HL Deb 20 June 1968 vol 293 cc982-94

9.47 p.m.

THE PARLIAMENTARY SECRETARY, MINISTRY OF PUBLIC BUILDING AND WORKS (LORD WINTERBOTTOM)

My Lords, I beg to move that the Gas and Electricity Bill be read a second time. The principal purpose of the Bill is to enable the gas industry to secure finance for its development programme in the natural gas era. I will, with the permission of the House, deal first with the minor clauses concerning powers to borrow overseas and to give technical assistance. These concern the electricity industry as well as the gas industry. I will come later to the main purpose, the extension of the gas industry's borrowing powers.

Clauses 2 to 4, relating to borrowing in foreign currencies, take up a great deal of the Bill's space. Both the gas and electricity industries have expressed interest in being able to borrow in foreign currencies, believing that from time to time this might be beneficial to them. The House will know that the Air Corporations were given in Section 6 of the Air Corporations Act 1966 a power to borrow in foreign currencies, and that the Greater London Council has been given a similar power.

I would emphasise that no borrowing by the gas and electricity industries in foreign currency is intended at present. But Clauses 2 to 4 have been included in the Bill so that the power will be available for use if needled. In view of the great size of their investment programmes, it is unlikely that either of the industries will ever be able to raise any great part of their requirements for new money in this way. Apart from this practical limitation noble Lords will note that control is asserted by the Government through the requirement in the clauses that the borrowing must be from persons and on terms specified by the Minister with the approval of the Treasury. There is, of course, no intention of either industry issuing securities with voting rights. I hope that the House will welcome this extension of the industries' possible sources of capital.

I now turn to technical assistance overseas. The opportunity of the Bill has also been taken to seek a power for the gas and electricity industries to make available their special experience and skills to developing countries through agreements with the Minister of Overseas Development. There is nothing in Clause 5 that obliges the industries to give assistance if they do not so choose, or to incur any expense on their own account. Their technical eminence makes our gas and electricity industries well placed to give help in this way, and I hope the House will welcome the removal of the legal impediment—which I am surprised to find exists—to the flow of their technical assistance.

I now come to the main purpose of this Bill, which is to raise the Gas Council's power to borrow money by an additional £1,200 million. The reasons for this are set out both in the Memorandum on the Gas and Electricity Bill and in the Gas Council's brochure Investment in Natural Gas. It may be helpful to noble Lords if I explain the position briefly. The last Act to extend the borrowing powers of the gas industry was the Gas (Borrowing Powers) Act 1965. That Act set a limit of £1,200 million. It was expected at the time that this would suffice until 1970, but of course, no North Sea gas had been discovered at that time. Now that we have this gas—and it should be of great benefit to the British economy—it is of great importance to develop its use as rapidly as possible. It offers advantages in terms of relatively low cost industrial fuel, savings of up to £100 million per annum in balance of payments, and security of supply. The more quickly the gas is introduced the greater will be the gains to the economy.

This means a very great increase in the size of the industry. I shall spare your Lordships the statistics, but in simple terms the effect of the Government's plans is to double the sale of gas by 1970–71, and this would be doubled again by 1975. This great increase will necessarily involve large increases in investment, since it will require a very substantial programme of work to expand the industry's system and services.

The main element of all this, however, is the creation of a national gas grid, which is known technically as the main transmission programme. First of all, we have to complete the feeder mains from the North Sea coast. The main pipeline system from Canvey to Leeds has already been supplemented by a feeder from Easington to Sheffield, and a second is due to be commissioned this year, from Norfolk to near Rugby. A third (from Norfolk to near Hitchin) is being laid, while two more are planned, to make a capacity to take an average of about 3,000 million cubic feet a day. The backbone main is also being extended to the remaining four Area Boards so that North Sea gas can be supplied to all of them by 1970. This main pipeline system is to be operated by the most modern techniques involving computers and radio telemetry. It involves a radical shift in the nature of the industry's capital investment. Two years ago nearly half its investment was on gas-making plant and only 5 per cent. on bulk transmission. Next year these proportions will be reversed; that is to say 50 per cent. on transmission and 5 per cent. on gas-making plant.

May we turn to the Area Board programmes? The quickest way for the Boards to use North Sea gas is to take it into gas-making plant at present fed by oil. This enables them to supply it to the consumer as towns gas, for which of course no conversion of appliances is needed. This substitution of oil feedstock by the new gas will also be especially helpful to the balance of payments in the next few years. In the longer term, however, it will be cheaper to convert everybody to take North Sea gas "neat" rather than to put up the additional reforming plant which would be needed to convert all this gas to town gas. Moreover, because of the higher calorific value of the natural gas, the capacity of mains and storage is greatly increased. It is to enable the industry to carry out these plans that this Bill is being presented.

Perhaps your Lordships will be interested in a picture of the overall investment and borrowings. The Gas Council estimate that the rate of investment is likely to average just over £300 million a year for the period up to March, 1973. This compares with only £50 million a year in the ten years up to and including 1961–62, though of course the trend has risen since to the present level. Total capital requirements in the five years up to March, 1973, are expected to be about £1,600 million, of which about £500 million will be met from the industry's internal resources, leaving about £1,100 million to be met from external borrowing. The industry's self-financing ratio is expected to increase from under 20 per cent. as at present to about 50 per cent. in 1972–73—an average of 31 per cent.

I might conveniently deal here with a point which was raised in another place about the industry's financial target. Because of the standstill in prices and incomes introduced in July, 1966, and then the uncertain position pending the issue of the Fuel Policy White Paper, it was decided to leave unchanged the financial objectives of the gas and electricity industries. However, preparations are now in hand to agree with the industries on fresh objectives for a period of years beginning in 1969–70. Three-quarters of the estimated capital requirements of £1,600 million—that is, £1,200 million—comprises expenditure on fixed assets. Of this, almost half, £546 million, is on hulk transmission and on storage; almost another half, £532 million, is on distribution and consumer service; about one-sixth of the total, £276 million, is for the conversion of consumers' equipment to burn natural gas instead of town gas; and the remainder, about £250 million, comprises provision for North Sea exploration and development by the Gas Council, for increased working capital, for residual gas manufacture and for offices, land, vehicles and the rest. This seems very precise, but in point of fact these are long-term forecasts.

I should like to talk about the flexibility which lies behind the figures I have given your Lordships. The fact is, however, that this vast expenditure is far from being fully committed. If it became clear that more or less natural gas would be avail- able or sold than has been assumed, the programme would have to be adjusted accordingly. The industry makes broad five-year plans, but firm plans are made only one year ahead with provisional plans for a second year. The programme can therefore be reviewed by the industry as it rolls forward; and, subject of course to Ministerial approval, the industry may only commit itself to expenditure in the light of the most recent knowledge.

In view of the need for flexibility, however, there are in the Bill two special provisions about the borrowing limits. On the one hand, to allow for tilt possibility that expenditures and borrowings may exceed the current estimates, there is a margin for contingencies. The sum chosen (which is a slightly "phoney" one, due to rounding of other figures) comes to the precise-looking £237 million, and is a large contingency allowance by any standards. But it is not out of line with the length of the period, five years, which the borrowing provision is aimed to cover, or with the scale of the gas industry's operations. On the other hand, an interim borrowing limit is proposed, equivalent to only £400 million of new borrowing, which should ensure that the finances of the gas industry come under consideration by Parliament within two years of the passage of this Bill.

It will be possible to decide then precisely what provision should be made for borrowing in the ensuing three years or so. In addition to the control exercised through the borrowing limits, the industry's capital expenditures are subject to control by the Minister annually through the Government's annual review of the investment programmes of the Gas Council and Area Boards. Moreover we have the National Board for Prices and Incomes looking into the industry's efficiency, and the Select Committee on Nationalised Industries is at present examining its plans for natural gas. It is perhaps unfortunate that this Bill could not await the Select Committee's Report, but there is no doubt, on any likely future, about the industry's need for a higher borrowing limit than the £400 million mentioned.

May I now turn to the industry's plans for selling gas? In order to double its market by 1970/71, and double it again by 1975, clearly an immense effort will be required, especially to penetrate the industrial market. It expects to make most progress in the premium markets where the special qualities of natural gas (that is, its cleanliness and high calorific value) are of most value. This is where the gain to the balance of payments is greatest since the fuel displaced is likely to be oil. But other industrial outlets will also he required to help secure a good load factor and rapid build-up. In order to make the most rapid possible progress on marketing, the industry has been strengthening its marketing staff, in particular the Marketing Department of the Gas Council has recently been strengthened.

I now come to Clause 6 of the Bill which deals with an alteration in the organisation of the Gas Council. It gives power to appoint up to another two full-time members of the Gas Council. This clause needs to be considered as part of the process of development of the organisation of the industry to cope with the major change to natural gas. Under the 1948 Gas Act the industry took over about 1,000 separate gas undertakings. It has welded them into large supply systems in each Area supplied from large and efficient gas-making plants. Then came further change, the purchase of Algerian liquid gas amounting to about 10 per cent. of this country's supplies. And then something of a revolution, the making of gas by new cheap processes from oil. The industry was in the midst of this revolutionary change before North Sea gas was discovered.

I think it is fitting to pay a tribute to the gas industry for the way in which it has adapted to these changes—and, indeed, promoted them. But as the industry becomes basically a distributor of North Sea gas—and that is really its future—so the manufacturing functions of Area Boards must gradually be phased out. Therefore, it will become more and more important, and indeed essential, for decisions to be taken on a national basis and not Area by Area. Within the present statutory framework the industry is itself strengthening its machinery for such national decision, by reorganisation at the Gas Council. At the same time, the Government are giving very careful thought to the question whether any statutory changes are now called for.

As the Minister announced in another place, we now have in mind changes intended to strengthen the central powers and duties of the Gas Council but at he same time leaving the Area Boards with their continuing and essential roles of bringing gas to the consumer and of providing the accompanying services. The Gas Council will need to have responsibility for the main policy decisions of the industry. These would include the industry's investment decisions and financial performance. In those matters the Area Boards will need to become responsible to the Gas Council. The Area Boards will remain as statutory bodies with their responsibilities for supply (subject to the general policies of the Gas Council) and for safety. Their chairmen would remain members of the Gas Council and would be appointed by the Minister.

These changes will require legislation, and it is hoped a Bill will be included in the programme for the next Session of Parliament. The two further full-time members of the Council for whom provision is made in this Bill are a further immediate step in the evolution of the organisation of the industry following the strengthening of the Council by the 1965 Act. The Bill will enable the Minister to appoint at once, without waiting for the more far reaching legislation which I have outlined, new Council members to fill key posts at the centre, for example, to take charge of the industry's finance and economic planning. My Lords, that is a brief, and rather fast, outline of the scope of the first six clauses of the Bill; I hope it clarifies to a certain extent what is intended.

Moved, that the Bill be now read 2a, —(Lord Winterbottom.)

10.5 p.m.

LORD DENHAM

My Lords, I am most grateful to the noble Lord, Lord Winterbottom, for his extremely detailed, and very rapid, explanation of the rather complicated provisions of this Bill. I have two reservations only on the policy behind this Bill and they are both connected with the main provision, the raising of the money for conversion to natural gas. With our present limited knowledge, can we be quite certain that it is wise to decide now, irrevocably, to go over exclusively to natural gas? The scale and nature of the markets for gas inevitably depend to a large degree on the selling price. Those rather obvious words are not mine, they come from the Ministry of Power White Paper Fuel Policy (Cmnd. 3438) page 7, and perhaps the noble Lord will keep at that page because I shall be returning to it later.

LORD WINTERBOTTOM

My Lords, would the noble Lord be kind enough to give me that reference again?

LORD DENHAM

My Lords, it is page 7, paragraph 14, line 30. Industrial gas sells at present at 20d. per therm. Can the noble Lord tell us how favourable will be the price of natural gas, in relation to that figure, by the time it gets to the user? In other words, if industrial gas sells at present at 20d. per therm, and if a few years ago we had converted to natural gas, what would be the estimated price per therm of natural gas based on present-day prices?

My Lords, as the noble Lord, Lord Winterbottom, has said, the gas industry has recently re-equipped with new plant to go over from the use of coal gas to naphtha gas. I believe that at present two-thirds of the gas comes from naphtha and one-third from coal. Therefore, in addition to the price of the new equipment needed for natural gas, the accelerated depreciation of the good plant already existing must be taken into consideration, and this is going to be depreciated over the next ten years, which will add to the cost of the natural gas. I should be grateful, therefore, if the noble Lord could say what is the cost of the natural gas in present-day terms.

My second question is this. Will the rate of production of natural gas be big enough to cope with our needs, or are we liable to run out of natural gas too soon? To go back to page 7 of the White Paper, at the end of paragraph 13, it reads: Though there can be no certainty as yet, it is a reasonable assumption for planning purposes that production from the United Kingdom part of the North Sea could reach 4,000 million cubic feet a day in 1975. How sure is that assumption? And if that assumption is proved to be wrong, are we going to be "up the creek"?

Secondly, stocks of North Sea gas are calculated to last for something like 25 years. After 25 years, will there be more? And if there is no more in our part of the North Sea, shall we have to choose eventually between buying from abroad, with the risk to our balance of payments, or reverting to naphtha or coal gas at a great deal more capital expenditure?

I quote from the Blue Book again, from paragraph 14: But, particularly for the longer term, much more needs to be known before it will be possible to establish precisely the role to be played by natural gas in our energy supplies. It will take time to assess the ultimate reserves; … Again: … because of the uncertainty about them the longer-term strategy for absorption must allow sufficient flexibility to accommodate fresh knowledge as it builds up. And again: … only provisional conclusions can be reached. Are we right in putting all our money in natural gas at this moment, when there are so many uncertainties?

The second reservation I have about this Bill is with regard to the borrowing powers. Are we right to give what is virtually an open-ended cheque to the gas industry against the background of the current economic situation? Way are we allowing in this Bill for an eventual borrowing of £2,400 million when only £1,600 million is thought to be necessary? There seems to be a very large contingency fund on the way. I know there is a safeguard in the Affirmative Resolution procedure before borrowing powers are extended too much, but the difficulty is that if the Gas Council and the Boards know that they can plan on a limit of £2,400 million they are liable to do so. The present limit of borrowing powers has been reached earlier than expected, and can anyone believe that the whole £2,400 million will not in fact be used?

What would be very much better would be to introduce natural gas more slowly. Her Majesty's Government could have extended the powers by £400 million in this Bill alone for the next two years. The industry could have gone over to natural gas for industrial use only at first. After two years the position could have been reviewed yet again in the light of the knowledge that had then become available. It might then, for instance, prove a better proposition to reform natural gas to town gas at source rather than adapt all gas-burning equipment to take natural gas direct. Although it would not be proper to hold up this Bill at this stage, I thought it only right to draw the attention of the noble Lord to the reservations that I and my noble friends—I should say at this time of night my noble friend—have to this Bill.

10.15 p.m.

LORD WINTERBOTTOM

My Lords, I am grateful to the noble Lord, Lord Denham, for the constructive approach that he has taken to this rather technical Bill. I apologise for having gone at a rather rapid rate, but I tried to slow down when I thought it was complex. I have another equally complex Order to discuss with the noble Lord in a few moments, and I thought that perhaps any time saved would be of value.

The noble Lord made various reservations on this Bill, and I think quite rightly so. We are moving into a new era, which has come upon us unexpectedly. I believe that this is one of the strokes of luck, unexpected and unearned, but very welcome, that this country has received in the past few years. The gas industry, which started as a Cinderella, and in fact with half a shoe and which has become one of the more dynamic of the nationalised industries, has grasped this opportunity with both hands and, I think quite rightly, is taking every step it can to make the largest possible use of this new source of wealth that we have discovered off our coast. I am fairly certain that although the gas industry is pushing ahead as fast as it can, it must share to a great degree the noble Lord's reservations.

The point the noble Lord made was: Will there he gas after 25 years? Is the rate of production sufficient for our needs? These are factors that I think we can only take as an act of faith. I obviously believe that it is so. Experience in our generation has been that there has always been more oil and more natural gas than we ever thought was there. We know, for instance, that there are traces ' of gas North of the present field, and also maybe, in the Irish Sea. For all we know, we may be floating on some vast bubble of natural gas. Nevertheless, I think the noble Lord is right to ask the question and to try to look a little distance ahead.

Of course, if we found that natural gas reserves ran out at the end of this period, then we should have to go back to other systems of gas production, which I would guess in 25 years' time will be technologically far in advance of anything that we are doing now. I am reasonably certain, although I do not have any hard facts on the subject, that research into other sources of gas will continue during the last years when the gas comes in from the North Sea.

Again, there is the reservation about the very large sum earmarked for the development of the programme as now foreseen, and the questions: Would it not have been better to have gone more slowly, not to be forced to accept accelerated depreciation of new plant—which obviously might have to come—and perhaps to feel our way a little more carefully? I venture to suggest to the noble Lord that we are doing that. We are not committing the full additional £1,200 million immediately. We are committing £400 million, and we shall then come to the House of Commons again to ask for permission to take up the next draft. This two years will be a substantial part of the period of development, and I suggest to noble Lords that at the end of that time we shall have a much clearer idea of what the market will be, what the reserves are, and what the alternatives will be if the bonanza is not quite so big as we think it is.

The noble Lord asked me a technical question on prices, and how really favourable the present price of natural gas is. I am afraid that I am unable to give the noble Lord a satisfactory answer at the moment. It is a highly technical subject. I have figures, but I do not think they would help the noble Lord, and I would not put them forward with any confidence. He has been good enough to indicate to me that we shall not, in fact, be taking the next stages of the Bill "on the nod", but I will make certain that the information he requires is available to him at some appropriate point in our discussions on the next stage of the Bill. I am not certain when that will be. We shall have plenty of opportunity to discuss the borrowing facilities of the Board. Perhaps I may be able to give the noble Lord the exact information he requires on the Third Reading of the Bill. I do not know if this is a satisfactory way of doing it.

LORD DENHAM

My Lords, I hope I did not give the noble Lord the idea that I was going to raise Amendments on this Bill because I think probably I shall not. What I meant was that the later stages would otherwise go "on the nod". If the noble Lord could give me that in- formation at some future stage, I should be very grateful to him.

LORD WINTERBOTTOM

My Lords, I will most certainly undertake to do so on the Third Reading, which I think might be a convenient point. Having said this, I feel that at this stage there is very little that I can add. I shall lie very glad to expand various other aspects of the Bill on the Committee stage of our discussions, when I think we could go into greater detail into borrowing abroad and the exact borrowing programme of the Gas Council as a whole.

On Question, Bill read 2a, and committed to a Committee of the Whole House.