Gestión administrativa

A new approach to regulation of the kind referred to in part 1.1 of this chapter, when directed to the achievement of the regulatory goals to be described in part 1.10 below, incorporates a number of aspects which will be considered in the course of the thesis. These can be summarised as follows:

• a requirement to adopt and follow open and transparent procedures involving full consultation and the issuing of reasoned decisions on regulatory issues;

• the need for a clear legislative mandate for regulatory action in which matters of policy, such as the comparative weight to be accorded to differing regulatory goals, are clearly expressed for the guidance of the regulator;

• the provision of sufficiently flexible regulatory powers allowing regulators the opportunity of developing a regulatory regime involving an optimal mix between the use of rules and discretion while preserving fairness and accountability;

• adequate powers of regulatory enforcement, particularly in areas where existing competition law restraints may be inadequate, such as in relation to predatory or anti-competitive market practices;

• an appropriate regime of judicial review, together with a possible right of appeal on the merits, which provides for adequate redress on the part of persons affected by an irregular regulatory decision while recognising and according reasonable deference to decisions reached by an expert regulatory body within the terms of its expertise;

• structured procedures, which are independent of the regulator and which are adequately funded and resourced, allowing for effective participation by third party interests, such as consumer groups, in the process of regulatory decision making;

• the use of innovative procedures in the resolution of regulatory issues and disputes, such as consensual procedures involving negotiation and bargaining.

and alternatives to full trial procedures such as mediation, arbitration and ADR processes;

an institutional framework which allows regulatory bodies to pursue the objectives of an ideal regulatory regime in the context of the foregoing factors;

• a system of public and administrative law which encourages regulatory action along the above lines while at the same time providing an effective check on regulatory procedures.

Many of the above points raise issues which remain quite controversial, not only in Britain but also in the US and elsewhere. To take just a few examples:

• is a broad regulatory discretion ever compatible with concepts of accountability and the legitimate rights of regulated firms?;

• can wide consultation requirements be reconciled with the goals of regulatory efficiency and effectiveness?;

• is legislation which prescribes the comparative weight to be given to regulatory objectives inconsistent with the goal of regulatory autonomy?;

• is an expansive approach to judicial review or a right of appeal on the merits, which can lead to the views of a judge or a less specialised appellate body being substituted for those of an expert regulator, ever justifiable?;

• does the need for verification of the accuracy of information on which regulatory decisions are based outweigh the possible cost and complexity of trial type procedures?;

should regulatory enforcement be primarily based on stringent sanctions or on moral persuasion and education?;

should broad areas of economic regulation be subject to the discretion of a single regulatory commission?

Many of these questions cannot be adequately answered in the abstract but need to be addressed in the context of a specific regulatory situation. The empirical research

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and case studies contained in the following chapters will illustrate how these issues arise and the ways in which they can be resolved.

1.6 A Brief Historical Perspective

The need for an innovative approach to economic regulation can be illustrated by the history of attempts to regulate in the economic area. This is a subject which will be examined in more detail in chapter 2, but which merits some brief discussion here.

Economic regulation in Britain has had a longstanding pedigree, extending back at least as far as Tudor and Stuart times. For several hundred years, up until the 19th centuiy, state regulatory activity focused on the use of specific legislative prohibitions and controls on particular practices, with delegated legislation gradually increasing in significance over this period. The control of certain kinds of monopoly power came increasingly to be the subject of legislative and judicial attention. The common law developed its own techniques of control in this area at an early stage, with attempts from the 17th century onwards to define the responsibilities of those operating businesses with a public interest element. These initiatives, leading to the formulation of principles such as the requirement to provide universal service at a reasonable price, laid the foundation for the regulation of public utilities in modem times.

The Victorian era witnessed increased government involvement in a number of areas of economic and social life. An age of increasing industrialisation gave rise to unique challenges. Technical innovations such as the supply of piped gas and water, railways and later the provision of electricity and telephone services gave rise to a corresponding need for regulatory control.

In the area of social regulation, early attempts were made to relieve the plight of the poor through the introduction of comprehensive poor law legislation, administered through a commission stmcture. In other areas of social policy, such as child labour, education and industrial and mining safety, remedial legislation brought about considerable improvements. One of the apparent paradoxes of the Victorian era is the fact that these initiatives were pursued during an age which is often regarded as

representing the epitome of laissez faire, or lack of government interventionism, an issue which will be explored further in the next chapter.

The processes of economic regulation continued to be refined during the present century. The period between the wars witnessed a new phenomenon, the emerging public corporation, with early examples being provided by the BBC, the London Passenger Transport Board and the Central Electricity Board. This structure was envisaged by its designer, Herbert Morrison, as combining the pursuit of commercial objectives with public interest considerations.

After the Second World War an era of nationalisation began, which lasted for the next 40 years. Regulation by government ownership and control of major industries in Britain became the predominant model. However, contrary to what might perhaps have been expected, this approach did not succeed in solving various regulatory problems. Particular difficulties persisted in areas such as opeimess and accountability, efficiency and regard for the consumer interest. Finally, the trend towards privatisation in the mid 1980s brought with it a need for new approaches involving external regulatory bodies.

These developments were broadly paralleled in the case of other Commonwealth jurisdictions, such as Canada, Australia and New Zealand. In each of these countries early attempts at economic regulation, particularly in areas such as public utilities and railways, were followed in the present century by a period of reliance on public ownership as a regulatory model, to be succeeded more recently by a move to privatised ownership. Regulatory methods in these jurisdictions will be referred to in the course of the thesis where appropriate.

In the United States, events took a different course at an early stage. During the first half of the 19th century economic regulation largely took place at the state or municipal level, with localised ownership of utility companies being the norm for much of this period. Rapid industrial development and the increasing concentration of market power in the period following the Civil War led to federal legislative activity, particularly in the commerce and antitrust areas, with the passing of the Interstate Commerce Act in 1887 (which established the Interstate Commerce Commission, or ICC) and the Sherman Act in 1890.

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After this, the so-called independent regulatory agencies gradually came into being, a process which received renewed impetus during the New Deal period of the 1930s. This was matched by the introduction of state public utility commissions, beginning with New York and Massachusetts in 1907, and followed quickly by the other states. The passing of the Administrative Procedure Act by Congress in 1946 ushered in a new era of regulatory intervention. Under this Act the US federal regulatory agencies were given a statutory fi’amework in which to undertake rule making and adjudication and regulatory decisions could be subjected to judicial review on various, specific grounds.

During the 1950s concerns began to surface that the US regulatory agencies were too closely identified with the interests of the regulated industries that they were supposed to be controlling, to such an extent as to give rise to the phenomenon known as regulatory capture. The validity of this and other theories of regulatory agency behaviour will be discussed in subsequent chapters. However, it now seems fair to say that these early theories were insufficiently refined to explain adequately the complexities of the regulatory process, particularly in more recent years. In the 1960s and 1970s a new wave of regulatory activity, the so-called "new regulation", occurred in areas as diverse as environmental protection, occupational health and safety and equal opportunities, giving rise to several new regulatory agencies and a great deal of fresh activity in this area.

An era of deregulation in the 1980s led to some traditional areas of US regulation diminishing in importance while others continued on largely unaffected. Increasing disquiet about the perceived financial burden of new regulatory initiatives resulted in cost/benefit considerations being applied to proposed agency actions. Contemporary concerns about the US regulatory process have focused on the adequacy of agency procedures, particularly in areas such as rule making (which is allegedly undergoing a period of ossification), public regulatory hearings (thought to be accompanied by undue cost and complexity), and the problems which are said to arise from extensive, or excessive, use of the process of judicial review in relation to agency decisions. This debate has been accompanied by an examination of new regulatory techniques, particularly involving the use of negotiated and consensual procedures in relation to

agency rule making, and various forms of ADR and mediation in the adjudicative area.

This long experience with economic regulation by external agencies in the United States is of particular relevance in the UK context. The privatisation movement of the 1980s in Britain gave rise to the need for external regulation in the public interest, of the kind which had long been a feature of US practice. While there are differing legislative and constitutional arrangements in force in the United States, much US experience in this area is of direct relevance to the UK position and will be the subject of extensive reference in the chapters which follow. The approach adopted in the US APA, for example, has certain discernible advantages and the possible application of similar techniques will be examined further in the UK context, along with more recent US experience in the use of innovative regulatory methods.

1.7 Economic v Social Regulation?

When discussing the context of UK regulation some mention should be made of the relationship between economic and social regulation. Although some commentators endeavour to distinguish between these areas of r e g u l a t i o n , ^^0 the drawing of such a distinction may prove to be difficult in practice. In the US, the "new regulation" of the 1960s and 1970s was directed both at securing economic efficiency and also promoting various social goals, as will be discussed in chapter 6. Such wide-ranging regulatory activity clearly has a direct economic impact, both in terms of the costs of compliance and also because of its effect on business and investment decisions.

This is no less true in Britain. Social regulation in areas such as consumer protection, product safety standards, occupational health and safety regimes and control of

100. For an example o f this approach see Foster, supra note 58, chapter 9, entitled "The Dangers o f Mixing Social with Economic Regulation."

101. See for example Schuck, "Book Review o f James Q. Wilson (ed). The Politics o f Regulation" (1981) 90 Yale LJ 702 at p 710, where the author notes: "This is not to deny that social regulation often generates benefits: doubtless it does, although available data do not establish conclusively or even persuasively that benefits always exceed costs. The point here is that those costs are no less problematic simply because the regulation is social rather than economic. If anything, the contrary is true."

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environmental pollution all have clear economic i m p l i c a t i o n s . The costs of compliance must be factored in to the overall costs of doing business in these areas. Regulatory costs also influence commercial decisions in areas such as investment, capital expenditure and market entry.

Regulatory experience in Britain reveals a number of areas of economic regulation in which considerations of social policy also play a significant part. These include the activities of the regulators of the privatised utilities and the Rail Regulator, who are required to have regard to the interest of customers and consumers when making regulatory decisions, the role of the Civil Aviation Authority, both in relation to air transport licensing and safety matters, and the involvement of the Independent Television Commission in allocating television licences while also being responsible for regulating programme content and standards.

This thesis focuses primarily on regulation of economic affairs but recognises that the attainment of desirable social objectives is often inseparable from this analysis. Where such considerations arise they will be dealt with in the course of the succeeding chapters.

1.8 The Existing Model of UK Economic Regulation

As the above discussion has indicated, the need for extensive external economic regulation in the United Kingdom was not a major issue until the move to privatised ownership during the 1980s. Until then externally imposed regulatory intervention was sporadic and limited in its scope, being restricted to areas such as civil aviation and radio and television broadcasting. Other major areas of industrial activity were subject to direct government ownership and control under the then prevailing system of nationalised ownership.

102. For a general discussion of these and other areas of social regulation see Ogus, supra note 1, chapters 7-12.

103. See the discussion in part 7.6.1 (ii) o f chapter 7. 104. See the discussion in part 7.6.2(i) o f chapter 7.

A proper appreciation of the nature of the regulatory regimes introduced during the 1980s in Britain requires some understanding of the factors underlying the privatisation process. These will be the subject of more detailed analysis in subsequent chapters. However, it is important for present purposes to realise that the political and economic agenda behind privatisation exerted a central influence on the design of the accompanying regulatory institutions. Government economic policy dictated that the privatisations should be successful and should provide a means of raising revenue to defray the public borrowing requirements of the state, while, so the theory went, simultaneously giving rise to efficiency gains in the enterprises themselves.

Political considerations required that shares in the privatised industries should be available to a broadly based, share-owning public, which would find them attractive as an equity investment. This in turn required a more or less guaranteed return, to be achieved by preserving largely intact the existing natural monopoly structure which had been a feature of these industries during the era of nationalisation. At the same time privatisation would conceivably reduce the power of organised labour, as well as making the newly privatised firms more responsive to market conditions.

The fulfilment of these conditions dictated the introduction of a regulatory regime which would not seek to assert the supremacy of other values, such as consumer protection, above the interests of shareholders and their anticipated return on investment. Regulation had to be as unintrusive as possible. While it was acknowledged that privatised entities such as British Gas and British Telecom, which were permitted to retain their pre-existing positions of market dominance, had to be subject to some form of regulatory control, particularly in relation to pricing, this was viewed as a necessary evil rather than as a potential benefit.

This philosophy was reflected in the design of the regulatory institutions themselves. These were hastily conceived, almost as an afterthought, and the resulting regulatory regime suffered from various difficulties of design. A system which in jurisdictions such as the United States had taken over a century to refine was put in place without much, if any, consideration of regulatory experience elsewhere. The individual

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regulators were given a broad discretion on pricing issues but accompanying powers seen as necessary as a result of long experience in jurisdictions such as the United States were noticeably absent.

Thus the regulators had no independent means of assessing the accuracy or completeness of financial information provided by the regulated companies (a task accomplished in the US by means of a fully fledged adversarial hearing procedure) and the sanctions for supplying inaccurate or misleading information to the regulator were derisory in comparison with US practice. Individual industry regulators had no general rule making powers and the empowering statutes gave them little guidance on policy matters, either in relation to the particular industry or on a sectoral basis. The comparative weight to be given to various regulatory goals was largely unspecified. Powers of enforcement were generally limited and the general competition law provided little assistance in this area. Mechanisms for involving consumers or other third parties in the regulatory process were of doubtful effectiveness. Many of these criticisms continue to apply as cogently in 1997 as they did ten years ago.

With the move towards greater industry competition, especially in telecommunications, electricity and gas, the focus of regulatory concern has broadened to include measures necessary to address structural problems in the market. Anti-competitive practices by dominant operators have become a focus of regulatory interest, especially in relation to telecommunications and gas. Such concerns have been particularly cogent in areas such as interconnection (allowing competitors access to the existing industry transmission or distribution network) and accounting separation (the provision of accounting rules designed to ensure that dominant firms cannot structure their business so as to subsidise prices in certain areas of competitive activity, thus creating artificial barriers to market entiy).

Bodies such as OFTEL have perceived a need to become active in the enforcement area in relation to such practices. This in turn has required adequate powers of