Select Committee on Constitution Minutes of Evidence

Examination of Witnesses (Questions 900-919)



  900. So you would look at it from the point of view of effectiveness and, in order to deliver that, that requires the regulator to have that degree of independence, and therefore what you are getting at is, how do you balance independence with accountability?
  (Sir Derek Morris) Indeed. It is often thought that in some sense they must be in tension or even irreconcilable, and one only has to look outside this area at the Monetary Policy Committee. I do not think anyone questions its independence and I do not think anyone questions its accountability. How you do that in this field is a matter, obviously, we might come to later.

  901. Yes; we are talking about balance, as you say, rather than anything else. Just focusing on your role as a Competition Commission, your role is very distinctive; in other words, I would not see you in the same light as we see the other regulators, and that is something that comes across in your evidence, so if we are looking at accountability, whereas with the others we ask whether they are accountable and who they are accountable to, there is to me a prior question here, which is, to what extent should you be accountable given that you have got a distinct position? Do you have to look beyond that?
  (Sir Derek Morris) Yes, I believe that the Competition Commission should and must be fully accountable. If I might unpack what that means, I do think that there are three different and equally important levels of accountability. The first, to give it an epithet, would be transparency. People have to know what you are doing and how you have done it, and in trying to explain that and being forced to explain it there is an element of accountability. Vis-a-vis the Competition Commission that comes through a number of routes, the most obvious of which, one often forgets, is that every single decision of the Commission has to be published as a report with sufficient explanation so that the reader can understand that decision. That is an important element of accountability. There is quite a lot that goes on during the course of the inquiry before the report is published. Particularly in the regulatory field, there is a lot of to-ing and fro-ing of information and modelling and discussion of evidence with the parties. We have hearings with all the main parties and many third parties as well. In principle we never refuse a hearing to anyone who has a legitimate interest and requests one. On some occasions those hearings, if we think it would help, can be held in public. We also do a considerable amount with the press because with the best will in the world most members of the public are not going to read our reports, so we work through the press to explain them. That is one important tier of responsibility. The second is more penetrating. It is not just transparency. It is actually being questioned, if you like grilled, on what you have done and how effective have you been in doing it. The decisions cannot be changed but you can be cross-questioned. There, fairly obviously, the role of the select committees is paramount. In the new regime I would expect that I and my successors would be subject to that, and rightly so. That may be on individual cases; it may be more on the overall role that we play. The third level is where, of course, the decisions can be changed, and that is in our case through judicial review and to the High Court. That is a very thorough process. We know that particularly at the moment because we have just been through a very major judicial review on our mobile phones judgment. It is thorough in itself but, more important and I think often missed, in a report there may well be (no exaggeration) 400 or 500 individual bits of argument, reliance on evidence and so on, and in judicial review anyone of those may be subject to a huge spotlight. You may have many economists and lawyers crawling over one sentence, one paragraph. It is a bit like water under the door: if there is the slightest crack you will be found against. That is a very powerful further accountability. Finally, just to put that in context in the regulatory regime, what that means is that you have the regulators who consult. They have provisional findings, they go on to their final decisions. Then companies can fully assess that and if they do not accept the decision they can come to us for in effect a full re-hearing, and then beyond that there is thorough judicial review, and that to my mind as a broad principle is a pretty powerful set of accountable institutions.

Lord Lang of Monkton

  902. Sir Derek, first can I apologise; I think I have to leave before the end of the session, but I will be reading your answers to the questions. Can I pursue this question of accountability in relation to any inhibiting factors that affect it? It seems to me that if you have no power to conduct inquiries on your own initiative that is an inhibiting factor on accountability. Do you feel that you are inhibited in any way?
  (Sir Derek Morris) It is true. We operate under about 15 different Acts, many that go outside regulation, but the characteristic of every single one is that we can never choose our own cases. I do think that there is an argument for more symmetry as to who could bring a case to us. At the moment, of course, it is the regulated companies who, if they dispute a licence modification, will bring it to us. I can think of particular examples where one might have hoped that third parties could have instigated an appeal to us.

  903. Do you feel that this makes you essentially reactive? Do you feel that if you had a power to be proactive you would be better placed to hold to account those who you might think ought to be held to account but cannot be by you because nobody brings a case to you?
  (Sir Derek Morris) Could I half agree with that? I believe we should stay, purely in this context, reactive. We should never have a role in deciding what comes to us any more than an individual judge or jury does, but I do think there could be advantage in terms of the overall accountability of the regime if parties other than the regulated companies themselves might be able to bring a licence modification to us. We would still be reactive.

  904. You are also inhibited because on grounds of commercial confidentiality you cannot always explain yourselves as fully as you might like to. Is this a factor that inhibits you and the process of accountability?
  (Sir Derek Morris) It has not particularly in the past, partly because, up until two weeks ago, under the Fair Trading Act regime excisions were the responsibility to the Department of Trade and Industry, but we advised. We tended to err on the side of protecting confidentiality and I do believe there have been some reports in the past that I will not say were incoherent but were beginning to get a little difficult to understand because of those excisions, and that is a public detriment. In recent years—let me put it this way—we have drafted our way round that. We have found ways of drafting reports such that nothing needs to be excised on the grounds of commercial confidentiality. As at the moment, therefore, I do not see it as a problem, but I do believe it is going to be a much more severe problem for us in the post-Enterprise Act regime. This is more in the competition field, and that is because because we are now determinative, but it reads across to regulation, we are no longer writing a report such that a minister can decide whether to accept our recommendation and, if not, perhaps she will wish to vary it, but simply explaining to the world what (subject only to judicial review) is our definitive and final decision. I think that means there is going to have to be more disclosure and there will be more cases in which the tension that you have described leads to some commercially sensitive material having to appear in order that the decision can be explicable.

Lord Acton

  905. Sir Derek, I think I heard you say under your second heading of accountability that you liked being grilled. I have never met anybody who liked being grilled.
  (Sir Derek Morris) I said it was right that we should be.

  906. Are you grilled enough? Does Parliament grill you enough? Should there be another parliamentary body that grills you? Have you any thoughts on that?
  (Sir Derek Morris) I have appeared several times in front of various select committees. I would say overall in the six years or so that I have been Chairman that I have been summoned to appear less than I had anticipated. In that sense this particular type of accountability has been fairly light.

  907. Do you think it should be much heavier, and do you think there should be a special grilling body?
  (Sir Derek Morris) Particularly in the regulatory field the issues—I am sure you have discovered this—can be immensely complex, very difficult indeed. I think this type of accountability is difficult to exercise unless the body is really quite expert itself. That does mean a certain amount of continuity. I think it must mean a certain level of expert staff who advise. I think that without those it is inevitably going to be a bit difficult to make this type of accountability very effective. I think it will also be much more effective if there is a clearer distinction than there is at the present time between those matters which I would call policy and are the responsibility of the Government and those issues which are more implementation and which I regard as the proper preserve of the independent regulator. There is a much bigger debate there which perhaps I should hold fire on.

  908. If there were to be a special regulatory select committee on regulation, (a) you point out what an incredibly complicated field it is, and (b) it follows that you would want continuity on the committee and, (c) you think it would be essential to have an expert staff, and without (b) and (c) frankly it would not work?
  (Sir Derek Morris) Yes.

  909. Is there anything you want to add to that as a caveat? Quite a lot of people have said about regulation in general that they think a select committee would be the answer. In fact, one witness actually said one in the House of Lords. I do not know if that was to cheer us up or not. Is there anything else you would like to say about that? I really think it would be very helpful.
  (Sir Derek Morris) If, for example, a select committee wanted to have a clear understanding of how the Commission, through a series of its reports over, let us say, the last three or four years, had dealt with and implemented a particular broad issue, for example, a very key one in the regulatory field is the cost of capital, in order to assure itself that we had behaved in a correct manner, that we had been thorough in our analysis, that we had been reasonable in our judgments and so on, I do not think that is possible without considerable expert advice. I could in the next five minutes go off into the most abstruse issues—I assure you I shall not—which are critical to an understanding of whether we have dealt with those issues properly or not, and a committee would need, just as the members of my Commission need from our staff, detailed expert support. I do not see how it can really work without that.


  910. Given the nature of the regulatory regimes—we are not talking about a single one—it would actually be quite extensive because the rules that govern the regimes themselves differ quite significantly.
  (Sir Derek Morris) That is true, they do. One thing that we believe we have provided is what I call consistency without rigidity, a high degree of predictability, but best practice does develop, different industries do have different considerations, and hence I think the objective is, as I say, consistency without rigidity. It would be immensely time-consuming to start from a position of not having been involved in many of those cases to get to a point where you could say, "Have you actually done as much as you should have done to ensure that?".

Lord Elton

  911. How are you funded?
  (Sir Derek Morris) Could I ask the Chief Executive to answer that?
  (Mr Foster) We are funded from the DTI vote. I have joint responsibility with the DTI accounting officer, Robin Young. We the two accounting officers for the £25/27 million that we receive annually from the DTI.

  912. Does that mean that a reference to you costs the person or the organisation making the reference nothing?
  (Sir Derek Morris) I think the answer is, it varies. In the regulatory field typically the costs go to the regulator who will then recover those from the industry. There have been, however, some quite controversial issues in regard to that. It is perhaps best if I give an example to make the point. We recently had two water companies dispute their licence agreements which controlled their prices. It came to us and I will not say we fully backed the companies but our findings were some long way away from the regulator's, in which case it was manifestly clear that it was reasonable for the companies to have brought that case to us. The Act is very clear, that price must allow for "the reasonable costs of the enterprises". These were, subject to checking that they were not in themselves hugely inflated, "reasonable costs", in which case, as a matter of law, we had to allow for those costs in the price control. Normally, this would be a rather de minimis point. It so happened that both of these companies were relatively small and the costs of having come to us in the dispute were not insignificant. Therefore, they got those costs in the price control and the regulator, Ofwat, was understandably concerned that this might open the flood gates because anyone could dispute anything and as long as it was not declared totally unreasonable it would be a costless exercise for them. There are now measures that are being proposed for the forthcoming Water Bill that effectively would give us the power to allocate costs in the light of and to the degree of the reasonableness of the case brought.

  913. Would you regard it as odd if that dispensation to allocate costs was restricted only to the water industry?
  (Sir Derek Morris) Yes.

  914. And it will therefore be applied throughout?
  (Sir Derek Morris) Not necessarily, because, as it happens, this arose in the water industry. It could have arisen elsewhere but it has not. Again, as it happens, there is the intention to have for all sorts of other reasons a new Water Bill, so there was (a) the problem and (b) the opportunity to correct it. I do not know that this has been identified, except as a generally theoretical problem, vis-a-vis any other sector, and there is not, except, I suppose, in telecommunications, an opportunity to correct it in other sectors.

  915. Is the general philosophy therefore that the complainant shall have recourse to the customer in order to get the money back?
  (Sir Derek Morris) In as far as the costs are regarded as reasonable and can therefore be recovered in the price control, it is the customer who bears those costs, that is correct.

  916. Even if the complainant has been at fault? You have such a wide remit I am not familiar with the law in all cases. Talking in generalities, if a complainant was found by you to have done something to the disadvantage of the customer that it was up to you to stop them doing, would it not be very odd if they then had recourse to the customer to pay for being told that?
  (Sir Derek Morris) There are two cases. One is where they bring an appeal to us and we dismiss it, in effect, and regard their having brought it to us as unreasonable, in which case we would not need to include those costs in the price control; therefore the companies would not recover those costs and they would be borne by the shareholder. The problematic one is where a company brings an appeal to us, we do not accept it, we dismiss it, but we none the less consider that it was reasonable for them to bring it. In those cases at the moment the customer as a matter of law will bear the costs, but that will change in that it will become a matter of discretion for us and we might, of course, partition the costs in some way. It will be a matter of discretion for us in the water industry after the Water Bill has been approved. As far as I know, and I will check with my Chief Legal Adviser, there is nothing in the same vein occurring in any other regulated industry at the moment.
  (Mr McHenry) No, that is correct.

The Committee suspended from 5.54 pm to 6.03 pm for a division in the House

  917. Can you tell me, Sir Derek, whether the cost regime is regarded as a filter or a deterrent, in other words, whether the effect of either the amount or the allocation of costs has impacts on the number of references made?
  (Sir Derek Morris) I do not believe to date that it has. Because of the particular case that I described just before the break there is a serious concern on the part of the water regulator that it might but there is a move to address that. It is very difficult to estimate whether this could be a problem in other sectors. Obviously, it could be, but it is of some relevance that it has not actually occurred to date.

  918. In the water industry the concern is that it might encourage large numbers of new applicants, is it not?
  (Sir Derek Morris) Exactly.

  919. I was thinking of asking whether the cost was a deterrent so that justice available was denied because it was too expensive?
  (Sir Derek Morris) I see; I am sorry, I misunderstood that part. It is often said that appealing a disputed licence modification to the Commission is "the nuclear option", is the phrase; it is extremely expensive. I am a little bit sceptical about that. To some extent the cost to the companies concerned is within their own discretion. We perhaps in a moment will talk about fast track solutions but at the moment, if a company (or companies) come to us, almost invariably they will dispute virtually every part of the licence modification and the analysis that underpins it. They will dispute the investment plans, the cost levels, the cost of capital, the financial side, etc. They will typically deploy large numbers of lawyers and economists on that and, as we get into the case, they will demand, perfectly reasonably, huge amounts of information about our thinking and our analysis and they will subject all of that to further analysis. Very rapidly it becomes, from their point of view, quite major. It must be a decision for them how much they spend and how thoroughly they dispute a price control. If a company and a regulator were to come to us and say, "Here is the price control, but the point that the company does not accept from the regulator is the depreciation regime", we will say, "That is where the dispute is", and they will appeal to us on that. While as a matter of law we could say, "Sorry; we are going to look at absolutely everything", in practice, of course, we would focus purely on the depreciation regime, so we now can deal with cases very much more quickly than we did and at very much less cost to the parties and to ourselves, but it does require that there is agreement on what the dispute is and that we get that focused. The great concern from the regulators is, to coin a phrase, cherry-picking, that a company will look and say, "All this is beneficial to us. That is a problem. We will dispute that", and I think it is very much the regulators who have said, "If you want to question this price control it is a package, and if you unpick one bit of it then the whole thing is back in the melting pot".

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