Proving them wrong

With fewer challenges to utilities regulators being brought, Andrew Denny asks: are the regulators finally getting it right?

Since the public utilities were privatised in the 1980s, there has been a significant number of court challenges of utilities regulators' decisions. Yet judicial review applications against the regulators have dropped off recently, with no decided cases in the last two years. This raises the question: have the regulators learnt from past errors and are they now getting it right?
The regulators' roles differ from sector to sector, but the common theme is the regulation of monopoly power and the promotion of competition. These are public functions capable of challenge in the courts by way of judicial review, and in the past the utilities have been prepared to do so, particularly given the significant financial impact that regulatory decisions can have on their revenue stream.
Why, then, the apparent absence of challenges in recent years? This may be due to an increased sophistication in the market – fairly blunt regulatory rules are now more refined and the need for adjustment is accordingly reduced. For example, the New Electricity Trading Arrangements are largely perceived to be a success, delivering clearer price signals and greater competition, and so the need for regulatory decisions has been reduced.
Arguably, those within the industry have also recognised the legal difficulties of challenging the regulators on judicial review and the fact that the regulators are now more aware of pitfalls and how best to avoid them. Mr Justice Lightman neatly summed up these difficulties in R v Director-General of Telecommunications, ex parte Cellcom & ors (1998): “The court may interfere with a decision if satisfied that the director has made a relevant mistake of fact or law. But a mistake is not established by showing that, on the material before the director, the court would reach a different conclusion. The resolution of disputed questions of fact is for the decision-maker, and the court can only interfere if his decision is perverse, eg if his reasoning is logically unsound.”
To appreciate the difficulties facing a prospective claimant, consider the various grounds of challenge. As with any judicial review application, the strongest grounds are likely to be that the regulator has misdirected itself as to the law. The 'law' in this case may be the governing statute or the provisions of codes, rules or licences made or granted under that statute. Licences in the utilities sectors commonly include a provision stating that words and expressions used in the licence are to be “construed as if they were in an Act of Parliament and the Interpretation Act 1978 applied to them”. This confirms the courts' view that, in general, the interpretation of licences is a matter on which they need not defer to the regulator – it is a question of 'hard-edged law'.
Furthermore, where the regulator has made an error in interpretation, the court may be prepared to substitute its decision for that of the regulator, particularly where the 'correct' interpretation allows no other result. In R v Director-General of Water Services, ex parte Oldham Metropolitan Borough Council & ors (1998), Mr Justice Harrison considered that the issue of whether budget payment units (which cut off the water supply when the customer runs out of credit) were lawful under the Water Industry Act 1991, was a question of law for the court to determine. He then went on to make a declaration that the units were indeed illegal.
Even where issues of interpretation are central, a claimant may still face difficulties. The words of the statute, licence or code may be wide enough to allow different interpretations. If the regulator has adopted an interpretation that is rational, then the court is unlikely to interfere, even if it would have reached a different conclusion. In R v Director-General of Electricity Supply, ex parte First Hydro Company (2000), Mr Justice Moses was unwilling to find that the definition of 'connection charges' in the National Grid Company's transmission licence was capable of only one meaning. The question of whether particular works could be charged for by way of connection charges was one for the Director-General, and the conclusion he reached was rational.
With most decisions, the regulator will be exercising a wide discretion based on its obligations to promote competition. As Judge Lightman noted, the exercise of that discretion will only be impugned by the court if the reasoning is “logically unsound”. Accordingly, there have been few cases where the courts have overturned a regulator's decision on competition grounds. This is perhaps unsurprising, as a judge would be reluctant to question the judgement of an expert regulator on such a technical area. The notable exceptions are the decisions of the Court of Appeal in the Scottish Power (1997) and Northern Ireland Electricity (1998) cases. Both turned on the issue of how far the regulator was bound to follow recommendations of the Monopolies and Mergers Commission (MMC). However, it was not necessary for the court to reach a detailed view on the regulatory issues considered by the MMC; it only needed to determine that the regulator's reasons for not following the MMC's views were inadequate.
It may be possible to challenge a regulator's discretion as discriminatory. If the decision treats one member of the industry differently from a similar company, the court will expect the regulator to provide rational reasons. In Scottish Power, the Director-General refused to make the same changes to Scottish Power's licence as had been made to Scottish HydroElectrics' licence following the MMC recommendation. The court found that the Director-General's reasons were not sufficient to justify treating similar cases differently.
Another potential ground for a challenge is if the regulator has failed to take relevant factors into account. In Cellcom, the applicant alleged that the Director-General had failed to give sufficient weight to a series of factors, including the “catastrophic” impact that the decision would have on it. But as the court noted, provided the regulator gives thought to such factors, its decision cannot be challenged. It is for the regulator to decide how much weight to accord to each factor.
If the regulator's decision is rational, the remaining options for a claimant are few. It may be possible to argue that the regulator has failed to follow correct procedure, perhaps due to a failure to consult adequately with those potentially affected by the decision. But the prospects for this appear limited. Generally, the relevant statutes make ample provision for consultation prior to any decision. The regulators' practice is to indicate their views well in advance of any final decision. This gives plenty of opportunity for further comment.
However, one area where a regulator has slipped up is the requirement to provide adequate reasons for its decision. In R v Director-General of Electricity Supply, ex parte London Electricity (2000), the court considered that the Director-General's reasons were inadequate as they did not address the applicant's main point of complaint. Judge Harrison noted that the points made in the witness statement filed on behalf of the Director-General were different from the original reasons given, suggesting “ex post facto rationalisation” on the part of the regulator.
Even if there are good grounds on which to challenge a regulator's decision, a prospective applicant can still come to grief over the tight time limits that apply to applications for judicial review. An application must be brought 'promptly', in any event within three months of the decision that is the subject of the challenge. The question that arises in this context is: what is the type of decision that is capable of being reviewed? Regulators will commonly give their view well in advance of a formal determination, which usually follows a period of consultation. The usual rule in judicial review is that the claimant should have exhausted all alternative remedies, including any appeal procedures, before applying to the courts. Accordingly, in Cellcom, the applicants were initially refused leave to apply on the basis that the application had been made prior to the consultation period, during which the applicant's representations could have been taken into account prior to a final decision.
A claimant must also be careful to preserve its position, and cannot leave a decision unchallenged if certain aspects of it are final. This will require careful analysis of any statements by the regulator. If there is any doubt about the position, it may be better to incur the additional cost of applying for leave, even if only to have it refused, rather than risk losing the opportunity altogether.
Given the legal difficulties facing prospective claimants, it is perhaps unsurprising that there have been few decisions taken by utilities regulators that have been challenged in recent years. However, in an area where the financial benefits to a successful claimant can be substantial, there will always be those that are willing to take a gamble against the odds. These benefits will no doubt result in lawyers looking for new and more inventive ways to avoid the traditional judicial review pitfalls – look out for future claimants relying on European Commission directives and even the Human Rights Act in order to argue that the regulator has acted unlawfully.
Andrew Denny is an associate in the litigation department at Allen & Overy