representatives should
be selected, or select themselves, is an interesting question
that lies beyond the present paper. These representatives would
need access to adequate information and advice, which could be
arranged. If the companies and customers reached agreement, the
regulator could approve the proposed controls, provided he or
she were satisfied that the controls were consistent with the
statutory duties and other relevant considerations. If the parties
did not reach agreement the regulator would need to stand ready
to propose a control in the normal way, although it is entirely
possible that this fallback would not be necessary. Controls set
in this way would tend to reflect more directly the needs or concerns
of the customers of the utilities, and allow more scope for innovation
and learning over time. Some North American utility commissions
have apparently adopted a similar practice, and I am presently
studying experience there.
On the whole, UK utility regulation has worked
well. It is not clear that recent changes have been necessary
or always for the better, but the framework has so far proved
robust. My main concerns are the increasing extent of displacement
and "second-guessing" of regulatory decisions. An increasingly
active role for government in the utility sectors, and excessive
and repeated investigation of the regulators by Parliamentary
and related bodies, could impact adversely on the performance
and accountability of the regulators. I would therefore urge this
Select Committee to "let the regulators get on with their
Professor Stephen Littlechild
7 February 2003
2 Formerly Professor of Commerce, University of Birmingham,
1975-89, and Director General of Electricity Supply 1989-98. Presently
Honorary Professor at University of Birmingham Business School,
Principal Research Fellow at Judge Institute of Management Studies,
University of Cambridge, and consultant on privatisation, competition
and regulation. Back
Eg "A total of only four members of the public appeared
to testify at service hearings held in this docket in Hollywood,
Tampa, Orlando, Jacksonville, and Panama City." In re Petition
for rate increase by Peoples Gas System, Florida Public Service
Commission, Docket 020384-GU, Order PSC-03-0038-FOF-GU issued
6 January 2003. Back