§ 3.54 p.m.
§ Lord Ezra rose to call attention to the case for a review of the regulation and operation of the privatised utilities; and to move for Papers.
§ The noble Lord said: My Lords, in introducing this debate on the privatised utilities, I wish to declare that I am chairman of a group of energy companies which, among other activities, are involved in the distribution and usage of gas and electricity. I have other energy interests including membership of a number of voluntary bodies. I am also associated with a group which has interests in the water and cable sectors, although I am not involved in those operations. I may add that my activities and connections have given me the opportunity to study the subject under debate at close quarters.
§ Over three years ago, in July 1992, I introduced a similar Motion in your Lordships' House. I concluded that the subject of the privatised utilities merited "serious and continuing discussion". It has certainly received it since. Not only has there been substantial press coverage in recent months but there have also been numerous studies and conferences on the subject. Two major reviews have been started, one by the Hansard Society and another by the National Audit Office. Therefore, there can be no mistaking the lively and sustained interest in the matter. I consider that it is timely that we should be looking at the situation again in your Lordships' House.
§ It is now 11 years since telecommunications were privatised; gas followed in 1986, and water and electricity in 1989. The enterprises involved supply basic services and are substantial in size. They represent together about 10 per cent. of GDP, have a 1289 stock market valuation of some£70 billion and employ 400,000 people. They are all subject to regulatory control. In recent months there has been mounting public concern about how these industries are regulated and operated. There has been much criticism of the alleged inconsistencies and other shortcomings in the system of regulation. The operation of the enterprises is widely considered to favour shareholders at the expense of consumers. These are the essential issues with which I shall deal.
§ It is my opinion that many of the problems besetting the privatised utilities have arisen from the way in which they were privatised in the first place. Like other noble Lords who have an interest in the subject, I participated in the debates on the privatisation legislation. Although the Government stated that the objective was to subject the utilities to the competitive pressures of the private sector, little was contained within the privatisation legislation to bring this about. There were many proposals from the Floor of the House—and I moved some amendments myself—for the industries to be restructured before they were privatised. The Government rejected those proposals. British Gas and the water companies were privatised in their existing form. One competitor operating on a limited scale was allowed in the case of British Telecom. Although there was some restructuring of electricity, the regional distribution companies were privatised as they existed and the generation of electricity was left in a limited number of hands.
§ There were clearly two reasons why the Government acted as they did. One was to get the privatisation measures through with the minimum of delay; and the second was to achieve the maximum financial benefit. Major restructuring before legislation would have introduced delay and uncertainty and would undoubtedly have had an adverse impact on the financial markets. The restructuring came later and in a somewhat haphazard manner. This sequence of events is in my opinion the main reason why the privatised utility sector is under such controversy at the present time.
§ Because of the way in which the utilities were initially privatised with the minimum of restructuring, there had to be safeguards that there was not an abuse of monopoly or quasi-monopoly power. This was provided by a regulatory system. The intention was that the regulator in each case should be given broad duties and considerable discretion to carry them out. However, increasingly the system of regulation has come under criticism. For example, it is argued by some of the enterprises that political intervention, which was the bugbear of the nationalised industries which I well know from my own personal experience, is being replaced byad hoc regulatory intervention. Other criticisms are made of a lack of accountability and transparency. It is also contended that the present system depends too much on the personal inclinations of the regulator. For example, in the case of gas, the previous regulator, Sir James McKinnon, and the present regulator, Ms. Clare Spottiswoode, have taken radically different views of the way in which they 1290 should exercise their duty to promote efficiency in the supply and use of gas under Section 4(2)(b)of the Gas Act 1986.
§ A number of proposals have been ventilated for changing the regulatory system in order to overcome those problems. One proposal is that there should be a regulatory board with non-executive directors. The regulator would act as a chief executive, having powers over day-to-day issues, but referring larger decisions to the board. That would have the advantage of de-personalising the regulatory relationship and limiting discretion.
§ Another suggestion is that there should be a small regulatory panel rather than a single regulator. There has also been the suggestion of a regulatory commission which would amalgamate the existing individual regulators and, as a variant of this, the merger of the regulation of the gas and electricity industries.
§ Those various suggestions have emerged because of concerns about the way in which the present regime works, leaving too much discretion in the hands of a single regulator. The disadvantage of the alternatives is that they could lead to delay and greater bureaucracy. It is my opinion that the two aspects of the problem need to be balanced to find a solution.
§ There is mounting pressure also for greater transparency and accountability for the regulatory system. The Gas Act 1995 moved in the direction of transparency, and that needs to be applied more generally. As to accountability, the favoured solution is to appoint a Select Committee on regulation through which the regulators would be accountable to Parliament as a whole.
§ The essence of the regulatory system in the UK is that the regulator sets the annual rate at which prices may rise by an amount linked to the retail prices index. That amount, expressed in the form "RPI-x" (x being the figure below the retail prices increase that would be allowed) is reviewed at fixed intervals, usually every five years. That system, as opposed to the American system of controlling the rate of return, is considered to provide a major incentive to increase efficiency. The fixed five-year term between reviews is intended to enable companies to plan their operations effectively.
§ While the system of price control has undoubtedly stimulated greater efficiency, the consumer has not necessarily been the main beneficiary. For example, during the recent spate of takeover bids certain regional electricity companies have been able to draw substantially from their resources to safeguard their position with shareholders. That caused the regulator to intervene unexpectedly to announce that he would re-examine a recent price review which in the normal course of events would not have been looked at again for another four years.
§ Those and other circumstances have led to the proposal for a windfall tax or for more equitable profit sharing as between shareholders and consumers. The concept of profit sharing depends upon the definition of what should be a normal level of profits above which 1291 customers would get an extra share. However, the concept underlines the point gaining widespread acceptance that consumers are not getting a fair deal.
§ Mr. Ian Byatt, the regulator for the water industry, suggested in a speech last October, that the interests of consumers in receiving a wider share of the profits should be met by voluntary action on the part of companies. He instanced as an example that six water companies have committed themselves to additional cash payments amounting to £252 million. Others have undertaken to provide benefits in kind.
§ What that serves to demonstrate is that the RPI-x regime, with its fixed five-year period, does not sufficiently benefit the consumer, otherwise those massive reserves for further distribution would not be available. Therefore, whether by voluntary or other means, consumers seem entitled to a larger share of the profits of the privatised utilities than they are getting at the moment.
§ That leads to the wider question of the protection of consumers' interests. The legislation varies considerably in that regard. The Gas Consumers' Council is an independent body with considerable authority. There is no similar body in the case of the other industries. Furthermore, the Government have been reluctant to make safeguarding the interests of consumers a primary duty for the regulators. That came out clearly during the various stages leading to the passing of the Gas Act 1995, which the noble and learned Lord will recall. In spite of efforts by myself and others to introduce amendments to that effect, the Government resisted.
§ There is increasing concern that in the forthcoming opening up of the gas and electricity markets to domestic consumers special protection for the interests of consumers is required. That is a totally untried area and there could be serious problems, particularly in the early years. Examples of those problems are the major difficulties which could arise in changing the invoicing and metering systems on a substantial scale due to the entry into the market of a large number of new suppliers. There have already been such problems in the much lesser range of difficulties arising from the opening up of the industrial and commercial markets. Those problems will be much greater when the much larger domestic markets are opened up.
§ British Gas has been the subject of much criticism in recent times. However, it has suffered particularly from the policy of the Government to restructure the market after privatisation rather than before. At privatisation British Gas retained responsibility for supplying the whole of the gas market; and while the intervention of other suppliers was possible, the nature of the legislation made it unlikely. In order to meet the market requirements and discharge its responsibilities in addition to its existing commitments, British Gas entered into a number of long-term contracts with North Sea gas suppliers. Due to regulatory changes, British Gas has since lost a large part of its market share in the industrial and commercial sectors and by 1998 will be subject to full-scale competition in the domestic sector. In the meantime, gas prices have fallen. British Gas is therefore left with onerous contracts. The producers 1292 claim that the contracts were willingly entered into at the time. It is difficult to see how this problem, which results largely from changes in government policy, can be resolved without some form of government intervention. No doubt the noble and learned Lord will enlighten us on that when he speaks later.
§ In the light of the issues that I have indicated and of others which will no doubt be raised by noble Lords in the course of the debate, it seems clear that the time has come for a major government review of the way in which the privatised utilities are regulated and operated. Let us also be clear that there has been a noticeable increase in efficiency, and consumers have benefited to some degree as a result. Nevertheless, there is growing public disquiet and there are many matters of principle which need to be re-examined. I hope that we shall be assured at the end of the debate that the Government take these problems seriously and that they will urgently consider proposals for dealing with them. I beg to move for Papers.
§ 4.8 p.m.
§ Lord Skelmersdale
My Lords, I should like to begin by congratulating the noble Lord, Lord Ezra, on achieving this debate. Having been a micro-wheel in the usual channels in the past, I know how difficult it is to get a subject that you know well debated in your Lordships' Chamber.
However, I note that the list of speakers in this debate is on the flimsy side. I wonder whether some noble Lords, like me, have had second or even third thoughts about speaking in it. I welcome the debate. As the noble Lord, Lord Ezra, said, it is over three years since we last discussed the matter in depth. I had no inhibitions then about referring to individual firms or their regulators. Today I have two problems: one about the debate itself; and one which I shall shortly explain.
First, my position has changed somewhat because of the standing order to which we recently agreed which states that it is forbidden to speak on a firm that you have declared in the mandatory section of the Register of Members' Interests. By virtue of my employment with British Gas, that bars me from referring to it. That is quite straightforward. Since it is currently the only large company regulated by Ofgas, and since this is a debate about regulators, it would seem by extension that the word or semi-acronym Ofgas should not pass my lips.
§ Baroness Seear
My Lords, surely we have not got into the foolish situation that because the noble Lord knows a great deal about the gas industry, having declared his interest, he is not allowed to talk about it. That would be nonsense writ large. He is surely allowed to talk about it having told us that he has this interest. Is that not the position?
§ Lord Skelmersdale
My Lords, I am afraid not. I consulted the Clerks on this matter. I begin my speech as a result of the advice that I received from them.
As I was saying, since British Gas is the only large company regulated by Ofgas, and since it is a debate about regulators, it would seem by extension that the 1293 word or semi-acronym Ofgas should not pass my lips. However, come April, Parliament has agreed to a major trial of competition in the supply of domestic gas and there are already advertisements on show in the West Country encouraging prospective customers to get in touch with soon to be licensed competitive firms. Licensed by guess whom, my Lords?—Ofgas, and operating under exactly the same licence, which incidentally still has not been agreed to, as British Gas will.
Having got that off my chest, I shall try to abide by the very strict rules—the noble Baroness is quite right; they are extremely strict—that we have saddled ourselves with because there are today general points which apply to all regulators. I am delighted that my noble friend Lady Platt, who has had recent experience of the gas industry, will speak later.
My second problem is with the Motion itself. It encourages us to think about reviewing the role of the regulator rather than reviewing the way that role is actually performed —which I believe is the problem that the noble Lord, Lord Ezra, was addressing.
§ Lord Skelmersdale
My Lords, I am grateful to the noble Lord.
Were I to be a right reverend Prelate—chance would be a fine thing—I would take my text from the Book of Common Prayer. At one point in the marriage service it says,[Consider] the causes for which Matrimony was ordained".Regulation of the soon to be privatised industries was sold to Parliament as a surrogate for competition. The regulator was to use the pricing formula to reduce prices except in the water industry where he was to limit the increases needed to pay for a century of under-capitalization. The regulators' role was quite clear. Section 3 of the Electricity Act 1989, provides that the regulator of that industry has,to secure that all reasonable demands for electricity are satisfied; to secure that licence holders are able to finance the carrying on of the activities…to promote competition in the generation and supply…to protect the interests of consumers of electricity",and to check into,the prices charged and the other terms of supply; the continuity of supply, and the quality of the electricity supply services provided; to promote efficiency and economy on the part of persons authorised by licences…to promote research into, and the development and use of, new techniques…to protect the public from dangers arising from the generation, transmission or supply…to secure the establishment and maintenance of machinery for promoting the health and safety of persons employed in the generation, transmission or supply",and at the same time to take account in particular of the protection of the interests of consumers of electricity in rural areas and the interests of those who are disabled or of pensionable age. At the end of the section, the director has slight relief. The Act states that any functions so assigned,do not include references to functions…relating to the determination of disputes".1294 As we have seen, such determination is the province of the Office of Fair Trading and the Monopolies and Mergers Commission.
The key to this disparate collection of requirements is, as the noble Lord, Lord Ezra, said, the pricing formula which we know as the RPI plus or minus x formula. Of course, "x" is fundamental to its whole operation and to decide upon x the regulator has to be a pretty invasive fellow, which has a cost to the regulated industries. They have to install whole bureaucracies to answer questions from the regulators who have completely to understand what is going on in each industry and in the process become experts in their respective industries.
The companies naturally complained of the number and detail of the questions they were asked in the early days, and presumably will again with the advent of gas competition and the multiproduct energy firms, and the railways regulator. I believe that the Government were right to resist those complaints and recognise that it is unrealistic to expect the regulators to operate without that expertise.
Equally, it is unrealistic to expect the regulatees not to understand both where the regulator is coming from and where he or she expects the firms to get to. I agree with the noble Lord, Lord Ezra, on that point. Secrecy in regulation is of no advantage to anyone. It will annoy the industries and cause bad blood between them and the regulators. That has happened in the past, and I am told, in some areas it is still happening, but it must not be allowed to continue. At the same time, regulators should not become too personal in their relationships. Either there will be complaints of unreasonable behaviour, or, on the other hand, of favouritism. I believe that a clear framework of regulatory principles and objectives is overdue. I would expect it to lead to a greater consistency of decision making and avoid sudden changes of direction which I have heard described as the "whim of the regulator".
Capital investment only occurs when a firm can see where it is heading. If there is doubt as to the consistency of regulatory decisions, either new investment is not made, or, worse, it is, and is then under-utilised or aborted part-way through, with all the waste and therefore the cost to the consumer that that entails.
This debate would not be taking place, I believe, if the tales of woe to which I and other noble Lords will allude are not real. How are we to advise the Government to deal with them? One suggestion has been to amalgamate all the regulators into a single body. Given the need that I have described for them completely to understand their individual industries, I do not believe that that would be the right thing to do. Having studied the gas, electricity and water industries in some depth over the past 20 years, to say nothing of taking more than a passing interest in telecommunications and the rail industry, I do not see enough common factors to make that a going proposition. I accept that in the energy sector there are interests in common. There might therefore come a time when Offer and Ofgas can be amalgamated, but not in 1295 the next three years while competition is being introduced into both the electricity and gas industries. Nonetheless it would be a nonsense if the decisions of one regulator were to be completely at variance with those of another. Discussions between regulators will, and I am sure do, help to prevent that. However, that does not stop the regulatees from complaining.
Regulators remain very powerful executive bodies in their field—one might almost say autonomous. In the event of a major row such as we have seen in the gas and water industries, the only appeal is to the Monopolies and Mergers Commission. It is, as I understand it, only then that the Government get involved, with their ability to accept, reject or accept in part the reports of the MMC. Surely that is really what is wrong with the regulatory framework as we have it at the moment. It is conducted by experts with no involvement from the man in the street. There is no political direction other than that in the various privatisation Acts. There is no one to suggest, however humbly, that if you want to achieve A, why not do it by method F, or even G; method E is bound to annoy the consumer, small shareholders or whoever; or even, why are we seeking to do A at all if B has worked perfectly well for the past three years?
That leads me to believe that small regulatory panels operating in single industries, as opposed to individual regulators, would obviate the need for expensive and time-wasting appeals to the MMC in most cases, and would have the advantage of depersonalising the regulatory process and making sure that the discretion that regulators undoubtedly have is used with more forethought. It need not, as is often suggested, be bureaucratic, or slow the decision making process. I have not, for example, noticed any non-executive directors slowing down the plans of their companies. If they did, it would be for very good reasons, one may be sure, or they would not last very long. I would also second a senior employee of one regulator to the board of another regulator, and vice versa, for a year or 18 months—no longer, or the secondees would become embedded—to ensure a measure of consistency between decisions. That would deal with the most commonly voiced complaints about today's regulatory framework, and preserve the first reason for privatisation; namely, getting government off the backs of the utilities.
§ 4.21 p.m.
§ Baroness Hamwee
My Lords, I, too, considered whether I had any interest to declare, in that perhaps the pension funds to which I contribute held shares in the utilities. I dare say that is likely, although like most pension fund contributors I do not know. I hold no shares in any of the utilities in my own name. I have to admit to being somewhat "unreconstructed" in that connection. I did not buy any shares because I had something of a distaste for seeing essential services pass into private hands. We all carry some sort of political baggage. I have to admit that that is mine. But I also admit that there is no turning back the clock, save 1296 perhaps for Railtrack and for possibly even not starting the clock in the case of HMSO. However, neither of those fall within today's debate.
I believe that the outcries against the levels of profits made in the utilities and the levels of executive salaries and remuneration packages are because the consumer resents funding both of those. The utilities were privatised at much the same time as so much of the private sector was being transferred to quangos. Although the regimes are of course not the same, it is no wonder the public feel that both are tarred with, if not the same then at any rate similar, brushes in their lack of democratic accountability and the difficulties of regulation. If we add to that the levels of profit, and in some cases the levels of pay—in referring to pay I think it is a little rough on those in middle management that they are regarded as being on the same gravy trains as some of the more senior management—it is not surprising that there is such a level of resentment at private profit from what is essentially still part of the nation's infrastructure; indeed, what are recognised in many cases as consisting of very precious commodities.
Because these services are essential, indeed fundamental, the public regard them as qualitatively different from other products. They look for protection from the state in areas of standards, availability and price, as well as the application of social obligations which a beneficent state must have at the heart of its policy. It is, I believe, the general view that the state has not done all it could to protect its citizens, and that it has failed to assist them to play their proper role as consumers.
At the time of the privatisations I do not believe we often heard comments such as, "I shall be buying shares so that I can go to annual general meetings and question the directors". The comment that I heard most was, "I shall be buying shares for myself and my family so that"—not necessarily expressed in these words—"I can make a turn". I wonder in fact how successful the privatisations were in turning us into a nation accustomed to owning shares, as I believe was one of the aims. It has not so far been so successful. More particularly, it has not been successful in boosting our powers as consumers.
The current situation is regarded as one of (as was put to me recently) embarrassingly soaring profits going hand in hand with poor services and unsatisfactory prices. If market forces cannot be brought to bear, then political pressure must.
I understand of course the need to retain profits for big schemes, investment in repairs and improvements, and so on. Long-term planning is essential. But the public, especially in Yorkshire, must have little confidence that that is the reason. The explanation that we have become accustomed to hearing—namely, that the problems are the results of the predecessor bodies—does not hold much water (and I hope noble Lords will forgive the pun) since by and large the same people are in post.
The profits should be shared with the customers or consumers. Profit is, after all, a means to an end. In the area of the utilities it should not be an end in itself. 1297 Indeed, if the water, gas and electricity consumers do not profit from improved performance, that end is not reached. Profits going solely or largely to shareholders is a short-term policy. Shareholders have individual short-term interests. I concede that those shareholders include institutions. I also concede that my pension in 15 years time may therefore be the bigger. I do not allege that Thames Water fails to provide it, but what I want is a clean, reliable water supply now. As stakeholders we all have mutual long-term interests. The development of a culture that places more emphasis on the stakeholder model would be very welcome.
The greatest benefits may be from competition, but there are some services where competition is not practicable. I support opening the networks to rival service operators in those areas in order to encourage such competition as there can be. But, in the telecommunications business, where there is the longest experience, I understand that BT still has some 90 per cent. of the market. The July issue of Consumer Policy Review contained a report commenting on the publication of an advert by Mercury which,claimed that it had been responsible for putting pressure on BT to cut prices over the previous ten years".That led to a complaint from BT to the Independent Television Commission on the grounds that,the cuts were largely due to regulation not competition",and that,it was misleading to claim that 'everyone' had benefited from price reductions since the most significant reductions principally affected business customers".That is not necessarily the record that one wants to look back on.
A Consumers' Association survey quoted in the same article showed that there was a very large gap in the information that consumers have about the choices available to them. Half of those surveyed said that they did not have enough information about other suppliers. They did not have accurate, up-to-date information. They said that they,stay with BT because otherwise they would have to change their telephone equipment".A large number said quite simply that it would be "too much hassle to change". That is still not the climate that was hoped for and aimed at.
If competition is to develop, consumers must have clear and accessible information in order to make real comparisons. They must also have the confidence that they will not be disadvantaged. I come from south-west London, which over the past two or three years has been very extensively cabled. Many telephone users have switched to cable services. But try to find their telephone numbers! I understand that Directory Inquiries is supposed to give out those numbers—I did not know that; again illustrating the lack of information—but it is hardly obvious, since apparently there is considerable reluctance to divulge the numbers.
The regulators should ensure the availability of information. For instance, they could ensure the development of performance indicators of standards; not just of price, but environmental standards. The effectiveness of supply in a relatively small country 1298 means that people can quite rightly expect consistency of supply—and not just consistency of service, but also consistency of the approach to regulation. The noble Lord talked of this at greater length and I found his comments interesting. There should be a consistency of approach through a regulatory body to oversee all the utilities, with the interests of the consumers at heart rather than those of the industry insiders.
Performance indicators measuring customer satisfaction across the utilities will tell us quite a lot. As the noble Lord, Lord Skelmersdale, said, they are very different industries but there are many areas in which they can be compared. That of itself would lead to pressures to improve. The regulators should also be required to publish more fully the reasons for their decisions.
I still remember vividly the comments about selling the family silver. It is sad that today that silver is somewhat tarnished; and it will not become brighter without an energetic application of consumer-friendly polish.
§ 4.31 p.m.
§ Lord Harmar-Nicholls
My Lords, the debate introduced by the noble Lord, Lord Ezra, shows Parliament at its most responsible and its most effective. It is three years since we debated this matter seriously and in depth, and the noble Lord, Lord Ezra, raises it again. The reason it is responsible is that the three-year period has given everybody a chance to see how the new direction is working. I deplore many of the day-to-day inventions which come from the propaganda sheets and do the opposite of what the noble Lord is trying to achieve today. I therefore welcome Parliament looking at this issue, under the terms of the debate, seriously and responsibly.
I am a little puzzled when I compare my reaction to the new direction with that of the noble Lord, Lord Ezra. His speech, which was fair, detailed and informative, showed that by and large he felt that the three years had been something of a failure; that it was not the success that it should have been. As a small businessman and a consumer in my own right, I believe that the three years' experience we have all had showed it to be a great success at almost every level.
§ Lord Ezra
My Lords, I thank the noble Lord for his kind remarks. However, I should like to enlighten him on what I said in relation to the results of that period. I said that there had been increased efficiency but that I did not consider sufficient benefits of that efficiency had been passed on to consumers.
§ Lord Harmar-Nicholls
My Lords, half a loaf is better than no bread, so I am grateful for that explanation. However, by and large, the fact that the noble Lord initiated the debate and the tenure of his speech, which was good, indicated some dissatisfaction with the experience of the three years. That is completely opposite to the way I feel, using the same material upon which to form a judgment.
I claim—I do not need to produce evidence; everybody can use their own experience—that the evidence of our day-to-day experience shows that the 1299 utilities have been a great success. They are more efficient, as the noble Lord conceded, than they have ever been; he also conceded that prices are falling year by year. I do not want to appear to be on opposite sides to the noble Lord. In general, I am with him when it comes to wanting to examine what has happened and arrive at eventual perfection; I am one of his disciples, not one of his opponents.
In my experience and that of others, the standards of service are better and the companies are profitable. It looks therefore as though everybody is benefiting. The profitability means that the companies have funds to reinvest in the industry to make it even better; it means that they can give adequate dividends, which will encourage more people to invest in industry—that is what we should all want because that is what the nation needs. We can compare that with the position of 12 years ago, when prices were rising, services were poor, and the Exchequer was subsidising the utilities in order to keep prices even lower than they are today.
One of the main reasons for the success which I am proclaiming is that the Government, having set up the framework of the new direction, kept out of it. They had enough confidence in the people who have to produce the results to let them make decisions without governmental or electoral party policy interference. It is vital that that should continue.
We have to head in new directions; we are not the same nation as we were. When I first came into politics—a good many years ago—we were the head of a great empire; we were the financial and industrial leaders of the world; we had a Navy that the world wanted and needed, and because of our great power (which now seems to be vested in America) we were able to make little mistakes and interfere without it affecting our general power and influence to do good. That is not so today. We depend upon the day-to-day success of the way we do things, whether we are part of the Government, employers, workers or whatever part we play. Pragmatism is the order of the day. We have no fat—as we used to have—where mistakes can be submerged, overlooked or forgotten about. We need that, and this new direction seems to be producing it, as opposed to government intervention with the Government, through extra taxation, having to pay into it. We are therefore entitled to feel satisfaction as to how things have been going over the past three years.
Nobody likes to be regulated. But the regulators have done their job extremely well. Whatever decisions one makes as a referee or an umpire, somebody will be upset; any decision for one person will result in a decision against somebody else or some other group. That has been the regulators' job from the beginning of time. The regulators were appointed to do a specific job and have done it extremely well, with the minimum of disturbance and interference.
There have been mistakes, such as directors raising their own salaries stupidly and prematurely on occasions. There are all kinds of things as regards which I could criticise my noble friends who have responsibility in government. However, having said that, 1300 it would be remiss not to stand back and see whether, despite those pimples, there have not been results which justify some commendation. This debate in enabling us to do that today. Noble Lords may accept the case put forward by the noble Lord, Lord Ezra, although he conceded a good part of it when he intervened a few minutes ago, or they may accept mine as a consumer/small businessman. I have to sign the cheques. I know the difference when we have to pay the gas bill. One of my companies runs a small group of hotels. I have to sign the cheques for the electricity bill, the gas bill and the council tax. I have some pretty good idea what I am paying for the services I am likely to get.
I ask my noble friends who have responsibility in government to carry on with the policy of minimum interference from government. Those of us who have held ministerial office, however small, know of the interference and intercommittee problems that have to be overcome. Those involved are not doing wrong. Every group is fighting its own corner. It is difficult for a committee to run anything. Those of us who have sat on committees know jolly well that of a committee of seven or eight never more than two or three produce the ideas and initiatives and get the work done. Handing it back to the people who have to produce the results was a move in the right direction. The advice I give to my noble friends is to pay heed to the criticisms; and if it is possible to amend on the way without interfering with the general direction that has been set, yes do that. Digging up the plant two days after it has been planted to see whether or not the roots are moving in the right direction is the way to nowhere. That is what we must not do and that is what, under our present parliamentary system, we are much too apt to do.
I now wish to give a little advice to our fellow countrymen. One of the problems today when we are discussing any of these matters is that, instead of having a Lord Ezra debate where one can get at the subject, hear different opinions, weigh one advantage against another disadvantage in a proper way and come to an overall conclusion—nothing will be perfect but one can get it as near right as one is likely to do—everything seems to be done by sound bite. That is a new word which I honestly do not understand. I do not know what a sound bite is. But from the way it is being used by various people, I see it as a means by which to influence the crowd to put up their hands in your favour without having to think a lot about a subject. The sound bite takes an attractive word and tries to give it a vicious meaning. It tries to make it sound nasty and dirty.
The process started back in the 1930s when I was actively involved in politics as a very young Conservative. It was admitted on all sides that the country was almost bankrupt. In the end all the parties got together in a coalition in order to get out of the difficulty. They set up the May Committee with instructions to look at the whole picture and see what could be done. The May Committee made a very good report and spelt out in minute detail where savings had to be made if we were to remain solvent. Even in those days we were moving in an awful direction. However, the coalition did not carry out the recommendations of the May Committee. The "sound bite" got to work. As 1301 soon as the report was there with suggestions as to how we could remain solvent someone invented the phrase the "means test"—those who need it must get it but those who do not need it must stand further back in the queue. So whenever one wanted to move in the direction in which this impartial committee had suggested, having reported in great detail and with great thoroughness, we heard the phrase the "means test". That stopped us getting our house in anything like order.
What is the next sound bite that disturbs me? It is the "community charge". The community charge was one of the soundest, safest and fairest pieces of legislation that has ever been introduced. The idea was to see to it that those who benefited from government paid their proper and fair share. But, oh no, another phrase was used to give it a vicious twist—the poll tax. Whatever you did you only had to say "poll tax" and you would work up a frenzy with the crowd outside the factory or at your meetings. The sound bite replaced the Lord Ezra way of looking at an issue properly and examining all its aspects.
What is the latest word? What is the latest sound bite? The new sound bite is "privatisation". There is nothing wrong with the word but some people are trying to inject it with a viciousness and anger which can do so much damage. We should cut out the sound bite. It is up to the people of this country to recognise a sound bite as against sound argument such as we are trying to produce today.
I congratulate the noble Lord, Lord Ezra. He presented his doubts fairly and effectively as to whether we are going in the right direction. I believe that his overall pessimism was wrong. My practical day-to-day experience of privatisation is that it is a success. I hope that that message will go out from this short debate.
§ 4.47 p.m.
§ Baroness Platt of Writtle
My Lords, I am grateful to the noble Lord, Lord Ezra, for initiating today's debate calling for a general review of the regulatory system of the privatised utilities. However, I shall not refer to the general problem in depth as I had thought we would be more severely time limited in our contributions. I shall speak only about the regulation of British Gas plc of which I was a non-executive director until this time last year. I now have no financial interest in the company except a small shareholding.
British Gas was among the first privatised utilities. There was a great deal of publicity to attract "Sid" and his friends to become shareholders, perhaps for the first time. I joined the throng of several millions who bought shares. I did not become a director until two years later. British Gas still has 1.8 million shareholders, many of them with small holdings. I suppose that I am referring to the success of privatisation, just as my noble friend Lord Harmar-Nicholls did so eloquently a few moments ago.
Since privatisation British Gas has reduced prices to domestic customers by 23 per cent. in real terms, excluding VAT. It has carried out a vigorous campaign of negotiating international business, including exploration and production, and of providing gas 1302 distribution and services worldwide, firmly based on its longstanding successful operation in this country. That has resulted in considerable earnings for this country, achieved by British Gas itself and by allied British suppliers selling abroad under its umbrella. As a successful company it also pays billions of pounds into the British Exchequer in taxes every year.
Over a long period of years British Gas has entered into North Sea gas supply contracts for the supply of gas to its customers. With the legislation passed since privatisation British Gas is no longer the monopoly supplier it was when it entered into those contracts. At that time it had the legitimate expectation of fulfilling its statutory duty of supplying gas to its customers whatever their needs. British Gas has accepted the transformation of that monopoly to a fully competitive gas market in the interests of benefits to its customers. I am greatly in favour of privatisation in that respect, too.
The change, however, presents a major new challenge to British Gas, entailing considerable initial costs and great uncertainty in the way it works. Already the price of gas has fallen substantially, as the noble Lord, Lord Ezra, pointed out. British Gas is, however, left with fixed price contracts under what are known as "take-or-pay" terms, so it has an obligation to pay for annual quantities of gas even if today and in the future it no longer requires them.
Already, under government regulation British Gas has lost over 60 per cent. of its industrial market. Over the next two years, as already referred to, pilot schemes will be put into action. A fully competitive market is planned to be introduced in the domestic field shortly afterwards. That is bound to mean an even greater fall in the need for gas by British Gas. The legislation was brought into action several years after privatisation.
It is imperative that the Government support British Gas in the renegotiation of contracts, as noble Lord, Lord Ezra, said. The imposition of the legislation has placed British Gas in an invidious position, potentially disastrous for a very successful company.
Way back in the late 1960s and early 1970s, British Gas took a courageous decision, against some contrary public opinion, and replaced an organisation consisting of individual small coal gas companies with a system of national transmission and distribution of natural gas which has proved so popular in so many ways; for example, in power generation, community heat and power, and the vast expansion of domestic central heating.
It has also meant much cleaner fuel environmentally. The transmission system, named TransCo, was recently separated within British Gas, again at government instigation, as part of a move to a fully competitive domestic market, allowing other suppliers to use it. It is a virtually leak-proof system, unlike the leaking water pipes the public are determined must be repaired or replaced. That is imperative as gas is a hazardous substance; nevertheless, it is a tribute to British Gas and its considerable innovative engineering developments that constant maintenance and updating of pipelines can be carried out efficiently and economically and with the 1303 least disturbance to traffic where pipes are laid under roads. That is in the interests of consumers and the public as a whole, and it is vital.
It is essential that safety and security should be maintained into the next century. That can only be done if the selling prices and regulations set by Ofgas for other suppliers provide adequate financial return to British Gas so that it can maintain the safety and security of pipelines, miles of which go below our countryside, operating at high pressure.
I speak of a company with a highly successful business record. Competition means that European suppliers are invited to compete without the possibility of British Gas competing in the European market. There is no level playing field. In those circumstances our Government need to ensure that conditions are set for the continued commercial success of British Gas here and worldwide in the future; otherwise this country stands to lose a natural resource of great value. That, I submit with respect, we cannot afford to allow to happen. We certainly do not want to return to the 1930s, as my noble friend Lord Harmar-Nicholls has just so vividly described.
§ 4.55 p.m.
§ Baroness Seear
My Lords, in launching this debate about the private utilities, we on these Benches do not wish to give the impression—and it is certainly not the impression held here—that everything before privatisation was wonderful. Some of us remember the state of the sewers and the condition of the water supply. The condition of the water supply enabled those who took to bottling water to make the most ridiculous success out of the refusal of people to drink decent tap water. Personally, in a restaurant I greatly enjoy asking for water. When I am asked which kind of water I say, "Tap water" very firmly and now with considerable confidence. All was certainly not well before the privatisation programme.
There have been very real successes in privatisation. I have found that my gas bills have come down and the service I get from British Telecom is a great deal better than it used to be before privatisation. For one thing I now know how my money that goes to British Telecom is spent. In the past how the money was distributed or how I spent so much was always a dark secret. I am now told, but it is still quite a lot! At least I know what has happened to my money and that is some compensation.
This debate is not an attack on the privatised industries as such. What we are really saying is that privatisation was launched in an attempt, presumably, first and foremost, to improve the service to the country and to improve consumer satisfaction. Competition was a means to that end. Competition is never an end in itself, but a means to that end. We need to be satisfied that in fact that end is being achieved and that the consumer's position has improved as a result of privatisation. It is because we are not satisfied that that has developed entirely in the way in which one would wish, that we launch the debate today.
1304 Competition, to the extent that it is working, has had some very good results. We have to keep reminding people that the protection of and benefits to the consumer come not only from a quick reduction in price or an improvement in service, great or small as it may be, but also from the long-term and continuing provision of improved services. That means devoting the profits raised to investment as well as immediately benefiting the consumer through reductions in price.
Large amounts of money that are raised are being used for real investment. In particular that was long overdue and very necessary in the water industry; in the telecommunications field, and, I suspect also in the other privatised industries, although I know very little about them. To that extent, in order to raise the standard continuously and for services to be at the same level as those which are available to our competitors elsewhere, it probably means that a very large amount of the moneys taken need to be devoted to long-term investment, if we are not merely to satisfy the consumer today but also to continue to satisfy both the private and the business consumer.
After all, energy, water and telecommunications are very important components in any business expenses. We must get them right from the point of view of the business consumer in the long term, but most assuredly there are very great disadvantages to the ordinary consumer. All those matters are of the very greatest importance.
The privatisation of industries of such importance was new and an experiment. It would have been extremely surprising if the Government had got everything right straight away. However, it would be advantageous if they would now agree that, given an experiment as new and important as that, it is high time to review the way in which it is working—not in a spirit of carping criticism, but by saying that it is very unlikely that we cannot improve on what we have done.
The competition is by no means perfect competition. The Government should be willing—indeed, they should encourage—issues of competition to be referred to the Monopolies and Mergers Commission so that we can consider whether the competition is working as it should. A great many people at present believe that it is not working properly. There is a legitimate query in the minds of the public, among both industrial and private users. Surely the Government should be on the side of ensuring that the competition is as good as it can be made in the difficult circumstances of industries where natural competition does not exist. After all, the Government are the great supporters of competition. It is true that a degree of competition has been introduced, but it is not competition in the way in which it exists in industries which have always been in the market and which are not natural monopolies in the first place. It is now high time that the issue of competition was reconsidered so that we can ascertain whether we are really getting the benefits of the competition which the Government promised.
As other noble Lords have said, the role of the regulators needs to be considered. I remember saying repeatedly from these Benches at the time of the 1305 privatisations that although we do not like monopolies (whether public or private), if we are getting rid of a public monopoly, we have to be extremely careful that we are not creating a private monopoly. That was the burden of a good deal of the criticism that came from these Benches during the privatisation programmes. The Government's reply was to introduce a regulator in all the industries concerned. I do not know that at the time anybody had a better idea, but it is not surprising that people are not entirely satisfied with this first attempt at finding an alternative way of bringing to this market the benefits of real competition, given that we are talking about markets in which there is no competition through normal market forces.
As has been said, the regulators have acted in varied and different ways, and we do not know how they should be acting. Indeed, they cannot all be right because they operate so differently. It is not a question of the Government admitting that they have got it wrong—it does not involve any loss of face for them; but in our view it is time that the Government said, "We have now had experience of regulators for some years; let us establish an independent committee to take a real look at how regulation is working and at whether any improvements in the system of regulation could be made". What is an appropriate type of regulation for one privatised industry is not necessarily the right type of regulation for another privatised industry. It does not follow automatically that they should all be regulated in exactly the same way. The Government should say, "We have now had enough experience of this and we know that people are not exactly satisfied. It would be surprising if they were, but let us take a real look at how the regulation can best be carried out". Nobody has thought of a better way of simulating real market forces than having a regulator. It is not the idea of regulation that is wrong, but experience of it is raising many doubts.
Finally, and following the points raised by the noble Baroness, Lady Platt, we need to reconsider the whole question of the gas industry and its contracts. Gas is an enormously important industry in this country. It is important both to industry and to ordinary, individual consumers. If as a result of the contract arrangements that were entered into the industry really is faced with the kind of threats with which the regulator says it may be faced, surely there is no time to lose in taking a look at that and at what can be done about it. We cannot accept our privatised gas industry running into a serious financial position that is not of its own making, but which would have adverse effects on all types of consumer.
We are asking the Government to look at the best possible way of developing competition. There are doubts about whether that is what we have at the moment. There should be a real review of how regulation has been working, how it can be improved and of what other systems could be introduced. There is also the special question of the position of the gas industry and the contracts that it entered into some years ago.
§ 5.5 p.m.
§ Lord Haskel
My Lords, I too wonder why so few noble Lords have put down their names to speak in this debate, which deals with a most important topic. Perhaps it is the proximity of Christmas; perhaps it is because of the flu or perhaps, as the noble Lord, Lord Skelmersdale, suggested, it is because of our various interests. At this point, I must declare an interest as a non-executive director of a cable company.
The question that we need to ask ourselves is: why do we need regulation of the utilities? It is because they are the monopoly suppliers of the essentials of life—heat, water and light. Every person and every business in the country needs them. They also form an important proportion of British industry, accounting for around 14 per cent. of our total market capitalisation and for about 10 per cent. of GDP. Therefore, I agree with many noble Lords that the objective of regulation must be to balance the different interests of all those involved: the consumers, the shareholders and the employees. There is also a national interest here, as the noble Baroness, Lady Hamwee, told us.
The Government's policy seems to be that all those interests can be balanced simply by introducing competition. The noble Lord, Lord Skelmersdale, spoke about that by referring to the marriage service—no less. I was not quite sure of the relevance of that. Competition is desirable, but it is not an end in itself, as the noble Baroness, Lady Seear, said, because there will always be an element of monopoly in the means of distribution.
It is all very well for the electricity regulator to declare that we will have full competition in electricity by 1998, but competition does not follow simply from declaring it in a press release. The fact is that domestic consumers will still receive electricity only through a single wire owned and operated by their local regional electricity company. There will also be only one water pipe, owned and operated by the local water company.
So it is necessary to strike a balance and not seek a simple absolute answer. Special care is needed in regulating an industry where there is a chance of genuine competition. Telecommunications is a good example of that. Here, there is a good prospect of real infrastructure competition between different kinds of cable and radio-based services. However, installing that new infrastructure is a very long-term endeavour. Investment in the telecommunications network is proceeding, but it is still at a sensitive stage because three-quarters of households still have no alternative to British Telecom, which still carries over 90 per cent. of all calls. Regulating telecommunications at this interim and complex phase is difficult. I think that the Minister will agree with me that it is much more difficult than regulating a monopolistic market or one where competition is firmly established.
The noble Lord, Lord Ezra, told us that the Government made a serious error in not reorganising the companies before privatisation. I think he is right. The signs of poor regulation are everywhere. I do not agree with the noble Lord, Lord Harmar-Nicholls, who seems to find everything satisfactory, and I too sign the 1307 cheques in a number of companies. We were told last week, for instance, that some regional electricity companies are paying industrial users to shut down their operations rather than supply electricity to them at pre-agreed prices.
The cancellation on Monday of the two new nuclear power stations means the cutting of safety measures still further in scheduling supply to meet demand. From that, we can only conclude that the short-term needs of privatisation take precedence over the long-term needs of British industry for continuous electricity supply. The noble Baroness, Lady Seear, told us about that and about the need for investment. Incidentally, does the regulator have to worry about our international carbon dioxide emission obligations?
There is another example. We heard recently Yorkshire Water asking customers dependent upon water supplies to move their production elsewhere. In the recent Budget, we saw the Government virtually doubling their cash demand from the Royal Mail, with all that implies for less investment and higher postal prices. Is that what Ministers mean when they speak of Britain becoming the enterprise centre of Europe? Those are the sort of things that go on in a Third World country.
Of course price is central to regulation. The noble Lords, Lord Ezra, and Lord Skelmersdale, told us about the RPI-x price capping formula which lies at the heart of the current system of regulation. I agree with them. I find that it has failed the people of this country as an adequate tool of regulation. That is because whatever efficiency gains have followed from privatisation for the most part have not been passed on to the consumer in lower prices.
§ Lord Harmar-Nicholls
My Lords, the noble Lord answered my point about signing cheques by saying that he too signs the cheques for these bills. Are the cheques he signs bigger or smaller than they were four years ago?
§ Lord Haskel
My Lords, I shall come to that point in a few minutes.
On any reasonable measure, the profits of the utilities have been very high. Over the period 1991-94, Oxford Economic Research Associates has calculated that the average total returns to shareholders of the regional electricity companies has been in excess of 38 per cent. Meanwhile, the average total returns calculated on the same basis for the Financial Times All Share Index over the same period are just under 16 per cent.
At the same time, because of a number of tax credits and allowances granted by the Government to many of the utilities, some of them have paid very low levels of tax. A recent analysis of company accounts of the water companies has revealed that, on mainstream profits of£7.8 billion, water companies have paid just under£07 million—a tax rate of just 1.36 per cent. So the taxpayer too has lost out.
Meanwhile, water rates are set to rise to the end of the century. Domestic electricity consumers pay an average of 9p per kw/hr, almost double the US average. 1308 Certainly electricity prices have fallen since privatisation, but only from the very high levels to which they were raised prior to privatisation.
It is quite clear to me that the level of profits provides the best guide for regulators. Like the noble Baroness, Lady Hamwee, I find the concept of profit sharing entirely reasonable. A "normal" level of profit would be agreed, an excess profit beyond that level would be shared between the utility and the customers in the form of rebates and lower prices. Because the utility would retain a share of the excess profits, there would still be an incentive towards increasing efficiency, and funds would be available for investment.
The calculation of a normal level of profit would not be a difficult burden for the regulator. Such a calculation is common to all forms of regulation, including the present RPI-x framework. Profit sharing has the advantage that the profit sharing rule would require the normal level of profit to be made public and not, as at present, hidden away in the regulator's assumptions. It would provide the greater transparency for which the noble Lord, Lord Skelmersdale, asked.
Meanwhile, business has to go on. Regulators have a lot to do. Companies have to motivate their staff and service their customers. Business managers know that demoralised staff rarely deliver good service.
There was a time when people joined the public utilities out of a sense of service, and there was something rather high-minded about that. That high-mindedness has been destroyed now that the overriding priority is cost cutting. Is it a sign of poor management that the sense of public service has gone out with the cost cutting, and the sense of high-mindedness which made the work worthwhile for many people has not been retained?
Now that the cushion of excess water and electricity supplies has been removed, thus making the chance of cuts more likely, the regulator's concern with service must extend to seeing that the people who work at the utilities have a feel-good factor too. We know that the directors have a feel-good factor£we have heard quite a lot about that recently.
The regulator will have to come to terms also with the take-overs and mergers among the utilities. It was only after strong pressure from Labour that the President of the Board of Trade recently referred the bids by PowerGen and National Power for Midlands Electricity and Southern Electricity to the MMC, but only after allowing a similar take-over of ManWeb by Scottish Power to go unchecked.
We are also seeing water companies taking over electricity companies. How are those going to be regulated? It is naive to think that the accounting can be kept separate. We need to be assured also that the regulator is properly screening companies which are taking over our utilities. There are some disturbing stories about the unethical behaviour of prospective and current owners, especially those coming from abroad, who may be attracted by the more lax regulatory regime we have here compared with the United States. That screening of their past behaviour has to be opened up to the public.
1309 Several noble Lords have discussed the qualities of the regulators themselves. Obviously regulators must be more than honest and incorruptible. They need to be sophisticated and aware. They must be paragons. They must insist that utilities carry out best practice, not just in management and technology but in corporate governance. Otherwise they will easily have the wool pulled over their eyes. I hope that the Government have a number of people in training. We need too a reply to the question: "Who regulates the regulators?".
The noble Lord, Lord Ezra, is right—it is time that this state of affairs was reviewed thoroughly by the Government. As the noble Baroness, Lady Seear, told us, it is a new experience, and because of that it needs a review. We are most grateful to the noble Lord, Lord Ezra, for introducing the debate and, it is hoped, starting the process of review. Perhaps the Minister will tell us whether that is happening.
Like any business, utilities need to change and evolve continuously. Regulation must allow for that, so there is no universal easy answer. Regulation must be light enough to allow for that continual change, but sufficiently severe and balanced to look after the interests of all. It is obvious that privatisation is the easy part. Regulation is the hard part.
§ 5.20 p.m.
§ The Minister of State, Department of Trade and Industry (Lord Fraser of Carmyllie)
My Lords, I welcome the opportunity provided by the noble Lord, Lord Ezra, to debate once again an important subject of wide public interest. A number of important points have been raised and I will attempt to answer them tonight.
The privatised utilities touch everyone in the country. All of us take a keen interest in their prices and quality of service. The Government are well aware of this. Indeed, as was said by the noble Baroness, Lady Seear, it was a desire to improve the performance and service of the utilities that led the Government to privatise them, to introduce competition where feasible, and to adopt a stable regulatory regime which would deliver increased efficiency, lower prices and better quality.
Perhaps I may say at the outset that no system of regulation is, or ever will be, perfect. We have learnt much from experience both here and overseas. We are still learning and considering possibilities for further improvements. I hope that that is sufficiently modest in setting out where we see the debate on regulation as lying.
As this debate has shown, there is no shortage of ideas for change. But I emphasise that we have built much scope for change into the existing regulatory system. Thus, regulators may and do make changes to licences including, if appropriate, changes to price caps.
There is also scope for changes to the structure of industries following, if necessary, references to the Monopolies and Mergers Commission under general competition law. This has already helped to transform British Gas, separating out its monopoly transmission business and allowing further competition in gas supply. My noble friend Lord Harmar-Nicholls was right in 1310 saying that it is this system of regulation operating at arm's length from Government, and so it should be, with competition introduced wherever possible, that has provided incentives for the companies to improve their performance dramatically. For example, National Power and PowerGen have doubled their labour productivity and British Telecom has more than doubled its productivity. This has in turn helped to bring down prices. BT's prices are down 35 per cent. since privatisation. Domestic gas prices are down 23 per cent. and domestic electricity prices are down 7 per cent., with further reductions to come. Telecoms, electricity and gas prices are now all among the lowest in Europe.
The quality of services is up. Over 95 per cent. of BT's phone boxes now work! In gas and electricity, the regulators have required demanding new guaranteed standards of service for customers, backed up by compensation. The number of disconnections for debt has gone down in gas by 70 per cent. since privatisation; in electricity by over 95 per cent.; and in water they have fallen rapidly since Ofwat guidelines were issued in 1992. For other interruptions, supply is now being restored within 24 hours in over 99 per cent. of cases in gas and electricity. The number of properties at risk of low water pressure has now fallen for the fourth successive year to 1 per cent. of connected properties.
Noble Lords spoke of the levels of investment that are required and the noble Baroness, Lady Hamwee, spoke of the water industry. Privatisation has enabled that industry to undertake a capital investment programme averaging approximately £3 billion per year. That is double the rate that was in place prior to privatisation. The benefit of this investment can be seen in significant improvement in river and coastal water quality and also in drinking water. Therefore, the noble Baroness has everyone's approval in deciding to drink tap water in such circumstances.
My noble friend Lord Skelmersdale indicated that he thought that regulation was a substitute— and a poor substitute at that—for competition. To that extent I agree with him—
§ Lord Skelmersdale
My Lords, perhaps I may interrupt my noble and learned friend. I made no allegation that it was a poor substitute. I said that it was sold as a substitute.
§ Lord Fraser of Carmyllie
My Lords, whether or not my noble friend believes that it was a substitute, it is the improvements in competition rather than regulation which we see as being a key to obtain further benefits. There is no doubt scope for more competition and more consumer choice.
Competition between suppliers is already a fact of life in telecoms; and for medium and large users of electricity and gas. We are determined to press ahead with further opening up of these markets. Next year we shall see the first phase of the introduction of competition to the domestic gas market. The gas and electricity markets will be fully open for competition in 1998.
None of this will be easy. The progressive opening of markets does bring with it problems, including those of adjustment for a dominant player. The noble Lord, Lord 1311 Ezra, the noble Baroness, Lady Seear, and my noble friend Lady Platt, raised the particular point of British Gas's long-term contracts for gas purchases. The Government are aware that British Gas is committed to taking gas at a price for which it does not have the customers. That is why the Government have been expressing the view for some time that some adjustment to contractual arrangements is no doubt inevitable and in the best interests of all concerned.
In spite of the invitation extended by the noble Lord, Lord Ezra, the Government do not seek to impose a solution. We believe strongly that commercial discussion between the parties concerned is the only sensible way forward. The department is monitoring the situation and will continue to encourage all parties to engage in sensible re-negotiations. Despite apparent difficulties, there is also scope for extending competition in the supply of water and waste water services, in the first instance, for large users. The Government are working on proposals with the Director General of Water Services and will publish a consultation paper early next year.
A number of noble Lords pointed to the criticism that executives are paying themselves too much at the expense of consumers. While I am aware of that criticism, perhaps I may say that this is primarily a matter for the shareholders not the regulators. The regulators should concentrate on controlling prices. It is prices which matter to consumers. It is the shareholders, led primarily by the institutional investors, who should press for a proper balance between profits and pay. As the Greenbury Report rightly stated, this is an issue which goes far beyond the issue of utility regulation. The utilities should be treated in exactly the same way as other companies.
The noble Lord, Lord Ezra, the noble Baroness, Lady Hamwee, and the noble Lord, Lord Haskel, also pointed to the criticism that shareholders are gaining at the expense of consumers. It is sometimes argued that the regulators have allowed the utilities to make too much profit. The initial price caps were set by government. With hindsight it is all too easy to say that some were too generous. At the time it was difficult to predict the extent and speed of the efficiency improvements which have since been achieved. The profits declared by these companies should be welcomed. Today's profits turn into tomorrow's price cuts for consumers; and profits finance investment in new infrastructure for the future, sometimes at substantial levels.
The utilities' success has enabled the regulators progressively to tighten the price caps, facilitating the large drops in prices to which I have already referred. Without the possibility of making profits, it is doubtful whether the companies would have had sufficient incentives to improve their efficiency.
The noble Lord, Lord Ezra, referred to the decision of the electricity regulator, earlier this year, to re-open a price review as a result of an REC takeover bid. The Government's view is that it was entirely appropriate for the electricity regulator to decide to re-open the electricity distribution price review in March, in the 1312 light of new information that had become available. With respect to the noble Lord, the customer is, I emphasise, benefiting. The electricity regulator's original proposals meant that from April this year an average annual domestic bill is £12.50 lower in real terms. His revised proposals, published in July, will reduce an average bill by a further £9 in real terms from April next year. We welcome that review, and the further benefits that it will bring for electricity customers.
The noble Lord, Lord Ezra, raised the issue of a windfall tax on excess profits. Apart from re-nationalisation, it is difficult to imagine what more could be done to destroy the incentives to improve efficiency, which provides the basis for further price reductions. A windfall tax also damages millions of small shareholders and—if the noble Baroness, Lady Hamwee, will allow herself to be included—pension fund beneficiaries who have invested for their future.
The noble Lord, Lord Ezra, the noble Baroness, Lady Hamwee, and the noble Lord, Lord Skelmersdale, also pointed to the apparently gentler reform of incorporating profit sharing into the present price caps so that customers would share profits above a specified level every six months or so. I understand the argument that profit sharing might appear more fair, acceptable and sustainable. It might also reduce the pressure on regulators to intervene between announced reviews of the price caps, so reducing uncertainty and the cost of capital. And, unlike the windfall tax, the beneficiaries would at least be the customers. But against that, there is a risk that profit sharing would also, like a windfall tax, reduce the incentives on the companies to cut costs and to be efficient. The present price controls already do share profits with customers in a way which preserves the companies' incentives to make them in the first place. Nevertheless, it is not for the Government to decide how the price caps should be reformed. We will not seek to impose solutions. It is for the regulators to initiate changes. Their final views are not yet clear.
Mr. Byatt, to whom the noble Lord, Lord Ezra, referred, has indicated that the regulatory system should evolve, but he has also warned on a number of occasions against radical change on the basis of short-term experience. Other regulators are consulting publicly about the desirability of change. I stress that this is an example of where there is scope for change within the existing legislative system. But gone are the days when Ministers intervene or change prices at a whim while bowing to the political pressures of the day. We have moved properly towards a more stable, independent and transparent system.
Concern was expressed that too much power has been given to the regulators; and the noble Lord, Lord Ezra, drew attention to the proposal that they should be made accountable to a new Select Committee. That is not a matter for government but is for Parliament to decide.
The noble Lord, Lord Ezra, referred back to the debates that we had on the Gas Bill and suggested that there may still be insufficient safeguards to protect consumers in a competitive gas market. I cannot agree with the noble Lord and I repeat my objections. There 1313 is a statutory duty on the regulator to protect consumer interests. The standard conditions of a gas supplier's licence contain an important protection for consumers. All suppliers are required to publish their prices and principal terms; to supply on those terms any customer in the licensed area who requests a supply; and to provide special services to more vulnerable customers, as British Gas does now.
The regulators also have a duty to facilitate or promote competition which should benefit both customers and competitors. It is interesting to note that the Director General of Telecommunications is seeking to use his greater powers to ban anti-competitive behaviour as a result of pressure from non-dominant competitors.
My noble friend Lord Skelmersdale and the noble Baroness, Lady Hamwee, argued that regulators' decisions should be more transparent. Over the years the regulators have put increasing emphasis both on consultation before taking decisions and on explaining their decisions in published reports.
I turn to an issue raised by both the noble Lord, Lord Ezra, and my noble friend Lord Skelmersdale; namely, the criticism that too much power lies in the hand of an individual and that individual regulators should be replaced by boards with non-executive directors, panels, or commissions. There is something to be said for these proposals, but I entirely agree that such devices are likely to slow the regulatory process, once again putting at risk the promotion of competition.
My noble friend Lord Skelmersdale suggested that there are too many regulators and, in particular, that there should be only a single energy regulator. There is, of course, an inter-relationship between the energy markets. The present regulators work closely together. I agree with my noble friend that the major changes in prospect in the gas and electricity markets require the undivided attention of specialist regulators to assist the transition to competitive markets in 1998. After 1998 there could be stronger logic in having one regulator covering the markets. Indeed, the Government welcome with open arms the prospects of fewer regulators and less regulation. There will, of course, always be the need to regulate the natural monopoly elements of the utilities; for example, the gas and electricity transmission systems. But elsewhere we look forward to increasing competition in telecommunications, gas, electricity, railway services and even water. That is where the Government's priorities lie. If further legislation is needed, it will be primarily directed towards the promotion of competition.
As has been indicated, the regulatory structures we introduced were innovative. Both the Government and the regulators recognise that the arrangements are not perfect, but I believe that the existing arrangements are highly flexible. The system is in an evolutionary phase. This process will no doubt continue, and rightly so. I am grateful to the noble Lord for introducing the debate. I hope that I have indicated sufficiently that we are in no sense complacent. We shall continue to keep the system under review to ensure that, as this House would wish, it develops in line with the needs of the market and consumers.
§ 5.37 p.m.
§ Lord Ezra
My Lords, I thank all noble Lords who have taken part in the debate. In view of the importance of the subject, I had hoped that more noble Lords would participate but that has been more than compensated for by the contributions of those who have taken part.
We have had a wide-ranging review. I am most grateful to the noble Lord, Lord Harmar-Nicholls, for his kind remarks at the beginning of his speech when he said that this is just the sort of debate which one would expect in this House: that we take a subject and have a close look at it; we suggest various courses of action; we put suggestions to the Government; and we hope that the Government will take up some of them. We watch and see what happens thereafter.
Many suggestions were made today as to how the regulatory system, which the noble and learned Lord admitted is innovative, could be improved. For example, when I referred to the windfall tax, I said that that was a suggestion made with regard to what were deemed to be the excessive profits of the companies.
Many other suggestions were made about the system of regulation and about how consumers should have a larger share of the profits which are being made by the various companies. Because those criticisms and suggestions are being made, we suggest that there should be a review of how the system is working.
As I pointed out in my speech, there are to be two major reviews —one by the Hansard Society and the other by the National Audit Office. Once those reviews from such eminent bodies are completed, perhaps it would be a good idea if we had another look at the subject. We could then ask the Government, in the light of whatever conclusions they come to, what they propose to do about it. I conclude by saying that I consider we have had an extremely useful and timely debate. I beg leave to withdraw the Motion.
§ Motion for Papers, by leave, withdrawn.