NAO backs overhaul of regulators

The National Audit Office yesterday gave its effective backing to a root-and-branch review of the way Britain's privatised gas, water, electricity and telecoms industries are regulated.

In a hard-hitting 360-page report the NAO raised questions about the use of price caps to regulate the four industries, whether the individual regulators should be made more accountable, whether they had struck the right balance between shareholder and consumer interests, and whether they should be replaced by boards of regulators.

The report from Sir John Bourn, the Comptroller and Auditor General and head of the NAO, comes at a critical time for utility regulation with two of the four watchdogs - Clare Spottiswoode of Ofgas and Don Cruickshank of Oftel locked in disputes with British Gas and BT respectively that could result in both companies being referred to the Monopolies and Mergers Commission.

The Commons Trade and Industry Selet Committee has also just announced a wide-ranging inquiry into the role and performance of the regulators.

Sir John's report points out that Ms Spottiswoode, Mr Cruickshank, the water regulator Ian Byatt and the electricity regulator Professor Stpehen Littlechild, are responsible for industries with 25 million customers, assets of pounds 240bn and annual turnover of pounds 51bn representing 8 per cent of Britain's total gross domestic output.

He stresses that while it is not for the NAO to question the policy objectives of regulation, it is a matter of public interest to illuminate how the regulators have handled their portfolios.

Sir John says there are a number of issues which Parliament "may wish to consider" concerning both the way the regulators work and the way policy is implemented. Echoing a criticism that has been widely levelled at the regulator regime, the report questions whether alternatives to industry specfic regulation by single regulators should be looked at asking whether boards of regulators would "be a sensible insurance against the over- concentration of power in one pair of hands" or whether they would dilute effective decision making.

The report also asks whether there is a case for widening appeals procedures against regulatory decisions to include consumers and whether there is not scope for increasing the openness of the four regulators to public scrutiny, such as through public hearings in order to develop their accountability and legitimacy.

Sir John also queries whether the regulators are sufficiently effective in communicating their decisions and the reasons for them.

He asks whether there is a case for bringing in staff with specific expertise in individual regulating industries.

Meanwhile, the price formula used in all four industries - whereby bills are capped by RPI less a certain percentage - is questioned. The NAO asks whether it is the best method of putting monopolistic suppliers under pressure to improve efficiency.