HL Deb 03 November 1987 vol 489 cc914-9

4.48 p.m.

Viscount Davidson

My Lords, with the leave of the House I shall now repeat a Statement made in another place by my right honourable friend the Secretary of State for Energy. The Statement is as follows:

"With permission, Mr. Speaker, I should like to make a Statement. As the House knows it has been the policy of successive Governments to agree targets for the nationalised industries which set their financial framework and which enable them to plan their operations in a commercial manner. The industries then decide how to achieve these targets either through price increases, cost savings or a combination of both.

"The present target for the electricity supply industry which covers the three years 1985–86 to 1987–88 is a 2.75 per cent. average return on current cost assets.

"The Government have therefore been discussing with the Electricity Council the targets for the years ahead. Although the details of individual boards' targets have yet to be finalised it has agreed an overall target for 1988–89 and 1989–90. The industry's external financing limit which was announced by my right honourable friend this afternoon, is based on this target.

"In considering the target for these years the Government have had to take into account the fact that, although in the recent past the electricity supply industry has had a surplus of capacity, this position is now changing. On current forecasts, the Central Electricity Generating Board envisages that at least 13 gigawatt of new capacity will be needed to meet demand by the end of the century. Furthermore the industry also needs to modernise its transmission and distribution system if it is to maintain secure and economical supplies into the next century.

"At a time of surplus capacity, it is possible to meet extra demand by using that surplus at relatively little extra cost. In the past this has been reflected in a low rate of return. It took account of the fact that some of the industry's assets were underused. This has resulted in the industry's prices effectively remaining unchanged since April 1985 and in prices falling by at least 15 per cent. in real terms over the last five years.

"Mr. Speaker, when new capacity has to be built to meet additional demand, the costs of meeting that extra demand rise. It must be right that the rate of return should rise to a level closer to that which nationalised industries are required to earn on new investment as a whole. This is currently 5 per cent.

"The Government have therefore agreed that the industry's overall target return on current cost assets should be 3.75 per cent. in 1988–89 and 4.75 per cent. in 1989–90.

"The CEGB and area boards are now considering their individual profit targets. Until this process is completed it will not be possible for the industry to be specific about the consequences for electricity prices. In particular, Mr. Speaker, the Government expect the industry to consider carefully the scope for improving the rate of return through increased cost efficiency. But preliminary indications are that it will be necessary to increase prices by an overall average of 8 to 9 per cent. on 1st April 1988 and substantially less in the following year. There is likely to be some variation around these figures for individual boards and different groups of customers.

"I am determined that Britain will have a modern, secure and efficient electricity supply industry in the years ahead. This will involve a massive investment programme and that in turn demands an improved rate of return for the industry".

My Lords, that concludes the Statement.

Lord Stoddart of Swindon

My Lords, I should like to thank the noble Viscount for repeating the Statement, although I imagine that he would rather not have done so. Indeed, it is unfortunate that such an important Statement had to be forced out of the Secretary of State by my honourable friend the Member for Kingston upon Hull, East, although having heard the Statement one can now understand the Government's reluctance to tell the electricity consumers that they had decided to force—and I use the word "force" advisedly—an increase in the price of electricity at twice the level of inflation. This has nullified all the good work that the CEGB and British Coal have done over the past weeks and months in negotiating a reasonable and new coal price regime. It has nullified that, and the electricity consumers are to suffer.

Does the noble Viscount agree that apart from causing hardship to domestic consumers, particularly those on fixed incomes, there will be an adverse effect on electricity costs to British industry to the tune of about £300 million a year? That of course is bound to hit investment. Will it not increase the price of exports just at a time when we need additional exports to make up for the loss of oil revenues that we heard about in the Chancellor's Statement which was recently repeated in this House?

A 2.75 per cent. return on current cost assets represents a return of 14 per cent. on an historic cost basis—the basis that is used by virtually the whole of private industry throughout this country. Indeed, would not the noble Viscount agree that that 14 per cent. is not too far out of line with the rate of return earned by manufacturing industry? The rate of increase to 3.7 per cent. in 1988–89 and 4.75 per cent. in 1989–90 is, in my view, excessive and unnecessary.

What is more, we appear to be embarked upon a pay-as-you-go policy. Whereas most of British industry agree to borrow for capital equipment and capital re-equipment, we appear to be saying to the electricity supply industry: "You must first get the money and then build your power stations". It is a nonsense, and the noble Viscount and the Government know it. It is a policy which would be rejected throughout British industry, and indeed if it were imposed upon British industry it would bankrupt it and the whole of the country.

Taking into account the external financing limit for 1988–89, over the last five years the Government will have filched over £3 billion from the electricity supply industry. That is £3 billion paid from the electricity supply industry to the Chancellor of the Exchequer. That represents sufficient money to build three new 2,000 megawatt coal-fired stations and two nuclear stations the size of Sizewell B. That is the extent to which the Government have robbed the consumer as regards the electricity industry.

In conclusion, I have to say to the House and to the noble Viscount that the Statement and the Government's policy amount to nothing less than theft from electricity consumers, especially as this increase in prices has nothing to do with efficiency and everything to do with fattening up the industry for privatisation.

Lord Ezra

My Lords, while thanking the noble Viscount for repeating the Statement I must express some puzzlement as to its contents. The noble Lord, Lord Stoddart, in concluding his remarks referred to privatisation. I waited carefully while the Statement was being read for any reference to privatisation. Therefore, will the noble Viscount first of all confirm that it is still the Government's intention to privatise the electricity industry? Secondly, if that is so, will he confirm that it is their intention to privatise it with the maximum possible degree of competition, particularly in the generating sector?

If, as I assume, his answers to both are in the affirmative, why are the Government necessarily assuming that a competitive, privatised generating sector would go into the same capital expenditure projects as those in which the CEGB are at present? If it is the Government's policy—and there are some who feel that electricity should be left as it is, but that is not the view of the Government—to change the structure and introduce competition, would it not have been much wiser to have left prices as they are and let the prices then emerge in the new competitive situation? We are entitled in this House to an answer to that question because this whole matter looks a bit puzzling.

Listening to the Statement one gets the impression that nothing is going to change; that the CEGB and the Electricity Council are going to go on exactly as they are. Is that the underlying intention of the Statement that we have heard?

Furthermore, along with the noble Lord, Lord Stoddart, I should like to remind the Government that it has always been their intention to try to reduce costs for industry, particularly in the energy sector—views to which I fully subscribe. Why at this stage, when we have suffered an enormous setback in the financial markets, where there is at least some risk of world recession through developments in America and elsewhere, are the Government choosing this moment to increase such a vital commodity as electricity prices? I therefore feel that on two grounds—first, the fact that things will change if the Government pursue their privatisation measures and, secondly, the uncertainty of the forward economy —they should stay their hand on this matter and wait until their further policies are developed.

5 p.m.

Viscount Davidson

My Lords, I should like to thank the noble Lords, Lord Stoddart and Lord Ezra, for their interesting but not unexpected comments on the Statement. Contrary to what the noble Lord, Lord Stoddart, said, I was pleased to be able to repeat the Statement, which I consider to be highly positive. I do not accept any of his strictures. At the same time I do not intend to enter into a party political debate.

This is a Statement on the financial target for the electricity supply industry. There is no relationship or connection between the Statement and the privatisation of the industry, which will go ahead in due course. Even if the industry were remaining in the public sector there would be the same need to raise the rate of return as the amount of surplus capacity declined and investment in new generating capacity became necessary.

I should like to repeat—I think that my noble friends will agree—that electricity prices remain highly competitive. I should also like to emphasise the fact that prices next April will have remained substantially unchanged for a period of three years. Even after the next increase prices will be some 6 per cent. lower in real terms than five years ago.

The noble Lord, Lord Ezra, made some interesting comments to which I listened with a great deal of interest. In all honesty I do not feel in a position at this Dispatch Box either to answer his question or to make any constructive comment. However, I shall certainly draw his remarks to the attention of my right honourable friend the Secretary of State. That is all that I can say at this stage.

Baroness Jeger

My Lords, will the Minister say whether, in view of the fact that electricity prices are to rise 8 to 9 per cent., social security benefits will be increased to take account of that?

Viscount Davidson

My Lords, I am afraid that I cannot answer that. That is another Question.

Lord Peyton of Yeovil

My Lords, will my noble friend say what consideration the Government have given to the effect of this measure on industrial costs? Secondly, if the position of the Government is that the electricity supply industry, as at present organised, is not as efficient as they would wish, is it not an odd way of going about matters to increase prices now instead of putting pressure on the industry to increase efficiency without giving it such a cushion?

Viscount Davidson

My Lords, I do not think that I can usefully comment on the second part of my noble friend's question. As regards the first part, the Statement says that there is likely to be some variation around these figures for individual boards and different groups of customers. I am sure that my noble friend will realise that there will he a certain amount of flexibility.

Baroness Phillips

My Lords, will the Minister say whether the Government considered this matter when deciding what was the retail price index on which they based the increase in pensions? Was it a matter of the Government giving that figure first and then giving this? Pensioners do not buy cars but they need electricity. I should also like to know what the industry is competitive with; it is a monopoly.

Viscount Davidson

My Lords, I should love to be able to answer the noble Baroness but I am afraid that I cannot.

Lord Somers

My Lords, I do not wish to comment on the financial side of the Statement because no one could he more profoundly ignorant of that than I. But will the noble Viscount say whether there has been any advance in the research into alternative sources of power, particularly wind power, which as we all saw last month is no mean power?

Viscount Davidson

My Lords, yes, I can assure the noble Lord that continuing research is going on into wind power, tidal power, wave power and all kinds of other renewable energy. The Government are spending a great deal of money on that research.

Lord Gray of Contin

My Lords, will my noble friend pass on to his right honourable friend the Secretary of State for Energy the concern that has been expressed in the House as to the possibility of an 8 to 9 per cent. increase in the price of electricity? At the same time will he suggest to him that every possible measure should be taken to try to influence the various component parts of the CEGB and other boards to effect measures which will reduce that 8 to 9 per cent. as far as possible? In other words, will he encourage people to buy coal where it can be bought at the cheapest prices? Will he encourage the boards to do all that they can to ensure that the amount of nuclear power fed into the grid is the maximum amount available? In addition, will my noble friend tell his right honourable friend that while nobody likes increases in price we appreciate the fact of which he has reminded us, that in real terms the cost of electricity has been reduced by 15 per cent. over the past three years?

Viscount Davidson

My Lords, I am grateful to my noble friend. I can assure the House that I shall make it my duty to tell my right honourable friend of the exchanges that have taken place this afternoon.

Lord Peston

My Lords, I sympathise with the noble Viscount in dealing with this extremely technical matter and also accept that it ought not to be dealt with in party political terms. But will be accept from me the proposition that it is not the case, logically or within sound economics, that in order to invest it is absolutely necessary to raise the rate of return? It is a fortiori not the case that this should happen by exploiting the unused monopoly power of this industry. In other words, what the noble Viscount is trying to say is unsound economics and it will be immensely damaging to British industry if it has to bear these costs.

Viscount Davidson

My Lords, I am not trying to say anything to your Lordships; I am repeating a Statement.

Lord Mulley

My Lords, is not electricity one of the few industries that is self-financing from revenue in its capital expenditure, whereas private industry borrows and pays back over a period? If the industry is to be privatised, why is it continuing the bad practice which has been foisted on it by successive governments?

Viscount Davidson

My Lords, I take note of what the noble Lord has said.