HL Deb 30 November 1926 vol 65 cc997-1004

Rules for Determining Cost of Production of Electricity at Selected Stations.

The cost of production of electricity at any selected station, shall be ascertained by calculating the following costs, charges and allowances in respect of the year of account:

(b) sums paid as rents, rates and taxes (other than taxes on profits) and for insurance, in respect of the station;

(e) interest (exclusive of interest payable out of capital), on money properly expended for capital purposes (whether defrayed out of capital or revenue) and attributable to the generating station and the plant suitable to and used for the purpose of generating electricity therein, and interest on working capital properly attributable to the station and the production of electricity therein.

The rate of interest for the purposes of this paragraph shall be—

  1. (i) where the owners of a selected station are a joint electricity authority or a local 998 authority, the average rate payable on the money raised by the authority for the purpose;
  2. (ii) where the owners of the station are a company, the average rate of dividends and interest paid by the company on their share and loan capital during the preceding year; so, however, that the rate shall in no case be less than five nor more than six and a half per cent. Per annum.

THE MARQUESS OF WINCHESTER moved to insert in paragraph (b), after the words "other than taxes on profits," the words "except irrecoverable Income Tax." The noble Marquess said: This is an accounting point arising when a company pays the Income Tax and it does not recover the same amount from the Income Tax authorities on the dividends it has paid. Therefore I move that this should form part of the working expenses.

Amendment moved— Page 38, line;32, after ("profit") insert ("except irrecoverable Income Tax.").—(The Marquess of Winchester.)

VISCOUNT PEEL

I suppose the noble Marquess is referring to Income Tax on profits. I do not understand how the Income Tax on profits can be considered to be a part of working expenses. If they cannot recover it, surely that is a matter between them and the taxing authorities.

THE MARQUESS OF WINCHESTER

It is the point that they do lose it.

VISCOUNT PEEL

I am very sorry they lose it, I know one does lose in discussions with the taxing authorities. I only submit that it is not part of the operating expenses.

On Question, Amendment negatived.

LORD DANESFORT moved, in paragraph (e) (ii), relating to the rate of interest, to leave out "average rate of dividends and interest paid by the company on their share and loan capital during the preceding year; so, however, that the rate shall in no case be less than five nor more than" and to insert "rateof."

The noble Lord said: The effect of the Amendment is that it gives a company, who are made compulsorily to sell electricity to the Board, slightly better terms than are given by the Bill. By Clause 7 it is provided that the owners of selected stations shall be compelled to sell to the Board all electricity generated at their stations at a price equal to the cost of production. The Second Schedule defines what the cost of production is to be. In paragraph (e) you find that the company is to be allowed interest upon certain things which are specified. I do not question that those are properly allowed. It says that the rate of interest for the purposes of this paragraph shall be as set out in subsection (ii) of the paragraph, so that the difference between the Bill and my Amendment is this. The Bill prescribes a rate of interest at the minimum of 5 per cent. and a maximum of 6½ per cent., and I propose a uniform 6½. I hope my noble friend will agree that a uniform rate is a fair rate to the persons who subscribe or may hereafter subscribe—and that is the important point—capital for generating electricity.

The reasons I advocate this change are these. There are many cases where companies have been paying larger dividends than 6½ per cent. On the other hand, there are cases where, in the bad years, companies have been paying less than 6½ per cent. and in the opinion of competent authorities—Lord Weir is one—it would be fair to have an average of 6½ per cent. If your Lordships look at paragraph 47 (b) of the Weir Report you will find this in reference to interest: Cost will include interest on the capital properly attributable to the generating stations (the interest will be at a uniform rate of, say, 6½ per cent., whether the generating stations to be controlled are owned by public authorities or companies);

A statement was made by the Attorney-General in another place on an Amendment moved by Mr. Dennis Herbert, on November 11, 1926. The Amendment that was moved was as to the rate of interest to be allowed, but was not quite in the same form as the one I am moving. The Amendment moved by Mr. Dennis Herbert was that the interest on capital, other than loan and share capital, was to be 8 per cent. The Attorney-General, resisting that, said:— We are proposing that the average rate, dividend and interest shall be given, but we are conscious that there may be cases in which dividends are too high and others where capital has not been remunerative, and the average would come out too low. The House will realise that the average 6½ per cent., which we think is a not unreasonable return to propose, is a just one, and I ask them to accept it. I do not desire to tie the Attorney-General down to a pledge that it should be 6½, but it shows that 6½ per cent. would be a good fair average rate as a whole.

May I recall to your Lordships the fact that in several of these earlier Power Companies Acts, notably three passed in 1900, 1901 and 1902, 8 per cent, was recognised by three Acts of Parliament as a fair rate of dividend to be allowed upon the capital of companies who generate electricity. It was only when the dividends exceeded 8 per cent. that any alteration or adjustment in the price of electricity had to be made. The cases I refer to were the North Metropolitan Electric Supply Act of 1900, the Yorkshire Electric Supply Act of 1901 and the Newcastle-on-Tyne Electric Supply Act of 1902. And this 8 per cent. on the capital was fixed at a time when money could be borrowed very much cheaper than it can now—namely, in 1900 and 1902. May I add this further consideration, that this rate of interest which is to be fixed upon the companies' capital, so far as capital for generating stations is concerned, applies not merely to existing capital but to capital which may have to be raised in future by the companies in order to carry out the orders of the Board for improving existing stations or building new ones. I venture to think it is most important that if the companies are to carry out these orders reasonable inducements should be given to investors as to the rate of interest that is to be allowed on the capital that is to be raised.

I have been furnished with instances of very serious hardship which would occur to companies if the rate of interest or of dividends is fixed as low as 5 per cent. I will only trouble your lordships with one, which refers to a case in which capital was raised before the War and raised at a very low rate, 4 per cent. for debentures, and 5 per cent. for preference shares, the ordinary shares earning 6 per cent. If the principle laid down in this Bill is to be applied, the average rate of interest of that company would be only 5 per cent. I ask your lordships to consider what that means and I will give the noble Viscount the arithmetic if he likes to work it out.

Suppose this company is ordered to build new generating stations or improve existing ones and has to raise new capital, say £900,000, in debentures and preference and ordinary shares, it could not raise the money now at the old rate of 4 per cent. for debentures. Probably it would be 5½ per cent. Instead of the old rate of 5 per cent. for preference shares there would be 6 per cent. If the proposals of this Bill are adopted they would not be able to pay a dividend of more than 4 per cent. on their ordinary capital, or, if they sold their electricity cheaply, of more than 4½ per cent. If the new capital is to bear the rate of interest prescribed in the Bill, which is 5 per cent., and they have to pay 5½ per cent. for debentures and 6 per cent. for preference shares, that leaves only 4½ per cent. for the ordinary stock. The calculation is here and I have many others of a similar character. When I am fortified, as I am, by the view of the Weir Committee and to a certain extent by the Attorney-General, I hope the Government will agree to accept the Amendment.

Amendment moved— Page 39, line 18, leave out from ("the") to ("six") in line 21., and insert ("rate of")—(Lord Danesfort.)

VISCOUNT BERTIE OF THAME

I would like to point out that 4½ per cent. on the ordinary stock is less than the interest on War Loan. Therefore the money would not be raised at all.

VISCOUNT PEEL

I do not know whether noble Lords have looked at the exact terms of this provision of the schedule which, as my noble friend has rightly said, deals with the rate that should be allowed in interest on money for the purpose of calculating the cost of the production of electricity at these selected stations. It is, of course, an average. The words are:— The average rate of dividends and interest paid by the company on their share and loan capital during the preceding year. If the average is less than 5 per cent. it is to be treated as 5 per cent.; it shall not fall below 5 per cent. or go above 6½ per cent. They get the actual ratio of the average that they pay for their money, with that proviso.

My noble friend spoke of some difficulty about raising money. He said that you had to pay more for money than a few years ago. But, after all, what are you raising it for? You are raising it for an absolutely safe and secure undertaking for the purpose of developing an absolutely safe and sure market for any amount of electricity that you produce under orders. I do not want to be dogmatic, but you get 6½ per cent. on an investment as safe as Consols. I should be very glad to put my money into an undertaking on those terms. No doubt my noble friend likes something more speculative, but I am more cautious; I am an Englishman and he is an Irishman. It seems to me a pretty satisfactory average. He mentioned a statement made by the Attorney-General. I should like to look into that—he need not give it to me now for it is rather late, but at some more reasonable hour of the day. I hope he will not press the Amendment. I cannot make any promise on any question of increasing the rate, but I should like to look into the point.

LORD DANESFORT

My noble friend charges me with an unreasonableness which I do not think that I possess. Like him, I should be only too happy, being cautious, to get 6½ per cent. in a safe security. That is exactly what I propose in my Amendment.

VISCOUNT PEEL

If they earn it.

LORD DANESFORT

But the Point is this: Supposing that in the last year they earned only 3 or 4 per cent. on their ordinary capital, while in the normal year they earned 6 or 7 per cent.—still we are told that they must not get more than 5 per cent. when they sell electricity. Surely that is not fair. They may claim, for instance, that last year they had a bad year, owing to the cast of coal and so on, while on the average of five years they have been earning 6 or 7 per cent. on their ordinary capital. That would be reasonable enough. But here you are forced to take what you earn on your capital during the last year, and this is fixed for ever.

VISCOUNT PEEL

No, it is not at all fixed for ever. My noble friend has not looked at the words: the average rate of dividends and interest paid by the company on the share capital during the preceding year. Therefore, the question is, what is the cost of production of the electricity? It will be based on the average in the preceding year. It will change from year to year.

LORD DANESFORT

If that is the real meaning of it it is rather different. But I understood that it meant that when electricity is sold by the undertaker to the Board they got only the rate which they earned in the preceding year.

VISCOUNT PEEL

Yes, but then that preceding year is constantly changing.

LORD DANESFORT

So the rate changes every year?

VISCOUNT PEEL

Yes, I understand it so. It is like Income Tax, which is not the same every year. Your income varies from year to year, and therefore your charge varies from year to year. If five years hence I sell electricity, the price is based on the cost of production in the preceding year, and in that cost of production one of the elements is the average rate of dividend on capital in the preceding year.

LORD DANESFORT

That throws a new light upon it. I will withdraw the Amendment and consider the matter before Report.

Amendment, by leave, withdrawn.

LORD ASKWITH moved to add to the paragraphs relating to interest the following proviso:— Provided that in the case of any company which is a London company within the meaning of the London and Home Counties Electricity District Order, 1925, such average rate aforesaid shall be taken to be the average rate of the interest payable by the company and of the dividends which such company is entitled to retain or distribute in the year of account under the provisions of the London Electricity (Nos. 1 and 2) Acts, 1925, together with a proper proportion of any co-partnership benefit payable in such year under the said Acts or either of them.

The noble Lord said: This Amendment is designed to put the generating stations of London on the same basis as what was arranged for the whole undertaking under the London settlement of 1925. Under the London settlement of 1925 interest of 10 per cent. was payable up to 1931 and 7 per cent. after that date. It is surely better that within such a short time there should not be an axe coming down, altering the rate of interest and impinging upon the co-partnership schemes. I should be quite ready to suggest that the 10 per cent. rate should be maintained, at least until 1931, but after that period it might be possible for the companies, fully warned, to come within the general scheme of the Bill.

Amendment moved— Page 39, line 22, at end insert the said proviso.—(Lord Askwith.)

VISCOUNT PEEL

I understand that the noble Lord wishes to make some differentiation in the case of the London companies.

LORD ASKWITH

No, they have it already. The point is that the companies are authorised at present to pay dividends on a sliding scale and to set up co-partnership schemes for the distribution of benefits to the employees.

VISCOUNT PEEL

I understand that what the noble Lord wishes to do is to link up provisions in the London Acts with regard to the sliding scale with the provisions of this schedule, which deal with cost of production, which are two different things. I think as regards this scale that London companies ought to be treated in the same way as other companies and you have no business to import provisions from one scale into another. I will, however, if the noble Lord wishes, examine the matter further.

Amendment, by leave, withdrawn.

Second Schedule agreed to.

Third and Fourth Schedules agreed to.

Fifth Schedule: