Memorandum by OFGEM
This memorandum sets out the principles that
Ofgem follows in combining independence with accountability; and
answers the specific questions of the Committee.
2. Ofgem is established through statute
as an independent regulator, with defined duties and powers. Its
principal objective is to protect the interests of consumers of
gas and electricity, present and future, wherever appropriate
by promoting competition. Its independence is central to achieving
this objective, as it enables a more durable regulatory framework
to be set, and greater regulatory certainty to be established,
than if Ofgem were subject to political direction. Regulatory
independence, within a statutory framework laid down by Parliament,
is widely accepted by commentators and analysts as a necessary
condition for successful regulation. It has been established as
a principle of Energy White Paper as a critical element in making
energy markets work to the benefit of consumers.
3. Ofgem is acutely aware that independence
can be represented as lack of accountability. It believes this
criticism, if valid, would damage the legitimacy of the organisation.
It therefore has worked hard to demonstrate how it discharges
its responsibilities, to explain the reasons behind its actions,
and to ensure that its decisions are based on as open processes
as possible. Over the life of Ofgem, it has significantly extended
its procedures to effect this. In particular, the following:
Parliamentary reporting: Ofgem, like its predecessors,
has always had a legal duty to report on its activities annually
to the Secretary of State, who lays the report before Parliament.
Ofgem now links this report to its annual plan, so that, for example,
the report for the year 2001-02 can be compared with what was
said a year earlier in the plan for that year. The result is a
much simpler and more comprehensible means of comparing plan and
outcome, and hence greater accountability;
Parliamentary scrutiny: Ofgem welcomes the part
played by Parliamentary Committees in scrutinising its decisions
and actions. This has been extensive: since 1999 Ofgem has been
called to give oral evidence to Select Committees on 12 occasions.
In addition, Ofgem has sought opportunities, both formal and informal,
voluntarily to brief Committees on particular topical issues:
thus in relation to the draft Electricity (Trading and Transmission)
Bill Ofgem not only answered questions at the request of the Trade
and Industry Committee, but also initiated briefing meetings with
the Enterprise and Lifelong Learning Committee of the Scottish
Parliament and with the Scottish Affairs Select Committee;
Consultation: Ofgem attaches great importance
to consulting on its proposals and to explaining its decisions.
Consultation occurs in many ways. In 2002-03, for example, Ofgem
published on its website more than 50 consultation documents.
Ofgem has worked to make these more accessible through, for example,
including a summary, and a rationale explaining both the range
of options considered and the reason for the preferred choice.
In addition, Ofgem consults via a range of meetings, typically
with either individual companies affected by its work, or with
organisations representing wider interests such as energywatch,
the Major Energy Users Council, or Age Concern. Ofgem sets out
full reasons for its decisions in its decision documents, which
typically relate the decision to Ofgem's legal duties;
Planning process: Ofgem consults not only on
its specific proposals, but also on its overall priorities and
its allocation of resources. This Plan now covers three years,
against a legal requirement to produce a plan covering one year
only. For the first year of the plan, all major programme targets
are identified with, where appropriate, target dates by quarter
for their achievement. The actual achievement of individual targets
is subsequently reporteda degree of transparency which
Ofgem believes to be clearer than any other part of Government.
4. In all these ways, Ofgem seeks to show
all parties interested in its activities that it discharges its
powers and duties in a responsible and careful way. Ofgem regards
this as essential for its continuing legitimacy.
1. What is the legal basis for Ofgem?
1. Ofgem is the name used to describe the
office of the Gas and Electricity Markets Authority (the Authority),
which determines strategy and decides upon major policy issues
but delegates day to day operations to its executive members.
The Authority's powers are provided for by Parliament under the
Gas Act 1986, the Electricity Act 1989 and the Utilities Act 2000.
The Authority also has powers under the Competition Act 1998 to
deal with anti-competitive agreements or abuses of a dominant
position, which relate to the gas or electricity sectors. The
Authority will acquire additional powers under the Enterprise
What is the nature of Ofgem's powers and how does
it exercise them?
2. Ofgem's duties are set out in the Gas
Act 1986, the Electricity Act 1989 and the Utilities Act 2000.
Those Acts limit the Authority's and therefore Ofgem's activities.
Ofgem has a principal objective to protect the interests of consumers
(existing and future) in relation to electricity conveyed by distribution
systems and to gas conveyed through pipes, wherever appropriate
by promoting effective competition.
3. Within this statutory framework, Ofgem
has powers to grant, revoke and enforce licences (including imposing
financial penalties on licence holders who contravene licence
obligations and specified statutory obligations). Ofgem may also
propose any licence modifications that it considers necessary
to meet its objectives.
Ofgem may also approve or reject modifications proposed by industry
participants to the codes that govern access to the electricity
and gas networks.
4. The statutory objectives of Ofgem are
not solely based on economic factors, but include duties to have
regard to social and environmental matters. The Authority has
been given discretion under the Gas and Electricity Acts to determine
how best to protect the interests of customers, in instances where
there may be a need to prioritise between the range of general
duties which the Authority has been given.
5. The Utilities Act 2000 gave the Secretary
of State the power to issue guidance in relation to environmental
and social matters to which Ofgem must have regard. Guidance was
issued in November 2002.
How could Ofgem's powers be revoked?
6. As the Authority's powers are derived
from statute, in most circumstances primary legislation would
be required to change or revoke these powers.
From where does Ofgem obtain its financial and
7. Ofgem operates within the public expenditure
framework laid down by HM Treasury. Most of Ofgem's expenditure
is financed by income from licence fees paid by network operators.
However, the Government directly finances the work that Ofgem
does in relation to implementing some of the Government's environmental
polices, such as the Climate Change Levy.
8. Since 1999-2000, when Ofgem was established,
considerable progress has been made to improve working practices
and manage costs efficiently. By 2003-04, the costs of Ofgem will
have fallen by 17 per cent (excluding NETA). Ofgem's net costs
for 2003-04 are forecast to be £36 million. Ofgem has projected
indicative budgets of £34 million for both 2004-05 and 2005-06
and has published these figures in order to provide transparency
to industry and licence fee payers of likely future costs. In
preparing these projections, Ofgem has managed to contain expected
inflation throughout the period of its three year Corporate Plan.
2. By whom and how is the continuing need
for regulators such as Ofgem measured? How is their role changed
9. It is of course for Parliament to determine
Ofgem's statutory remit, and occasionally to modify it, as Parliament
did most recently in 2000.
10. In line with its principal objective,
Ofgem has pursued pro-competitive policies to deliver consumer
benefit. Therefore, Ofgem and its predecessor organisations have
introduced competition into a range of activities within the gas
and electricity industries. For example, competition in retail
electricity and gas supply is well established and has produced
huge benefits to all customers in terms of reduced energy bills
and greater service variety. Since privatisation, domestic bills
have fallen in real terms by 37 per cent for gas and 28 per cent
11. As competition has developed in the
various liberalised markets, Ofgem has withdrawn from prescriptive
economic regulation. For example, residual controls on the prices
that suppliers charge their customers were lifted in April 2002,
without prompting the immediate price hikes that were feared by
some at the time. Overall, Ofgem has withdrawn from some 70 per
cent of the activities subject to regulation at the time of privatisation.
Where competition has been established, Ofgem has a role to monitor
its progress and, if necessary, enforce licence obligations, competition
and consumer law, so that all customers continue to benefit.
12. Where competition is not developed there
will be a continuing need for prescriptive regulation so that
customers receive value for money and secure and reliable service.
This approach applies to the monopolies that run the pipes and
wires bringing gas and electricity to homes and businesses. Ofgem
has taken steps to make the ongoing regulation of network operators
such as Transco less intrusive by creating incentive schemes that
reward the network operators for responding efficiently to the
requirements of network users.
3. Who are the members of the Authority; how
are they appointed; are they adequately representative; and do
the "Nolan principles"" operate?
13. Ofgem instituted a management board
structure well before the Authority was created under the Utilities
Act in November 2000. This reflected Ofgem's belief that moving
to a structure in which responsibility was shared by a number
of people rather than vested in one individual would be likely
to de-personalise regulation and promote greater consistency and
stability in decision making.
14. As at 1 April 2003 the Authority comprises
11 members. Callum McCarthy holds the posts of Chairman of the
Authority and Chief Executive of Ofgem until 31 October 2003,
whereupon the Government intends to appoint a different individual
to each of these posts. There are three other executive directors
and six non-executive directors. The executive members of the
Authority are Callum McCarthy, Boaz Moselle, John Neilson and
Richard Ramsay. The non-executive members are John Belcher, Richard
Farrant, Margaret Ford, James Strachan, Sir Keith Stuart and Professor
15. Members of the Authority are appointed
by the Secretary of State for Trade and Industry and, importantly,
they are appointed for their expertise in a variety of relevant
fields rather than to represent certain interest groupsan
approach supported by the Better Regulation Task Force.
16. Callum McCarthy and all the other members
of the Authority were appointed by the Secretary of State following
a selection process that was fully consistent with the Nolan principles.
4. What is Ofgem set up to achieve? To What
extent does Ofgem achieve its purposes?
17. Competition and regulation has developed
significantly over the years and has produced great benefits for
British consumers of gas and electricity. This has been recognised
by the National Audit Office in various recent reports.
there is genuine competition throughout
the gas and electricity supply chainsfrom the production
and wholesale trading of gas and electricity, and the provision
of meter reading and gas storage services, to retail supply markets;
as stated above, domestic prices
have fallen in real terms by around a third since privatisiation
(37 per cent for gas and 28 per cent for electricity);
prices for domestic and industrial
customers are among the lowest in Europe;
lower energy prices resulting from
competition and effective regulation have helped remove 2.5 million
households from fuel poverty since 1996;
Britain enjoys generous capacity
margins in generation, and more diverse energy supplies today
than ever before;
competition has developed to allow
Ofgem to withdraw from many areas which were previously regulated;
price controls on the network businesses,
where competition is unavailable, have transferred £1.25
billion annually from the companies to their customers, without
preventing the companies from raising new finance, and with improved
18. In exercising its functions, Ofgem must
consider the merits of competing interests and take policy decisions
that are consistent with its statutory objectives; this is almost
by definition not a consensual activity and in many cases Ofgem's
decisions will produce both gainers and losers. Ofgem uses the
consultation process as a means of informing itself about the
likely consequences of its proposals, and may refine its proposals
in the light of responses, which helps Ofgem to minimise adverse
consequences where it is possible to do so. This process will
be strengthened when Ofgem begins publishing regulatory impact
assessments later this year.
How is Ofgem's effectiveness assessed?
19. Ofgem's effectiveness can be assessed
by referring to the outcomes achieved to date by introducing competition
and regulating the network monopolies (see above). In addition,
Ofgem's annual report measures progress against and success in
achieving specific policy deliverables in a very visible way.
In drawing up its Corporate Strategy, Ofgem consults extensively
with all interested parties to find out their views about what
Ofgem is doing well or not so well, what other things Ofgem should
be doing and what things it should stop doing. This provides an
excellent opportunity for interested parties to give their views
on how effective Ofgem has been.
5. To what extent is Ofgem both prosecutor
and jury on an issue; what rights of appeal are there against
decisions made by Ofgem?
20. All of Ofgem's decisions are subject
to some form of appeal. Where Ofgem wishes to modify a licence
condition, for instance in relation to a price control, and the
licensee does not agree (or a prescribed percentage of licensees
in the case of a standard condition), Ofgem can refer the matter
to the Competition Commission. The Commission can then propose
its own modifications as appear requisite to deal with the adverse
public interest effects. Decisions taken by Ofgem under its Competition
Act powers are appealable on their merits to the Competition Commission
21. Decisions to impose enforcement orders
and financial penalties are subject to specific statutory right
of appeal to the courts. Other decisions, such as approving changes
to industry codes and regulatory statements of methodology, are
all subject to judicial review.
22. In the Energy White Paper the Government
said that it would consult on the issue of whether it would be
appropriate to provide for appeals against Ofgem decisions on
certain code modifications. The Government said that the consultation
would take place within the wider context of the Committee's present
inquiry. Ofgem is keen to work with the DTI in developing its
thinking in this area.
23. Industry codes are contracts that set
out many of the terms by which network users may connect to and
use the pipes and wires networks. Ofgem believes that very careful
consideration needs to be given to any proposal to change the
existing code modifications process, to ensure it produces benefits
rather than harm.
6. How is Ofgem held to account by parliament?
What other accountability does Ofgem have to auditors, Government
departments or other public bodies?
24. Although the Authority is an independent
statutory body, it is formally accountable for the exercise of
its powers to Parliament. It must submit an Annual Report to the
Secretary of State for Trade and Industry, which must be laid
before Parliament. In addition, it is subject to Treasury financial
control and its Estimates are approved by Parliament. The Authority
is accountable to Parliament in several ways:
it must submit annual Resource Accounts
for audit by the head of the National Audit Office (the Comptroller
and Auditor General (C&AG)), and the Chairman and Chief Executive
is responsible as Accounting Officer for the activities of the
the C&AG may examine the economy,
efficiency and effectiveness with which the Authority has used
its resources and produce a report for the Public Accounts Committee
the PAC may call upon the Chairman
to give evidence to it in relation to matters covered in reports
from the C&AG. The current Chairman has given evidence to
the PAC on five occasions;
Ofgem may be called to give evidence
before other Select Committees of Parliament, such as the Trade
and Industry Committee (which has taken evidence from Ofgem on
five occasions since 1999), the Environmental Audit Committee,
and the Science and Technology Committee;
the actions of the Authority are
open to review by the Parliamentary Commissioner for Administration.
25. Ofgem is proactive in seeking opportunities
to discuss topical issues with Select Committee members. Ofgem
did this most recently in relation to the draft Electricity (Trading
and Transmission) Bill, which it has discussed with the Enterprise
and Lifelong Learning Committee of the Scottish Parliament and
also with the Scottish Affairs Select Committee.
26. The Authority is not accountable to
other Government departments, but liaises effectively with them
wherever appropriate as part of maintaining an effective working
27. Organisations such as the Better Regulation
Task Force, the International Energy Agency and the Organisation
for Economic Cooperation and Development may review the activities
of Ofgem and publish reports containing recommendations about
Ofgem's policies and processes. All these organisations have produced
reports of this nature in the last two years.
7. How is Ofgem accountable to those whom
28. Ofgem takes account of the views of
regulated companies principally through the consultation process,
and the existing appeals process balances the rights of all parties
29. Ofgem's activities have a significant
effect on the economy. As a result of effective competition and
tough regulation British energy prices are among the lowest in
Europe. For example, the introduction of more competitive electricity
wholesale markets in March 2001 has greatly improved the competitiveness
of British businesses. Businessesand other large organisations
such as hospitals and schoolshave saved over £1.8
billion pounds since the reforms were first announced in 1998.
30. The NAO has estimated that domestic
electricity customers have seen their electricity bills fall by
£750 million a year since competition began, and that domestic
gas customers had enjoyed a reduction of £1 billion a year
in their bills since the introduction of competition. The NAO
has also reported that the regulation of the network businesses
by Ofgem had helped to deliver lower network costs without diminishing
service quality and investment levels.
How transparent are Ofgem's methods of working?
31. Utilities legislation imposes a number
of obligations that promote transparency, but Ofgem strives to
go further than the Acts require where it is sensible to do so.
32. The Authority must publish its forward
work programme and it does so in its Corporate Plan and Budget,
which establishes the priorities and work plan that it will pursue
for the following financial year. Ofgem has taken an innovative
approach in this area in that it consults interested parties on
a plan over a three-year time period rather than the one-year
period stipulated in the Acts. The Corporate Plan includes detailed
policy deliverables for the first year.
33. The table below sets out the steps that
Ofgem takes in producing its Corporate Plan.
|July||Ofgem writes to representatives of key audiences inviting early views on priorities for the coming year.
|December||Ofgem publishes its draft Corporate Plan for consultation.
|Ofgem hosts a series of meetings in London and Glasgow with the representatives of key audiences (in 2003, Ofgem hosted seven meetings attended by around 120 organisations).
|March||Ofgem finalises the Corporate Plan and publishes it along with its response to the views of respondents. The Corporate Plan includes the key deliverables for the coming year (there are 73 for 2003-04).
|July||Ofgem publishes its Annual Report setting out its achievements against the previous year's objectives.
34. Ofgem must subsequently submit an Annual Report to
Parliament on the work carried out during the previous financial
year. In doing so Ofgem is required to pay particular attention
to whether it has achieved specific deliverables in its plan on
time and to budget.
35. In developing policy Ofgem consults widely from the
earliest stages and in a variety of ways. In 2002-03 Ofgem published
over 50 consultation documents seeking the views of interested
parties on policy proposals. All these documents (and other material
related to Ofgem's activities) are published on the Ofgem website,
whose pages receive over 750,000 "hits" per month.
36. The process that Ofgem typically follows in consulting
on proposals is set out in the table below.
|"Pre-consultation"||Ofgem may discuss policy options with key audiences, whether through bilateral meetings or industry event.
|Publish consultation document
||All include a summary, a rationale in which Ofgem may set out the various policy options, and a recommendations chapter.
|During consultation period||Ofgem will often host seminars and/or one to one meetings in order to engage key audiences in debate on the proposals, and to help refine the proposals.
|Publish formal proposals document
||All such documents include the detailed policy proposal, on which further consultation usually takes place.
|Publish "decision" document
||Decisions on licence modifications are subject to a further statutory consultation period.
37. Ofgem has also committed itself to publishing regulatory
impact assessments for all new significant proposals initiated
by Ofgem. The impact assessments will include consideration of
security of supply and environmental issues.
38. In addition to the consultation process, Ofgem routinely
notifies parties who have requested to be kept informed of items
that are placed on the website. This service is valued particularly
by small organisations that wish to avoid unnecessary effort on
monitoring Ofgem's website. For most major policy decisions Ofgem
also produces short "easy to read" fact sheets and sends
them to representatives of Ofgem's main audiences.
39. Ofgem produces regular newsletters for MPs and MSPs
and for those who have particular interest in areas of Ofgem's
remit, such as the Social Action Plan, Energy Efficiency and Renewables
40. Ofgem has published the rules of procedure for the
Authority. There was no obligation to do so but Ofgem believed
that this would improve the transparency of regulatory action,
since interested parties would know, as they did not previously,
which decisions must be made at the highest level and which can
41. Ofgem must keep a public register in which determinations,
licence modifications and derogations made by the Authority may
be inspected by the public.
8. How is Ofgem accountable to the public other than through
Parliament? What opportunities do members of the public have to
express particular concerns to Ofgem?
42. Changes introduced by the Utilities Act 2000 mean
that energywatch now has the primary responsibility for helping
customers if they need information about the energy market or
if they have a complaint about their energy supplier, which has
not been dealt with to their satisfaction. That said, Ofgem holds
regular meetings with groups that represent the interests of customersbe
they domestic customers, vulnerable customers such a those in
fuel poverty, and business customers. Ofgem also commissions consumer
research to help inform policy decisions (such as the research
that Ofgem commissions to find out about how well competition
in retail markets is working for domestic consumers). Ofgem is
also accountable to the public by way of correspondence: Ofgem
received around 7,800 items of correspondence in 2002.
How does Ofgem relate to the associated consumer watchdog,
43, Both energywatch and Ofgem are statutory bodies created
by Parliament, whose duties towards the protection of consumers'
interests are in some respects similar. Ofgem's principal objective
is to protect consumers' interests, wherever appropriate by promoting
effective competition. In carrying out this duty Ofgem must have
regard to the interests of the disabled and chronically sick,
pensioners, people on low incomes, and rural residents. Consequently
Ofgem, in practice, places the interests of consumers at the heart
of what it does, but is reliant upon energywatch to provide accurate
data and other evidence in relation to customers' complaints so
that, for example, Ofgem can take robust enforcement decisions
44. Given that Ofgem is reliant on energywatch, Ofgem
energywatch's advice to consumers will be timely
and accurate, resulting in a high level of satisfaction rating
for users; and that
when adopting an advocacy role on behalf of consumers,
energywatch's arguments will be well-founded in fact and analysis.
45. Ofgem is required in certain circumstances to consult
energywatch, but often consults energywatch even where it has
no duty to do so. Ofgem and energywatch have developed a Memorandum
of Understanding that sets out how they will interact.
9. How effective is Ofgem's public consultation? What opportunities
do the public have to contribute? To what extent do the public
use these opportunities?
46. Ofgem is committed to consulting all interested parties,
including the general public, since doing so improves the quality
of decision-making and increases public understanding of Ofgem's
work. Ofgem has been innovative in providing a variety of different
options for interested parties wishing to enter the debate, for
instance in relation to its Corporate Plan. However, it should
be recognised that the issues with which Ofgem deals are often
complex and therefore, in practice, individual members of the
public rarely respond to consultations, although consumer groups
such as energywatch regularly do so.
10. To what extent do the needs or concerns of the public
guide the work of Ofgem?
47. Ofgem's policy priorities are set in the light of
its statutory remit, hence Ofgem must consider the extent to which
its polices are in the interests of consumers, and prioritise
48. In devising the Corporate Plan, Ofgem consults well
in advance seeking views on the key challenges facing the industry;
whether any of Ofgem's existing work should be given a greater
or lesser priority, or stopped altogether; and whether there were
any new areas of work that should be started and, if so, to what
extent they should be given priority.
49. Ofgem is neither an instrument of Government nor
a representative of the public: its powers and duties derive from
statute. Ofgem is required to analyse carefully the arguments
of interested parties and arrive at a policy that is consistent
with Ofgem's principal objective and other statutory duties.
11. How independent from the Government is Ofgem? What
factors might or do compromise Ofgem's independence?
50. Ofgem is an independent non-ministerial government
department responsible for the regulation of the electricity and
gas industries in accordance with legislation passed by Parliament.
Parliament has given Ofgem discretion to carry out its statutory
duties independent of political direction so that it can concentrate
on regulating the energy sector in the long-term interests of
consumers. Independence from political direction has been crucial
in providing a climate of regulatory stability in which companies
could readily secure finance for investment. It has also been
crucial in enabling Ofgem to pursue the policies of introducing
competition and refining monopoly regulation that have been so
beneficial to British energy consumers.
51. Ofgem is not responsible for implementing Government
policy, except insofar as it is given responsibility in statute
for implementing particular environmental polices such as the
Climate Change Levy where Ofgem seeks to do so in the most economically
efficient manner. In this context, the Government has made it
clear that where it wishes to introduce social and environmental
measures that would have a significant financial impact on consumers,
it will seek to do so through new legislation.
52. While Ofgem places considerable importance on its
independence, it recognises the need to establish and maintain
effective working relationships with other government departments.
In support of this, Ofgem operates a policy of "no surprise"
so that Ministers are aware in advance of any significant Ofgem
53. Ofgem welcomes the statement by the Government in
its Energy White Paper that it remains committed to liberalised
and competitive markets as a cornerstone of energy policy. Ofgem
also welcomes the White Paper's recognition that independent economic
regulation is a critical component of making these markets work
in the best interests of consumers.
For a fuller treatment of the subtleties of the relationship between
the Authority and Ministers see the speech given by Callum McCarthy
on 6 November 2002 at a conference on "The politicisation
of regulatory policy" organised by the Regulatory Policy
Institute. This speech is attached as Annex 1 to this memorandum.
PART 2: RESPONSE TO THE COMMITTEE'S
While the Authority was formally brought into being by the Utilities
Act 2000, Ofgem was created by the merger of Offer and Ofgas in
Annex 2 illustrates the Authority's principal objective and general
duties as set out in the Gas Act 1986 and the Electricity Act
The Authority's powers are however constrained by the Secretary
of State's rights of veto on, for example, licence modifications
under sections 11 and 11A of the Electricity Act 1989 or references
to the Competition Commission made under section 12 of that Act.
General directions may be also made by the Secretary of State
under section 47 of the Electricity Act 1989. Back
Further information on the Authority members' breadth of expertise
can be found on the Ofgem website at http:/www.ofgem.gov.uk/about/organisation.htm. Back
See in particular the National Audit Office's reports on introducing
competition in domestic gas and electricity supply, and on how
we regulate the monopoly pipes and wires businesses. These reports
were published in May 1999, January 2001 and April 2002 respectively.
To what extent does Ofgem achieve
its purposes without adverse consequences? Back
It is expected that the Chief Executive of Ofgem will assume the
role of Accounting Officer when the posts of Chairman and Chief
Executive are split later this year. Back
Annex 3 provides a list of all the PAC and Select Committee appearances
since the beginning of 1999.
What is the impact of Ofgem's regulation
on the economy? Back
National Audit Office, "Pipes and Wires"", The
Stationary Office, April 2002. Back
Ofgem will not always carry out all these activities during a
consultation; whether or not Ofgem does so in practice may depend
on the significance of the proposals.
Is Ofgem an instrument of Government
or a representative of the public? Back