Building Independent and Accountable Regulators

Font Size:

OECD data shed light on the governance of economic regulators.

Font Size:

Although economic regulators are often invisible to much of the public, they are indispensable agents of many things we take for granted. Through their work, economic regulators support the achievement of economic, social, and environmental objectives in utility sectors. By regulating prices, authorizing activities, and settling disputes, they oversee the smooth and efficient delivery of essential services including energy, electronic communications, water, and transport.

Economic regulators’ work has never been more relevant, but it has also never been as complex. The emergence of new technologies and services reshapes the sectors they oversee, increasing the need for dynamic regulations. At the same time, regulators must facilitate the resilience of these sectors to weather crises such as COVID-19 and the energy crisis.

In this dynamic context, regulators require strong governance arrangements to do their work effectively. Good governance lays the foundations for technically rigorous, objective, and predictable decision making. This path includes clarifying the regulators’ role, providing them with adequate powers and resources, and employing mechanisms to hold them accountable.

Good governance will strengthen economic regulators’ agility to adjust to evolving circumstances and challenges, such as new roles to support the decarbonization of the sectors they oversee. To help regulators ensure their governance supports strong performance, the Organization for Economic Cooperation and Development (OECD) defined a set of best practice principles and regularly conducts in-depth performance reviews of individual countries’ regulators.

To assess different regulators’ states of play and compare them across sectors, the OECD has also developed indicators on the governance of sector regulators. To provide a high-level overview of its governance, these indicators measure a regulator’s independence, accountability, and scope of action. By highlighting trends, challenges, and good practices, the governance indicators provide an objective basis to assess the different aspects of a regulator’s governance and help to highlight areas of potential concern.

In chapter five of its most recent Regulatory Policy Outlook, the OECD discusses some important takeaways from this research on the independence and accountability of economic regulators.

On independence, the data show that most OECD member countries have delegated economic regulation to independent regulatory bodies. Establishing regulators that are independent from government and the sectors they oversee can strengthen confidence that decisions are objective and impartial. This setup can prevent politically-motivated decision making and signal a commitment to long-term goals that go beyond political cycles.

In OECD member countries, a majority of regulators are independent. Broken down by sector, this translates to an independent status for 87 percent of regulators in energy, 84 percent in e-communications, 83 percent in rail transport, and 76 percent in water sectors. Only about 50 percent, however, of OECD air transport regulators are independent.

Additional safeguards can ensure independent decision making and prevent industry or governmental interests from capturing regulators. For example, post-employment restrictions on a regulator’s leadership, such as “cooling-off periods,” are a common safeguard to minimize the risk of a “revolving door.” Safeguards against arbitrary dismissal can prevent cases of the government dismissing the regulator’s leadership as a consequence of unpopular decisions. Although governments often hold powers to dismiss a regulator’s leadership, there are usually defined criteria in law to limit when this can happen.

Furthermore, for most regulators, executive involvement in day-to-day regulatory work is limited. On average, although, 59 percent of regulators can receive government guidance on their long-term strategies, only 37 percent receive guidance on work programs, 23 percent on individual regulatory decisions, and 20 percent on appeals. Governmental guidance tends to happen more frequently for air transport regulators than for regulators in other sectors.

The way that regulators receive and manage their resources is another important lever that can affect their autonomy and agility. New OECD work on the resources of regulators shows that arrangements to preserve a regulator’s autonomy in staffing, funding, and financial management could use further strengthening.

Many regulators, for example, recruit their staff independently through public processes, but approximately a quarter need permission from the executive before they can recruit. When this arrangement restricts staff numbers below what is required, or when it simply slows down recruitment, this reduces regulators’ ability to respond to developments. Furthermore, over a quarter of regulators can experience modifications to their budget during the year that do not require legislative approval. These occurrences reduce budgetary predictability and open the door for potential undue influence in regulators’ work.

In theory, independence and accountability are two sides of the same coin. When regulators enjoy a higher degree of independence, they also face a bigger responsibility to remain accountable for their actions. The data show that this correlation is also true in practice: Regulators that are more independent use more good-practice accountability mechanisms, such as stakeholder engagement and reporting on performance. A majority of independent regulators, for example, publish draft decisions to collect feedback and respond to stakeholder comments. Such accountability measures can build trust in regulatory systems and public institutions.

Performance assessment is another critical ingredient for maintaining accountability, fostering transparency, and driving improvements. But the Regulatory Policy Outlook identifies an opportunity to expand the collection and reporting of information about a regulator’s performance. In particular, regulators can improve reporting on their organizational performance. Only half of regulators publish information on the quality of their regulatory processes, such as impact assessment and stakeholder engagement. Moreover, only 54 percent publish information on their compliance with legal obligations and 58 percent on their organizational governance.

The OECD’s indicators on the governance of sector regulators can serve as a starting point to understand the impact of regulatory governance on the performance of sectors. Early quantitative research in this area seems to suggest a positive relationship between good regulatory governance and better market performance. Further research will be necessary to explore the exact nature of these relationships.

Vincent van Langen

Vincent van Langen is a policy analyst at OECD.

Martha Baxter

Martha Baxter is a policy analyst at OECD.

This essay is a part of a nine-part series entitled, A Global Regulatory Policy Outlook.

This contribution builds on the publication OECD (2021), OECD Regulatory Policy Outlook 2021, OECD Publishing, Paris, The additional opinions and arguments employed herein are those of the authors and do not necessarily reflect the official views of the OECD or of its Member countries.