Select Committee on Constitution Minutes of Evidence


Examination of Witness (Questions 440-459)

WEDNESDAY 14 MAY 2003

MS CLARE SPOTTISWOODE

Lord Jauncey of Tullichettle

  440. We know that at the moment the appeals—apart from judicial review, which I am not worrying about—are restricted to decisions on licensing terms, is that right? Modification and alteration of licensing terms.
  (Ms Spottiswoode) Yes.

  441. We have had various views, and they seem to coincide very much with your view, that the appeal mechanism should be extended to appeals on the merits of a decision. Is that right?
  (Ms Spottiswoode) Very much so. As I say, I felt this acutely back in 1994, when there was not an appeals mechanism and indeed subsequently, in my facing that decision. I felt my responsibility was, "I have to be absolutely in the middle. I cannot come out with a decision that I feel that they might want to appeal, because there isn't an appeals mechanism. So I have to be really careful to make sure this is carefully defined and no one could consider this appealable". Subsequently, however, the Northern Ireland regulator decided that he would throw out the MMC recommendations and he did something different. He actually never went through with it, because the Utilities Act came in which did not allow that any more. But there are still a number of areas where the appeals mechanism is just not there. I think that, for legitimacy of the system, there should always be an appeal mechanism—where there is a big enough issue.

  442. Should the right of appeal be granted to persons whom you have regulated—companies—or should it be granted also to the consumers' committees such as Energywatch?
  (Ms Spottiswoode) I think that there is a case for saying that, if it is a licence issue and it is against the company, it should be just the company. If it is a customer issue, then the consumer body should be the one that is allowed to appeal. It needs to be carefully thought through, because you do not want the whole system becoming gummed up, as we have in the States where the whole thing is in legal process all the time. One does not want to make it easy, but one does want to make it available where conditions merit it.

  443. In the final sentence of your paragraph 27 you refer to the extension of the Competition Commission to "any significant policy decision".
  (Ms Spottiswoode) For example, the issue of NETA (New Electricity Trading Arrangements), the issue of location charges. There is a whole series of things going on in Ofgem that have major implications, and there is no mechanism to appeal. Indeed, in NETA, some of the appeal mechanisms through the court—because there were contracts before that—have been superseded by no methods of appeal. Judge and jury are in Ofgem. Whatever you are looking at, if it has a major impact on an organisation or on consumers, there should be a mechanism where, in the limit, for major issues, you should be able to appeal.

  444. Supposing a regulator got a decision in relation to one particular company wrong on VAT, as they thought, would you still support an appeal by that company?
  (Ms Spottiswoode) You cannot go against one company. Something like commission charges will have an incidence which is different for each individual company. Some companies will feel very strongly indeed. They will feel that their property rights are being abused; they will feel a legitimate right to go to a court. Judicial review does not work for them. The competition courts are very beneficial, I think, because they take into account a whole series of things in the round. Is this good for the country as a whole? Therefore are there legitimate reasons to say that this particular property right can be overridden? I do think that it should not just be the regulator making that decision. There should be a mechanism to allow the company that is aggrieved to go to another court for an appeal.

  445. One final question on this matter. Again, we have heard that at the moment, in certain matters, if an appeal does go to the Competition Commission, they are inclined to reopen the whole of the circumstances, rather than just going for the one issue about which parties are in disagreement. Would you recommend that that should be altered so that they should be encouraged simply to deal with the one issue?
  (Ms Spottiswoode) Definitely not. The reason is—and it is normally about price controls that this comes around, but for anything—a price control is a judgment call across a whole number of things. The way in which we did it, we would come out with a number and say, "This is a number we think is appropriate". You then allocate it according to a price adjustment on year one, and an X in years. If you were to challenge X, you are not taking into account the original price change or the other aspects of it, which will include what precisely is making up that price control. It is a balanced judgment against all of those issues. If you could challenge just one of them, you would pick one which you think looks strong for your case and then you destroy the whole of the regulator's balance of judgment across all the pieces. Also, if you say that going to appeal means that the Competition Commission might go outside the bounds, then the Competition Commission actually has to be able to open it up—open up Pandora's Box. That is the risk you are taking if you take something to appeal: that they might decide to open up Pandora's Box more than you might otherwise wish them to.

Lord MacGregor of Pulham Market

  446. You have answered some of the points that I was going to raise with you. It is all on the appeal process. You have made a case very clearly for the appeal mechanism, but you have also drawn attention to the dangers of clogging up, the American system, and so on. How would you avoid that danger? Would you have much stronger appeals? Would you limit the appeals to certain issues, defined in legislation or whatever? I do not know how you would avoid that.
  (Ms Spottiswoode) Usually the law tends to have nice words like "significant", or things that are not fully defined but people tend to get a feel for what they mean. The FSA, I gather, already has a similar kind of mechanism where it is on the merits of the case, and they have not been inundated with cases. So it is not at all clear that, just because you open up the appeal mechanism, you would be inundated with cases. What I would do is probably think, much more carefully than I have done here, about every individual case and what was legitimate to open out and what was not. Then, with some of the brilliant parliamentary lawyers we have, work out how to express that in legal terms. If the system did become clogged up with bureaucracy and appeal mechanisms, then we have really done a disservice. One of my concerns generally about the regulatory system is that the whole thrust is to become more formal, with more and more paperwork and, in doing so, you are also making it much more expensive and possibly less responsive to things. The tendency is always to put on more regulation to the regulators, rather than to think about how do you make the system work. There is a danger in that. I would just say that you have to think about it very carefully. In principle, it is really important that that appeal mechanism is available.

  447. Can I be absolutely clear where the appeal mechanism lies and who do you appeal to?
  (Ms Spottiswoode) The Competition Appeals Tribunal seems to be the obvious body.

  448. And you would do that with, for example, the FSA as well, would you?
  (Ms Spottiswoode) I am not sure. The FSA has their own special committee for appeals.

  449. We still have to talk to the FSA. That raises all sorts of different areas. It is not just about price controls, monopoly or anything of that sort. It is about mis-selling and all sorts of issues like that.
  (Ms Spottiswoode) So are licence conditions. Licence conditions are not just about price controls. They are also about the mis-selling-type provisions that are in there. So already, theoretically, there are cases that could go to the appeals tribunal on those issues that are not in their normal remit. But I still think that it is a more appropriate body, because it is set up to do those kinds of cases. It is not for the legal courts.

  450. You refer in paragraph 178 to this question of boards of individual regulators and to it really being about the question of giving so much power of discretion to an individual—and of course that partly involves the appeal process as well. Now that the whole regulatory system is more mature—and we had some evidence earlier that it was better to have a single regulator in the early days in order to get it speedily off the ground—do you think that a board system can partly help with this point about people wanting an appeal mechanism, but also avoids that danger of discretion being given altogether to one individual?
  (Ms Spottiswoode) You have to trust the process. So you have to trust that people will appoint reasonable people to do these jobs. Then the issue is that actually an institution makes better decisions. Then I would also say that you also need to be careful not to give that organisation, because it is not democratic, too much responsibility. So you have to define what you do. However, I think that worrying about giving discretion to an individual is slightly misplaced, because all too often, when you actually get a board, it is one person who takes the main brunt. Even though I did not have a board, I had an executive team that we treated as a board. I had external advisers, whom we treated effectively as non-executive directors. Indeed—and I recall saying this in 1995—I think that boards are quite a good way of doing good organisation. It is good organisationally. However, there is a lot of distrust of putting too much power in an individual. You just have to find a system that works and makes the best decisions, and not worry too much about how much power is in a particular individual or not.

  451. My final point is on the cost of the regulatory body itself. You said that there are not enough checks on this and suggested a select committee. Presumably, that could be the NAO (National Audit Office) and PAC (Public Accounts Committee)?
  (Ms Spottiswoode) It could be. They do an ad hoc check. I guess that I am going back to my experiences too, where we would put forward a budget, the Treasury would do it, and we might have an NAO review of it; but it was not done on a regular basis. I think that part of it is about what should this body be doing. Certainly a response of my staff was, "Anything that comes into this office, we should attend to". That tends to mean that the body keeps on growing and it does not keep its fingers out of things from which it might possibly be withdrawn. I understand that Ofcom is going to do the regulatory impact assessment on its own organisation. I think that there is a real case for that, where the organisation regularly looks in on itself and says, "What should we be doing?" and, more importantly in many ways, "What should we not be doing?". If that organisation is going to get on itself and be judge and jury of it, it makes a lot of sense to have an external organisation overseeing it. It could be the NAO but, if you did have an external select committee specifically on this issue, I think that it would fit more easily there. Then the NAO would probably provide the professional advice.

  452. The difficulty about the internal examination is this, is it not? Regulatory bodies like the FSA are under a lot of pressure from outside, especially from media, but there is a lot of outside pressure, consumer pressure, and so on. It is a natural instinct to want to be able to defend yourself by showing that you have dealt with all of that very thoroughly.
  (Ms Spottiswoode) Yes.

  453. I would guess that it is very difficult to make that judgment internally as to the regulatory costs of all that you are doing, as against the need to show that you are being thoroughly efficient.
  (Ms Spottiswoode) That is why I would have welcomed an external organisation helping me with those decisions, precisely so that you could stand up and say, "Another organisation has looked at this and agreed/not agreed with us. We should not be doing this". In other words, you have an external legitimacy. To me, it is a tool that is helpful to the regulator, rather than an oversight body that is a real problem for it.

Lord Elton

  454. One small question while we are still on appeals. It is not a subject with which I am very familiar, as will be clear. You said that the Government is increasingly expecting regulators to deliver aspects of social and environmental policy and that the normal channel of appeal should be to the Competition Commission. It seems to me that it is quite possible that regulators will find that they are challenged on their interpretation of the Government's environmental or social intentions. Is the Competition Commission competent to be the adjudicator in that, or would you expect that sort of appeal to go elsewhere?
  (Ms Spottiswoode) I would far prefer it if the regulator did the economic job and said, "This is what I do in my task. Now, Government, you want to impose on this structure certain environmental and social requirements. So give me a specific instruction which is in the public domain that tells me to do that".

  455. Can you recall such an instruction that you had to fulfil?
  (Ms Spottiswoode) I did not, but if, for example, the Government had said to me publicly, "You should spend that £1 billion over the next five years that you have been asked to spend, and we give you a tick in the box", and it was all public, then I would have felt that was okay. However, I think that, with that amount of money, it should have had a parliamentary process to be approved more formally. There should have been some form of Public Sector Borrowing Requirement.

  456. This is a way of avoiding appeal, is it not, because the thing is clear from the start?
  (Ms Spottiswoode) Yes, but the appeal then goes through normal government processes, with their checks and balances. That is the ideal. Clearly, in everything a regulator does there are implications, social and environmental, so there is a significant test. Clearly, a regulator ought, in doing its normal work, to do things that help in those areas and have regard to them—which is exactly how the law is written. It is just that, over time, things tend to get bigger and grow. I would much prefer to have that as a very formal process, where by it does not change unless it has been formally approved—particularly if it is significant.

  457. You have the phrase "disruptive innovation", which is something you think is desirable and you make it clear why. You say that the regulator should not be tied to precedent, however. Do you see a difficulty there for the people you regulate, in not being able to predict how you will conduct yourself in regulating their market?
  (Ms Spottiswoode) Yes, and there is a real tension there, particularly in the utilities, where investments are made over many years. In fact, you cannot confine any future regulator, in a price control, to do what you have done—as indeed we did not in our price control. So there has to be appeals mechanisms. Clearly, regulators have to have, and should have, strong regard to the cost of capital. There is a regulatory risk. You are increasing the cost of capital and you are increasing the overall cost to industry, and hence to customers. It is a balance, therefore. When do you say, "This rule is so out of date and we could improve things so much for everybody—but there will be winners and losers by turning over that rule"? When do you say, "Regardless of all of those benefits, it is not big enough to make it worthwhile. It is better to keep to what has been done before"? There should clearly be a preference for precedent, but there must be a case when that precedent can be overtaken.

  458. And presumably notice being given of it, over time?
  (Ms Spottiswoode) Notice of it being given, a huge amount of consultation and, for really big things, hopefully and probably government legislation to back it—and the appeals mechanism. There must, must, must be the appeals mechanism.

Chairman

  459. I notice that at paragraph 48, in response to the point about needs or concerns of the public guiding the work of regulators and whether regulators are instruments of government or representatives of the public, you open by saying, "Regulators are representatives of UK plc". You then go on to say what regulators are not. You mention that you do not think they should have a public interest duty, and so on. I wondered what that actually encapsulated. Looking at that statement in relation to what then follows, I wondered how you were defining "UK plc" in relation to, if you like, the other stakeholders involved in the whole process.
  (Ms Spottiswoode) I was defining it as a shareholder—like in a company. In a company you do things for money for shareholders, to make sure that the company is healthy over the long term on behalf of its owners. It is just an economic test. There may well be things added to that economic test which are not significant, like social and environmental things, but fundamentally it is an economic test. It is not a general public interest test, because that is for government. If that is really clear and made very clear, and people abide by it, then it becomes very clear where decisions should be taken.


 
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