Select Committee on Constitution Minutes of Evidence


Examination of Witness(Questions 80-99)

WEDNESDAY 12 FEBRUARY 2003

PROFESSOR STEPHEN LITTLECHILD

  80. I am also interested in the issue surrounding fuel poverty. How much did the regulator get involved with things like the amount of help people were given to pay their electricity bills, or did you get involved in that type of what might be suggested to be micro-management? Did you in fact set a standard of how electricity companies were to deal with people in such circumstances?

   (Professor Littlechild) Yes, we did. We were very conscious that it was quite an important political and social issue, and we wanted to ensure that the companies were more responsive on this. For example, one of the very first things I did was to look at what had happened to disconnections in the gas industry. When the gas industry was privatised those disconnections absolutely soared and there was a tremendous outcry about that. I said to the companies, "We don't want that to happen here. We want the number of disconnections to go down and not up". We took two steps. First, we said, "We are willing to allow, indeed we are prepared to encourage, the use of prepayment meters", which would enable customers to know how much electricity they were using as they were going along and budget for it. Secondly, before disconnecting anybody we required the company to go through a procedure of ascertaining what they could afford to pay in the way of paying off their debt, for example, and not simply saying, "You haven't paid—we cut you off". That meant in some cases that, instead of allowing customers, say, a month or two months to pay off their debt before disconnecting them, they would have to allow, say, a year. Both of those steps proved tremendously effective, I think, with respect to disconnections certainly. The number of disconnections when I left was down to about 1 per cent of what it was when I came in. There were two or three companies—London was one, and I think there were two or three others—that had not disconnected a customer for a year or two. This was a dramatic change. We were therefore very conscious of that and we worked with the fuel poverty lobbies in that area. I guess the second thing we would do would be to try to encourage Government to take some sort of responsibility where customers simply did not have the money and were not likely to have the money. We said, "We can't really go about reducing the price of electricity, either across the board or selectively, just because of this. Maybe some of the poverty payments that are made could be channelled directly, if that were to help matters". Thirdly and above all, we took the view that if we could get the price of electricity down as far as possible—which meant making the companies more efficient—that would be by far the best way of helping people across the board. So we had a broad range of approaches.

Lord Fellowes

  81. On page 5, under "Accountability to Parliament", you make plain that you take very seriously the accountability to Parliament; but before that, at the bottom of page 4, you also make it plain that you consider that there are implications, because of the "considerable overlapping of government and regulatory actions", for the working relationship between Government and regulator. Does it mean that you are concerned that the regulator may come to be seen, even if he does not see himself, as a creature of Government rather than an independent figure, working on the whole on the behalf of the consumer?

   (Professor Littlechild) I did not so much have in mind that he or she may be seen not to be independent, though I think that is a consideration. It was primarily the fact that if governments took the view that in general they were either to do the same things as the regulator, or do things instead of the regular, or second-guess the regulator, this would reduce the effectiveness of regulation. It would reduce the confidence that all parties in general would have in the way the regulator worked. It was therefore the substance rather than the perception that I was concerned about.

  82. You have never felt at any stage that you were leant on by Government?

   (Professor Littlechild) I did not, on the whole, because I had a Government that broadly took the philosophy I explained in my paper—"We think it is better to step out of the involvement in this industry"—and therefore there was not a difficulty. There are areas where they took a view that I would have preferred them not to have taken. I would have preferred, in some ways, a little less involvement at the very end in the New Electricity Trading Arrangements. I suppose I took the view, however, that they had a legitimate interest, they had views to express. I took account of those interests and I was not precluded from saying what I wanted to say and doing what I wanted to do.

Lord MacGregor of Pulham Market

  83. I think that regulators have a very difficult task, not least because you are having to stray into areas that are almost political. You are making a one-man judgment on issues that people have all sorts of different views on. Some of the points you raised in answer to the Earl of Mar and Kellie are in that area. I wanted to explore a little with you the point about being prosecutor and judge, as you have put it in your paper. When you were a regulator, to whom did you feel you were accountable? To whom did you think you had to justify your decisions? In the judge's case there is an appeal to a higher court. Were you ever conscious of the need to take account of higher courts who might question or overturn your decision?

   (Professor Littlechild) First, I agree with your point about the political context. After all, regulators are taking decisions that previously had been the decisions of Government. Part of the reason they have got them is because they were such uncomfortable decisions for politicians! Who did I think I was accountable to? I would say no one single person or organisation, because otherwise one would simply be carrying out the orders of that organisation and there would not be such a thing as an independent regulator. If anyone, it would be Parliament. The various select committees of Parliament, it seemed to me, discharged their duty of appraising what regulators were doing. We were always very conscious that the media was following practically everything we did in great detail. They would always want to run a story, as of course they do about politicians, if they sense anything can be made out of it. That would include the investment analysts and the financial community, who would be constantly commenting on regulatory judgments in their reviews, and that would often make its way into the press or on television. Of course, what are sometimes called the stakeholders—the customers and the companies—were constantly expressing a view about what we were doing. I suppose you could also say Government, in the sense that there is a formal ability of a government to veto a licence modification. In a sense, therefore, you have to carry Government with you when you have in mind to make a change. So all those constituents, all those groups, we felt we were having to explain ourselves to and to justify what we had done. Did we feel there was a higher court? Very definitely. There was the Monopolies and Mergers Commission, now the Competition Commission, without whose approval the regulator simply does not have the power to change the licence and impose anything on any of these companies if they do not want it. That was a very real threat—that the Commission would refuse. I suppose that a reference to the Commission happened to me three times; it has happened to my successor about three times.[4] The judgments have sometimes gone in our favour and sometimes gone in the favour of the licensee. We have always felt that we have had to explain ourselves in great detail, because the first thing the Commission will say is, "Why did you do that? Give us your reasons". Unless they look convincing, you are going to lose. I was therefore constantly saying to myself—when I made a decision, when I made a proposal—if it came to it, could I justify this before the Competition Commission? That, I found, was a very significant factor in my decision-making. The second factor is the judicial review. I was judicially reviewed three or four times; I am not sure about my successor's situation.[5] You win some and you lose some. I am sorry, I did not mean that lightheartedly! 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.[6]

  84. That is very helpful. In fact, Ian Byatt, in front of us last week, made the same points about the Competition Commission and judicial review. Could I explore one or two of the bodies in a little more detail, just to be clear? The National Audit Office is one you mention in your paper but did not refer to just now. In terms of the National Audit Office, was that just the cost-effectiveness of your operation and the value-for-money aspects, or did it stray into policy?

   (Professor Littlechild) If I recall correctly, all this is presented as value for money, is it not? I suppose, however, that the National Audit Office takes quite a broad interpretation of what that is. Since the regulators are influencing the expenditure of rather a large amount of money, that does not seem to limit to any degree what the National Audit Office thinks it can look at. The first one that I recall was really a question of are the regulators doing a good job, what changes have happened in the industries, and to what extent can they be attributed to regulation? After that, it looked a little more specifically at, for example, whether the costs of opening up the whole of the domestic market to competition were worth incurring. So I think there has been a mixture as to how specifically they have looked at cost-effectiveness.

  85. That means that in some cases it can be a very detailed investigation of the attitude you are taking to the way you approach the job of regulation.

   (Professor Littlechild) I think that, with their latest investigation—the report was entitled Pipes and Wires—it amounted to saying, "Is the RPI minus `x' form of price control the appropriate control or not? What have people said about it? What do the regulators say in response?". That is quite a wide-ranging issue, I think.

  86. In terms of select committees—I will say this, perhaps you cannot—select committees from time to time do vary enormously in their effectiveness, the way in which they approach their task, the number of people who attend, and all those sorts of issues. How did you see your relationship with the select committee? Was it something that you felt enabled you to justify your position and to answer criticisms, or were you concerned that the select committee might make recommendations which could affect the way you worked? Do you see the distinction I am trying to draw here?

   (Professor Littlechild) Both of those things were true, and I think that you are right about the mixture of the select committees. That, in a sense, is part of their strength as well as part of the problem from the regulator's point of view. You have people coming from very different perspectives and political attitudes, with very different concerns—some sympathetic to some of the things you are doing and some not sympathetic. That, in a sense, reflects the country as a whole, and you have to explain yourself to everybody. I never had any criticisms about not being given the opportunity to defend myself. I knew the kinds of things that were likely to be on their minds and I was given a fair opportunity to say what I wanted about that. Of course, one does not always agree with the conclusions that come out. As you say, it is not just conclusions but it is recommendations. Sometimes I did not find those helpful and sometimes I did. If you do not find it helpful, having considered the matter later on, you have to explain why you have not gone along with it; but that does not seem to me to be a bad thing. That has to be accepted. I suppose I did sometimes feel that the publicity given to these reports, and the press releases written associated with them, did not entirely reflect an unbiased account of the contents of the reports, but maybe that goes with the territory.

  87. I was at a meeting last night where the chairman of one of the select committees was complaining that the way in which the media had treated her report did not actually reflect what they were saying! The last question on this aspect is this. You seemed in your paper to be slightly doubtful about the value of a board, as distinct from a single regulator. One other point you make, quite legitimately, is that it slows up the process and does not necessarily mean consistency and continuity in the same way as you will get from the regulator, if the board changes. I wonder if you feel that is a price you have to pay for having a wider set of viewpoints about the regulatory process you are engaging in from a well-chosen board?

   (Professor Littlechild) I agree that there are pros and cons. I served as a single regulator and I did not serve as part of a board, so I do not have direct experience of that. I did serve on the Monopolies and Mergers Commission for about eight years, in which one operated in panels, so I had some feeling for that variant. I think that there is something in what you say about being a price you have to pay for getting the advantages of a board. However, I thought that I could get quite a lot of the advantages of different points of view by bringing in advisers to help me on specific issues. On the price control, for example, the first time round we had technical advisers, financial advisers and so on, but we did not have any businessmen there, and I felt afterwards, "That was a limitation. I wish I'd had a businessman on". The next time round I had a panel of three very distinguished and senior businessmen to help me on that aspect of it. I think I felt that, insofar as I needed different views, I could get access to them as an individual regulator. However, it is true that, if you have a board, you have those various views not just for one topic but on an ongoing basis. There is something to be said for that, and there is something to be said for having a board so you can say, "We have taken the view" and not "I have taken the view".

Chairman

  88. Perhaps I can ask a supplementary on the first question Lord MacGregor raised. I noticed in your paper, when you referred to the potential to appeal to the Competition Commission or the use of judicial review, you said you thought that had been used effectively and not excessively. I think that in answer to that first question you gave some indication of the quantitative aspect not being excessive. I did wonder how you defined effectiveness. Do I infer from your first answer it was the fact that sometimes people are able to appeal and to win their cases?

   (Professor Littlechild) I think that it is two things. It is that, from the point of view of the licensees or those who appeal, they feel that they have got justice; there has been a mechanism for appealing against the regulator, and it is effective from their point of view. I am saying it is effective from the regulator's point of view in that one thinks very seriously about one's decisions. There is no doubt at all in my mind that having that possibility out there, to some extent modified either the substance or the timing of what I did.

Lord Jauncey of Tullichettle

  89. Pursuing Lord MacGregor's point a little further, did you ever feel that you would have been happier if you had had a board with you to join in the taking of the decision, or were you perfectly content to make the decision yourself, guided by such expert advice as you have just been describing to us which was available to you?

   (Professor Littlechild) It certainly was a lonely job at times, particularly when you had made decisions that were not popular and you had to take the stick all on your own. I do not know whether at that point my reaction was, "I wish I had a board" as much as, "I wish I had done it a little bit differently"—as an individual. Sometimes you think you are right—"I have just got to explain to the world". Sometimes you think, "In retrospect, I should have given a little more weight to this or a little more weight to that". Whether you would have been saved by being a board, whether you would have made a better decision, I do not know. I suspect that sometimes it might be helpful; other times, it might not be. So it is a possibility.

  90. If you were asked the straight question, would you prefer to have a board or to have the method which you used with the expert advice, where would your preference lie?

   (Professor Littlechild) I think if that question were asked of me and I were in the situation as I was at the beginning, I would still have gone for being an individual regulator, primarily because I think that you can do bolder things either more quickly or more radically if you are on your own. I knew what I wanted to do in general terms and to have to carry a board with me could have been rather onerous, and I do not think that I would have liked so much the chairman aspect of that. Now, I suppose, I do not feel that there are the great dramatic changes needing to be done, because the system is bedded down to a much greater degree. It is not so crucial to make more radical changes now. You can argue that the situation now is more one of ticking over in a sensible and reasonably responsive sort of way, and therefore the frustration that one might have felt with a board would probably be less now. So I would be willing to consider it now, I think.

  91. You did say a moment ago that anyone who was really adversely affected by one of your decisions, apart from going to the Competition Commission, could also go to judicial review. Is not one of the difficulties there that, while somebody may be adversely affected by a decision of yours, it may very well be that many others benefit? There is a difficult balancing exercise here, is there not? You were basically balancing the matter in a utility context between the suppliers and the consumers. What might seem to be marvellous for the consumer with, let us say, a very cheap commodity, was not by any means the answer for the supplier. Indeed you might have made a decision which would have involved increasing prices in order, for example, to carry out long-term maintenance, repairs and so on.

   (Professor Littlechild) Absolutely.

  92. There would be, would there not, many cases where people might complain of being adversely affected but where, if you looked at the whole thing in the round, there was really no other reasonable answer?

   (Professor Littlechild) I think that is correct. In electricity that issue arose mainly at the beginning, when people were saying, "Look, prices are going up. This doesn't seem right". I think that was a fair comment and basically that had not been the intention. It took us a few years before we were able to turn things round. It was fortunate that we were able to stimulate sufficient efficiency improvements. The companies responded magnificently on the whole, in terms of reducing their costs, increasing their productivity, and improving their quality of service. For the most part, therefore, it was not a question of higher prices or not; it was more a question of how fast you reduce the prices, or should you spend some of that potential reduction in terms of putting more investment in and improving quality of service. You are quite right, however. In principle—and this has been the case in other countries and could be the case in Britain in future—it could be that higher prices are necessary, in the interests of keeping an effective and balanced set of —

  93. For the long term?

   (Professor Littlechild) Yes.

  94. On page 6 of your very helpful memorandum you refer to the fact that consumer committees had given you much valuable assistance. You add, "...which is no longer available since restructuring of the regulatory framework". Does that mean that these consumer committees have been done away with?

   (Professor Littlechild) It does, and the legislation created Energywatch as a separate entity in place of the consumer committees. As we touched on a moment ago, there are some potential benefits there in terms of an independent voice, but it also means that that independent body will have its own view as to what it wants to work on and what it wants to explore, promote and press for. It so happens that Energywatch has chosen to focus on the competitive supply market for domestic customers, which is a legitimate interest, but it has, I think more or less explicitly, chosen not to look at the situation of the distribution businesses, which remain as monopolies. In consequence, it has not taken a particular interest in what value the customers place on improved quality of service in terms of fewer outages. I think therefore that my successor would have felt that there was not that source of information coming in from a consumer representative body there otherwise previously had been.

  95. So from the consumers' point of view that was a minus rather than a plus point?

   (Professor Littlechild) I perhaps would say that, but I have to recognise that Energywatch has been set up with a view to representing the customers and it is for Energywatch to decide how best to represent the interests of the customers.

Lord Holme of Cheltenham

  96. I want to go back to the central issue of accountability, which is the main concern of this Committee. First of all, there is a case for a board which does not have to do with the collectivisation of decision but should rather be seen through the perspective of corporate governance. There is, in terms of the accountability of the regulator, a single person. A board is a check and balance. Rather than simply being seen as a way of getting a group of colleagues making a collective decision, it could be that you have a relationship of a different sort, where the chief executive, if you like—the single regulator—is making the decisions but is subject to the review of a board. So, rather than thinking of it as a way of gathering colleagues round a collegial decision, it could be seen as a matter of the checks and balances of corporate governance. The other thing I wanted to press you on is that, in the response to Lord MacGregor, you went through a whole set of stakeholders and other interested parties. Many of those I do not think one could possibly describe as accountability. The media are there to haunt us all. I am not sure that they are a group to whom you are in any way accountable. I am not sure that you are accountable to teenage whizz-kid investment analysts. You therefore come back in your list to the first group, which is Parliament. I think that you did say that you were primarily accountable to Parliament—which is a prejudice we would obviously share. Yet in your description of accountability to Parliament you take, if I might say so, a very conservative view that it is all perfectly fine, and let us carry on with it the way it is, although there is an implicit criticism in your paper of the randomness, as it were, of select committees and that they are going to follow whatever their own particular hobbyhorses are—and we all know that to be the case. The question I want to ask you is, if you really believe your first accountability is to Parliament, is there a better way, in terms of proactive reporting on your part, to try to shape more meaningful discussions and get the input of Parliament in a more structured way than the slightly unsatisfactory relationship you describe? I suppose the problem I am having is that you say accountability to Parliament—and you are obviously not wholly satisfied with the way that operates, and I can see why—and yet you do not, at least in this excellent paper, have any proposals to improve the way that relationship could work.

   (Professor Littlechild) I agree with you that Parliament is the prime route for accountability. The other parties that I mentioned are occasions on which you have to explain what you are doing, but obviously less formal and less serious. I do not think that I meant to be critical of parliamentary select committees for jumping around. It may be inconvenient to have a select committee jumping on you just at the time you are doing something that is going wrong, but it is probably necessary. At one time I thought that there was quite a lot of merit in having a select committee for the utilities. That probably was the leading runner a couple of years ago. I think that would more explicitly seem to be dealing with the problem of accountability, because if anybody said, "Who are you accountable to?", you could say, "That committee there. That is their job". On the face of it, therefore, I think that it would be a more satisfactory situation. Secondly, it is fair to say that that committee could become more expert in what is going on and in that sense it could, it might be said, ask more probing questions. Having said that, I think the resistance to that, or the lack of enthusiasm, came, if I may say so, from the parliamentary side—a feeling of, "Do we really want to tie ourselves down to investigating these regulators every year?". The kind of advice the select committees get, coupled with the continuing expertise of a number of their members, means that they are able to ask the kind of probing questions that they would be able to as a specialized committee. I have therefore come to the view that I do not see an obvious source of improvement in the way that I once thought, in terms of a specialised committee.

  97. Assuming that Parliament did not want to change to a standing utilities committee but to keep it as select committees, I suppose the question I am asking you is can you see, from your side or from the parliamentary side, any way of making that accountability more meaningful in terms of the way you structured your reporting, the way that you pre-prepared the meetings and the way that the parliamentarians pre-prepared for those meetings? I think that this is getting to the heart of what we are trying to consider. How could you have a better quality of accountability? It is certainly not a criticism; I am just interested in your perspectives on that.

   (Professor Littlechild) I myself think that the system is presently effective, in the sense that it forces regulators both to explain themselves in detail on particularly serious issues that are sufficiently serious to be taken up by a select committee and, secondly, before taking those decisions to think seriously about what a potential select committee might say. If you are now looking to say what better kind of dialogue or examination can we have between the regulator and the select committee, I feel that the regulators produce an annual report of what they have done and it summarises the set of actions to which they might be held responsible. It would be for a parliamentary committee to indicate a greater interest in one or other of those items—which I think happens when a select committee is set up.

  98. This is just a wild suggestion. Did you specifically seek feedback from a select committee on the shape and content of your annual report and how usefully it was organised and presented, the content of it, and on the way you did it?

   (Professor Littlechild) No, I did not. I did not think that it was appropriate to do so, I might say. I suppose I thought that if a select committee had views about that, they would make those views known at an early opportunity. Nobody ever did. No select committee ever said, "This is not the sort of information we want" or "Can you not produce this or that on a more routine basis?".

  99. I suppose I am suggesting that it takes two to tango. Certainly a number of public companies now go to some pains to consult on the shape of their annual reports, with the stakeholders most keenly involved, simply to make sure—to put it in market terms—that the accountability they are showing is one that those to whom they are accountable want.

   (Professor Littlechild) Specifically in terms of the annual report, we had a bit of feedback from consumer committee chairmen at the beginning, for example, saying, "What is all this doing here? We want something short and sweet"—and it may or may not be sweet—and so we produced a little summary in two or three pages. We never had any indication from anywhere else that what we were doing was inappropriate or insufficient. If there were such indication, I think that we would have explored it.


4   Note by the witness: During my term, one licence modification reference and two parallel merger references. During my successor's term, one licence modification reference. Back

5   Note by the witness: Two judicial reviews for my successor (one electricity, one gas). Back

6   Note by the witness: Moreover, a customer (Redrow Homes) succeeded at judicial review, and a domestic consumer won her case at a Tribunal. Back


 
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