§ 3.49 p.m.
The MINISTER of STATE, DEPARTMENT of EMPLOYMENT (The Earl of Gowrie)My Lords, I hope that the House will not mind if, following the distinguished maiden speech of the noble Lord (which my noble friend Lord Rawlinson of Ewell will shortly be following) I now repeat a Statement being made in another place by my right honourable friend the Secretary of State for Energy. The Statement is on the financial targets for the gas and electricity industries, and these are my right honourable friend's words:
" With permission, Mr. Speaker, I should like to make a Statement about financial targets for the British Gas Corporation and the electricity supply industry in England and Wales.
" It is a fundamental objective of this Government's policy towards the nationalised industries that they should be set a clear financial discipline. We therefore opened discussions with the gas and electricity industries on medium-term financial targets for the period 1980–81 to 1982–83. The external financial limits for 1980–81 announced last November were set in the light of those discussions, which have now been satisfactorily concluded.
"In a period of international uncertainty over fuel supplies and rapidly rising fuel costs, it is important that consumers should be aware of the true value of the fuel they are using. The prices which consumers pay for different fuels must reflect that value—taking into account in particular the fact that oil and gas supplies are limited. We must conserve our scarce energy supplies for future generations. After a year in which crude oil prices have risen by 100 per cent. or more, this is bound to mean heavy increases in other fuel prices. The need to move to economic pricing has been our main consideration in setting the financial targets for the two industries.
133 "I recognise that adjusting to an era of higher energy prices brings serious problems for many consumers, especially the old and the poor. The new scheme of assistance with heating costs announced by my right honourable friend the Secretary of State for Social Services on 22nd October last was designed to provide worthwhile help for those in most need. We shall take proper account of the cost of energy in our social policies and in determining benefit levels, particularly the levels of extra heating additions. We are reviewing in this context the whole range of help available to assist consumers with fuel bills.
"Turning specifically to gas fust, there are five reasons why domestic gas prices will have to rise. First, our reserves of natural gas represent a finite and increasingly valuable national resource. If the price is too low, we shall burn it up too fast and bring forward the day when we have to turn to more expensive sources of supply.
"Second, in the short term too, low prices cause peak demand to surge above what it would otherwise be, bringing the risk of shortages and supply cuts on cold winter days.
"Third, gas from new North Sea fields will cost several times more than earlier gas supplies and prices must reflect these much higher costs.
"Fourth, a sensible approach to pricing is vital if we are to achieve a proper balance of supply and demand as between all consumers of gas. For industrial and commercial customers it has been the long-standing policy of the British Gas Corporation to sell gas at a price broadly related to that of the competing oil product. The Government endorse this policy. The only alternative would be some form of arbitrary rationing and the risk of ever-increasing supply shortages.
"Fifth, artificially low prices concentrate the benefits on those who have access to gas supplies at the expense of the rest of the population. Correct pricing is essential if some of the financial proceeds from our natural gas resources are to be secured for the benefit of the nation as a whole. Honourable 134 Members will recall that even the Price Commission in their report last July, before recent oil price increases, concluded that domestic tariffs should be 30–35 per cent. higher in real terms.
"Against this background, and the background of soaring world oil prices, we have set the British Gas Corporation a target, expressed as an average annual rate of return to be achieved over the period April 1980 to March 1983, of 9 per cent. on net assets valued at current cost. The target is related to current cost operating profit after taking account of depreciation but before interest and tax. It will be adjusted if necessary after introduction of the proposed new current cost accounting standard. The target rate of return is expressed as an average over three years: the actual rate of return is likely to be lower than 9 per cent. at first, but will increase progressively over the period.
"Details of the tariff changes necessary to achieve the target are a matter for British Gas. However, in broad terms the Government expect domestic gas prices to increase this year by 10 per cent. over and above the rate of inflation, followed by comparable real increases in the following two years.
"Against the same criteria of economic pricing, electricity prices will also rise, though the expectation is that this will be less than in the case of domestic gas.
"The target for the electricity supply industry in England and Wales has been set at an average annual rate of return of 1.8 per cent. on net assets valued at current cost—again over the three years 1980 to 1983. As in the case of gas, details of tariff changes are a matter for the industry. Prices are likely to increase over the three-year period of the target by about 5 per cent. over and above increases in the industry's own costs, of which fuel costs are the biggest element.
"The Government have asked both the British Gas Corporation and the Electricity Council to phase this year's increases in two stages, one in April and another in October."
My Lords, that concludes my right honourable friend's Statement.
Lord BRUCE of DONINGTONMy Lords, the House will be grateful to the noble Earl for having made a Statement at such length. We on this side of the House must express our appreciation that, uniquely on this occasion, the Minister has not quoted precisely from that section of the Conservative Party Election Manifesto which foreshadowed increases of the magnitude that have been postulated. We are indeed grateful for that small mercy.
This is a very serious Statement indeed. The authorities concerned have already announced the increases they propose to make in obedience to the policy which has been enunciated: a 17 per cent. increase in gas in April and a further 10 per cent. increase in October; a 17 per cent. increase in electricity in April and a further 8 per cent. increase in October. No noble Lord can conceal from himself the fact that this is bound to give an extra twist to an inflation rate which is already running at 17½ per cent.—an inflation rate that is presently going to be further increased by the forecast increase in rates, by increases in fares, by increases in monthly mortgage repayment charges and by increases in food prices due to the Government's present inability to obtain changes in the Common Agricultural Policy. I invite the noble Earl, when he replies, to give the House some indication of the changes he expects to take place in the retail price index during the period that is covered by these increases.
It is quite clear from the Statement itself that, although the Government have been protesting, "Conservation"—and indeed at various points the noble Earl referred to it—the main emphasis of the Government has been on dogma. I quote from the Statement:
It is a fundamental objective …[to] set a clear financial discipline";and,The need to move to economic pricing has been our main consideration".In other words, considerations of dogma have taken priority over any reasonable and prudent steps that could be taken to contain the rate of inflation—even the rate at which, at the Government's stimulation, it already stands.The noble Earl has made reference to the new system of assistance with heating 136 costs announced by his right honourable friend the Secretary of State for Social Services on 22nd October last. Yes, we well recall it. Due to the public expenditure cuts, the expenditure under that scheme, which was put at £45 million with a benefit to about 3½ million people, was, with the same cold fanaticism, cut to £14 million with a benefit to only one-tenth of that number, or 350,000. This is not the occasion, I believe, to indulge in lengthy debate, but, indeed, the contents of the Statement itself, and the Government's thoughts behind it, betray a degree of cold fanaticism which seems to have beset the Government. The duty of the Government is to govern in the interests of all the people. It is to govern with a strict sense of justice, with the object of obtaining as great a degree of consensus and unity as possible among the population as a whole. This announcement and the policies which flow from it will give an extra twist to the inflationary spiral; they are unjust and will cause unnecessary hardship among hundreds of thousands of our people.
§ 4 p.m.
§ Lord TANLAWMy Lords, we, too, welcome this Statement from the Government and would thank the noble Earl for the way in which he has presented it; but, unlike the last speaker, we from these Benches would create some doubt as to whether the financial discipline referred to in the Statement is perhaps as soundly balanced as the noble Earl might consider. While expressing concern for the consumers of gas throughout the country—and we will have an opportunity to debate this later—I will not go further in this direction.
There are a few questions which I should like to ask the noble Earl. First, he emphasised in the Statement the finite nature of this increasingly valuable national resource of gas. Is the noble Earl able to say whether the increase in price will be used to encourage oil producers in the North Sea to prevent flare-off and to use the gas which at the moment is being burned off? Secondly, will the noble Earl advise us whether the commercial and industrial consumers of gas may be encouraged to be weaned away from this source of energy over the next few years in order that the domestic 137 consumers of gas may have a supply for as long as possible?
Thirdly, the Statement goes on to say that the profits and return on capital will be for the benefit of the nation as a whole. Will the noble Earl explain how he gets the figure of 9 per cent. on net assets valued at current costs? What is the value being placed on the gas assets in the North Sea? It will be interesting to know this figure and to work out how he achieved the figure of 9 per cent. Finally, I should like to point out that the word "electricity" was mentioned only four times in the Statement. The electricity supply industry has a capital expenditure programme of some £10 billion in the next 10 years. Could the noble Earl explain whether the rate of return of 1.8 per cent. on net assets takes into consideration the capital expenditure which is anticipated by this industry?
§ 4.2 p.m.
The Earl of GOWRIEMy Lords, where some of the points which the two noble Lords have put to me overlap, it may be convenient that I take them together rather than in turn. The main charge of the noble Lord, Lord Bruce of Donington, was that these price increases would be an extra twist in the spiral of inflation. He also asked me a specific question about the retail price index, which I shall come to. That inflationary point overlaps the point made by the noble Lord, Lord Tanlaw, about how one was going to go about seeing that the value of these assets was felt by the nation as a whole. The answer to both points is that the gas industry is very highly profitable because gas is a relatively easily available form of energy. Because other forms of energy have become very expensive, people have been rushing into gas; and this is one of the reasons for anxiety about the balance of supply and demand. But any profits which the British Gas Corporation hold in excess of their investment needs (which are not considerable) will go back into the Exchequer; and in that way they are reducing the public borrowing requirement and are directly counter-inflationary in their effect. In general economic terms, the noble Lord's anxiety is some-what misplaced.
138 Coming to the question of the retail price index, my information is that the April increases will add about ½ per cent. in the case of electricity and ¼per cent. in that of gas, spread over the subsequent three months; and the October domestic gas increase will add a further 0.16 per cent.; so that we are talking overall of a little less than 1 per cent.
The noble Lord, Lord Tanlaw, asked me about flaring. Of course, the higher costs and rates of return of gas now—or subsequent to this going through—will make the incentives not to flare all the more considerable. He mentioned about weaning commercial and industrial concerns off gas. I think that is a difficult thing to do by central directive but, certainly, from the fact that commercial, industrial and domestic use are becoming more in line we will get a fairer distribution of the issues there.
§ Lord BALOGHMy Lords, does the noble Earl not agree that the present system of pricing, whereby the unit cost for large consumers is smaller than that for small consumers, should be changed, given the situation as it is now?
The Earl of GOWRIEMy Lords, I think the net effect of that is rather different from what the noble Lord, Lord Balogh, is suggesting; because at present the British Gas Corporation charge an overall much higher rate to commercial and industrial users than to the domestic users, as we domestic users know. I have not done any calculation of the relative unit costs there, but surely the distinction must be made between the overall costs of commercial and industrial users and those of private consumers.
§ Lord FERRIERMy Lords, I hope the House will forgive me for asking a brief question, knowing, as noble Lords must, that I have been concerned over the years with the problem of low rates for energy for domestic space heating. The noble Lord, Lord Tanlaw, mentioned that we should have an opportunity to debate this. As your Lordships may have noticed, I put down only last night an Unstarred Question on the subject and I took care over the final words, which are:
… and to what extent they consider that such a step is justified?139 If there is going to be a debate, I hope that I shall be permitted to withdraw my Unstarred Question. That would be prudent, provided that we will have an opportunity to discuss the matter at some later stage—but not too late.
The Earl of GOWRIEMy Lords, I should like to answer the point made by my noble friend. He has put down an Unstarred Question. That obviously is a more suitable arrangement for a general debate on this issue than a repetition of a Statement in the House of Commons. I suggest that we have that debate, although it is not for me to say whether we do or not, as that is a matter for my noble friend. I shall be delighted to answer all of his points, and others at that time, should the Unstarred Question go through.
§ Lord ROBERTHALLMy Lords, while congratulating the Government on these very modest steps announced today, may I ask whether the Minister would not agree that the most urgent task for the whole of Western industrial society is to get the maximum economies in the use of oil and the maximum pressure for the development of substitutes for it? From that point of view, the faster the oil prices rise the better, and the more hope we have of surviving the crisis and the more we shall be doing for our successors. There is one more point. There is no need for these things to give a twist to the infllationary spiral, because Government receipts that go up because of increases in the price of oil will reduce the other financial requirements of the Government; and if you do not want to affect the cost of living, you could reduce other indirect taxation, exactly pro rata.
The Earl of GOWRIEMy Lords, I am grateful to the noble Lord, Lord Roberthall, effectively for answering the attack made by the noble Lord, Lord Bruce of Donington. Extra receipts in one area have a counter-inflationary effect in another. This is the point that I was seeking to make. I am grateful that my noble friend made this clear.
§ Lord BALOGHMy Lords, does the noble Earl realise that he made a mistake? I was speaking as between the domestic consumer, large and small, and not as 140 between domestic and industrial users. This is a very important question. What one can do to alleviate the small consumer's charge for energy which they both share is very important.
The Earl of GOWRIEMy Lords, I apologise if I misunderstood the noble Lord. I took it that the noble Lord was making a distinction between the commercial and industrial users and domestic consumers. The burden of my statement was to say that in so far as these price increases in the costs of gas fall or are burdensome on smaller users or poor consumers, with whom I take him to be concerned, we are going to work through social policies—the additional fuel costs on supplementary benefit scheme and the rest—in order to get redress there.
The increases which are going to take place this year will not affect the heaviest bills until next winter, and they, of course, will be taken into account in the November uprating of pensions and social security benefits. We are extremely concerned to see that the weakest members of society, the elderly and those lower income groups, are given protection here. They are given some protection with the automatic indexation of some of the benefit systems. We are looking at additional protections where they are needed.
I should like to underscore to the House—following the intervention of the noble Lord, Lord Roberthall—that it is impossible these days to insulate society as a whole from high energy costs. The costs of oil have gone up 100 per cent. in this last year alone and gas cannot be protected from that kind of increase, either.
§ The Earl of LAUDERDALEMy Lords, could the noble Earl clarify two points that he made? First, are we to understand that the higher gas prices are now to be related to the higher cost of gas from the northern North Sea? Therefore, they will be notionally related to what might be the notional replacement cost. Secondly, are we to understand that he is calling in aid for the case to raise gas prices, the recommendation of the Price Commission which I think was set up by the previous Government?
The Earl of GOWRIEMy Lords, on the last point, it is true that the last 141 Government were faced with the same problem of a great imbalance in pricing between gas and other forms of energy, and customers were rushing towards gas at such a rate of knots that our sources of supply were in considerable danger. That is why, as my noble friend said, the Price Commission recommended, at the time that the last Government were in office, that there should be a price increase considerably more in percentage terms than anything that we are suggesting. On the point about the northern North Sea, as the Statement implied, the present costs of gas gathering—if that is the phrase to use—are in any case in real terms in excess of the costs in the southern fields.
§ Lord KALDORMy Lords, I trust that the noble Earl will appreciate the logical incongruity involved in first arguing that our domestic oil price must be raised to the full extent of every rise in the OPEC price in order to make the consumers in this country substitute other fuels for oil, and then arguing that it is necessary to raise the gas price because it has become too cheap in relation to oil. The two arguments are completely contradictory. Either one wants to encourage substitution or one does not. If substitution is too much encouraged, there is a perfectly good remedy in reducing the oil price and not in raising the gas price.
The Earl of GOWRIEMy Lords, the noble Lord's example in a pure world would be extremely effective. It is not effective in so far as we are dealing with finite sources of supply. Our anxiety—which is underscored by the international situation—is that the great imbalance between gas pricing and other forms of energy costs were using up our gas supplies at a rate which is extremely damaging to the overall interest of this economy.
§ Lord HAMNETTMy Lords, would the Minister explain to my probably non-economic and irrelevant mind, if the gas industry is so profitable and it is necessary to make these increases, why it is not possible to treat the whole of public industry as one entity and then solve the problem of the steel industry by encouraging the steel board to greater wage increases because of its non-profit-ability?
The Earl of GOWRIEMy Lords, all that would have been possible if the party which the noble Lord supports had not originally engaged in the creation of nationalised industry boards which presumably have to have some financial disciplines under which to operate. They were certainly given financial disciplines under which to operate by the last Government.
§ Lord WYNNE-JONESMy Lords, in the Statement which the noble Earl gave us from the Government he said that it was hoped that gas would be made available by this policy for many generations to come. But it is well-known that the total supply of gas from the North Sea, so far as we are aware of it. is not likely to last for more than 15 to 20 years, which is not many generations. Therefore, there is no great advantage in conserving this gas, especially as one is given to understand that the producers from the North Sea will find it extremely un-remunerative if they have to cut back the supply. Is it not, therefore, a poor policy to adopt now, to try to conserve the gas in that particular way? Is it not also true that to raise the cost of gas with some quaint theory of thermal egalitarianism in which they would want to make the price of all fuels the same, is really ludicrous? The cost of electricity in real terms is necessarily not less than three times the cost of the fuel used; whereas the cost of gas, as used, is virtually the same as the cost of production. Is it not therefore quite foolish to try to have this quaint egalitarianism?
The Earl of GOWRIEMy Lords, the noble Lord, Lord Wynne-Jones, is putting a case for using up the gas as fast as possible. It is a perfectly credible case. I have heard it argued by supporters of my own party. But the fact is that it is not a view which, on balance, the last Government shared or the present Administration shares. We are not talking about conserving gas infinitely, or not allowing it to be used. We are correcting an imbalance which has made consumers go very heavily into gas, and at a rate which a broad, overall and sensible conservation policy—particularly in the light of the international situation—does not. in our view, warrant.
§ Lord LEATHERLANDMy Lords, may I——
The MINISTER of STATE, MINISTRY of AGRICULTURE, FISHERIES and FOOD (Earl Ferrers)My Lords, there are 22 people who wish to take part in what is really the subject matter for debate this afternoon, before we come on to an Unstarred Question. The House might consider it appropriate that your Lordships are now prepared to resume the debate.