Examination of Witnesses (Questions 280-299)|
WEDNESDAY 9 APRIL 2003
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
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
(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.
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
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
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
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
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,
(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.