Examination of Witnesses (Questions 500
WEDNESDAY 21 MAY 2003
500. Fine. Thank you very much. Mr Latif, is
it the same for you?
(Mr Latif) Yes, absolutely.
501. Thank you very much. Having read your evidence,
since we are focussing very much on accountability, it strikes
me that one can identify three levels and this fits in very much
with the papers that you have put in. There is what you might
call the low level, which is transparency, of requiring information
to be in the public domain. The second level is that of answerability
or, if you like, of scrutiny where there are bodies which can
actually put questions to regulators and require answers. The
third level is essentially that of challenge where there are other
bodies which can overturn a decision of the regulator. The material
you have put in fits in with those three levels but where there
is a particularly common element in the two submissions is in
that third layer, that challenge, because you both stress problems
in terms of the appeal mechanism. Particularly on the Electricity
Association side you make recommendations dealing with scrutiny
and transparency. If I could start with the appeals process. Both
organisations invite us to subscribe to the principle that there
should be reform of the appeals process, you need a swifter and
more effective appeals process. If the Committee signed up to
the principle what form would the actual appeals mechanism take?
In other words, how would you translate the principle into practice?
(Dr Golby) If I could start and then hand over to
my colleague. I think there are two specific levels here. One
is an appeals process relating to the competition element of the
role of Ofgem and the other and quite separate one relates to
the regulatory element of that process. Maybe, Roger, I could
ask you to pick up those two separate areas.
(Mr Barnard) Thank you, yes. I think one has to answer
that question by reference first of all to the sort of patchwork
quilt or in less respectful terms the ragbag of review/appeals
mechanisms which are currently available in the regulatory field
generally, and when we are talking this afternoon we are talking
specifically about Ofgem for most of the time but so much overlaps
anyway with other areas of regulatory activity. You have got a
de facto form of appeal by way of the triggering of references
to the Competition Commission when the regulator brings forward
licence modification proposals that the licence holder or holders
do not wish to accept. You have then got in most of the statutes
a rather attenuated form of judicial review in relation to enforcement
procedures and financial penalty proceedings. You have got full
blown rights of appeal on the merits to the Competition Appeal
Tribunal where the regulators (in this case Ofgem) are exercising
their jurisdiction or functions under the Competition Act or the
Enterprise Act. Last of all, you have got good old traditional
judicial review, the historically renowned way of keeping, if
I can put it this way, the bureaucracy in check. There is no apparent
logic to this patchwork quilt and I think one has to look at it
in those terms and ask how, if one were starting from a bare sheet
of paper again, would one want to structure appeals mechanisms
in relation to decisions which are of enormous importance to licensees,
to the economy, to society generally and to the environment. I
think both industries that are appearing before you this afternoon
would probably say the answer ought to be something like this.
First of all, where a licensee is dissatisfied or cannot accept
a price control review proposal from his regulator, then the existing
route of triggering references to the Competition Commission is
probably the best and most satisfactory means that you are going
to find of getting a balanced judgment on what is essentially
a complex economic decision. I think we would then go on to say
that in relation to all other types of decisions by regulatorsand
they might be decisions in relation to the grant of a licence,
decisions as to licence modifications, decisions as to enforcement
orders or financial penaltiesthere should be rights of
appeal by the licensee to a new animal called a RAT, a Regulatory
Appeals Tribunal, which would span appeals mechanisms and rights
of appeal in all those industries listed in the Competition Act
as sectoral regulators. The advantage of that would be of course
that one might expect a sensible and consistent body of case law
to emerge quite rapidly in response to appeals to a body like
that. Then last of all, let us not disturb the existing rights
of appeal against regulatory decisions to the Competition Appeal
Tribunal in relation to regulators' jurisdiction under the Competition
(Mr Latif) I have to say we agree with that. We have
had this discussion before internally in terms of our two organisations
and I cannot really add much more to that than Roger has already
502. Fine. The point you are making is that
although you are particularly concerned with Ofgem this would
have general applicability in terms of regulated industries?
(Dr Golby) Absolutely, yes.
Chairman: Thank you
Lord Lang of Monkton
503. I wonder if I could just ask both the chairman
and the president a rather general question. I am not quite clear
what the impact is in regulation terms of representative industry
associations. On the one hand, there is the danger that your members
might have very strong grievances but either leave you to press
their case as an association or they fail simply to make their
case even to you because they feel that you will no doubt do the
necessary. On the other hand, your relationship with the regulator
could act as a rather bland filter between the coalface of the
industry and the regulators. So do you think that your members'
grievances are properly heard and understood by the regulators
and do you think they are justified in most casesyou might
like to give us some examplesor do you think that you have
a danger of, not dumbing them down but muffling them slightly?
(Dr Golby) Let me attempt to answer that
first. The Electricity Association is a very broad church covering
most of the companies in the sector. One of the issues we have
recognised recently is the possibility of dumbing down, that we
produce the lowest common denominator view to take to the regulator.
As a result of that we decided some months ago to actually split
the Electricity Association into three new bodies, one being a
body that represented the generation part of the industry which
has very specific issues in its own right, the second representing
the infrastructure or the networks activity of the industry, both
the electricity networks and also the grid operation of the gas
industry, which has quite specific issues in its own right, and
of course both of those networks are regulated monopolies and
therefore they are quite specific. Then thirdly an association
representing the retailing activity, the selling activity of the
industry, again both electricity and gas. So we have seen a convergence
of electricity and gas and a divergence of the activities into
those three broad categories, which I believe fairly well mirrors
the operation of Ofgem in terms of what it choose to regulate
and what it chooses to allow to operate in the free competitive
market. That is how we are responding to that dumbing down challenge
and you are correct that there has been a number of occasions
where individual companies have wished to dissociate themselves
from a particular stance taken by the Electricity Association.
We believe that the way I have described is the way forward to
deal with that, with strong associations but with companies able
to individually represent themselves, of course, as they have
every right to with the regulator on a particular issue.
(Mr Latif) I think that is the same for the Gas Forum.
As you have probably seen from our response, the majority of our
members agree with us but a few chose not to actually come on
board, but we would reflect both views. I think it is incumbent
upon us as a representative of the industry to reflect the various
views there are in the industry. As you quite rightly say, if
you do go to the lowest common denominator you do not really get
any meaningful responses back. So what we allow is for our members
to express themselves and where we would agree unanimously that
becomes a very powerful communication tool but where we do not
we actually reflect the actual balance of views. So people can
judge which way they wish to actually go through with.
504. I was going to pick up on the very point
you have made because, as you have indicated in the addendum,
there is a number of your members who felt that an appeals mechanism
along the lines indicated would actually slow up the process and
my introduce uncertainty, but I take it from your submissions
that the majority of your members actually feel quite strongly
than an appeals mechanism of the sort you propose is actually
(Mr Latif) Yes.
Chairman: Thank you very much.
Lord Holme of Cheltenham
505. I would just like to press that point first
of all, my Lord Chairman, the fact that two very large companies,
British Gas and ExxonMobil, both feel that the downside of appeal
outweighs the benefits of appeal. I am not absolutely clear from
your statement whether there are grounds for saying that British
Gas feels the same as ExxonMobil. It seems in both cases to arrive
at uncertainty being a problem in the case of British Gas because
delays would lead to uncertainty. You talk about the incremental
regulatory uncertainty introduced by such processes. Does that
mean something different from delays? What is the problem?
(Mr Latif) As I say, my Lord Chairman,
I have to ask those companies to actually represent themselves
in that view. We did not really actually go down to the level
of depth of their uncertainty of our proposal in that respect
but there is this view that it does bring undue delay to the process
and also it brings uncertainty. The words, I think, probably mirror
the same effect. I think they do mean uncertainty rather than
506. So trying to understand your dissenting
minority, their concern is that they would prefer to have the
certainty of decisions which they may or may not like than the
longer drawn out process of appeal, which may or may not result
in a decision that they like?
(Mr Latif) I think that is their argument, yes.
507. I see. May I ask a supplementary. Just
moving on from that, let us assume that the appeal decision which
the majority of your members in both cases are in favour of. Let
us assume there was a decent appeal mechanism in place. In the
opinion of both bodies what would the implications of that be
for the theme of this Committee, which is accountability? Would
the presence of a proper appeals mechanism have the net effect
of obviating or reducing the need for parliamentary and other
(Mr Barnard) I think the answer, my Lord, and I suppose
you would expect me to say this as a lawyer, is that in the end
legal accountability is probably the only form of legal accountability
which really matters to licensees who are on the receiving end
of the jurisdiction of a regulator. It is an addition, a long-stop
addition to increased political accountability, increased financial
accountability and possibly increased public accountability, although
that is a very elusive concept in our administrative system. It
enables licensees to walk tall in relation to their regulator
in a way that they cannot do at the moment.
(Mr Latif) Yes. I think also in terms of accountability
you have to have the Regulatory Impact Assessment to be a part
of the actual accountability process. We believe the appeals process
is the ability to be accountable. With these two in combination
hopefully what will happen is that the actual companies will feel
that the solution which is being arrived at has had the full participation
of the members who are actually going to be impacted at the front
end rather than at the end bit, where it comes to a solution and
people will need to actually then start worrying about how they
are going to implement it and what the consequences are. If you
do the Regulatory Impact assessment at the front end you will
find that people will then be able to assess on merit what the
actual proposal is and the regulator becomes more accountable.
It actually does its homework and produces evidence so that the
members who are going to be affected by that change can actually
either challenge the evidence or take it on board and say there
is a greater benefit to having that change thrust upon them.
(Miss Love) My Lord Chairman, in terms of the two
members you have spoken about, British Gas and Exxon, in particular
talking about regulatory impact assessments when we do not actually
know what the framework is going to be for appeals, I think that
is maybe where the uncertainty in terms of committing to this
proposal is. If we could actually see what it might look like
then we would be able to give a more informed judgment. As Mr
Latif said, if we had Regulatory Impact Assessments we are hoping
to keep appeals to a minimum by going through that process. I
think that would give you a greater commitment from British Gas
(Mr Barnard) One has to bear in mind also, I think,
my Lord Chairman, the remarkably unlitigious nature of these two
great industries thus far. One has to work inside these industries
to know the extraordinary lengths to which directors will go to
avoid legal confrontation with their regulators. It may be circular.
One of the reasons for that may be the lack of credible appeals
mechanisms. But I come back to my earlier point: if licensed industries
cannot challenge their regulator in an appropriate forum with
equality of arms then they are always the subjects of regulation;
they are not equal partners in the process with the regulator.
Chairman: Thank you.
Lord MacGregor of Pulham Market
508. Would you like to say a bit more about
the Regulatory Impact Assessmentshow you see them developing,
what objectives you would like to see them having, what impact
you think they might have?
(Mr Latif) I think it is wider than economics
and they need to take the social aspect, the environmental aspect
into it. I have to say that the FSA and the telecoms model, I
think, requires them to do a wider assessment. We had a situation
within the gas arena where shorter balancing periods were suggested
and we went through a process where this was thrust as a way forward
for the regulator to make the balancing more efficient. We went
through years, I think, of uncertainty on this process. At the
end it was the industry itself then which actually had to pay
for an independent assessment to be carried out, which basically
made the idea economically unsound. So if we had the basics of
regulatory assessment across the economic, environmental and social
then I think that would be a good framework.
(Miss Love) I think ultimately in terms of our concerns
if the Regulatory Impact Assessment was carried out from day one
individual companies could understand what costs of capital, etcetera,
they might have to employ to actually endure this proposal and
it would give us a better opportunity to understand what we would
have to pass on to customers and obviously a justification for
that cost. Again, as I said earlier on, that would hopefully reduce
the number of appeals because it would be obvious to parties involved
in the process as to why the proposal was going ahead.
(Mr Latif) Just on the actual balancing, in the study
that was carried out the actual cost to the industry would have
been between 1 billion and £3.5 billion and that is a substantial
amount of money that would have had to have been recovered by
the end consumer really. So that assessment was not carried out
in the initial stages.
509. In a way the economic assessment can be
more quantifiable and less judgmental in a sense than the social
(Mr Latif) I agree.
510. So where would you think the greater impact
(Mr Latif) We are torn between the fact that the Government
then requires the environmental type ofI think there is
a balancing act there which needs to be legislated for, I think,
but there is a tendencyand I will let Paul talk about thatthe
green issues have come to the fore but when you do assessments
currently it will be just on the economics.
511. One view which has been expressed is that
indeed the role of the regulator should concentrate on the economic
impact and the competition impact and that the social and environmental
considerations are more for the Government to deal with in other
ways. I do not know if you would agree on that.
(Mr Latif) Yes.
(Dr Golby) If I could pick up that point, my Lord.
I think it needs to be one or the other. I think where we are
at the moment is most unsatisfactory, with an economic regulator,
with environmental and other guidance given by the Secretary of
State because that almost creates a double jeopardy situation.
So I think this needs to be enshrined, maybe through primary legislation,
to change the remit but a very clear framework for regulatory
impact assessments so that we clearly know, frankly, where we
are coming from.
(Mr Barnard) My Lord Chairman, every regulated industry
is in favour of impact assessments, like motherhood and apple
pie. One needs to be careful how they are structured. We of course
welcome the Government's proposal to give them statutory backing
but I think we would say that the present form of the obligation
in the Communications Bill currently before your Lordships' House
is most unsatisfactory. If you are going to lay duties on regulating
authorities to run proper meaningful impact assessments you need
to specify quite tightly what those assessments are going to apply
to. In Ofgem's case I guess they ought to apply to those things
that are picked out in what is known as Ofgem's forward work plan.
I use those words because they are embodied in statute already
in the Electricity and Gas Acts. It is there that you see the
plethora of regulatory projects going forward, none of which have
been subject to meaningful or indeed any impact assessment. You
need an obligation which specifies in quite tight terms what sort
of costs and benefits an RIA should assess, including the cost
of doing nothing. You need an obligation which requires the regulator
to publish an initial impact assessment and then when he publishes
his final impact assessment an obligation to say how it differs
from the initial one backed up by a fair and accurate summary
of the representations he received in response to the initial
one. The regulators of course will say that all this is impossible,
it is far too prescriptive. I would merely point out that the
Department of Trade and Industry's own RIA in respect of the better
electricity trading and transmission arrangements, which presumably
Ofgem had a large hand, alongside the DTI, in producing, fulfils
exactly that sort of prescriptive model that I have just outlined.
So it can be done; do not let them tell you that it cannot.
512. And it can be embodied in statute?
(Mr Barnard) Yes, indeed. We have actually
give the DTI some illustrative drafting of how that might be achieved,
if you would like to see it.
Chairman: That would be very helpful.
513. I probably misheard, Mr Barnard, but did
I understand that RAT would be an addition to the pack, as it
were, rather than a substitution for any of the existing route?
(Mr Barnard) Regrettably, I suppose,
yes, it would be an addition to the existing array of statutory
514. That would scarcely simplify matters, would
(Mr Barnard) It depends what sort of simplification
one is looking for. I painted earlier a picture of a patchwork
quilt of rather inconsistent provisions for appeals, or more properly
reviews or scrutinies that have been built up historically over
ten to fifteen years of privatisation. They are complex. There
is a complex variety of routes. It seems to me to quite considerably
simplify things to say price control to the Competition Commission,
everything else that a regulator does under his sectoral statute
to a new Regulatory Appeal Tribunal, and everything that he does
under competition law, as now, to the Competition Appeal Tribunal.
515. Thank you. We have been looking and referring
to guidance as well as the means by which Ministers effect what
goes into the regulatory field and the lack of control, as you
may see it, over this or influence. I do see that Section 14 of
the Utilities Act 2000, which put a new section into the 1989
Act, does provide in fact for the draft of any guidance proposed
to be issued under this section to be laid before each House of
Parliament. Parliament then has the opportunity to consider and
reject it if it wants to, or to consider it and let it through
or simply to ignore it. Has there been any activity of significance
in this field to your knowledge?
(Mr Barnard) I think the Secretary of State issued
draft guidance shortly after the commencement of the Utilities
Act provisions, which amended both the electricity and gas legislation,
and only recently has crystallised that into final guidance.
516. November last year, to be precise.
(Mr Barnard) Yes, indeed. It is, one might say, extremely
innocuous stuff actually and I understand that there are pressures
within government, perhaps from departments other than the DTI,
to toughen it up
517. What I was really intending to ask was
whether you regard this potential area of activity as an area
in which you could exercise some influence?
(Mr Barnard) I suppose it depends really on what position
you take in the great debate as to whether Ofgem should be a purely
economic regulator or a regulator who is also subject to explicit
social and environmental responsibilities. If it is to be the
latter then I think one would want as a licensed industry to have
some quite considerable influence on the form and contents of
that guidance. With no disrespect to your Lordships' House or
to the other House either, there is a feeling generally outside
Parliament that procedures for passing and turning into law statutory
instruments or other kinds of secondary legislation, whether under
negative or affirmative procedures, do not offer a lot of protection
to those on the receiving end.
518. The difference between negative and affirmative
is that affirmative procedure requires the instrument to be considered
by Parliament and the negative only gets considered if parliamentarians
think it should be. This falls into the latter and I wondered
whether in fact you regarded that as a mechanism which you could
use to bring the parliamentary interest into your area of activity?
As regards the other place, in which I am no expert, it requires
a constituent to approach a Member in order to get his interest,
I would think, and the same is true in this House. I just wondered
if this was a route which you considered fruitful. From what you
have said so far I think you regard it as a dead end perhaps?
(Mr Barnard) You took the words out of my mouth, my
Lord. It is very difficult for citizens, industries, and others
outside Parliament to modify the procedures or to modify the contents
of secondary legislation. The sheer volume of secondary legislation
which is made by Ministers is impossible to keep up with and parliamentary
scrutiny, with all due respect, must be perfunctory; I do not
see how it can be otherwise. Therefore, guidance to regulators
which is made under those sorts of procedures is not a framework
within which the industries can hope to contribute much by way
of influence, control or challenge.
Lord MacGregor of Pulham Market
519. The basic problem is the neither House
can amend secondary legislation.
(Mr Barnard) Indeed.
(Dr Golby) That is correct. I think, my Lord, I will
go back to an earlier answer that I think any change in remit
here in terms of social, environmental obligations really, I believe,
needs primary legislation to determine the remit properly as opposed
to secondary legislation for the reasons we have just been discussing.