§ Motion made, and Question proposed, That this House do now adjourn.—[Jim Fitzpatrick.]2.32 pm
§ Brian White (Milton Keynes, North-East)
I begin by commiserating with my hon. Friend the Under-Secretary for Trade and Industry having to be present on a Friday afternoon and for drawing the short straw and so having to reply to this debate.
When I requested this debate a few weeks ago, I caused consternation in the Table Office and across various Departments mainly because the subject does not fit neatly within the remit of only one Department—in fact, it relates to a myriad. In order to secure the debate, I had to change its title. My first point, therefore, is that regulators have grown ad hoc. Their powers, terms of reference, relationship to the Government and accountability are all slightly different, and over recent years they have mushroomed. What we have today has developed from an ad hoc, incremental approach. Each new regulatory system has been a different variation on reinventing the wheel. I shall argue that, although we have enjoyed some benefits from such a system, now is the right time to review it and to try to introduce some coherence. We have a wealth of experience on which to draw—some good, some bad
I suppose that I had better define at the outset what I mean by "regulators". A narrow definition would cover only the former public utilities of gas, water, electricity and telecoms, but the regulatory function goes far wider than that. Organisations such as the Environment Agency, the Health and Safety Executive and the lottery and rail regulators all have regulatory functions. In the health service, the National Institute for Clinical Excellence and half a dozen other bodies carry out some aspect of regulation. I shall consider bodies such as the National Audit Office and the Audit Commission shortly.
Debates about regulation tend to polarise opinion around whether we have too much regulation. I do not believe that we have time today to stray into that territory except to emphasise that the work of the better regulation taskforce is to be commended. However, it has only begun to scratch the surface. Regulation will not go away, and the debate should be about its style, content and application, for example, whether it is full blooded, light touch, co-regulation, self-regulation, or the application of reserve powers, which will be more common in future.
Let us concentrate for a moment on the narrow definition. There has been tremendous change since the first regulators were established with British Telecom. They were set up to tackle incumbent monopoly, but today's economic landscape is totally different, and EU directives will make economic regulators examine issues such as market dominance. There are also arrangements for individual regulators in different countries to work together. In future, those regulators, working together, will have an impact on our lives outside normal Government and Council of Ministers decision making. We need to consider that.
Overall, the economy is doing well and that is likely to continue. However, there are several blockages in the micro-economy that have an impact on the quality of life; regulators make decisions that affect ordinary lives. Let 335 us consider the current controversy about Ofgem's proposals for pre-payment meters. The relaxation of regulatory controls anticipates a functioning, competitive market rather than responding to its emergence. Ofgem's primary role seems to be developing competition as a goal in itself rather than a means of protecting vulnerable groups.
The free market approach has been the Whitehall orthodoxy for some time. We do it automatically without thinking and assume that it is good rather than ascertaining the circumstances in which it is appropriate and those in which we should adopt a different approach. The renewables industry's current problems and its representations to the Chancellor to try to protect some of the combined heat and power companies in next week's Budget is a good example of that.
When we hit a problem, we find that we have devolved decision making to the independent regulator, but the responsibility does not leave the Government, who continue to pick up the flak without having the tools to deal with problems effectively. That applies in the case of the Rail Regulator, the Financial Services Authority in respect of Equitable Life, which was mentioned earlier today, and the lottery licensee, to give only three examples. The only remedy is primary legislation, and the Minister knows only too well that that is difficult to obtain.
I should like the Government to examine the assumption that an independent regulator is de facto a good idea. I accept the need for independence, and I do not argue for a return to day-to-day political interference. If people are to regain trust in governance, they must have faith in the information that they have been given. There must be strict rules and transparency. However, there are drawbacks and I want the Government to consider how we deal with them. If the appointments process is the only sanction, problems arise such as those that the Select Committee on Public Administration is currently considering.
The Government have rightly moved away from individual regulators to a more collegiate approach. The FSA and Ofcom are clear examples of that. For too long, we have had individual regulators, and Oftel under Don Cruickshank is a different beast from that body under Dave Edmonds. Ofgem under Callum McCarthy was different from Offer under Professor Fairchild or Ofgas under Clare Spottiswoode. I am not commenting on quality, but Ofgas was not prepared to examine environmental considerations under Clare Spottiswoode—that was her decision—whereas Offer under Professor Fairchild was prepared to do so. If we compare Ofsted with the prison inspectorate, it is apparent that the characters of the individual regulators led to the consequences that ensued. A board leads to less maverick interpretations and a more independent point of view.
Regulators in Europe operate in a clearer, more transparent framework. We have a tendency not to learn from other countries, and to think that because we started it we know best. However, central bank independence and the way we have run the economy show that we have learned lessons and benefited from them. The Government are to be commended for learning those lessons and applying them here.
336 Because there is an assumption that independent regulators are a good thing, the automatic answer is to have a regulator, but that assumption is not necessarily correct and I ask the Minister to accept that there is a need to challenge it.
There is a need for regulators to provide proper information, but the problem is that some of the information provided by the companies is commercial in confidence. The result is that regulators become very close to the companies. They become captured by the provider culture rather than looking at the matter from an end-user perspective. In fact, companies have actually poached staff from the regulators' office. The regulators are then much more dependent on the companies that they are supposed to be regulating. That is a serious issue that needs to be addressed.
The National Audit Office issued its "Pipes and Wires" report this week on how the utilities regulators have worked. They have been very good at achieving lower prices and improving efficiency, but that is the only measure of success. The report talks about what happens when the regulator gets it wrong. Ofwat was criticised in April 2000. The report says:Estimating an excessive return entails customers paying unnecessary costs while estimating too low a return may discourage investors from providing funds to regulated companies, thus potentially making it difficult for companies to meet their obligations".
The RPI minus X formula that regulators have used has worked quite well in the initial stages following a monopoly, but, as many companies have found, when they concentrate solely on efficiency savings, they hit the law of diminishing returns. The danger is that we are at the point where we may be hitting the law of diminishing returns for this particular price control mechanism. The issue of long-term investment is highlighted by the debate over broadband and the contrast between Germany and the United Kingdom. That is one of the reasons why we are in danger of missing the boat.
The creation of the Office of Public Services Reform is a major step forward. It has a role to play in reviewing the interaction between the regulators and the Government.
One of the ways in which the Government have sought to counter this provider-centric approach, under the Utilities Act 2000, was to make customers Ofgem's primary focus. Ofwat and Oftel still have customer focus as a secondary objective, and that remains a concern. For a number of the other public service regulators, customer focus is not even on the agenda.
While regulators focus on the economic side, they are making value judgments. Under the Utilities Act, the Government gave themselves a reserve power to require cross-subsidy if they concluded that the benefits of competition were not being shared by all consumers. As the Energywatch campaign on pre-payment meters shows, low-income customers are not getting the benefits of the existing regime and, as the Minister for Industry and Energy has pointed out, would lose out under the removal of price controls. Can the Under-Secretary tell us the circumstances in which she would use those reserve powers? It seems to me that the present circumstances represent the kind of fallback situation for which the Utilities Act was designed.
337 If the independence of regulators means that the Government's only powers are to talk to the regulator or the nuclear option of replacement, what is there to ensure that regulators help to achieve the Government's objectives, or at least do not frustrate them? That is a real problem. I tabled a number of amendments during the proceedings on the Utilities Act to help the renewables system. At the time, the Government said that they would provide guidance on environmental and social objectives to the regulators. That guidance has not been forthcoming. I am a believer in the cock-up theory of life, rather than the conspiracy theory, so I am sure that there is a very good reason for that. However, if the Government were to issue the guidance now—I would be interested to know when they are likely to do so—how would it affect the way of working that Ofgem has already set in stone? If it does not properly take effect, there will be very little point in issuing it, but proper guidance will have implications for other regulators and their relationship with the Government.
I have concentrated on independence because I do not believe that we have thought through the issues. I believe that a regulator is not only about regulation but about the monitoring and provision of information, and should be a catalyst to change. It is also an adviser to the Government and should undertake its work in the context of modernising government and achieving better regulation initiatives.
It has often been proposed that, because we have a number of regulators, they should be merged into one, but I do not think that that is necessarily the best way forward. One problem is that our small companies, niche players and market entrants often do not get a look in, as the regulators tend to talk to the larger companies that have specialist staff for that purpose. We also get into a game in which the competitors automatically complain and the dominant players automatically appeal against any decision. In today's economy, speed of decision making is vital. In respect of new technologies, it is even more important. I am concerned that the RPI minus X formula needs to be reviewed if we are to move our regulators forward.
I firmly believe that regulators need to move to a much more coherent and transparent framework. They need to be providers of impartial and understandable information, and to have a complete range of sanctions that are more coherent than the individual sanctions that some of them currently use. They need to be seen to reduce costs, or at least not to add to regulatory burdens. We need also to redefine the relationship between Government and regulator, and the relationship with service users and the industry. In other words, we should consider the nature of decision making. We need a mixture of roles to ensure that staff are not tied to the provider culture that I mentioned earlier and are sufficient to tackle the end-user focuses.
There are plenty of examples of good practice, including the work of the Environment Agency and the Audit Commission, but we have also had problems with regulation. Too often, we have designed complicated routines that seek to cover the whole area, rather than tried to identify risk and apply a light touch. Everybody says that we need light-touch regulation, but we very rarely achieve it. We need quicker decision making with shorter 338 appeal mechanisms and regulators that have good knowledge and a clear focus on the key issues, and are not involved in turf wars.
In conclusion, there has been an assumption that the creation of independent regulators is a good thing in its own right. It is now time for us to switch from that producer mentality to a focus on the end user. The question is not how we tackle company X, but what is done for the citizen. Times have changed and regulators need to move on. What was right in the past is not necessarily right now. The Michael Lyons/Ian Byatt study for the Treasury is a very useful step forward, as is the NAO report. With the imminent publication of the Communications Bill, now is the right time for the Government to step back and consider the whole regulatory environment, what has worked in the past and the challenges for the future. I do not expect an immediate reply from my hon. Friend the Under-Secretary, but I hope she will accept that there is an issue that the Government need to consider.
§ The Parliamentary Under-Secretary of State for Trade and Industry (Miss Melanie Johnson)
I congratulate my hon. Friend the Member for Milton Keynes, North-East (Brian White) on securing this debate and on managing to find a title that met the needs of the House. He raised a number of issues covering a wide range of bodies. I may disappoint him to some extent, as I shall obviously need to focus on some of those bodies. As a Minister in the Department of Trade and Industry, it has struck me that I might focus on the regulatory bodies that relate to my Department and especially the utility regulators, which are at the heart of his concerns. He will appreciate that I cannot cover the wide-ranging brief with which he dealt.
I take my hon. Friend's point that different regulators are set up in different ways, but there is a reason for that. It is understandable, given that different sectors have different characteristics and policy objectives. Neither I nor the Government believe in a one-size-fits-all model.
One of my hon. Friend's principal questions was whether the current regulatory structure is correct—in particular, is it right to have independent regulators at arm's length from the Government, and is it right to give them so much freedom and discretion? Those are important issues, but they are not new, as my hon. Friend would agree. They were considered as part of the work that was done in preparation for the Utilities Act 2000, which he knows well from having served on the Committee that considered the Bill.
The Government launched a review of utility regulation on coming to power in 1997. That was a major exercise involving substantial analysis and consultations with a wide range of stakeholders. It dealt with the role of the regulators and endorsed the existing framework, as did the Government's Green Paper, "A Fair Deal for Consumers Modernising the Framework for Utility Regulation", which explicitly considered the role of regulators. It stated:The regulatory regimes for the utility sectors, established at the time of privatisation were built on the principle that economic regulation must be conducted on an arms-length basis by independent regulators. We endorse this. Within the framework set by Ministers it is vital that regulators should be given the independence and discretion necessary to make economic decisions, for example on price reviews.339 On Wednesday this week, the Second Reading of the Enterprise Bill provided more evidence that the Government are taking the right steps to put regulators on a fully independent basis in relation to competition regulation.
A structure with independent regulators at arm's length from the Government helps to reduce regulatory risk and to provide a stable climate for investment. That is vitally important, because these sectors are characterised by extensive physical networks and are highly capital-intensive. Let me illustrate that with some figures from the National Audit Office's report "Pipes and Wires", which was published this week—my hon. Friend has already referred to it. That report sees the regulatory framework as a great success story. It says that the electricity transmission and distribution assets in England and Wales are valued at £16.5 billion and that the combined value of the 23 water and sewerage companies in England and Wales is £30 billion. A significant proportion of the ongoing costs of running such businesses is based on the financing costs for the assets. The greater the certainty about the regulatory system, the less expensive the financing costs. The end result is that regulatory certainty feeds through into lower bills to customers.
The regulatory system for these industries has already delivered significant benefits to customers in the form of price reductions as well as improved services. Regulatory independence is a vital part of the system.
§ Brian White
The regulatory system protects and works well for existing companies, but new market entrants and very small players lose out. Have the Government considered that, as well as the totality of the regulatory regime, which is right in principle?
§ Miss Johnson
It is difficult to generalise across such a wide area, but all the issues are kept under review. The way in which the system is working is constantly monitored in any given sector, but, as I said, they are all different and have different characteristics. Different issues may arise even in capital-intensive areas such as the main utilities. As for new entrants coming into the markets, the competition authorities must also help to ensure that that is always possible.
As well as paying the financing costs of previous investments, companies must be able to access capital in order to make new investments. There has been significant investment in the industries since they were privatised. For example, according to the National Audit Office, more than £31 billion has gone into the gas and electricity industries, more than £50 billion into water, and similar amounts into telecommunications. These figures compare very favourably to the investment in the decades before privatisation. Further investment is still required as we go forward. The regulatory certainty provided by having independent regulators gives investors the confidence to provide money for vital investment in these industries.
Giving regulators independence is not about giving them carte blanche to do things however they please. The fundamental principle is that Government set out an overall regulatory framework through legislation. This sets out the overall parameters by which regulators are to operate, constraining their discretion. Regulators must 340 carry out their responsibilities according to a set of objectives or statutory duties. Having set this overall framework, Ministers can then rightly take a step back, removing politicians from day-to-day decision making, thus giving business greater confidence.
None the less, Government remain responsible for the framework as a whole and will still take an active interest in whether the system is operating properly. Frameworks evolve over time, following the appropriate consultation and parliamentary process. They are not set in stone for ever. As my hon. Friend has said, we have moved on from the model of a one-person regulator to regulatory boards. This helps give greater predictability to decision making and reduces the risk of significant policy shifts when the head of an organisation changes.
I shall take up some of the specific points that my hon. Friend raised. He referred to social and environmental guidance. I am pleased that he believes that the delay in issuing guidance is for justifiable reason. The Department has consulted on drafts of the guidance and is now considering the matter afresh in the light of the energy review report that was published on 14 February by the performance and innovation unit, which has implications for the guidance.
We have made it clear that that is not the method for implementing social and environmental policies, which would have significant financial implications. Where such implications are at stake, the Government need to take forward such policies by introducing appropriate legislation. Examples of this would be the vulnerable groups regulation in the water industry, the requirement to provide free postal services for the blind or partially sighted, or the renewables obligation in electricity.
My hon. Friend is clearly interested in renewables, so I shall say more about the subject in response to his remarks. As an example, the renewables obligation is the Government's single most important measure to develop the increased uptake of renewables electricity. We have set a target of 10 per cent. renewables electricity by 2010, and from 1 April licensed electricity suppliers are required to provide an increasing proportion of their supplies from renewable sources.
Ofgem is administering this arrangement for us. It is accrediting generating stations to ensure that they meet the eligibility criteria of obligation, issuing renewables obligation certificates, or ROCs, for renewable electricity actually supplied and assessing and monitoring suppliers' compliance with the obligation.
Ofgem will also recycle to electricity suppliers the buy-out payments that can be made by suppliers, in proportion to the number of ROCs that each supplier has presented compared to the number presented overall. Ofgem has also played a key role in working with the Department on the drafting of the necessary legislation to introduce the renewables obligation. That illustrates that a regulator can be involved in taking forward Government environmental policies, playing an invaluable role in helping the UK reduce its greenhouse gas emissions through the greater use of renewable energy.
My hon. Friend referred to RPI-X, and that is shorthand. The system of price regulation that regulators use now has been developed significantly from the formulas that were used at the outset of privatisation. I am sure that my hon. Friend would recognise that fact. The NAO is much aware that some observers claim that 341 RPI-X is no longer appropriate. However, its report notes how regulators are already working to address risks in the system, and they suggest further improvements. The National Audit Office is certainly not advocating abandoning the system, which has served us well so far and delivered significant investment as well as price cuts.
I turn to another point that my hon. Friend raised, which is the question of cross-subsidy powers in the Utilities Act 2000. For me to access the powers to require suppliers to adjust charges where particular groups of consumers are treated less favourably than others under sections 68 and 98 of the Act, there must be evidence of disadvantage. Ofgem's position is that pre-payment meter customers will not be penalised by increased prices as a result of the removal of price caps.
There is no evidence that the position of pre-payment customers in relation to standard credit customers and that of standard credit customers in relation to direct debit customers has worsened. Indeed, I am pleased to say that during 2001 it marginally improved. If pre-payment meter customers are not disadvantaged within the meaning of the cross-subsidy regulations, I would have no basis for accessing those provisions. Like Ofgem, we monitor developments in the market, but I stress that the cross-subsidy provisions are very much reserve powers.
It is interesting that my hon. Friend thinks that we need to address the problems caused by the independence of regulators. Certainly not everyone shares that view. Last year, the better regulation taskforce published a report on economic regulation which looked at that issue. The taskforce found that some stakeholders felt that Government needed to do more to underpin the independence of the regulators. My hon. Friend raises his points for understandable reasons. The Government have objectives in these industries, and it is important to look at how best to achieve them.
I pick up my hon. Friend's point about assessing risk and ensuring that regulation has as light a touch as possible. I confirm that it is the Government's view that risk is a relevant issue in all areas where regulation is proposed. It is certainly the Government's view that regulators need to ensure that the touch that they apply in 342 order to achieve competition and level playing fields is as light as possible—indeed, that is implemented by regulators.
When I was a Treasury Minister, the Financial Services Authority was set up with exactly those parameters at the heart of the way it works. It has been operating under those since it became a fully fledged body at the end of last year.
I firmly believe in the need for independent regulators to give us a predictable and stable framework. That is not to say that regulation should not be mindful of the wider context in which regulatory decisions take place. The Ofgem social action plan and environmental action plan are examples of initiatives taken by the Gas and Electricity Markets Authority to consult on and establish its own work plan in areas that reflect the contemporary needs of society. That complements the guidance that will be given by Government on their social and environmental objectives.
However, Parliament has given only very specific powers to the sectoral regulators, and specific objectives to tackle a defined area of work. The sectoral regulators are neither equipped nor intended to develop and implement policy on their own behalf on issues, however important, which touch on the regulated utility sectors.
There is a clear need for Government, as well as the sectoral regulators, closely to monitor developments in the markets. There are important initiatives on which it is right that Government should work closely with the sectoral regulators and with the industries to bring changes to the utility market frameworks. As we have shown, it is right that Government should take the opportunity to address the need for change in legislation where that is necessary but the role of Government in markets should be guided by the need for transparency and a self-denying ordnance to avoid short-term reaction to what may be symptoms of longer-term problems with the market framework.
I believe that the utilities review—
§ The motion having been made after half-past Two o'clock, and the debate having continued for half an hour, MADAM DEPUTY SPEAKER adjourned the House without Question put, pursuant to the Standing Order.
§ Adjourned at two minutes past Three o'clock.