On 7 January the UK’s Department for Business, Innovation and Skills published a ‘call for evidence’ relating to principles of economic regulation.
As those who have read my earlier post will know, in industries where network effects (or various economies such as scale) are present (such as telecoms) it is unlikely that an unregulated market will deliver the best outcome for consumers, so long term regulation is likely to be required.
The call for evidence seems to have been driven by last year’s change in government and the new administration’s desire to check that policy is on foundations that it sees as sound (bearing in mind the somewhat different political views on ‘soundness’ as between this government and the last).
The call identifies some issues with current practice:
1. uncertainty as to how regulators should balance conflicting duties – in particular between economic, social and environmental duties;
2. lack of clarity and communication generally, and in particular a lack of clarity:
(a) from Government to regulators on policy objectives;
(b) from regulators to regulated companies about outputs they are to deliver;
(c) from regulators to regulated companies around how long-term business planning feeds into price control; and
3. weak dialogue between regulators on a common approach to issues such as price control, competition and consumer affordability.
Principles proposed for comment
The call then sets out proposed principles for comment, which I have copied below:
- independent regulation needs to take place within a framework of duties and policies set by a democratically accountable Parliament and Government
- roles and responsibilities between Government and economic regulators should be allocated in such a way as to ensure that regulatory decisions are taken by the body that has the legitimacy, expertise and capability to arbitrate between the required trade-offs
- decision-making powers of regulators should be, within the constraints imposed by the need to preserve commercial confidentiality, exercised transparently and subject to appropriate scrutiny and challenge
- the framework of economic regulation should provide a stable and objective eenvironment enabling all those affected to anticipate the context for future decisions and to make long-term investment decisions with confidence
- the framework of economic regulation should not unreasonably unravel past decisions, and should allow efficient and necessary investments to receive a reasonable return, subject to the normal risks inherent in markets
- regulatory frameworks should form a logical part of the Government’s broader policy context, consistent with established priorities (vertical coherence)
- regulatory frameworks should enable cross-sector delivery of policy goals (horizontal coherence)
- the framework of economic regulation needs capacity to evolve to respond to changing circumstances and continue to be relevant and effective over time
- policy interventions must be proportionate and cost-effective while decision making should be timely, and robust
- economic regulators should have clearly defined, articulated and prioritised responsibilities focussed on outcomes rather than specified inputs or tools
- economic regulators’ duties should be concentrated on economic considerations (including protecting the interests of current and future consumers, ensuring the operation of well-functioning and contestable markets and constraining the exercise of market power of dominant companies)
- economic regulators should have adequate discretion to choose the tools that best achieve these outcomes
The watcher’s initial thoughts
At first read, these seem sensible and somewhat ‘motherhood and apple-pie’ (what is not to like?). However, a few thoughts occurred to me as I read:
Social and environmental impacts disregarded
There is a shift away from requiring regulators to consider the wider social or environmental impact of their decisions towards a narrower focus on the economic impact. Whilst this would be expected with the change from Labour to the Conservatives, it is perhaps less obvious that environmental concerns should be defocussed given the green credentials of the coalition. On a personal level, this seem right to me – provided that consideration of wider impact is picked up elsewhere within government.
Right of appeal
Somewhat surprisingly for those who have been following the Digital Economy Act and the proposals to make it harder to appeal Ofcom’s decisions, the principles seem to push in the opposite direction, enshrining a right of appeal. However, I am not sure there is a really a contradiction here as within telecoms the right to appeal is here to stay as a result of the European Regulatory Framework and the DEA changes are just making sure that the pendulum has not swung too far over so as to encourage the appeak of every decision.
Predictable returns on investment
I absolutely agree with the predictability principles, and would be rather worried if any economic regulators’ current practice were to diverge from the proposed principles. Within the telecoms sector where significant investment in fibre local access is yet to be made, these principles should help with decisions to invest in next generation access networks.
Comments are due by 18 February, so if you have an interest do get involved.