Democratic regulation: learning from the US

10 Jun 11
Colin Talbot

If private and non-profit providers are to be encouraged into public services such as the NHS they should be subject to ‘democratic regulation’. We should look to how the US oversees its utility companies

It is widely recognised, and mostly accepted, that ‘utilities’ provide a public service and not just private services, so it is legitimate to regulate them in ways that ensure the public interest.

This is partly because there are always elements of natural monopoly in the way in which these services – power, water, fixed-line telephony and cable, public transport, etc – can be delivered. It makes economic sense to only have one set of lines, pipes and cables going into one property or neighbourhood.

The other public interest dimension of these services is that they are regarded as essential – rights almost – for survival in a modern society. Hence, there is usually an obligation for ‘universal service’ which includes provision to uneconomic areas (such as remote rural locations) and strict conditions on suspension of supply, usually only in extremis.

So far so good, but the question immediately arises how are they to be regulated to meet the public interest, and how far does the public interest extend?

The ‘UK model’ of utility regulation lies at the extreme end of a spectrum. Developed under Margaret Thatcher’s Conservative government and never really altered under Labour, this model focuses strongly on competition as the primary outcome and pays only minimal interest to protecting public interest concerns.

It also has specific process characteristics: largely opaque processes, very limited transparency from providers and no requirement for regulators to publish specific reasoning to justify decisions, which often appear to bear no relationship to any evidence.

There is a largely ignored democratic alternative from probably the least likely place one would expect to find it: that bastion of ‘free markets’ the USA.

In their rather neglected book ‘Democracy and Regulation – How the Public can Govern Essential Services’ (Pluto Press, 2003) Greg Palast and colleagues analyse in detail how this system, used in various forms across the USA, works.

Very simply it starts from the assumption that the ‘public’ interest in public utilities needs to be strongly reflected in how they are regulated. This translates into two simple principles – first that effective regulation requires complete transparency by providers and regulators. No hiding behind ‘commercial confidentiality’ – anyone providing public services must accept full public scrutiny.

In practice this means strong ‘discovery and disclosure’ rules that force providers to divulge any and all information about their operations. At the same time, regulators must also disclose full reasons for their eventual decisions. And there are even requirements for parties who make submissions to regulators, or seek to discover information, to be open about themselves. In other words complete transparency.

The second key principle is strong public (civic) involvement with the regulatory process. This usually means a very open regulatory process where interested parties get the chance to seek information and put views to the regulators, which the latter are legally required to consider.

Public engagement covers not just pricing, but also levels and types of service and standards to be met such as coverage, safety and environmental responsibility.

All of this operates within an assumption that utilities should be treated a bit like government bonds – they should be seen as secure, but not exciting or risky. They should be long-term investment opportunities that guarantee a reasonable, but modest and secure return on investment. This often involves regulators fixing maximum returns for investors.

The net result, according to Palast & co, is that the USA has amongst the cheapest public utilities in the world.

This example could provide some useful yardsticks for the current debate about other public services. For example, if private and non-profit providers are to be encouraged into health then they too should be subject to ‘democratic regulation’ – complete transparency and strong public involvement in deciding prices and quality of services.

This post first appeared on Whitehall Watch

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