Select Committee on Constitution Minutes of Evidence


Examination of Witness(Questions 100-107)

WEDNESDAY 12 FEBRUARY 2003

PROFESSOR STEPHEN LITTLECHILD

Chairman

  100. I should like to pursue that question and to take the opportunity, in response to Lord Holme's first point, to say that there is not necessarily anything wrong with taking a conservative view. To pursue the point Lord Holme is making as it applies to the relevant accountability, whether it is through judicial review or the Competition Commission, it is that it is essentially sporadic and reactive and, as I think you are implying, it tends to be resorted to—including parliamentary committees—when there might be a problem, which might then give you a distorted view of what the regulators are about. I think that this is at the heart of what Lord Holme was getting at—whether there is need for a more consistent and perhaps proactive interaction between Parliament and regulators and whether one can devise a mechanism for achieving that. A select committee, on a specific subject, may be able to question. Historically, Parliament, the House of Commons, did set up a select committee on nationalised industries in the mid-1950s which worked reasonably well. I think that is what we are getting at—as to whether there can be more consistent and more proactive interaction, which presumably would be to the benefit of regulators. It would be an opportunity for you to say how well you are doing, rather than merely responding when a problem comes along. I do not know whether that might be done through a formal mechanism in a select committee, or whether there might be less formal devices that might be established.

   (Professor Littlechild) I think that you are right to say that if select committees only investigate things when they think there is a problem, then of course regulators tend to appear in the media only when there is a problem. That might give a slightly distorted effect. Against that, it is fair to say that some select committees have said, "We haven't looked at this area for a while. We will have a look at that. We don't see a particular problem, but let's have a review of it". Secondly, it is not always the case that all select committee reports are critical; some of them are positive as well. Thirdly, the National Audit Office seems to have adopted a policy of investigating some utility regulation issue each year, so that there is a more routine investigation going on there. As I indicate, it has pros and cons, but I think that is happening. One has to ask, if all these things are happening, is there really a serious problem that demands the scarce resources both of Parliament and of the regulator? We all have lots of things to do, so do we really want to create additional work? As you have probably gathered, I do not think there is sufficient concern at the moment to warrant a great deal of change, but others may have a different view.

  101. I was going to ask, as an independent question, about the contact that regulators have with one another—so what was your contact with regulators? I wonder if one could link that to what we have just been discussing, so that instead of individual regulators having to respond themselves, whether, if there were some co-ordination between regulators in terms of material provided to Parliament, there is a case for better co-ordination between regulators and, if so, whether that would be a route to providing consistent information to Parliament?

   (Professor Littlechild) Views on this have been evolving over time. The present view is that regulators ought to liaise with each other and, if necessary, statutory obligations ought to be put on them to do so. That was not always the case. In practice, we did meet from time to time, but I know at least one regulator, in the early days, took the view that this may not be appropriate and thought that it might compromise his position and independence if he had been thought to have liaised with others. I think he had in mind particularly the Monopolies and Mergers Commission, but he also felt a little uncomfortable about liaising with other regulators. I do not think that most of us felt that, so it was a matter of how seriously we thought that it was necessary and how frequently to meet. It developed into about once a quarter, but staff would discuss more often if there seemed to be issues that would benefit from further discussion. Very frequently there would be issues that overlapped two regulators' jurisdictions. You would have a fairly active burst of discussion there, where you worked out who would take prime responsibility and, if you had different policies, how you would try to reconcile those. In practice, therefore, it worked reasonably effectively. It was heightened in two respects. One was when the Government announced an intention to look at all the regulators and it was clear that one of the questions would be, "Are you doing the same thing? If not, why not?". Regulators rather more intensively asked themselves, "Why are we doing what we are doing?" and "Can we bring them together?". Secondly, we were very conscious that, in the case of appeals to the Competition Commission—the Monopolies and Mergers Commission—they would tend to take a consistent view across the utility sector, or at least they would have to explain why they did not. If, for example, the cost of capital was held in water to be this amount, it was very difficult in electricity not to go for the same cost of capital—unless you could argue, as you perhaps could, a little more risk or something of that kind. That mechanism tended to bring regulators into a more consistent pattern of working than they otherwise might have done.

  102. On the point about Parliament, if it were slightly more formalised, would that be a mechanism for reporting to Parliament almost collectively?

   (Professor Littlechild) I do not sense that regulators would like to report collectively for the most part, because they would see themselves as having a set of statutory duties for which they would want to be accountable. If you did not agree with another regulator, you have a difficult situation. Either you say, "We just don't agree" or you try to find some "fudgy" wording that covers this up. I am not sure that it would be helpful to look for a lot of joint reports here.

  103. I was not thinking in terms of the regulators coming to agreement in terms of what they were presenting, but more the compilation of reports from regulators—which might just be the aggregate of the individual reports.

   (Professor Littlechild) Fine, but this is on specific issues other than the annual report, is it? I am sure that regulators would be happy to give further details on what is required.

Earl of Mar and Kellie

  104. When you mentioned that the distribution network was a monopoly, it reminded me that I ought to ask you about the way that the industry is organised throughout the United Kingdom. I believe that in Scotland the privatisation was different. I believe that it was more vertical integration. Did you find yourself dealing with Scottish electricity matters in a different way, or was there no issue on that?

   (Professor Littlechild) Yes, it was different because traditionally the structure had been different there. It had been two vertically integrated companies, as opposed to distribution companies quite separate from generation in England and Wales. That was the previous situation. That provided, not a painless but a relatively straightforward way of introducing competition and separation of these activities in England and Wales. To do the same thing in Scotland would have meant taking a bigger knife and cutting more things apart. I do not think there was political support for doing that. So the decision was, "Let's see where we can get to with the framework", but leaving the vertical integration in place. I tried as far as possible to have a consistent policy in England and Wales and in Scotland. What it meant was that in some respects we had to judge, and indeed set, prices in Scotland where there was more of a monopoly, in relation to what we took to be an increasingly competitive market in England and Wales. For example, there was a Pool in England and Wales into which all generators sold and from which everybody bought. It may not have been fully competitive but, in principle, it was a competitive market. There was no such thing in Scotland. Consequently, if a new supplier wanted to enter the market in Scotland, there was no way of buying electricity; they had to buy it from one of the incumbent companies. Question—what price should be paid? We took the view that we would take the price from England. We therefore had to deal with Scotland to some extent based on what was happening in England and Wales. Because of the rather more delicate situation in Scotland—and there is a question in the draft questions, "Did you prioritise your duties?"—I think that Scotland was put a little bit on the back burner, in the "too difficult" box. But that may not have been the question you were asking.

Lord MacGregor of Pulham Market

  105. Could I ask a question which may relate more to the time after you had left, but I would still be interested in your general reaction? It is in relation to the work of the Better Regulation Task Force and the principles they have drawn up. Did that have any effect at all on the work of the regulators? Secondly, to what extent in taking decisions does the regulator take account of these regulatory impact assessment procedures?

   (Professor Littlechild) I have considerable sympathy for some of the aims of the Better Regulation Task Force, particularly the notion of improving the general quality of regulation and of reducing regulation where it is feasible and sensible to do so. As you say, it came after my time, if I remember. I think that they got off on rather the wrong foot, because the prime example they gave in their first report of one of the problems of price regulation was illustrated with a company, Nuclear Electric, that had never been price-regulated in its history. There was therefore a question about how much expertise this body had in the energy sector, I am afraid. It is fair to say that the kinds of things they say are worth looking at and giving thought to, but it is also the case that the regulators to whom this is addressed have spent 10 to 20 years working on these issues, thinking actively about precisely these issues of process and the consequences of what they do. I think that it would be a little surprising if that particular body came up with a lot of novel ideas that had not occurred to regulators that were nonetheless worth going ahead with. To some extent that applies to the particular assessment studies you mentioned. They set out there a rather formal procedure, but my experience when I was at Offer was that certainly the civil servants amongst the senior staff, but also others, would as a matter of course set out the pros and cons, the implications of each activity or proposed decision. So I felt that we did in principle do those kinds of things, even though we did not call it by that name.

Chairman

  106. Your conclusion in your paper is plain and explicit about "Let regulators get on with their jobs". I infer from the paper and an earlier answer you gave that it is essentially regulators as presently constituted. I wonder whether, given the changes in the nature of ownership that have been taking place, you see a case for, rather than just having discrete regulators for particular sectors, cross-sector regulatory bodies?

   (Professor Littlechild) It began to look as though there was going to be a strong case for that when we had an electricity company taking over a water company. We worked with the water regulator to devise a framework for dealing with that, with which we were reasonably satisfied. We thought that there would be a stream more, but there were not. I do not know whether the electricity company has already divested itself of this water company or whether there is another one that is contemplating doing so, but that kind of cross-utility activity did not take off to the extent that it seemed it would at one time.[7] Similarly, National Grid went into telecoms and its subsidiary Energis had a very chequered history. You will remember that the value of this subsidiary company went up and then down again, and National Grid is not in it now.[8] Scottish Power got into telecoms and is in the process of getting out of it.[9] Most other companies have not got into telecoms.[10] With the exception of gas and electricity, which have been very actively business-interrelated—and we now have Ofgem which deals with both—I do not myself see that there is a big, new, urgent issue that there is a lot of cross-utility integration which needs to be dealt with.

  107. Reinforcing what is in the paper, in effect the fit, you would say, is more or less right at the moment?

   (Professor Littlechild) I think it is okay. My own preference, other things being equal, is to have rather more decision-makers than fewer, simply because you can then compare them and because any one decision-maker has less absolute power at his or her disposal. I am in favour, I suppose, of that degree of dispersed power—other things being equal.

  108. The logic, clearly from the paper, is also for dispersed accountability to different bodies and for each to respond rather than, say, having a regulator of regulators?

   (Professor Littlechild) I think so. That would be (a) bureaucratic and complicate the situation, and (b) simply to shift the question as to whom that overall regulator would be responsible.

Chairman: Professor Littlechild, that has been extremely helpful for our purposes. I suspect that we would have had many more questions, had it not been for the fact that you put in an extraordinarily helpful and well-structured paper. It gave us a lot of information which has been invaluable, and we are most grateful to you both for your time today and for the paper.





7   Note by the witness: Scottish Power purchased Southern Water and sold it in April 2002. Northwest Water acquired Norweb (United Utilities). RWE acquired Thames Water and Innogy. Hyder (Welsh Water) acquired South Wales electricity but when WPD acquired Hyder in 2000 it sold off Welsh Water in 2001. Back

8   Note by the witness: National Grid reportedly retains a 32.5 per cent stake in Energis. Back

9   Note by the witness: Scottish Power demerged its telecom subsidiary in March 2002. Back

10   Note by the witness: Centrica owns One Tel and British Gas Communications. PowerGen offers a telephone service. Back


 
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