Examination of Witness (Questions 440-459)|
WEDNESDAY 14 MAY 2003
Lord Jauncey of Tullichettle
440. We know that at the moment the appealsapart
from judicial review, which I am not worrying aboutare
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
(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 mechanismwhere there is a big enough issue.
442. Should the right of appeal be granted to
persons whom you have regulatedcompaniesor 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 courtbecause
there were contracts before thathave 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 isand
it is normally about price controls that this comes around, but
for anythinga 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 upopen 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
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 individualand
of course that partly involves the appeal process as well. Now
that the whole regulatory system is more matureand 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 grounddo
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. Indeedand
I recall saying this in 1995I 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.
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 themwhich
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 approvedparticularly 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 doneas 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 everybodybut 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,
(Ms Spottiswoode) Notice of it being given, a huge
amount of consultation and, for really big things, hopefully and
probably government legislation to back itand the appeals
mechanism. There must, must, must be the appeals mechanism.
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
(Ms Spottiswoode) I was defining it as a shareholderlike
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.