Select Committee on Constitution Minutes of Evidence

Examination of Witnesses (Questions 280-299)



Lord Jauncey of Tullichettle

  280. Can I take you up on just one matter, which Lord Elton has just dealt with; the Health and Safety Executive, that is not a truly independent regulator, is it? Surely, it is an arm of the Government looking to the enforcement of regulations for health and safety made under various Acts, no doubt probably the Factories Acts and many others; is that not right?
  (Mr Armour) I think you are right, and that was why I said I do not think it qualifies, in terms of the definition, let us say, of human rights; however, it does give us a way of, if we wanted to, looking at how we would tackle a decision by the safety regulator. Now we prefer to resolve it by a discussion with the safety regulator and come to an agreement; if not, this gives us some limited protection, in saying, "Here is an informed group who can take a view on it," over and above that. Now whether that is sufficient is another question, but it is not one that we are pursuing particularly hard.

  281. And, ultimately, of course, if you are charged with a breach of a particular regulation, you may well have a ground of appeal in the courts anyway?
  (Mr Armour) Yes.
  (Mr Love) Correct; whereas to Ofgem decisions, or the Authority's decisions, we do not.
  (Mr Armour) We try very hard not to get into litigation or altercation.

Lord Acton

  282. If I may come back to the select committee again, I wonder, have you consulted colleagues, I am not sure that `colleagues' is the right word, your equivalents, in other utilities, about this, and is there a broad thing of people wanting it?
  (Mr Love) There seems to be.

  283. And can you name names, of anybody?
  (Mr Love) The Electricity Association, I believe.

  284. You said you were adopting their idea, did you not?
  (Mr Love) Correct. They have canvassed other sectors as well. The information I have had from them is that this seems to have struck a chord.

  285. Have they done a paper on it?
  (Mr Love) I do not know, I will have to revert to you on that one, or perhaps you could ask them when they are in front of you.

Chairman: We could check up on that.

Lord Acton

  286. Perhaps we could find out about that. I think it would be rather interesting to see who they have consulted and how broad it is?
  (Mr Armour) The Electricity Association has 19 major companies as members, effectively, in the gas and electricity market; some of them also are in the water business, and various others.

  287. So it is very broad?
  (Mr Armour) Also they have regular liaison with other trade associations; however, I think those trade associations have to speak for themselves on this particular one.

Lord Acton: I think that would be very useful, to get their evidence, if that is the right word, on this. Thank you.

Chairman: We will try to get a feel for that. We have had other submissions now which make a similar point, from other organisations, very much along the same lines as you are making.

Lord Elton

  288. In paragraph three of your paper, you are paying attention to the cost of Ofgem, which you say, I presume, with a sigh of relief, is passed to the consumer. Is that absolutely the case; how does it impact on you? Are you making this statement for the public good?
  (Mr Love) Ofgem's costs go through a kind of tortuous route, if you like. Technically speaking, they are dealt with by the Treasury, so Ofgem actually recover their costs from the Treasury, but that gets reimbursed via only, at the moment, the wires business of National Grid and the distribution companies, as well as National Grid Transco for their pipes, in gas. So there is a small increment on the rental, if you like, for the wires and pipes that recovers Ofgem's costs, actually a year in arrears, and then that gets paid back to the Treasury, the Treasury having reimbursed Ofgem for their costs in the actual year.

  289. So you are spectators rather than victims?
  (Mr Love) We are, but we pay, for example, to National Grid, for use of the wires, I think it is £35 million a year, so the element that relates to Ofgem's costs is in that, and we seek to recover that, obviously, through the wholesale market trade that we do, that on-sells the energy that we produce, which ultimately is passed on to customers, in one way or another.
  (Mr Armour) There is no free lunch in this area. But there is an interesting contrast, if I take the NII, the NII are funded partially by Government and funded partially by levies on particular operators, but their costs are constrained, and periodically the regulator will say to Treasury "We need more funding, and we need more people, in order to discharge our function." That constraint creates a degree of prioritisation, which we think is, broadly speaking, the right sort of balance. If it is simply all recovered from the industry, one way or another, there is not a bit from Treasury, as such, then there is less pressure on regulators to contain their costs. In the ultimate, effectively it could lead to regulators pursuing a wish list, rather than pursuing what is appropriate, from having some sort of limitation on regulation. I am not saying the balance is wrong, but there is a difference between the pressures on regulators depending on how they are funded.

  290. And what led you to choose, in particular, RPI minus 5 as the cap?
  (Mr Love) A finger in the air. RPI minus 5 would have been, in the early years of price controls on wires businesses, a typical number that was used to drive efficiencies into the business. It could be RPI minus anything, but the fact that it was RPI minus we thought was important to put a constraining pressure on the—

  291. And not simply RPI?
  (Mr Love) Even RPI, it would just maintain the status quo. We thought it was important to say, if you were prioritising your work properly, if you had less of a budget, what, on your current list, would you have to chop off; and having to go through that decision-tree is a very important discipline in private industry, and we see no reason why it would not be an important discipline for the regulatory bodies as well.
  (Mr Armour) Many of the major reforms in the electricity sector have been brought in in recent years, and I think we are approaching a kind of position which if not approaching steady state at least says we are on a plateau. Now, in terms of regulating companies, RPI minus X, and we are not going to argue about what the "minus X" was, has been the driver for efficiency. I think we see a large regulator here, and efficiency has had benefits in the industry, it might have benefits in the regulator.


  292. If I can pursue that, because I take the point you make about cost, and you could look at it in its own right, along the lines you have indicated, but also I took it as part of a wider concern you have got about Ofgem, in the sense of perhaps a lack of constraints that there may be on its operation to ensure priorities, to ensure that there is adequate listening. Because one of the points you make is that where there is the requirement to consult, I take it from the paper, and I trust this is a fair summary, although they consult, you are not sure that they are always listening. Would that be a fair summary of the points you are making, that it is not always clear?
  (Mr Love) Sometimes it is difficult to perceive that, yes. They do consult and they consult very well, and they consult very frequently. We get on average, I would think, one significant consultation from Ofgem every week, year on year, and their papers are very high quality and they set out the arguments very well. But there is a perception that sometimes they prejudge the issue and that maybe consultees' views do not carry significant weight, not in all decisions, just in some cases.
  (Mr Armour) And it is not confined to Ofgem. We have concentrated on Ofgem. Our two largest regulators are the NII, the Nuclear Installations Inspectorate, and Ofgem, the others tend to be slightly more distant. But the reality, I remember one private secretary telling me, his minister, when he took up his post, introduced him and said "There are five consultations out at the moment; this one is a real consultation." Whether, as I say, that is anecdotal, not just in any given regulator but in wider consultations; some are seen as going through the motions to implement policy, and some are seen as really listening.

  293. Yes; you were saying going through the motions, or the implication that at some point hearing what they wanted to hear. So, given that particular problem, what does one do about it, because is the only way one can do anything about it after the event, in other words, through appeal, or is there any change you can make to the process, any duty you can impose on the regulator, that actually would make sure not only that it was a real consultation but, equally, and I think this is important, what you have just been saying, that it is seen to be a real consultation?
  (Mr Armour) I think it comes down to the quality of the consultation. If best practice drives the regulator to justify the need for the change, on the basis of the regulatory impact assessment, and of a thorough exercise that informs the risks and benefits, then the chances are it is difficult to justify a change that is not merited, and, therefore, effectively, the process becomes self-policing, to a larger extent.
  (Mr Love) I think that is right. I think historically Ofgem have been very reluctant to do regulatory impact assessments, it is a requirement of government departments, it was a clear recommendation from the Better Regulation Task Force. Very recently, they have given an undertaking that they will, and it was flagged up in the White Paper that the Government might be bringing forward legislation to enforce that. If that were the case and if regulatory impact assessments formed a proper part of the consultation process, in other words, the options were set out with a regulatory impact assessment of each, so people could then comment on them and say, "Well, hang on, I think you've got the costs wrong on this one," or "You've underestimated the benefits of that one," as Robert said, I think it would bring much more transparency into the consultation process and would raise people's confidence that there was a proper process there.

  294. So that would be the route to go down, you mean?
  (Mr Love) I think that is the easiest thing that you can see as a kind of quick fix for the process.

  295. And within the paper you place great stress on the importance of the regulatory impact assessments and the need for them to be done essentially consistently. Is it sufficient then to rely on guidelines or government commitments, would there be any value in it being actually a statutory requirement?
  (Mr Love) I suspect that it will be a statutory requirement.

  296. And then do you support that?
  (Mr Love) We would support that. I suspect that the Energy Act, that comes out of the White Paper, will make that, and we have been advocating that; and that is just the sort of job that the select committee, back to Lord Acton's point, would have a valuable role in, ensuring best practice in the production of regulatory impact assessments. Because we recognise they are not always easy, quantifying the costs and benefits is not easy, and particularly if you are looking as well at rolling an environmental impact into the same kind of regulatory impact assessment.
  (Mr Armour) It is not a perfect science. It is exactly the sort of process we would expect ourselves to go through in making a change or an investment decision, and actually we do not see that it has not got a merit in the regulatory framework that we operate under.

  297. Have you any inkling as to why the Authority has not really made a practice of policing regulatory impact assessments?
  (Mr Armour) It can be quite difficult.
  (Mr Love) I think Callum answered the question, and that was the answer he gave, that it is difficult to do it. I think we would argue, just because it is difficult, it is never going to get easier if you never do them.

  298. So there needs to be much more of an impetus to make sure they undertake what is a difficult exercise, basically?
  (Mr Love) Yes, and this is not just Ofgem, this goes across the piece; and, I am sure, once it is a regular part of the consultation process for all the utilities then best practice will arrive and they will become quite easy to do.

  299. Yes, I was not thinking of the statutory requirement solely in respect of one particular sector, but it is good practice across the board. And an allied point, in terms of statute, would statutory provision address another problem you have got, which is the co-ordination among regulators?
  (Mr Armour) It might, and it might not. I think, in many cases, that is addressed more at this point in time by protocols between regulators. Inevitably, there are, on occasion, some tensions, for instance. We have seen differential approaches between the NII and the Environment Agency; at times, we have differential approaches between the NII and Ofgem. So these are things where sometimes we are piggy in the middle, but we try to put the regulators together and say, "Look, there's a variety of ways you can do this, but please don't each tell us to do something different." The protocols are helpful; for instance, between the NII and the HSE, it says our sites are subject to the Factory Inspectorate as well as the Nuclear Installations Inspectorate, but they agree who operates the jurisdiction within the site fence, outwith the site fence, or whatever. Similarly, between the NII and the Environment Agency and SEPA, there is an agreement where they will draw the line; that is helpful to us in giving us a degree of certainty as to who we are going to be dealing with.
  (Mr Love) The other good example is, back to Ofgem again, that Ofgem also has joint powers with the OFT under the Competition Act 1998, and they have got a public document that sets out how they are going to operate and who is going to take the lead on what kinds of inquiries, which is helpful for the industry, so we know who is doing what, basically.
  (Mr Armour) Primarily, we want clarity, a degree of certainty, we would like it to be logical and on the basis of cost/benefit; but we are a long-term business, with long-term investment decisions, and, therefore, having a degree of certainty as to where the regulator will take us in policies, which may stretch over 100 years, is quite important.

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