The Paradox of Regulatory Discretion

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Publication details 

Mantzari, Despoina and Francesca Pia Vantaggiato (2020) ‘The Paradox of Regulatory Discretion’, Journal of Law and Policy (Wiley), pp. 1-52. Available online at: https://onlinelibrary.wiley.com/doi/abs/10.1111/lapo.12158

Summary

Regulatory authorities in the utilities sector typically employ economic evidence and analysis to make expert discretionary judgements under uncertainty. However, economic analysis does not provide clear answers regarding policy outcomes. This exposes regulators to environmental uncertainty (i.e. uncertainty regarding the reactions of other actors in the institutional system to their decisions). When environmental and policy‐outcome uncertainty are high, discretion takes center stage. Will regulators pursue the course of action suggested by economic analysis and their expert judgement, or not? What explains this choice? To answer these questions, we carry out a comparative analysis of three British regulatory authorities in the utilities sector: the Office of Communications (Ofcom), the Office of Gas and Electricity (Ofgem), and the Water Services Regulation Authority (Ofwat). We consider key sectoral and organisational characteristics, namely the extent of market competition and statutory discretion. We rely on interview evidence and documentary analysis and a principal–agent framework. Our analysis reveals a paradox: when environmental and policy‐outcome uncertainty are high, higher regulatory discretion is associated with a reduction in the importance of the role of economic expertise in regulatory decisions. Our findings call for a normative reflection on the role of expertise in regulated sectors.

The research on which the article draws has been funded by a BA/Leverhulme Small Research Grant (Grant No: H5234700); the British Academy’s support is gratefully acknowledged.