The regulator must go by the board

The power to constrain privatised utilities is too important to leave in a single pair of hands

Related Topics
Quis custodiet ipsos custodes? Juvenal's question would today surely apply not to the guards but to our new guardians: who will regulate the regulators?

The issue was given a twist this week when Northern Electric, one of the regional electricity suppliers, announced that it would give back £450m to its shareholders as part of its defence against a takeover bid from the construction and engineering group Trafalgar House. When companies find themselves subjected to a takeover bid they usually discover ways to boost their profits or reorganise their operations to the benefit of shareholders. But this sort of largesse is extremely unusual, and testimony to the extraordinary profitability of the regional electricity companies. The "recs", as they are called, are in the process of paying back money to shareholders by devices such as special dividends - payouts over and above the normal flow of funds the shareholders might expect.

Why are they so profitable? In a word, monopoly. Electricity is generated by several different power companies, so there is competition in that part of the chain. But the business of moving the electricity into our factories, offices and homes, through the national grid (which is what the regional companies own between them, and are all planning to sell) and the local distribution networks, is a natural monopoly. We cannot choose our supplier of electricity, for that depends on where we live.

It was because the market could not provide the usual commercial discipline that, when the public utilities were privatised, each was twinned with a regulator: Oftel for the phones, Ofgas for gas, Offer (the Office of Electricity Regulation) for electricity and so on. What no one knew was how these regulators should work, because we had no experience to go on. Nationalised monopolies had been formally regulated by parliament, through a minister who was notionally responsible for their activities. In practice such regulation was either non-existent or capricious - indeed one of the reasons why nationalised industries have failed as a form of corporate organisation is the difficulty of providing appropriate control.

So there was no model, no precedent, no template. Nor was their any foreign experience which could be drawn upon, for this country pioneered denationalisation. As a result our regulators had to learn on the job. They had to devise systems of controlling pricing which would allow the industries to be profitable enough to carry on their investment programmes, and provide adequate (or improved) quality of service, but not so profitable as to constitute an abuse of their monopoly power. More than this, they had to invent a whole new culture of regulation, working out what was expected of them and what would be going beyond their proper powers. Though they had duties under statute, much of the interpretation was left to one individual appointee, who inevitably sometimes made mistakes.

In the case of the "recs" the regulator, Professor Stephen Littlechild, made a mistake. His latest price formula, revealed last August and setting prices for the next five years, has clearly been too lax. There are two possible reactions to this. One is to call for the head of the regulator, and predictably there have been suggestions that Professor Littlechild should resign. The other is to ask whether we cannot refine our regulatory system so that it works demonstrably better. To do that we need to regulate the regulators.

There are two main regulatory failures. The first is the technical basis on which prices are controlled; the second the corporate governance of the regulatory body.

Typically prices are set by some formula. This may be a simple one: the retail price index plus or minus a figure. Or it may be complicated - Offer has drawn up an extraordinarily complex equation for the recs. But in either case it is rigid: once the formula is fixed, it is fixed, and in the case of electricity, for five years.

Yet surely there is a powerful case for allowing an annual adjustment to the pricing formula. Unfair on the companies? Not really. Many commercial firms have little idea of what prices the market will set for their products or their raw materials even a few weeks ahead. All that the regulator would be doing is to mimic a little more accurately the sort of conditions which the harsh competitive world would normally apply.

But a capricious regulator must not be able to impose frequent changes in an arbitrary fashion. The normal way western societies guard against individual arbitrariness is by splitting responsibility. To share responsibility among a board of regulators would reduce the danger of corruption - which mercifully we have avoided so far, but which is potentially enormous in any system where billions of pounds turn on the decision of a single individual. And it would increase the evident legitimacy of any decision.

Just how many people should be on the board, how they are appointed, how frequently they meet, how long they serve and so on are important details, but details none the less. The problem is the concept of the single individual regulator. It was not a bad first shot, more than a decade ago, when we had to invent a new type of body; and some (such as Oftel) have been a clear success. But we can now see a better way of ordering our affairs. The real lesson of the past week is not that Professor Littlechild should go; rather it is that all the regulators should go.

The wider point here is that quality of regulation is becoming one of the key determinants of competitive advantage between countries. As governments withdraw from direct involvement in producing goods and services they turn to regulation to ensure that the quality of service is maintained. But bad (or rather inefficient) regulation can be just as damaging to an economy as lack of regulation. The more successful we are in learning from the regulators that we have created, the more we can use them as a model to improve other services, public and private. This is a new game for government and will become an even more important one. We are not doing badly thus far, but we need to learn from our mistakes.

React Now

iJobs Job Widget
iJobs General

Business Analyst Consultant (Financial Services)

£60000 - £75000 per annum: Harrington Starr: Business Analyst Consultant (Fina...

Systems Administrator - Linux / Unix / Windows / TCP/IP / SAN

£60000 per annum: Harrington Starr: A leading provider in investment managemen...

AVS, JVS Openlink Endur Developer

£600 - £700 per day: Harrington Starr: AVS, JVS Openlink Endur Developer JVS, ...

E-Commerce Developer

£45000 - £60000 per annum + competitive: Progressive Recruitment: Exciting opp...

Day In a Page

Read Next

Letter from the Political Editor: Phone and data laws to be passed in haste

Andrew Grice
The first lesson of today is... don't treat women unequally?  

Yvette Cooper is right: The classroom is the best place to start teaching men about feminism

Chris Maume
A History of the First World War in 100 Moments: Peace without magnanimity - the summit in a railway siding that ended the fighting

A History of the First World War in 100 Moments

Peace without magnanimity - the summit in a railway siding that ended the fighting
Scottish independence: How the Commonwealth Games could swing the vote

Scottish independence: How the Commonwealth Games could swing the vote

In the final part of our series, Chris Green arrives in Glasgow - a host city struggling to keep the politics out of its celebration of sport
Out in the cold: A writer spends a night on the streets and hears the stories of the homeless

A writer spends a night on the streets

Rough sleepers - the homeless, the destitute and the drunk - exist in every city. Will Nicoll meets those whose luck has run out
Striking new stations, high-speed links and (whisper it) better services - the UK's railways are entering a new golden age

UK's railways are entering a new golden age

New stations are opening across the country and our railways appear to be entering an era not seen in Britain since the early 1950s
Conchita Wurst becomes a 'bride' on the Paris catwalk - and proves there is life after Eurovision

Conchita becomes a 'bride' on Paris catwalk

Alexander Fury salutes the Eurovision Song Contest winner's latest triumph
Pétanque World Championship in Marseilles hit by

Pétanque 'world cup' hit by death threats

This year's most acrimonious sporting event took place in France, not Brazil. How did pétanque get so passionate?
Whelks are healthy, versatile and sustainable - so why did we stop eating them in the UK?

Why did we stop eating whelks?

Whelks were the Victorian equivalent of the donor kebab and our stocks are abundant. So why do we now export them all to the Far East?
10 best women's sunglasses

In the shade: 10 best women's sunglasses

From luxury bespoke eyewear to fun festival sunnies, we round up the shades to be seen in this summer
Germany vs Argentina World Cup 2014: Lionel Messi? Javier Mascherano is key for Argentina...

World Cup final: Messi? Mascherano is key for Argentina...

No 10 is always centre of attention but Barça team-mate is just as crucial to finalists’ hopes
Siobhan-Marie O’Connor: Swimmer knows she needs Glasgow joy on road to Rio

Siobhan-Marie O’Connor: Swimmer needs Glasgow joy on road to Rio

18-year-old says this month’s Commonwealth Games are a key staging post in her career before time slips away
The true Gaza back-story that the Israelis aren’t telling this week

The true Gaza back-story that the Israelis aren’t telling this week

A future Palestine state will have no borders and be an enclave within Israel, surrounded on all sides by Israeli-held territory, says Robert Fisk
A History of the First World War in 100 Moments: The German people demand an end to the fighting

A History of the First World War in 100 Moments

The German people demand an end to the fighting
New play by Oscar Wilde's grandson reveals what the Irish wit said at his trials

New play reveals what Oscar Wilde said at trials

For a century, what Wilde actually said at his trials was a mystery. But the recent discovery of shorthand notes changed that. Now his grandson Merlin Holland has turned them into a play
Can scientists save the world's sea life from

Can scientists save our sea life?

By the end of the century, the only living things left in our oceans could be plankton and jellyfish. Alex Renton meets the scientists who are trying to turn the tide
Richard III, Trafalgar Studios, review: Martin Freeman gives highly intelligent performance

Richard III review

Martin Freeman’s psychotic monarch is big on mockery but wanting in malice