Are UK utilities regulators dancing to the same tune?: Infrastructure Journal, 7 August 2008
07 August 2008
So far in 2008, fines totalling around £80 million have been imposed by the economic regulators of UK utilities.
The Office of Rail Regulation (ORR) and Water Services Regulation Authority (Ofwat) began in February with fines of £14 million for Network Rail and £20.3 million for Southern Water respectively. Ofwat followed up in April, imposing a fine of £9.7 million on Thames Water. In June, the Office of Communications (Ofcom) imposed fines totalling around £225k on MTV and finally, in July, Ofwat imposed a fine of £35.8 million on Severn Trent Water.
The two remaining major economic utility regulators, the Postal Services Commission (Postcomm) and the Gas and Electricity Markets Authority (GEMA), have not imposed any fines so far this year, although they have previously done so.
Raichel Hopkinson and Zara Skelton of Denton Wilde Sapte look briefly at the power of the economic utility regulators to levy these fines, how regulators decide whether to impose a fine, how the amount is determined, what happens to the money paid over and the mechanism for challenging fines.
The authors note that this article does not address the regulators' powers in connection with infringements of competition law or the Ofcom Broadcasting Code, as they are subjects worthy of separate consideration in their own right.
The role of regulators
The regulators' powers to impose fines derive from legislation.
For example, the ORR's power to impose penalties arises from s57A of the Railways Act 1993. Pursuant to this, the ORR is permitted to impose fines for breach of a condition or other requirement imposed on regulated entities, or breach of an order previously issued by the ORR to a regulated company.
All the economic regulators considered here have similar provisions regarding breach of conditions, which are generally found in the licences granted by the regulator to a company allowed to operate in that regulated industry. The provision regarding breach of a previous order is however specific to ORR. Besides the provision regarding breach of conditions, both GEMA and Ofwat have the power to impose fines where a regulated entity has failed or is failing to achieve a prescribed standard of performance.
Apart from Ofcom, regulators are under a duty to "prepare and publish a statement of policy with respect to the imposition of penalties and the determination of their amount". Unusually, Ofcom's duty extends only to publishing a statement "containing the guidelines they propose to follow in determining the amount of penalties imposed by them". All the regulators have complied with these statutory duties and the resulting policies are available on their websites.
Penalties
Considering first what these policies say about the imposition of a penalty, each of the regulators stresses at the outset that deciding whether to impose a penalty will involve consideration "of the particular facts and circumstances of the contravention".
Representations from the company under scrutiny and interested parties such as individual consumers, consumer bodies and competitors will also be considered by the regulators at this stage. The policies then go on to list factors which will make imposition of a penalty more likely.
A factor that is common to all the regulators is to consider whether the contravention has or may have damaged the interests of third parties. That this is the case is unsurprising, since protecting the interests of consumers is at the heart of the work of the economic regulators. Other factors that are mentioned, but without consistency among regulators, include that the contravention was deliberate or premeditated (Postcomm), profiting from the breach (ORR, Ofwat and GEMA) and creating an incentive to comply (Ofwat and ORR). In terms of factors that will make imposition of a penalty less likely, there is agreement between regulators that transgressions of a trivial nature will be forgiven. Other examples include that the contravention would not have been apparent to a diligent entity (Ofwat and GEMA) and that the licensee has already been punished for the contravention by another body (Postcomm).
Guidance regarding the amount of any fine tends to require general factors to be considered followed by any mitigating and aggravating factors. These factors again lack any real degree of consistency between regulators, but are similar to those listed above that go to whether a penalty should be imposed. All the regulators do however make clear that the factors listed are a starting point and additional factors may be considered depending on the circumstances of the case.
Fines
So far so disjointed, but when looking at the way in which the amount of a fine is decided, there is one key principle which all regulators considered here must bear in mind. That is that the fine cannot exceed 10 per cent of the turnover of the company being fined in the previous year.
However, that is as far as the similarity goes, as each regulator has a slightly different method of determining turnover. The methods are laid down in Statutory Instruments issued by the relevant Secretary of State covering each of the regulated industries. There are numerous small differences between these methods, but one point which relates to GEMA is particularly noteworthy. When calculating turnover for the purposes of imposing a penalty, GEMA can include all of an entity's turnover derived from "ordinary activities (whether or not such activities are authorised by a licence) …". This is in contrast to the position of all other regulators, which are limited to consideration of turnover from regulated activities. The extension of GEMA's powers outside the scope of the regulated industry in this respect is perhaps surprising, and certainly may give those involved in the gas and electricity industries pause for thought.
Fines are paid to the Treasury's Consolidated Fund. They are therefore not available to be spent by the regulator that imposed them, but by central government. Earlier this year, this aspect of the system prompted Network Rail to argue against the fine of £14 million imposed by ORR. Network Rail suggested that it would be better for the rail industry if, instead of paying the fine, the company spent £14 million on a series of passenger improvements. This proposal was backed by a rail consumer body and some train operating companies. ORR dismissed this option, saying that it would "reduce the effectiveness of the incentive that penalties place on the company to secure compliance with its licence".
Appeals
After a fine has been confirmed by the regulator, an aggrieved company's route of redress is via statutory appeal.
Statutory appeals are essentially a right of appeal, conferred by statute, to a court or tribunal against a decision of a Minister, Government department or tribunal. As a general rule companies who have been fined can appeal against the imposition of the penalty, the amount of the penalty or the date by which they must pay the penalty. Ofcom and ORR are exceptions to this rule, having slightly different schemes. A statutory appeal will proceed on the basis of a review of the regulator's determination in connection with a contravention.
For all regulators apart from Ofcom, a statutory appeal culminates in a hearing in the Administrative Court of the High Court (or an equivalent Court outside England and Wales). In Ofcom's case, the appeal is to a Tribunal. In reviewing the regulator's actions and reaching a decision regarding them, the Court or Tribunal will assess the regulator's decision but it will not seek to substitute its own decision for that made by the regulator. The system recognises that the regulator has detailed knowledge of the market which it regulates and, subject to checking that the regulator has exercised its powers appropriately, the Court or Tribunal will be reluctant to disagree with a regulator's exercise of discretion.
Postcomm is as yet the only economic utility regulator whose decision to impose a financial penalty has been subject to statutory appeal. In 2007 Royal Mail pursued two statutory appeals against Postcomm in respect of two separate financial penalties imposed on it. In both cases the challenges related to the amount of the fine imposed. Postcomm successfully defended its approach in relation to one of those statutory appeals, but Royal Mail was successful in connection with the other. On both occasions Postcomm's guidance on financial penalties was pored over in detail by the Court. In the light of experience gained in applying its original policy, Postcomm revised and updated its guidance in April 2008.
Representatives from all the economic utility regulators discussed above (plus their Northern Irish and Scottish equivalents), the PPP Arbiter (regulator of the London Underground PPPs), and the Civil Aviation Authority (regulator of UK aviation) meet informally as the Joint Regulators Group to discuss successes, challenges and best practice in the regulated environment. The House of Lords Select Committee on UK Economic Regulators considered this Group in its November 2007 Report, recommending that its existence should be formalised and that its role should be to "ensure greater consistency of focus and a clearer direction of effort".
As illustrated above there are numerous inconsistencies in the approaches of the various regulators, time will tell whether this initiative will lead the regulators to dance to the same tune.
Raichel Hopkinson is a partner and Zara Skelton a senior associate in the Public Law group at Denton Wilde Sapte.
This article was published in Infrastructure Journal on 7 August 2008
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