§ Motion made, and Question proposed, That this House do now adjourn.—[Mr. John M. Taylor.]
9.38 am§ Mr. Barry Field (Isle of Wight)I thank you, Mr. Speaker, for the opportunity for this morning's debate, and I thank my hon. Friend the Minister of State for being here to reply. It may be helpful if I quickly paint in some of the background to my request for this debate this morning.
In October 1988, the Monopolies and Mergers Commission published its report and recommendations about the future pricing of contract gas. That followed a long and sustained campaign by Sheffield forgemasters and others about the cost of gas for those with very big loads. The Secretary of State for Trade and Industry accepted the report and asked the Director General of Gas Supply to seek agreement with British Gas to modify its authorisation to give effect to the recommendations. The proposed and agreed draft modifications were published at the end of January. There then followed a 28-day period for representations on the proposals. Early in that period, British Gas published an explanatory memorandum showing the likely form of the pricing schedules that would be introduced as a result of the proposed modification. That memorandum was sent to the 20,000 contract customers of British Gas.
It is fair to say that the National Farmers Union and the regional gas boards were taken by surprise by the MMC proposals and their effect. They had believed, and I believe had encouraged their customers likewise, that the MMC report was likely to affect large industrial users only. With hindsight they realise that they had not, as a result of their initial belief, made as strenuous representations as they might have done had they foreseen the effect on the glasshouse growers.
At this stage it is worth putting down a marker—I find it extraordinary that the MMC and the Office of Fair Trading seem to conspire against small business men in all their recent reports. We have seen that happen with publican tenants or responsible brewers building up their clientele, or—here I must declare an interest—local funeral directors trying to compete with the mighty Co-op.
In this case glasshouse growers are trying to compete with their Dutch competitors. Even before the proposed price increases resulting from the MMC report, our glasshouse growers faced a price differential disadvantage in comparison with the Dutch who are still buying gas in volumes as low as 25,000 therms per annum at the price of 15.5p per therm, compared with 16.1p per therm for 500,000 to 1 million therms charged by British Gas. So that there can be no doubt that alternative fuels are not an option, heavy fuel oil was, at the time of the published proposals, 15.91p per therm. It carries none of the CO, advantages of gas, which I shall describe later.
Those facts make the conclusions of the MMC report, that British Gas prices for interruptible gas supplies were broadly in line with the rest of the Common Market and that prices were also comparable for small-firm gas customers, all the more extraordinary and breathtaking. They demonstrate a lack of comprehension of the effect that the clumsy intervention and interference of the MMC with the established market will have on the small business man. The MMC's proposals, taken together with its 1422 obsession and that of the OFT for transparent pricing, demonstrate that they are a recipe for disaster for the small business man, the little entrepreneur and the fledgling capitalist that the Government have done so much to nurture and encourage.
After all, every French restaurant must, by law, exhibit its prices ouside the premises, but any self-respecting Englishman will tell you, Mr. Deputy Speaker, that no one has ever succeeded in paying a bill that bears any relation to that published menu. Similarly, in the energy market, every liquid petroleum gas and fuel oil salesman in the country is rubbing his hands in glee at the prospect of pitching his undisclosed price just below the British Gas published price.
I hope that my right hon. Friend the Secretary of State for Trade and Industry, who is new to the post, will get to grips with the enclaves of theoreticians and academic gombeen men at the MMC, who have consistently failed to champion the cause of the small business man in practically every commercial sphere on which they have published reports. In this case, their philosophy to the market gardener seems to have been "tough tomato".
I have not come to this debate today as a Back-Bench banshee seeking to grab the headlines by screeching my complaints at my right hon. Friend. It is much more my style to seek the route of practical politics by endeavouring to find a solution without bothering the apparatus of Whitehall. In this case I have carefully examined the possibility of glasshouse growers connecting up their gas mains to one another so that they become a single customer of British Gas. That would mean that the total load would be eligible for the lower tariff prices; that would remove, or at least alleviate, the economic disadvantage faced by those growers. That proposition, however, is not financially viable and it would require capital investment beyond the reach of the growers. In any event, it would require such a long buy-back period as to be a financial disaster.
Under the new schedule, interruptible supply will be available only to single premises taking in excess of 250,000 therms per year. In the past, British Gas has allowed several independent nurseries to form a gas group so that the price could be based on their total consumption.
Being nothing if not resourceful, my second line of attack in practical political terms was to seek to use the MMC's directive that British Gas should make available its pipeline for other suppliers to contract gas supplies to commercial users. As the Wytch Farm gas and oil site is not far from my constituency, and as the chairman of the Isle of Wight development board is the recently retired chairman and chief executive of Mobil Oil, I asked whether he would investigate that proposal for our island growers.
The possibility of providing low-price gas to other island commercial customers appeared extremely attractive. Such gas could be used by other glasshouse growers in adjoining constituencies. The thought of establishing the island as a centre of low-cost energy appealed to my commercial instincts and would probably accelerate our economy quicker than any application for assisted-area status, which has been the longest running campaign that the island has ever mounted.
We were told, however, by Mr. Legatt, British Petroleum's section manager, that gas supplies from Wytch Farm are fully committed until more fields come on 1423 stream in 1991–92. I hope that my right hon. Friend will therefore appreciate that I have examined all the possibilities before bringing this matter to the House.
One other dimension that must be considered is the environmental effect of the MMC proposals. Glasshouse growers have invested heavily in CO2extraction plants that take the CO2 out of the flue gases from the gas-fired boilers and circulate it in the greenhouse, which is an essential ingredient to any plant's growth. Before the introduction of gas-fired boilers, growers had to purchase bulk CO2 and introduce it into the glasshouses from bottled gas. It is extraordinary that the Government are, quite rightly, pursuing environmentally sensitive policies on the atmosphere, but the MMC report, if effected, will require growers to switch back to fossil fuels. That will therefore increase the amount of "nox and sox" put into the atmosphere.
By purchasing gas for their heating and recovering CO2 from the flue gases, growers are pursuing as environmentally sensitive a policy as one could possibly get. That is especially true when one appreciates that it is coupled with an extraordinarily efficient energy-saving arrangement, whereby the heat of the flue gas is also used to heat water storage heat reservoirs, which are then used to supplement the heating requirements during the night-time drop in temperature.
Currently, the glasshouse industry of the United Kingdom has an output value of £271.4 million per annum for vegetable crops and £156 million for ornamental crops at 1987 prices. Those figures show that the industry is making a substantial saving in imports and therefore making a contribution to our balance of payments. Much as we love the Dutch, every British housewife would prefer to buy her pound of tomatoes from an English grower, providing that the price is right.
The glasshouse growers were encouraged to invest in the provision of new gas pipelines for their glasshouses in the expectation that the contracts into which they had entered with their local gas boards would be held in terms of the price for interruptible supplies for a few years hence. Indeed, in one case, taken together with the provision of the CO2 extraction plant, the total capital expended on a gas main and new energy-efficient gas boilers has been £100,000
One can therefore imagine the considerable anger and frustration that the glasshouse growers feel in finding that, because of the MMC's requirements for British Gas to publish a price tariff, the price of interruptible gas will rise from 16.1p per therm—already less competitive than the Dutch prices that I have mentioned—to 26.5p per therm, assuming that the grower continues to opt for the same maximum period of interruption. That is a rise of 64 per cent., with no rights of negotiation and no discussions between customer and supplier.
As a result of the representations made to me by the glasshouse growers, I contacted the Director General of Gas Supply, Mr. James McKinnon, who kindly agreed to visit the Isle of Wight and see at first hand the enterprising way in which the glasshouse growers were conducting their business and the effect that this massive increase in their prices will have on their business. As a result of that arrangement and representations that he has received from parliamentary colleagues on the Conservative Back-Bench horticultural committee, he has published a seven-point set of proposals, which he has asked British Gas to look at. These state: 1424
The number of bands in the price schedule should be expanded in firm and interrupted contract categories to cater for higher levels of volume. Aggregation should be available in both categories. The number of proposals for which firm supplies can be aggregated should be increased to cover all customers' circumstances.All legitimate trading affinity groups and energy management companies or other agents offering centralised contracts should be permitted to aggregate for the purpose of price qualification in both the firm and interrupted sectors.Load factors to be introduced without delay as further determinant of the prices charged to customers.Arrangements should be made to 'buffer' the impact of changing from one band to another.The existing matrix of choice should be expanded to provide a further range of options. An understanding should be given that interruptions under contract should, if possible, be pre-arranged with customers.A review should be carried out as to the choices which are presently offered in terms of an inflator or indices.Some customers have experienced very heavy increases in prices. For such customers the transition period should be extended to three years.On Friday 14 July, I met the regional deputy chairman of Southern Gas in Southampton and put to him the points about the effect that those increases would have on the glasshouse grower, the point being that in most businesses the energy cost of heating the premises is a small proportion of the total overheads, but in the glasshouse industry it amounts to some 30 per cent. of total production costs. It would be fair to say that Mr. Webb, the regional deputy chairman, and I had a robust conversation, but I believe that, having spoken to Mr. Young, the regional chairman, having corresponded with Sir Denis Rooke, the chairman of British Gas, and having met on no fewer than three occasions the Director General of Gas Supply, it is time for a champion in the Department of Energy to blow the whistle on behalf of the glasshouse growing industry and say that enough is enough.The simple solution to this problem would be to allow glasshouse growers who are members of a similar buying and selling co-operative group to aggregate their supplies, even if this meant that the regional gas board was committed to invoicing a single trading entity, leaving the members to divide the costs and recover the payments among themselves.
The information that British Gas has given me—that it believes that the MMC's report prevents it from doing this—is falsely based. That is certainly the view of Ofgas. It criticises my solution also on the ground that other organisations will be able to aggregate their supplies and obtain a lower tariff. On one occasion, it was suggested that every betting shop would wish to aggregate its demand. We in the House are well used to attempts to rubbish logical solutions by extreme argument. The fact is that, whether multinational conglomerates or high street retailing chains, they are none of them part of the same purchasing and selling consortium. Each is a trading entity or a cost centre in its own right. Even if these organisations are centrally supplied, they are not also a consortium for sales in the daily marketplace, and it is that that distinguishes the growers from other gas consumers. After all, the MMC accepted the exception for customers who used gas as a feedstock for ammonia production.
I believe that allowing aggregation is not such a problem, nor is it so likely outside horticulture, where, as in all things, growers, like farmers, are well used to pooling their resources to obtain a stable price for their produce and to buy as cheaply as possible their fertilisers, packing 1425 requirements and so on. Also, these nurseries provide British Gas with summer demand, thereby balancing its total demand throughout the year.
I look to my right hon. Friend the Minister to champion this cause. I feel like a dog that has a flea in its tail; I have gone round and round in circles trying to end this small irritation. Like that flea, I believe that there is common ground between myself, the regional gas board and the chairman of British Gas on the view that the amounts involved for horticulture and the pricing of an aggregated gas supply for horticulturists are a fleabite in the total contracted interruptable gas supplies in the United Kingdom. British Gas has promised a response by September to the seven proposals from Ofgas. As my right hon. Friend the Minister lists gardening as one of his pleasures, I hope that he will ensure that, before we return to the House, everything in the greenhouse will be lovely once again.
§ The Minister of State, Department of Energy (Mr. Peter Morrison)I am delighted that my hon. Friend the Member for Isle of Wight (Mr. Field) has had the opportunity to raise this important matter in the House on the last day before we rise for the summer recess. I listened to him carefully and, without wishing to sound patronising, I was extremely impressed by the tremendous work that he put into not only his speech but the whole issue, talking to many people to find a solution. He did not in any sense give me the impression that he was a dog with a flea in its tail; rather that he was a lion who had stalked through the jungle.
I agree with much of what my hon. Friend said. He noted that I count gardening among my hobbies, so I take a particular interest in the glasshouse growers. They are a shining example of what the Government have been doing over the past 10 years, and especially of the lead that my right hon. Friend the Prime Minister has given. I can therefore assure my hon. Friend that I share his concern about the problems experienced by horticulturists and other customers because of the introduction of British Gas's first price schedule. I assure my hon. Friend that Ofgas, which is so ably led by Mr. James McKinnon, and, to be fair, British Gas, are alive to the difficulties and that British Gas has committed itself to considering a number of proposals for improvements and to reaching conclusions, as my hon. Friend pointed out in the latter part of his speech, by the end of September.
I shall return to the present position in more detail, but it is important first to put gas prices in context.
The House will recall that, when British Gas was privatised, the market for gas to customers using more than 25,000 therms—non-tariff customers—was made subject to normal competition law. Gas was already facing competition from other fuels, and, in order to promote competition in gas supply, the Gas Act 1986 included further provisions to enable others to acquire rights to use British Gas pipelines. In particular, Ofgas was given the power to make directions on charges and other terms.
In November 1987, following major anxieties about British Gas's pricing policy, the Director General of Fair Trading referred to the Monopolies and Mergers Commission the issue of the supply of gas through pipes to 1426 non-tariff customers. In making the reference, the director general set out four matters of concern to him: the arbitrariness of individual prices and price changes; wider differences in prices paid by customers with similar requirements and levels of consumption; contracts only fixing prices for a very short period—three months or less; and British Gas's total control over whether to provide interruptible supplies.
The MMC's report was published in October last year. In it, the MMC said that it found extensive discrimination by British Gas in the pricing and supply of gas to contract customers, and went on:
We believe that this is attributable to the monopoly situation and operates or may be expected to operate against the public interest in a number of respects. First, British Gas's policy of price discrimination imposes higher costs on customers less well placed to use alternative fuels or to obtain such fuels on favourable terms, which in turn puts an arbitrary cost disadvantage on these consumers, and distorts competition in the markets in which they operate. Secondly, British Gas's policy of relating prices to those of the alternatives available to each customer places it in a position selectively to undercut potential gas suppliers. This may be expected to deter new entrants and to inhibit the development of competition in the market. Thirdly, the lack of transparency in pricing creates uncertainty in the minds of customers about future gas prices and renders more risky the business environment in which they operate. Furthermore, British Gas's refusal to supply interruptible gas to some customers imposes additional costs on those users; its prices for gas used in Combined Heat and Power schemes have inhibited the implementation of some such schemes; and its insistence on particular contract terms has imposed additional costs on users. We have also concluded that British Gas's failure to provide adequate information on the costs of common carriage, its ability to use information obtained when negotiating common carriage terms to identify potential customers of potential suppliers and the potential source of gas, and its position as a dominant purchaser of gas, may all be expected to operate against the public interest by deterring new entry to the market.I accept that this is all rather a mouthful, but it led to a number of important recommendations which the MMC believed would encourage competition in the supply of gas and restrain British Gas's discriminatory policy on pricing and supply of gas until such competition was effective. The MMC's main recommendations were that British Gas should be required to publish a schedule of prices at which it is prepared to supply gas to contract customers, and not to discriminate in pricing or supply. Secondly, the MMC recommended that British Gas should not refuse to supply interruptible gas on the basis of the use made of the gas or the alternative fuel available. Thirdly, British Gas should publish further information on common carriage terms in sufficient detail to put a potential customer in a position to make a reasonable estimate of the charge that would be sought by British Gas. Fourthly and finally, British Gas should be required to contract initially for no more than 90 per cent. of any new gas field.The MMC recognised—this was inevitable—that among British Gas's customers some would lose and some would gain from the recommendations. That is something which common sense dictates and which we had to accept in endorsing the commission's findings and recommended solutions. Like the MMC, we believe that price increases will be considerably outweighed by price decreases, that the MMC's proposals will contribute to the emergence of effective competition in gas supply, and that only such competition can produce a long-term solution to the adverse effects that it has identified.
1427 Essentially, the MMC endorsed the basic approach of the Gas Act in making this section of the gas market subject to the normal requirements of competition, rather than going for a regulated system. Its regulations build on that, in order to make competitive pressures more effective.
On 19 October, Lord Young, then Secretary of State for Trade and Industry, welcomed the report and set out the steps being taken. The Director General of Gas Supply, Mr. James McKinnon, was asked to seek agreement with British Gas on modifications to its authorisation to implement the recommendations on pricing and contract policies in the supply of gas to large users, and on the provision of information on its common carriage terms for transmission of gas. The Director General of Fair Trading was asked to consult interested parties with a view to proposing a scheme which would make it easier for companies other than British Gas to buy gas from developers of gas fields.
These measures have now been put into effect. Ofgas went out to consultation on the modification to British Gas's authorisation on 31 January. British Gas's first price schedule was published on 20 March and came into effect on 1 May. My hon. Friend the Minister of State, Foreign and Commonwealth Office, then Parliamentary Under-Secretary of State for Corporate Affairs announced on 27 April a Government target for 10 per cent. of all new gas contracted from producers to be supplied to final consumers by suppliers other than British Gas. British Gas published common carriage information on 15 June.
Since British Gas's first price schedule was published there have been a number of reactions from these customers, including—and this is why we are here today—horticulturists, who felt that they would be adversely and unfairly affected. Some of these have been about obvious flaws in the schedule, such as the incentive to waste gas at the boundaries of the volume bands. Some have related to the level of price increases, which in some cases appear to have been higher even than British Gas's expectations; others have related to changes in terms such as the introduction of minimum periods of interruption into interruptible contracts. All these concerns have gone to Mr. McKinnon for him to pursue, and he has kept me informed of the situation. Only yesterday, he and I had a further full and detailed discussion of these issues. We are keeping them in the front of our minds.
British Gas's price schedule is subject to competitive pressures in the ability of some customers to switch to alternative fuels. Therefore, British Gas recognises the need to reconsider in the light of its customers' reactions.
Representations from horticulturalists have covered many of the points raised by my hon. Friend, who I suspect has already covered many of the following points. They say that some increases in gas prices are very large, with claimed instances of up to 100 per cent. Energy costs account for a quarter to a third of the total cost inputs to the business. Interruptible supplies are no longer available to growers with consumption below 250,000 therms a year. Buying groups are no longer recognised. Growers have made major investments based on gas, and because of their requirement to use flue gas—CO2—for injection to glasshouses, they are particularly tied to gas. Their competitors in the Netherlands obtain firm gas at very low prices. They are believed to pay lower prices than customers in other sectors with similar consumption.
1428 My hon. and noble Friend, the Parliamentary Secretary to the Ministry of Agriculture, Fisheries and Food has given me a clear picture of the effects of the price schedule. My hon. Friends the Members for Broxbourne (Mrs. Roe) and for Cambridgshire, South-East (Mr. Paice) have been in frequent contact with me on the matter, and other hon. Friends have written to me about the impact on horticulture in their constituencies.
I certainly recognise that this is a progressive industry. Glasshouse growers have invested heavily to incorporate the latest in heating equipment and environmental control technology. They achieve high energy efficiencies of up to 93 per cent. with modern systems, in addition to using the waste CO2. They have been quick to take up and develop new R and D. They operate in competitive markets, not dependent on European Community support systems. With this background, it is clear that the problems the industry has raised are not just whingeing, but serious issues deserving attention.
On 17 July, Ofgas announced that British Gas had agreed to consider a number of proposals designed to improve the recently introduced system of pricing, and that British Gas expected to reach conclusions on them by September. The proposals were that the number of bands in the price schedule should be expanded in firm and interrupted contract categories to cater for the higher levels of volume; aggregation should be available in both categories; the number of premises for which firm supplies can be aggregated should be increased to cover all customers' circumstances.
The proposals also stated that all legitimate trading affinity groups and energy management companies or other agents offering centralised contracts should be permitted to aggregate for the purpose of price qualification in both the firm and interrupted sectors; that load factors should be introduced without delay as further determinants of the prices charged to customers; that arrangements should be made to "buffer" the impact of changing from one volume band to another; and that the existing matrix of choice should be expanded to provide a further range of options. An understanding should be given that interruptions under contract should, if possible, be pre-arranged with customers.
The proposals continued: a review should be carried out as to the choices which are presently offered in terms of an inflator or indices; some customers have experienced very heavy increases in price and for such customers the transition period should be extended to three years. In a separate press release, British Gas has confirmed that those are the areas that it is now studying.
Those proposals are not aimed specifically at horticulturists. To do so would be to engage in the sort of discrimination that the MMC wished to eliminate, and which has indeed been eliminated by the requirement on British Gas to operate to a published price schedule. However, from the representations made by growers, it seems that, to the extent that they are taken up by British Gas, a number of these proposals could assist the glasshouse sector.
The regulatory arrangements for gas are proving responsive and effective. The original problems were taken to the MMC and the MMC produced a set of interrelated recommendations designed to remove discrimination and encourage competition. Those recommendations have 1429 been implemented. British Gas's first price schedule has admittedly resulted in difficulties for some customers and a number of complaints.
These have now been taken up by Ofgas and have resulted in constructive discussion between it and British Gas, and proposals which British Gas has agreed to consider. The system is working as it should and the matters are properly ones for Mr. McKinnon to follow through; it is now up to British Gas to be responsive to its customers' needs.
There is also a European dimension. We in the United Kingdom have gone further towards non-discriminatory pricing and the encouragement to competition than other EC countries. We shall be trying to persuade our partners in Europe to move in the same direction so that there can be no question of assistance to particular sectors in those countries from discriminatory fuel pricing.
I hope that British Gas is changing its attitude, from one which began as perhaps a little negative to becoming more positive.