Examination of Witness(Questions 100-107)|
WEDNESDAY 12 FEBRUARY 2003
100. I should like to pursue that question and
to take the opportunity, in response to Lord Holme's first point,
to say that there is not necessarily anything wrong with taking
a conservative view. To pursue the point Lord Holme is making
as it applies to the relevant accountability, whether it is through
judicial review or the Competition Commission, it is that it is
essentially sporadic and reactive and, as I think you are implying,
it tends to be resorted toincluding parliamentary committeeswhen
there might be a problem, which might then give you a distorted
view of what the regulators are about. I think that this is at
the heart of what Lord Holme was getting atwhether there
is need for a more consistent and perhaps proactive interaction
between Parliament and regulators and whether one can devise a
mechanism for achieving that. A select committee, on a specific
subject, may be able to question. Historically, Parliament, the
House of Commons, did set up a select committee on nationalised
industries in the mid-1950s which worked reasonably well. I think
that is what we are getting atas to whether there can be
more consistent and more proactive interaction, which presumably
would be to the benefit of regulators. It would be an opportunity
for you to say how well you are doing, rather than merely responding
when a problem comes along. I do not know whether that might be
done through a formal mechanism in a select committee, or whether
there might be less formal devices that might be established.
(Professor Littlechild) I think that
you are right to say that if select committees only investigate
things when they think there is a problem, then of course regulators
tend to appear in the media only when there is a problem. That
might give a slightly distorted effect. Against that, it is fair
to say that some select committees have said, "We haven't
looked at this area for a while. We will have a look at that.
We don't see a particular problem, but let's have a review of
it". Secondly, it is not always the case that all select
committee reports are critical; some of them are positive as well.
Thirdly, the National Audit Office seems to have adopted a policy
of investigating some utility regulation issue each year, so that
there is a more routine investigation going on there. As I indicate,
it has pros and cons, but I think that is happening. One has to
ask, if all these things are happening, is there really a serious
problem that demands the scarce resources both of Parliament and
of the regulator? We all have lots of things to do, so do we really
want to create additional work? As you have probably gathered,
I do not think there is sufficient concern at the moment to warrant
a great deal of change, but others may have a different view.
101. I was going to ask, as an independent question,
about the contact that regulators have with one anotherso
what was your contact with regulators? I wonder if one could link
that to what we have just been discussing, so that instead of
individual regulators having to respond themselves, whether, if
there were some co-ordination between regulators in terms of material
provided to Parliament, there is a case for better co-ordination
between regulators and, if so, whether that would be a route to
providing consistent information to Parliament?
(Professor Littlechild) Views on this
have been evolving over time. The present view is that regulators
ought to liaise with each other and, if necessary, statutory obligations
ought to be put on them to do so. That was not always the case.
In practice, we did meet from time to time, but I know at least
one regulator, in the early days, took the view that this may
not be appropriate and thought that it might compromise his position
and independence if he had been thought to have liaised with others.
I think he had in mind particularly the Monopolies and Mergers
Commission, but he also felt a little uncomfortable about liaising
with other regulators. I do not think that most of us felt that,
so it was a matter of how seriously we thought that it was necessary
and how frequently to meet. It developed into about once a quarter,
but staff would discuss more often if there seemed to be issues
that would benefit from further discussion. Very frequently there
would be issues that overlapped two regulators' jurisdictions.
You would have a fairly active burst of discussion there, where
you worked out who would take prime responsibility and, if you
had different policies, how you would try to reconcile those.
In practice, therefore, it worked reasonably effectively. It was
heightened in two respects. One was when the Government announced
an intention to look at all the regulators and it was clear that
one of the questions would be, "Are you doing the same thing?
If not, why not?". Regulators rather more intensively asked
themselves, "Why are we doing what we are doing?" and
"Can we bring them together?". Secondly, we were very
conscious that, in the case of appeals to the Competition Commissionthe
Monopolies and Mergers Commissionthey would tend to take
a consistent view across the utility sector, or at least they
would have to explain why they did not. If, for example, the cost
of capital was held in water to be this amount, it was very difficult
in electricity not to go for the same cost of capitalunless
you could argue, as you perhaps could, a little more risk or something
of that kind. That mechanism tended to bring regulators into a
more consistent pattern of working than they otherwise might have
102. On the point about Parliament, if it were
slightly more formalised, would that be a mechanism for reporting
to Parliament almost collectively?
(Professor Littlechild) I do not sense
that regulators would like to report collectively for the most
part, because they would see themselves as having a set of statutory
duties for which they would want to be accountable. If you did
not agree with another regulator, you have a difficult situation.
Either you say, "We just don't agree" or you try to
find some "fudgy" wording that covers this up. I am
not sure that it would be helpful to look for a lot of joint reports
103. I was not thinking in terms of the regulators
coming to agreement in terms of what they were presenting, but
more the compilation of reports from regulatorswhich might
just be the aggregate of the individual reports.
(Professor Littlechild) Fine, but this
is on specific issues other than the annual report, is it? I am
sure that regulators would be happy to give further details on
what is required.
Earl of Mar and Kellie
104. When you mentioned that the distribution
network was a monopoly, it reminded me that I ought to ask you
about the way that the industry is organised throughout the United
Kingdom. I believe that in Scotland the privatisation was different.
I believe that it was more vertical integration. Did you find
yourself dealing with Scottish electricity matters in a different
way, or was there no issue on that?
(Professor Littlechild) Yes, it was
different because traditionally the structure had been different
there. It had been two vertically integrated companies, as opposed
to distribution companies quite separate from generation in England
and Wales. That was the previous situation. That provided, not
a painless but a relatively straightforward way of introducing
competition and separation of these activities in England and
Wales. To do the same thing in Scotland would have meant taking
a bigger knife and cutting more things apart. I do not think there
was political support for doing that. So the decision was, "Let's
see where we can get to with the framework", but leaving
the vertical integration in place. I tried as far as possible
to have a consistent policy in England and Wales and in Scotland.
What it meant was that in some respects we had to judge, and indeed
set, prices in Scotland where there was more of a monopoly, in
relation to what we took to be an increasingly competitive market
in England and Wales. For example, there was a Pool in England
and Wales into which all generators sold and from which everybody
bought. It may not have been fully competitive but, in principle,
it was a competitive market. There was no such thing in Scotland.
Consequently, if a new supplier wanted to enter the market in
Scotland, there was no way of buying electricity; they had to
buy it from one of the incumbent companies. Questionwhat
price should be paid? We took the view that we would take the
price from England. We therefore had to deal with Scotland to
some extent based on what was happening in England and Wales.
Because of the rather more delicate situation in Scotlandand
there is a question in the draft questions, "Did you prioritise
your duties?"I think that Scotland was put a little
bit on the back burner, in the "too difficult" box.
But that may not have been the question you were asking.
Lord MacGregor of Pulham Market
105. Could I ask a question which may relate
more to the time after you had left, but I would still be interested
in your general reaction? It is in relation to the work of the
Better Regulation Task Force and the principles they have drawn
up. Did that have any effect at all on the work of the regulators?
Secondly, to what extent in taking decisions does the regulator
take account of these regulatory impact assessment procedures?
(Professor Littlechild) I have considerable
sympathy for some of the aims of the Better Regulation Task Force,
particularly the notion of improving the general quality of regulation
and of reducing regulation where it is feasible and sensible to
do so. As you say, it came after my time, if I remember. I think
that they got off on rather the wrong foot, because the prime
example they gave in their first report of one of the problems
of price regulation was illustrated with a company, Nuclear Electric,
that had never been price-regulated in its history. There was
therefore a question about how much expertise this body had in
the energy sector, I am afraid. It is fair to say that the kinds
of things they say are worth looking at and giving thought to,
but it is also the case that the regulators to whom this is addressed
have spent 10 to 20 years working on these issues, thinking actively
about precisely these issues of process and the consequences of
what they do. I think that it would be a little surprising if
that particular body came up with a lot of novel ideas that had
not occurred to regulators that were nonetheless worth going ahead
with. To some extent that applies to the particular assessment
studies you mentioned. They set out there a rather formal procedure,
but my experience when I was at Offer was that certainly the civil
servants amongst the senior staff, but also others, would as a
matter of course set out the pros and cons, the implications of
each activity or proposed decision. So I felt that we did in principle
do those kinds of things, even though we did not call it by that
106. Your conclusion in your paper is plain
and explicit about "Let regulators get on with their jobs".
I infer from the paper and an earlier answer you gave that it
is essentially regulators as presently constituted. I wonder whether,
given the changes in the nature of ownership that have been taking
place, you see a case for, rather than just having discrete regulators
for particular sectors, cross-sector regulatory bodies?
(Professor Littlechild) It began to
look as though there was going to be a strong case for that when
we had an electricity company taking over a water company. We
worked with the water regulator to devise a framework for dealing
with that, with which we were reasonably satisfied. We thought
that there would be a stream more, but there were not. I do not
know whether the electricity company has already divested itself
of this water company or whether there is another one that is
contemplating doing so, but that kind of cross-utility activity
did not take off to the extent that it seemed it would at one
Similarly, National Grid went into telecoms and its subsidiary
Energis had a very chequered history. You will remember that the
value of this subsidiary company went up and then down again,
and National Grid is not in it now.
Scottish Power got into telecoms and is in the process of getting
out of it.
Most other companies have not got into telecoms.
With the exception of gas and electricity, which have been very
actively business-interrelatedand we now have Ofgem which
deals with bothI do not myself see that there is a big,
new, urgent issue that there is a lot of cross-utility integration
which needs to be dealt with.
107. Reinforcing what is in the paper, in effect
the fit, you would say, is more or less right at the moment?
(Professor Littlechild) I think it is
okay. My own preference, other things being equal, is to have
rather more decision-makers than fewer, simply because you can
then compare them and because any one decision-maker has less
absolute power at his or her disposal. I am in favour, I suppose,
of that degree of dispersed powerother things being equal.
108. The logic, clearly from the paper, is also
for dispersed accountability to different bodies and for each
to respond rather than, say, having a regulator of regulators?
(Professor Littlechild) I think so.
That would be (a) bureaucratic and complicate the situation, and
(b) simply to shift the question as to whom that overall regulator
would be responsible.
Chairman: Professor Littlechild, that has been extremely
helpful for our purposes. I suspect that we would have had many
more questions, had it not been for the fact that you put in an
extraordinarily helpful and well-structured paper. It gave us
a lot of information which has been invaluable, and we are most
grateful to you both for your time today and for the paper.
7 Note by the witness: Scottish Power purchased
Southern Water and sold it in April 2002. Northwest Water acquired
Norweb (United Utilities). RWE acquired Thames Water and Innogy.
Hyder (Welsh Water) acquired South Wales electricity but when
WPD acquired Hyder in 2000 it sold off Welsh Water in 2001. Back
Note by the witness: National Grid reportedly retains a
32.5 per cent stake in Energis. Back
Note by the witness: Scottish Power demerged its telecom
subsidiary in March 2002. Back
Note by the witness: Centrica owns One Tel and British
Gas Communications. PowerGen offers a telephone service. Back