Businesses have until 16 September 2011 to respond to the DBIS
"discussion document" – Transforming Regulatory
Enforcement: Freeing up business growth. This document has received
surprisingly little coverage or commentary, despite the fact it was
published by DBIS on 24 June. Are utilities companies missing an
important opportunity to shape the future of regulatory
enforcement?
The discussion document is effectively a "pre-consultation
consultation" with the industry. It is an opportunity to
influence views before DBIS formulates its proposals. The
government has indicated that it will publish a white paper on the
future of regulation in the Autumn and that it is using this
preliminary period to gather views.
Procedural shortcomings will be particularly familiar to utilities
and energy companies that have been the subject of regulatory
enforcement proceedings. However, the focus of the debate which the
discussion document is intended to encourage is far too broad and
general to take into account the particular issues faced by
utilities. The examples given in the discussion document relating
to under-age and the red tape facing many businesses, particularly
SMEs, are clearly topics worthy of further debate in themselves,
but debate about the regulatory procedures adopted by the utilities
and competition regulators is also long overdue, and needs to be
focused on the key issues faced by the sector.
Given the numerous and conflicting challenges faced by utilities
companies and the regulators' self-professed focus on a
"risk-based" approach to regulation, it is all the more
important that regulators are clear about their expectations of
regulated companies and that procedures adopted for regulatory
investigations and enforcement proceedings are scrupulously fair.
There are basic standards of fairness and natural justice which
regulators must adhere to, but these can provide little comfort for
regulated utilities in the face of established procedures and the
limited nature of the grounds for challenge, and potential
remedies, available.
The discussion document focuses on three areas which regulated
utilities companies will agree are ripe for reform:
- Greater accountability;
- Recognising and promoting good practice; and
- Greater transparency.
The need for greater accountability
Regulators are generally under requirements to act
proportionately, transparently, consistently and to focus resources
where the need for intervention is greatest1. However,
while the Regulators Compliance Code2 places great
emphasis on regulators "helping and encouraging regulated
entities to understand and meet regulatory requirements more
easily" and "responding proportionately to regulatory
breaches" the duty on regulators is only to have regard to the
Code, and it is not applicable to "the exercise by the
regulator or its staff of any specified regulatory function in
individual cases" (paragraph 2.4).
As such, the Code does not amount to regulatory limits on the
powers of regulators. There are also inconsistent procedures
between regulators and differing powers of appeal, either to the
High Court or to the Competition Commission, for example.
Recognising and Promoting Good Practice
Regulators have in the past been quick to criticise utilities companies, in circumstances where clearer policy statements might have enabled companies to meet the regulators' expectations. The discussion document proposes that there should be a system of "earned recognition" where regulators take account of business' efforts to comply with regulations "and adjust their enforcement plans accordingly". This raises some practical issues as to how efforts would be objectively measured, and the circumstances in which regulators would recognise that efforts made to meet licence conditions were more meaningful than actual licence compliance.
The need for transparency
The discussion document talks generally about the importance of
improving the transparency of enforcement. Regulators are to be
encouraged to sign up to a common sets of standards with input from
trade associations, accreditation and professional bodies. There is
also a stated intention to strengthen the Regulators Compliance
Code, to provide for greater accountability for regulators and to
identify underperformance by regulators.
There is currently very little evidence of moderation of regulatory
responses as between regulated entities. This can be a particular
source of frustration, where at the level of individual entities it
is not possible to challenge on the basis of apparent inconsistent
application of standards, but there exists nonetheless an inherent
sense of unfairness which undermines basic principles of natural
justice. Similarly, there is a case for greater transparency of
communications between regulators, particularly where such
communication may lead to policy changes and greater consistency of
approach.
Suggestions for change
Suggestions to enhance transparency and accountability, together with consistency of approach across the utilities sector, would include the following (all would of course need to be the subject of cross-industry consultation prior to implementation):
- Publication of consistent procedures for opening, conducting
and reaching conclusions in relation to regulatory
investigations;
- Consistent approach to implementing procedures, and imposing
sanctions;
- Separation of the investigation team and regulatory
decision-makers, and transparency of communications between the
two;
- Recognition of steps taken by regulated utilities to meet
regulatory requirements;
- Clear and standardised guidelines on how mitigating
circumstances will be applied;
- Standardised approaches to the setting of financial
penalties;
- Consistent appeal procedures which provide for a
reconsideration of the merits of the case; and
- Clear guidelines on communication with regulated entities during investigations and the opportunity to meet with the subject of an investigation at an early stage.
Conclusion
Poor regulatory enforcement processes can act as a disincentive
to companies self-reporting problems and issues. It is clearly in
everyone's interests to seek to create a robust enforcement
environment in which regulated utilities can have confidence. The
discussion document poses a series of questions and invites
"full and frank reflections" while recognising that
"businesses can be wary of voicing views directly to
government, or of airing them with regulators". It suggests
that trade associations and other business membership organisations
may collate views to submit on behalf of their members. Eversheds
intends to submit representations in response to the discussion
document. Please let us know if you would like to review a copy of
our representations.
We also have experience of acting for regulated utilities in
disputes with regulators. Please contact us if you would like to
discuss any of the issues raised above further.
1 Principles of Good Regulation specified in section 21(2) of the Legislative and Regulatory Reform Act - regulatory activities should be carried out in a way which is transparent, accountable, proportionate and consistent; and that regulatory activities should be targeted only at cases in which action is needed. There are various requirements on particular regulators – eg section 4AA of the Gas Act 1986; section 3A of the Electricity Act 1989, section 2(4) of the Water Industry Act 1991.
2 Made under section 23 of the Legislative and Regulatory
Reform Act and published by what was then DBERR in December 2007.
Referenced in the discussion document and available to download here.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.