Privatised Utilities

HL Deb 19 February 1997 vol 578 cc689-722

3.18 p.m.

Lord Haskel

My Lords, in the absence of my noble friend Lord Currie of St. Marylebone, and at his request, I beg leave to move the Motion standing in his name on the Order Paper.

The Lord Chancellor (Lord Mackay of Clashfern)

My Lords, is it your Lordships' pleasure that the Motion standing on the Order Paper in the name of the noble Lord, Lord Currie of St. Marylebone, be moved by the noble Lord, Lord Haskel? Leave is granted.

Lord Haskel rose to call attention to The Report of the Commission on the Regulation of Privatised Utilities published by the Hansard Society; and to move for Papers.

The noble Lord said: My Lords, I thank noble Lords for allowing me to introduce the Motion standing in the name of my noble friend Lord Currie. Unfortunately, my noble friend has gone down with flu and I am sure all noble Lords will join me in wishing him a speedy recovery. We are all grateful to him for bringing this well-written and reasonable report to our attention. I should also like to say how much we look forward to the maiden speech of the noble Earl, Lord Inchcape, and how delighted we are that he has chosen the important topic of regulation on which to address us for the first time.

In a way the debate is a continuation of that on privatised utilities introduced by the noble Lord, Lord Ezra, on 13th December 1995. At that time the noble Lord told us that the report we are debating today was in the process of being written. The Government, he said, had made a serious error in not reorganising the utilities before privatisation. In particular, British Telecom and British Gas should not have been privatised as monolithic monopolies. He was right, and the happenings of the past 14 months confirm that he is still right. The restructuring of British Gas last Monday also confirm that view.

A large number of tax credits and allowances granted by the Government to many of the utilities, which turn out to have been excessive, would have been unnecessary if the companies had been properly restructured before privatisation. It is because of that mistake that many of the proposals outlined in the report are necessary. The whole purpose of privatisation, as the noble Lord, Lord Ezra, pointed out, was to subject the utilities to competition. But the necessary restructuring was not done. What has also become obvious during the intervening time is that the Government still have no clear idea of what is a suitable structure for the utilities industries or a suitable form of utility regulation.

One of the main reasons why I welcome the report is that it seeks to build on experience and not to turn the clock back. New Labour is not seeking to turn the clock back either but to learn from the experience of the past 10 years and to ensure that the utilities contribute to the progress, competitiveness and growth of our economy. After all, not only are well-managed utilities important to our economy; they are also a significant part of it, accounting for approximately one-sixth of the total stock market valuation. It is wrong therefore that the privatised utilities should be so unpopular. We all know why. The excesses of privatisation caused that unpopularity.

I welcome the proposals contained in the report to publish a code of practice; to establish consultation procedures; and to have industry and consumer representation bodies. All those proposals should help to overcome the unpopularity of which I have spoken and are consistent with modern, open government. Not only do these sensible proposals encourage best management practice; they should also help end the cult of secrecy surrounding the regulation of privatised utilities. That they are unpopular is to our disadvantage: it lowers the morale of staff and acts as a brake on investment.

The report carefully lists the primary duties of the regulators. The promotion of competition is among the most important. Indeed, the report proposes that some licence conditions be replaced by the rigours of competition law. It rightly emphasises that stronger competition law will replace the more cumbersome regulation by licence and speed up decision making. However, that presupposes that we have an effective body of competition law, which we manifestly do not.

Competition law is inadequate, largely because it has not been modernised. We have had many consultative documents ranging from a Review of Restrictive Trade Practices Policy, published in March 1988, through, finally, to a draft Bill in August 1996 with many other documents on the way. However, in all those years nothing effective has been done.

New Labour would start where the Government's August draft Bill left off. It would introduce heavy fines for companies which break the anti-cartel rules and behave in an anti-competitive manner. It would give the Office of Fair Trading strong investigative powers and would go further than the Government's draft Bill and ban unfair behaviour such as predatory pricing by utility companies which dominate their markets. Utilities behaving in that manner would face civil claims from companies that have suffered from anti-competitive conduct. In short, it would introduce the much tougher regime suggested in Recommendation 18 of the report, modelled on Articles 85 and 86 of the Treaty of Rome. That would be an additional deterrent to possible fines by the Office of Fair Trading, or the usual reprimand as mainly happens at present.

With those tougher laws in place the work of the regulator in promoting more competition would be far more effective. It becomes necessary for the director general to be far more open and consistent, as foreseen in the report. As enforcement of competition becomes stronger and the rules tougher, there is a greater need to explain decisions. That would be done through the appeal body for competition law suggested in the report.

The present trade law did not envisage essential utilities being in the private sector yet retaining a monopoly in delivering their products. Most premises only have one electricity cable, one water pipe or one gas pipe. In those circumstances, regulation by price cap and competition is not enough. The customer has no leverage and so we have a "take it or leave it" attitude. As a result, with the existing inadequate competition law, many businesses are overpaying for all those services and British industry is losing out. That certainly happens in Yorkshire. Once in the private sector, neither the regulator nor the Office of Fair Trading was able to stop Yorkshire Water raising its prices and reducing its reserves to a level where it invited its textile customers to move production elsewhere. Some did—to northern Italy. Yorkshire textile companies were also asked if they would like lower priced electricity at the risk of being cut off—that to an industry which depends for its livelihood on quick response! My noble friend Lord Paul will speak of his concerns about supplies to industry. Lack of competition for electricity is a disgrace and a brake on our competitiveness.

The brokers, James Capel, who market the shares of all UK electricity stocks, in a circular of 27th January 1997—just three weeks ago—said: The perceived lack of competition in the electricity generation market has led to increasing calls from consumers for fundamental reform of the market. OFFA has publicly stated its disquiet over the present lack of competition. With a potential Labour Government on the horizon a review of the electricity market looks increasingly likely, focused on the reduction in National Power's and Powergen's price setting ability". They set 70 per cent. of the side market price in the third quarter of 1996–97.

If the price is settled by a commodity market, it is important to see that that market is neither rigged nor speculative. The regulator could usefully look at that, particularly the paper producers of gas and electricity. There is a great attraction in buying it cheap on paper and selling the same paper dear. But it does nothing for the investment and progress of the industry. Indeed, it is difficult to know whether those contracts are an investment or a lottery. The circular is quite right. There will be radical reform under Labour.

There are many other sensible recommendations in the report which will be dealt with by other noble Lords on these Benches. There are recommendations regarding protecting the interests of the consumer, about which my noble friend Lord Dubs will speak. My noble friend Lord Berkeley will speak about regulating transport. Other noble Lords will speak about the recommendations regarding the appointment of regulators and their independence. The writers of the report are well aware of the dependence of the regulators on the industry which they are regulating for reliable and timely data so that the regulator can ensure that there are adequate supplies and that the utility companies are adequately financed. However, I was interested to note that the report did not think that the utility companies should be protected from bankruptcy. The Minister need not worry. All these and many other matters are yet to come. I beg to move for Papers.

3.30 p.m.

The Earl of Inchcape

My Lords, I am most honoured to be speaking here for the first time in this great Chamber. My father was too busy in shipping and took nearly 40 years to make his maiden speech, but with your acquiescence I am now making mine after only two.

When the utilities were first privatised, starting with British Telecom in 1984, it was absolutely essential that there should be some effective system of regulation until possibly the time came when full and genuine competition came to pass. They were, after all, state monopolies, and it was vital that the interests of the consumer be protected. This gave birth to the Oftels, Ofgas, Offers and Ofwats that we all know about so well. They were all headed by a director general, whose appointment was to be non-political, and they would have a staff of sufficient size and competence to enable them to do the job properly. These directors general would be given four primary duties: first, to ensure that supply is sufficient to meet all reasonable demands; secondly, to ensure that such supply can be financed; thirdly, to promote competition; and last, but not least, to protect and promote the interests of the consumer.

This carefully prepared report, which we are debating now, would indicate that, while there is naturally still some way to go, the system is working, the regulators are doing their job and all groups are benefiting as a result—consumers, investors and even the Government, as they do not have to fund expansion, some of which is enormous, and they can use the sale proceeds for other things too, as well as earn a lot in tax. Generally speaking there have been substantial reductions in prices, combined with higher levels of investment and improved standards of consumer service. Real competition is now really taking root, and this can be seen not only in the telecommunications sector, where a pact to allow open competition has just been signed covering 90 per cent. of the world's 670 billion dollar industry, but also in the gas and electricity fields. Only water is lagging behind, and there are very good and obvious reasons for this. It would seem that the RPI minus x system of regulating prices is working, and has the support of both the CBI and even the Fabian Society. It is a better way of doing things than the American system of capping profits, as this still leaves scope for more profit by way of improved efficiency and higher volume sales, while at the same time reducing the real price for the consumer.

There are many examples of benefits that well regulated privatisation has brought about, and here are just a few of them. Telecom prices have fallen by 40 per cent. in real terms on average, and the United Kingdom is one of the cheapest countries in the world now in which to make phone calls. This has come about largely because of fierce competition. Domestic gas prices have fallen by over 20 per cent. in real terms since privatisation in 1986, and are now lower than in Germany, France, Italy, Belgium and the Netherlands. At the same time industrial gas prices have fallen in real terms by no less than 48 per cent., providing generally the lowest prices in Europe.

Electricity prices have improved slightly too, and only water has gone up in real terms since privatisation. But this was necessary to cover the investment needed to improve the industry's infrastructure and to provide better quality water and high environmental standards required by EC directives; and without efficiency savings it would have been much higher than this. Also they look as though they are going to be in for a one-off price cut, along with electricity, in the year 2000.

BT has invested no less than £27 billion since privatisation, and offers a much more modern service, and new competition coming in during the past decade has done the same sort of thing. There is no waiting list now for installing telephones, and in 1984 the waiting list was 250,000. Only one call in a thousand fails to get through, compared with one in every 30 in 1984.

In 1979 nationalised industries were heavily overmanned and losing substantial sums of money. Now they contribute nearly £60 million to the Exchequer every week. British Gas, for example, paid £504 million in tax in 1994, and the regional electricity companies paid £461 million.

In conclusion, I must say that I have been in business for many years now and know by experience that in order to succeed you have to have a good product or a good service, and if possible better than anyone else's, unless of course you are enjoying a monopoly situation. Privatisation of the utilities has enabled them to modernise and become much more efficient. They have to comply though with the regulations that are clearly outlined in this report. This they are doing for the benefit of us all, and as I read it, there is no real need therefore to strengthen these regulations.

3.36 p.m.

Lord Ezra

My Lords, it is my pleasure to congratulate the noble Earl, Lord Inchcape, on the maiden speech which he has just given us and to express appreciation of the fact that he decided to do so rather earlier than his father in similar circumstances. As he reminded us, his father was well known in shipping circles. Indeed, I had the pleasure of meeting him on a number of occasions. He was a towering figure in shipping and in the City of London and we know that the noble Earl is himself also involved in some of those activities. We wish him well in them.

I should like to congratulate him on his knowledge of the subject of regulation, with which he probably was not very familiar until he had to prepare for this speech. But he has done his homework very well. He quoted many figures which are incontrovertible and he has given us a good synopsis of the situation. With this evidence of his capability in adapting himself to new subjects, I hope that we may hear from him on many occasions in the future.

The noble Lord, Lord Haskel, is to be thanked for and congratulated on taking the place at short notice of his noble friend Lord Currie of St. Marylebone. Naturally, we also hope that the noble Lord, Lord Currie, will recover very quickly from his indisposition.

The noble Lord, Lord Haskel, is familiar with this ground and raised a number of important issues in connection with it, especially on a subject on which he is particularly knowledgeable—the question of competition policy. The noble Lord was kind enough to refer to a debate which I initiated in this House in 1995—indeed, I initiated an earlier one in 1992—and have therefore at intervals been raising the question of the regulation of privatised utilities. There was also an important debate on the subject initiated by the noble Lord, Lord Borrie, in May 1996. It is a subject which we have considered on many occasions, and rightly so, because of its importance. It is also a subject which has attracted much attention in academic and other circles.

We have in front of us the report from the Hansard Society which is the specific objective of our debate today. But there have also been reports by the CBI, by the National Audit Office and by the Select Committees on Transport and on Trade and Industry of another place. The Public Accounts Committee is also looking at the subject.

It is my opinion that as a result of this continued study of the subject of the regulation of privatised utilities—the question of regulation is relatively new in British industrial history—we now have emerging a consensus on what the next steps should be. I believe that certain issues are emerging on which all these studies and debates are reaching a common point. That is what makes this debate so timely and interesting, quite apart from what may happen as a result of the next government's policies.

Before we look at the analysis in the Hansard Society report, we must take into account the background to which the noble Lord, Lord Haskel, referred. Having followed these matters closely and having myself served in a nationalised industry for many years and participated in all the debates on the privatisation of the utilities, it is my opinion that it was not the original purpose of this Government, elected in 1979 and re-elected subsequently, to privatise the utilities. That came later. The original purpose of their privatisation intentions was to privatise those segments of publicly owned enterprise which could enter into the competitive framework. It was only later that they moved to the utilities, because obviously they raised a number of questions—particularly the supply of basic needs on a monopolistic basis. So that raised the question of whether one could put such enterprises into the private sector.

The Government decided to go ahead on the basis of a regulated regime. At the time when the first utility privatisations took place they worked out a system on which the question of competition, which was largely lacking because there was monopoly or near-monopoly operation, should be met by the regulatory system and that there should effectively be a form of "surrogate competition". That was the phrase used at the time. I remember that the noble Lord, Lord Moore, who was then much involved in these matters, produced a number of reports on surrogate competition as being the equivalent of real competition through the operation of the regulatory regime.

So when the first privatisations of utilities took place it was my opinion that the prime intention was to diminish the role of public ownership. A secondary objective was to bring as much money as possible into the Treasury, which as taxpayers I suppose we must applaud. But competition in the real sense only came third. It was not until the electricity industry was privatised, after the privatisation of telecommunications and gas, that an attempt was made to restructure the industry before privatisation, which was the point made by the noble Lord, Lord Haskel. Even that was done on a basis which left the generation of electricity virtually as a duopoly.

Therefore, what has happened is that since privatisation of these industries in a monopoly or near-monopoly form, the Government have taken a number of measures to introduce competition. That is particularly noticeable in the case of telecommunications, gas and electricity—water being an exceptional feature because of its natural monopolistic aspects.

The problem that has arisen is that, as the original legislation, which included the regulatory regimes, was postulated on one basis, we are now finding ourselves in the case of the enterprises to which I have referred on another basis. It raises the issue of whether that regime is absolutely appropriate to the new situation. The ground rules have been changed. Does the existing regulatory regime fit into these new rules?

I believe that in general the regulators have done a good job in difficult circumstances. I am not complaining about their dedication to their task. It is over 10 years since the first privatisation, and after so many changes having been introduced in many of the enterprises, I believe that it is now appropriate that we should be looking for a review. I therefore believe that the proposals in the Hansard Society report should be taken very seriously. There are such issues as the definition of duties, particularly between the regulator and the Secretary of State. It puts forward the interesting proposal that there should be a "social policy framework" so that the regulators will know where they stand in relation to social matters such as consumers who are in difficult circumstances. The National Association of Citizens Advice Bureaux has produced a report on that. It is very concerned about the way in which the present regime is working. There is the related question, which interests me a great deal, about energy efficiency and whether the regulators of gas and electricity should be taking a part in promoting that.

There is also the question of transparency which still needs to be dealt with. There is the question of consolidation. I agree with the recommendation that the time will come—certainly in 1998 when the gas and electricity markets are fully opened up—when Ofgas and Offer should be brought together. There are structural problems and the fact that the regulator is on his or her own. There is a personalisation factor. Should they have an executive board or an advisory board to support them? The report comes down in favour of an advisory board and there is something to be said for that. We shall then have to decide what role that board would play.

There is also the question of parliamentary accountability. I believe that there should be a single Select Committee in another place to which the regulators refer rather than a number of Select Committees depending on the enterprise. The appeals procedures need to be looked at. Finally, consumer representation needs to be sharpened up.

These are some of the issues referred to in this very valuable report. I believe it brings to a head the debate and discussions on this subject over a number of years, which I hope will be very seriously considered by the Government.

3.48 p.m.

Lord Berkeley

My Lords, I too would like to congratulate my noble friend Lord Haskel on instituting this debate and the Hansard Society on producing this fascinating document. It studies four regulators—telephone, gas, electricity and water, as we have heard. My regret is that it has left out transport. In the short time available I do not intend to cover all types of transport. I hope that we shall be debating soon the bus industry. But I would like to concentrate on rail since there is a rail regulator. Perhaps I may take this opportunity to declare an interest with the Piggyback Consortium and the Rail Freight Group.

We can surmise why there is no more than a passing reference to transport in this report. It comments that it is outside the remit of the commission which the Hansard Society gave it. So be it. I feel rather sorry for the rail regulator. On several occasions in the past month or two my noble friend Lord Clinton-Davis and other colleagues have tried to get the Minister, the noble Viscount, Lord Goschen, to come out fully in support of the regulator. We have signally failed. Perhaps we shall try again some time, and that may be tomorrow even.

The rail regulator has been left out of this report and he does not seem to get too much support from the Government. Perhaps that is because he no longer has to take notice of what the Government say, as from 1st January this year. Apart from that, there is good reason for treating rail like any other privatised utility. There are many similarities such as concerns over the monopoly supply of certain parts of it and other matters.

I shall seek to demonstrate why I think the five regulators should be considered together and why the new ideas and possible synergy between the other four covered in the report should apply equally to the rail regulator. Before doing so, perhaps I may describe the main powers of the rail regulator and then comment on the commission's report and on how its findings might apply to the railways.

We must first consider whether the railways are a monopoly. They are in competition with air and road, but I suppose that electricity is in competition with gas, and vice versa. There are now monopolies within the railways, such as Railtrack. There may be others in the future. We do not know, but they may come about as a result of the buying and selling of various companies. We need to consider whether the railways need regulating, how effective they are and whether anything else is required. The Government think so, since the rail regulator has the longest list of statutory duties of any of the regulators. In addition, he probably has the most concentration of power. That was well described in the magazine Utility Week, which I am sure all noble Lords read, on 17th January by Tom Winsor, who was formerly the chief legal adviser to the Office of the Rail Regulator.

I shall try to summarise briefly the four main powers of the rail regulator. First, every new access contract requires the regulator's approval. He has the right to require parties to change the contract, as a condition of his approval—and apparently has nearly always done so. He can even compel an unwilling owner of a station, track or depot to grant access on terms which he will decide—interesting, that one.

Secondly, he has the unilateral power to alter the commercial arrangements for access to track, stations and depots against the will of the parties concerned. I expect that other regulators wish that they had such powers.

Thirdly, parties have no right to appeal over the head of the regulator to the Monopolies and Mergers Commission in respect of the regulator's price control formulae. Those are in the access contracts. The regulator thus consults, publishes his proposals, listens to final representations and then decides. Again, other regulators may wish that they had such freedom, although I understand that Railtrack says that it is not bothered. That is good news.

Fourthly, the regulator has the powers to deal with anti-competitive and exclusionary conduct without going through the tortuous procedures of the Competition Act 1980. He can therefore act as policeman, prosecutor, judge, jury and executioner. He is also able to levy unlimited fines—nice if you can get it.

Those are strong powers, but how do they fit in with the commission's report and how do they work in real life? Perhaps I may give a few examples. First, the commission makes the point on page 3 of its report that the regulators have a strong challenge in attempting to regulate powerful companies with, deep … knowledge … of the relevant technology, markets and physical infrastructure", with their core network containing "areas of natural monopoly". Those companies are run by substantial organisations, whose interests systematically conflict with many of the regulators' objectives". That applies to the railways, and to the owner of the infrastructure, Railtrack, in particular.

Perhaps I may give two examples. The first relates to the problem of information. The regulator has only a small staff and it is easy for big companies to flood them with information and to bury the important stuff in lorry-loads of paper. It will be ages before the regulator can find what he really wants—if he ever does. The second problem, resources, applies to all regulators. They may trumpet their independence, but they are beholden to the Treasury for the money to run their organisations. They are non-ministerial government departments. They are funded by the Treasury and are therefore subject to public sector pay policies. Licence fees are not hypothecated to the regulatory organisation and go straight to the Treasury. The Treasury can therefore exercise a large measure of de facto control by putting pressure on the regulators via their annual budget negotiations.

I turn now to the complexity of the railways. The railway industry is probably the most complex industry, with thousands of contracts and other legal instruments. Many of Railtrack's customers—if you can call them that—have difficulty in their commercial dealings with Railtrack. One rail freight company likened it to having to teach market economics to unreconstructed Russians, so tenuous was the grasp of Railtrack's headquarters commercial department of the most basic of commercial contract principles and practices. That is a pretty lamentable comment. The problem is that people have nowhere else to go. There is only one Railtrack and you have to deal with it. That is why there is a strong case for imposing on Railtrack the statutory duty to be efficient and economical in its dealings with dependent customers.

Does the regulator have any power to compel Railtrack to make up its investment spending shortfall? The answer is that the regulator does not have a lot of power in that regard. He can ask questions. Perhaps we shall hear what is happening in the network management statement tomorrow, although not a lot appears to be happening at the moment. Other regulators are able to ensure that competition can be financed. They can promote competition and can protect the interests of the consumer, as well as promoting efficiency and economy, research and development, safety, the environment and the protection of vulnerable groups of users. Let us examine whether that can apply to rail—and whether it does. Page 6 of the report proposes that the regulators should produce an "Applications of Principles" document which would indicate how they see their activities developing over the next three to five years. That aims to increase the certainty of those with interests in the regulator's activities. That is good for rail and must be encouraged.

It may also be useful for the rail regulator to adopt good administrative practice by giving reasons for his decisions, as he is required to do by the code of practice on disclosure of government information. That would assist in the establishment of transparency in the decision-making process and would increase the confidence of the railway industry that the regulator will look after those users who are dependent on the network.

Page 8 of the report contains another interesting quotation about transparency, consultation and consumer representation. It strongly recommends greater openness and transparency in decision-making by both the regulators and the Secretaries of State. The rail regulator should be encouraged to do that quickly.

I turn now to the issue of codes of practice for customers, partners and consumers (whether they are individuals, large or small companies or whatever). The gas and electricity industries already have codes of practice. They were established as part of the legislation. The Government forgot to do that with the railways in, I would suggest, their dogmatic haste to get them off their hands. There is no code of practice. There is no such statutory requirement, but I believe that such a code of practice should be established either voluntarily or compulsorily, depending on what progress is made. For customers of monopolies, there is always a natural fear of using the regulator to enforce the licence obligations, except in the very last resort, because if you upset somebody who is effectively the only source of supply for your business and that person turned nasty—I am sure that that would not happen—your business would really be at risk. It is important to bear that point in mind when consulting on such issues and asking about people's reactions. People may not react in public as they do in private—and with very good reasons, I believe.

What is the real objective of monopoly suppliers? Is it to encourage traffic? Is it to come up with new ideas for more cost-effective service provision? Is it to fight to eliminate unnecessary bureaucracy, which was, after all, the lifeblood of many of the old utilities, or is it to maximise profit for shareholders and hope that the customer goes away? I hope that it is not the latter.

Senior management say many of the right things, but delivery down the line is often haphazard, inefficient and the opposite to what one would expect of a big company dealing with its customers. In theory, the regulator has the power to point the monopoly supplier in the right direction in furtherance of his duties, but he desperately requires a comprehensive code of practice. I shall try to push forward this matter with Railtrack in the next few months. Perhaps it should be encouraged to come up with targets for increasing the amount of traffic that it carries.

In conclusion, I believe that the regulator is the sword and shield of the dependent user, but for rail he could do a great deal more to help people and organisations who are aggrieved and frustrated by the many shortcomings and inefficiencies that still exist in the industry. We shall continue to press for a code of practice to support participants, new and old, large and small, in this important industry.

4 p.m.

Lord Crickhowell

My Lords, I am grateful to the noble Lord, Lord Haskel, for giving us the opportunity to discuss this interesting and timely report. I shall speak about two particular aspects of the report. I welcome the fact, which was referred to by the noble Lord, Lord Haskel, that the Labour Party has learned something in recent years and has no intention of reversing the privatisations that it so bitterly opposed, for reasons made clear in the admirable maiden speech of my noble friend Lord Inchcape.

The noble Lord, Lord Berkeley, referred to the importance of the regulation of Railtrack. I suspect that even more important than the regulator's action will be the nature of the contracts with the operators and the effectiveness of the carrot and stick regime that they incorporate.

There is a great deal in the report that is of value. Like the Commission, I believe that legitimacy and accountability are facilitated by transparency. The provision, publicly, of full and accurate information by those who are regulated is a fundamental requirement for successful regulation. The regulation of prices would be relatively simple if the regulator had as much information as the regulated about demand and cost conditions. That is very rarely the case.

It is also a clearly observable fact that the cost of meeting environmental objectives is routinely exaggerated. Companies have an obvious interest in maximising the evidence of costs before regulatory decisions are taken and minimising them afterwards. Publication of all the information that is provided enables comparisons to be made and doubtful claims challenged.

In the first Ofwat review of water industry prices carried out in 1994 the initial phase of the examination was admirably open, although unfortunately the wildly exaggerated first estimates of cost were given unjustified credence by the director general, who used them as a weapon to try to limit charges by reducing desirable environmental programmes.

At least in the opening phase there was a vigorous debate. The NRA, of which at that time I was chairman, challenged the original estimates. Quite suddenly, just as partial realism was creeping in, those of us involved in the quadripartite discussions with Ofwat, NRA, the water industry and DOE were told that the more realistic numbers then emerging were price sensitive and could not be published. In my view that was a wrong and nonsensical decision. The figures that we were then talking about were not those for individual companies and they did not incorporate Ofwat's firm conclusions about K-factors. It is hard to see how they could have been price sensitive. If they were there must have been a false market based on the original estimates. This deplorable situation must not be allowed to happen again. I suggest that we follow the example of some US regulators and ensure that every figure at every stage is available for examination.

If I agree with the Commission on openness, I am deeply concerned about its proposal that the economic regulators should no longer have environmental duties, or at least that they should be secondary. It was unfortunate that the Commission, composed of a distinguished group of economists and business experts, did not include an environmentalist. I believe that the Commission is correct in stating on page 6: In the case of the environment, the Environment Agency can impose binding obligations the cost of which the industry regulator has to allow to be passed on". It goes on to say on page 44: The industry regulator has to allow the affected utility suppliers to pass through the costs of meeting enforceable prescribed standards. For this reason, the suppliers have little or no incentive to challenge such standards or to oppose proposals that involve costs out of all proportion to the benefit of consumers or other members of society. The industry regulator's knowledge and objectives make him/her a very suitable advocate of the consumer interest in the process of establishing and implementing environmental standards". While it is true that the industry regulator must allow the cost of existing European Union and UK statutory obligations to be passed on, he can effectively block environmental proposals to which the environmental regulator may attach a very high priority. In 1994 Mr. Byatt, basing his case on the exaggerated estimates of the cost of EU regulations, argued that those costs were so substantial that no other additional regulatory requirement should be permitted. The NRA pressed its case very hard and in the event the Secretaries of State approved expenditure that allowed for some of the most urgent non-statutory schemes.

It is absolutely right that the Environment Agency should have a duty, as it has, to take account of costs. Given the development of statutory water quality objectives or wider environmental quality objectives, there is an instrument for costing those objectives and consulting upon them. But it is also essential that the director general should be obliged to take account of the need to protect and improve the environment.

The commission has stated that the industry regulator's primary obligation is to consumers. Mr. Byatt used to refer to "customers". But it is not just those who pay the bills or turn on the taps who are affected by decisions that are taken on charges. Equally affected are the wider public with an interest in preventing pollution, excessive depletion of the water table and ecological damage to rivers. Those are not matters that should be regarded as subordinate or residual obligations. If they continue to be regarded as important, as I hope they will, and not secondary objectives the industry regulator has an incentive to improve his inadequate consultation procedures.

In 1994 I was shocked and dismayed by the ignorance and lack of interest shown by the chairmen of the Ofwat consultative committees on environmental matters. Their consultation procedures at that time did not match those put in place by the NRA, which had been inherited and developed by the Environment Agency. The fact that the Environment Agency has a duty to consider the economic implications while the industry regulator must take account of environmental requirements does not prevent a tension between the two that is entirely appropriate and helpful.

I welcome the fact that at the present time the Environment Agency, the Drinking Water Inspectorate and the director general are working closely to establish improved arrangements for the preparation of material for the next review, but that must not lead to excessive cosiness. I do not apologise for the fact that during the last review there was a vigorous debate about these matters between Ofwat and the NRA. As a consequence, we got much nearer the true costs and protected vital environmental objectives while reducing the burden on those who paid the bills. Transparency must involve not just the publication of facts and figures but open debate about their legitimacy, what the public and the customer want, priorities and affordability.

4.10 p.m.

Lord Paul

My Lords, I have an interest to declare. I am chairman of Caparo, an industrial group which is a major user of energy in the engineering industry, and a former president of the British Steel Producers Association. I read the report with interest and welcome its call for tougher regulation. I congratulate my noble friend Lord Haskel on introducing the debate at such short notice and I wish my noble friend Lord Currie good health. I also congratulate the noble Earl, Lord Inchcape, on his maiden speech. His father was respected not only in the City of London but in the country of my origin, India. I know how daunting it is to make a maiden speech, having done so only two months ago.

Industry is very much at the mercy of the utilities. Few companies are large enough to provide their own supplies of gas, water and electricity. An adequate supply of those commodities is essential to competitiveness. The concern is that the utilities should be not only efficient, economic and safe, but that they should also carry out research and development from which industry will ultimately benefit. Existing legislation imposes a duty on the regulators to do that, but their attention seems to be diverted to the more powerful lobbies of the domestic consumer and the environment. The DSS and the Environment Agency have responsibilities for those. Who is looking after the efficient supply of commodities to industry? For instance, the supply of electricity to industrial users seems to be in the hands of a financial market which has little relevance to the needs of the industry. Is the Minister aware that such an important commodity for British industry as electricity is left to the kind of paper market which guesses what the price will be at 30 minute intervals, thus raising the cost to large consumers?

A pricing structure of such volatility and short-term outlook places British industry at a severe disadvantage to its international competitors. Even though they have a declining share of the market, most of the time the prices are set by National Power and Powergen. The regulator has failed to break the monopoly of the generators.

Converting a state monopoly into a private monopoly can be dangerous unless the private monopoly faces strong competition. Whenever examples of good privatisation records are given by the Benches opposite Members nearly always quote British Airways and British Steel. Those companies are successful because of competition not because of regulation. Competition is the best regulator, but, in the case of the utilities, that will take a long time.

The Minister will doubtless point to a reduction in price. I believe that it is not nearly enough. Fuel costs have declined by 50 per cent. and we have all heard about the savings in labour costs. Perhaps the regulator will inform consumers how the prices they pay are made up between the raw materials bought by the utilities and the value they add. The price reductions claimed by the managements of the gas and electricity companies are due almost entirely to the reduction in the prices of coal and gas. The major part of those savings remains with the generators. That is why National Power and Powergen have been able to increase profits year on year despite a declining market share.

It appears impossible for the regulator to get to the bottom of the matter. The regulator depends on the generators and distributors for information. The UK generators have diversified overseas and overseas companies have come into the UK. There is no unity of transparency of accounting. A fundamental problem for regulators is that they are dependent upon information about the true costs of industry from the management of the companies. Those managements have a clear incentive to obscure the picture. And so we have the regulator second guessing the company and the company second guessing the regulator. Of necessity, the regulator has to make comparisons between competing companies. That is becoming more difficult as companies merge, are overtaken by overseas businesses and themselves diversify into other countries and businesses.

A major concern for industry is the ownership of the suppliers and distributors of gas, water and electricity. Ownership is not transparent and it could be that the supplier of an important commodity is one of our competitors. Competitors can gain useful information about each other through their use of energy and water. If they behave in an uncompetitive or predatory manner the worst that can happen is a reprimand.

Let us compare the situation with that in the United States where regulation is much tougher. There an electricity supplier must reduce its price if another electricity company elsewhere in the US can supply at a lower price. Furthermore, in the United States one can learn a lot more about one's suppliers and competitors because company regulation is much more transparent. The filings of the US Securities and Exchange Commission make public a great deal of information which is not available in the UK. The penalties for filing wrong information, or for predatory or non-competitive action, are much higher. Firms can be fined their entire annual profit. Only last week Nynex, the telephone company, was ordered to pay 110 million dollars to its customers in New York State for shoddy services and improper business practices.

I am pleased to note the report's proposals regarding the accountability of the regulators. No one is clear to whom they are accountable. Appendix 5 of the report states that they can advise the Secretary of State for Trade and Industry and they seem to be appointed by him. That is a nice basis for a cosy relationship. The report's proposals to open up the selection procedures as established by the Nolan Committee and for having the public appointments unit oversee the appointment of the directors general is a sensible precaution.

I welcome the report's recommendations, but perhaps they do not go far enough. One suggestion I would make is that all utilities make annual public reports containing the detail and information required by the SEC so that those in business know who they are dealing with, what they are paying for, and where the profits are coming from. In that way we could work much more in a spirit of partnership and equality with the privatised utilities. That in turn would help British industry to remain competitive.

4.18 p.m.

Lord Dubs

My Lords, I congratulate the Hansard Society on its report, which is interesting and timely; my noble friend Lord Haskel on introducing the debate; and the noble Earl, Lord Inchcape, on his interesting and effective maiden speech. His speech contained a great deal of detail and he will forgive me if in a moment I differ from him in one respect.

I say at the outset that I believe that all the regulators are doing a good job, especially given the constraints under which they have to operate. I say that because some of the things which other noble Lords have said and that I shall say might be seen as criticism of them; it is not. It is a criticism of what was forced on them through the way in which the Government privatised those many industries.

The regulation of the privatised utilities is a difficult concept and real problems are posed as to how regulation will evolve in the fullness of time. That is something that we shall continue to discuss and argue about for many years. As the noble Lord, Lord Ezra, has said on a number of occasions, those industries should not have been privatised until more was done to ensure that competition was in place. Monopolies have been privatised with competition introduced several years later. In the meantime, the regulator has had to deal with the difficulties of a monopoly situation and the possible abuses of the power which resulted.

I was fortunate to be able to spend a couple of weeks in the United States last summer and I talked to one or two of the regulators. They too are struggling with difficult concepts. I switched on my radio one morning and I heard on a local radio station—I think it was in Oklahoma City—an individual who had won the primary election in order to stand for election to the regulatory body. I do not argue that we should elect our regulators or regulatory boards in this country. However, it was interesting to hear on the radio an extremely impassioned statement as to what that individual would stand for if elected. That brought the whole process into the open. That is something that we need to do, I hope by methods other than having elections for every regulatory body which is set up. The Americans are doing that somewhat differently, but we have something to learn from them.

There are two basic objectives: the first is to achieve competition and choice in services for consumers; the second is regulation where competition cannot be fully achieved or has not been achieved so far. But I believe that even if we achieve full competition—whatever that means—we shall still need to have regulators for those industries. Perhaps I may coin a phrase and say that I believe that the regulators can reach the parts which competition does not reach.

Perhaps I may illustrate that. There will need to be regulation of the pipes and wires which will supply the common services which individual companies will tap into for gas and electricity. We need regulation to avoid cherry-picking; to avoid a system that, through a price structure, might penalise poor consumers. We need regulation to ensure that environmental considerations have sufficient priority in the scheme of things; and we need regulation to try to encourage the companies to do more about energy efficiency.

Perhaps I may put forward figures relating to the performance of some of the utilities since privatisation. If one takes all the gas, regional electricity and water and sewerage companies together, since privatisation—that is, from the time that they were privatised to the present time—the number of employees has fallen by more than 20 per cent.; directors' remuneration increased by nearly 46 per cent.; pre-tax profits increased by nearly 12 per cent.; and complaints increased by 75 per cent. Let us take British Gas as one example. The number of its employees fell by 37 per cent.; its directors' remuneration increased by 280 per cent.; its pre-tax profits fell by nearly 59 per cent.; and complaints increased by 100 per cent. It seems to me that there was no question of performance-related pay there. But that is public knowledge.

We have moved through mergers and takeovers to what in some respects is a completely different company structure from that which existed when privatisation first took place, especially in the electricity industry. We have seen the beginnings of competition as regards domestic consumers of gas in the south-west. There has been a myriad of stories about improper behaviour and how the Devon County Council trading standards investigation revealed practices which were undesirable. There was a referral by the Gas Consumer Council to the Director General of Fair Trading, and other companies made offers but had to withdraw them because they excluded pre-payment meter customers. All that must be brought under some form of control. That clearly did not happen in the south-west. I hope that all the companies which intend to move into that area will take note of what has happened.

It is often asked to whom the regulators are accountable. They are appointed. Are they then to be left to make their own decisions without reference to anyone else or any body? At the moment, that is not clear. But I agree with the suggestion that we may need a board, perhaps of non-specialist advisers or non-executive directors, to work with each regulator, and with which the regulator would have discussions and involving some accountability. We need to be clear whether we are talking about advisers or non-executive directors because non-executive directors would be answerable for the decisions made. We need to consider those areas further and reach a conclusion about them in the future.

I agree with the noble Lord, Lord Ezra, that, when competition for domestic customers has been put in place, we might consider merging the gas and electricity regulators. They have more in common with each other than with other regulators and that would make sense.

The noble Earl, Lord Inchcape, was full of praise for the privatised utilities and said how much they had lowered their prices and so on. Perhaps I may put forward some other arguments. Our electricity prices to consumers are about double the average charge in the United States. I would like to know why that is so. The price of gas may have come down recently but there was a large increase in gas prices just before privatisation and that set the level against which we should judge today's prices. As regards British Telecom, between 1990–91 and 1994–95 British Telecom's charges to business users fell by 20 per cent. but charges to residential customers fell by 1 per cent. It seems to me that that poses a question as to how well the process has been working.

We all know what has been the public perception of boardroom excesses, share option packages and monopoly profits which followed the initial privatisation of many of those industries. The situation may be better now. Some of the people who derived personal fortunes from that may no longer be in those companies, although some perhaps are. Behaviour is perhaps now more responsible, but the public perception remains.

When I was in the United States in the summer, I discussed some of those matters with people in those industries. They were appalled by some of the large sums of money which the directors of those privatised industries were putting in their own pockets. The American perception is that if the private enterprise system is to work it must do so with a measure of public consent. The Americans know that and they are more restrained in what they do than some of the privatised industries were just after privatisation. If there is no public consent there will be a great deal of dispute about the way in which those industries operate, which is surely not healthy for the economy or the industries themselves.

Regulation is also necessary for the protection of the environment. I believe that there should be a legal obligation that these utilities should provide energy efficiency services. We may discuss whether regulation of emissions of, for example, CO₂ would be best regulated by an environmental agency or the industry regulators. But most of us would agree that there should be some such regulation.

In the case of water, I believe that there should be mandatory leakage reduction targets. Perhaps there should also be targets for the length of time that the regional electricity companies take to repair cables. In the cold weather not long ago, it took those companies a long time to repair cables and consumers were left without supply for far too long.

After all, consumers need reliable, assured, good-quality supplies. There has been a report that one of the regional electricity companies has been surveying customers to see whether they would accept regular power cuts in return for lower prices. I hope that that will not be foisted upon people. It would be highly undesirable. It may be that some industrial users would be able to deal with power cuts if they do not have continuous manufacturing processes. But I do not believe that domestic consumers should be pressurised, bribed or obliged to settle for such an arrangement.

The regulators should ensure that the protection of the consumer is given much higher priority than it is at present. That is what I would like to see and that would be the proper way forward. As other noble Lords have said, the whole structure of regulation should therefore be more accountable and open. The way in which the regulators themselves are selected and appointed should be part of an open process. It would be a good idea, as the Hansard Society report says, that there should be a code of practice. The regulators should give full public reasons for the decisions they make and there should be proper consultation procedures about some of the areas in which they have to make difficult decisions.

I thought hard about whether the industry consumer bodies should be part of the regulatory system or should be independent of the regulators as in the case of gas. Some of the regulators believe that their consumer bodies are more effective within the regulatory structure but, on balance, I believe it would be better if they were independent of it. That is certainly a view taken by the Consumers' Association.

I also believe that consumer bodies themselves should have the right of appeal against decisions which they judge to be against the interests of consumers. The Hansard Society report says that utilities should be allowed to go bust. That is right in principle, although in practice I find it difficult to see how the regulators would allow that to happen. Perhaps that is something on which the Minister could give some guidance.

Competition policy has to be toughened up. I like the suggestion of the Hansard Society that legislation modelled on Articles 85 and 86 of the Treaty of Rome should be brought in with powers to enforce anti-competitive practices. There should be a method whereby companies could appeal against the regulator if they did not agree with the regulator's decision.

There is a case for parliamentary oversight of the regulation process. The idea of a Select Committee, possibly of both Houses, might be a useful way of keeping under permanent scrutiny the way in which the regulatory process works, because all these industries have a regulator. However, we would have to be careful that we do not come into conflict with the powers of the departmental Select Committees in the other place. I believe that we can find a way of achieving the right balance.

I understand that the regulators themselves talk to each other; they have a structure now for doing this. I believe it has been called the college of regulators, with parallel staff meetings. That is a good idea and would enable the input into a Select Committee to be effective.

I conclude by saying that the Hansard Society report has been invaluable to us in allowing us to have a debate and in to focus our minds on what are the real issues in the regulatory process. I believe that the aim of a regulation policy should be fairness and efficiency so that consumers are protected and safeguarded.

4.33 p.m.

Baroness O'Cathain

My Lords, the noble Lord, Lord Haskel, replaced the noble Lord, Lord Currie of St. Marylebone, to whom we send our best wishes. He has done a great service in introducing this debate to call attention to the report published by the Hansard Society together with the European Policy Forum. The poor old European Policy Forum has not been given much credit today for its part in the publication of this report of the Commission on the Regulation of Privatised Utilities.

The report is excellent in its analysis. All who read it will increase their knowledge base of how the regulatory system works. The 111 pages of closely typed and small print demand a fair amount of time and concentration, but it is time well spent. I shall use the report to draw conclusions which are not necessarily dealt with in detail in the report but which seem to me to be important when we consider this most important sector of the national economy.

The debate has naturally and inevitably concentrated on the duties of the regulators and the operation of the regulatory system: Oftel, Ofwat, Ofgas and Offer. A case for reviewing the regulatory system is made, but let us not believe that the regulators themselves are not frequently examining their own operations and considering how they can improve them. I believe it to be of fundamental importance that in the case of every recommendation in this report the question must be asked: how is the customer likely to benefit from the changes suggested? Of equal concern, bearing in mind the fundamental importance of these businesses to each one of us every day of our lives, is the added question: how can these utilities, subject to this regulatory regime, cope with more and more demands of a non-customer nature being put upon them?

Very frequently, the process is sacrosanct. The results of process are assumed to follow as night follows day. But there never seems to be much emphasis on the results of the process, or certainly not as much as there is on the process itself. We should also remember that the implementation of recommendations will almost certainly carry with it a cost. We cannot allow theory and concentration on the process to militate against efficiency.

Mention of the fact of concentrating on process and theory reminds me of a lovely, and true, story told of one of my economics lecturers. He went on to reach dizzy heights and his name would be known to each one of your Lordships, but I spare his blushes today. One day he agonised for hours over a specific policy proposal and eventually said, "Yes, I can see that it will work very well in practice, but how about the theory?" I hope that we do not get confused between the process and the results.

The justification for this report and the work of the commission is contained in the first sentence of the foreword. I did read the report; do not think that I am just concentrating on the first sentence of the foreword. It says: Public utilities are rarely out of the headlines. The way in which such basic staples as energy and water are provided and regulated is understandably a matter of continual public attention". Everyone will agree that regulation is necessary, but we must take cognizance of the fact that all of these utilities have undergone enormous change in a relatively short space of time, setting themselves up as privatised organisations, moving from what one could call a dependency culture to a consumer and customer-oriented business, changing from a sheltered financial position to one where they have to survive on their own financial acumen. All of this has imposed huge workloads and culture change and indeed has produced new problems. It is most important that we are not instrumental in putting yet more heavy burdens on them. None of these burdens can guarantee a better customer service or indeed lower customer prices.

All businesses—dare I suggest even governments and government departments—should constantly ask these questions. What have we learned or what are we learning from the systems we have adopted? If starting from scratch, would we be doing it this way? The most difficult question arising from the answers to these two questions is: is it wise to change? In other words, will the benefits outweigh the inevitable disruption and probable extra cost caused by the change?

It is easy for economists, management consultants, accountants, policy analysts, civil servants and politicians to see flaws, because most of us as a collective group look only for flaws. Success is at worst anathema and at best accepted without comment and certainly without congratulation. Of course, serious flaws must be sorted out, but less serious flaws should be dealt with on an evolutionary basis and in an evolutionary manner. This sounds as though I am advocating a softly-softly approach, which is wholly uncharacteristic of me. My attitude is usually to say, if there is a problem, "sort it out". In one sense I am advocating a softly-softly approach, but I would like to justify this by a quick analysis of where the utilities have come from and what changes they have had to make at every level since they have been privatised.

I have five points. The public utility reported directly to Ministers. The Ministers and officials took total responsibility, in effect. The privatised utility had to set up a board, work within the terms of the Companies Act, abide by Cadbury, Greenbury and, soon to come, Hempel and report to shareholders.

Secondly, the public utility was able to rely on Ministers and officials to take responsibility and even take the rap for policy decisions. The privatised utility has to devise, initiate and monitor policy, subject to scrutiny from the regulator, the media, customers and shareholders, to mention just a few and not in any order of importance.

Thirdly, the public utility never had to worry about its future capital and revenue financing. Yes, there were periods of financial stringency, but it was never the fault of the utility; it was always the fault of "the government". The privatised utility, on the other hand, has to negotiate its own financial security with banks and other financial institutions, develop pricing policies, become adept in financial matters—in effect, survive financially.

Fourthly, as it was production and distribution oriented the range of skills required to operate a public utility were mainly technical in nature and fairly few in number. The privatised utility, on the other hand, has of necessity to employ a whole new range of skills (or competencies, as the jargon now calls them): for example, marketing, financial management and customer relations, just to mention three.

Fifthly, and finally—this is just a sample of the differences—operating in a state monopoly environment the public utility was cushioned from the customer, being supply and production oriented in the main. The privatised utility, on the other hand, operating in the competitive market, has to concentrate on customer satisfaction.

The conclusion I wish to draw from this quick analysis of the differences between the public and privatised utilities is that yet more change could lead to overload or indigestion, and we ought to be wary of that. The noble Lord, Lord Ezra, suggested that, as privatisation of the utilities took place quite a long while ago, the time is now right to consider change. The privatisation of British Telecom took place in 1984 but that of the regional electricity companies took place only in 1990 and that of British Energy only last year. I do not know what a sensible "bedding down" time is but I suggest that it is a little more than six years in view of all the work—

Lord Ezra

My Lords, I referred not only to the length of time but also to the significant changes that have taken place in certain of the sectors, particularly gas and electricity.

Baroness O'Cathain

My Lords, that is, of course, a valid point. I thank the noble Lord for mentioning it. However, I believe my point still stands; namely, relatively few years have passed in terms of the privatised utilities having to develop a completely new ethos and culture and learn new skills, and we shall create difficulties if we tamper with them once more.

The recommendations in the report concerning the workings of the regulators' own operations not impinging on the operations of the utilities is another matter. I was heartened to note—a couple of other noble Lords have mentioned this—that on page 47 of the report the commission agrees with the suggestion made by some witnesses to the commission that it would be helpful for the regulators to be able to call on a board of independent individuals, but not those representing sectional interests. That is a terribly important point.

It should be stated that regulation has been a terrific success. The regulators ought to be congratulated on all that they have achieved. I was pleased to hear the noble Lord, Lord Dubs, make favourable comments about the regulators because they have achieved a great deal. Their contribution to the success of the privatised utilities is acknowledged by the said utilities—and what better commendation could there be?

In my home area there has been a reduction of 22 per cent. in annual electricity bills in real terms since 1991 and there has been much better customer service. These improvements have been brought about by the combination of competition and action taken by the regulators. This combination, regarded by the electricity company as a double edged sword—that is, it cuts both ways—operates wholly in favour of the customer. The regulator has played a serious role. For example, the simple introduction of league tables has resulted in much better service and the electricity company—Seeboard in this case—is rightly proud of its number one position nationwide, but conscious that it has to work even harder to maintain that.

Another simple but most effective action by the regulator has been the hugely improved standards of customer service. There is a list of "offences", mistakes or inadequacies—call them what you will—which the regulator has drawn up and which incur fines. One such is that if the utility makes an appointment to read a meter and fails to arrive at the time promised it incurs a fine of £20. In 1996, of the 411,000 appointments made, only one failed to meet the promised time and incurred a fine of £20. If we recall the days when we had to stay in to wait for the meter reader and all the rest of it, the present position is a sea-change.

The relationship between the regulator and the private utilities is excellent. In the regional electricity company that I have named there is regular communication and a deep understanding of the problems and concerns expressed by both parties. It could well be described as a partnership based on the sole objective of ensuring that the service provided is the best possible.

It is imperative that that success is built upon and not tampered with or harmed in any way. It is only by striving for a stable environment in which the utilities operate that it can be guaranteed that the ultimate customer—you and I—will continue to benefit. What no one needs is uncertainty. Uncertainty and change there will always be but some uncertainty is created by political dogma, and that is the uncertainty the utilities can well do without. I make no bones about referring to the current uncertainty created by statements that the party opposite would bring in a windfall tax on the privatised utilities if it got into power. That is greatly exercising the utilities at the moment. Not only would it be a retrospective and possibly illegal tax; it would also weaken the financial base of the utilities and in turn would lead to higher prices for customers. I know that the party opposite is usually most concerned about unemployment, but such a step could ultimately lead to job losses.

But leaving aside all of that, will the party opposite consider how it can justify such a volte face? When the proposals to privatise the utilities were produced by this Government, the Opposition fought them tooth and nail and in doing so they talked down the price. The utilities were sold cheaply. The businesses have capitalised upon that, with magnificent results for customers, and now noble Lords opposite want to milk that. We should be extremely grateful for the success of both the utilities and the regulators and subscribe to the maxim "If it ain't broke, don't fix it".

4.46 p.m.

Viscount Hanworth

My Lords, I too with to thank the noble Lords, Lord Currie and Lord Haskel, for their respective roles in promoting this important debate. And may I also offer my congratulations to the noble Earl, Lord Inchcape, on his maiden speech?

Since my noble friends have dealt in detail with many of the technical points which arise I feel free to be more discursive. More than 40 years ago, the American economist John Kenneth Galbraith, wrote a small book, American Capitalism. The thesis of the book was there was a remarkable disparity between the ideology of American business enterprise—its self-image, if you will—and the realities of American industrial organisation.

Since much of the book was to be devoted to an analysis of economic mythology, Galbraith thought it appropriate to begin his account with some words which can be found at the start of the tract of John Maynard Keynes, The General Theory of Employment Interest and Money.

Keynes, in his introduction, observed: The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood—Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist". That is not an attractive passage. It is a distasteful display of arrogance on the part of a professional economist. However, as Galbraith explained in his book, Keynes's dictum provided an accurate summary of the state of mind of the American business establishment in the 1950s. What is also clear is that it summarises the outlook and the mentality of the political party which has been in power in Britain over the last 18 years.

The economic theories which have held such sway arose at the end of the 18th century and are commonly associated with the name of Adam Smith. As many will readily recall, Smith asserted that if it were allowed to operate without hindrance and intervention and if individual self-interest were given free rein, then the economy would be guided, as if by a hidden hand, to a state in which the wealth of the nation would be maximised and in which competing interests would be reconciled in a manner which would be to the benefit of all concerned.

Among the major hindrances to the free operation of the economy, Smith identified the power of monopolists. Prominent amongst the monopolies which he observed were those which had been sponsored by the state, many of them in association with the military provisioning of the wars with France. He attacked state monopolies with particular venom. Neoclassical economic theory, which is Smith's intellectual legacy, was invoked by the Thatcher administration in its pursuit of the denationalisation of Britain's public utilities. These were to be taken out of the hands of the state and subjected to a regime of competition which would restore their health and eliminate their supposed economic inefficiencies. Some weak guidance was to be applied by independent economic regulators whose role was to monitor the performance of the denationalised industries and to ensure that they had been purged of their erstwhile tendencies; but it was envisaged that, ideally, this role would be largely superfluous.

That was the ostensible purpose of privatisation. But little has been done to ensure that privatised industries should be subject to competition. Many are the subjects of natural monopolies, and it is impossible to populate them with the competitive enterprises of neoclassical economic mythology.

Such provisions as have been made to induce competition are bizarre in the extreme. The competition in rail franchising has been a mad scramble for windfall profits. The competition in the gas industry promises to be competition among rival sales forces to bamboozle the public with a confusing array of discounts, rebates and loss-leaders, all designed to market an identical project piped through the self-same gas lines. In the case of water and sewerage, there really is no possibility of any meaningful form of competition.

We should have no doubt that the real purpose of privatisation has been to make it almost impossible for industries to fulfil the social agendas which were envisaged when they were nationalised.

I may say that some of us—perhaps there are many—on this side of the House are proud of the history of the nationalised industries in this country. Nationalisation was applied to a set of industries which were in a state of chaos and dilapidation. In some cases, notably mining, the industries had been notorious over many years for abusing their workforce. I think that it is true to say that the nation at large had a high regard for the nationalised industries in their heyday.

Moreover, it is becoming clear, in the light of recent academic research, that far from being examples of economic efficiency, some of the industries in question had records of investment and innovation which were markedly superior to those of similar industries, in the United States and elsewhere, which were the subject of so-called free enterprise.

According to the thesis of Professor Galbraith, it was quite inappropriate to describe the conditions under which the analogous American utilities were operating as free enterprise. The industries of transport, electricity supply, telecommunications, and so on, were each subject to an active regime of federal regulation which did not hesitate to set the prices and other essential parameters within which they should operate.

It seems surprising, at first, that, under such circumstances, so little complaint was heard from the industries regarding the heavy interference of the state. However, the fact of the matter was that the federal regulatory commissions had been so deeply penetrated by the industries themselves that it was often difficult to determine whether they were working in the interest of the state and of the consumer or merely of the industries. This is a hazard which, in this country, we must resolve to avoid.

In particular we ought to heed the example of the electrical supply industry in the United States. That industry has been subject to a form of regulation which has allowed it to withdraw its services from low-income inner city areas with the result that some urban ghettos are now completely bereft of electricity. That is an extraordinary circumstance which should not be tolerated in any advanced industrial country in the 20th century.

In this country, there are already some disturbing analogies with the American experience. Some of the erstwhile public utilities are currently pursuing pricing policies which are bound to compel poorer people to forego what have long been regarded as the basic amenities of life; namely, water, gas and electricity. Moreover, it seems that there is little that industrial regulators, with their present, inadequate, powers, are capable of doing to avert this circumstance.

Another experience of American federal regulation has been the sporadic episodes of state intervention, ostensibly designed to foster competition, which have utterly disorganised the industries in question. The two best known examples concern the telecommunications and the aviation industries which have both been subject to federal cartel busting.

Among the more felicitous consequences of those interventions is that Britain's own air passenger and telecommunications industries have been able to exploit the opportunities which have arisen to become major players in global markets at a time when their strongest competitors have been disabled. We ought to heed that warning as well.

The point of these stories is to assert that economic regulation has to be attuned to the circumstances of the industries concerned. It cannot afford to be the product of a preconceived ideology which is intended to be applied across the board and which is liable to be applied sporadically.

In this country, we have already seen some of the deleterious effects of applying the free-market ideology to nationalised industries. It is simply not enough to place the task of regulating a major industry such as gas, water or electricity in the hands of a solitary professor of economics suffering an unaccustomed degree of public exposure or in the hands of some worthy doyen of consumerism. In the words of Galbraith, there is a need for a strong countervailing force which can stand in opposition to the considerable economic powers of the industry.

In the case of the telecommunications industry, for example, we need to guard our national interests and ensure that the path of technological innovation is a smooth one. In the case of the domestic utilities of gas, water and electricity, we need to bind the industry to a social contract. In other words, the state itself, following socialist precepts, must enter the demand side of the market to ensure that the interests of the consumer are not sacrificed to the uninformed forces of the market or to the greed of a new class of corporate moguls.

4.55 p.m.

Lord Peston

My Lords, it is an excellent report; and it has been an excellent debate. I add my congratulations to the noble Earl on his maiden speech. I think I heard him say that it was 40 years before his father made his maiden speech, and two years have elapsed before he now makes his maiden speech. I believe that there is more to human life than speaking in your Lordships' House and I see no reason to apologise for taking time on these matters. On the other hand, I found his speech interesting and robust. I hope that he will be encouraged to speak again before another two years elapse.

The report is of great value. The chairman, John Flemming, is one of the most distinguished economists in the country. He got together a group of members of extraordinarily high standing. One can always think of other interests that one would like to have on such a commission and—dare I say it?—I think that probably there are too many economists in areas where other issues need raising. Nonetheless, the members are all to be congratulated.

It is a most appropriate time for such a debate. We are at the end of an era of economic policy making. We shall soon have a new Parliament and a new Government whose task will be to lay down the foundations for economic efficiency and prosperity for the new millennium. I do not wish to exaggerate, but I think it is obvious to all of us that the performance of the privatised utilities will be a significant factor contributing to that, as will the behaviour of the regulators. My noble friend Lord Paul was right to emphasise how important that is for the future efficiency of industry in general. The noble Baroness, Lady O'Cathain, was right to emphasise more generally the customer interest in this matter. But one should not forget that the customer interest includes the interest of industry. The noble Baroness rightly emphasised the importance of practice. However, to refer back to her joke, the trouble with practice is that it is excruciatingly boring. What is really interesting is theory. That is why some of us at least concentrate on matters of that kind.

A paradox to which I must refer at the outset concerns the intellectual origins of regulation in this country. It used to be associated with the so-called revisionist wing of the Labour Party. The late and lamented Anthony Crosland took the view a long time ago that nationalisation was really an irrelevance and that where monopoly was inevitable the public interest could be better served by regulated private ownership. It is intriguing that such a philosophy, rejected by his own party at the time, was adopted and adapted by this Government. I say "adapted" because I do not believe that Crosland would have favoured selling off the public's assets at prices so disadvantageous to the long term interest of the taxpayer. I believe that he might have advocated retaining an equity interest in all the relevant concerns. But those are technical matters.

Having made that point, let me make another point in the Government's favour. Most economists, including myself, had taken it for granted that we are dealing with the so-called natural monopolies. I think that the noble Lord, Lord Ezra, used that expression, as have others. Indeed the Government seemed to start from that position. The privatisation of gas was an example; and the way electricity was privatised into what was essentially a duopoly was another. Interestingly, since then, thinking has moved forward. As the noble Lord, Lord Ezra, said, the regulators are supposed to encourage competition. The Government have at least started to do some of the things that they can do to promote competition. Most of what has happened so far is experimental. I agree with my noble friend Lord Hanworth that some of the experiments seem a little silly. Nevertheless, trying to be objective, if we are to have the utilities within the private sector, but regulated, it may well be that we can think more imaginatively of possible competitive solutions or analogies. It is certainly a subject worth thinking about. The whole point is that regulation was, and continues to be, experimental.

I was involved from these Benches when some of these issues were debated. Those who devised the original legislation, and those of us who argued about it, did not fully appreciate what was in the process of being developed, rightly or wrongly. I have no difficulty in confessing that I did not anticipate for one moment many of the important and interesting problems that have emerged. That is one of the reasons why the Hansard Society report is of such value. It is also why I think all of us—not least, the Government, but outsiders as well—need to take a long, hard look at the regulators and the process of regulation. Here again. I am afraid I disagree slightly with the noble Baroness, Lady O'Cathain. I do not think it is too soon to examine this matter. If we are to learn from what is going on, we have to examine the process of regulation more or less continuously through time just to see whether we can do better. That is effectively the point made by the noble Lord, Lord Ezra.

To revert back to the remarks of my noble friend Lord Hanworth, as I understand it, the regulator is meant to create an operating environment that is analogous to the working of the competitive market. It is all a bit peculiar, because three of the four Acts of Parliament to which we are referring—leaving aside the water Act, which is the most peculiar Act of Parliament altogether—use the expression, "meeting all reasonable demands". As I have said before in this House, the concept of "reasonable demand" does not exist in economics. I have not the faintest idea what it is supposed to mean. I have asked more than one Minister sitting on the Benches opposite to give an account of it. I must tell the noble and learned Lord that I do not insist that he does so today. The point is that the competitive market certainly does not operate on any concept of "meeting reasonable demand". It operates on the concept of "meeting demand". That is different altogether. That is therefore one of the problems for the regulator; he is supposed to see that "reasonable demand" is met, when some of us believe it to be a meaningless concept.

More generally, producing an analogy to the competitive market is easier said than done. We have to recognise that competition in the real world is a highly dynamic process. It is far from the static model so beloved of economics textbooks and academic articles, and—dare I say so?—professors of economics.

The important point to bear in mind—this is a great problem for the regulator; I am certain it is one that noble Lords on the other side of the House appreciate—is that in a competitive environment it is still possible for a firm to earn very large profits. Therefore the appearance of large profits is not necessarily an indication of lack of competition. That is particularly the case if new competition can appear. The sophisticated view of competition is that such profits are meant to bring in new competition and then they are driven away. How is that to be simulated by a regulator? I have very little idea as to how that could be so. In some cases, as my noble friends pointed out—for example, local water supply—it is impossible. Hard as I may think, I cannot think of a way in which to achieve "free entry" into a local water supply. But others more intelligent than I may be able to do so.

The second point about an analogy with the free market—a point made in the report—is that profits are justified as a reward for taking risks. But one of those risks is the risk of bankruptcy. One matter that is not fully appreciated is that the regulator must regulate in such a way that bankruptcy still remains possible. I know it is difficult, but that is so. If the regulator allows the use of market power to avoid the risk of bankruptcy, shareholders in the privatised utilities are, ipso facto, being over-rewarded.

One of the main objections to monopoly generally is that the owners of the monopoly firm are rewarded by more than is necessary to bring forward the output in question. That is what the regulator is supposed to prevent. The evidence is that, typically, he does not, but the point can be argued.

In my view it is a genuine error to say that monopoly profits are acceptable if they are ploughed back into investment. It is simply not a valid argument. Monopoly profits are not acceptable, end of story. If investment is desirable, it must be financed in the normal ways. What worries me slightly about the regulators is that they seem to have fallen for that argument.

My noble friend Lord Hanworth referred to the "arrogance" of a professional economist. Speaking as an arrogant professional economist, as he well knows, perhaps I may make one point about the windfall tax. It is a well-known proposition in first-year economics that proportionate tax on the profits of a monopoly has no effect on allocation of resources, price or anything else. Therefore it is simply impossible that the windfall tax that my honourable, right honourable and noble friends wish to introduce could have the adverse allocative effects that are sometimes suggested. The alternative is that economics is wrong—which I, of course, find impossible to believe or even consider. It is very important to bear in mind that there is nothing simple in this world.

I wish to refer briefly to one other matter which I believe should be debated in this House at some time. Several noble Lords referred to transparency and how the regulators can be appointed. The report refers to this whole area of raising constitutional matters. It states: too little attention has been given to the implication of such changes for accountability and democratic control … Today, the role and powers of the regulators give rise to important constitutional questions". The report is entirely right in that regard. It is not obvious to me that those of us who are either economists or business people are the right people to be discussing that issue. But some of our colleagues in this House might well take the opportunity to have a debate of their own examining the constitutional side. It is not a trivial matter to vest such great powers in people of this sort without considering what that means for the political process.

In conclusion, I congratulate all those who took part in the debate.

5.8 p.m.

Lord Fraser of Carmyllie

My Lords, I listened with interest to the debate introduced by the noble Lord, Lord Haskel, in place of the noble Lord, Lord Currie, on the report of the Commission on the Regulation of Privatised Utilities. I followed with keen interest the contributions made, ranging from a robust and expert knowledge of the way regulation has developed recently to a fascinating and, if I may say so, deeply unfashionable defence of the former nationalised industries—unfashionable particularly on the Benches opposite.

The debate has been very worth while. I join those noble Lords who complimented my noble friend Lord Inchcape on his maiden speech. I noted with interest all that he had to say in his short and forceful speech. I enjoyed in particular his timely reminder of how things were before many of the utilities were privatised. I recall most vividly that, when I was Member of Parliament for Arbroath—from whence my noble friend's famous family stems—the largest single file I had was for those who wished to be connected to the telephone system. If they had the impudence to ask of their Member of Parliament how they might move up the six-months queue, they received short shrift, as I did. Nowadays there will not be a single Member of Parliament in another place who has any file whatsoever dealing with those wishing to have a telephone installed.

I was gratified and interested to see that the report unambiguously acknowledges that the present arrangements work a great deal better than the old ones. I feel, like my noble friend Lady O'Cathain, that it would sound as though I had not read beyond the introduction if I take as my particular quotation a passage to be found at the bottom of page 1 and continuing at the top of page 2, but it is such an excellent executive summary that I make no serious apology for so doing. The report states: we concluded that the independence of economic regulation of privatised utilities from day-to-day political control is extremely important for the achievement of efficiency in the use of national resources and that the achievements, to date, of the present regimes are very substantial". I am grateful for that very useful conclusion.

The commission was an independent body established in 1995 with a remit, to review the present regulatory regime for the privatised utilities and recommend changes in the light of experience and the evolving structure of the industries". Its report, published last month, examined the procedural or "constitutional" aspects of the regulatory regimes for telecommunications, gas, electricity and water. It made some 24 detailed recommendations aimed at increasing, the transparency, effectiveness, accountability and legitimacy", of the regulatory regime. I join others who have contributed to the debate in welcoming that examination and accept that this is a timely moment to undertake it, not least because it coincides with a number of other inquiries currently being undertaken into the regulatory regime.

The present arrangements work a great deal better than the old ones. Indeed, following the speech of the noble Lord, Lord Haskel, it would seem that it is now a settled orthodoxy that these arrangements should be kept in place.

I join the noble Lords, Lord Ezra and Lord Dubs, and my noble friend Lady O'Cathain in recognising that regulation is not an end in itself. There will of course always be those who believe that some form of regulation is needed to protect vulnerable customers. There may be some argument about that. There will certainly always be a need for regulation in areas where natural monopoly is likely to remain; otherwise regulation is a proxy or a surrogate for the competitive forces which operate in a free market.

In our view, the key to future benefits does not lie in trying to find perfect regulation, a will-o'-the wisp that we do not consider could ever be wholly achieved and that could never be more than an imperfect proxy for the competitive forces which it seeks to replicate.

I entirely agree with the noble Viscount, Lord Hanworth, that there are dangers in having a preconceived ideology of regulators. Matters have evolved and will continue to do so. It has been extremely useful that the commission has considered ways in which the system might be amended.

I make no apology for emphasising that we wish to see the introduction of more competition. Indeed there has been more. Over 190 new telecoms licences have been issued since 1991. Large and medium sized gas and electricity users can already choose their supplier. Last April we began to open up the domestic gas market. It has now been extended to Dorset and the former county of Avon and next month it will be extended to 1 million consumers in Sussex and Kent. Full competition will be introduced into the domestic electricity market in 1998 and by the end of 1998 all gas and electricity consumers will have a choice of supplier. We are examining further proposals for extending competition in water and sewerage services, initially for the larger users.

The Government's immediate policy objective is to press ahead with the development of competitive markets to ensure continuing improvement in prices and services to customers and to reduce to a minimum the amount of regulation and substitute the workings of the market itself.

I was disappointed that the noble Lords, Lord Paul and Lord Haskel, considered that insufficient competition had been introduced into the electricity market. I do not pretend that it has yet reached a final stage. However, at the end of 1996 there were of the order of 17 new-entrant generator companies in England and Wales with a capacity of something like MW 12,000. I also accept that the electricity pool is not yet in a perfect form. A number of changes are being considered in terms of involving consumers. While it has perhaps not yet been taken forward as vigorously as I should like, I am interested that intensive energy users and others are clearly suggesting that some sort of demand-side bidding would be a desirable addition to the techniques whereby the pool might work.

Competition has evolved but I recognise that the regulatory system is not perfect. We welcome practical suggestions for improvement. While I do not disagree with much of what my noble friend Lady O'Cathain said about the evolution of regulation, a further argument needs to be addressed. Even though we have received a number of good ideas for its improvement, it is clearly desirable to secure a stable regulatory environment. That is important because the investment decisions taken in this area are long term. Those who are proposing to invest should have the confidence to enter these markets and remain involved in them, thereby contributing to the further development of competition. The desire to tinker is one that I suppose many Ministers have. I am resisting it, though I want to see some change in an evolutionary way, because of that important consideration.

The Government have acknowledged that in due course there may be a case for bringing together the electricity and gas regulatory structures. It would be appropriate to look at this in about a year's time—not because that is the other side of a general election but because by that time the thrust towards full competition should have been secured in terms of both gas and electricity. We have said already that in the medium term the broadcasting and telecommunications regulatory regimes should be brought together to reflect convergence. The review in a year's time will be an opportunity to look at other aspects of the regulatory regime also, building on the strength of the existing system but maintaining its fundamentals. We should not, in the Government's view, embark lightly on any changes.

In his opening remarks the noble Lord, Lord Haskel, referred to the competition Bill. Let me assure him that we remain committed to reform. The curtailed nature of this final Session of the present Parliament meant that it was not possible to introduce a Bill in this Session. In relation to one of the recommendations made in the report we propose a prohibition on anti-competitive agreements based on Article 85 and are considering the feasibility of a prohibition of abuse of market power based on Article 86 for the economy as a whole in the context of the competition Bill. The Government have not ruled out a prohibition approach modelled on Article 86 and are promoting further debate on this issue, for example by talking to business and other interests.

Some noble Lords made reference to the formula that might be applied and whether RPI minus x might be appropriate. I was interested to hear that and even more interested to learn that in the course of a conference on competition policy last week the Opposition spokesman, Dr. Kim Howells, explained that the Opposition had concluded that the main beneficiaries of price regulation based on profit-sharing would be lawyers and accountants and that there was after all much to be said for RPI minus x. I am told that there are something like 50,000 lawyers in the United States engaged in regulatory matters. I see certain advantages in that which others may not see. But the RPI minus x formula is very much more preferable.

Let me take a moment to address in more detail the concerns of my noble friend Lord Crickhowell, particularly given his expert appreciation of the duties in relation to environmental matters. There is the recommendation by the commission that the industry directors general should not have duties for quality regulation, notably environmental duties. I understand that my noble friend strongly disputes that. The recommendation deals with the need to balance differing objectives when regulating an industry. The consumers' interest in value for money and the best possible service for the least payment cannot always be apparent. Other objectives may be just as important—for example, health and safety and environmental improvement. In some cases those other objectives are so important that there are indeed other public regulators charged with achieving them. In the case of water, the health objective is safeguarded by the Drinking Water Inspectorate and environmental protection is regulated by the Environment Agency.

The Government agree with the recommendation that in such cases it should not be for the industry director general to duplicate the work of quality regulators. In the Government's view there is already a clear separation of functions: the quality regulators set standards and police their implementation; the industry regulators consider their cost implications. We do not want to see any confusion. But I noticed with interest what my noble friend had to say about the value of having some tension in the relationship between the two.

Lord Crickhowell

My Lords, I am most grateful to my noble and learned friend for giving way. I did not suggest that the industry regulator should become the environmental regulator. But I believe that the balance arrived at in the Environment Act where he has to take account of those responsibilities is the right balance. I am worried about the suggestion in the report that we should move away from the balance that has been carefully debated and carefully considered.

Lord Fraser of Carmyllie

Perhaps I misunderstood my noble friend. I shall read carefully what he said. I certainly want to indicate that the recommendation made by the commission, as we saw it, seemed to us to have an appropriate balance.

The noble Lord, Lord Berkeley, observed correctly that the report does not cover rail. But I noticed his comments about the general utility regulation issues in relation to rail and also his reference to certain shortcomings. He may well have had in mind the action of South-West trains and the temporary cancelling of a number of planned peak services. Not only the Government but also the regulator share the disappointment at that action.

I conclude by saying how much this report is valued. Over the next year, indeed by the end of 1998, the area subject to the blunt instrument of detailed regulation will in many respects retreat as the area becomes subject to the rapier-like qualities of competition.

Your Lordships' House is establishing something of a tradition for high quality debates on various aspects of utility regulation. Like others to which many noble Lords have contributed, this debate has been wide-ranging, valuable and stimulating. We welcome the practical suggestions for improvement and will take account of them in the review—I look forward keenly to participating—proposed for next year. I give that unequivocal undertaking to the House. In doing so, I shall pay the keenest attention to this report and shall regard today's debate as a constructive contribution to the exercise.

5.26 p.m.

Lord Haskel

My Lords, I thank all noble Lords who have taken part in the debate. I particularly thank the Minister for his detailed response, from which few would believe that he did not get beyond page 2 of the report. All noble Lords welcome the report as an important contribution to the debate on regulation.

I also congratulate the noble Earl, Lord Inchcape, on his maiden speech. I do not agree with his view on competition and perhaps he should bear in mind the words of the noble Lord, Lord Ezra, and the phrase "surrogate competition". That has quite an important bearing on the subject.

Surprisingly, my noble friend Lord Hanworth reminded us forcefully of the success of nationalisation. He also mentioned the hazards of regulatory capture. We all welcome recent improvements in the services of the privatised utilities, due to a variety of reasons: competition, new technology, culture change—the noble Baroness, Lady O'Cathain, told us that that never stops—and price, due to the reduction of coal and gas prices, as my noble friend Lord Paul reminded us.

I am delighted that the Minister told us that more work is taking place on planning competition. But that is pointless unless there is some review of competition law. The two go hand in hand; the report makes that very clear.

All noble Lords welcomed more openness, consultation and debate. I liked the phrase of my noble friend Lord Dubs who called for a measure of public consent. We were all concerned about care for the customer. My noble friend Lord Berkeley was worried about regulators being beholden to the Treasury. The noble Baroness, Lady O'Cathain, raised the question of the windfall tax and I could not possibly improve on the explanation given by my noble friend Lord Peston. I thank the noble Lord, Lord Crickhowell, for raising the question of the relationship between regulation and the environment, which is a very important point.

Once again, I thank all noble Lords for participating in the debate. I beg leave to withdraw the Motion.

Motion for Papers, by leave, withdrawn.