§ Motion made, and Question proposed, That this House do now adjourn.—[Mr. Bates.]10.16 pm
§ Mr. Paul Tyler (North Cornwall)
At this time of night, matters of interest and concern in relation to the privatised utilities are familiar territory to you, Mr. Deputy Speaker, and to the House. The regulators of those utilities often feature largely in such discussions. They include Offer, the Office of Electricity Regulation, Ofgas, the Office of Gas Supply and Ofwat, the Office of Water Services. We have not yet had Offrail or Offmilk, which were threatened at one stage. If the weekend recommendation that the monarchy might be privatised were accepted, we might find ourselves discussing Offcrown or, indeed, Offhead.
Despite the time of night, it is important to recognise that there is an issue of national significance here, although I shall also consider it in relation to the part of the south-west that I represent. There is consumer representation, which is extremely important, but the committees that represent the consumer increasingly find that their concerns are not being fully reflected in the way in which the industry is regulated. That applies to all the privatised utilities.
To a large extent, that is due to the buck-passing between the Minister and regulator in each of the respective sectors. The powers that each has and their inter-relationship is as important as the regulators' statutory responsibility. My colleagues in the south-west and I had a meeting today with professor Stephen Littlechild, regulator of the electricity industry. That clarified the borders of his responsibilities vis à vis the Minister.
Clearly, unbridled competition between regional electricity companies, the so-called RECs, is pre-supposed because that is what privatisation is all about. Equally, that competition pre-supposes elimination of the cross subsidies that were a feature of those utilities.
The National Grid, however, is a different matter: it is a national monopoly. It would indeed be a political decision to insist on full distance-related charges, especially if such charges now arise disproportionately. At the time of privatisation, assurances were given that the grid would remain a national service. Compare this privatisation with, for instance, the privatisation of British Telecom. What if, in those circumstances, that entire national service had been subjected to a straight distance-related charge? There would have been uproar by now, especially in the more peripheral parts of the United Kingdom.
The chairman of the South West electricity consumers committee has drawn the attention of hon. Members representing my region to a new development. He writes:The Office of Electricity Regulation has recently unveiled proposals to increase the electricity transmission charges imposed by the National Grid Company on electricity supplied to the South West. As you will know, customers in the South West are already penalised by a charging structure which takes account of the distance that power has to be transmitted from the generating stations, 888 predominantly in the North of England, to the consumer. It is now proposed that the costs of losses on the transmission system be recouped in the same manner.The existing charging structure already means that electricity customers in the South West pay more than almost anywhere else in the country. These latest proposals could mean further increases of up to 2 per cent., with Devon and Cornwall being particularly badly affected.I emphasise that, although the chairman referred to the south-west, the principle will apply throughout the country, and the more peripheral areas furthest away from the centres of generating capacity will suffer similarly.
An excellent overview by the Centre for the Study of Regulated Industries shows that the typical South Western Electricity domestic bill for 1994–95, after rebates, was £303.66—the highest in England. I know that Conservative Members representing my region will share my fear that, having already reached the highest point, we are likely to be pushed even further away from the norm.
There are, of course, many factors at work, and the future is very unclear. The CRI brief shows that a number of influences may affect future prices: National Grid rebates, distribution price controls and the sale of the nuclear elements of the generating industry—and, indeed, the extent to which that may or may not be postponed, and its effect on the nuclear levy. There are also the reductions in overall generating prices as a result of new contracts; and who knows what competition will do?
I do not want to overestimate the extent to which the latest development to which our attention has been drawn will alter the overall level of electricity costs in the south-west, or, indeed, other areas that are similarly affected. One thing is certain, however: the cumulative disadvantage is likely to increase rather than decrease. That was recognised today—by complete coincidence, as far as I am aware. In Northern Ireland, it has now been acknowledged that the discrepancy requires the award of a £60 million grant. Some of us in other parts of the United Kingdom may feel that our case is almost as strong. All areas of this kind—the south-west, Wales and Northern Ireland being the most obvious—tend to contain more small industrial firms, so they cannot even benefit from the high-volume tariffs that are comparatively common elsewhere.
Along with my south-west Liberal Democrat colleagues who are here this evening, and who attended our meeting with the regulator this afternoon, I have some special concerns. If the differential is allowed to increase, even discriminating within the South Western Electricity area—more specifically, for each National Grid zone within that area—regions such as Cornwall and Devon will be hit particularly hard. That will add to the existing calamitous water and other household costs in an area where, after the initial experiment with gas competition, we are bound to face higher prices than other parts of the country.
I need hardly remind the House that the south-west has high unemployment and low household incomes. Cornwall is especially badly affected by both. The cumulative effect of that series of differentials is disastrous.
There are wider implications for similar parts of the country. Professor Littlechild agrees with that but has also said: 889there are important advantages in more cost-reflective transmission charges. Better pricing signals will encourage investment in new generation plant in areas where it is needed, like the south-west. This would also increase energy efficiency, reduce the need for new transmission lines and benefit the local economy.The House will immediately realise that those signals will be effective only if they are aimed at the appropriate decision makers. That is a sine qua non. Secondly, they must be sufficiently powerful to offset other economic factors pulling in the opposite direction. No one will decide on the basis of the so-called signals to invest in new generating capacity in an area such as Cornwall without other factors being brought into play. There is evidence that the signals will, in the present circumstances, fail on both counts.
If the signals are imposed on the consumer, they will have no impact on the decision makers. The generators take investment decisions, not the consumers. In the past, consumers have had little or no impact on generating capacity. It should be remembered that in the far south-west, the Central Electricity Generating Board closed down power stations at Hayle, Plymouth and Yelland against local opposition. Many of us felt that employment, economic potential and spreading energy capacity around the country were important objectives that those decisions went against.
The decision makers ignored the effect on local people then, so why should they listen to local consumers now? It is ironic that the CEGB took those decisions on the specific ground that transmission charges from elsewhere in the United Kingdom were likely to be so low that the closures would be cheaper than continuing local generation, which they argued would be too expensive. Some hon. Members here tonight will recall those decisions being made against local opposition.
Offer and the RECs cannot have it both ways. If they argue, as they appear to, that the costs will be only marginal, clearly they will have only a marginal impact.
Our discussions with the regulator this afternoon appeared to move towards a possible solution. That is why at the outset of my speech, I emphasised the difference between the responsibilities of the regulator and those of Ministers. It appears that the only way to achieve the possible remedy is by ministerial direction. If we could find a mechanism to ensure that the decision makers—the generators—have to bear the extra cost of inefficient transmission over long distances in a way that safeguards the position of consumers in vulnerable areas such as the south-west, there is clearly some prospect for success. That would apply perhaps to Wales, and for all I know, to Northern Ireland.
Professor Littlechild acknowledged the force of that argument in respect of both tests—its effect on decision makers and its economic impact—and that that course would be preferable. It was clear from our discussions with him this afternoon that if extra burdens on south-west consumers were imposed, they would be damaging. However, it was equally clear that those burdens are by no means automatic. They do not have to follow from the decision to try to cut out all cross-subsidies but it will need Government intervention to prevent them doing so.
§ Mr. Matthew Taylor (Truro)
Perhaps I can help to persuade the Minister of the case. He represents the 890 Department of Trade and Industry, which spends considerable sums trying to support business in the south-west. There is little point in that money being spent if it is cancelled out by the extra costs on business from electricity charges. Therefore, our suggestion could be a net saving to the Department as it would not have to spend money overcoming problems that it is itself creating.
§ Mr. Tyler
My hon. Friend makes a valid point. I am sure that the Minister will acknowledge that the disincentive to incoming investment and, perhaps, to the natural growth of companies already resident in the region is extremely important to avoid if we are to achieve a more economically successful region and, indeed, save the hon. Gentleman and his Department money in the long run. It is precisely this sort of signal, as the regulator calls it, that can discourage people from bringing their investment in new businesses and jobs to a region such as ours, which so desperately needs them.
That is why we lay such emphasis on what is otherwise seen as a comparatively marginal difference between our region and other regions. For example, if a business is contemplating moving either to Scotland, where electricity costs are comparatively low, or to the south-west, which may be comparable in other ways, it is yet another disincentive to come west and an incentive to go north. As Conservative Members as well as my Liberal Democrat colleagues have been able to establish in recent weeks, there have been huge incentives to take people north of the border. This could be yet another factor.
Left to themselves, in the present regime the National Grid Company, the regional electricity companies and Professor Littlechild seem almost bound to end all cross-subsidy. In those circumstances, the consumers in those areas furthest from the power stations will pay full distance-related charges. It need not be so. If Ministers so choose, they could instruct that the differentials were borne by the generators, not the end consumer—be it business, commercial, industrial or domestic. Not only would that obviously benefit all those consumers—and, as I have just said, in the wider economic sense be a huge benefit to the south-west and similar areas—it would also encourage a revival of generating capacity in those areas.
I fear that without that ministerial intervention the far south-west will be destined to suffer the worst penalties of privatisation in every direction. I therefore plead with the Minister at least to take seriously the suggestion made today, as a result of our discussions with the regulator, and to look at a different mechanism that could avoid this disaster.
§ The Minister for Small Business, Industry and Energy (Mr. Richard Page)
I congratulate the hon. Member for North Cornwall (Mr. Tyler) on raising this subject for tonight's debate and on giving me this opportunity to say a few words in response. I hope that he will understand if I do not follow him down the side track of saying what an excellent record the Government have on producing inward investment in the south-west.
I want to say a few words about the background to electricity privatisation and the way in which electricity prices are determined under the regulatory regime that the Government put in place at the time of privatisation. I shall then come to the issue that the hon. Gentleman raised of regional variations in electricity prices.
891 A key point about the Government's policy for the restructuring and privatisation of the electricity industry was thatDecisions about the supply of electricity should be driven by the needs of customers.The privatisation framework was also guided by a number of further principles: for example, that competition is the best guarantee of the customer's interests; that regulation should be designed to promote competition, oversee prices and protect the customer's interests in areas where natural monopoly will remain; that security and safety of supply must be maintained; and that customers should be given new rights, not safeguards.
The Government's reorganisation of the electricity industry before privatisation provided the framework for giving effect to those principles. The old Central Electricity Generating Board was divided into three competing generators—National Power, PowerGen and Nuclear Electric. The National Grid was transferred to the ownership of the 12 regional electricity companies, and it was responsible for electricity transmission and the independent central dispatch of electricity generating plant. Regional electricity companies are facing increasing competition in their authorised areas as their franchise markets are progressively reduced.
An important part of the electricity privatisation framework has been the creation of an independent regulator. The hon. Gentleman referred to the Director General of Electricity Supply and to the conversations and the meetings that he has had with him. That man is the head of the Office of Electricity Regulation and his job is to promote competition and to constrain the activities of the remaining monopolies and dominant suppliers.
This framework has brought significant benefits to the electricity consumer. For example, since privatisation prices have fallen, domestic prices have fallen by 7 per cent. in real terms—excluding VAT—and industrial prices have fallen by 10 per cent. in real terms. There have been some genuine new rights for customers, in the form of the ability of customers outside the RECs' franchise markets—which are being progressively reduced, and which will be ended completely by 1998—to shop around and select a supplier of their choice. There are guaranteed standards of performance of supply for tariff customers, set by the DGES, covering aspects such as the need to keep appointments on the date specified and fixed amounts of compensation for customers in the event that the guaranteed standards are not met.
There are overall performance standards that the RECs are to meet, such as the minimum percentage of supplies to be reconnected following faults within three hours and within 24 hours. There are new codes of practice to cover matters such as how to handle customer complaints, the efficient use of electricity, services for the elderly and disabled, and arrangements for paying bills. Customers have the opportunity to complain to an independent regulator, the DGES, and for those complaints to be investigated by the Office of Electricity Regulation.
In 1990, the RECs' transitional franchise market—the market within which the RECs were the monopoly suppliers—comprised sites taking 1 MW or less, and in April 1994 it was reduced to sites taking 100 kW or less. In April 1998—in just over two years' time—the franchise will be ended, and all customers, including domestic customers, will have a choice of supplier. Within the franchise market, electricity prices are controlled by the DGES.
892 The price of electricity is made up of four elements: first, the wholesale purchase cost of the electricity to the REC, which the REC may pass through to the retail price; secondly, the cost of transmitting the electricity from the generating station, through the National Grid's transmission system, to the REC's system of wires; thirdly, the cost of distributing the electricity over the REC's system, which accounts for some 25 per cent. of the electricity price, and has been subject to price controls that have required real price decreases in this component of the final electricity price; and, fourthly, the fossil fuel levy and value added tax.
The final cost of the electricity used by the hon. Gentleman's constituents reflects all four of these elements. Even taking VAT into account, real domestic electricity prices are no higher than they were before privatisation—since privatisation, they have fallen by about 7 per cent., excluding VAT.
There are further decreases to come. As we all know, domestic customers of the RECs have received a one-off discount of £50 on their electricity bills under the terms of the flotation of the National Grid in December. The tightening of the distribution price control, announced by the Director General of Electricity Supply in July 1995, will bring a 3 per cent. reduction in real electricity prices as from 1 April. The reduction in the rate of the fossil fuel levy at the time of privatisation of the nuclear generating stations will bring another further significant reduction in electricity prices later this year.
The main point raised by the hon. Member for North Cornwall concerned regional variations in electricity prices. In the context of the elements that I have just enumerated, that means the distribution and transmission price controls; and there is a link with transmission losses, so I shall say a few words about that.
There is nothing too surprising about the existence of regional variations in prices; indeed, regional price variations are to be found in commodities separate from electricity. They can be found in such things as tea and houses, and they are a natural and unsurprising consequence of underlying regional differences in market conditions. There is not too much that anyone can do about the geographical and demographic conditions that push up supply costs to the more remote and sparsely populated regions of the isles. Against the background set by the differences, however, it is important that the severity of regulation should take into account, case by case, the extent of the scope for cost reduction in different areas.
Consequently, the director general sets the distribution price control separately for each of the 12 RECs. The revised controls that he announced last summer mean that the aggregate required reduction in the distribution charges by South Western Electricity over the period 1994–95 to 1999–2000 will be nearly one third in real terms—to be precise, 30 per cent. Some other RECs have had more severe reductions while others have had smaller ones.
At present, electricity transmission losses are charged on a uniform basis throughout the country. However, annual rates for transmission losses have increased by about £30 million in the past few years and the director general has said that customers would get a better deal if charges for transmission were more cost-reflective—that is, if they related more closely to the typical distances that 893 electricity must travel from generator to customer. That is part of the point that the hon. Member for North Cornwall made.
A more cost-reflective basis of charging would bring reductions in charges to some, but the reverse side of the coin, fairly obviously, is that Professor Littlechild has acknowledged that it would mean increases to others. He said, however, that any such increases in transmission charges should not exceed 12 per cent. of the electricity price in any region and would be more than offset by the reduction in charges to those customers resulting from the implementation of the new distribution price controls.
Professor Littlechild has commented—this returns to one of the points that the hon. Member for North Cornwall made—that customers alone should not bear those charges. He said:Generators should also share the charge for transmission losses, since the most important single need is to inform decisions on the location of new generation".Within government, that is a matter for the director general. He has called on the electricity pool to make proposals by the end of the month. The director general has suggested that if the pool considers that it cannot deal adequately with transmission losses by that time, it should transfer responsibility to the National Grid so that necessary arrangements can be put into effect in good time. That brings me, as night follows day, to the subject of transmission price control.
The original transmission price control covered the period from 1990 to 1993, and restrained the National Grid's average regulated revenue per kilowatt to increase by no more than the rate of inflation. In 1992, the Director General of Electricity Supply reviewed that control, and tightened it to "RPI minus 3" for three years as from April 1993. That means that the National Grid's average regulated revenue per kilowatt has had to reduce in real terms by 3 per cent. a year for three years. Those effects are all reflected in the present electricity price level, and they will bring a further decrease in transmission charges as from this April.
§ Mr. Harvey
The Minister is referring to overall reductions in transmissions. He said that other commodities show a price differential between regions, as though that were an act of God over which there was no control. Does he accept that, because the transmission part of the electricity industry remains a monopoly, it is a matter of policy whether there is economic costing, differentiating by region, or whether the costs are shared equally, as they have been until now? That is a matter of policy that might be controlled.
§ Mr. Page
I understand what the hon. Gentleman is saying, but as I said at the outset, the director general has been given specific tasks to achieve and—in being given those tasks—he has also been given a certain independence. If someone is given independence, he or she is expected to exercise it. Therefore the arguments to the director general have to be advanced; much of what I have said tonight shows that so much of the decision making will be in the director general's hands.
In November, the DGES began to consider the revised transmission price control to apply from 1 April 1997. He issued a consultation paper and asked for comments by the end of January. I understand that the DGES hopes to announce the revised control later this year and that it will take effect from 1 April 1997. That is a matter for the DGES. An important aspect of the regulatory system—introduced at the time of privatisation—is that the DGES is independent. His statutory duties include protecting the interests of the customer and promoting efficiency and economy on the part of the electricity licensees.
The hon. Gentleman has already expressed his concerns fairly forcefully, and I am sure that he will state them in writing to the DGES. I shall draw the contents of the debate to the attention of the DGES and flag up the hon. Gentleman's concerns. My hon. Friend the Member for South-East Cornwall (Mr. Hicks) has also made his views known to me. I advise the hon. Member for North Cornwall to lobby the director general enthusiastically so that he may take into account those views when he conducts the review of electricity transmission charges.
§ Question put and agreed to. Adjourned accordingly at fourteen minutes to Eleven o'clock.