Theorising Utility Regulation
| Published date | 01 March 1999 |
| DOI | http://doi.org/10.1111/1468-2230.00201 |
| Date | 01 March 1999 |
Theorising Utility Regulation
Tony Prosser*
The Department of Trade and Industry Review of Utility Regulation marks a final
recognition that the debate on such regulation is here to stay and will not disappear
with the development of further competition or reforms of competition law.1
Within the European Union a similar debate is taking place with the liberalisation
of utility markets, especially telecommunications.2Utility regulation has also been
controversial worldwide; in the United States, long regarded as its natural home,
the relationship between deregulation and new regulatory techniques is now being
reconsidered and many of the problems faced earlier in the UK about how to
liberalise markets are being faced within a culture which has given a much greater
role to identifiably regulatory institutions.3Finally, many other countries (for
example in Central Europe) are, as the result of their privatisation programmes,
having to grapple with the creation of regulatory institutions in cultures not
necessarily sympathetic to the concept of relatively independent agencies.
In this article I will not attempt to deal in detail with reform proposals such as
those in the Review, important as they are. Instead, I wish to suggest that the
theoretical underpinnings implicit in much of the debate are unsatisfactory. In
particular, two possible theoretical approaches to regulation are inadequate to bear
the weight of understanding, or reforming, regulatory practice. These are a bilateral
or contractual model of regulation in which the primary relationship is between
regulator and regulated firm; a variant of this can be found in the economist’s
favourite critical model of ‘capture theory’. The second approach (which indeed
appears in the Review) is that of stakeholder theory with the regulatory agency
seen as the centre of a web of relations in which the firm may be only one interest
out of many, and this has something in common with the proceduralism popular in
some legal writing. I shall attempt to suggest, using material primarily relating to
UK utility regulation, that neither of these approaches can capture the complexity
of the regulatory task, either for explanatory or prescriptive purposes. I shall
conclude by speculating as to how a more successful approach to studying
regulation can be developed by returning to political and constitutional theory and
adopting a rights-based approach to regulation.
ßThe Modern Law Review Limited 1999 (MLR 62:2, March). Published by Blackwell Publishers,
108 Cowley Road, Oxford OX4 1JF and 350 Main Street, Malden, MA 02148, USA.
196
* School of Law, The University of Glasgow.
I am most grateful for comments on a draft of this article from Cosmo Graham, Douglas Lewis, Colin
Scott, John Tasioulas, Charlotte Villiers and the anonymous referees of the MLR. A much earlier version
was presented as a Scrymgeour Lecture at the University of Dundee on 22 January 1997, and I am grateful
to the organisers and those who commented.
1 Department of Trade and Industry, A Fair Deal for Consumers: Modernising the Framework for
Utility Regulation Cm 3898 (1998) (the Green Paper); A Fair Deal for Consumers: The Response to
Consultation (London: Department of Trade and Industry, 1998).
2 For an introduction to these debates see C. Scott, Competition and Coordination: Their Role in the
Future of European Community Utilities Regulation (London: Centre for the Study of Regulated
Industries, 1995) and ‘Changing Patterns of European Community Utilities Law and Policy: An
Institutional Hypothesis’ in J. Shaw and G. More (eds), New Legal Dynamics of European Union
(Oxford: Clarendon Press, 1995). Particularly important questions have arisen with theestablishment
of new forms of regulatory bodies for telecommunications in France, Germany and Italy.
3 See eg R. Pildes and C. Sunstein, ‘Reinventing the Regulatory State’ (1995) 62 University of Chicago
Law Review 3.
The complexity of regulation4
Many claims about regulation, both in practical policy and in economic theory, are
misleading; regulation is a much more complex task than either would suggest. For
example, in both, regulation has been seen as a temporary way of protecting
customers of monopolies and thus ‘holds the fort’ until markets replace it with the
free play of competition; like the state in Marxist theory, regulation then withers
away.5Moreover, it has been argued that regulation can ideally be accomplished
by the application of economic reasoning designed to achieve the single goal of
maximising economic efficiency, mainly allocative efficiency.6This provides the
legitimacy of the regulator through his or her economic expertise; what should be
avoided, it is argued, is sullying this with social goals which are for elected
governments, not unelected regulators. It does not mean that the regulatory task is
necessarily a simple one, for the content of the economic theory applied is often
highly controversial and the regulator still needs to ensure an adequate flow of
information from the enterprise. Nevertheless, it does provide a potentially
coherent set of principles within which the regulatory task can be addressed.
The withering away of the regulatory task and the central rationale of allocative
efficiency have had little correspondence with the reality of utility regulation in the
UK, in the EU or indeed in the USA. Regulation has shown little sign of withering
away; rather it has become more complex as time has passed, as is recognised in
the Review in its recognition of an indefinite future for some regulatory controls.7
This would not in itself matter very much for the view of regulation outlined above
in which efficiency maximisation is the predominant regulatory task; it would
simply mean that providing market surrogate controls on monopoly would be
permanent rather than temporary. However, regulation does not cease with the end
of monopoly. One unexpected element in UK utility regulation is the extent to
which the regulators have taken on a new task, that of regulation for competition,
for example through liberalising the domestic energy markets where the new
markets have only been created through constant regulatory pressure in the face of
foot-dragging by regulated companies. Moreover, market creation also involves
creating a substructure of rules and other institutional and normative devices. Some
of these are market-constitutive in the sense that we cannot envisage a functioning
market without them; others are designed to create the proverbial level playing
field, such as the continuing prohibitions of undue preference or undue discrimi-
nation by a dominant firm. Regulation thus has an important role in market
creation; and it is not merely temporary, for these rules and other pro-competitive
norms need continuing policing.8There are advantages in this being undertaken by
specialist sectoral regulators which know their firms more intimately than could a
general competition authority, especially where the operation of the competition
authorities is attended by as many problems as it is in the UK; the reform of
competition law currently in hand will not change the desirability of more
4 The arguments in this section are based on research published in much greater detail as T. Prosser,
Law and the Regulators (Oxford: Clarendon Press, 1997).
5 The most influential statement of this view in relation to UK utility regulation was S. Littlechild,
Regulation of British Telecommunications’ Profitability (London: Department of Trade and Industry,
1984).
6 See C.D. Foster, Privatization, Public Ownership and the Regulation of Natural Monopoly (Oxford:
Blackwell, 1992) esp ch 9.
7 Green Paper, n 1 above, para 2.8.
8 See C. Shearing, ‘A Constitutive Conception of Regulation’ in P. Grabosky and J. Braithwaite (eds),
Business Regulation and Australia’s Future (Canberra: Australian Institute of Criminology, 1993).
March 1999] Theorising Utility Regulation
ßThe Modern Law Review Limited 1999 197
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