Some Benchmarks for Assessing Regulatory Performance

1.10.1 The Objectives of an Improved Regime of Economic Regulation

In considering issues of regulatory design, some consideration needs to be given to the objectives that are desirable in an ideal system of economic r e g u l a t i o n . *^9 These are set out as follows, not necessarily in any particular order of importance:

137. For a discussion o f these grounds see Swann, supra note 5, pp 10-11; Ogus, supra note 1, pp 41-46; Breyer, supra note 68, pp 32-34; Breyer and Stewart, supra note 40, pp 9-11.

138. See Helm, British Utility Regulation: Principles, Experience and Reform, supra note 57, pp 156-161.

139. In listing the objectives in this part o f the chapter I have had regard to the five criteria for the assessment o f the legitimacy of agency action set out in Baldwin and McCrudden, supra note

16, chapter 3 at p 33, where the authors observe: "When there is talk o f this or that agency action being legitimate or illegitimate, in the sense that certain values are satisfied or left unsatisfied by agency action, reference appears to be being made to one or more o f five key criteria: Is it supported by legislative authority? Is it otherwise accountable? Does it carry out its tasks with due process? Is the body expert? Is it efficient?" I have also considered the criteria set out in Foster, supra note 58 at p 417.

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• Certainty - An ideal regulatory regime must, as far as possible, deliver an assured result in any particular context. Such a goal is necessary in the area of economic regulation in order to facilitate forward planning by regulated entities and to achieve the degree of predictability required for the conduct of business and the making of investment decisions. In practice the attainment of this objective requires either a clear legislative mandate to the regulatory body in question or sufficiently specific rules or guidelines for that body to follow. The grant of wide discretionary powers to a regulator without accompanying guidelines for their exercise may not be compatible with this goal.

• Accessibility - The ideal regulatory regime must be open and transparent and must encourage and facilitate participation by interested parties. It needs to ensure the provision of adequate information to interested parties on the regulatory issue to be determined and to provide a suitably structured process to enable meaningful participation to occur, either by way of known consultation procedures or similar mechanisms. Such interested parties need not be only the regulated interests themselves or members of the regulated industiy but might also be other third party interest groups such as consumer organisations. 141 The balance to be struck here is not an easy one to define. On the one hand the procedures employed must not be so exhaustive so as to cause the regulatory process to become bogged down irretrievably or to

140. For a further discussion o f the objective o f certainty see Noll, "Government Regulatory Behaviour" in Noll (ed), supra note 4, at p 22: "Solutions [to the problem o f regulatory failure] include: ... clear legislative mandates that are regularly reviewed... ". See also Cranston, "Regulation and Deregulation: General Issues" (1982) 5 UNSWLJ 1 at 11: "Regulation is only as strong as its legislative mandate however well-endowed with resources and dedicated to legislative purpose a regulatory agency might be or however compliant those being regulated... Many instances o f 'regulatory failure' are in fact a failure to achieve a legislative mandate which, despite popular perceptions, a regulatory agency was never given." Foster, supra note 58, at p 417 describes this requirement in terms o f the need for "definitions o f regulatory offences which enable regulators to concentrate on the critical economic issues".

141. Foster, supra note 58, at p 417 postulates the need to provide "enough information ... on a routine basis to enable the Regulator to do his job without protracted, inconclusive wrangles over data" and the need to provide "procedures that conform to natural justice without being legalistic."

undermine the independent expertise of the regulatory body c o n c e r n e d . ^^2 On the other hand the procedures need to be sufficiently effective to ensure the attainment of this goal.

Effectiveness - A system of regulation must be effective in achieving its objectives. This requirement differs from that of efficiency, set out below, in that the latter requirement implies considerations such as value for money and procedural adequacy. While an effective system will probably embody such features, it is possible to envisage a system which functions efficiently at a technical level but which nevertheless fails overall to deliver the results to be expected from a truly effective regulatory approach.

Efficiency - The regulatory regime must function with an adequate level of efficiency. This entails both the need for reasonable expedition in the regulatory process and the provision of responsive and flexible regulatory procedures that not only reflect the aims of the regulatory regime but are also sensitive to the needs of the regulated industry and its particular business c i r c u m s t a n c e s . Again a balance needs to be drawn here between efficiency as a goal in itself and other objectives, such as that of fairness, which are

142. The perceived problem is described by Ogus, supra note 1, at pp 114-115 in the following terms: " 'Open' rule-making procedures might inhibit attempts at cost-benefit analysis and reduce the importance o f independent, expert judgments. There is an inherent difficulty in adapting an adjudicatory framework to the complexities o f rule-making and in deciding who should have participation rights. Nor should it be forgotten that American-style procedures generate substantial administrative costs and delays. The extent to which 'open' procedures can be used to enhance or, conversely to control, the influence o f private interest groups is uncertain."

143. Foster, supra note 58, at p 417 refers to this aspect in terms o f the requirement to provide sufficient regulatory information (see note 141, supra) and the need to allow "enough discretion for the Regulator to develop and use specialized knowledge." For a discussion of some o f the difficulties inherent in assessing the efficiency of a regulatory regime see Baldwin, Regulation in Question: The Growing Agenda (Merck, Sharp & Dohme, London, June 1995), pp 107 - 118. See also Ayres and Braithwaite who note in their book.

Responsive Regulation: Transcending the Deregulation Debate (Oxford UP, Oxford, 1992), at p 4 that: "Responsive regulation is distinguished (from other strategies o f market governments) both in what triggers a regulatory response and what the regulatory response will be. We suggest that regulation be responsive to industry structure in that different structures will be conducive to different degrees and forms o f regulation. Government should also be attuned to the differing motivations o f regulated actors. Efficacious regulation should speak to the diverse objectives of regulated firms, industry associations, and individuals within them." On the general concept of responsive law see also Nonet and Selznick, Law and Society in Transition: Toward Responsive Law (Harper & Row, New York, 1978).

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identified below. As the US Supreme Court has observed on at least two occasions, convenience and efficiency are not necessarily synonymous with democratic procedures.

Accuracy - An ideal regulatory regime must be designed so as to reach the optimal or "correct" result, bearing in mind the applicable legislative, economic and political framework. Such a requirement involves the regulator making full use of his or her particular regulatory expertise in the area in question. The issue of what the correct outcome is in any particular case may of course be controversial, but the regulator must be able to show that the decision in question has been reached on the basis of adequate supporting evidence and is justified by reasoned conclusions.

Fairness - The regulatory regime must strike a fair and equitable balance between the interests of competing elements in the regulatory process, such as shareholders, regulated firms and consumers, while employing the transparent procedures identified under the heading "Accessibility" above. In the context of the public utilities substantive requirements of fairness include the need to provide universal service without discrimination and at a reasonable price.

144. See for example Bowsher v Synar 478 US 714, 736 (1986) where the US Supreme Court observed (quoting from the earlier case o f INS v Chadha 462 US 919, 944 (1983)) ... the fact that a given law or procedure is efficient, convenient, and useful in facilitating functions o f government, standing alone, will not save it if it is contrary to the Constitution. Convenience and efficiency are not the primary objectives - or the hallmarks - o f democratic government." See also Mayton, "The Possibilities of Collective Choice: Arrow's Theorem, Article I, and the Delegation o f Legislative Power to Administrative Agencies" [1986] Duke LJ 948.

145. Foster, supra note 58, at p 417 describes this requirement in terms o f the use o f specialised expert knowledge by the regulator - see the passage quoted in note 143, supra.

146. For a general discussion o f aspects of this objective see Foster, Natural Justice and the Process o f Natural Monopoly Regulation (CRJ Discussion Paper No. 9, London, 1994). Baldwin, supra note 143 at pp 123-124 identifies the goal of fairness with consistency and predictability o f regulatory action, although I have preferred to treat these latter objectives under the separate heading o f "Certainty" in my listing o f regulatory goals. However, these concepts are undoubtedly closely related and the adoption of procedures designed to bring about a fair result should also promote the achievement of certainty in the regulatory context.

Enforceability - The regulator must be given adequate powers to enforce regulatory decisions against parties that are subject to the regulatory p r o c e s s . ^"^”7 jn the UK context this requirement will be the subject of

particular scrutiny in later chapters given various perceived deficiencies in the existing state of competition law in Britain, particularly from the perspective of its relative inability to exercise effective control over anti-competitive market practices. Enforcement strategies can vary greatly in practice, ranging from the use of persuasion, education and warnings to heavier penalties, such as regulatory suspensions, civil or criminal penalties and ultimately the revocation of a franchise or licence. The efficacy of various regulatory enforcement strategies will be considered in some detail in the course of this thesis.

Accountability - Under a democratic system of government, regulators must be able to be held accountable to the appropriate legislative authority. While methods of accountability differ in various jurisdictions the essential principle remains the same.^^^ In the United Kingdom, economic regulators vary in their degree of independence from government. The regulators of the privatised utilities and of rail transport and television broadcasting enjoy a relatively high degree of independence, whereas other regulatory bodies such as the Civil Aviation Authority and the Director of Passenger Rail Franchising have a lesser degree of autonomy from the state.

147. See for example the criterion advanced by Foster, supra note 58, at p 417 who refers to the need for "appropriate penalties the regulator can enforce."

148. See the case study in parts 9.6 and 9.7 o f chapter 9 relating to the proposed OFTEL licence condition dealing with anti-competitive behaviour in the UK telecommunications market. 149. For a general description of the range of available enforcement strategies see Ayres and

Braithwaite, supra note 143, chapter 2; Baldwin, supra note 8, chapters 5-6. 150. See in particular the discussion o f this area in chapters 7, 9 and 11.

151. For a general discussion o f the requirement of accountability in the UK context see Smith and Hague (eds), The Dilemma o f Accountability in Modern Government (Macmillan, London,

1971); Turpin, supra note 10, p 75: "None who wield the powers or discharge the functions o f the state should be exempt from the requirements o f accountability."; Ogus, supra note 1, pp 111-117; Baldwin, supra note 140, pp 118-120; Graham, Is There a Crisis in Regulatory Accountability? (CRI Discussion Paper No 13, London, November 1995). On the US position see Sunstein, supra note 41; Freedman, supra note 41.

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• Autonomy - This refers to the degree of regulatory independence enjoyed by a regulatory authority. To a certain extent it is the converse of the previous requirement, given that the greater the degree of autonomy conferred on a regulator, the lesser is the level of accountability that is likely to be present in the relationship between the regulatory body and the legislature. A reasonable level of regulatory independence is thought to be essential to the development of regulatory expertise and the ability to fulfil the regulatory function adequately. However excessive autonomy, or autonomous powers that are exercised imprudently or expansively by a regulator, can give rise to criticism. In the US context the independent regulatory agencies have sometimes been referred to as the "headless fourth branch" of government for such reasons. *52

1.10.2 Reconciling these Regulatory Objectives

Some reflection will serve to demonstrate that the above objectives of an ideal regulatory regime may be difficult to attain in practice and may indeed conflict with each other under certain circumstances. For example, a requirement of accessibility, which emphasises the use of open and transparent regulatory procedures (which may also be quite time consuming), may conflict with a requirement of efficiency, which could require certain kinds of regulatory action to be taken urgently or within a tightly defined time frame.

Similarly the goal of certainty may also conflict with that of enforceability, especially where the latter objective is pursued through the use of discretionary regulatory powers, the outcome of which may not be completely predictable in any particular case. Indeed, discretionary powers may be intended to confer greater scope for enforcement on the regulatory body in 'grey areas', where certainty in the application of the regulatory process is lacking. Requirements of fairness and efficiency may

152. See the discussion in part 6,2.4 of chapter 6, The question o f autonomy is bound up with the breadth o f appeal rights and the scope of judicial review in relation to regulatory decisions. For a general discussion o f these issues see Baldwin, supra note 143, pp 120-122, The scope o f rights o f appeal and review in this area will be discussed in more detail in subsequent chapters, particularly in chapters 6-10,

also be mutually opposed and efficiency and effectiveness are not necessarily synonymous. Finally, the more obvious potential conflict between accountability and autonomy has already been referred to above.

1.10.3 The Relevance of the Economic and Political Background

In addition to these potentially conflicting goals, issues such as the optimality or correctness of a regulatory decision can only be assessed in the context of a particular economic or political theory. One person's conception of regulatory efficiency may well represent another's arbitrary coercive power. Someone who believes that all forms of government intervention in economic affairs are undesirable in themselves will be unlikely to praise a stringent regime of economic regulation, however much others may regard its effects as beneficial. An economic or political theory that emphasises collective, rather than individual, values may well ascribe a lower value to economic efficiency which is achieved at the expense of social objectives. On the other hand a system that emphasises the central importance of private (or privatised) ownership may tend to support a regulatory approach that promotes the interests of shareholders and industry, rather than those of consumers, employees, or other third party interests.

Furthermore, the political options here are not merely a stark choice between pursuing collectivist goals and espousing a free market approach. Even among those who accept the legitimacy, or the political reality, of a market-based economy the paramountcy of various competing interests can still be a matter of debate. The adherents of public choice theory, for example, frequently start from the position that any government interference in the operation of the free market system is inherently illegitimate. The more extreme among such theorists dispute the need for any action by the state to redistribute resources in the interests of fairness or justness.

Theories of political liberalism, on the other hand, combine acceptance of market allocations and recognition of individual liberty with a concern that, to a greater or

153. These models represent the two extremes identified by commentators such as Ogus, supra

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lesser extent, the state should intervene to alleviate unjust distributions of r e s o u r c e s . ^ 5 4 ^ t the other extreme, socialist or Marxist thought emphasises the pursuit of equality through state control of the means of production, distribution and exchange, to the total or partial exclusion of market processes. Under this approach, equality is conferred from the top down by removing advantages of personal privilege, wealth and power.

Given these divergences of approach to economic and social issues, it is largely meaningless to refer to the optimality of a regulatory decision without specifying the economic and political context in which the decision is to operate. Under each of the three models of political thought identified above, a different bundle of regulatory values will inevitably be present. Thus, a system favouring the interests of industry and the market economy will also be likely to prefer a regulatory regime with comparatively weak powers of intervention, so that regulated parties can pursue their business interests with a minimum of external government interference. It is therefore little surprise to find that in practice this tends to be the approach advocated by the New Right and by the adherents of public choice theory.

Liberal theorists are likely to recognise the need for some degree of regulatory intervention by the state in order to redress market failures, promote the interests of third parties such as consumers and to prevent unjust allocational outcomes. Socialist thinkers, on the other hand, will tend to favour the ultimate form of regulation, that of state ownership or control, or at the very least, close state involvement in the regulation of whatever market processes may be permitted to exist.

154, For representative contributions from each o f these schools o f thought see, on the libertarian/public choice side, Levitas (ed). The Ideology o f the New Right (Cambridge UP, Cambridge, 1986); Green, The New Right (Harvester, Brighton, 1987); McLean, supra note 85; Epstein, supra note 48, From the standpoint o f liberal theory see Rawls, A Theory o f Justice (Oxford UP, Oxford, 1972); George and Wilding, Ideology and Social Welfare

(Routledge and Kegan Paul, London, 1976); Sandel (ed). Liberalism and its Critics

(Clarendon Press, Oxford, 1984); Kymlicka, Liberalism, Community and Culture (Oxford UP, Oxford, 1989),

155, For contributions from this perspective see Crosland, The Future o f Socialism (Cape, London, 1956); Habermas, Legitimation Crisis (trans, T McCarthy, Heinemann Educational, London, 1976); Pashukanis, General Theory o f Marxism and Law (C Arthur (ed), London,

The approach taken in this thesis will be to assess techniques for regulatory