Regulatory appeals – change on the way?

Replacing the CMA with the courts when it comes to reviewing economic regulatory decisions could have profound impacts on utilities,

On 21 February this year, Lord Tyrie, the chair of the Competition and Markets Authority (CMA), wrote to energy secretary Greg Clark setting out preliminary advice on legislative and institutional reforms to safeguard the interests of consumers and to maintain and improve public confidence in markets. The letter was written in response to a request for such advice made by Clark in August 2018 and contains wideranging proposals for reform.

There was a brief statement tucked away amid the proposals that there is a strong case for removing responsibility for review of economic regulatory decisions from the CMA, and passing responsibility to the courts.

The letter represents preliminary advice only and any proposals taken forward by the government will be subject to consultation in due course, however this is a radical suggestion from the CMA and it should be on the radar of all energy and water companies.

It also comes at a time when there is already some uncertainty about the appeals regime, given Ofgem’s proposal (as part of RIIO2) to consider the extent to which a successful appeal has consequences, if any, on other aspects of the price control.

Significant departure from position since privatisation

Since privatisation, the CMA (or one of its predecessors) has been the body dealing with licence modification/price control references or appeals. This makes sense because the CMA has the necessary economic, financial and market expertise to make decisions on these matters.

The CMA is also particularly well-placed to reconsider issues of regulatory practice (given its cross-sector expertise) and its inquisitorial approach is an effective method of determining matters of fact.

Lord Tyrie did not set out any details of the “strong case” for his proposal, so industry is left to guess what the case may be. It is also unclear whether the secretary of state agrees with his point of view which, if implemented, would require a radical shift in the regulatory system within which the CMA sits. Perhaps Lord Tyrie’s suggestion simply reflects a concern about the CMA’s resources, particularly in light of Brexit (when the CMA will take on many other responsibilities) and Lord Tyrie’s other proposed reforms (which will increase the CMA’s remit).

Perhaps it arises from a concern that there may be a multitude of appeals in 2021, now that market participants understand the energy licence appeals framework and their ability to bring appeals on defined grounds. The proposed change in appellant body may also reflect a desire to change the standard of review applied by the relevant appeal body. This would chime with Lord Tyrie’s proposal to change the standard of review applied by the Competition Appeal Tribunal when reviewing the CMA’s competition decisions.

If decisions on licence modifications and price control matters were to become subject to judicial review (which is primarily concerned with the lawfulness of decision-making, rather than its merits), this would mark a major change to the regulatory framework. It is likely to affect perceptions of regulatory risk because it would limit the ability of licensees to challenge economic reasoning and decision making. As such, it could weaken a key constraint on regulators’ decision-making and impact the incentive on regulators to conduct a thorough analysis and produce well-reasoned, evidenced decisions.

Challenges without the benefit of the CMA’s flexible procedures and statutory deadlines are also likely to become more protracted and legalistic – and have a less satisfactory end result: a successful judicial review would normally result in the decision being quashed and remitted to the regulator, whereas a successful appeal in respect of a price control often results in the CMA substituting its own decision for Ofgem’s.

Next steps

It seems that reform in the utilities sector is on the government’s agenda. There has been a plethora of consultations recently, and of particular note in this context is the National Infrastructure Commission’s call for evidence on its future of regulation study. Therefore there may be a number of reforms proposed by the government in the near future, including proposals to change the way in which economic regulatory decisions are reviewed.

A key question is how long it would take for any reform to be implemented. It seems unlikely (albeit possible) that any changes would be in place for the first set of RIIO2 determinations in 2021, but they could well be in place for the RIIO-ED2 determinations in 2023.