HL Deb 09 March 1981 vol 418 cc6-14

2.50 p.m.

The Minister of State, Department of Employment (The Earl of Gowrie)

My Lords, I beg to move that this Bill be now read a second time. The House will recall that in May of last year the Secretary of State for Energy announced that the Government had decided in principle to impose a levy on the British Gas Corporation in respect of gas purchased from the United Kingdom continental shelf and sold to the corporation under contracts not subject to petroleum revenue tax. The Gas Levy Bill before your Lordships today is in a sense rooted in events that took place in the early part of the story of North Sea Gas. Natural gas was first discovered off the Norfolk coast in 1965, and within a year of this first discovery the decision had been taken to convert Britain to natural gas.

The initial purchases of gas made by the Gas Council were from the Southern Basin fields, which are off East Anglia. The Gas Council's successor, the British Gas Corporation, has gone on to acquire gas from the Northern Basin fields. Almost all the gas that is now piped ashore is purchased by the BGC under long-term contracts negotiated before the leap in energy prices of 1973–1974. This means that the prices currently paid for gas under these contracts reflect the prices and escalation provisions regarded as commercially sensible in the era of cheap energy.

The average cost to the British Gas Corporation of all their gas purchases in the current year, that is 1980–81, will be about 8p per therm and this includes the cost of the relatively more expensive gas, including imports, from the Northern Basin. Eight pence a therm as the current average cost of gas may be compared with prices double that figure sought and achieved by producers for new supplies or re-negotiated contracts in recent international deals. Such prices, together with substantial escalation against subsequent oil price increases, evidently reflect the value placed upon gas supplies by the utilities that are now vigorously seeking to acquire them. It will therefore be clear that the gain to gas consumers in Britain which results from the British Gas Corporation's current access to cheap gas supplies is, of course, enormous. It would also be politically very tempting to leave this windfall with gas consumers but it would be quite wrong to do so.

Cheap gas under the old contracts is a rapidly declining asset. New supplies will cost anything up to 10 times the prices originally paid. If consumers are to make decisions on consumption and investment that are sensible for the nation as a whole gas prices must reflect the costs of supply on a continuing basis. That is what is meant by economic pricing and that is the consistent principle underlying the Government's policy. We may argue about the details about price levels at any particular time, or rates of change, but there is no avoiding the need to bring energy prices generally to levels which are consistent with matching supply and demand and which, in particular, reflect the costs of new supplies.

Rather over a year ago the Government set the BGC a financial target which reflected the decision to move steadily towards economic pricing, particularly in the domestic sector where prices are to be allowed to rise by 10 per cent. per year for three years, over and above the rate of inflation. The financial target was also consistent with the Corporation's own policy of selling gas to industrial customers at prices broadly related to those of the competing oil product.

Moving towards economic prices to consumers when gas costs remain constrained by long running contracts at prices which were agreed many years ago, must necessarily result in big windfall profits accruing to the British Gas Corporation. Last year BGC's pre-tax profits were £425 million. Within a year or two they would rise to over £1,000 million—unless Parliament approves this Bill—well in excess of the needs of their current capital investment programme. The intention of the levy proposed in this Bill is therefore to transfer this windfall gain from the Corporation to the Exchequer for the benefit of the nation as a whole. There is a close parallel in intention with our North Sea oil taxation regimes, which is designed to recover the windfall element from rising international oil prices, from the producers for the benefit of taxpayers generally.

Clause 1 of the Bill proposes a levy on the BGC's purchases of gas that are at present exempt from petroleum revenue tax. Petroleum revenue tax was introduced in the 1975 Oil Taxation Act, and Section 10 of that Act exempted from PRT gas sold to the Corporation under contracts made before the end of June 1975. As I indicated earlier, the rationale for this exemption was that the price and escalation provisions of those old contracts precluded any substantial windfall gain accruing to the producers. The windfall element resulting from rising energy prices has accrued instead to British Gas. It is therefore entirely appropriate that the levy be restricted to the Corporation's purchases of gas under contracts not subject to PRT.

Clause 2 specifies the proposed rates of levy for the first three years, namely 1980–81 to 1982–83, at 1 p, 3p and 5p per therm respectively. A rising rate of levy is consistent with moving towards economic prices in the domestic sector and with the continued rise in oil prices in real terms. The revenue from the levy is forecast to be about £1,300 million over the three-year period. Clause 2 also enables the Secretary of State, with the consent of the Treasury, to vary the rates of levy specified in the Bill and to set rates for later years, by order, subject to the Affirmative Resolution procedure in another place.

Let me now summarise the consequences of the proposed levy for the finances of the British Gas Corporation. Profits after the levy in the current year are forecast to be in the region of £300 million, with similar out-turns expected in the following years. The Corporation's financial target has recently been revised to a 3½, per cent. return on assets at current cost, to take acccount of the levy. Such a return would, in our view, be appropriate for an industry such as British Gas, taking into account the nature of the business and the returns made by industry generally, both in the past and at present.

Some concern has been expressed that the impact of the levy will hinder the Corporation's current major capital investment programme, aimed at improving gas supplies to industrial and to domestic customers. This is not the case. The Corporation's post-levy profits over the three-year period, together with provision for depreciation, should be enough to finance the investment programme currently under way. Let me stress that the levy is not a means of raising gas prices. The proposed levy will not affect what happens to gas prices since the rates of levy have been set to be consistent with the pricing policies which have already been announced.

In conclusion, the intention of the gas levy is to transfer the windfall gain that is accruing to the British Gas Corporation as a result of rising energy prices, to the Exchequer for the benefit of taxpayers generally. The windfall is substantially in excess of the Corporation's present requirements; it should not accrue to gas consumers alone, nor should it be held in reserve solely for the ultimate use of the industry. The proposed levy on PRT-exempt gas is a simple, efficient and appropriate means for transferring the windfall gain from the Corporation to the nation as a whole, without affecting gas prices or the investment programme of BGC. My Lords, I beg to move that the Bill be now read a second time.

Moved, That the Bill be now read 2a—(The Earl of Gowrie.)

2.58 p.m.

Lord Strabolgi

My Lords, we are grateful to the noble Earl, Lord Gowrie, for explaining the provisions of this Bill. This of course is a Money Bill and all further stages should be formal. However, a Second Reading gives us, on this side of the House, an opportunity very briefly to urge the Government to do something to help the gas users, both the domestic users and the industrial gas users and particularly the energy-intensive industries.

Government policy for domestic gas has been to increase the price at the rate of 10 per cent. a year over and above the rate of inflation, as the noble Earl said. For industrial gas it is the corporation's policy, as the noble Earl said, to sell this gas at a price related to fuel oil. This of course has meant enormous profits to the British Gas Corporation and we do not quarrel with the purposes of the Bill. However, the increase in April of 15 per cent. will be the third in 12 months. There will be a further increase of 10 per cent. in October, making a 25 per cent. increase by the end of the year.

British industry is already paying far more for its energy supplies than its European competitors and this is falling particularly hard on the energy-intensive industries, such as the chemical, paper and board, glass and ceramic industries. These industries have been making representations to the Government for months now without any success. The NEDC report published last week has completely vindicated their case. This report has confirmed that for the large industrial users of gas British prices are 10 to 15 per cent. higher on average than those in other EEC countries. Our tax on heavy fuel oil here is £8 a tonne, compared to just over £3 a tonne in Germany and under 10p in France.

As The Times said last week: The Government has become a victim of its own over-rigid policies of insisting that electricity production covers its cost and gas is priced in relation to its alternatives. By always allowing pricing aimed at energy conservation and a reduction of the public sector borrowing requirement to dominate its thinking, it has put industry at a disadvantage in a way which a more flexible attitude could well have avoided". The NEDC report concedes that for over 95 per cent. of British industrial customers electricity and gas prices are broadly in line with those on the Continent, and this, of course, has always been the line adopted by the Government. But the report makes clear what should surely already have been clear to the Government; in volume terms these customers account for only 15 per cent. of industrial gas consumption. The position is very different for the large users of gas, the gas-intensive industries, where they are paying between 10 and 20 per cent. more for supplies than on the Continent, with an average cost disadvantage of from 10 to 15 per cent.

The Government, apparently, as soon as they knew the NEDC report was on the way, began to bestir themselves and to take some action at last. I am glad to say they have now asked the commission to investigate the price differentials. If action had been taken earlier, it might have prevented the closure of Bowater's Merseyside newsprint mill, many lost orders and increasing unemployment. After all, the Government were warned by the CBI months ago. As long ago as last November the CBI in its evidence to the Select Committee on Energy in another place made clear that to an energy-intensive industry increases of this proportion, exacerbated by a high exchange rate, can be crippling. This is the evidence of the CBI. In the glass industry—and here I must declare an interest—energy costs currently account for nearly 22 per cent. of total glass manufacturing costs, which is surely an unacceptably large figure for a manufacturing industry to bear.

I hope that tomorrow's Budget will bring more understanding and better news for our hard-pressed energy users. They have, I submit, a strong case. There was an encouraging change of attitude on the part of the Government last month over the matter of pit closures and foreign coal imports. I hope this represents a change of direction, a change of heart perhaps, and the emergence of a new energy and financial policy that is less rigid, less hidebound and less destructive to British industry.

3.4 p.m.

The Earl of Lauderdale

My Lords, when I saw that the noble Lord, Lord Strabolgi, had put his name down to speak, I felt it would be fairly predictable what line he would take and perhaps one might have in mind an answer to one or two of the points he made. It was, of course, inevitable that he would focus, with his customary rhetoric, upon gas prices and the damage done to British industry. I was particularly fascinated by his suggestion that the Government have been fast asleep, or words to that effect, or at any rate dilatory in getting the NEDC to study the matter. I think he will know from evidence that we have both heard in the Select Committee to which we both belong that as a matter of fact the study by the NEDC was set up last autumn.

It is surely worth putting back in the record one or two facts which are now a matter of history. So far back as July 1979 the Price Commission, the love child of the party opposite, declared that domestic gas was at that stage under-priced to the extent of some 30 per cent. The same Price Commission, the same love child of the same parents, had said on more than one occasion that gas prices to the consumer should reflect the long-term replacement costs. Since 1979 the gas cost to BGC has risen by about 70 per cent. in money terms, and of course the northern gas is inevitably more costly than the southern gas because it comes from further away and from deeper waters. Some 30 per cent. of British gas now comes from the Frigg gasfield, most of which is in the Norwegian sector although it does straddle the median line.

The gas gathering pipeline now in prospect is going to cost something like £2 billion, and although happily the Government and the taxpayer are not directly involved in that, none the less the BGC will have to take account of the need to service and to redeem that capital, and tariffs in the future are bound to reflect that need. Before we pass from the gas gathering pipeline, may I ask my noble friend—he may or may not have received a message I sent recently saying that I would ask this question—whether he has any news about stories that are current that the banks, who are preparing to organise a consortium to fund the pipeline, have told the Government that they may be unable to do so unless the Government forces all available gas resources from that part of the North Sea into the pipeline? Defence strategy apart, I wonder whether my noble friend can assure us that he is satisfied, as not everybody is, that this is going to be the most economic way of gathering the gas.

Returning to the point about gas pricing at home, unless domestic under-pricing is ended demand will go on rising until the demand becomes unmanageable, and this inevitably at the expense of industry's premium needs. As to the industrial position, there has been, of course, much heat generated on this subject, and scarcely a day passes without my postbag, at any rate, having some propaganda statement on the subject to open up and read. But the fact is that comparisons with the situation in Europe are confused by the rise in the value of sterling, something like 20 per cent. up on the deutschmark and the franc, which makes comparisons difficult. Then, most European industrial suppliers guard as a deep secret the contracts that they have for supply, and it is indeed very difficult for anybody, NEDC or anybody else, to discover exactly what the main European industrial consumers are paying for the gas that they get.

The next thing is that, whereas industry here—or shall we say the market here?—has the prospect of absolutely secure supplies of gas, that is not so on the Continent. Some statistics published by the European Economic Community on gas prices—not, I admit, specifically industrial gas prices, but gas prices for consumers generally—are of some interest. The EEC has published a scale, based on 1970 at 100, giving current United Kingdom gas prices overall at 60; German and Italian at 12; Dutch at 135 and French at 150.

Finally, the complaint is commonly made—but it was not made by the noble Lord who has just sat down; he is far too intelligent to make such a stupid point, but it has been made by many others—that gas prices follow oil prices and in the United Kingdom oil prices follow those of OPEC, and should we not, it is argued, be basking in the enjoyment of cheap oil and gas of our own production? Of course, if our own oil prices were not related to those of OPEC then there would be an overwhelming demand for it and it would be resold at enormous profit to middlemen, who are hardly the darlings of the party opposite. The same would apply to gas. If gas did not follow oil prices more or less that, too, would encourage a gigantic waste of premium fuel in the private sector.

The argument overall that the British Gas Corporation should be left free to use its profits to subsidise the consumer reflects, I have to say, a socialist interventionist philosophy and is the economic counterpart of the political argument that all that is not compulsory is forbidden. I congratulate my noble friend on the way in which he has moved this modest Bill to serve good causes to an honourable end.

3.12 p.m.

Lord Beswick

My Lords, although my name is not down on the list of speakers I rise to invite the noble Earl to correct an impression which I am sure he inadvertently gave when he moved the Second Reading of the Bill. The impression he gave was that the profits of the British Gas Council are the result of some "windfall ", as they call it, as if they were, to use a phrase that is often used in another connection, "pennies from Heaven ". Those profits have not been achieved as a result of any climatic condition. They result from an enormous amount of hard work by the people in a public sector industry. I hope that the noble Earl will take the opportunity, when he replies to the debate, to correct that impression which, as I say, I am sure he inadvertently gave. I would only go on to say that there appears to be in some quarters the idea that the profits result from an over-pricing by the British Gas Council. Yet, as the noble Earl, Lord Lauderdale, said, there is an argument that they have, in fact, in previous years been under-pricing gas. If there were to be a proper investment programme in the future then an economical price would be needed.

I should have liked to hear the noble Earl, Lord Gowrie, tell us in what way the £1,300 million was going to be used in the future. Will it just go into the Treasury account as possibly part of the social service payments? Or are we to see a deliberate investment in energy programmes, or indeed—as I should like to see and as I have suggested here previously and so I shall not puruse the point now—are we to see a public sector investment board, with these sums of money going into that investment board? Instead of continually criticising other sections of British publicly-owned industry, like steel or BL when they have to invest, for being a drain on the taxpayer, we could see, if the operation were carried out properly, a balanced national investment policy which would not be a drain on the taxpayer but, in my belief, over a period of years would see a net return to him.

However, my main reason for rising to my feet is to suggest to the noble Earl that it would be appreciated in the British gas industry if he would take the opportunity to say that its success is in large part a result of the great efforts which have been made in running a high technology industry in a most efficient and competent way.

3.14 p.m.

Lord Leatherland

My Lords, I have nothing in the way of argument to add to the three highly intelligent speeches that we have had from noble Lords. I merely wish to ask two questions. In his opening speech the noble Lord the Minister used the expression "PRT ". I cannot find "PRT" mentioned anywhere in the Bill and I wonder whether he could tell us what it means. My other question concerns the final paragraph of the Bill where it says: therm ' means 0.105506 gigajoules". What is a gigajoule?

3.15 p.m.

The Earl of Gowrie

My Lords, one of the great many disadvantages of standing at this Box is that every year one gets a little further from the O-levels that one did in these subjects. I am able to set the mind of the noble Lord, Lord Leatherland, at rest, in that I did, in fact, refer to petroleum revenue tax and only later truncated it rather unattractively to "PRT" in the interests of getting on with the business. Petroleum Revenue Tax was what I had in mind. As regards the definition of a therm, I would point out that a gigajoule is a metric unit of heat. I hope that that, at least, sheds some light on the issue.

I am grateful for the way in which the Bill has been received although I must say I admired the ingenuity of both the noble Lord, Lord Strabolgi, and my noble friend Lord Lauderdale—with the noble Lord, Lord Beswick, coming in on the rails, as it were—of perhaps turning it into a debate on economic pricing generally rather than a debate on the issue of the gas levy. I thought that that debate was quick and to the point and that both sides had something to be said for their arguments.

The noble Lord, Lord Strabolgi, mentioned price rises. Of course, the price rises that he actually itemised were for domestic prices, and industrial prices have been rising much more slowly. Indeed, my advice is that United Kingdom industrial prices were in line with those on the Continent until the middle of last year. However, the cost disadvantage of 10 to 15 per cent. opened up in the latter part of last year, owing mainly to the movement of the pound, and that, of course, was pointed out by my noble friend Lord Lauderdale most succinctly. Therefore I think that the CBI was over-stating its case. The benefit of the NEDC report is that it has provided a very balanced statement of the facts. I cannot, of course, anticipate what easing, if any, of the position is in the pipeline in order to try to help industry overcome this adverse balance in trade, in energy terms, which is principally a currency problem rather than an energy pricing problem.

My noble friend asked me whether the gas gathering pipeline would not be able to raise medium-term finance unless the Government required all the gas to go through the pipeline. As I am sure my noble friend appreciates, the concept of the gas levy is not in any way related to the financing of the gas gathering pipeline. Obviously he has raised an important question and the Gas Gathering Pipeline Organising Group has, I am able to tell him, asked the Bank of Scotland to hold detailed discussions on interim finance, and they will be reporting back shortly. The organising group aims to reach agreement on the structure and finance of the interim company as soon as possible after the end of this month. That will meet the financial requirements of the gas gathering line ahead of sufficient gas purchase contracts.

I am delighted to accede to Lord Beswick's request to pay a tribute to the efforts and endeavours of the British Gas Corporation. I do that most warmly, without any qualification. However, I do not withdraw the use that I made of the expression "windfall profit ", because the windfall involved was, of course, the very sharp rise internationally in the price of oil. That affects the price of gas, and it affects it particularly where the British Gas Corporation had, wholly properly, negotiated contracts based on a previous cheaper price of gas.

We, of course, believe that that windfall should be returned to the Exchequer for the benefit of the nation as a whole, as I said; but sufficient profits are, of course, left to the British Gas Corporation for it to continue with its excellent and, indeed, very expensive work of developing our national resources.

The last point I would make is on the suggestion of the noble Lord, Lord Beswick, that these monies be used specifically to help industry. When I look at what the Government have been doing to help industry, I can only say that they are being used to help industry. I am sure that the noble Lord's colleagues, or former colleagues, on nationalised boards would have to agree with that, whether they are Sir Michael Edwardes, Mr. MacGregor or, indeed, Sir Denis Rooke himself. However, the noble Lord, Lord Beswick, who was a distinguished member of previous Governments, knows perfectly well that we do not adopt a hypothecated taxation policy in this country and, indeed, I think that there would be very many dangers in doing so.

That said, I welcome the reception of this Bill—a Money Bill, as the noble Lord, Lord Strabolgi, reminded us.

On Question, Bill read 2a; Committee negatived.