§ 2 am
§ The Under-Secretary of State for Scotland (Mr. Alexander Fletcher)
I beg to move,That the draft North of Scotland Hydro-Electric Board (Compensation for Smelter Deficits) Order 1981, which was laid before this House on 7 July, be approved.Despite the lateness of the hour, it is a pleasure that the Government, who are much criticised for their tight fistedness, are dispensing public funds, first to the Islands, and now to the Highlands.
The draft order is the sixth to be laid under the provisions of the Electricity (Financial Provisions) (Scotland) Act 1976. Its purpose is to authorise my right hon. Friend the Secretary of State to contribute towards reimbursement of the deficit incurred by the North of Scotland hydro-electric board in supplying electricity to the British Aluminium Company's reduction plant at Invergordon.
The order relates to the deficit incurred by the board during the last financial year. Similar orders have been made for each of the past four years, relating in each case to the deficit of the previous year. I am sure that he n. Members are familiar with the background and the details set out in the memorandum that accompanies the order.
Deficits have arisen on the board's smelter accounts because the cost of the electricity supplied for the smelter, which the board purchases from the South of Scotland electricity board, has been consistently higher than the price that it is entitled to charge the company under the terms of the 1968 contract.
The main reason for the gap has been that the Hunterston B station has not produced as much electricity as it was expected to when the contract was drawn up. The reasons for the shortfall in performance are complex. Hunterston B and its companion station at Hinkley Point were prototypes and have suffered from problems of the sort that commonly affect prototypes. Some have been peculiar to nuclear stations and some are peculiar to the AGR design.
It is worth emphasising that many of the problems that have affected the station's output have been in the conventional part of the station, such as the turbo generators. With growing operating experience, most of the problems are progressively being ironed out.
The performances of Hunterston B during 1980–81 marked a substantial improvement on previous years. That was mainly because of the return to service of the second reactor at the station. The accident to that reactor, which affected the smelter deficits in the three previous years, had no effect on the deficit for 1980–81. Similarly, the derating of the station pending examination of the risks of corrosion to boiler tubes, which had affected the deficit in previous years, was not a factor in 1980–81. Laboratory tests have shown that the output of the station need no longer be restricted on that account.
There is one other important factor underlying the proposed compensation payment on which I should comment. The board and the British Aluminium Company are in dispute about the interpretation of a number of points in the 1968 contract. As a result, the company has refused to pay both last year and in several previous years charges under a number of heads for which it has been billed.
Those unpaid charges have increased the size of the deficit in the smelter account and now amount to about £40 463 million, including financing costs. In March this year the board raised an action against the company in the Court of Session. As hon. Members will appreciate, the amounts at stake in the dispute are very large. In addition to establishing whether the company is liable for the disputed charges, for which it has already been billed, the outcome of the dispute will determine whether it will be liable for similar charges for the remaining 19 years of the contract.
It has become clear, as the board has completed its preparations for the court action, that the dispute may not be finally resolved for some time. I am afraid, therefore, that the hopes that I and others expressed, when last year's compensation order was debated, for a quick resolution of the dispute now seem unlikely to be realised. While the Government are anxious to see the dispute between the company and the board resolved, the Government are not a party to the 1968 contract and are not, therefore, directly involved in the dispute. I made it clear to the board that I hoped that there would be no unnecessary delays on its part during the legal proceedings.
As with previous compensation orders under both Administrations, we have taken the view that no compensation should be paid for the disputed portions of the deficit until liability is firmly established. These disputed charges are retained, therefore, in the smelter accounts, thereby inflating the deficit.
The board's annual report and accounts for 1980–81 show that the deficit at 31 March 1981 amounted to £49 million. As the annex to the memorandum accompanying the order shows, just over £40 million of that represents accumulated disputed charges for 1980–81 and previous years, and a further £250,000 represents a provision for future costs, for which the board is not currently seeking compensation. The remaining £8.7 million is the amount that the Government propose to reimburse to the board under the order. The House will note that that is about half the previous figure.
The calculations underlying the 1980–81 deficits and the amounts specified in the order have been certified by the board's auditors, following the same general principles as those followed in previous years when the accounts were twice examined by independent consultant accountants. As required by the terms of the 1976 Act, the board has been consulted about the drafting of the order, and the Treasury has given its approval. I invite the House to consider the draft order.
§ 2.7 am
§ Mr. Harry Ewing (Stirling, Falkirk and Grangemouth)
I was rather surprised at the Minister's introduction to the order, because the moneys involved and the reason for the introduction of the order can hardly be compared with the previous order introduced by the hon. Member for Edinburgh, Pentlands (Mr. Rifkind).
My guess is that the only people who are pleased that the debate is taking place at 2.10 am are the members of the British Aluminium Company. The Minister will be delighted to know that I do not hold him personally responsible for one of the few scandals in Scotland that I do not lay at his door. This is rapidly developing into one of the scandals of our times. If the debate had been held at two o'clock in the afternoon instead of at two o'clock 464 in the morning there is a distinct possibility that it would have caused more comment than our exchange this morning is likely to cause.
I am concerned that in the memorandum submitted by the Scottish Office to the Select Committee on Statutory Instruments there are one or two points about Hunterston B that are at variance with what the Minister said.
As the Minister correctly said, the whole story goes back to a negotiated contract in 1968 when the British Aluminium Company made a contribution to the capital cost of the construction of Hunterston B power station. The other part of the contract was that the British Aluminium Company would receive guaranteed supplies of electricity for its reduction smelter plant at Invergordon until the year 2000.
When the contract was negotiated it was expected that the Hunterston B station would produce a load factor of 78 per cent. in actual output, as distinct from theoretical output. At no time since 1968 has Hunterston B reached a load factor of 78 per cent.
That is where I take issue with the Minister. I understood him to say that the recent tests with reactors show that the problems of recent years are about to be resolved. In the last year design changes have been made at the Hunterston B station. It is now clear, according to the memorandum submitted by the Scottish Office to the Select Committee on Statutory Instruments, that at no time in the future life of Hunterston B will it reach the 78 per cent. load factor, or anything like it.
The British Aluminium Company is not responsible for that situation. I do not blame the company. However, we must make it clear that the predictions about Hunterston B have not been realised, nor will they be during the lifetime of the Hunterston B station. That has serious implications for the remaining 19 years of the contract negotiated in 1968 between the Scottish Office and the British Aluminium Company.
Most of the losses to which the Minister referred have accrued since 1976, not since 1968. In that time, because Hunterston B has not realised its potential, the North of Scotland hydro-electric board has had to accept responsibility for supplying the British Aluminium Company with much more expensive electricity.
As part of the contract negotiated in 1968, it was agreed that the board would stand any loss incurred. It was also agreed that the other consumers who take their supply from the board would not face increased charges to meet the deficit accrued by British Aluminium.
I say that this is rapidly turning into one of the scandals of our time because a dispute has developed which is now before the courts. British Aluminium is refusing to pay—or disputing—charges to the staggering total of £40,037,898.
All hon. Members receive complaints from constituents about their electricity being disconnected. The amounts involved when the boards decide to disconnect come nowhere near the £40 million involved in the British Aluminium Company case. I can speak for my constituents. They will find it difficult to understand how such massive deficits can be accrued and how disputes can arise about whether a company should pay them. I do not hold the Minister personally responsible, but apparently the State is unable to do much about it.
It would help if the Minister would say which charges are in dispute. Are they for the supply of electricity? Are the electricity charges in dispute? Why is the British 465 Aluminium Company refusing to pay? I know that the memorandum submitted by the Scottish Office stated that the company says that it does not consider itself to be liable under the terms of its contract. However, it would assist us to make our judgment of the situation if we knew the headings under which the £40,037,898 falls. It is important to have that information, because it is not a matter that will go almost unnoticed.
As I said, and as the Minister said, the contract runs to the year 2000. I have not read the report of last year's debate. Last year was the first year during which I was the Opposition spokesman on this subject, and I have not read what I said last year. However, I am sure that I said that by the year 2000 I could see accumulated losses on the smelter account of the North of Scotland hydro-electric board of about £300 million. The figures that we have been given tonight show that by the year 2000 the accumulated deficit on the smelter account—I agree that we would write it off year upon year—could reach the staggering total of £500 million on this contract, which has another 19 years to run.
I want to ask the Minister whether anything is being done in the Scottich Office, or through the SSEB or the North of Scotland hydro-electric board, to renegotiate the contract. I know that these things are legally difficult, but I am sure that the possibility of renegotiating this contract is being considered. What is happening between the British Aluminium Company and the North of Scotland hydro-electric board is not publicly defensible, and I hazard a guess that many of the electricity consumers of both the SSEB and the North of Scotland board agree with that.
We miss tonight the expert voice of my hon. Friend the Member for Edinburgh, Central (Mr. Cook), who usually attends these debates and contributes his knowledgeable comments on nuclear energy in general. He asked me to say that his absence is due to the fact that he has gone to Edingurgh to give the Lothian region some moral support in its difficult struggle with the Government over the rate support grant.
This debate raises the question of generating policy and also the over-capacity that there is now and has existed for some time. It is not a new phenomenon to have over-capacity in the electricity generating industry. It is not something that has occurred in the past six months, or the past year or even in the past two years. I hope that the Minister will tell us whether studies are taking place in the Scottish Office or through the SSEB on generating policy and over-capacity in the generating industry.
There are several issues in the Scottish Office, some of which I should be out of order to mention and which I freely admit were current when I was a Minister in the Scottish Office, that seem to take an interminable time to resolve. I refer not only to the issue of the smelter account with the North of Scotland hydro-electric board and the dispute with the British Aluminium Company but to a number of examples, such as the Yorkhill hospital, that appear to take year after year to resolve. All that time taxpayers' money is being spent. I would have thought that this Government of all Governments would seek to resolve these matters as speedily and as satisfactorily for the taxpayer as possible.
If there is not some improvement in the position of the British Aluminium Company and the smelter account with the North of Scotland hydro-electric board by the time that we debate the order next year, some arrangement should 466 be made through the usual channels for a much fuller debate, not only on the order but on the terms of the contract that binds the company and the board for the next 19 years, and also the whole position of Hunterston B, which is an integral part of the problem. It is a growing part of the problem because, according to the Scottish Office memorandum to the Select Committee on Statutory Instruments, there is no possibility of Hunterston B reaching the 78 per cent. load factor. We do not know its load factor. All we are told is that it will never reach the potential that it was thought to have when it was built. That has serious implications for the tranche of Hunterston B that is set aside to supply the electricity to the smelter plant at Invergordon. If the load factor at Hunterston B is reduced—the Scottish Office says that it is reduced—that tranche must be increased. That plays an important part in the equation that we are discussing tonight.
I know that these are detailed questions. I honestly do not expect the Minister to reply to some of them today I should be grateful if he would write to me about them. I freely admit that since 1968, when the contract was negotiated by the Labour Government, it has been an important issue. The matter is now becoming so out of hand that it is of great public concern. I hope that the Minister will find time to write to me on the questions that he cannot answer today. I hope also that he will consider what I have said about next year if we are again faced with the same order. It would be incumbent on the House to discuss it at a more convenient hour and at much greater length so that the whole background to it could be brought into the open and those concerned about the matter could understand the facts.
Obviously, it is not the Opposition's intention to vote against the order. We realise the importance of what the Minister has said. I look forward to his reply.
§ Mr. Alexander Fletcher
The hon. Member for Stirling, Falkirk and Grangemouth (Mr. Ewing) talked about the possibility of another order next year. The best information that I have is that there will be an order of this nature next year, perhaps providing for a similar amount, and that there will be many more such orders, disappointing as that is to those concerned on both sides of the House in view of the large sums involved. It is unlikely that the debate next year will be more wide-ranging and embrace the contract. The best advice that I have from counsel is that the action is likely still to be under consideration this time next year and perhaps beyond that. I am disappointed. During last year's debate on the order I expressed the hope that there would be a speedy conclusion of the issue. The hon. Member for Glasgow, Garscadden (Mr. Dewar), who sits beside the hon. Gentleman on the Opposition Front Bench, will know that once these matters get into the hands of the lawyers they have a habit of being extremely protracted.
The case is particularly complicated and there is a great deal of money involved. It is an extremely important contract. We are much in the hands of the lawyers on both sides. The contract is a matter for the parties. It is difficult to see how it could be renegotiated unless both parties sought renegotiation. There is no sign that the British Aluminium Company would agree to a renegotiation that would reduce the deficit. As the hon. Gentleman said, the terms of the contract are matters for those who in a previous Labour Government set out on the path of 467 negotiating a contract in 1968 that would last until the year 2000. As far as one can judge, there it is likely to rest. It seems that it will remain a contract until then.
There is no desire on my part to gloss over the loading factors. It has been pointed out in memoranda on previous orders going back to 1977 that the 78 per cent. load factor is not a practical possibility. It was an over-optimistic estimate at the early stages of the AGR development. The loading has improved during the year in question, but there is no likelihood of its reaching the optimistic targets that were considered a possibility in the early days of the contract.
The hon. Gentleman referred to over-capacity in Scotland. Capacity has to be considered many years in advance. There is more than a decade between the planning of a power station and its being commissioned. When we are considering capacity and power stations in Scotland, we are also required to take into account the types of fuel being used. The Government's policy on nuclear stations is that there will be great benefit to the United Kingdom if we develop more nuclear power stations to replace stations using other fuels that are scarce and more expensive.
I am reluctant to enter into a detailed discussion of a matter that is currently before the courts. The parties are in dispute about charges under a number of heads, of which the most important are the charges for the reprocessing of nuclear fuel. I understand that the issue of the company being charged for a share of the eventual cost of the decommissioning of Hunterston B is also one of the items in dispute. There is nothing that I can helpfully add to that without entering into areas that are very much a part of the present action.
§ Question put and agreed to.
That the draft North of Scotland Hydro-Electric Board (Compensation for Smelter Deficits) Order 1981, which was laid before this House on 7 July, be approved.