Regulation and Markets Beyond 2000

Laura Macgregor, Tony Prosser

• Publisher: Routledge
• Year: 2017
• Topic: Law
• eBook ISBN:
  9781351727914
• Subtopic: Law Theory & Practice
• Index: Law

This title was first published in 2000: The book will be a set of essays addressing various aspects of regulation. It will concentrate on regulation as a precondition of successfully operating markets - by opening up markets and establishing conditions of trust. It will cover a broad range of varied forms of regulation. The book will respond to recent developments, for example, the shift from deregulation to better regulation will be explored. Most chapters will be written jointly by an academic and a legal practitioner (from the commercial solicitors firm of Shepherd and Wedderburn), thus ensuring an integration of theoretical analysis with practical problems.

1
Introduction

LAURA MACGREGOR, TONY PROSSER AND CHARLOTTE VILLIERS, University of Glasgow

Concepts of Regulation

Even a cursory examination of the contents page of this book would suggest that it covers a bewildering range of activities, some of which are outside the scope of what is normally regarded as regulation. A central aim of this chapter will be to suggest that regulation is a much broader phenomenon than it is often conceived to be, and that recent developments in the political world are changing its nature further. In particular, the frequent opposition of regulation to markets, in which regulation is seen as an outside intervention limiting the free play of market forces, only encompasses part of the picture; a central role for regulation is that of creating, and maintaining, the conditions which make the operation of markets possible. In this chapter we shall thus discuss different types of regulation, and some recent developments in the regulatory environment, notably competition law and corporate governance. The first is important as background to the more specific examples of competition regulation discussed in later chapters. The second will provide an example of what has normally been seen as a classic area for self-regulation, and suggest that in fact private and public responsibilities are inextricably mixed. Both of these themes are the subject of important developments likely to affect future regulation, and our discussion will set the scene for the discussion of particular areas of regulatory activity in later chapters.

Concepts of regulation are of course already legion, and some of them very broad in scope. For example, Majone has suggested that ‘When one speaks of regulation today, in America and increasingly in Europe, one usually refers to sustained and focused control exer-cised by a public agency, on the basis of a legislative mandate, over activities that are generally regarded as desirable to society’.¹ Even this may be too narrow, however; as we shall see, much regulation may not be carried out directly by public agencies, nor may it be based on a legislative mandate. This definition has also been criticised as being limited to socially desirable activities, and so confusing a particular legal usage of the term ‘regulation’ with the broader concept itself.²

There is however a much narrower view of regulation in which it is treated as representing an external political or social intervention in markets which are normally self-regulating. For example, this usage,

chiefly associated with the discipline of economics, opposes regulation to markets, and employs the former term to describe all acts of the state that control or alter the activity of markets. … use of the term regulation in this way is particularly associated with writers (many of them grouped in the so-called Chicago School) who are optimistic about the capacity of markets to produce economic welfare and correspondingly suspicious of any state interference in them, casting doubt both on its motives and its effectiveness.³

Such a conception is characteristic of much of the currently influential schools of capture and public choice theory in which the operation of political bargaining results in both the creation of regulatory regimes and their capture by regulated industries; again, the dark world of politics sullies the purity of markets.⁴ Finally, this opposition of regulation to markets is probably the most characteristic popular usage of the term; to quote no less elevated a source than Rupert Murdoch, ‘Socialism is alive and well and living in regulatory agencies … The growth of regulation has given enormous control to government… Socialism has effectively reinvented itself.’⁵

This book will express a view of regulation which is radically different from this latter usage. Some regulation, such as that relating to the environment and genetic testing, does limit the operation of markets and, by doing so, aims to implement public interest goals. In other cases, however, it is impossible to conceive of markets without their being constituted by regulatory action. This is of course reasonably well accepted in the case of the allocation of property rights, though it is often seen as a different exercise from regulation itself. To quote Daintith once more:

a key role of law may be seen as the underpinning of economic relations by the recognition and enforcement of property rights. … This provision is seen as something anterior to regulation; it is the underpinning of the market system, into which the state intervenes by way of regulation, in order to correct market failures, furnish public goods, and redistribute wealth.⁶

A theme in other work, however, is that it is impossible to separate the constitutive role from regulation; ‘Scholars of a variety of persuasions have for a long time argued that the conditions required for social interaction are not given by interaction itself. Interaction, they have argued, is not self-constituting. Markets are not self-ordering. Markets are always and necessarily regulated through careful constitutive work’.⁷ Not only does this imply that markets and regulation are complementary rather than opposed, it suggests that both are means of delivering public interests, rather than regulation being the only means of doing so. A central purpose of this book will be to examine the role of regulation in constituting and structuring markets, a process in which economics, politics and law are inextricably intertwined.

Constituting Markets

Some examples should make these points clearer. An area which has been examined in detail in other work is that of utility regulation.⁸ Even when the utilities were nationalised, serious tensions were evident between different purposes of public ownership and public intervention. On the one hand, nationalisation was seen as a means of implementing the (undefined) public interest, characterised as opposed to the profit motive and in many cases to market allocations. On the other hand, a later view was that, given proper governmental guidance, public enterprises could mimic the operation of markets and so act in ways which were economically efficient despite the monopoly nature of much of their activity.⁹ Thus, rattier than public ownership and markets being incompatible, such ownership would permit public intervention to mimic markets where private ownership would be subject to market failures.

With privatisation, only limited debate occurred about the purposes of the regulatory institutions which were established. The most influential document was the first Littlechild Report setting out the design for the price control to be used for the monopoly areas of British Telecom’s business, a model also adopted for the other utilities. The report starkly opposed competition and regulation; thus ‘Competition is indisputably the most effective means – perhaps ultimately the only effective means – of protecting consumers against monopoly power. Regulation is essentially a means of preventing the worst excesses of monopoly; it is not a substitute for competition. It is a means of “holding the fort” until competition arrives.’¹⁰

The reality has turned out to be somewhat different. Although regulation of monopoly through, for example, price control, has been one central task of the regulators, other tasks have included the constitution and policing of competitive markets. One example to be discussed in detail later, in Chapter 4, is that of electricity, where the regulator has been at the forefront of efforts to create and police markets against strong opposition from regulated companies, although serious doubts remain as to the degree to which generation is properly competitive. A similar story can be told of gas, this time with greater success, and also of telecommunications; again, regulators have been the key actors in developing competitive markets. In all these sectors, but especially in telecommunications, action to create competitive markets against strong opposition from some national governments has also been taken by the institutions of the European Union; as we shall see, the European Commission has become a key regulatory actor in many of the sectors to be described in this book. Nor has action by the regulators and Commission in relation to the utilities been simply a matter of creating competitive markets and letting them operate, for continued policing of their operation has also been required. This has included, for example, action by the telecommunications regulator to incorporate general conditions requiring fair trading into the licences of telecoms operators, and by the Commission to require separation of regulation and operation.¹¹ In the UK this has now been supplemented by the 1998 Competition Act (to be discussed below), which, apart from creating general prohibitions on anti-competitive agreements and behaviour, enables their implementation to be carried out by the utility regulators themselves.

A further example of regulatory intervention to constitute markets is that of competitive tendering and in particular compulsory competitive tendering in local government. The traditional position in the UK was that local authorities provided a wide range of services through their own staff with no requirement to seek competitive tenders from the private sector or to separate the provision of services from specifying what was needed and purchasing it. This was changed by legislation during the 1980s and early 1990s which required in many areas that competitive tendering took place and also required the actual service provision to be in the hands of direct labour organisations or direct service organisations at arm’s length from the authority itself and subject to detailed accounting provisions and rate of return requirements.¹² In many ways the interventions involved have been characteristic of the worst forms of bureaucratic regulation; the legislation has been badly drafted, over-complex and stipulatory, in places mutually contradictory and involving a massive use of informal rule making in the form of ministerial guidance. Indeed, the current government is in the proc-ess of replacing it with a more flexible system of ‘best value’ giving more discretion to local government itself to decide how best to improve the delivery of services.¹³ Despite the bureaucratic and over-specific nature of the regulatory interventions, however, the goal was not to restrict the operation of pre-existing markets but to bring new markets into existence where previously services had been delivered administratively. Thus, apart from the tendering requirements, much of the corpus of rules involved was designed to ensure that competition existed, not to limit it. Once again, this is supplemented by a body of rules at a European level designed to open up markets in public procurement, as we shall see in Chaper 13, when an assessment of their effects will be made.¹⁴

This is not to say, of course, that other regulation does not have a social rationale; important areas of social regulation exist for the utilities, although the legitimacy of entrusting them to unelected regulators is much debated and a new set of arrangements is to be established sharing responsibilities between government and regulators in social and environmental matters.¹⁵ In other areas, such as broadcasting, social rationales for regulation are much more fully established and, apart from die familiar restrictions on explicit portrayal of sex and violence, include the norms, formal and informal, which constitute public service broadcasting. Here die debate is not whether social regulation is illegitimate, but how it can work successfully in the new media world of channel profusion and consumer choice, thus raising a further important theme in this book: the ability of regulation to cope with a rapidly changing technological environment.¹⁶ Rather than social and economic regulation occupying different territories they are becoming closely intertwined, for example in requiring open access to essential facilities such as conditional access technology for digital television both on pro-competitive grounds and avoiding too great a share of media influence falling into the same hands and so subverting access to information necessary for democratic choice.

Competition Law and Policing Markets

The developments in utility regulation towards a model based on the creation and policing of competitive markets show in microcosm die general developments in competition law. Here the position adopted in the past in the UK has been that of applying a general ‘public interest’ test to assess the acceptability of restrictive practices, monopolies and mergers, something which has enabled a number of different rationales to be employed ...

Table of contents

• Cover
• Half Title
• Title
• Copyright
• Contents
• Contributors
• Preface
• Table of Cases
• Table of Statutes and Statutory Instruments
• 1 Introduction
• 2 Essential Facilities and Utility Networks
• 3 The Regulation of Trans-European Networks
• 4 Regulating Electricity
• 5 Telecommunications Regulation in the USA: Seeking the Right Balance between Regulation and Competition
• 6 Competition in the Telecommunications Sector
• 7 Regulation of Genetic Testing
• 8 Transport and Regulation
• 9 Environmental Law in the United Kingdom
• 10 Tax as a Regulatory Tool: The Case of the Proposed Climate Change Levy
• 11 Corporate Governance and the Approach to Regulation
• 12 Regulation of Financial Services
• 13 Regulating Public Procurement in the Single European Market: Past, Present and Future
• 14 Governing Information
• 15 Regulating Business and the Business of Regulation: The Encouragement of Business-friendly Assumptions in Regulatory Agencies
• 16 Regulation and Markets Beyond 2000: Conclusion
• Index