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Ensuring the independence of regulators

Caio Mario da Silva Pereira Neto

FSR Topic of the Month

Competing Architectures for Regulatory and Competition Law Governance

by Peter Alexiadis and Caio Mario da Silva Pereira Neto

In this Topic of the Month, we will turn to the notion of energy governance, both within and beyond the EU, and consider how regulation and competition law function as competing for governing tools. The two authors for this month will be Peter Alexiadis, a partner at Gibson Dunn & Crutcher LLP and part-time professor at King’s College London, and Caio Mario da Silva Pereira Neto, a professor at FGV Law School São Paolo, Brazil and partner at Pereira Neto – Macedo. Each week, they will take a look at a different angle of this topic and weigh the effectiveness of these two governing methods.

#4 Ensuring the independence of regulators

Independence from government or industry influence for an institution responsible for administering sector-specific regulation or competition rules is critical to the effective implementation of both ex ante and ex post disciplines.

The academic literature consistently takes the view that the key rationale for agency independence is that it provides a sound basis to guarantee consistent and impartial decision-making in technically complex cases, driven by the opinions of experts in the field and consistent with fundamental principles regarding “effective, efficient and fair decision-making”. This is particularly important in the context of sector-specific regulation, given that it is primarily asymmetric in nature, imposing regulatory obligations on those entities with market power or some proxy of market power. In such an environment, it is vital that the institution responsible for the imposition of such obligations is free from bias in interpreting and applying complex economic data and in making delicate policy trade-offs when formulating such measures.

In the ex ante field, concerns about regulatory “capture” are therefore at their highest precisely because the degree of independence of the agency might be compromised either because its members are drawn from the ranks of the historical incumbent operator subject to regulation (or expect to join one of the operators in the regulated sector after leaving the agency) or because they are unlikely to apply economic regulation independently of political influence. These concerns are heightened in institutional contexts where State-owned enterprises are competing with private providers, which is still common in many countries around the world. In these cases, because the State maintains a material economic interest in a specific provider, the lack of independence can also lead to the “capture” of the regulator by the government itself in favour of the State-owned enterprise.

The imperative for a competition regulator to act in such an independent fashion is just as strong – if not even stronger – but is less likely to require detailed rules to ensure independence given that the risk of “capture” across a broad range of sectors is more difficult to orchestrate, and the fact that the industrial policy directions of government may vary greatly across all of the sectors of the economy (especially in larger economies, which are not overly dependent on a handful of ‘flagship’ companies). As has been noted in an OECD survey on competition policy, “greater independence was the factor most frequently identified as likely to lead to better promotion of competition law objectives”. To this end, the OECD has concluded that there is a broad consensus among OECD member countries that the independence of NCAs constitutes “best practice” for all competition regimes.

In order to secure the independence of NRAs and NCAs, it is usual for legal systems to establish certain measures that could insulate the agency from pressures and undue influence directed by private parties and the central government. Some of the common institutional features to guarantee the independence of NCAs and NRAs are:

  • (i) fixed and stable mandates for senior officials;
  • (ii) administrative autonomy and absence of hierarchical controls from central government;
  • (iii) financial and budgetary autonomy.

However, the prevention of conflict of interests and the insulation of NRAs from undue influence does not (and cannot) mean a disconnect from constituencies and stakeholders that are involved in the regulatory process. Indeed, there is little doubt that the additional policies of participation, transparency and accountability – including the possibility for judicial review – have improved the legitimacy of the way in which NRAs exercise their competence. It is thus undeniable that true independence, as perceived by stakeholders and citizens alike, has as much to do with whether there exists some mechanism by which those parties can challenge and contribute to NRA decision-making, as well as the ultimate accountability of the NRA to the independent courts of a country. In turn, NRAs are often obliged by law to consult with stakeholders and to embark upon appropriate regulatory action where circumstances so justify.

In turn, this transparency in the context of a stakeholder consultation mechanism means that a regulatory Decision is arguably less likely to be challenged before a national court.  Conversely, the merits of an NRA Decision are more susceptible to appropriate review by the European Commission, thereby improving the effectiveness of EU law.  By being subject to these requirements to take appropriate action, NRAs are thereby subject to a series of checks and balances on their behaviour. As is well summarised by Lavrijssen: “The European rules concerning market oversight are increasingly moving toward a checks-and-balances approach, in which a mix of political, public and judicial accountability mechanisms are put in place to secure that independent regulatory authorities exercise their powers in a rightful and reasonable manner.” This effectively means that the European requirement of independence of NRAs and NCAs has evolved into a multi-layered system.

Read the previous articles of this Topic of the Month.

For a more in-depth study on this topic, you can read Peter and Caio’s recent FSR Research Report on the issue, available here.

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