Select Committee on Constitution Minutes of Evidence

Supplementary note by Ofgem

  1.  I wonder if I could make one observation on the responsibilities of regulatory organisations, such as Ofgem. This observation is sparked by hearing one of the Electricity Association witnesses referring yesterday to the desirable "partnership" between regulatory organisation and regulated company, with the implication that regulatory and regulatee share objectives and responsibilities (the essence of partnership). This, while a beguiling notion, is profoundly misleading. Although there are some objectives which are shared (both companies and regulator organisation have a common concern about security of supply), there are others which are significantly different (companies are concerned about returns to shareholders, whereas the regulatory organisation is concerned to ensure that efficient companies can finance their activities). It follows from this that regulation is not a consensual activity: it is, for example, unrealistic to expect companies which face the transfer of £1 billion annually to their customers, as occurred with electricity distribution network operators, to approach this in a spirit of "partnership". Similarly, it is clear from the behaviour of companies in the electricity and gas industries with market power that they do no share the responsibility for protecting consumer interests which is Ofgem's principal statutory objective.

  2.  Please forgive me if this appears to belabour an obvious point. But I make it because it is important to recognise that we have to deal with situations where interests of consumers and of producers can conflict, and that our duty is to protect consumers. Producers will understandably fight for their interests—but they should not suggest that this establishes an identity of interest or "partnership" between regulator and regulatee. A continuing concern during my time at Ofgem has been to encourage regulated companies to deal with this relationship on the basis of greater openness and truthfulness, and more professionally, than has traditionally occurred. I believe we have made progress on this.

  3.  I should be delighted to discuss this if you would find it helpful, or to expand on this more formally.

Callum McCarthy

May 2003

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