When regulation fails

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Industry – and the consumer – are seldom well-served by the relationship between regulators and monopolies. Competition where possible: regulation only where necessary is a useful maxim.

Supervision of the lottery stumbles from mishap to mishap. In desperation the government has now appointed one of its most distinguished fixers to sort out the mess. Britain once preached to Europe on the need for a competitive telecommunications market. Now we have to ask for a delay in liberalisation so that we can catch up. The troubled relationship between government, regulator and Railtrack is pursued through public inquiries and the courts. The water industry’s price controls were harsh – so harsh that several companies are uncertain of the viability of their current structure. One outcome has been the first significant reversal of regulatory decisions on appeal.

All the disputes have a common element. It is difficult for a regulator to manage a relationship with a single dominant company. Peter Davis, the first lottery regulator, lost his job for being too close to Camelot. Dame Helena Shovelton, his successor, lost hers for not being close enough.

On one side lies the danger of regulatory capture. Being a regulator is a lonely job. You depend for information on the industry you regulate; the people who work within the industry are the people you see every day. It is easy to understand how regulators come to see the public interest through the eyes of the firms they regulate. That is how airline regulators ended up operating cartels on behalf of the world airline business.

Yet if you escape the danger of capture, you may fall into pitfalls. You may end up as, in effect, the manager of the business. After all, you have to review the marketing strategies of the contenders for the lottery franchise. You need to make a detailed assessment of whether planned investment in water pipes and sewers is really justified. You have to look at Railtrack’s safety record, and judge whether it is responsible for late trains. The trouble is that second-guessing commercial decisions is going beyond your job.

Yet if you are to control a business without managing it, you incur the further risk of risk of establishing an adversarial relationship between regulator and regulated. If that happens, regulation is conducted through the media and the courts. This makes lawyers and spin doctors rich, but at the price of undermining the rationality of the regulatory process.

These problems are intrinsic to the process of regulating monopolies. Plenty of institutional solutions have been suggested – regulatory commissions, more or less detailed statutory frameworks, more or less regulatory discretion, more or less extensive judicial involvement or political direction, putting regulatory bodies together or pulling them apart. But none of these wheezes will make the problems go away. They will just re-emerge in slightly different forms. If regulators combined political skill, high technical competence, and unquestioned charm and integrity, and if the companies they regulated were committed to pursuing the public interest, we could have less cause to worry. But if these things were always true of civil servants or private firms we would not need regulation.

Given that regulating private monopolies is so fraught, we need to avoid it when we can. Competitive answers are usually better. This is straightforward enough for telecommunications, where the days of natural monopoly are over. The job of a regulator is to achieve a competitive outcome as quickly and as comprehensively as possible and then retire early. The mistake of David Edmonds, head of Oftel, was to believe that such an outcome could be achieved by industry agreement. That is like expecting crime to be managed by negotiations between burglars and their victims.

But you can’t have companies competing to provide a rail network or tap water – they are natural monopolies. And the issue here must be whether it was sensible to pass over ownership of the assets of the industries to a private company. It is increasingly clear in both industries that it would have been better to retain these assets under public control of assets and to transfer responsibility for their operation to competing private companies.

So why need there be a monopoly of the national lottery? If Sir Richard Branson can run a better lottery than Camelot, or people would prefer an operator with more whiskers and less profit, then why shouldn’t the People’s Lottery get a chance? Equally, why should Camelot have to disconnect its terminals to let him do so? Why should a lottery not be run by anyone who can show that they are respectable and willing to make a suitable contribution to good causes?

There is an argument that a lottery is a natural monopoly. Wouldn’t we all rush to the lottery with the biggest prizes? Maybe we would: but football pools survived as a competitive industry for many years, even in the face of legislation that created unnecessary barriers to new entry and innovation.

When it’s difficult to choose, it’s always worth asking whether you really need to make a choice. And when it’s difficult to regulate, it’s always worth asking whether competition could do the job instead.

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