Today we hear that Network Rail faces a large fine from the Rail Regulator for its failure to complete the engineering works to its network on time over Christmas and the New Year period. A few days ago we heard that Ofgem had fined national Grid Â£41.6 million for its behaviour towards pre payment meter consumers. These are presented as good news stories, designed by the government and its regulatory quangos to prove they feel our pain and are standing up for us, the overcharged and under-served long suffering public.
We should ask is this approach makes any kind of sense? Making large companies â€“ one a monopoly and one a former nationalised monopoly â€“ pay large fines does not help the customers for the past problems. All those who have had to pay a lot for their gas, and all those who had their travel disrupted by Network Rail a couple of months ago, will draw no immediate benefit or relief from knowing these two companies have been fined. In the case of Network Rail the position is worse. Much of the money they spend comes from the taxpayer, so ultimately any large fine imposed on them will come from the same source. It is a circular movement of cash from the taxpayer to Network Rail, and from network Rail back to the taxpayer in the form of payments to a taxpayer financed quango. The taxpayer still ends up paying for the regulator, but his or her money is routed through Network Rail so there are larger handling charges. If any money is to pass it should be from the offending company to the customer that has suffered. The problem in the rail case is anyone could claim to have wanted to use the cancelled trains.
The defence for these large fines is presumably that the senior managers of these organisations will not let them happen again. I am not so sure. If the senior managementsâ€™ own bonus payments were removed because they had made serious mistakes, that might concentrate their minds in future. The impact of a fine which causes a day or twoâ€™s embarrassment in the press for a large organisation that will be used to a mixed press may not have the same benign effect.
Is there an alternative to such an approach? I think a good referee is one who tries to keep the game flowing, not someone who takes a delight in every minor infringement so the can be the centre of attention and drive as many players off as possible. Good rugby referees these days are constantly shouting advice to the players to try to prevent them breaking the many and complex rules. Only if a player flouts the refereeâ€™s clearly stated understanding of the state of the game will there be a penalty. That makes for a more interesting spectacle for the fans.
In the National grid case the regulator found against a series of long term contracts National grid had entered with five of the six main energy suppliers in that market. Given the amount of information Regulators now expect, and given the number of people the Regulator now employs, why couldnâ€™t the Regulator have advised them before signing that these contracts would be unacceptable? Or noticing them after signing, why couldnâ€™t the Regulator have said then that they wanted them modified, and given the industry a little time to do so before coming in with heavy handed intervention?
In the railway case, the travelling public would prefer lower fares than an industry having to pay a heavy fine out of the money the taxpayer gives the industry. The Regulator needs to think through how much of a penalty a fine is on a wholly owned subsidiary of the taxpayer, used to seeking taxpayer money for much of its costs.
The idea of imposing heavy fines to show who is boss has spread to the EU. Their Competition Commissioner has just succeeded in a case which has led to a large fine for Microsoft. At least that is a fine on a private sector competitive business, where the pain is felt by shareholders. Clearly there was a strong difference of opinion between the company and the EU over what is an acceptable practise when selling popular and state of the art computer software.
We live in the age of the regulator. In the two UK cases the government appears pleased that unpopular outcomes â€“ rising gas bills and a shortage of train services â€“ have led to large fines on the offending companies. Consumers would be happier if a solution to the underlying problems could be found. Large fines are not going to make taxpayers and customers feel better off, because they are not going to be better off. It is time the government thought again about the scope and style of regulation, to see if regulators could become better referees, keeping business flowing within the rules rather than waiting for the offences and then coming down like a ton of bricks.
Itâ€™s the same thing these days in the money markets, where a movement of the Governorâ€™s eyebrows used to ensure the old clearing banks took appropriate action to avoid stresses and strains. The modern â€œreformedâ€ Bank of England no longer uses the eyebrows in the same way, so we ended up with a run on a bank for the first time in more than a century.