ELECTRICITY INDUSTRY (FINANCIAL POSITION) (Hansard, 12 May 1967)

§ The Minister of Power (Mr. Richard Marsh)
With permission, I should like to make a statement about the financial position of the electricity industry.
Electricity prices have been stable for two or three years, although the coal price increase of a year ago was passed on to large industrial and commercial users of electricity through contract clauses. In view of the Government's call last July for the standstill and following period of severe restraint, no move has so far been made to revise tariffs. Meanwhile the necessary measures of last year have resulted in a lower rate of growth in sales of electricity at a time when capital charges are growing due to the need to catch up at last on shortages of plant and provide for the faster growth which was previously foreseen. In consequence, 1876 net revenues of the Electricity Boards have been falling for some time, and despite efforts to absorb increased costs through greater efficiency, the industry would incur a deficit in the current year if nothing were done.
The current financial objective of the industry is a gross return of 12.4 per cent. on average net assets—equal to a net return after depreciation, but before paying interest, of about 6¾ per cent. This implies a net balance of revenue of about £85 million a year, about 8 per cent. on gross revenue. In the four years ended March, 1966, the industry's balance of revenue, closely matching the financial objective, amounted to a total of some £260 million, the whole of which was put towards the industry's new investment of nearly £2,000 million. Last year, however, net revenue fell considerably short of the financial objective—by about £60 million—and a further £100 million shortfall would occur in the current financial year if there were no change in prices. Additional loans from the Exchequer of this order would have serious implications for taxation and would, of course, affect our capacity to support other investment. The industry has materially reduced its total capital requirements, but they are still around £600 million a year, which is about one-tenth of total national investment. In such a programme we have to aim to pay as we go a substantial part of the new money required.
In these circumstances the Electricity Council consulted the Government on what action should be taken. We are satisfied that in the circumstances of the industry an increase in tariffs in order to improve the rate of return would be justified against the criteria for price increases after 30th June. I have, therefore, told the Council that the Boards should not try to recover past short-falls but should try to regain the rate of return required by their current objectives as soon as practicable. The increases will vary considerably as between Boards and as between different classes of consumer, but there will be no increase until after the period of severe restraint.
Area Boards are now working out their proposals, which will be considered by the Government under the arrangements for early warning of price increases: they will also be considered in 1877 detail, under statutory procedures, by the Area Consultative Councils and the Electricity Council.

§ Mr. Patrick Jenkin
Is the right hon. Gentleman aware that this is a very grave announcement which will be greeted with dismay by electricity consumers throughout the country? Is he aware that it has profound implications for the Government's prices and incomes policy, and will have a major impact on industrial costs, particularly of large electricity users like the steel, chemicals, glass and cement industries?
The right hon. Gentleman has given us a plethora of excuses, among which figured largely the failure of the National Plan, but he has given us very few facts. I should like to ask him three questions.
First, how much does the right hon. Gentleman expect the average increases will be? In 1965 the average increase in tariffs to the consumer was about 9 per cent. It is suggested this morning in the Press that it may be about 10 per cent. Is this a realistic estimate?
Secondly, bearing in mind that out of £100 revenue £80 goes to the Central Electricity Generating Board and only £20 to the area boards, how much of the increase is due to the increase in the bulk supply tariff to the area boards and how much will go to the area boards?
Thirdly, while we on these benches entirely accept the financial targets which have been set and agree that they should be maintained, why must this always be achieved by increasing prices and never by cutting costs? What progress has been made towards the Prices and Incomes Board recommendation that the financial targets should be combined with a requirement to keep costs down? How long must the electricity industry go on paying the cost of giving preference to coal?

§ Mr. Marsh
The hon. Gentleman has asked a number of questions in a somewhat polemical tone. It is difficult to work out exactly what the increases will be. We must first hear what the area boards will do. The average increase probably should be about 10 per cent.
The point is—and the House really must accept this—that if the country wants an efficient, modern, large-scale electricity industry without breakdowns, 1878 it must be prepared to invest large sums of money. The hon. Gentleman knows that as well as anyone else. The effect on the cost of living index of the increases should be about 0.3 per cent.
As I made some effort to make clear, in terms of the incomes policy, there will be no increase until after the period of severe restraint, and the criteria are thus in accordance with the White Paper. The effect on industrial users is likely to be rather less than on domestic consumers, since industry has already absorbed some of the increased coal prices.

Mr. Alan Lee Williams
Does not my right hon. Friend agree that, now that the consumers are faced with increases in the tariff, they have every right to demand an increase in the standard of service? Can he give a guarantee that there will be no further cutting or shedding of the load during the winter months so that at least there can be some benefit from the increased tariff?

§ Mr. Marsh
That is a fair question. Every Minister of Power gets more letters and objections to breakdowns and disconnections, voltage reductions and the rest than about any other subject. But these factors have been reduced enormously in recent years as a result of hard work.
The fact is that the country cannot have the sort of electricity programme it requires unless it is prepared to pay for it. It is not a question of whether it can be done more cheaply or not—and I am sure that the hon. Member for Wanstead and Woodford (Mr. Patrick Jenkin) does not believe this himself, since, for example, nuclear power stations tend to be expensive articles—but whether the cost should be met out of personal taxation or out of capital that had been made available for other things, such as hospitals, roads and education, or whether we should be realistic and face the issue, which is what we have done.

§ Mr. Alison
The right hon. Gentleman has spoken of the capital burden. First, why is he announcing an increased price when we have just had an announcement of a substantial cutback in the capital programme and when Bank Rate has been reduced so that the cost of Government borrowing has been reduced? Secondly, why is it that we are not to wait for the completion of the Government's review of the fuel policy 1879 before these increases come into effect? The cost of the electricity industry may be substantially reduced in the light of the Government's future fuel policy. Thirdly——

§ Mr. Speaker
Order. I must protect the business of the House. Questions must be reasonably brief. That is enough.

§ Mr. Marsh
I gave the reasons as clearly as I could. If there is no increase, the Central Electricity Generating Board and the Electricity Council will be unable to meet their financial objectives, and the short-fall would be about £100 million. That money would have to come from somewhere. No one would suggest cutting the programme and therefore it is a question as to whether one is prepared to meet the cost by cutting back on investment elsewhere or by meeting it within the industry itself.

§ Mr. Murray
Is my right hon. Friend aware that the fact that the domestic consumer is likely to pay more on average than the industrial consumer is a matter of great concern, particularly to the lower-paid workers. How far is it intended to leave the gas industry in a favourable position?

§ Mr. Marsh
This is one of the difficulties in hon. Members trying to draw me on what the average increases are likely to be. We do not know yet. It is a question of the area boards' interpreting how this will affect them, and the recommendations they make will have to be considered by me on behalf of the Government.
The point my hon. Friend has raised about the gas industry is real enough. The same considerations clearly apply there. It is too soon to say whether any general increase would be necessary at some time in the future for the gas industry. Clearly, the burdens of the North Sea gas investment must be faced and the matter is under consideration.

§ Mr. Ridley
Is the Minister aware that the fact that he has chosen a very quiet day to make his statement will not result in his having a very quiet reception of what he has said? Can he tell us how the Government have got themselves into such a muddle that, in the period of a nil norm, and after 12 months of wage 1880 standstill, they dare to put up electricity prices by 10 per cent. to all consumers?

§ Mr. Marsh
I do not think that I am naive enough to believe that an announcement of this type would make me widely popular whenever it was made.
These prices will not come into operation until about September, when the period of severe restraint will be over. The party opposite has tried to dodge these issues, with catastrophic results, for many years. I come back to the simple proposition that if we have to find £100 million for the electricity industry we can either get it from the Exchequer at the expense of other things, cut the programme, or find the money within the industry.

§ Mr. Conlan
Is my right hon. Friend aware that the increases will bear particularly hard on the pensioners? Will he consider whether any worth-while schemes for rebates can be considered for pensioners?

§ Mr. Marsh
This is a very big question. It has been looked at on a number of occasions. It would be a quite incredibly difficult thing to do, not least because not all pensioners are cases of hardship; there are wealthy pensioners as well as others. It is extremely difficult.
Successive Governments have felt that the best way to deal with people in such circumstances—and I do not under-rate their problems at all, which are serious—is by direct benefits rather than by attempting to jig around with prices in this way. I accept the point that these increases are not inconsiderable but it is estimated that the effect on the cost of living as a whole will be about 0.3 per cent. We are also giving a great deal of notice. The increases will not be made until the end of the year.

§ Mr. Winnick
Despite the hypocrisy of hon. Members opposite and the many problems he has explained, is my right hon. Friend aware that many wage earners with low and average incomes will be bitterly disappointed by his announcement?

§ Mr. Marsh
Of course everyone is disappointed at the idea of increased costs for anything. But we are all agreed on the sort of electricity programme we need, and it has to be financed. This 1881 can be done by cutting the programme or at the expense of other things—which I know my hon. Friend feels strongly about——

§ Mr. Patrick Jenkin
Or by efficiency.

§ Mr. Marsh
It is no good the hon. Gentleman bumbling about efficiency. This is a highly efficient industry which compares with any other in the world.

§ Mr. Atkinson
Does my right hon. Friend accept that this just about finally kills the Government's wages policy? Is it not the case that the Government's mismanagement of their capital resources shows that the wage restraint by the electricity workers has proved valueless in keeping down prices?

§ Mr. Marsh
It shows nothing of the sort. First, we are talking about increases after the period of severe restraint has ended, and, indeed, increased labour costs are part of the story. If there are no price increases for three years and labour costs rise in the meantime—which is precisely the position—obviously prices have to be increased in the end. Of course I am not blaming all this on wages but increased labour costs have contributed.

§ Mr. Patrick Jenkin
Does the right hon. Gentleman really believe that nothing can be done to increase efficiency? Is he aware that the staff of the Central Electricity Board increased by over 12 per cent. between 1965 and 1966 while sales increased by little more than half?

§ Mr. Marsh
Of course everyone is using a "phoney" argument. Of course one can increase efficiency in any industry on the margin. I am sure—indeed, I challenge him on it—that the hon. Gentleman does not believe for one moment that efficiencies on the scale that he suggests could be achieved in the electricity industry. If a deficit of this size were due to inefficiency it would be a shattering condemnation of the entire industry, which the hon. Gentleman would not make now.

§ Mr. Speaker
Order. Before I call the first Adjournment debate, I would point out that we have lost about 40 minutes of Adjournment time. I make 1882 no complaint, but this means re-adjusting the times of the debates.
The first debate will end at 1 o'clock; the second will be from 1 to 1.45 p.m.; the third from 1.45 to 2.30 p.m.; the fourth from 2.30 to 3.15 p.m.; the fifth from 3.15 to 4 p.m. and the last, in the name of the hon. Member for Bebington (Mr. Brooks) will be from 4.0 to 4.30 p.m.
I will have a copy of this list made and it will be posted in the usual way.