Labour’s proposal to abolish Ofgem: if you don’t like the answer, change the regulator?

(by Chris Hanretty) At its party conference this week the Labour party offered starkly differing views on the value of independent authorities. On Monday, Ed Balls called for the (independent) Office of Budgetary Responsibility to audit the costings of measures in Labour’s election manifesto. On Tuesday, Ed Miliband called for (independent) energy market regulator Ofgem to be abolished and replaced by a new energy regulator with power to set retail prices.

It’s not hard to see some tension between these two proposals. Suppose that in 2018 the OBR were to issue a negative verdict on the economic plans of a future Labour government. Would we see calls to abolish the OBR and replace it with another authority capable of adopting a broader view? That’s unlikely: the whole value of the OBR depends on it operating without regard to interference like this.

The same is true with Ofgem. Abolishing regulators and establishing new regulators to carry out the same functions is problematic, because it undermines the reasons that these regulators were set up in the first place. According to one story, regulatory authorities are the answer to a problem governments face, namely a problem of credibly committing to policies given the electoral incentives they face. When elections are far off, or when the issue of the cost of living is low on the agenda, governments may wish to encourage companies to invest. But companies may refrain from investing if they believe that the government will change its mind later on when elections draw closer, or when the issue of the cost of living becomes more salient. As a response to this, governments set up regulators which absolve them of responsibility for regulating. It’s the Look Ma, No Hands! approach to utilities markets.

What happens when you promise to abolish regulators? The problem of credible commitments rises its ugly head again. Companies may refrain from investing either because they fear that if the regulator allows them to raise prices in order to fund investment, the regulatory regime will simply be altered, or because they believe that the regulator will pull its punches in order to avoid being shut down and reformed. Indeed, Stephen Greasley and I have already looked at the survival of non-departmental public bodies, and have found some evidence to suggest that agencies with a regulatory remit do survive longer, perhaps because of this fear.

All this doesn’t mean politicians have to maintain a Trappist vow of silence when it comes to economic regulators. On the contrary, political oversight is important to ensure that regulators aren’t captured by those they oversee. But not every adverse decision or undesirable outcome is evidence of regulatory capture. The Daily Mail sees a Blairite cabal behind every decision Ofcom makes with which it disagrees. Labour should not act in the same way towards Ofgem. The energy market might not be competitive. Bills may be asymmetrically linked to wholesale prices to consumers’ detriment. But all of these failings are failings Ofgem has itself identified. Labour needs to make a better case for abolishing Ofgem than simply pointing to high consumer prices.

One Response to Labour’s proposal to abolish Ofgem: if you don’t like the answer, change the regulator?

  1. […] are continuing to endure declining income in real terms. My colleagues, Catherine Waddams and Chris Hanretty have recently written on this blog about proposals by the Labour party to cap prices and abolish […]

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