Memorandum by Peter Vass MSc(Econ), CPFA,
Director of the Centre for the study of Regulated Industries,
University of Bath
My experience is as follows:
Graduate in economics (BSc and MSc) from University
College London; entered the Government Economic Service 1970-76
(Ministry of Transport and Department of the Environment); qualified
as an accountant 1976-81 (at Essex County Council, then Technical
Officer, Treasurer's Department); secretariat of the Chartered
Institute of Public Finance and Accountancy 1981-90 (Head of Technical
and Research); Senior lecturer in Accounting and Finance, University
of Bath School of Management 1990-date; Director of the Centre
for the study of Regulated Industries (CRI) at the University
of Bath (1991 to date). Specialist author on regulation (in particular
the economic and accounting methodologies for regulation and the
regulatory frameworklegitimacy, institutions and governance)
and editor of the annual CRI Regulatory Review.
1. (i) Acts of Parliament. In the case
of the utilities, this was part of the overall Acts which privatised
the regulated industries (water, energy, transport and communications).
(ii) The nature and extent of the powers
granted depend on the functions of the regulator (the objectives
of the legislation). So, for example, utility regulators may set
price controls (e.g., for a natural monopoly business such as
electrical transmission) or act as competition authorities (e.g.,
in a competitive business such as gas supply). The regulators
may exercise their powers by proposing (or, contingently, enforcing)
changes to an operator's licence, collecting information and monitoring
compliance, and enforcing compliance or levying penalties.
(iii) Act of Parliament.
(iv) Typically, the regulated companies
pay for the costs of regulation through, for example, licence
or registration fees. There is usually an additional safeguard
in that the regulators' budgets have to be approved by the Treasury.
Administrative support is usually provided through an associated
office, so, for example, the Director General of Water Services
has a "non-ministerial" government department (NMPD),
the Office of Water Services (Ofwat). The staff might comprise
civil servants on secondment, directly appointed staff or temporary
staff and consultants.
2. (i) The Government. Evidence may
come from reviews occasioned by specific "crises" or
from periodic re-examination, and from a variety of Government
and Parliamentary sources, including the sponsoring departments
(e.g., DTI, Defra, DTR), HM Treasury, the Cabinet Office (e.g.
Better Regulation Task Force and Regulatory Impact Unit), Select
Committees, the National Audit Office, the European Commission
and the OECD.
(ii) Act of Parliament.
3. The members of the regulatory bodies
are appointed by the Government. In general the appointments are
determined on the basis of merit and the expertise necessary to
carry out the specific functions. Utility regulators have typically
been appointed for five years and cannot be removed except for
exceptional circumstances (e.g., incapacity). Regulators are not
intended to be representative. Nolan principles are expected to
operate. The utility regulators' legal powers have been vested
in individuals (the director generals) but are progressively being
replaced by boards (i.e. Authorities), as with the Gas and Electricity
Markets Authority (GEMA) through the Utilities Act 2000. Questionably,
this is seen as a defence against over-personalisation of regulation
and arbitrary use of discretion.
4. (i) Regulators are set up to achieve
particular objectives determined by Government policy and sanctioned
by Parliament. In general, economic regulators are established
to control the abuse of monopoly power and to set appropriate
output standards, such as the availability of reliability of supply.
Other regulators set standards. Certain standards are set by the
Government or the European Union and Commission, notably environmental
(ii) The regulators' actions may result
in adverse consequences for some parties, but, overall, regulation
is expected to be beneficial. This means that the benefits of
regulation (as well as for specific regulatory policies) should
outweigh the costs. As an example, regulators may provide incentives
to improve efficiency and control the abuse of monopoly power
by introducing competition, but the resulting cost-reflective
tariffs may "unwind" cross-subsidies, thereby disadvantaging
previous recipients of those cross-subsidies.
(iii) Effectiveness is not simply assessed
by a single measure. The process of regulatory impact assessments
(RIAs) is, however, a growingly important feature of regulatory
accountability and a means to assessing performance, focusing
on the "cost-benefit test" referred to in 4(ii) above.
5. (i) The regulators have responsibility
to make a case for the exercise of their powers and then to determine
the appropriate regulatory outcome. In this sense they are judge
and jury (unlike inspectorates). However:
(ii) These powers are constrained, most
notably in the case of the utility regulators by the right of
the regulated companies not to accept the regulators' proposed
changes to their licences following a periodic review, and as
a consequence for the matter to be reviewed or determined by the
Competition Commission (known as "appealing" to the
Commission). Judicial review is another safeguard (a good example
being the High Court and Appeal Court cases heard in respect of
the Northern Ireland regulator and his 1997 review of distribution
and transmission price controls). Judicial review in relation
to the "reasonableness" of the decision is generally
judged to be a weak defence against arbitrary regulation (since
the courts do not question the "wisdom" of the decision,
only whether it was so unreasonable as to be "irrational").
However, the development of a body of "better regulation"
principles (see, for example, the Better Regulation Task Force's
five principles of good regulationTransparency, Accountability,
Proportionality, Consistency and Targetingpublished by
the Cabinet Office in 1998 (amended 2000)) and the associated
RIA procedures, along with the general development of human rights'
legislation and higher general expectations of public accountability,
make it likely that judicial review will progressively develop
towards tests that require a regulator's decisions to have been
6. (i) The regulators' annual reports
are typically laid before Parliament, and the Select Committees
and the PAC carry out inquiries.
(ii) The National Audit Office audits and
carries out value for money studies of the regulators. In general,
regulators are expected to consult on their proposals and to give
reasons for their decisions.
7. (i) The respective outputs of 6 above
provide the means of accountability.
(ii) Regulation imposes costs but the benefits,
say in improved efficiency or higher standards, should be expected
to yield a net public benefit, allowing for the costs.
(iii) In general, regulators' consultation
documents demonstrate a high degree of transparency.
8. (i) Public consultation and through
associated consumer forums.
(ii) The primary opportunity is afforded
by the formal consultation procedures.
(iii) The relationships are growingly supported
by "memorandums of agreement", although there may be
friction due to duplication of objectives, if not roles. An example
from the utilities is that both the consumer bodies and the regulators
have, in substance, a primary duty of consumer protection.
9. The regulators' "inputs" into
the consultation process can be judged effective, but knowledge
and engagement may still not be widespread among the general public.
Representative bodies in practice act as surrogates for consumer
10. (i) Regulators have regard to the
needs and concerns of the public, but in the context of their
functions, powers and their duties. So, for example, an economic
regulator may not seek to regulate to correct for environmental
damage or inequitable market outcomes where those are more properly
the province of Government decision, for which ministers should
be held to account. One problem may be that regulators are given,
or acquire over time, a rather long and undifferentiated, and
possibly conflicting, set of duties. This may contribute to a
mismatch between public expectations and the role of a regulator
in practice. This may contribute to a "fudging" of accountability
between "independent" regulators and the Government
and its ministers.
(ii) Regulators are instruments of Government.
Parliament and Government are the representatives of the public.
11. (i) Utility regulators, in particular,
are considered to be "independent" of Government, but
their discretion is bounded. Where appropriate, sectoral regulators
are expected to harmonise their approaches, and there are formal
mechanisms for achieving this.
(ii) Regulators' independence would be compromised
either by regulators who show themselves to be incapable, by virtue
of inadequate expertise, experience or partiality, of carrying
out their functions well (thereby undermining public confidence
in the regulatory system) or by Government ministers seeking to
overturn the established "regulatory settlement" in
favour of greater ministerial discretion and involvement, but
without this change having been properly established through a
new regulatory framework, duly endorsed by parliament. The current
regulatory framework seeks to provide a good foundation for effective
public regulation, balancing the policy role of Government with
technocratic functions more suitably placed in the hands of "independent"
regulators. Different regulatory institutions can focus on specific
market or conduct failures (compare, for example, the economic
regulators with the Environment Agency), and the consequential
"unbundling" of the regulatory state has been judged
to have improved accountability.