In need of reform?

At our event we asked a panel of eminent speakers (Jon Stern, Chris Bolt, Regina Finn and Stephen Littlechild) to reflect on four themes:

• the competence of current regulatory arrangements to facilitate investment in infrastructure
• mounting tensions between politicians and independent regulators
• growing scepticism about the role of competition in the governance of infrastructure
• the risk of ‘capture’ of regulators by provider companies.

The discussion generated some interesting insights, together with a good deal of agreement among the panellists. The original conjecture that underpinned privatisation and regulation of some industries – that, with time, regulation would wither away and be replaced by competition – looks increasingly implausible. On the contrary, regulators look set to become a near-permanent fixture of the institutional landscape around infrastructure. Yet, all the panellists took the view that considerations of political economy (the interplay between politics and regulation) are likely to become more important in the future. The complexities of competition and technological developments that we face today – and will continue to face – pose challenges that are very different from those of the past. Governments cannot and will not abdicate responsibility for the performance of regulated industries; they will want to have some degree of supervision over what they do, insofar as it relates to policy objectives. Transparency in the relationship between politics and regulation was one of the most salient words heard at the seminar. Regulation will always be necessary, as multiple political objectives cannot be managed through a single policy instrument (a price cap, for example). Regulation operates in the context of policy objectives that are publicly specified and privately delivered. Since there is no clear-cut boundary between policy and implementation, there is a clear need for constant dialogue between regulators and politicians. It is critical to ensure that this dialogue takes place in a transparent manner, rather than behind closed doors, with arms perhaps being twisted. That is one of the fundamental challenges for economic regulators: to preserve independence while working within politically charged environments. Regulatory independence is not tainted by discussion or consultation with government; rather it is enhanced, through greater knowledge of the concerns of those elected to represent the public. Regulatory ‘capture’ was one of the other themes that took centre stage in the discussion. Not so much capture of individuals which, according to the panellists, is not much of a problem in UK regulation, but other, subtler forms that nevertheless need to be guarded against. One example relates to the asymmetry between the strong engagement that industries typically have with regulators (“a very loud voice”, according to Regina Finn), and the comparatively little input received from consumers. Another example is regulatory ‘self-capture’, where regulators made up of well-meaning individuals adopting conservative and incremental approaches to their activities are led to sub-optimal regulatory outcomes. ‘Political capture’ is another relevant case – the temptation for politicians to seek (perfectly legitimate) objectives through economic regulators in ways that compromise the regulators’ independence. Potential tools for mitigating these problems include: peer challenge between regulators; strengthening the consumer voice in regulatory decision-making (for example, negotiated settlements and costumer challenge groups); continuous disruptive change; and promoting 'self-awareness' among regulators. Economic regulation facilitated privatisation and competition, with significant economic benefits for consumers. But can we have too much of a good thing? Could regulators be expanding their remits in unproductive ways? Stephen Littlechild, one of the founding fathers of price cap regulation in the UK, thinks we are already living in a world of excessive regulation, and that there are powerful forces at play (some of them anchored in behavioural economics) that might aggravate the problem in the future. Stephen noted that when price regulation was first introduced in the electricity sector, it used to take about a year to set price controls: now it takes three to five years. This is seen by many as time-consuming, costly, complex and failing to provide appropriate incentives for companies to focus on consumers and develop good business plans. Shifting from price regulation to facilitating constructive engagement with consumers might be one way around this problem. The seminar also raised important questions about the (dis)advantages of having greater collaboration between regulators, or even a common approach (for example in the design of the components of the cost of capital). Whether or not this would be better than allowing regulators to experiment with different models as they search for the best possible deal for consumers is an open question, which should be the subject of comprehensive debate. The Institute for Government has a longstanding interest in the political economy around independent bodies and their relationship with ministers. This seminar is part of a series of events organised by the Institute for Government in partnership with the City of London Corporation. The events will bring together key figures from the private and public sectors, to discuss how far the structures and practices for economic regulation in the UK remain fit for purpose and what future reform might be needed. Watch this space.