Select Committee on Constitution Minutes of Evidence

Examination of Witnesses (Questions 920-935)



Lord MacGregor of Pulham Market

  920. Can I follow up a point that Lord Acton was pursuing with you in terms of parliamentary accountability? I understood all the points you were making about the need for expertise on the committee if you have a specific committee dealing with regulators, but can I be quite clear? Do you think that the present system is not working well enough yourself because there is not that collective expertise when it is spread over a number of select committees?
  (Sir Derek Morris) It is hard for me to answer because where I have myself been before a select committee it has hitherto always been in relation to our competition responsibilities, not in relation to our effective appeal status in the regulatory regime. Individual regulators, of course, have appeared. I never have, so it is very difficult for me to judge quite why that is.

  921. We must make our own assessment of it, I suppose, but the key point you want to put to us is that this is such a complex area that you need not only a bit of continuity among the members of the select committee but also, most important, a body of expertise which does not always exist among the current specialist advisers to the committees and which is very specific to the whole competition and regulatory regime?
  (Sir Derek Morris) I believe so, yes.

  922. The other question is about the fast track procedure and I have to admit I am no expert on this. I understand entirely what you were saying in paragraphs 15, 16 and 17 of your memorandum as to why, if there were one, you believe, in your words, that, "The CC is ideally suited to a fast track procedure". I understand all of that but I wonder if you would outline a bit more the pros and cons of having a fast track regime, as you see it, in what circumstances you would like it and (and you have already started to talk about this) how you would discourage delaying tactics that could be used by a fast track regime?
  (Sir Derek Morris) I have tried to emphasise that I think a prerequisite of fast track is an agreement to focus on the disputed elements. I have explained why I can see as it were a conceptual difficulty about that. Whether it would be possible to try to address that problem, to have a two-stage process in which the first stage would be submissions to the Commission as to what was a proper issue for dispute and in that way narrow it down and then, if that is quite narrow, have a fast track solution, I do not know, but it seems to me that that would be worth exploring.

  923. So the ultimate judgment on that, before moving on to the fast track procedure, would be the Commission satisfying itself that it had got agreement on what the issue was about?
  (Sir Derek Morris) Yes, or possibly even make a decision without agreement on that, which might be a necessary part of that.

  924. And then it is up to the parties to decide whether they want to take it further?
  (Sir Derek Morris) Indeed. On your second part about how do you ensure that you can maintain fast track, we are considering this in some detail at the moment because I should add that the Government is contemplating that the Commission would be the effective appeal body for code modification decisions by Ofgem. There are many code modifications in a year, there might be perhaps, who knows, a dozen appeals a year, and we are looking at the possibility of effectively dealing with those in six weeks because typically they are much more focused. The other input from this, if I can just move to the Enterprise Act for a moment, is that under that Act we have to deal with mergers very rapidly and we need very tight case management. The proposal that we are intending to pursue is that we would agree in the first week of a case a complete schedule of the inquiry which we would have to keep to and we would expect the parties to keep to. Under the Enterprise Act we do have quite significant powers to require information by a certain date and, if that is not forthcoming and there is no reasonable reason why, the Act gives us powers to fine the companies. The figures which have been set by the DTI are, I think, an initial £25,000 and then £10,000 a day for delay. I think therefore there are quite strong powers to get the information. Could I add one other point? This is on the basis of historical experience. I do not think getting the evidence is the heart of the problem. The real problem is what I call the vicious circle problem, that a company will put a particular point to us and then will add to it the following request: "Will you, O Commission, please tell us whether you accept this point or not?" If we say, "We are not going to tell you", then we are immediately vulnerable at the end of the case to judicial review. Of course we may say, "We accept that point", and that is the end of it. If we say, "No, we do not accept it", they will say, "Please tell us why you do not", and again we would have to provide that. When we provide that invariably we get three or four more arguments back as to why our rejection of their position is wrong, and there at the end it will say, "And please confirm that you now accept this or not", and, of course, if we do not, the whole process goes on again. Almost as a matter of logic there are only three possible outcomes. One is that we accept, another is that we are judicially reviewed, or the third is an infinite loop. None of those is an acceptable outcome and I think companies and their lawyers recognise that and they are putting us in a position where in effect we cannot reach an adverse conclusion against them. We find ways to deal with that which I will not take up your Lordship' time with, but that is often something that really protracts an inquiry and, if at any point we say, "Oh, sorry, we simply cannot go on. We are stopping now", we are vulnerable to the courts. We have even sometimes said, "Look: we have a deadline. It has been given to us. We have only got another two weeks", or whatever, and it has been pointed out to us that we have powers to request an extension, and we could be judicially reviewed if we did not properly treat their points purely because of a deadline which is not unalterable. It goes back to my earlier point. There is an agenda behind all this, which is trying to ensure that companies get the results they wish to achieve. I understand that but the regulatory regime needs to be firm against it.

  925. Does that lead you to argue that at the moment there are not the final mechanisms to prevent that process happening and therefore there is a problem about having a fast track procedure altogether?
  (Sir Derek Morris) I think it would be a problem. We are seeking to deal with the problem in relation, for example, to mergers by having statutory backing for saying, "If we do not have information or argument by a certain time then we will regard it as not relevant to the case", in effect, "You are out of time", and that may help. On a number of occasions in this vicious circle we have gone back and said, "We believe we have given you sufficient argument and evidence and we are not proceeding further on that track", and to date we have not been judicially reviewed on that, but it is a constant tension and there is no clear statutory backing for a means of dealing with it.

Lord Jauncey of Tullichettle

  926. You presumably have the power in that you do make your own rules and procedures, do you not?
  (Sir Derek Morris) Yes.

  927. Do I understand from what you say at paragraph 15 that at the moment you could not have a fast track procedure for dealing with applications because you are prohibited by statute? Is that the position?
  (Sir Derek Morris) No. De facto we could have a fast track but it would only work at the moment by agreement of the parties that they would narrow down the substance of the dispute. If they come to us and say, "We dispute this element, this element, this element", a fast track is not really possible.

  928. But supposing the customer, the person who is regulated, comes along and says, "I am only really interested in one point here", and the regulator presumably will say, "Oh, no, that is of no relevance because you cannot deal with this point in isolation". We have evidence rather along these lines from people who have said, "It is very expensive if you have got to go into the whole matter all over again", when they are really only concerned with one point, and the regulator, as you have rightly said, says, "Well, change". Is there any reason why you should not have a preliminary hearing simply on what is the question (or questions) at issue, and then give a ruling on that to the effect that you are only interested in hearing evidence on one particular matter? You would have to be pretty certain that there really only was one issue but is there anything to stop you doing that at the moment?
  (Sir Derek Morris) We could try it at the moment. There is nothing procedural or statutory to stop us, but if at the present time the regulator said, "I believe that this challenge unpicks the whole price control and I insist on that point", and we said, "We are going to consider that very quickly", and perhaps after a week or two we said, "We do not accept that", again, I think we would be vulnerable to judicial review because under the present regime we are required to give due process and prompt consideration to any reasonable point put to us. However, you could envisage under a new regime with proper statutory backing that there could be a two-stage process. There could be an explicit provision for fast track and there could be specific provision for the Commission to have an early stage to determine whether fast track was appropriate or not in the particular circumstances.

  929. You must have a fair amount of discretion in reaching a decision and you could not be challenged on every exercise of that discretion. It is only if your discretion was unreasonably exercised that you would be challenged by judicial review, is that not right?
  (Sir Derek Morris) That is right.

  930. It would not necessarily be unreasonable if you took the view, and there were reasonable grounds for so doing, that it was appropriate to consider one or two matters only.
  (Sir Derek Morris) My Chief Legal Adviser is anxious to come in.
  (Mr McHenry) I wonder, my Lords, if I could just say briefly that the way the system works in all these regulatory statutes is that we receive an order from the regulator to pursue a licence modification reference and that effectively is our warrant to proceed. One risk about our over-narrowing our investigation would be not necessarily a challenge about unreasonable exercise of discretion as you have been referring to, Lord Jauncey, but more that we have acted unlawfully because we have not operated within the scope of the statute under which the licence modification reference was made. That is the inhibiting factor on Sir Derek and his colleagues when they are dealing with these inquiries.


  931. As I understand it, the Commission itself is fairly large as a body and you form panels to undertake a particular inquiry.
  (Sir Derek Morris) That is right.

  932. Is there a particular mechanism you employ to determine who serves on a particular panel? Is it geared to the nature of the inquiry?
  (Sir Derek Morris) Yes. If I could give one small bit of background, there are about 50 members. They are part-time. They are virtually all what I would call expert; that is, they are lawyers or economists, industrialists, have a finance or accounting background or some have more of a consumer background, but they essentially have relevant expertise. When a case comes in I typically appoint five members and the criteria for that are, first, that I need to get that spread of disciplines reflected; secondly, they need to be available, ie, not already on a case; thirdly, and this is much more important than is generally recognised, there must be no conflict of interest of any sort. I will not go into a lot of detail, but may I tell you that it is extremely rare for me to identify five people initially and find that none of them has a conflict of interest. Sometimes I have had cases where four of the five had some sort of conflict. It is a very severe rule. Finally, one wants to as it were mix members about. Typically I find that by the time I have applied those four criteria there is very little and often no discretion as to who I appoint. If there does remain some discretion I typically then use the principle of who has gone longest since the last appointment. That is how it works.

  933. Would there be a case for increasing the number of commissioners?
  (Sir Derek Morris) We did increase up to 50 and I thought that that was fine but, with the expected workload and the increasing intrusion of the conflict of interest criterion, I suspect we may need to go higher.

  934. You used the term "consistency without rigidity". Does that mean therefore that you tend not to be bound by precedent but none the less could there be?
  (Sir Derek Morris) We are not bound by precedent, that is true. As I say, best practice evolves, but we do regard it as a legitimate expectation of parties that we will be predictable and consistent and we do put a huge amount of effort into that. Past reports form an important basis for future analysis and we always invite the parties appearing to comment on that. I would add two things. First, a number of the regulators are on record, whether or not we have upheld their views, as saying that we have provided across a number of sectors a very large measure of consistency, and I do believe that is true. I only know of one example since privatisation started in 1984 where we explicitly and consciously reversed a previous methodological position and we explained why there were very good reasons for it and were not challenged on it.

  935. So if a legitimate expectation builds up people refer to the precedent and therefore presume that the same will happen next time and you have to provide very clear reasons why you have departed from that?
  (Sir Derek Morris) That is exactly right.

  Chairman: I am conscious of the time. We are extremely grateful to all three of you for coming here this afternoon and answering our questions. It has been extremely helpful to us; the answers have been very clear and will be very valuable for our purpose. Thank you very much indeed.

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