§ Motion made, and Question proposed, That this House do now adjourn.—[Jane Kennedy.]10.13 pm
§ Mr. Barry Gardiner (Brent, North)
It would be a foolish Member of the House, Mr. Deputy Speaker, who presumed to test your patience by standing here at the end of a long parliamentary day in a vain attempt to suggest that the fate of the gas connections industry is a matter of vexation to most of his or her constituents. The gas connections industry is simply not a sexy topic. At the risk of testing not your patience, but perhaps my hon. Friend the Minister's sense of humour, I venture to suggest that gas connection is no Dounreay. Be that as it may, bullying and lies, discrimination and overcharging will, I trust, never fail to be of interest to the House, and it is on that basis that I beg leave to detain hon. Members this evening.
The Gas Act 1995 introduced competition to the business of connecting premises to the mains gas network. Previously, the market had been under the monopoly control of British Gas Transco. In January 1997, my constituent, Mr. Andrew Duffield, who had been a senior manager at Transco, left to set up a specialist gas connection company—Exoteric Gas Solutions—to compete against Transco. EGS not only increased choice, but brought considerable savings to customers.
I am here not to praise EGS, however, but to expose Transco. As with any former monopoly, Transco enjoys a pre-eminent market position, but it is also charged with custodianship of the existing network. All competing connection companies are compelled to apply to Transco for certain information and services relating to the existing network. Final connection to the mains can be performed only by Transco itself, and competitors such as EGS must obtain a quotation from Transco for that final aspect of any new pipe laying scheme before they can submit an accurate quotation for the whole scheme to their customers.
Transco has a statutory duty to provide such information and services to my constituent's company and other competitors. Transco is licensed by the Office of Gas Supply under the 1995 Act, and is required to treat all participants in the connections market without discrimination. It cannot gain an unfair advantage by delaying a quotation for final connection to its competitor so that its own connections team can provide a more timely quotation. By the same token, it cannot quote an exaggerated cost for such work by a competitor in order to raise the cost of the competitor's quote to the end customer.
I have no intention of misleading the House. I have said that Transco cannot do those things; I should have said that, under the legislation, it may not do so. Evidence in my possession suggests not only that Transco can operate in an illegitimate and anti-competitive manner, but that it does so repeatedly and systematically. I spoke in my introduction not only of discrimination and overcharging, but of bullying and lies. Those are serious allegations, and I must justify them.
In March and April 1997, EGS was competing against Transco and other connection companies for a contract to design and build the new mains and services required 981 to supply an additional gas load at Chilterns crematorium in Amersham. On 3 April, my constituent received the following faxed letter:Dear Mr. DuffieldA formal complaint has been received from Ofgas about the activities of Exoteric Gas Solutions. The basis of the complaint is that you have been seeking to exploit commercially confidential information gained during the course of your employment with Transco.The matter specifically referred to is Chilterns Crematorium, Whielden Lane, Amersham.As you can imagine, Transco takes this complaint very seriously indeed.Accordingly, I should be obliged if you would let me have your observations on this matter as soon as possible. I would wish to have these before taking any further steps.Ofgas have specifically requested that the client, in the case referred to, does not wish to have any further involvement. I would ask you to respect that request.That letter was signed by Transco's legal services manager.
Mr. Duffield immediately contacted Ofgas to ask whether any such complaint had been received about EGS, and whether Ofgas had requested that EGS should have no further involvement with any client. He received a quite astonishing answer on 8 April. It read:Dear Mr. DuffieldCHILTERNS CREMATORIUM, WHIELDEN LANE, AMERSHAMFurther to both our telephone conversation and your fax of 7 April to the Director General, I am writing in order to clarify the situation regarding the above site.I would first of all like to reiterate that the complaint did not concern the activities of Exoteric Gas Solutions. It related to an alleged breach of Transco's licence conditions. As a result of the complaint, Ofgas has asked the Head of Compliance at BG plc to ascertain whether or not such a breach in fact occurred.May I also point out that the complaint did not come from Ofgas. Ofgas has simply requested that the Compliance Officer look into a complaint that was made to Ofgas.Moreover, Ofgas has at no stage requested that Exoteric Gas Solutions have no further contact with its clients.I appreciate the concern that you have about this matter and trust you feel reassured that it is the conduct of Transco that is being investigated, not that of Exoteric Gas Solutions.It was signed "Yours sincerely" by the regulation and business affairs manager.
That is pretty conclusive, not to say a damaging reflection on the interpretation of events provided by Ofgas's legal services manager in his original letter to EGS. None the less, it could have been an end of the matter but for the fact that rumours began to circulate in the industry to the effect that EGS was the subject of an official investigation by Ofgas and that perhaps one should not do business with it.
At this point, Ofgas, EGS and Transco were in possession of the facts. EGS could have little reason to spread such a rumour against itself. Ofgas wrote to it again on 9 July, stating:We are concerned that rumours detrimental to your company would seem to be circulating and we intend to discuss with BG plc how this issue has been handled.BG plc is of course the parent company of Transco.
982 For its part, BG plc's general counsel responded as follows in a letter to EGS dated 25 June 1997:I can only reiterate that I have no knowledge of allegations of a formal complaint being spread throughout the Gas Industry.I have a copy of a memo dated 27 March 1997. It is an internal memo headed "BG plc Transco Memorandum from the Area Directors to all the Managers of District Operations". It specifically notes:To be circulated to other Level 3s.I contend that it illegally denies EGS the statutory rights owed to it by Transco under the Gas Act. I will read it in full. It states:E.G.S.We are dealing with a high level complaint concerning this company and the alleged misuse of Transco information. Could you ensure that you and your staff have no dealings with this company or with its principal (Andrew Duffield) until further notice.Not three months later, the chief legal officer of BG plc could state in a letter dated 25 June 1997 that he hadno knowledge of allegations of a formal complaint being spread through the Gas Industry.
It is said that the difference between a lawyer and a supermarket trolley is that one can get more food into a lawyer, but that it is more difficult to keep the lawyer going in a straight line. However, the charge that I must level tonight does not remain focused on the legal officers of Transco, be they ever so exalted.
On 27 March, when the memo was circulated, it was circulated from the "area directors". The area director of the east area was Mr. Phil Nolan. He is now the managing director of Transco as a whole. On 1 September 1997, he wrote to Mr. Duffield specifically to confirm whether he had ever issued information to Transco's employees not to deal with EGS. He responded:I can confirm that I have issued no such instruction and there are no such instructions to that effect in place.If Mr. Nolan has lied, it is the duty of Ofgas to examine whether he is a fit and proper person to hold the position of managing director of the country's largest gas transportation company.
In November last year, I met representatives of Ofgas, and the question of its powers as regulator was discussed. In particular, it transpired that, where there has been a breach of section 42 of the Gas Act, it is open to it to take action under section 28. Such action may include the imposition of a financial penalty, and may extend to the recommendation of compensation to any adversely affected third party.
I believe that there may be a loophole in the Act, such that, where a company in violation of its statutory obligations has put in place revised procedures that make future violations less likely and has done so at the behest of Ofgas, and where a further breach is subsequently discovered to have taken place before that procedure was rectified, that breach is no longer subject to remedy by Ofgas under section 28 action. I urge my hon. Friend the Minister to examine that problem to see whether any amendments need to be made to the legislation.
I have spent much time elaborating on this matter because the charges that I have made are extremely serious in their own right—I trust that my hon. Friend will ensure that they are fully investigated. More than that, I have dwelt on the matter because it provides important 983 background for understanding the other issues of discrimination and overcharging that I mentioned at the beginning of my speech and to which I now turn.
Last year, on 22 December, I was grateful to the Minister for agreeing to meet Mr. Duffield and me. At that meeting, we left with my hon. Friend an extensive dossier detailing cases in which Transco had acted in what we considered was an anti-competitive manner, in spite of its statutory duty to treat all participants in the connections market without discrimination. After that meeting, the Minister communicated his own concerns about those matters to Ofgas—indeed, it appeared that, after his prompting, Ofgas had pursued its investigation with renewed vigour and that a resolution might be possible. Unfortunately, I have to report that that hope proved unduly optimistic.
My hon. Friend will recall the case of Saxon business park, where Transco quoted EGS a figure of £5,650.97 for a final connection to the Transco main, only to reduce it to £800 after the quotation was persistently challenged. I am able to provide many further cases where Transco has acted in a discriminatory manner by quoting an unreasonably high cost to EGS. For Brook Street business park, on 13 February 1998, a final connection was originally quoted by Transco at £1,133; after challenge, it was reduced to £578.25—it had been a 100 per cent. overcharge. The list is growing by the day. A quote of £44,328 was made for a connection which, had it complied with condition 5 of Transco's own public gas transporter's licence, would have cost no more than £14,000—an overcharge of almost 300 per cent. At St. Andrew's school in Watford, a quote of £1,137 was made which, when properly calculated, amounts to £440.25.
The House will appreciate that such wildly inaccurate initial quotations by Transco discriminate against EGS, not only on the basis of cost, but by delaying EGS's ability to provide a prompt and accurate quotation to its own end customers. It is impossible for a small company such as EGS to compete effectively in its chosen markets when faced with such behaviour from the dominant player—the monopoly as was, Transco. I urge my hon. Friend to make full investigations into these matters. I am happy to provide him with further information, and I trust that he will be in correspondence with Ofgas to pursue the matter with all due vigour.
§ The Minister for Science, Energy and Industry (Mr. John Battle)
I thank my hon. Friend the Member for Brent, North (Mr. Gardiner) for the terms in which he has presented his case tonight. He is fast earning a reputation in the House as a most conscientious champion of his constituents. The assiduous detail with which he has backed up his strong assertions has resulted in a strong case. Strong words have been used, and the case demands detailed investigation. I shall try to respond in general to my hon. Friend's points. I shall also say a few words about the Government' s overall approach to the regulation of the gas industry.
Let me say from the outset that I am well aware of the subject of the complaint made to Ofgas by a company—Exoteric Gas Solutions—based in my hon. Friend's constituency about certain aspects of the arrangements for new connections. As my hon. Friend said, we met on 22 December last year, but the matter has still not been sorted out. Since then, Ofgas has received certain 984 allegations—I stress that they are allegations—from other companies, as well as from my hon. Friend's constituent, that Transco is acting in an anti-competitive way in relation to the provision of connections and systems extensions.
Under the regulatory framework, the duty to investigate such complaints lies not with the Department of Trade and Industry, but with Ofgas. Section 31 of the Gas Act 1986 states:It shall be the duty of the Director"—the Director General of Gas Supply—to investigate any matter … which … is the subject of a representation (other than one appearing to the Director to be frivolous) made to the Director by… a person appearing to the Director to have an interest in that matter".
My hon. Friend referred to previous Gas Acts. The Gas Act 1986 provided for the privatisation of British Gas and competition in supplies to certain large contract customers. It also set up the office of the Director General of Gas Supply as the independent regulator of the gas industry. Since then, there have been a number of Monopolies and Mergers Commission inquiries into the gas market, as well as a review by the Office of Fair Trading, which have brought significant changes to the industry and its structure.
The 1993 Monopolies and Mergers Commission inquiry led to British Gas separating its trading and transportation functions and the Administration of the day's decision to introduce competition for domestic consumers. The way for that was prepared by the Gas Act 1995, which amended the 1986 Act to provide for the introduction of competition to all gas consumers.
The 1995 Act introduced significant changes into the structure of the industry, and brought to an end the supply and transportation of gas by a single integrated company. It introduced the concept of three separate licensed entities: the gas supplier, the gas shipper and the public gas transporter, all of which are subject to a licensing system operated and policed by the Director General of Gas Supply. That separation is important, and I shall return in a moment to the role of the public gas transporter.
As I have emphasised, the regulator has statutory responsibility for the licensing of transportation, shipping and supply of gas in Great Britain, and other duties in relation to gas metering and the investigation of complaints. The Director General of Gas Supply is under a general duty to secure that, so far as it is economical to meet them, all reasonable demands in Great Britain for gas conveyed through pipes are met; to ensure that licence holders are able to finance their licensed activities; to secure effective competition in the shipping and supply of gas; and to protect the interests of consumers in respect of prices, continuity and quality of supply, and rights of entry to their premises.
The Director General of Gas Supply has various other duties governing the exercise of those functions. I stress in particular the duty to protect the public from dangers arising from the conveyance of gas through pipes and from the use of gas conveyed through pipes, and the duty to secure effective competition in relation to the conveyance of gas through pipes to pipeline systems and to areas to which gas has not previously been conveyed. That relates to the point raised by my hon. Friend.
985 An essential feature of the regulatory framework is the division of function between the Government and the Director General of Gas Supply as the sectoral regulator. Broadly, the Government set the framework and the director general is responsible for regulating the industry within the framework set out by Ministers. I emphasise that distinction.
At the heart of the gas industry is the national transmission system—the national gas grid—which was set up as a result of connecting the North sea terminals. It comprises some 160,000 miles of mains pipeline and is owned and operated by Transco, one of the old British Gas's two successor companies, which is required to have a public gas transporter's licence.
The national transmission system is a natural monopoly. It is hardly conceivable that competitors should construct their own pipeline grid. The regulation of the monopoly is therefore crucial. Although the national transmission system is a monopoly asset, there is scope for competition in connections and systems extensions—in connecting new premises and extending the gas network to areas that previously have not been supplied with gas. That was spelled out when competition was opened up.
Competition in those areas arises in two ways: through the scope for other public gas transporters directly to compete with Transco in providing connections and system extensions, and through the scope for self-laying, where consumers purchase and lay the pipes. In addition to Transco, there are now six licensed public gas transporters to which consumers can turn.
As I said, the director general has a duty to exercise her relevant functions in relation to public gas transporter licences to secure effective competition in the conveyance of gas through pipeline systems and in the supplying and laying of service pipes. Each public gas transporter has a duty under the Gas Acts in relation to each of its authorised areas to develop and maintain an efficient and economical pipeline system for the conveyance of gas and, in so far as it is economical to do so, to comply with any reasonable request to connect that system and use it to convey gas. Under the Gas (Connection Charges) Regulations 1986, a public gas transporter is entitled to recover the full costs of any mains extension project.
Against that background, it is important to emphasise that, if competition is not to be thwarted, the dominant player's charges for connections and system extensions should not be above or below cost, with hidden cross-subsidies from other parts of its business. In short, it is important that there should be cost-reflectivity and that Transco should not discriminate in the prices or service standards it provides to competitors.
986 Ofgas has recently been addressing that issue through public consultation documents. In August 1996, it published a document entitled "British Gas TransCo: connection and system extensions—regulating for competition". Responses to that document were published in February last year.
Ofgas set up the Ofgas connections steering group, which is considering how best to promote competition in gas connections and pipe laying throughout Great Britain. As a direct result of that work, Transco has made proposals to eliminate what might be seen as discriminatory behaviour on its part. Transco has been developing arrangements for unbundling charges for connections and system extensions, and that process is continuing. Meanwhile, Ofgas has been investigating potential barriers to competition.
I have discussed Exoteric Gas Solutions with the Director General of Gas Supply. I make it absolutely plain to my hon. Friend that we and Ofgas take his complaints very seriously. Ofgas recognises the importance of the matter to my hon. Friend's constituents and the business concerned, which is a start-up business. The size of Transco compared with that of the business makes this a serious matter. Ofgas continues to investigate the allegations.
I understand that Ofgas wrote in March to the independent public gas transporters and the self-lay companies that it was able to identify to ask them for historical information about Transco's performance in providing connections and services since 1 April 1997. Ofgas gave 12 examples of the sort of dispute that it regards as relevant to the allegations that it had received and on which it was seeking comments. Some companies have responded. Ofgas acts only on the basis of information provided to it, but I am assured that the director general is using her powers to explore and investigate the matter thoroughly, and will ensure that, if allegations are substantiated, enforcement action will be taken to eliminate anti-competitive behaviour.
If my hon. Friend thinks that it would be useful, I would be more than willing to meet him again, perhaps in my office at the Department, with the Director General of Gas Supply or her senior representatives, so that we can go over the ground more fully and in more detail in the light of the information that my hon. Friend has brought to the House. 1 thank him for raising the matter and for the way in which he has done so. He has made strong allegations, but he has backed them up with solid research that ought to be precisely the purpose of Adjournment debates. The matter will not lie at the Dispatch Box—I shall take it further.
§ Question put and agreed to.
§ Adjourned accordingly at twenty-one minutes to Eleven o'clock.