Select Committee on Constitution Minutes of Evidence


Examination of Witness(Questions 70-79)

WEDNESDAY 12 FEBRUARY 2003

PROFESSOR STEPHEN LITTLECHILD

Chairman

  70. Professor Littlechild, thank you very much for being with us today. Thank you also for your helpful paper. It is both concise and robust in its approach. Is there anything you would like to say to us before we put some questions to you or are you content with what is in your paper?

  (Professor Littlechild) I am content with that. Thank you.

  71. If I could begin with your paper, you mention the increased obligation for a regulator to consult with others. You doubt whether there is a demand for more consultation than is already carried out. Could you say a little more about how consultation with stakeholders is actually conducted? In the light of your paper, given the point you make, could the quality of decision-making be maintained, say, if the extent of consultation was decreased?

   (Professor Littlechild) In the early days of regulation it was probably fair to say that people felt they had not been consulted enough and, when they were consulted, they were not given sufficient information on which to form judgments. Over time, however, I think that regulators responded to that and increased the number and the depth of the consultations: to the extent where, certainly in the last year or two I was there, people were saying, "We've got quite enough on our plates at the moment". I gather that, since then, they are saying there is even more. I do not see a lot of scope for reducing the extent of the consultation. I think that regulators themselves are very conscious of both the pros and cons of consultation. They hear from the people they consult with, who may be saying, "There's too much", but they have also heard from people who say, "And we want this much". If they see any opportunity to reduce it, they will do. As long as the people who are consulted have the option of saying, "Thanks very much, but I don't have anything to say on this", it need not involve them in a great deal of cost. The only area where you might argue there is a substantial burden is where the recipients of the consultation are required to reply and required to provide information. Typically, that is with a price control. It is always the case, everywhere in the world, that the regulators say, "We need all this information" and the companies say, "Surely you don't? You don't use it". That is not specific to Britain at this time; it is an ongoing thing. It is conceivable that there are circumstances—and I alluded to them towards the end of my paper—in which you could have an arrangement whereby people were not so concerned with the amount of information they had and were willing to do deals. However, as long as you have pressure on the regulator to treat all companies explicitly uniformly or on a fair and similar basis, and to explain to others what he or she is doing, then I think that you will need, broadly speaking, the sort of amount of information that is provided at the moment.

Baroness Gould of Potternewton

  72. I wonder if I might turn to page 3 of your memorandum, Professor Littlechild, under "Reordered duties of the regulator" and turn to the third paragraph, which relates to the interests of the consumers and the investors. You make the point that there now seems to have been compromise, "...by making the promotion of the interests of consumers the primary duty". One of the things I am particularly concerned about is making sure that the consumer feels satisfied in the service that they are getting. I wonder, therefore, if you could perhaps elaborate a little more on that and particularly on the point about being "both prosecutor and judge"? Do you really believe that a regulatory body can be effective in looking after the interests of the consumer? Have we now made it too complicated? The fact that we have the sorts of things like, in these terms, Energywatch and so on—does that make it more difficult to look after the consumer or not?

   (Professor Littlechild) I am not sure how significant this is as a practical point, because I have not myself had experience of working under that regime and I have not heard a lot of criticism of it. I simply make the point that there has been a change there and that, whereas the regulator initially was required to promote competition and take account of the interests of the customers as well, now the interests of the customers have come first. The question is can the regulator then fairly balance these two interests. I would not suggest any further changes now, simply because I do not think it is helpful to keep making continual changes. My impression is that all the regulators are very conscious of the interests of the customers. They see competition as being in the interests of the customers but they also recognise that in other circumstances competition is not enough. I think that they have the interests of customers very firmly in mind. Whether this change has made a practical difference is too soon to say and probably too soon for me to say, but I do not have any fears at the moment that the interests of customers are being compromised.

  73. Do you think the customer might be assisted by having a body like Energywatch, in order to be able to challenge the role of the regulator, which they could not do previously?

   (Professor Littlechild) They could do so previously, in the sense that the consumer committees could challenge and, I might say, did so. However, you are correct: they have a different explicit statutory duty from that which the committees had. I think that one of the consequences of making them independent is that they want to be seen to be independent and to stand out. There may be questions later on the pros and cons of this arrangement. I am not saying that in itself is a bad thing. I think that does make, or is capable of making, the consumer interest much more explicit. The regulator then has to decide more explicitly between the voice of the customers and what he considers to be the balance of his duties.

Chairman

  74. Perhaps I may pursue that as a supplementary. I was not sure from your paper whether—as a consequence of the Utilities Act, where the regulator's principal duty is now to the customer and yet you have these independent bodies which have the same priority—the implication was that the Utilities Act would probably reduce the influence of those bodies, because it was now the regulator who was taking a greater role in saying, "I know what is in the interests of the consumer".

   (Professor Littlechild) No, that was not my suggestion. I do not think the influence of the regulators will be reduced as a result of this.

  75. I was thinking that the consumer bodies might be because the regulator is strengthened, as the person who decides what is in the interests of the customer.

   (Professor Littlechild) I think that it is a puzzle, to be honest. There has obviously been a desire to put the interests of customers even more explicitly to the fore but, by pushing two bodies forward, I think that it does create more of a question than there was before and that was part of what I was pointing to. However, I would not have thought that, by that fact, it reduces the influence of these two bodies.

Lord Holme of Cheltenham

  76. Very much in the same area, I am very struck by the page that Baroness Gould was referring to and the following page, about this question of the clarity of the objectives and the hierarchy of the objectives of the regulator. It is perfectly possible to say that the primary objective is to promote competition, of which one of the benefits will be to the consumer, or it is possible to say that you have to protect the consumer by competition and such other means as are necessary. Those are actually rather different sets of arguments and they reflect the intent of the Government and Parliament in entrusting you with certain responsibilities. The point you make on the page, "Developments in Government policy", of the subsequent accretion of extra objectives—social, environmental and others—being laid on the regulator, is that, instead of having a clear primary thrust, the regulator potentially finds him or herself, with or without a board, trying to mediate between a whole lot of goods and to arrive at the judgment of Solomon between them as to what is the right course. To be a bit theoretical rather than specifically talking about energy, how much do you think it is incumbent on Government and therefore on Parliament to try and clarify, in a relatively minimalist way, what it is the regulator is to do? It seems to me that the more other Government policy requirements are laid on the regulator, the more you are putting the regulator in the position of being a minister—of basically having to plot a path between all sorts of good things and to try to find out what is acceptable to all sorts of stakeholders. Does that not potentially diminish the defensible judgment and clarity of the judgments of the regulator? It is put rather theoretically, but I think you know what I am talking about.

   (Professor Littlechild) It might diminish them to a degree, but I do not think I would stress that too much. It seems to me that even in the initial situation there were three primary duties and there were others. However you phrase them, it seems to me that these things will have to be balanced and judgments will be exercised. It is true that if the promotion of competition is put there explicitly as a duty in itself, it is, I would say, a stronger guide than something that says, "and by competition where appropriate", because in the latter case you are introducing more judgment as to whether it is appropriate, whether it is effective and so on. I myself thought that the first set of duties was clearer, but I would not want to say that with the second set of duties you introduce a degree of subjectivity or balancing that was not there in the first place.

  77. Perhaps I may press you on that. Are all duties equal? Because ministers or Parliament want all good things, they put everything to the regulator and say, "You have to do all these things"—and I am talking theoretically—"here is a long list of things you have to worry about". You do not think that there is any duty on Government and Parliament to try to think their way through, to the point where the regulator has at least a sense of priority or hierarchy within objectives, rather than potentially an area in which all objectives are equal?

   (Professor Littlechild) I do think that but I think that is, in principle and for the most part—and probably in practice—provided for, certainly by the first set of Acts. The first set of Acts said, "These are the three primary duties. Subject to these, take all these other considerations into account". The Utilities Act has changed the format somewhat, but there are probably three hierarchies now. I think that is as far as you can reasonably expect legislation to go. If it tried to be more specific, you would end up in the situation of trying to foresee what the specific situations were—which I do not think is practicable.

  78. A final question then. If, over time, the tendency of all governments is to load more responsibilities and more political concerns onto the regulator, do you think that there is a case from time to time, in a formal way, to revisit the objectives of the regulator and say, "It's time for a clean-up or a re-simplification"?

   (Professor Littlechild) I think that could be. As you say, governments are always inclined to say, "Oh, this must be important—and this—and this". They tend to grow and grow and there is never any incentive or any pressure to say, "We don't need this", "We don't need that". You will alienate so many people by doing that. You are right, therefore. The only qualification I would make is that there is a limit to how often you want to be changing this legislation. If it can be done at the same time as something else that has to be done, then it may be sensible.

Earl of Mar and Kellie

  79. Continuing on this subject of the supremacy of the consumer interest, I would ask you to do two things for me. Could you characterise the consumer interest and also explain how that might interface with the fact that the less polluting forms of generation seem to be being priced off the market? My final question about that would be, is that sort of issue beyond the regulator? Is that something which the Government should attend to?

   (Professor Littlechild) Tough questions. On the first one, I think it fair to say that environmental issues were not a significant factor during most of the time that I was regulator, with two qualifications, I suppose. One is that there was provision for investment in renewables and that was basically the Government's decision, and understood to be so. Secondly, I myself took a particular interest in whether there should be some undergrounding of lines; but I found that there was not a great deal of interest in it, surprisingly. I could not really generate any support for a move in that direction so I thought, "When it does become an issue, my successor will deal with it". So I would not claim to be an expert on the environmental issue. Basically, in that early context I interpreted the interest of customers as being price and quality of service. We therefore wanted to get the best price we could, consistent with getting steadily improving quality of service. The big issue for us was what is the trade-off between the two. I do not say that we came to any easy answers on that, but we were constantly asking ourselves would customers rather spend more, have more investment in the network and improve the quality of service, or would they rather have a cheaper and less efficient service that was subject to outages a bit more frequently? That was the issue. In terms of the environment, as I say, I think that there is a limited extent to which a regulator might say, "Surely customers would be prepared to pay a little extra to have some of these lines undergrounded?", where you are not talking about large sums of money. However, once you begin to consider—for example, if you underground the transmission network you are talking 10 to 20 times the cost of that transmission—that sort of magnitude, I do not think a regulator would be justified in pressing that. For the most part, you have to look to Government on the environmental trade-off—particularly since that is quite controversial, as we know.


 
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