Sitting of 5 November 2004

Preamble
The House met at eleven of the clock: The CHAIRMAN OF COMMITTEES on the Woolsack.
Prayers—Read by the Lord Bishop of Rochester.

Financial Statement and Budget Report 2004
The Parliamentary Under-Secretary of State, Department for Culture, Media and Sport (Lord McIntosh of Haringey)rose to move, That this House takes note with approval of Her Majesty's Government's assessment as set out in Budget 2004 for the purposes of Section 5 of the European Communities (Amendment) Act 1993.
The noble Lord said: My Lords, this debate gives us the opportunity to discuss the information provided to the European Commission. Each year, the Government report information to the Commission on our main economic policy measures. The procedure is set out in Articles 99 and 104 of the EC treaty, which relate to the broad economic policy guidelines, convergence and stability programmes and the excessive deficits procedure. The objective is to ensure that the economic policies of member states are consistent with the goals of the treaty, including non-inflationary economic growth, a high level of employment and social protection, and better living standards for citizens across both the UK and the European Union. Those goals are consistent with the Government's own approach to economic policy.
Section 5 of the European Communities (Amendment) Act 1993, usually known as the Maastricht Act, requires Parliament to approve the information sent by the Government to the Commission for this purpose. We had a debate under Section 5 on 16 December 2003 to discuss the UK's 2003 convergence programme, which was submitted to the Commission late last year. That report set out in some detail the Government's economic and fiscal policies. This debate focuses on the data transmitted to the Commission under the excessive deficit procedure, which is a more technical procedure for ensuring the Commission has the most up-to-date information, and is not accompanied by the full report, as the convergence programme is.
To help to facilitate this debate, we therefore need to look to the Government's strategy for economic policy which is, most recently, set out in the Budget, both published earlier this year. That material forms the basis of the forecasts that we send to the European Commission and is subject to the usual parliamentary scrutiny and approval. The background for this debate is one in which the United Kingdom has successfully weathered the recent global economic downturn, and is enjoying unprecedented macro-economic stability. More specifically, not only is the UK experiencing its longest expansion since records began, with sustained
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growth for 48 consecutive quarters, but it managed to maintain this record during the recent downturn, while all other G7 economies experienced at least one negative quarter of growth. Alongside that impressive growth record, the UK is also enjoying the longest period of sustained low inflation since the 1960s and, at the same time, interest rates remain low by historical standards.
As a result of the strong macro-economic framework, the Government have been able to deliver record high rates of employment, and record low rates of unemployment, with 1.8 million more people in work now than in 1997. As always, we will continue to maintain the fiscal discipline that is always at the heart of our strategy for long-term stability. In the Budget, the Chancellor announced that we were on track to meet our fiscal rules. Debt this year is forecast to be just over 34 per cent of national income compared to 44 per cent in 1996–97, and well below the 40 per cent ceiling of the sustainable investment rule. Because of this, the Treasury is able to afford all of our existing commitments abroad and at home, and yet to release extra resources for the nation's priorities in the years leading up to 2008.
Historically, the UK's productivity performance has lagged behind that of other major economies, with a sizable gap compared with the United States, France and Germany. The Government's approach is to raise productivity centres around maintaining macro-economic stability to allow firms and individuals to invest for the future and implementing micro-economic reforms to remove the barriers which prevent markets from functioning efficiently. The Government have examined the challenges and pressures that face the nation and are determined to make the right long-term spending plans for Britain. From our position of economic stability and growth, we are in a position to invest more, not less. This summer's spending review set departmental spending plans up to 2007–08, locking in the step change in resources delivered in the three previous spending reviews and announcing extra resources to be delivered to our priorities.
In the competitive global economy of the future, it will be the intellectual capital of our country that will drive its economic growth. It is therefore imperative that we invest in our children's education, in adult skills and training, and in science, innovation and enterprise. These are the investments that will enable us to reach our potential as individuals and as a nation, and to make Britain a world leader of the future global economy. That is why the plans we have announced in the 2004 spending review focus extra resources on delivering that investment in the drivers of our future prosperity.
Lord Sheldon: My Lords, I regret that I shall be unable to take part in this debate, because I cannot stay for my noble friend's winding-up speech. One particular matter that concerns me, however, is the state of the economic cycle. It looks as if we are well on course to meet the target, and the rest of the programme has been very good. But while we know the beginning of the economic cycle, we do not know

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when the end will be. Will it be 2005–06, or is it adjustable? We do not know the future, and we cannot say when the end of the economic cycle will come.
Lord McIntosh of Haringey: My Lords, we have discussed that matter in the House in the past week or so, and I told the House that the Government's estimate is that the current economic cycle will end in the year 2005–06. There is nothing prescriptive about that, however. It is simply an estimate of something not entirely precise. In that sense, the noble Lord is entirely right.
Our decisions in the spending review mean that we can confirm new resources for vital public services, including increased resources for health, crime and justice and affordable housing. To support those spending plans for the future, the public sector will seek, as always, to deliver value for money. That will allow the Government to release additional resources to the front line without compromising our ambitious programme of public service delivery.
Sir Peter Gershon has worked with us to identify how changing work practices, better technology and better procurement can help to free up the resources that we need to allocate to front-line services. In addition, the Government have made it clear that our policies to invest in education, skills, science and innovation are not bought at the price of fairness. They are underwritten by policies for achieving full employment and tackling child and pensioner poverty. As a result of our measures, employment has risen to record levels and unemployment remains close to its lowest since the 1970s.
The Government want all children to have the best possible start in life, with opportunities to develop their full potential and lead fulfilling lives. We have set an ambitious long-term goal to halve child poverty by 2010 and eradicate it by 2020. The Government also believe that a fair society guarantees security in old age and ensures that all pensioners can share in rising national prosperity. As a result of measures introduced since 1997, the Government are spending around £10 billion extra on pensioners. Building on the foundation of support for retirement income provided by the basic and additional state pensions, the Government launched the pension credit in October 2003 to tackle pensioner poverty and reward savings.
Our hard-won economic stability and sustained growth allows the Government to commit to more, not less, investment in the areas that matter to this country. It is investment that will enable Britain to develop into a world economic leader of the new global age. That is the programme set out in the 2004 Budget and, with the approval of the House, that is the basis on which we will send updated information to the European Commission. We are fulfilling our commitment under the Maastricht Act to report on our main economic policy measures, and are maintaining our position, developed by this Government, at the heart of the EU policy process. I beg to move.
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Moved, That this House takes note with approval of Her Majesty's Government's assessment as set out in Budget 2004 for the purposes of Section 5 of the European Communities (Amendment) Act 1993.—(Lord McIntosh of Haringey.)
11.15 a.m.
Viscount Trenchard: My Lords, I am grateful to the Minister for introducing the debate, and honoured to have been selected to speak immediately after him, an ordeal that I have not previously suffered in your Lordships' House.
I did not at first understand what the debate was about. I understand that parliamentary approval is required for the information that the Government submit to the European Commission regarding their economic policy measures and that, as the noble Lord explained, the information is based on the financial statement and Budget published in March this year. Is he happy with a situation whereby the House only has an opportunity to debate the Government's submission seven months after publication?
When the matter was debated in another place, Mr Stephen Timms, the Financial Secretary to the Treasury, explained that,
"the UK has successfully weathered the recent global economic downturn and is enjoying unprecedented macroeconomic stability".—[Official Report, Commons First Standing Committee on Delegated Legislation, 19/10/04; col. 3.]
The noble Lord said much the same today. He also spoke about our improving productivity performance but acknowledged that, compared with the United States, the gap remains stubbornly large. However, the European Commission is responsible for the introduction of a great amount of complicated regulations, bureaucracy and red tape which make it so very difficult for us to achieve productivity levels close to those of America.
I should be interested to hear the noble Lord's opinion on why the budget deficits of both France and Germany have increased since the introduction of the euro, and what he thinks would be the effect on our historically relatively low levels of borrowing should this country eventually decide to adopt the single currency. I also wonder how important he considers the submission to be, given that the stability and growth pact is now totally discredited following the Commission's inability to apply sanctions against France and Germany following their breaches of the 3 per cent budget deficit limits.
It is widely believed across the country that Her Majesty's Government are a conservative government. Although many deplore the expensive, piecemeal, asymmetric constitutional reforms that have been implemented, many of the same people are prepared to defend the Government's record in economic management. The Minister displayed a good measure of confidence and satisfaction with the economy, as he is habitually disposed to do. Indeed, he has previously said that he considered it his,
"privilege to present a Budget which is a tribute to the guardianship of our economy of the Chancellor of the Exchequer over a period of seven years".—[Official Report, 20/7/04; col. 212.]

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The noble Lord is very plausible and persuasive, and what he says about the economy is commonly believed to be the truth, even among many of those who are not natural allies of the Government. But after seven years, the real position is becoming clearer. The spinning is no longer convincing. People are finally becoming aware that the Government are taking for themselves an increasing proportion of their income and giving nothing in return. There is no perceptible improvement in public services. The noble Lord said that:
"Rather than saying that there is no jam today people always say that there will be disaster tomorrow" .—[Official Report, 20/7/04; col. 208.]
But people are now saying that the jam jar is already empty, and that certain aspects of the economy which looked good in 1997 now look rather less satisfactory.
Today is not the day for another debate on pensions. However, an assessment of the economy would be defective if it did not cover that. As people live longer and the ratio of those engaged in the productive economy to those who are not deteriorates, a healthy pensions sector and savings culture become ever move crucial. As the Economist pointed out in its leader on 16 September, Britain's pension system was in good health when this Government came to power in 1997. The article stated:
"British politicians pointed disparagingly at the problems in continental Europe, and prided themselves on how well things had been managed over here".
Now, as your Lordships are well aware, our pension system is in a mess. The Government should recognise their serious error and abolish the stealth tax of £5 billion a year that they applied through the abolition of advance corporation tax credits on UK dividends, so that our pension funds no longer have to pay tax on funds that have already been taxed. The real effects of the abolition of ACT credits is actually greater than £5 billion a year because of the cumulative effects of pension fund managers reducing their weightings in UK equities, leading to large-scale selling of shares, lower share prices and a depressed under-performing stock market. This has produced a disadvantageous capital markets background for British companies competing in an increasingly global and international market.
I earnestly hope that if this Government will still not recognise the disastrous consequences of one of their significant early acts, a future Conservative government will restore pension funds and charities to the proper advantageous position that they deserve to enjoy. I speak also as a former trustee of the Royal Air Force Benevolent Fund whose ability to provide direct charitable assistance has been reduced by some £1 million each year since the implementation of the tax.
The Government have not only harmed the environment for pension funds, they have seriously damaged the savings culture through their progressive removal of the incentives which had been provided by PEPs and TESSAs. The reduction of the maximum amount that can be invested annually in an ISA, coupled with the abolition of the 10 per cent tax credit, has also caused further damage to the stock market.
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One of the hallmarks of this Government is to make everything more complicated and difficult than it need be. To some extent this is because they do not like to admit their mistakes and adopt U-turns. The introduction of the new 19 per cent corporation tax, or "charge on non-corporate distribution", as I believe it is called, is a case in point. It takes up four pages of the Finance Act and is so difficult to understand that many chartered accountants are unable to explain when it is payable and when it is not. It would have been so much simpler and would have had the same effect if the Chancellor had been prepared to admit his mistake and adopt a U-turn. With one line only in the Finance Act, not four pages, he could have reduced the recently-introduced nil rate band of corporation tax from £10,000 to, say, £5,000—or to whatever figure would produce the same net effect as his new tax. It is ironic that the real victims of this tax increase are small companies earning less than £50,000 a year, which need the most help in building thriving businesses on which our future prosperity so crucially depends.
The Minister said that the Government's aims include the achievement of better living standards for all our citizens. I do not think that this new tax or, indeed, the many other tax increases introduced by the Government will do anything to achieve their declared aims. I thank your Lordships for listening and I look forward to the speeches of other noble Lords.
11.24 a.m.
Lord McKenzie of Luton: My Lords, I rise to support my noble friend the Minister on the Motion. He has explained the economic objectives of the Government to build a strong economy and a fair society, and has rightly asserted their strong performance in delivering those objectives.
I propose to concentrate most of my remarks on the issues of achieving social justice and maintaining investment in public services, recognising, as does Budget 2004, that their attainment must be founded on a strong economy. Before I do, however, perhaps I may comment briefly on the withdrawal of the imputation credit to pension funds. It is a bit rich to concentrate on the Government's act in 1997 without recognising that that act was accompanied by a reduction in the rate of corporation tax. Furthermore, previously, in 1979, the imputation credit was worth £43 to a pension fund on every £100 of dividend. In successive measures the preceding government reduced that until we inherited a rate of 25 per cent. I do not say that those reductions were by stealth, but the previous government withdrew almost the same amount as this Government have, but over a longer period.
Much has been made of the pressure on public finances, but it is easy to forget how far we have come in establishing a robust framework for these matters. Contrast our current situation with the Government's inherited position, where between 1990–91 and 1996–97 net public sector debt rose from 27 per cent to 45 per cent of GDP. Government receipts for 1996–97 stood at 38 per cent of GDP.

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The Government's record on tax stands strong comparison with our counterparts in Europe. Information from Eurostat in July this year shows that for the latest year for which figures have been analysed, as a percentage of GDP, the UK's tax burden was the 17th lowest of the enlarged 25 EU members and the 14th lowest of the 15 old EU members. In 2004, the UK's top personal income tax rate and its effective top statutory tax rate on corporate income were below the average for the 15 EU states.
Budget 2004 demonstrates how our economic strength has enabled progress in delivering higher quality public services; none more so than in education. Education spending has been funded to grow at an average of 4.4 per cent in real terms across the spending review. By 2007–08, it will amount to 5.6 per cent of GDP.
Investing in education lies at the heart of tackling inequality and exclusion and is an essential prerequisite of a future healthy economy. If I look away from the macro numbers in the Red Book to the practical effect of that on a single local authority, Luton—on which I still serve and in which I disclose an interest—I see that the impact has been enormous. In 1996–97, our education revenue budget was £76 million. For the current year, it is £122 million. Capital spending on local schools over this period has topped £60 million, with more to come from Building Schools for the Future.
Improving educational attainment and achievement is not only about money. However, this investment by this Government is helping in a dramatic way to improve the life chances of our young people. What is happening locally in Luton is being mirrored across the country. This is not spin. It is real investment, real progress and real delivery.
Budget 2004 reported explicitly on the strategy for building a fairer society, particularly the steps being undertaken to tackle child and pensioner poverty. Tackling child poverty requires action on a range of fronts, but it certainly requires measures to tackle income poverty in households with children. As the Minister said, the Government have set themselves clear targets in this regard to halve child poverty by 2010 and eradicate it by 2020.
We know that by the mid-1990s the UK had one of the highest proportions of children living in low-income households among the member countries of the OECD. It had more than doubled since 1979. It was a national scandal. We also know that children living in low-income households during their lives are more likely to experience low educational attainment, low self-esteem and aspirations, higher risks of social exclusion and engagement in crime and significantly lower lifetime earnings. It is a cycle of disadvantage which has to be broken, and it is being broken.
By universal measures such as the national minimum wage and targeted measures such as the working families tax credit—now the child and working tax credit—the strategy is working. By the end of the current year, support for children, through a variety of means, will have increased by £10.4 billion
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in real terms from its 1997 level; a rise of 72 per cent. The poorest 20 per cent of families have received over 40 per cent of the additional provision. Tax credits are benefiting 10.4 million children in 6 million families.
The Institute for Fiscal Studies has independently reviewed the Government's progress on their near-term target of wanting child poverty to fall by a quarter of its 1998–99 level by 2004–05. Its conclusion is that this target, when measured both before and after housing costs, will be met. That is a proud achievement, but there is still more to do.
Tax and benefit systems impact in an even more significant way on the incomes of retired households. In its June 2004 Economic Trends 607, the Office for National Statistics demonstrates, not surprisingly, that the disparity of "original incomes"—that is, incomes before government interventions—is much wider than disparities of post-tax incomes for retired households; that is, measured after benefits, retirement pensions and direct and indirect taxes. That is to say, for retired households, the tax and benefit system produces a larger reduction in inequality of income than for non-retired households.
We know that the result of government initiatives is that the number of pensioners living in absolute poverty has reduced by two-thirds, from 2.7 million to 0.9 million. When noting with approval the Budget 2004 assessment, we should applaud the fact that as a direct result of measures included therein and prior changes to the tax and benefit system introduced since 1997, pensioner households will, on average, be £1,350 per year better off, with the poorest one-third being on average £1,750 better off in real terms. The poorest third will be £600 per year better off on average than if the equivalent amount had been spent on raising the basic state pension.
Notwithstanding the challenges of take-up levels for measures such as the pension credit, this approach of targeting resources has made a significant change to the lives of many. Those who argue to reverse it will be distributing resources from the poor to the less poor and to the rich. There is generally a tension between equity and complexity in the design of tax and benefit systems, but I would not support a more simple system for simplicity's sake which disadvantaged the poor.
So Budget 2004 marks further significant progress in tackling child and pensioner poverty. The challenge of tackling wider issues of income and wealth inequality have yet to be overcome. Income inequality in the UK rose dramatically during the 1980s and has remained fairly static since 1993. The measures of inequality improved in 2002–03, but data for later years will be needed to be sure that there is a downward trend. What the research shows is that income inequality would have widened significantly without the measures, including those in Budget 2004, undertaken by the Government.
The most recent comparative data for the EU—it does not reflect changes to the UK tax and benefit system since 2001, which would have improved our position—show that on measures of income equality we are the fourth most unequal country in the erstwhile EU 15. So there is much to do.

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Building and sustaining a fairer society cannot only be about redistributing current income. It must be about promoting a strong and growing economy and enabling all who can to participate in its success. It is about removing barriers which would otherwise consign people to the status of unemployment or of low pay. This is what the Government's strategy is about and why we should support it.
11.35 a.m.
Lord Pearson of Rannoch: My Lords, I rise to oppose this Motion, because, in common with a growing majority of the British people, I do not think that we should be reporting subserviently to Brussels about the state of our economy at all, let alone that we should be doing so with approval.
Noble Lords will doubtless be aware of the most recent poll published by the Mail on Sunday showing that some 60 per cent of respondents now support leaving the European Union and continuing our free trade with it. "Aha!", the Government and our dwindling band of Euro-philes will doubtless bleat, "but how are you so sure that we could continue our free trade with the single market if we left the political construct of the EU"? The answer is of course because we are the EU's largest client. It sells us very much more than we sell to it; indeed, our trade deficit with it is at record levels and growing.
It is really quite amusing to see how the Government attempt to avoid the obvious conclusion which flows from this situation—most notably in a Written Answer as recently as two days ago at col. 33 of Hansard. That conclusion is that the euro-zone has many more jobs dependent on its trade with us than we do on our trade with it. And so if we left the political construct of the EU, it would be very keen to secure a free trade agreement with us. Could I take this occasion to ask the noble Lord, Lord McIntosh, whether he would be good enough to confess and confirm this obvious state of affairs today?
There is of course another reason why the British people support leaving the EU and thus the need for this demeaning debate. This is that they are starting to see through the Government's principal piece of euro-propaganda, which goes as follows: "Sixty per cent of our trade and 3 million jobs depend on our membership of the EU". End of propaganda. They are starting to realise that in fact only some 10 per cent of our economy supports our trade with EU countries; that none of it would be lost if we left the EU and continued our free trade; and that Brussels diktats apply to and strangle the whole 100 per cent of our economy, including the 80 per cent which stays in our domestic economy and the remaining 10 per cent which supports our other overseas trade.
It is not only British euro-sceptics who are starting to see through the whole European dream. The penny appears to be dropping even with the much respected German Bundesbank. So I conclude by asking the Minister to comment on the Bundesbank's recent statement that it can find no evidence that either the euro, or indeed the single market, have proved to be of
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any benefit to the German economy. The same presumably goes for the other euro-zone countries and indeed for our own economy as far as the single market is concerned.
I look forward to the noble Lord's answers to the two questions I have put to him. I have to say that that would make a pleasant change.
11.38 a.m.
Lord Newby: My Lords, Prudence for a purpose is the title of this year's Budget report. It is a phrase by which this Chancellor of the Exchequer will probably be best remembered, not least because he has used it so often.
What does the Chancellor mean by "prudence"? More than anything else, he has defined prudence by his ability to keep to the two key rules which he has established—the sustainable investment rule and, more importantly, the golden rule. The principle of the golden rule—that current expenditure should balance over the economic cycle—is a good one, but for this Chancellor it is more than that. It is the single most important measure by which he has chosen to define his own success in office.
The Budget report is optimistic about the Government's ability to meet the golden rule over this cycle and into the future, but, since the Budget, this optimism has increasingly been questioned. Within the past fortnight, the Institute of Fiscal Studies has claimed that the Government are on course to break the golden rule. The National Institute of Economic and Social Research said last week that the chances of meeting the rule are at best 50:50 and, depending on when the cycle is deemed to have ended, it could be a lot less. Last week, the chief UK economist at Barclays Capital said that the rule had been broken and that the Chancellor was "lying and cheating" if he claimed otherwise.
What are the areas of dispute? First, when does the cycle run to? That question was asked earlier in the debate by the noble Lord, Lord Sheldon. The working assumption, confirmed by the Minister, is that it will run to the end of the next financial year. It is important that we have clarity on that issue; otherwise, there will be a deep suspicion that moving the end of the cycle for political reasons will make all the difference to whether or not the golden rule is met.
The second problem is how one measures the deficit to determine whether the golden rule has been met. The Government have chosen to do that on the basis of the average current surplus over the cycle as a share of GDP. Martin Weale at the National Institute of Economic and Social Research believes that to be "plain wrong" in terms of methodology. But the effect of this choice of methodology, complicated though it is, is actually rather clever for this Government at this point because it gives greater weight to the early years of the cycle. That was very convenient, given that, at that point, the Government were building up surpluses. It will be far less convenient if they maintain this methodology into the next cycle because at the beginning of the cycle they are jolly well not going to

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have surpluses and, given their own bias in the rules to end up with a balance over the next cycle as a whole, they will find it much more difficult.
Another issue which is undermining people's faith in the ability to meet the golden rule is that current expenditure appears to be rising faster than expected in the Budget. In the first six months, it rose by 6.6 per cent, whereas it was anticipated to rise by 5.2 per cent. I should be interested to know whether the Minister thinks that the Government will be increasing current expenditure over the second six months at a significantly slower rate so that that overall annual increase of 5.2 per cent is met.
There is also considerable doubt about whether the Government's optimistic assertions in the statement on taxes and tax revenue will be met—not least in terms of corporation tax, which, indeed, rose significantly over the first six months of the year by some 15 per cent. However, given that the Government had pencilled in 22 per cent for the year as a whole, the projection clearly runs the risk of being missed.
What all these disputes show is that, far from being a clear rule, the golden rule is increasingly a muddy rule, with suggestions of murky redefinitions in the Treasury to keep the figures looking good. Given the importance of the issue and, more generally, of the reliability and basis of government tax and expenditure estimates, we on these Benches have suggested that a new body at arm's length from the Government should be established to audit the assumptions underlining the Government's tax and expenditure proposals.
At present, the NAO audits some of the assumptions, but the Government decide which and then use this partial audit as the basis for claiming that the whole Budget has been subject to rigorous external scrutiny. When, a couple of weeks ago, I suggested to the Minister across the Floor of the House that this function might be performed by a new fiscal policy committee, he said that there were plenty of committees already and that we did not need another.
As the Minister knows, we on these Benches always do our best to accommodate his concerns, and therefore my suggestion today is a variant of my earlier one; namely, that the National Audit Office should establish a separate unit which has as its sole function the analysis and audit of government taxation and spending assumptions.
Such a unit should be charged by Parliament, to which it would be accountable—but with government blessing—with the task of reporting formally at the time of the Pre-Budget Report and the Budget itself on the Government's fiscal performance and their plans. Its economic expertise would need to be strengthened and its line of reporting would be the Treasury Select Committee in another place. However, unlike at present, the NAO would be free to review whichever Budget assumptions it considered appropriate and make fully independent overall assessments of performance against the fiscal rules.
It is a suitably modest suggestion; it does not involve setting up a new quango or a group of highly paid wise men or women; but it would provide a genuinely
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independent assessment within an established framework of parliamentary accountability. The Chancellor is in serious danger of losing economic credibility, and his reluctance so far to entertain such a modest degree of independent scrutiny feeds the suspicion that the Government have something to hide.
One of the other key assumptions underlining the Budget projection was that the Government would be able to achieve 2.5 per cent savings in expenditure through efficiency savings identified by the Gershon report, leading to annual savings of some £20 billion by 2007–08. That is an extremely bold programme. How is it to be achieved?
The Gershon report is a masterpiece of management-speak. It states that, to quote one example,
"back office change agents will",
among other things,
"develop meaningful metrics and support bench marking".
What does all that mean? Will the change agents he more James Bond or Johnny English? Gershon said that all will be revealed by the end of October, when all departments would publish on their websites efficiency technical notes explaining exactly what they were going to do to achieve the desired savings.
I suspect that not many Members of your Lordships' House have yet had the chance fully to examine the efficiency technical notes which duly appeared last week. I thought that it was appropriate to draw to noble Lords' attention merely those that were produced for the Treasury. Many of the principles which apply to the efficiency technical notes published by the Treasury apply across other departments.
The notes set out, or purport to set out, in great detail exactly how these savings are to be met. The Treasury, being a relatively small department, is due to make savings of some £11.9 million per annum by 2007–08. How is that to be done? Workstream 3 of the notes talks about procurement, which is clearly a very big item. Two areas are covered: information services (IT) and accommodation. Information services is the most difficult area of procurement, as every government IT project has demonstrated. So here we expect to find an absolute example of how this knotty issue of keeping costs under control is to be resolved. The notes state:
"Information Services—Review options to reduce costs associated with procurement of software and IT consultancy and equipment";
that is, we are going to scratch our heads, look around and see what we can find. There is nothing there of any substance.
What about accommodation? This is a much more fruitful area. It states that economies of scale are going to be achieved through,
"sharing of services with partners (e.g. Post Room and Goods Inward with [Her Majesty's Revenue and Customs])".

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If there were ever a case of being able to count the paper clips but not seeing the big picture, those two paragraphs exemplify it. And the one consolation that one can draw from this statement is that Sir Humphrey is, indeed, alive and well in the Treasury.
The final element of the efficiency savings is to be found in the response of the Treasury to the Lyons report in terms of decentralising staff. Originally, the Treasury had a bold ambition to relocate 19 staff from central London to the regions. However, the efficiency technical notes say the following:
"This technical note also includes our relocation plans in response to the Lyons review. We are planning to relocate 11.5 [full-time equivalents] to a shared accounting function in Norwich".
So, the total Treasury contribution to Lyons is elevenand-a-half accountants who are moving to Norwich. If it were not so important, it would simply be laughable.
We agree with the Government that any well run organisation should seek continuously to make efficiencies and the government machine obviously falls within that category. But what the Chancellor has produced is a bold claim for savings which, to date, looks more like a pipedream than a bankable promise. As a result of today's Motion, the EU will formally receive the Government's estimates for the economy for government taxation and expenditure. I hope that it will take at least some of it with a big pinch of salt.
11.50 a.m.
Baroness Noakes: My Lords, the Minister was, as usual, scrupulous in introducing the Motion before us today, but I hope that he will forgive me if I cannot work up my usual enthusiasm for engaging in the debate. This day 399 years ago, Guy Fawkes tried to blow up the Houses of Parliament. I venture to suggest that if he dropped by today to find us engaged in a largely pointless piece of parliamentary procedure, he would have another go.
It is pointless because we are debating the Budget that the Chancellor announced nearly eight months ago. Your Lordships' House has already debated the Budget and the subsequent spending review in July of this year. It is also pointless because the Motion seeks approval for the Budget Statement in accordance with the European Communities (Amendment) Act 1993, which introduced a process without meaning. My noble friend Lord Trenchard forcefully made the point about the growth and stability pact being in a mess. I do not believe that the Chancellor cares much about Brussels' view of our economic policy and neither do we. In that respect I am with my noble friend Lord Pearson, although I am not necessarily with everything else that he said in his interesting intervention.
Lastly, parliamentary approval of this Motion is pointless. I understand it is required because the Labour Party forced its inclusion in the 1993 Act. Whatever Labour's motives were at the time, I am sure that the Minister now regrets that he has been dragged away from his day job on gambling, which surely needs his attention, to debate this.
I feel a lot better now that I have unburdened myself about the lack of purpose to our procedure. But as I am here, I shall not let the opportunity pass without
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saying a few words on the economy, particularly in the light of developments since the Budget Statement in April. In doing so, I am conscious that I am in fact warming up for our debate on the upcoming Pre-Budget Report. In fact, if the Minister can share any intelligence on when we can expect the PBR, that would be very helpful. I am sure that the noble Lord, Lord Newby, and I would like to earmark a lot of time in our diaries for a debate on that.
The Minister, as usual, made it sound as though he were submitting the Budget Statement to Brussels with some pride. I have ceased to be amazed by the bullish tone that the Minister adopts when speaking about the Government's handling of the economy. He is very good at it. But I respectfully suggest that the Minister does not fully align style with underlying substance. Things are not as good as he would have us believe.
The regulatory burdens on business now amount to £100 billion on the Government's own figures; 15 new regulations a day since 1997 are squashing British business. The UK has slipped from fourth to 11th in the World Economic Forum's competitiveness league table, and is an appalling 22nd in the one produced by IMD. Productivity growth has fallen by over a third since 1997 and is the lowest in the English-speaking world. Our performance has been only half of that in Ireland in the past seven years.
Our productivity performance overall is held back by the truly appalling performance in the public sector. The Office for National Statistics has, I am sure, tried its hardest to help the Government out. But the truth is that the very best interpretation of the NHS shows that, despite all the money being poured in, productivity has fallen by at least 1 per cent each year. If the Minister tries to say again that, of course, that does not measure all the good things achieved by this Government, I will simply remind him that 5,000 people die each year from hospital-acquired infections—more than die on our roads.
We can see many signs of fat government. Promising Civil Service cuts, which the Chancellor did in July, sounded like a good start on turning the ship around. But we know that the Government have no form when it comes to delivering savings. The fact that sickness absence levels are among the worst in Britain and that in the last financial year another 12,000 civil servants were added to the Government's payroll are proof that the Government do not have a clue about managing public services. I enjoyed the critique by the noble Lord, Lord Newby, of the Civil Service's latest attempt to prove that it can become more efficient. We have no confidence that the Government will deliver on that.
As has already been referred to, in 1997 the Chancellor invented some rules to prove how good he was, the linchpin of which was the golden rule. The noble Lord, Lord Newby, has given an excellent critique of that. The Treasury, on its own too-clever-by-half rules, says that the current plans are within the rule by £11 billion. That is only 0.1 per cent. We hope that he will stay within the golden rule because, if he does not, he will start the next cycle, whenever it begins, with a deficit that will increase the certainty that taxes will be raised.

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The noble Lord, Lord Newby, has already pointed to the growing chorus of serious commentators who believe that the golden rule will not be met, or will be met only if taxes are raised. The noble Lord, Lord McKenzie of Luton, may like to know that this morning his former firm, PricewaterhouseCoopers, joined that club of commentators.
We believe in lower taxes, but we are sure that the Government, if re-elected, will have to raise taxes. Tellingly, the Chancellor and his fellow Treasury Ministers have refused to rule out tax rises in a third term.
The most recent economic news is certainly not encouraging. Tax receipts, as we have heard, have continued to be soft. The Chancellor was particularly optimistic about that in the Budget and so far he looks to be wrong. He might be saved on tax receipts due to the rise in oil prices, but it is not looking good. The Government have to lose only one or two of the major tax cases queuing up at the European Court of Justice to expose another big hole.
The Chancellor told us in the Budget that he would borrow £33 billion this year—a lot—but the borrowing figures at the end of September—half way through the year—showed that he had already borrowed £23 billion, or two-thirds of that amount. As the noble Lord, Lord Newby, has already pointed out, current spending is well ahead of forecast, being compensated only by weaker investment spending. It beggars belief to think that the second half of the year will make up for the first half. The golden rule appears ever more fragile.
The trade deficit is another sign that things are not right. Records do not go back as far as Guy Fawkes's time but they go back to 1697, and we have the largest deficit ever recorded since records began. It is persistent—a deficit every single month since the beginning of 1998.
We have not said—and we will not do so today—that the economy is in crisis, but we believe that there are many warning signs of trouble ahead. The boastful Budget Report did not give a balanced picture of our economy in April and it certainly does not do so today. If we thought that sending it to Brussels mattered, we should be very concerned. It is not the custom of this House to vote against Motions such as the one before us today, and on that basis we shall not oppose it. But, on behalf of these Benches, we shall not add to the approving nods when the Motion is put formally for approval.
Noon
Lord McIntosh of Haringey: My Lords, I am grateful to all noble Lords who taken part in this short debate. I am slightly taken aback by the profound disagreements on this matter that have been evidenced by the contributions from the Conservative Benches. The noble Viscount, Lord Trenchard, thought that we had too little consideration of these matters in this House and the noble Baroness, Lady Noakes, thought that we had too much. I leave it to them to sort themselves out on these matters just as I think it would
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be intruding on private grief if I allowed myself to get involved in the difference between the noble Baroness, Lady Noakes, on the Front Bench and the noble Lord, Lord Pearson, whose Back Bench seems to be getting further and further back as the years go by. His distance from his own party is now immeasurable. I wonder whether the United Kingdom Independence Party, which he surely must join in due course, should find itself a place on the Benches in this House. Otherwise, he is in an impossible position and his Whips must be in an even more impossible position. By the way, on the question of why we are having this debate, it was indeed a Labour Motion on the Maastricht Bill in 1993, but I blame the Conservative Whips for allowing it through.
Several interesting points have been raised in this debate and I will try to deal with as many of them as possible. The first series of points referred to the stability and growth pact and the 3 per cent deficit rule. The noble Viscount, Lord Trenchard, seems to think that the stability and growth pact has been discredited. Our view is that the stability and growth pact was excessively rigid. We have always argued for a prudent interpretation of the pact that takes account of the economic cycle, sustainability and the important role of public investment. With Budget 2004 we published a discussion paper on the stability and growth pact.
Since then there have been some promising signs. First, there is the European Court of Justice decision about the application of the pact's provisions and proposals for strengthening and clarifying the implementation of the pact. Secondly, there are the Commission's own proposals published on 3 September, which we welcome. We welcome the references and emphases in the Commission's report on the sustainability of public finances, and in particular on taking greater account of public debt. Things seem to be moving in our direction and it may well be that we will have more effective, realistic and prudent stability and growth than we have at present.
The issue of the golden rule understandably attracted a good deal of attention. First, the noble Lord, Lord Newby, mentioned the possibility of us moving the anticipated end of the cycle for political reasons, but there would he no benefit in that even if we wanted to or could. Budget 2004—the document that we are debating today—states that over the current economic cycle, estimated to run from 1999–2000 to 2005–06, the average current surplus on the current budget is forecast to be 0.1 per cent of GDP, which has been correctly quoted, meaning that,
"the Government is therefore on track to meet the golden rule".
However, even if we were to change the estimate of the end of the cycle, it would not make any difference, because over the period 2005–06 to 2008–09, the average surplus on the current budget is forecast to be—guess what—0.1 per cent of GDP, meaning that the Government are on track to meet the golden rule beyond the end of this cycle.
The noble Lord, Lord Newby, then moved on to attack the method of calculation of the golden rule. However, we have been consistent in the way that we

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measure progress against the golden rule. We have measured it as a ratio to GDP, which has been accepted by the Treasury Committee in the House of Commons which concluded that:
"The substance of the golden rule has not changed".
I know that Martin Weal and other well respected outside commentators take a different view, but Parliament has not taken that view.
The noble Lord then had a modest proposal for the National Audit Office, and I am grateful to him for rowing back on his suggestion of another committee. As I understand it, he is suggesting that there should be a separate unit in the National Audit Office that would audit the assumptions over the projection period, both in the Budget and the Pre-Budget Report. I remind him that we publish both with the Budget and the Pre-Budget Report the NAO's assessment of all of the assumptions that are included in these forecasts.
Baroness Noakes: My Lords, if the Minister will forgive me, that is not strictly correct. The NAO audits each year only a certain number of the assumptions and those assumptions are selected by the Treasury. The NAO cannot choose what it examines and it certainly does not examine the whole amount every year.
Lord McIntosh of Haringey: My Lords, I will not argue about that, but if the NAO and the Public Accounts Committee thought that their ability to comment on the assumptions was diminished they would say so. The Public Accounts Committee is independent of the Government. The National Audit Office reports to the Public Accounts Committee. My point is that if the National Audit Office thought that it would do better with a separate unit as the noble Lord, Lord Newby, proposes, no doubt it would do so, but we do not control the internal organisation of the National Audit Office. That is a matter for itself and the Public Accounts Committee. To my mind, none of these accusations have any particular validity.
Next we had the issue of the trade deficit and the balance of payments. The noble Baroness, Lady Noakes, quoted figures back to 1697. There has been a certain amount of inflation since then that might have made a difference. I have quoted to the House previously the bursar of an Oxford college who queried the investment policies of the college on the grounds that the past 200 years had been wholly exceptional. I suspect that the noble Baroness, Lady Noakes, has fallen into that trap. In fact, the current account deficit in 2003 on GDP was 1.9 per cent. I do not have the table that I had when we debated the matter during Starred Questions, but that figure compares with a deficit of over 5 per cent in 1989. Those figures fluctuate, but the percentage of GDP is certainly not increasing. The trade deficit was 3 per cent in 2003, which is unchanged from 2002, and is significantly lower than the 4.1 per cent seen in 1989. Our foreign income position has improved considerably in recent years.
The noble Lord, Lord Pearson of Rannoch, had a particular take on this matter when he referred to our deficits and our trade with the European Union. He
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alleged that the euro had not given any benefit to the German economy, in particular. It is certainly true that the euro area underperformed in 2003 and that Germany experienced a small recession. Indeed, I said that in my opening speech.
Euro-area growth has picked up in the third quarter of this year. As a result of improvements in net exports, Germany emerged from a recession. Government policy on the membership of the single currency remains unchanged: the economic benefits must be clear and unambiguous. It would not be appropriate for me to enter into the wider issues which the noble Lord raised during this debate, which is about the Budget not the euro.
Lord Pearson of Rannoch: My Lords, the noble Lord will agree that the benefit or otherwise of the single market is crucial to this debate. Will he comment on the point that I put to him that the Bundesbank has also said that it can find no evidence that the single market has been of any benefit to the German economy or presumably the other economies of the euro-zone? That is fairly central to why we are having this unfortunate debate at all.
Lord McIntosh of Haringey: My Lords, first, it is not central, and, secondly, I would not comment on the Bundesbank's opinions anyway. We could swap commentaries until the cows come home, but we will simply not do that.
The noble Baroness, Lady Noakes, raised the usual accusation of regulatory burdens. Again, we could swap commentaries as she has done. Perhaps I may respond with a commentary: the World Bank, in a report published in 2004, said that the United Kingdom was seventh in the world for ease of doing business. The OECD in January this year said:
"Competitive pressures appear to be relatively strong in the United Kingdom, with economic and administrative regulations inhibiting competition and barriers to trade among the lowest in the OECD".
We will just have to declare a truce on the matter until everybody outside agrees.
The noble Viscount, Lord Trenchard, talked about the damage done to pensions by the removal of double tax credit for the pensions industry. If he looks at the size and nature of the problems of the pensions industry—of course there are problems—he will recognise that increases in life expectancy, decreases in interest rates and continuing trends away from single-lifetime employment to a variety of employments are enormously more important than the case to which he referred. In any case, my noble friend Lord McKenzie answered very fully the noble Lord's points and the accusation of the noble Viscount, Lord Trenchard, that there had been no improvement in the public services. I shall not take up the House's time with that.
The noble Lord, Lord Newby, had an interesting and very imaginative take on Gershon by quoting the Treasury. As is appropriate, the Treasury is a very small department. He ought to have looked at the Chancellor's department, which includes, in

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particular, the Inland Revenue and Her Majesty's Customs and Excise. If he had looked a little beyond the small focus of his investigation, he would have discovered that the Chancellor's department expects savings of around £550 million by 2007–08, a total reduction of 13,350 departmental Civil Service posts, with a further 3,500 posts deployed to the front line, at least 2,550 posts moved out of London and the south-east by 2007–08 and a further 2,500 by 2009–10. Those are serious figures but they are for a serious branch of government. The Treasury, although entirely serious, is in those terms relatively small.
The noble Lord, Lord McKenzie, adequately answered the accusations about tax burdens. I stand to be corrected, and if I am wrong I shall write to noble Lords, but I think that I have dealt with the principal matters raised.
Lord Pearson of Rannoch: My Lords, before the noble Lord sits down, I am afraid that he has not been good enough to answer the other, simple question that I put to him. He has agreed that the euro-zone trades in massive surplus with us. Our deficit with it is at record and growing levels. Does he agree that, because it is selling much more to us than we are selling to it, it has more jobs dependant on its trade with us than we do on our trade with it? It is a central question, and the answer must be "Yes", but I would just like the Minister to give it.
Lord McIntosh of Haringey: My Lords, any imbalance of trade arises because we have higher growth rates than the other European countries. That is entirely to our credit and in no way affects the basic argument that I put before the House.
On Question, Motion agreed to.

Companies (Fees) Regulations 2004
12.16 p.m.
Lord Triesman Lord Triesman rose to move, That the regulations laid before the House on 11 October be approved [30th Report from the Joint Committee].
The noble Lord said: My Lords, it will probably assist the House if I speak also to the Limited Liability Partnerships (Fees) Regulations 2004 to save time.
These regulations will apply to England and Wales and to Scotland, but not to Northern Ireland, which has its own companies registry. The effect of the regulations is: to revoke the existing company fees regulations introduced in 1991 and amended by statutory instrument eight times since; to revoke the limited liability partnerships—known as LLP—fee regulations introduced in 2001 and amended the following year; and to make new consolidated fees regulations for both companies and limited liability
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partnerships that provide for a revised scale of fees to be payable to the Registrar of Companies with effect from 1 February 2005.
The fees set by these regulations will also be mirrored in another statutory instrument to come into force on the same date, with the effect that the equivalent fees for European economic interest groupings will be the same as those for companies and limited liability partnerships. During this debate, I will concentrate on the company fees regulations, as companies comprise the major part of the register and are therefore the largest group affected by the regulations.
In order to equip Companies House to set appropriate fee levels for these regulations, a comprehensive internal review of all Companies House fees has taken place. The review analysed the statutory framework for setting fees and recommended that fees for established registration and information services should be set by statutory instrument. Therefore, charges for the most widely used electronic registration and information services are included in the regulations. Previously, those fees were set administratively under the provisions of Section 708(5) of the Companies Act 1985.
As a trading fund, Companies House must recover the full cost of the services that it provides to companies, LLPs and the public from fees charged for delivering those services. The cost base for Companies House has increased, with a rising workload and changes in customer practice and demand. The fees regulations reflect that, and the overall effect is to raise income to meet the increased costs of providing Companies House's services, mainly through increases in some registration fees. However, I am pleased to say that many registration fees have been reduced or held at the same level, along with most fees for searching company information. Companies House is not allowed to charge higher fees for one service in order to subsidise another. The prices in the proposed regulations are, therefore, based on a proper consideration and allocation of the cost involved in providing the services concerned.
The benefits of electronic services are clear in cost and efficiency terms. They are cheaper to administer; reduce bureaucracy; are more efficient for users and Companies House; and are more convenient and generally more secure. It is the method of delivery that Companies House sees as the most efficient way forward in the future, and, in line with government policy, it is set to enhance and transform its electronic services over the next three years. It is part of what is unquestionably an ambitious change programme by which Companies House will modernise all its IT systems. From 2008, Companies House believes that it will lead to substantial savings that will be passed on to customers.
I confirm that the regulations are compatible with the European Convention on Human Rights. I hope that my explanation of the purpose of the regulations has made them as clear as possible to the House. I beg to move.

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Moved, That the regulations laid before the House on 11 October be approved [30th Report from the Joint Committee].—(Lord Triesman.)
Baroness Noakes: My Lords, I thank the Minister for introducing the orders and for the clarity with which he did so.
One would not think that fees and charges for putting information into and getting it out of Companies House would be a contentious issue, and, in the whole scheme of things, clearly, it is not. However, the orders mark a fairly radical departure from the structure of fees that applied in the past, so it is important that we pause to examine them before letting them pass. I have a few specific questions for the Minister.
I accept the proposition that the fees charged by Companies House should reflect the costs involved. That has been the Treasury guidance for as long as I can remember. However, in the case of Companies House, some documents are filed free of charge; for example, the 288 forms, which deal with changes in directors. Of course, there is a cost to the registrar for handling them. Will the Minister explain how those costs are handled? Presumably, they are, in effect, recovered from other fees. How is that done, or, more simply, who pays for that?
The fees introduce for the first time a differentiation between documents that are filed and those that are retrieved electronically. I have no reason to doubt the basic proposition that electronic transactions can be more efficient than paper-based ones, but it is not inevitably the case, especially for documents that are filed as opposed to retrieved. A lot will depend on the capital costs of Companies House and how joint costs are shared between electronic and non-electronic activities and on the processes adopted by Companies House.
I see from the Explanatory Notes that a team headed by an outside expert has reviewed the Companies House fees. That is comforting.
Lord Razzall: KPMG?
Baroness Noakes: Will the Minister say who that expert was? My colleague on the Liberal Democrat Benches is suggesting the answer. Will he make the contents of the review available? I am sure that the Minister will agree that transparency in fees and pricing is essential. Whatever cost and pricing structures are set up, there will be a lot of subjective judgments. I hope that the Minister will want there to be the capacity for an honest debate on the issues that arise.
We do not have that review available today, so I shall ask the Minister a couple of questions about relative prices for similar activities. The annual return will cost £30, if filed by paper, and £15, if filed electronically, paper being more expensive by a factor of two. But the provision of a company report is £1 electronically and £3 on paper—a factor of three. There is a factor of four on document packages. Is the
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Minister happy that cost differences explain those different factors in the various forms of handling information?
As well as the premium paid for using paper, there are premiums for speed. For example, if I form a company electronically, it will cost me £30 for same-day service but £15 in other cases. What sort of costs require a fee to be doubled, simply for being dealt with at once?
The Minister will be aware that no consultation on the fees has been carried out and no attempt made to carry out a regulatory impact assessment. There are 1.9 million registered companies. Have the Government any idea how many of those companies will be hit by a doubling of their registration fees, if they cannot use electronic filing? We are not, in many cases, talking about a sophisticated business. We are talking about charities and non-profits. The orders will make obtaining information cheaper, but they will make it more expensive for the least sophisticated to provide the statutory data. Is the Minister content that that policy is fair?
I am all in favour of doing business electronically, but the service should be easily accessible. Can the Minister assure the House that the electronic filing requirements, which at first sight look a bit bureaucratic, with both a security code and an authorisation code, will be easy to operate? Lastly, can the Minister explain why, in a 24/7 electronic world, Companies House operates electronically only between 7 a.m. and midnight and only from Monday to Saturday? When will Companies House occupy the same world as the businesses with which it deals?
Lord Razzall: My Lords, I share the concerns expressed by the noble Baroness. I agree particularly with her opening comment that, if we are asked to spend time on this chilly Friday approving the increase in fees for companies and limited partnerships, we should pause and ask the sort of detailed questions that the noble Baroness asked. I have two more questions to put to the Minister.
Paragraph 7.1 of the Explanatory Memorandum on the Companies (Fees) Regulations, which deals with policy background, says:
"As a trading fund Companies House must always recover the full costs of the services it provides from fees and charges so that it does not become a burden on the general taxpayer".
Are Her Majesty's Government saying that that is the only policy background for fees and charges charged by Companies House? Are Her Majesty's Government completely neutral as to whether the fees and charges increase or reduce the number of organisations that incorporate? Is it simply a matter for Companies House, at best, to break even? Are the Government neutral on, in particular, the impact on small organisations such as those to which the noble Baroness referred?
There is a second policy issue on which I wonder about the Government's position. Are the Government neutral as to whether such an increase in fees will improve the capability of all the interested parties to search the registry at Companies House or reduce the number of

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people who will be prepared to pay the fees? I cannot believe that those arc not policy background issues that should be relevant to consideration of the fees.
We will not oppose the regulations, but I am intrigued. Who takes the decisions? If, in six months' time, it emerges that many fewer people are searching at Companies House or that many fewer small organisations are choosing to incorporate, will that be a matter for the Government or for Companies House? Who determines the policy?
Lord Triesman: My Lords, I will do my best to answer the questions. I may manage at least some of them.
The noble Baroness, Lady Noakes, asked how the costs would be handled in relation, for example, to filed 288 documents. They are largely covered by annual return fees. That has been found to be the most efficient method of collecting money and ensuring that the costs were covered on that front, rather than to charge per form. If Companies House was to charge per form, it is believed that that would raise the overall costs for everyone, which would be undesirable.
Telling points were raised about the relative charges that are now being made. In some cases, the differentials are plainly greater than in others because of the differences in the costs of using new and improved modern technologies or still having to rely on things being done by people handling large quantities of paper. I hope that I have got this statistic right. I was told it and I am doing my best to make sure that I have got it right. I understand that there is somethimg like six miles of files and papers.
As the number of incorporations has increased by well over 40 per cent in the past five years, the handling of papers has meant that the amount of paper being handled, and the number of people handling it, has increased considerably. Of course, that is going in the opposite direction as a trend from the capacity to handle some information electronically.
I simply say to the noble Baroness, Lady Noakes, that the expert was a senior civil servant from another department. In common with the normal approach to these matters, I will not name the civil servant. It was an independent operation undertaken by an entirely different department. It was advised by a steering group, which involved the DTI, Companies House and non-executive representatives. The review papers were for internal use only because of their policy and, even more significantly, their commercial nature. The review outcomes covered advice on good practice, detailed cost allocations based on up-to-date volumes, application for fee-setting powers and pricing levels.
Baroness Noakes: My Lords, I thank the noble Lord for giving way. I take it from that answer that the Government are not committed to transparency on the fee charging mechanisms for Companies House.
Lord Triesman: My Lords, we are entirely committed to transparency, but it would be an
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unfortunate departure in this debate to name senior civil servants from other departments brought in to do that kind of job for Companies House. Although my experience is a good deal more limited than many noble Lords, I believe that the tradition is not to name the civil servants who are involved. I certainly would not wish to change that.
The next point, which was made with some force by the noble Baroness, Lady Noakes, was about why some differentials are greater or smaller than others. In all of those issues, an attempt has been made to try to measure the relative cost of doing any particular activity and practice, even in the electronic field. The introduction of new information technology is improving most of those cost regimes all the time.
It is quite clear that the overall trendline for the costs of electronically handled data and forms is going down. We expect it to continue to go down and for customers to benefit from that. There would he little point in doing it for any other reason. There has been an attempt to metricate the level of cost to the level of work that is involved and to the extent of IT that is available.
Overall, the costs are the specific costs for the service. They are the premium costs plus the standard costs of providing the cost of the service. They are no more than that. The level of the premium services, including services that are done within 24 hours rather than delayed, are also factored into that so that Companies House can manage the demand for the level of service of one kind or another. That is why some of those costs are slightly different.
I had hoped that I had dealt in my introductory comments with the reason why costs have doubled. Essentially, they involve the increased size of the register, the handling of the bulk of the register still in paper form and the additional running costs both in personnel and facilities that are needed for handling those volumes of manual annual returns. It is an operation that is at its most complex in the handling of annual forms because of the sheer volume of them.
Currently, I do not think that there is reliable information—of course, the system has not changed in fee terms yet—on how the firms described as the least sophisticated by the noble Baroness will respond and how they will be affected. But there is some evidence of most firms making an attempt to move to at least a limited form of IT. After all, this is not the most sophisticated end of information technology use. Over time, I appreciate that questions will arise when we have more information about how firms respond.
I hope that it will be regarded as a fairly reasonable statement to say that we are talking about an annual increase of £15. Even in relatively less sophisticated firms, that will probably not be an unreasonable burden. But, in any case, I make the point to the House that the cost of handling these volumes of paper must one way or another be met, and not by cross subsidy. In any event, there is a cost.
Will it be easier to use the electronic methods, the security codes, the authorisation codes and so on? It will, on balance, be easily and readily understood.

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Even more importantly, it will be more secure. Paper forms arrive; they have whatever information is on the face of them; they are filed; and they are retrieved when people need them. But of course it would be an absolutely enormous task to check and authenticate all of the information that is on a paper form that has come back in in that way.
The advantage of an electronic development is that there is a proper track and trail back to the source. That will produce quite a considerable advantage in ensuring that more accurate information is retained by Companies House and that those who are dealing with companies will be less exposed to poor performance by companies or indeed to fraudulent performance.
I am told that Companies House has had a good look at why it is not operating on a 24/7 basis like most of the rest of us. Customers are and will continue to be consulted. The hours seem to reflect what it is believed that customers most use and most want. I have no doubt that that is a matter which would in any case be kept under review. Obviously, whatever practices are used at Companies House, they have to accord with whatever arrangements can be made with its staff for doing the job effectively and on a reasonable basis.
I understand the point that electronic registration does not need people in exactly the same way. My experience of electronic systems is that, although we rely on them to do a job perfectly, they often need people when they fall over—including occasionally the computing systems of your Lordships' House.
I hope that I have answered the main points raised by the noble Baroness. If I have not done so, I shall go through Hansard carefully to check and respond in writing if I have missed anything.
Perhaps I may turn to the points raised by the noble Lord, Lord Razzall. The background policy issues certainly have as one of their cardinal features the fact that this is a trading fund at Companies House and that therefore it must deal with matters in the way I described in my opening comment. The sums that have been done as a background to these increases reflect a number of other factors. No undue weighting has been added for the expected increase in incorporations. Indeed, that increase is a major factor: well over 40 per cent over five years of which some 23 per cent took place over the past year or so, although in general that has been a relatively neutral matter. There has been no increase in the fees for a period of eight years. This is the first increase for some time and reflects the new circumstances under which a review was thought necessary. Moreover, continuing reviews will take place to make sure that the figures all add up. It would be foolish to do otherwise.
The other main policy issue is related to improving the capacities of Companies House: encouraging people to make searches which, after all, will become cheaper under this fees regime. It will make use of search engines, meaning that people do not have to do it and therefore will be cheaper. It should also be more efficient, although of course we shall see what happens. The point is well taken. However, improving
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the capability of people using the register is likely to increase the numbers wishing to access it, and it will cost them less to do so.
I do not believe that any of these changes in fees will have an adverse effect on small businesses. Companies House is an executive agency and 90 per cent of the companies in the register are small businesses. In setting the fees and the review that took place, we have tried to reflect that fact. It is not the case that a huge proportion comprises large businesses. The review had to reflect the fact that this involves small businesses and I believe that the fee levels which have been set are broadly right.
As I said in response to the noble Baroness, Lady Noakes, I shall check to ensure that I have answered all the questions put to me by the noble Lord, Lord Razzall, and will write if there are any gaps in the information I have provided. With those assurances, we believe that this is the right way to go ahead and, in that light, I commend the regulations to the House.
On Question, Motion agreed to.

Limited Liability Partnerships (Fees) Regulations 2004
Lord Triesman: My Lords, I beg to move the Motion standing in my name on the Order Paper.
Moved, That the regulations laid before the House on 11 October be approved [30th Report from the Joint Committee].—(Lord Triesman.)
On Question, Motion agreed to.

Companies Act 1985 (International Accounting Standards and Other Accounting Amendments) Regulations 2004
12.42 p.m.
Lord Triesmanrose to move, That the draft regulations laid before the House on 11 October be approved [30th Report from the Joint Committee]
The noble Lord said: My Lords, I am pleased to be able to introduce the draft Companies Act 1985 (International Accounting Standards and Other Accounting Amendments) Regulations 2004, perhaps not least because I thought that I would never get through their title, let alone a description of them. These regulations are concerned with the introduction of International Accounting Standards pursuant to an EC regulation and the implementation of accounting changes as a result of two EC directives—the fair value and the accounts modernisation directives.
In June 1998, the European Council of Ministers invited the European Commission to table a framework for action to develop the single market in financial services. In May 1999, the Commission published a communication containing a financial services action plan, which was endorsed by the Lisbon European Council in March 2000. The financial services action

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plan is designed to facilitate a single market across the European Union. It consists of a set of measures intended by 2005 to fill gaps and remove remaining barriers so as to provide a legal and regulatory environment that supports the integration of European Union financial markets
One of the aims of the financial services action plan is to harmonise financial reporting across the European Union on the basis of globally agreed accounting standards. A key measure is the regulation on the application of International Accounting Standards, known as IAS, adopted by Europe in July 2002. Other key measures are the 2001 European directive on the use of fair value accounting and the accounts modernisation directive of 2003. These three measures together are the subject of the draft regulations before the House today.
The IAS regulation is directly applicable to publicly traded companies governed by the laws of EU member states. It requires such companies whose securities are admitted to trading on a regulated market in any member state to prepare their consolidated accounts in accordance with IAS, as adopted by the European Commission, for financial years beginning on or after 1 January 2005. The IAS regulation also contains options allowing member states to permit or require publicly traded companies to prepare their individual accounts, and other companies to prepare their individual or consolidated accounts, in accordance with adopted IAS. The term "company", as defined for the purposes of the IAS regulation, includes building societies. The IAS regulation, fair value and accounts modernisation directives will be implemented for building societies shortly by a separate statutory instrument amending the relevant regulations.
Today's global capital markets require consistent, reliable and high quality information if they are to operate effectively and everyone is to understand what is happening in them. IAS provides a high quality, principles-based financial reporting framework that will, by 2005, be used in approximately 90 jurisdictions around the world. I make that point because of course the regulation goes much wider than the European Community. The IAS regulation will ensure that all European publicly traded companies use the same accounting standards in their consolidated returns. This will ease the burden on multinationals that currently must follow different rules in different countries. It will contribute to stronger financial markets in Europe, allow comparability of the accounts of companies across the EU and beyond, and will thereby encourage cross-border investment. International standards should also help to promote financial stability through enhanced transparency.
When the Government consulted on the exercise of the member state options in the IAS regulation, there was general support for IAS. It was seen as the future for accounting standards. The Government decided to extend the application of the IAS regulation on a permissive basis. Companies not covered directly by the regulation would be able to choose whether or not to switch to IAS. We decided against mandatory extension for the time being, mainly because to do so
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would have imposed burdens. IAS are in a state of transition with many standards being revised. They do not yet offer a simplified regime for smaller companies comparable to those provided by the UK system and well understood by accountants and accountancy firms.
Under our proposals, companies can choose to switch to IAS when the time is right for them, and when the benefits of doing so will outweigh the costs. We believe that this is a business-friendly, market-led approach to the issue. However, we have included sensible restrictions on this option, such that in most cases companies will not be able to switch back out of IAS once the choice has been made. Companies within a group should make a consistent choice.
Allowing choice will create some lack of comparability in the short term as many companies wait and consider whether to switch. But we believe that take-up of IAS will gather pace as more and more companies recognise the benefits. In the interim period, the work of our Accounting Standards Board in aligning domestic standards with 1AS will ensure that lack of comparability is kept to a minimum.
In the UK, accounting standards issued by the Accounting Standards Board apply to all UK companies. They are also used by a variety of other entities. The ASB's standards and IAS are in many cases very similar, although there are a number of differences. The ASB's standards will continue to apply to all UK companies that do not report under the IAS regulation, whether directly or by extension. However, the ASB's aim is to bring UK standards into line with IAS. The ASB has been working towards this for some time.
The fair value and modernisation directives are not directly applicable but must be implemented through national law. The fair value directive requires member states to enable companies to follow modern, more transparent accounting practices in the area of financial instruments that are consistent with IAS.
The modernisation directive contains a number of other amendments which are designed to bring European accounting requirements into line with modern accounting practices. It requires member states to make certain changes to national law and gives them options in other areas.
The most significant of the provision in these directives—the use of the fair value accounting system—will, under our proposals, be optional for companies. The burden of complying with other amendments should he minimal.
These changes will benefit companies by allowing those not using IAS none the less to follow accounting practices that are very much in line with IAS, increasing comparability of accounts.
We have also taken the opportunity in these regulations to include five other amendments to the disclosure, reporting and filing requirements for companies. These continue our aims of modernising company law and achieving consistency and comparability. The proposed amendments will, first, reduce burdens on some companies by

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extending the circumstances in which Great Britain parent companies are exempted from the requirement to prepare consolidated accounts.
Secondly, they will amend the provisions in the Companies Act on the information to be disclosed regarding dividends, and the location of the disclosures, making the disclosure consistent with IAS. Thirdly, they will expressly permit companies voluntarily to revise their summary financial statements, thereby clarifying the current position. Fourthly, they will extend the Secretary of State's regulation making power on summary financial statements so that she has the option to permit all companies to distribute summary financial statements, rather than only listed companies. Finally, they will remove the right for a three-month filing extension for companies with overseas interests, a right that is now hard to justify in an era of rapid global communications.
Good company law needs to provide a framework for successful enterprise—that must be one of the overriding considerations—and these proposals will build upon that framework by allowing companies to use the same accounting standards across groups, providing more consistency and greater comparability and reducing barriers to growth. They will enable companies to follow modern, more transparent accounting practices that are consistent with IAS. We believe on balance that these are all considerable advantages. In that light, I commend the regulations to the House.
Moved, That the draft regulations laid before the House on 11 October be approved [30th Report from the Joint Committee.]—(Lord Triesman.)
Baroness Noakes: My Lords, I thank the Minister for introducing these complex regulations. Let me say at the outset that we are enthusiastically in favour of the greater use of International Accounting Standards. We believe that global capital markets will benefit from the removal of the inefficiency of a proliferation of accounting standards and that thereby global trade will be enhanced.
In the late 1990s, when I was active in the Institute of Chartered Accountants, I visited the US for a meeting of the larger accounting bodies—which we rather grandly called the G8—together with the major standard setters of the world. That meeting made amazing progress for the first time and was, I believe, the first step towards realising the desire for a common set of accounting rules for the whole of the global business world and not only the English speaking part, the accounting traditions of which have always been more aligned.
A huge amount happened after that meeting, including a complete overhaul of the International Accounting Standards Board and a massive work programme designed to achieve international accounting convergence. The regulations before us today are a very important step in achieving the goal of common financial statements around the world. I pay tribute to all those who have worked extremely hard to deliver this impressive achievement.
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Unfortunately, the European Union had to get involved and Brussels could not resist the desire to create yet another uniquely European solution to what was essentially a global issue. But one good thing came from the EU's involvement—that is, an early announcement that all European listed companies would have to adopt International Accounting Standards in their consolidated accounts from next year. I believe that that announcement gave great impetus to the convergence programme.
The downside was a filter mechanism in Europe for International Accounting Standards so that it is only those accounting standards that have been adopted by the EU that are to be applied. I always believed that this would cause problems for the creation of global accounting standards, and this has indeed proved to be the case. Last month's decision of the Accounting Regulatory Committee to approve one standard—IAS 39, which deals with the recording of financial instruments—in a castrated form has set back the process of achieving genuine international standards.
We should make no mistake that the really important issue is convergence globally, particularly with the US. EU financial markets and commonality within the EU are sideshows. UK companies need to be able to operate in the US capital markets without the need to re-present their financial statements in accordance with US accounting rules. Mr John Tiner, chief executive of the Financial Services Authority, warned in a speech last week that the SEC would not allow dispensations if there was not full compliance with International Accounting Standards, including IAS 39.
So my first question to the Minister is what are the Government going to do about IAS 39? UK listed companies will be required by the 2002 IAS regulation to adopt something which will conflict with the body of International Accounting Standards. The UK's Accounting Standards Board has already announced that it expects to adopt IAS 39 in its pure form, and it has strongly recommended compliance with IAS 39 until a UK standard is issued. Does the Minister regard this state of affairs as satisfactory and what action do the Government propose to take to sort it out?
I accept that this issue is not at the heart of the regulations before us today because they merely facilitate fair value accounting, but the politicisation of International Accounting Standards is a very real problem. Mr Robert Hertz, the chairman of the US Financial Accounting Standards Board, the FASB, said last week that further political interference could put up serious barriers to convergence between the US and the rest of the world. That would be undesirable. Does the Minister agree? If so, how will the Government work to get politics out of accounting standards?
Wearing my accounting anorak, I could raise many detailed points with the Minister, but I shall spare him and raise only a couple. First, is the Minister satisfied that the interaction between International Accounting Standards and the ascertainment of distributable

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profits is clear and unambiguous? The companies that adopt International Accounting Standards in their consolidated accounts will not of course face this issue, but those that do so in their own accounts will. I believe that there are some complex areas—for example, in relation to share-based payments and revaluations—and I shall be interested in what the Minister has to say about whether the DTI is planning to carry out any further work in this area to help companies or whether it will simply leave it to lawyers and accountants to muddle through.
Secondly, will the Minister say whether the Government are content that a company which prepares consolidated accounts under IAS may keep its holding company accounts in accordance with UK GAAP? At present there are some significant differences between UK GAAP and International Accounting Standards. The UK Accounting Standards Board has a conversion programme but it has not completed its work. So it is possible, I understand, that different accounting in areas such as deferred tax or pensions could result in a company paying dividends because its individual accounts showed that it could, although the IASs applied to its consolidated accounts—had they applied to the individual accounts—would have prevented it. Are the Government content that the law of unintended consequences will not arise because of the very permissive nature of the implementation of the modernisation directive?
Thirdly, these orders apply only to companies and LLPs. What do the Government intend to do about their own accounts, including those of bodies such as the NHS, which are not covered by the order? I hope that there will not be one rule for the commercial world and one rule for the Government.
Before I sit down, I simply observe that anyone with any understanding of the resources required for implementation of IASs will chuckle at the regulatory impact assessments. The listed companies now grappling with the task of applying IASs talk in terms of man years rather than the couple of days set out in the regulatory impact assessments. The RIA costings for the accounting staff involved are way below market rates, which have shot up significantly for almost anybody who can spell "international accounting standards".
Because these orders are generally permissive, I will not oppose them on the grounds that they impose costs. However, we should be under no illusion that those companies which choose to go down the path of international accounting standards will be paying rather more dearly than the Government have set out.
1 p.m.
Lord Razzall: My Lords, I join the noble Baroness in thanking the Minister for the clear way in which he has presented the regulations. I, too, do not think that these Benches will seek to oppose them, but I should like to take the opportunity to make two or three points.
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The Minister quite clearly said that this is not intended to apply to small companies or companies that do not wish to take advantage of the ability to trade on a global scale. That is extremely important. Given the noble Baroness's remarks about the complexity of the regulations and the man years that many companies think would be required to implement them, it would clearly be a disaster for a large number of UK companies were they to be forced to spend the amount of time necessary to implement the full IAS regime. I welcome the Minister's assurance that the Government do not intend to apply the regulations in that way.
I should like to make two general points. The noble Baroness referred in her remarks to the unfortunate interference of the European Union. I thought for one moment that I was listening to the noble Lord. Lord Pearson of Rannoch, although he is not in his place. This short debate represents in microcosm the problem that occurs whenever anything to do with Europe is discussed. The noble Baroness says that it is extremely unfortunate that the European Union became involved. I would say, as I suspect the Minister would, that it is extremely fortunate that the European Union got involved, because how else would our continental European partners have been persuaded to implement IAS? Would the noble Baroness have had to go around demonstrating her expertise to people in Bonn, Frankfurt, Paris and other places in Europe to persuade them that this was an important move?
Of all the major European countries, the UK, traditionally, in practice and in fact, has had the best accounting standards. The mechanisms in the regulations are, to put it crudely, an attempt to drag the rest of continental Europe behind us in complying with better accounting standards. The noble Baroness says it is unfortunate that the European Union got involved but has not quite got it right. I would say, from these Benches, that were it not for the involvement of the European Union, this would not have happened at all in Europe. This debate is, in microcosm, a forerunner of all the debates we shall be having over the next two years when we get the referendum at the top end and all the detailed arguments at the bottom end. It shows the division that will inevitably occur between two different points of view.
Secondly, does the Minister agree that the discussion we have had over the past half hour demonstrates the need for the eventual comprehensive reform of company law that we have been promised? I know it is well above his pay grade to determine what goes into the Queen's Speech. Nevertheless, every time regulations or small Bills are put before us, we are simply providing an accretion to the existing body of company law that demonstrates the necessity to have the codification we have been promised. I am sure that the Minister agrees, although he will not say so. This is yet another example of the difficulty that endless governments will get themselves into if we do not have that reform of company law.
Lord Triesman: My Lords, I thank noble Lords for a very useful exchange on the regulations. I am pleased

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that the House has again had an opportunity to devote further attention to company law, even if it is in a somewhat piecemeal way. I understand the point made by the noble Lord, Lord Razzall. I suspect that more comprehensive codification of many of these matters will always have to be undertaken, at least periodically, if they are to be coherent. But I believe that the change before us has the merit of adding a bit of coherence.
Accounting requirements might not be the subject of wide public discussion, but they are vital to our companies and therefore important to the economy as a whole. It is even more important, when people feel that there is turbulence or difficulty in understanding what companies are doing, to be able to see from companies' accountancy practices what they are doing, so that there is security for investment, and so on.
I strongly agree with the noble Lord, Lord Razzall, that the extension of the standard accounting procedures across the European Community—something we would probably have taken as axiomatic in this country—must be of benefit across a trading bloc of that size, even if there may have been some imperfections. I call to mind once again the fact that this process started with 90 jurisdictions. It went well beyond the European Community, but the European Community made sure, in the course of events, that it was carried into the EU to make sure that it happened in the EU as a result of discussions in Lisbon.
Let me turn to the remarks of the noble Baroness, Lady Noakes. On IAS 39, the UK would have unquestionably preferred full endorsement, but it has not proved possible. The key short-term priority was to provide companies with clear guidance on the implications of the partial endorsement decision. We are working with the ASB on this guidance. We encourage all parties to work towards a position in which the full version of IAS 39 can be endorsed as soon as possible. We certainly share the view that it should be.
The European Commission has said that this is an exceptional case. We hope that it will stick to this and that in future, the IASB standard will be endorsed without amendment. That is the clearest way in which I can express the matter.
I was asked whether the existing principles of realised and unrealised profits will continue to apply where profits are determined in accordance with international accounting standards. Dividend planning is one of the factors to be taken into account in deciding whether or not to opt to use IAS in companies' individual accounts. The Government are aware of the problems; the link between accounts and distributions is required by the second company law directive. Encouraging the European Commission to re-examine this in the light of the move to IAS must remain an important factor.
We were also asked to say something about the regulatory impact assessment. We do not believe that it was an underestimate of costs. It was subject to wide consultation. The respondents to those consultations commented on the costs and benefits of the changes.
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Most comments were used in the preparation of the final regulatory impact assessment. The benefits will unquestionably outweigh the costs.
The costs will vary greatly from company to company, but, overall, it is plain that the benefits will outweigh the costs. One of those benefits goes to the heart of one of the points made by the noble Lord, Lord Razzall. It must be right—and the noble Baroness, Lady Noakes, made the same point—that the complexity of the arrangements would be a huge burden for some small companies and would take them considerable periods of time to implement. That is why they must be left with a choice about when the cost justifies the benefit that will flow before making the change.
On the question of whether the Government's accounts, including accounts like the NHS, will conform to the same standards, I want to say because I believe it to be true that the accounts of the NHS and other government departments and operations under government departments have become more transparent. I do not think they are hard to follow any longer. Indeed, some of the more robust debates that take place across the House flow from the fact that people can see and understand the accounts and argue not about whether the accounts are accurate or transparent, but whether they reflect matters that are of benefit to the United Kingdom. That has tended to be the tenor of most of the major debates.
I want to address a final point with the caveat I expressed for the first regulations, that after a study of Hansard if I have missed things I shall make sure that I come back to them. The point made was that the standard setting process has become politicised in some way. The UK Government believe that the accounting standards are essentially technical matters. They should be independent, set by independent setters following the process, and subject to effective oversight. The UK has a long history of independent standard setting with the ASB. We agree that on occasions there may be evidence of some political interest in those matters in other states, but we do not have that fault-line in our approach to it. It is done without political intervention and by those who should do it. I completely agree that those independent standards are critical to us.
We appreciate that as a result not everybody will be happy with every IAS. The big picture is unquestionably one that noble Lords have reflected on in this debate—that this is by any standards an advance. Regulations build on the framework of company law by providing our companies with the opportunity to use high-quality, globally accepted principles based on financial reporting frameworks. The permissive regime for IAS is flexible, as it should be, it is business friendly and it will be market led. The Government are introducing one of the most flexible systems for the use of IAS in Europe. I applaud that fact.
It will give our companies the opportunity to have consistency of reporting frameworks across groups and across geographical boundaries. The use of global standards by our companies will give them greater

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access to global markets and global investment. That must benefit UK companies. Managing the accounts of our companies in a more transparent way and encouraging investment into our companies will create stronger financial markets, both at home and, as we have explored the matter, in Europe. It will ease the burdens on multi-nationals and it will keep our companies in the forefront of global investment in global markets, contributing to the UK economy by encouraging innovation, investment and employment.
We have ensured in these regulations that there is a level playing field between companies and also that we will in due course benefit buildings societies, allowing them to continue to contribute to providing for greater choice and diversity in the financial services sector. I recommend these regulations to the House.
On Question, Motion agreed to.

Gas (EUC Report)
1.14 p.m.
Lord Woolmer of Leeds Lord Woolmer of Leeds rose to move, That this House takes note of the report of the European Union Committee on Gas: Liberalised Markets and Security of Supply (17th Report, HL Paper 105).
The noble Lord said: My Lords, I should like first to thank my fellow members of Sub-Committee B for their support, hard work and contributions to this inquiry. I know that they will join me in expressing our deep appreciation and thanks to our specialist adviser, John Wybrew, and in conveying our warmest thanks to Patrick Wogan, who was our Clerk for this inquiry and who retired from the service of the House last week. He was a tower of strength and an inexhaustible source of wisdom and sage advice throughout his time with the House. We are indebted also to our secretary, Marilyn Byatt, and I thank her for her unstinting endeavours on our behalf.
I should also like to record our thanks to all those who submitted written evidence and to those who additionally appeared before us. Finally, but not least, I thank the Government for their positive and constructive response in September to our report.
The background to your Lordships' committee inquiry has two elements, both of which affect producers and users of gas. The first is the drive within the European Union towards a liberalised gas market. The second is concern about the availability of gas—the security of supply—as gas becomes an increasingly important source of energy and as net imports into the UK and the EU as a whole become substantial. We sought to consider both of these matters and, where appropriate, the interrelationship between them.
The reason for liberalising gas markets, after all is said, is to ensure that consumers of gas have a choice of competing suppliers who themselves are free to enter the market and who have transparent access to a transmission infrastructure. A single liberalised market within the EU should enable the most efficient and competitive gas businesses to emerge offering the best
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deal for gas users. Your Lordships will be well versed in these matters. Our report itself deals with the details in Chapters 1 and 2 and in Appendix 4.
The European Commission first addressed these issues way back in 1991, but the first gas directive emerged only in 1998. Your Lordships' committee reported on that in its 7th Report of Session 1997–98. Little progress occurred, and the Lisbon Council of March 2000 urged rapid liberalisation of the gas and electricity sectors as part of a drive to complete the single market and improve EU competitiveness in the global economy. A second gas directive emerged and was agreed in 2003.
That directive requires a legal unbundling of the transmission companies from companies supplying gas to consumers, but vertically integrated companies are still allowed to own both types of business within the same group. To ensure that new-entrant supply companies are able to compete, they must have equal rights of access to the transmission network on fair and transparent terms. There must also be an energy-specific regulator in each member state. Member states are required to ensure that all non-household gas customers have free choice of supplier by July this year and all customers not later than July 2007.
Finally, since the directive was agreed, political agreement has been reached among member states on a draft regulation that sets out the detailed rules governing conditions of access to the transmission network. The United Kingdom, of course, liberalised its gas market some years ago. However, as the UK rapidly becomes a substantial net importer of gas, access to a liberalised and competitive gas market in the EU will be one aspect of ensuring the security of gas supplies to this country.
Your Lordships' committee welcomes the second directive and the proposed regulation governing third party access to the gas transmission network. There are, however, some issues that still concern us. Many, though not all, member states have managed markets with dominant vertically integrated companies, often seen as "national champions". Governments are often protective about national champions in what they see as a key strategic sector.
At a time of rising energy prices, uncertain energy markets and increasing global competition for energy, we expect member states to resist a speedy movement to a liberalised, internal single market and to fight their corner hard in the detailed discussions about the implementation of changes. The Government, Ofgem and the industry must ensure that we are fighting our corner with sufficient resources in the corridors of Brussels and in the committee rooms of comitology.
The Commissioners told us that they were,
"absolutely sure we are going to have a competitive gas market".
We hope they are right. The history of gas market liberalisation to date has been one of foot-dragging and procrastination in many member states. Indeed, Mr Monti, the outgoing EU Competition Commissioner, is reported as saying on 21 September that the level of competition in the energy sector is "not encouraging". He spoke of highly concentrated

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market structures and the prevalence of vertically integrated companies. He reiterated his preference for the mandatory ownership unbundling of transmission operators. I agree with him. Is my noble friend the Minister able to tell us the Government's view on this point? Do the Government know if the Commission is considering a further directive on this or other aspects of gas liberalisation'?
I turn now to security of supply. Chapters 3 and 4 of our report deal with these issues. In the simplest of terms, the EU as a whole imported 45 per cent of its gas demand in 2001, a figure forecast by the Commission to rise to 59 per cent in 2010 and to 77 per cent by 2020. The UK, after a long period of self-sufficiency, will become a net importer by 2006 and we are expected to import 50 per cent of our requirements by 2010.
The committee asked whether there was a danger that the UK, and more widely the EU, would face difficulties in ensuring that future demand for gas can be met by a combination of domestic and imported gas supplies. The evidence we received is set out in our report and in the written and oral evidence. Virtually all witnesses agreed that there are ample supplies of gas available throughout at least the next 20 to 30 years and probably well beyond. The Commission told us that 80 per cent of total world gas reserves are within economic reach of the European market.
Increasing the diversity of supply sources will contribute to security of supply. Rising imports of liquefied natural gas, LNG, will contribute to that diversity and to flexibility of supplies. For the UK, increased supplies will come from Norway and more interconnectors with Europe. Significant increases in LNG are likely to come from such diverse sources as the Middle East, North Africa, Nigeria, the Caribbean and possibly from the Pacific.
What are the risks? One might be an over-reliance on a small number of countries as sources of supply. Russia provided 20 per cent of gas consumed in the EU 15 member states in 2002. The Commission told us that Russia and Algeria have delivered natural gas to the EU since the 1960s and have acquired a strong reputation as fully reliable suppliers of gas. Producer countries certainly depend as much if not more on revenues from gas exports as Europe depends on gas imports. Even so, diversification of supplies is important and will add to security of supply. Security of sources of gas supply must be high on political and diplomatic agendas. As one witness observed, it is important not to be complacent.
The International Energy Agency has estimated that the investment requirement in gas infrastructure to cope with the large increases in gas imports in OECD Europe countries will be some 465 billion dollars between 2000 and 2030. Witnesses emphasised the critical importance of a flexible but stable and predictable regulatory framework within the EU if this investment is to be forthcoming. Given that, witnesses were confident that the necessary finance would be forthcoming. This emphasises the need for the European Union to make steady but speedy and consistent progress in liberalising its gas markets.
Our report sums up our view on these issues in paragraph 88. The benefits of rapid implementation of the internal market in gas outweigh the dangers. The EU needs legal and regulatory certainty for investors. The risks inherent in greater dependence upon imported gas can be balanced by greater diversity of supply.
There is one issue that the Government might still usefully revisit. From now on the UK will be increasingly dependent on imported gas. We face a period of tight gas supplies globally and rising prices. Back in June our committee forecast real price increases of 25 per cent over the coming years; that now looks modest. Prices have risen by more than that in the last 12 months although many commentators expect prices to fall hack somewhat. In tight markets fully liberalised markets struggle to deliver sufficient insurance against shocks and fluctuations in the supply/demand balance.
The response in much of the EU to heavy dependence on gas imports with long supply lines has been to hold much bigger strategic stocks than in the United Kingdom—up to 20 per cent of annual demand compared with 4 per cent in this country. Until now we were self-sufficient and our own gas reserves were almost literally on our doorstep. The Government have consistently taken the line that this is a matter for the market and that even to talk about strategic stocks would interfere with that market response. However, massive import dependency will now become a new reality. The question of a strategic stockpile or other possible safeguards needs at least to he discussable. A blanket "no intervention in the markets" may not be the best way forward even if it served in a period of surplus gas and self-sufficiency. I do not ask for a response to this today from my noble friend the Minister but I urge the Government not to close their mind in the face of a changing world.
I turn finally to the matter of low probability/high impact shocks to the supply system. This is the subject of Chapter 4 of our report. Our committee was concerned about the security of gas supply over the next two or three winters. Demand for gas in the UK continues to grow as we phase out nuclear and coal-fired power generators, and production from our own gas fields is now falling. The increased physical gas infrastructure to facilitate the necessary large increases in imports of gas is now taking place. By 2007 our infrastructure capacity to import gas will be more than sufficient but the demand/supply balance for the next two or three winters will, in the view of the committee, be tight, especially if we have a prolonged severe winter. We hope that this does not arise but there is always that slight risk.
The forward market for gas prices for the coming winter shows very large rises on last year. Ofgem has recently investigated the causes of this and concluded that 30 per cent of the large rise in forward market prices has been caused by higher oil prices, 19 per cent by faster than expected decline in North Sea production and that much of the rest might be caused by the forward market's view of the risk of extremely cold winter weather.
The Government's response to this aspect of our report is, in summary, that in a very severe winter the market would be able to deliver the required level of demand-side response through gas-fired power stations and large industrial users reducing their demand for gas in response to higher prices.
On this point, Platts UK gas report of 18 October reports that the National Grid Transco mid-October review of the forthcoming winter said if there was a one in 50 severe winter the cut back in gas consumption would be the equivalent to,
"the cessation of gas consumption for approximately 25% of all non-domestic demand for a 40 day period".
On the face of it that would be a massive cost to impose on the business community. Is there no insurance policy worth considering to avoid those costs? Will the market alone make adequate provision for such low probability but high impact events?
With astute caution the government response concludes in masterly fashion that,
"no matter how much is spent on a system of energy infrastructure there can be no absolute guarantee of security of gas supply…in all possible extreme circumstances".
We do not suggest that, but we do believe that changing net import circumstances and rising global demand in energy markets requires a willingness to review past policy that was based on past circumstances. We were not completely reassured by the government response.
These are important issues and I look forward with great interest to your Lordships' contributions today.
Moved, That this House takes note of the report of the European Union Committee on Gas: Liberalised Markets and Security of Supply (17th Report, HL Paper 105).—(Lord Woolmer of Leeds.)
1.30 p.m.
Lord Swinfen: My Lords, it is an honour to follow the noble Lord, Lord Woolmer, in this short debate. I very much enjoyed being a member of the sub-committee under his chairmanship. I believe that there were occasions when he found me a little disconcerting, as I stared at him like a stoat at a rabbit as I tried to follow what he was saying by looking at his lips rather than hearing the actual words.
As we say in our report, and as the noble Lord has already said, gas is becoming an increasingly important source of energy for the European Union and for the United Kingdom. The EU has been an importer for years but, according to the European Commission, the percentage of imports will rise from 45 per cent of current demand to 80 per cent of forecast demand by 2030. According to our Government, we will become increasingly a net importer of gas on an annual basis from around 2006, and we are expected to import 50 per cent of our gas by 2010. At present we import only during the winter.
We report that in the case of the United Kingdom there is already concern about meeting peak winter demand over the next two or three years. There is also the risk posed by the very exceptional winter day that
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might occur once in 20 years. I find it odd that the industry is talking in terms of the very exceptional winter day that might occur once in 20 years. Many noble Lords will remember the exceptionally hard winter, 42 years ago, of 1962–63, when the weather remained very cold for weeks, if not months. I was unable to get my car to my house for three months that winter, due to the weather conditions and the snow on the ground.
At present, apart from gas landed from the United Kingdom Continental Shelf and North Sea fields, we can obtain gas only through the interconnector, which links the United Kingdom with Europe at Zeebrugge. The interconnector has currently a greater export capacity from our offshore fields than capacity to import gas from the Continent. However, there are a number of new import schemes in the offing, which means that we should have a sufficient gas supply within a few years to withstand the "very exceptional winter day" that occurs once in 20 years. Today our country is vulnerable to that very exceptional winter day, which I have already said may well last much longer than a single day—possibly weeks.
We live in dangerous times, and what I have already said takes no account of possible terrorist attacks on our gas supply routes. I do not want the Minister to tell the House what precautions the Government are taking to defend our gas supplies. However, I would like an assurance that they take this matter seriously and are looking with considerable imagination and forethought at how terrorists might attack parts of our supply routes where it would be difficult to make repairs and where those repairs might well take longer than is acceptable to the public at large. No one would have imagined that terrorists would deliberately fly hijacked aircraft into skyscrapers.
In their response to our report, the Government appeared satisfied that the power industry would be able to cope with the exceptionally high demand for gas in very unusual inclement weather. But for how long would the industry be able to cope? The Government gave no indication in their response. How many weeks' supply of alternative fuels for power generation is held in stock? Do we have the skilled manpower available to fire up mothballed power stations should that become necessary?
In the longer term, if we are getting most of our gas through Europe, what happens if there is a prolonged period of very cold weather, both here and on the Continent? Can we be sure of a satisfactory supply of gas? In his evidence to the committee, Herr Pfaff of Ruhrgas AG sought to assure us that no country on the supply route between the gas field and the United Kingdom would divert gas destined for the United Kingdom to its own use. My impression was that most members of the Committee, like me, found that hard to believe. I am sure that most political leaders, seeking re-election at some time in the future, would wish to please their electorate by ensuring that they would receive an adequate supply of gas in preference to the population of another country.

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On another aspect, we were told that in future much of the gas that we would use would come from fields in the old Russian empire, from Central Asia. These gas fields are already in demand to provide power for China and soon to India, both nations with an increasingly voracious demand for power as their industries grow and their standards of living improve. Eventually that will cause problems for both Europe and the United Kingdom, particularly as the demand for power in the western hemisphere is also growing.
We need, for strategic economic and political reasons, to be independent of others as regards our power supplies, particularly if the European Union breaks up, which I believe that it will in due course. At present, I understand that we have some 10 or a dozen nuclear power stations, but they are coming to the end of their lives. Some nuclear power stations have already been shut down, and I am told that in 25 years' time only Sizewell B will be operating. I have already said that for some years our coal and oil-fired power stations have been converting to gas. Is it not time, before it is too late, for the Government to grasp the nettle and put in hand a programme to build a number of new nuclear power stations?
1.37 p.m.
Lord Haskel: My Lords, it has been a pleasure and a privilege to work on this inquiry, and I join other noble Lords in my gratitude to our Clerk, Patrick Wogan, our special adviser, John Wybrew, and other members of staff. Their diligence and knowledge were sources of great strength to this inquiry. My thanks also go to the witnesses who took the trouble to talk and write to us. It was a pleasure to work with my fellow members on this Committee under the chairmanship of my noble friend Lord Woolmer.
Other noble Lords have explained why we are concerned about security of supply. Those concerns are justified: just over a third of our electricity is generated by gas, we use it to heat many of our homes and workplaces and we need it for industrial purposes. A shortage would hit us hard. Also, because gas is a cleaner fuel, we shall need more not less of it as we tackle global warming.
Our witnesses convinced us that there was enough gas in the world to satisfy our demand for the next 20 years. The problem is how to ensure that there is gas here in Britain, in the right place, at the right time and in the right quantity. As my noble friend Lord Woolmer said, the answer is to work within the European Union and to liberalise the market, so it is open to all and to work for a competitive market in gas with multiple suppliers, multiple sources and, eventually, multiple transmission systems, so that a free market operates with minimal regulation. Indeed, the European Union's energy council in June this year reached a political agreement on that, and directives are in place to ensure that it all happens. But will it?
Is that approach practical, sustainable and acceptable to all EU countries? After all, there are different ways of achieving security of supply.
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American cities and states do it differently; they prefer to secure their supply of gas by contracting with a single supplier, which undertakes the necessary investment in transmission and buys the gas on world markets. That seems to work, with big players able to buy gas cheaply. Prices are regulated in each state. They say that it is easier that way.
So where do the problems lie with our policy? Take the directives. They have to be implemented by member states. The speed and effectiveness with which that is done is greatly influenced by political expediency. Some governments—France arid Germany come to mind—argue that sometimes competition should be watered down, because too much holds some firms back from becoming European champions. They see their gas pipeline networks as a national asset, and access to it as a kind of hidden state aid—a political tool that some governments are very reluctant to give up.
Yes, European legislation calls for a liberalised market, but because each government have their own view of liberalisation, the implementation will be slow and patchy. That is why I agree with the noble Lord, Lord Swinfen, that it is important for our Government to facilitate several sources of supply and not be entirely dependent on the European network. For that reason, I welcome the new links with Norway and Belgium, and the terminals for liquid gas.
That independence requires a lot of private sector investment, however. My noble friend Lord Woolmer gave us the numbers. We were assured that a free and open market would encourage that investment. Will it? Markets are pretty unforgiving and prone to all kinds of glitches. Now that much of our gas supply will eventually come from countries that are not particularly politically stable, and will have to travel long distances by pipeline or special carrier, the market risks increase. Add to that that we have storage capacity of only something like 10 to 14 days. As my noble friend said, that is a small buffer to protect us from market risks. Then there is the fact that a break in the gas supply is especially serious because, after the break, all the equipment has to be reset. Add all that up and one has a risky business.
As risk increases so do prices, and as prices increase so does speculation. The other week, the Times ran an article saying that the disappearance of the big energy traders such as Enron and Dynegy only added to the uncertainty of the gas market. Perhaps, but my admittedly casual inquiries reveal that the gas traders have been replaced by the gas betters. Our inventive financial services sector has ensured that, to speculate in gas, one does not actually need to deal in it. One can simply place bets on the price. No one really knows the amount of ordinary or spread betting that takes place on the gas market, but if it is anything like the market in equities, it will soon come to dominate the market. Of course, it is virtually unregulated.
Does that matter? I think that it does, even though, here in Britain, we put the consumer first to create a true market. However, in spite of consumer groups

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condemning each rise, the price of gas is rocketing. Is the Minister happy to put his faith in that kind of market to secure the supply of such an important commodity as gas and, most importantly, to encourage the necessary investment? Perhaps, like me, he is a little nervous.
Regulation might make the difference. Let me make the point that Opposition Peers would make. Regulation often stifles enterprise and, without enterprise, one does not have a market. That is why regulation nowadays tends more towards setting standards than telling people what to do. Those standards are best enforced by the market players themselves but, as we have heard, in some European countries they are vertically integrated national champions or monopoly providers. Their standards and rules are different. In some countries, such as Germany, the regulator is not yet even in place. How enthusiastically will they implement market rules?
We have set up a consumer-driven market in Britain, but our rules are different and we are the exception. Each year, millions of customers here change their supplier and, as a result, price and service is seen as the key to customer loyalty. That requires only light regulation. Even so, in Britain some complain that the Government are regulating to achieve social objectives, such as the elimination of fuel poverty. Elsewhere in Europe, regulation is seen as a tool of social change, with the political gain being worth less competition. Once again, there is a difference in interpretation.
Liberalisation, markets and regulation are, I agree, probably the best way to secure our supplies in future. However, I have tried to show that each element is fraught with difficulty. Liberalisation is interpreted differently in virtually every European state. Markets are prone to failure through manipulation and speculation, and we have no cushion to support market failure. If regulation means setting standards and less social change, member governments will need the political will to implement them. We will have to work hard to overcome those difficulties.
We have important allies in that work, however. Yesterday, in a review of the Lisbon process and the economic reform of the European Union, Chancellor Schroeder argued that the emphasis should now be on accelerating domestic reform in the member states. At the same meeting, Mr Wim Kok, who conducted the review, suggested that there should be a league table of nation states to name and shame countries, in order to accelerate reform. From what I have learnt in this inquiry, I judge that they are both on the right lines. If there are to be league tables, I think that we in Britain would be in the lead.
I am optimistic that we can overcome the difficulties, but I have my concerns—the concerns of someone committed to Europe and the single market, but aware of the reality and, like Chancellor Schroeder and Mr Wim Kok, aware of the practical difficulties to be overcome. I hope that the Minister will be able to address those concerns.
1.48 p.m.
Lord St John of Bletso: My Lords, I join others in thanking our sub-committee's chairman, the noble Lord, Lord Woolmer of Leeds, for his able stewardship of this fascinating and topical inquiry. I also thank our very able Clerk, Patrick Wogan, who, sadly, has retired, and our specialist adviser, John Wybrew, for their invaluable assistance in guiding us through the maze of structural complexities and definitions, which has culminated in a very user-friendly and readable report. I wish that more reports of your Lordships' sub-committees were more widely distributed to and read by the mass media.
At the outset, I should declare an interest as a non-executive director of Regal Petroleum, a listed oil and gas exploration and production company with operations in the Ukraine, Romania, Greece and Egypt.
Although the report focuses on the challenges and scope for achieving a truly liberalised gas market and the importance of security of supply, it is particularly important now for Her Majesty's Government to focus on the recommendations. As the noble Lord, Lord Woolmer, mentioned, the UK is rapidly moving from being a net exporter of gas to being a net importer. I entirely agree with the statement in paragraph 47, that gas,
"has the potential to become the most important fuel for the next generation".
While there has been a recent hike in oil prices—and I agree with the noble Lord, Lord Haskel, that spread bets have hyped oil prices—and there have been concerns for the potential shortage in supply of crude oil, the comforting factor for the gas market is that global gas reserves are 50 per cent higher than oil, and gas resources are far less exploited than oil.
Demand for oil in the UK has fallen from 1.8 million barrels per day only two years ago to less than 1.7 million today. Our oil supply from the North Sea has fallen from 2.1 million barrels per day two years ago to less than 1.8 million today. That is fairly irrelevant, given that we tend to export all our expensive sweet crude and import cheaper crude oil.
However, our demand for gas has grown between 3 and 4 per cent every year, boosted by new gas-fired electricity generating power stations. Demand for gas is likely to peak next year. The estimate by National Grid Transco that by 2010 we will import almost 50 per cent of our gas requirements highlights our vulnerability on security of supply and price fluctuations.
While the three major pipeline additions to the existing European import pipeline network will ensure increased continuity of supply and provide redundancy backup, there is likely to be far more demand for liquefied natural gas—LNG. Although there have been tremendous technical advances in handling LNG—and a number of sites for terminals are already operational or identified throughout the EU—there is a major problem. There is currently a chronic shortage of ships suitably equipped to transport LNG. While that alternative supply of gas provides greater flexibility of supply, our report mentioned the likely increased global competition for LNG, particularly from the United States, where

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indigenous gas supplies are fast depleting, as well as demand from other huge nations such as China and India. What is clear is that economic forces are moving the direction of global markets for gas; and the EU's Lisbon agenda will continue to seek competitive energy markets to help the global competitiveness of the EU economy
I was encouraged to read the Government's response to our recommendation that existing regulations be reviewed to examine the possibility of introducing fast-track reconnection practices for emergencies—a point raised by the noble Lord, Lord Swinfen. Lessons certainly have been learnt from the gas outage in Victoria, Australia in 1998. Can the Minister elaborate on how the GEIEC, with its incident response plan, has been working with other similar bodies in the EU with knowledge transfer to ensure a fully redundant backup service to consumers in the event of an emergency?
With the seasonality of demand for gas—and, sadly, the ever-present threat of a terrorist attack on one of our gas supply terminals in the UK—apart from the obvious need for alternative sources of energy supply, there will be an ongoing need for specialist skilled labour to be available in the event of an emergency where self-restoration is not possible.
Paragraph 68 of the report addresses a key issue; namely, that the problem over the next 15 to 20 years will not be so much the availability of gas as the ability to move it from the places where it is produced to markets around Europe and the world. That will require an extensive pipeline system, often in areas of geographical difficulty, and substantial capital funding. That point was strongly made by the noble Lord, Lord Haskel. The IEA forecast the investment requirement in gas infrastructure for OECD between 2000 and 2030 at 465 billion dollars. In the past, investment risk was shared between the supply companies and the producing companies, and ameliorated by being based on long-term, take-or-pay contracts. But as EU gas markets liberalise and the second gas directive moves to dismantle the so-called "managed markets" in some member states, I question where the capital funding will come from to complete the build-out of the pipeline infrastructure
The noble Lord, Lord Woolmer, mentioned that our witnesses were of the opinion that necessary finance would be forthcoming. However, there will need to be more incentives for investors. Many witnesses recognised the importance of a regulatory framework to attract investment.
Concern was expressed by a few of our witnesses that there may be a partial or a piecemeal approach to European liberalisation in both gas and electricity markets and that the imposition of excessive rules and regulations may prevent markets from functioning effectively. That is a major debate—and I have been speaking for longer than I should—so I shall not dwell on that today.
In conclusion, it is clear that if there is to be a truly liberalised gas and energy market in Europe, there is a strong need for all the EU energy regulators to work together with a shared commitment to achieving a level
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playing field for all the gas providers and implementing the access regulations through consistent EU-wide arrangements, standards and network codes.
Is that achievable? Yes, I believe it is. I tend to agree with Tim Eggar, the former Minister for Energy, when he said that there was now a genuine desire for a change in Europe in the direction of greater liberalisation. In what time-frame will that be achieved? I tend to feel that it will take much longer than we all would have hoped, but the jury is out.
1.58 p.m.
Baroness Cohen of Pimlico: My Lords, this was a truly interesting inquiry and I join colleagues in thanking our chairman, the noble Lord, Lord Woolmer, for guiding our choice and taking us through this. We were indeed brilliantly served by our special adviser, John Wybrew, and our Clerk, Patrick Wogan.
The inquiry was also full of surprises. We undertook it because we all knew that the UK was substantially dependent on gas and that the UK's own personal supply of gas, the reserves in our back yard, the North Sea, was running out, to the point that the UK was moving swiftly from being a net exporter of gas to a net importer. By 2010 we will be importing 50 per cent of our gas needs, and 70 per cent by 2020.
We expected to find that everyone, from suppliers to Ministers, would be concerned about that situation, and would be engaged in fierce contingency planning. Well, up to a point. All witnesses concurred with the view that there was plenty of gas and that, because Europe was a rich market, we could depend on suppliers to bring the gas to us. Market forces would work to build the infrastructure that we do not have. We have plenty of infrastructure to obtain gas from the North Sea, even if some of it is rather old, but much of the new infrastructure necessary to bring gas to us from new reserves does not yet exist. It is true that we have new storage facilities for gas—or rather for LNG—but this is only a very small percentage of the supplies we need.
The new areas for gas are in the main separated from us by many other countries, some not at all politically stable. In the case of the politically stable countries of the EU, we are depending on their willingness to liberalise their energy industries as the new directives require; to unbundled their distribution networks so as to allow other suppliers to pass gas down their distribution systems on an equal access basis. All that seemed to us a very far cry from the present comfortable situation where we have our own gas supplies and our own well-established infrastructure.
It was argued to us that this is how all modern industries work; that we are all dependent on suppliers wanting to supply and finding market mechanisms to do so; and on governments being prepared to ensure that any market is so organised as not to prevent this activity—that governments do not encourage protectionism or obstruction by dominant players. In this context, all witnesses pointed to the recent directives and assumed that EU countries would comply.

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The trouble is that we are not dealing with baked beans or machine parts where disruptions to supply may have far-reaching financial consequences but do not totally disrupt the functioning of the country. Power cuts affecting electricity distribution threaten the vulnerable more or less instantly. They disrupt transport; they render accidents more likely; the elderly are more likely to die or fall ill; and they are, in short, a disaster. Interruptions to gas supplies to individual houses have even more serious consequences. At best it takes time to restore those supplies, leaving people in great difficulty while this is being done, and at worse serious accidents happen.
While this is perhaps less important in the grand scheme things, failure of supply threatens governments. It turns out that we are all remarkably poor sports about being unable to see to read, watch the TV, heat our houses or, more seriously, safeguard our elderly or our invalids. We seem to persist in thinking that in a modern world, where we are all dependent on safe consistent energy, the Government's basic duty is to ensure that safe supply. And we vote accordingly, as in this country in 1974 and in California in 2000. To paraphrase "Yes, Minister", courageous decisions in the area of gas supply may be the ones that lose you the election.
Against that background, it was surprising to find all witnesses, including Ministers, reasonably relaxed about the fact that we shall swing from the comfortable position of having enough of our own gas to export to a position of 70 per cent dependency on imports by 2020. In terms of risk analysis, those are the kind of risks which cause great companies to go bust or governments to fall. In those circumstances, company directors would be looking actively for ways to mitigate risk and I am not at all sure that Ministers were thinking along those lines.
Interestingly, the risk that all acknowledged was that of substantial price rises, as newly industrialised countries like China and India increased their demand on world reserves. That risk seems to have materialised very much more quickly than anyone thought and the consequences will soon be felt. The current Ofgem response to the various cries of anguish has been to advise us all to change our suppliers. But surely that is a somewhat limited reaction and what happens when we have all done that?
The risk of price rises is one thing, but failure of supply is quite another. Given the magnitude of that risk, some fairly drastic mitigation is required. Obvious routes to take are to increase direct gas access. At the moment, there are only two direct import routes, but two new pipelines are planned; the Langeled pipeline which will connect us to the Ormen Lange gas field, and another from the Netherlands to Bacton, but they do not yet exist. And of course we expect everyone in the EU to do their duty and allow the gas destined for us to have access to their transmission systems. It would, I suggest, be wrong to assume that EU governments are less sensitive than we to the undesirability of alienating their citizens. When it came to a competition for limited transmission
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capacity, I agree with the noble Lord, Lord Swinfen, I would not assume that market forces and agreements to liberalise would prevail over a national desire to keep the lights on. We could store gas, which we have not historically needed to do, and stores for LNG are being built but the amounts we can store are small.
Surely, the obvious course must be to use something other than gas; something we have under our own control. We have indigenous ways of generating electricity. We have coal-fired power stations and some, now mothballed, could be brought back into use but not, of course, in a hurry when they might be needed. We have renewables upon which the Government are setting a great deal of store for environmental reasons as well as for diversification. Far be it from me to criticise renewables, but currently, including all the hydroelectric power capacity that has taken 50 years to build up, 7 per cent of our energy needs are met from renewable sources. The Government have given the construction works necessary for renewables a very substantial helping hand, both financially and in their directions to planning authorities, but not one of our witnesses thought that generation from this source would reach anywhere near 20 per cent in the foreseeable future.
Of course at the moment we have nuclear power generation, which provides just over 20 per cent of our needs. But by 2020, on present plans most of those plants will be closed. Put like that, when a much smaller number of new nuclear plants built in the next 10 years could maintain our indigenous generating capacity, controlled by us, at 20 per cent of our needs or better, it seems an obvious route to build to eliminate the major risk of supply failure. It ought also to make a contribution to keeping overall prices down; at the current price levels, nuclear generation is roughly comparable with gas and modern plants would generate more cheaply.
Keeping nuclear generating capacity does not only mitigate the risk of lights going out or prices rising intolerably. We are committed to emission reductions under the Kyoto agreements. I will not labour the arguments here, except to note that on present assumptions none of our witnesses thought that we could conceivably meet our Kyoto obligations.
In conclusion, I would therefore suggest to my Government that they may not be thinking sufficiently about the risks involved in depending on gas—the risks both to prices and to security of supply. Despite the understandable wish to increase generation from renewable sources, we should accept that if we get to 20 per cent, we will be doing very well and it will be extremely difficult. We should not lightly abandon the other great renewable source; nuclear power generation.
2.7 p.m.
Lord Walpole: My Lords, I also thank our chairman for putting forward the report so clearly and for inspiring us to produce it. I certainly endorse what he said about our Clerk, our secretary and our adviser and, indeed, the rest of the committee, who I thought were very enthusiastic about producing the report.

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I want to make one remark about procedure. I do not think that it is a very good idea to put forward such an important report on a Friday with relatively few people in the Chamber. I hope that the Procedure Committee will look into that in the near future so that, when reports are brought to the House, attendance is slightly higher. After all, the only speakers are members of the committee and two Members of the Opposition, and that is a pity.
I am surprised that no one has pointed out the misprint in the report. When I read it on the train the other day, I discovered that it was ordered to be printed on 8 June 2003. I know that the Government have not been doing very well recently, but I am aware that the date should be 2004.
Basically, I am a practical person and I hope that noble Lords will forgive me if I am a little anecdotal for a moment, but I do seem to have been involved in gas for most of my life. My grandfather was chairman of the North Thames Gas Board and he was also chairman of the Hertfordshire and Essex Water Co Ltd. So I spent my youth wandering around and looking at gas retorts, water pumps and so on, and that has held me in very good stead for most of my life.
My uncle—my grandfather's son—was chairman of the Gas Council when the first load of liquid gas was shipped into Canvey Island and the surveys for North Sea gas began. In fact, it was hoped that the gas would be found on land, and the seismographic survey crossed my farm at the time. Just south of where I live, a coal seam was found, and not only a little one. On 5 November 1970, the local newspaper reported that a coal seam more than 10 feet thick had been discovered in Norfolk. The Coal Board said, "Don't worry about that. It's ours". So I declare absolutely no interest in the gas or coal underneath my farm which I know is probably there.
We now have three 36-inch gas mains within a mile of where I live. They come in from Bacton and go west. By way of history, I am still a director of Fakenham Gas Works, which is an ancient monument and the only surviving complete town gas works in the country. There is also one in Scotland, but that is a devolved country.
What is this gas that we are discussing? Very importantly, in paragraph 26 of the report one discovers that it should be pure methane. Gas coming in at Bacton is dealt with, and so what comes down the pipes past us is methane. I believe that the Government wish to use the distillate from Bacton fairly soon in order to run other power stations in an emergency. The distillate is taken out by road—a road which the Gas Council kindly built for us, and I was chairman of highways in Norfolk county at the time. The distillate then goes by train. That branch line was not closed by Dr Beeching because it was necessary to take out the distillate, and so I can come to the House by train.
The important point is that the memorandum by Shell on page 112 of our report states that the least polluting form of fossil fuel is gas, provided that it is pure. It is absolutely essential to work towards the gas
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in the mains of Europe being pure and not a nasty mixture. It should be what I believe is called "high-value gas" and not "low-value gas".
We must look at the local reserves that are still left in the country. We have coal beneath Norfolk and do not need to go down a mine shaft to extract it. Surely we can put microbes down there to extract the gas. In fact, parts of Norfolk are to be surveyed again because there may still be sufficient gas under the land to drill for, especially if the price is going up, as it is.
I turn to the subject of the "If…" programme, to which we refer in paragraph 89. I enjoyed the programme enormously but I am sure that, like all other members of the committee, we saw its flaws. But there is a certain amount of truth in it. One thing that we must remember if things go wrong is the enormous cost of reconnecting private houses.
When I wrote my speech, I wrote that the price of gas will probably go up, but since then I have read in the Times that it has gone up on, I think—I cannot remember—three occasions now.
The conclusion that I have come to is that gas must be of a standard quality in all the main networks, so that we all burn clean gas. Environmentally, that is very important. We should look for other latent sources of gas like the possibility of gas under north Norfolk and indeed in other parts of the country. Where there is coal, we should look very seriously for gasification of the coal.
The noble Lord, Lord Swinfen, mentioned ensuring that our mothballed generators are ready to work. I understand that the one at Great Yarmouth is nowhere near ready to work. I say, in parenthesis, that the other day I visited Yarmouth, and having been told that the marvellous new wind farm on Scroby Sands was working, I found that of the 30 turbines, only nine were working on the day I visited. It was very sad to see. I would like to have seen them all working. I would also like to see the power station at Yarmouth, which has been mothballed, ready to be brought back into service in case of emergency. As has been suggested, we should look at other sources of electricity so that in the long run we lower the percentage of our electricity that is dependent on gas.
2.15 p.m.
Baroness Harris of Richmond: My Lords, I too congratulate the noble Lord, Lord Woolmer, on securing this debate. I chair your Lordships' EU Sub-Committee F, which, as your Lordships know, deals with home affairs—so I hope that I will be forgiven for being an interloper in this debate from that rather particular angle. I have nevertheless read the excellent report of Sub-Committee B, as I am sure everyone who is fortunate enough to chair one of your Lordships' EU Sub-Committees has, and I felt moved to take a very small part in this debate. My noble friend Lord Shutt, himself a member of Sub-Committee B, is unable to be here today. I hope that your Lordships will accept my somewhat less informed views—but, none the less, fresh eyes—on a report in which I have not actually participated.

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The noble Lord, Lord Walpole, pointed out the error of the date in the report, so I shall not add to the collective embarrassment for missing that—an embarrassment that I too must share. However, it took three months to gather evidence and report, and then effectively four parliamentary months before a debate slot was made available. I am afraid that that occurs all too often in relation to EU Select Committee report debates. The noble Lord, Lord Walpole, anticipated the remarks that I shall make next, and I absolutely share his concerns. If your Lordships will indulge me for a moment, I shall make just a brief and valedictory remark for the record.
Many Members of this House participate in the EU Sub-Committees, spending many fruitful hours on important scrutiny and close and deep examination of legislation coming from Europe. No one else in our Parliaments does that to the same extent. If we are serious about saying that that work is important for the greater understanding and knowledge of how EU legislation will affect us as a nation, we really must take the trouble to effect debates in a more timely and responsible way.
Having got that off my chest, I return to the report. What of its substance? As we have heard, the report is made in the context of the liberalisation of EU gas markets in a future of diminishing supplies of EU gas to liberalise. Of course, liberalisation is to be welcomed, but the scarcity of supply in the future, which the report identifies as being problematic, must be a real cause for concern. At page 23, paragraph 52, the report states:
"On the assumption that there will be no more discoveries for development in the UKCS"—
the United Kingdom continental shelf—
"National Grid Transco predict a supply deficit of 21bcm"—
that is billion cubic metres—
"in 2004–05 increasing to 43bcm in 2008–09 and to 67bcm in 2011–12".
That cause for concern was expressed by the noble Baroness, Lady Cohen, when she referred to the possible alienation of citizens unable to have immediate access to supply in the event of a failure of that supply. We shall have to be significant importers of gas, having been self-sufficient for a very long time, as we have heard from all noble Lords.
The report identifies that there is plenty of gas available in other parts of the world. Well, that is a relief. The noble Lord, Lord Haskel, referred to unstable areas of the world from where the gas will come. In particular, I note that one of the major contributors to the supply of all forms of gas will be Qatar, a country which is taking the lead in moving towards a sustainable Arab democracy. I am sure that all sides of the House would encourage Qatar in its brave endeavours in that respect.
However, it is the immediate needs of this country in the next few years, until those supplies can be produced, that worry me. It all seems very "iffy". When will the proposed increase in capacity be realised, and is it all coming forward on time? Is the
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Minister able to reassure us that the work going on at the Isle of Grain site will be completed in 2005 as promised? What about Milford Haven, the upgrading of the interconnector with Belgium and the Orman Lange pipeline? Are they all predicted to meet their estimated completion dates?
Security of supply is of fundamental importance, especially in view of current price rises. In the longer term we need to ensure that there is maximum diversity of supply. I was pleased to see that the Government's response—their constructive response, as described by the noble Lord, Lord Woolmer—to some of those concerns was acknowledged. I hope that they will keep the sharpest of eyes on the producers to ensure that we all get sufficient supplies throughout the next few winters.
I should like to say a few words about pricing. We have heard that npower—our third largest energy firm—will increase its gas and electricity prices shortly. Oil prices have risen alarmingly, which will almost inevitably feed into gas prices. We will need to spend huge amounts on new pipelines to our country from geographically difficult areas in order to supply our needs effectively. For Europe as a whole, that will cost a total of 465 billion dollars between 2000 and 2030, which was referred to on page 28, paragraph 69 of the report and also by other noble Lords.
As the report states on page 30, paragraph 79, the European Commission recognised how important it was to,
"ensure that the necessary investments were made to allow the import capacity of the European Union to expand".
Energy companies have made equally direct comments, as the report recognises at paragraph 80:
"Energy companies predict that there will need to he a doubling of the pipeline infrastructure and LNG terminals in the European Union over the next 20 years"—
a point to which many noble Lords have referred. The fact is that it will take tremendous commitment and vision if all of this is to be realised and the European Union is satisfied that it has sufficient gas supplies to deal with both business and domestic consumers
I turn to the issue that concerns me most: the physical security of the supplies that we import. The noble Lord, Lord Swinfen, referred to terrorism, as did the noble Lord, Lord St John of Bletso, and I agree with them. If future supplies are going to have to travel vast distances around the globe to reach the EU markets, how confident are the Government that they can ensure the safety of the vessels in which the fuel will be transported? Because of the high risk of terrorist action, it is imperative that everything possible is done to ensure that the huge tankers which will transport the gas are carefully monitored throughout their journeys
The noble Lord, Lord Swinfen, referred to building more power stations. Perhaps I may make a bid to get our ship building industry up and running again to build some of those tankers. The noble Lord, Lord St John of Bletso, also recognised that need.

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Perhaps more importantly, security must be built in to the new terminals where gas will be landed and stored in future. Are the Government satisfied that that is happening? On page 39, paragraph 110, the report states:
"if there were, for example, a terrorist attack on either of the two existing terminals at St Fergus in Scotland and Bacton in Norfolk, then this could produce a national emergency for which the Government would have to assume immediate responsibility".
In the words of the country's senior police officer, it is not a question of "if" but "when" such an event occurs. I therefore ask the Minister how closely producers are working with the police and intelligence services. How frequently do they run "what if" incidents? In short, are the Government satisfied that everything is being done in terms of civil contingency around these terminals to ensure the safety of our communities? Noble Lords may feel that I am straying far from the subject of the production, transportation and storage of gas, for which I apologise, but that is a concern for the future and I wish to be reassured that it has been recognised as such.
The report is to he welcomed. It has identified the problems and challenges for gas supplies in the future, here and in the EU as a whole. It has pointed to the growing use of liquefied natural gas (LNG) and the probability that there will be fierce competition for that resource from around the globe. But it also highlights the concern about what will happen to our own supplies if we have harsh winters in the next few years. I share that concern, as do the people of this country.
2.25 p.m.
Earl Attlee: My Lords, I am grateful to the noble Lord, Lord Woolmer, and his committee for both their work and their contribution today. I share noble Lords' concerns about the timing of this Select Committee debate and others. I must admit that I found the issue very complicated. That is precisely why noble Lords set up a Select Committee to look at the issue on behalf of the House. I am grateful to the noble Lord, Lord Walpole, for pointing out the printing error. I had thought that I first read the report a few months ago, not 12 months ago, so I am relieved that my memory has not failed me.
After reading the report for the second time, I was still thankful for the distilled wisdom of the committee, to be found in the abstract before chapter one. The report observes that the EU is already a major net importer of gas and that the UK is moving that way fast. There were questions about security of supply in the short term. The UK and Germany are well ahead of our other partners in liberalising our gas market. Whereas we have done it, others could be described as dragging their feet.
The committee has concluded that there are adequate supplies for at least 20 years. However, prices are rising rapidly, and the committee is uneasy about gas supplies for the next two years. The committee did not look at physical interruptions of gas supplies; I can
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understand why. Noble Lords will be pleased to hear that I do not propose to cover the UK energy mix. Our debate is about gas markets and market security.
Like the noble Lord, Lord Woolmer, I broadly welcome the Government's response to the Select Committee report. We have moved from very stable prices built upon North Sea gas fields and infrastructure to gas prices that now move with the markets and events far away. Unfortunately, gas prices have not become de-linked from oil prices, even for the UK, where most of our gas still comes from UK production. Reasons for the increase in oil prices are outside the scope of our debate.
For affluent consumers, the price increases in domestic gas supplies might not be too much of a problem, but for others it could be very tough. The government White Paper on energy paid attention to the need to avoid, or at least to reduce, fuel poverty—that must be right. Those on low incomes will find it hard to accommodate rapidly changing domestic fuel bills for gas and electricity. Being cold in winter is miserable for most but could be fatal for the old and frail. Despite government efforts, this vulnerable sector of society will be severely affected.
Some noble Lords may have received a briefing from Ineos Chlor, which uses large amounts of gas to generate electricity in order to produce chlorine and chlorine-related chemicals. The UK wholesale gas price has been rising rapidly. That should not be too much of a problem for Ineos and other major gas users. They will buy in a forward market, and they sell their chlorine products in a forward market but based on the relevant gas price. The problem is that, although UK wholesale gas prices used to be a little lower than EU prices, they have risen quickly and outstripped EU prices by a considerable margin. It is not clear why that should be so. Can the Minister shed some light on that?
Energywatch and others suggest that full disclosure to all market participants of the availability of gas to the UK market might be beneficial. What information is available now? Would full disclosure improve matters?
The Select Committee expressed its strongest note of caution about winter gas supplies. The difficulty for the Minister is that, if he admits that there may be a problem after reading the latest JESS report and other indicators, he might further inflate gas prices. That would not be helpful.
Many noble Lords, especially the noble Lord, Lord Tombs, who unfortunately cannot be present today, are not convinced that we have sufficient electrical generating capacity. Of course, NGT can shed demand from industrial users on an interruptible contract, but I am anxious about the effect of having to reduce gas supplies to the generators. The good news is that we will have that vulnerability only for the next two or three years. Can the Minister confirm that I am correct in my optimism?
Is the Minister confident that, if the EU as a whole experienced gas market supply problems, our EU partners would co-operate, in accordance with the second directive? I hope that he is. The noble Baroness,

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Lady Cohen of Pimlico, did not seem convinced. A debate immediately after a multi-day gas or electricity interruption would be rather better attended.
Noble Lords have touched on the vulnerability of our energy infrastructure. It is not helpful to go into it in any detail, but I am aware of government efforts to assess the risks. Some precautions have been taken that might not be immediately obvious. In addition, the greatest vulnerability of the nation is not necessarily the most obvious. I do not envy Ministers the job of assessing or protecting against the effects of a low probability/high impact attack.
Under the gas directive, we are obliged, as we import more gas, to create storage capacity. I can understand the Minister's reluctance to become directly involved. The Government will have to ensure that the UK meets its obligation, but it would be highly undesirable for domestic gas and electricity retailers to inflict wildly fluctuating prices on their customers. Is the Minister confident that market mechanisms will encourage the development of storage facilities in order to meet the customer's need for stable prices?
The noble Lord, Lord Haskel, talked about the need for alternative sources, including LNG. LNG destined for the UK is, to some extent, in storage as well as in transit.
My noble friend Lord Swinfen talked about the danger of the one in 20 bad winter. He reminded us about the winter of 1963; I can only just remember that event. My noble friend asked about mothballed power stations, a point also raised by the noble Baroness, Lady Cohen of Pimlico. The stations that are easiest to recommission have already been recommissioned. Further ones will be more difficult to bring on-stream.
My noble friend Lord Swinfen also mentioned China, among other countries. It is interesting to note that China is already burning 300 million tonnes of coal, which will not do much for carbon emission levels.
The noble Lord, Lord Haskel, alerted us to the danger of betting on gas price without owning any gas. Alarmingly, there is no regulation, but I have an aversion to regulation. What is the effect on the real gas market of betting on gas prices? Is the Minister content for the situation to continue?
The noble Lord, Lord St John of Bletso, talked about oil and gas reserves. An advantage of gas is that it is not concentrated in a few Middle Eastern states. It is more widely distributed. That is no doubt why all the witnesses were relatively relaxed about gas supplies. The noble Lord also talked about LNG shipping: your Lordships will be aware that at present there is a shipping and ship-building capacity problem.
Noble Lords were also concerned about the capital for pipelines. Since I am not an international banker, I cannot offer my view. But Mr Tim Eggar appeared to be confident that capital would be available, presumably provided that the market is operating properly.
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The noble Baroness, Lady Cohen, touched on the energy mix. I agree with many of her sentiments. But, with difficulty, I will resist the temptation to pick up on her points about nuclear power.
The noble Lord, Lord Walpole, talked about microbes and biotechnology in order to extract gas from coal deposits. That technology is not available now, but I hope that the Minister does not describe it as an "interesting suggestion". If it works, it could facilitate extraction of energy from very poor hydrocarbon deposits, both liquid and solid, which I hope would produce good quality gas.
The noble Lord also spoke about gasification of coal. I am less enthusiastic about that. I suspect that it would create relatively high carbon emissions per therm of gas produced and burnt. In conclusion, I congratulate the noble Lord and his committee. I look forward to the Minister's response.
2.36 p.m.
Lord Davies of Oldham: My Lords, I am delighted to have this opportunity to put the Government's response after such a full debate. I commend the chairman and members of the committee on their report, which is a very useful addition to this debate on one of the most important of all issues that confront the Government; namely, the security of an essential part of our energy supplies.
Of course, we welcome the thorough analysis of this important topic in the report: it goes without saying that I want to reaffirm the obvious point that the Government are giving the most urgent attention to the issues highlighted, many of which reflect our concerns for the future and the impetus behind current policy. It is a very useful addition to the debate on the challenges that face our country. The future of energy supplies is certainly very significant.
I assure the House that, bolstered by strong UK support, the liberalisation of EU gas markets is well under way. That does not mean that we are complacent; we recognise the difficulties. We as a country have made very substantial progress in this area, to the extent that our position acts as a model for what we hope will be adopted across the European Community.
We are aware that there are inherent difficulties to be overcome. I recognise the point about virtual integration which, at the present time, in certain European countries requires very direct action. I assure noble Lords that the EU gas market liberalisation programme is meant to be completed by July 2007. Her Majesty's Government will put their fullest possible efforts behind the move to ensure that it is delivered by that time.
We strongly support the Commission's proposal for a regulation to ensure third-party access to gas transmission networks, which should be adopted early next year, and the directive to safeguard security of gas supply, which was adopted in May of this year. As a package, those measures, once fully implemented, will take us much closer to the fully liberalised market,

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which both the report and all contributors to the debate today have emphasised is a very important step towards guaranteeing our future with regard to the provision of gas. It is the Government's opinion that a competitive, well-regulated and liberalised energy market with no technical constraints on cross-border trade is an essential component to security of supply for the EU, and of course we are pushing hard to achieve this.
Let us not create bogeymen. It is a shift for the country to move from our own gas resources and the degree of self-sufficiency that we have enjoyed over the past two decades to a position where we are dependent on imports. But let us recognise the fact that there is a range of import options. Sometimes, in our debates on energy, one would think that we depend on one pipeline which, if it were subject to terrorist activity or if one country decided to redirect the resources of the line to meet its own needs, would make it extremely difficult for Britain. I have even heard it said that our problems lie at the end of the supply line which others could choke off. Let us be absolutely clear about this. We are talking about gas supplies available from a range of suppliers and using a range of delivery methods to this country. It is not only a question of gas pipelines. We are developing liquid natural gas installations so that we can receive imports of gas supplies from parts of the world different from those of the gas line suppliers. We are in the process of constructing those installations. They will broaden the base on which we can receive gas into this country.
I also make the obvious point: one of the critical objectives of the European legislation is to guarantee that essential supplies brought by pipeline into Europe are in fact supplied on a European basis. There can be no pre-emptive capacity for any one state, through its significant market position, its political stance or because it happens to be further up the pipeline than the United Kingdom, to enable it to direct supplies to itself during periods of shortage at the expense of all other states. That is the exact objective we seek to obtain: a guarantee that there is a proper and fair distribution. The concept of the liberal market means that the supply must be liberal not only in times of plenty but also, crucially, in times of shortage. I want to give the House my assurance on that point.
My noble friend Lord Haskel indicated that he was anxious about the slow progress on these issues. However, we are on target for the deadline that has been established. We contend that it is very much in this country's interest, as well as that of others, to meet the deadline. My noble friend need have no reservations; the Government will not hesitate to pursue these issues, and they will do so with the fullest possible vigour.
I accept what was said by the noble Lord, Lord Swinfen. It is a question of the necessity to unbundle these vertically integrated companies. I do not pretend that that will be easy, in particular with regard to the more dated perspectives of other countries concerning liberalisation of the market, but
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of course the Commission has to report on whether this market is working or whether further legislation is necessary. We will have regular information and analysis of the position. Of course, we have made significant progress along these lines and I am grateful that both the report and the debate identify the significance of that in terms of our work.
Lord Swinfen: My Lords, I thank the Minister for giving way. I did not refer to unbundling at all. I was concerned about the political necessity for leaders of other countries to make certain that they have adequate gas supplies for their own populations, and in so doing denying us an adequate supply.
Lord Davies of Oldham: My Lords, I am riot underestimating the political difficulties inherent in the situation. We all recognise that energy is a crucial resource for all advanced economies. In countries which have limited resources and have to import it, there is always the question of the political imperative. I am merely emphasising that we are working intensively to create the conditions under which the European Community will be committed to the liberalisation of the process along a trail that, to a large extent, we have blazed. It is essential that we sustain the pressure to achieve these objectives.
The noble Lord will recognise that the building blocks are in place. I am not suggesting for one moment that it is a facile or easy process—it is not—but equally, given the right regulatory framework, a market-based approach will attract the necessary gas infrastructure and supplies. It is the cornerstone of our energy strategy as set out in the White Paper and we have made considerable progress in this respect. We intend to ensure that, through its directives, the European Community follows with similar dispatch.
We recognise that this is not only a European Community matter but a world-wide issue. The necessity of guaranteeing our energy supplies means that we have a real interest in suppliers of liquid and natural gas in societies outside the European Union. It is very important that we should strike bargains with them.
Let me balance a little of the pessimism that may creep in with regard to the security of supplies. Europe has been importing gas from Russia—and, before Russia, from the Soviet Union—for more than 30 years without there being at any stage a difficulty of supply. It would be foolish of me not to recognise that we live in a dangerous, changing and challenging world. The past 30 years have not passed without disruption—they have certainly not passed without disruption in terms of the body politic now known as the Russian Federation as part of the former Soviet Union—and yet energy supply guarantees have held.
That is why, when we look at the crucial issues of big investment, big resources arid international agreements, we should recognise that states approach these issues with the greatest amount of seriousness and commitment. Therefore we should not suggest, in a flip

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way, that resources could be taken out at the throwing of a switch. That is not so. That is why we need to balance the question of security.
The same applies to the question of the short-term difficulties rightly referred to in the report and by noble Lords in considerable detail. My noble friend Lord Woolmer, the noble Lord, Lord Swinfen, and the noble Earl, Lord Attlee, mentioned that we are in a difficult transition period as we move from self-sufficiency to supplies from more distant producers. As we become a net importer of gas, margins will become tighter over the next couple of winters than they will be once the new supplies come on stream. My noble friend Lord Woolmer indicated in his introduction of the report that the committee had been satisfied by the longer-term indications in regard to energy, including the availability of gas supplies and the way in which we will be able to secure access to them. But there is an intervening period of some difficulty.
I should like to reassure the House that reports that the lights may go out in 2004–05 and 2005–06 are overly pessimistic. The National Grid's assessment in its Winter Outlook Report is that there is sufficient gas to meet demand, even in a very severe winter—even in the one in 20 type of winter to which the noble Lord, Lord Swinfen, referred. I seem to remember that the 1962 winter was probably a little more than one in 20—it seemed to be one in a lifetime. However, I have no doubt that someone—maybe even the noble Earl, Lord Attlee—will refer to the difficulties of 1947, which was also a fairly severe winter.
Earl Attlee: No, my Lords, I intend to get the video of this debate.
Lord Davies of Oldham: My Lords, the noble Earl does not need a video of this debate. Hansard will do him proud in this respect, with its promptitude and its accuracy. But no doubt he will get added enjoyment from the visibility of the debate on video.
There is flexibility in the gas market, and we expect large industrial users or power stations to reduce their demand if supplies become exceptionally tight due to significant problems. Of course we recognise that in the most extreme circumstances difficulties occur. It is essential that we guarantee supplies to households. We all know the potential danger—the actual physical Risk—of a failure of gas supplies to households. That would be the highest priority. It is recognised that other consumers can moderate their demands in order to ensure that we supply households in those extreme difficulties. However, we are talking about positions of real extremis. I am confident that the provision we have in hand for the next few winters, even if they are more severe than the ones we have recently experienced, will meet all the demands upon it.
I turn now to what I suppose is a euphemism, the term low probability/high impact events, and what happens if terrorist activities affect some aspects of supply. There are other elements in this category, but the predominant one is of terrorist activities. Let me assure the House that
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the Government are doing all they can to ensure that our response, should such an event occur, will be co-ordinated, fast and appropriate. We have been working with the industry to review existing plans for emergencies affecting both the gas and electricity sectors and have created an incident response plan to deal with such crises.
The Emergency Committee has also developed procedures to enable swift reconnections should any customers' gas supply be cut off. It will be recognised that I cannot go into great detail about the security provisions that we make with regard to essential installations, but let me give the obvious assurance that we cannot safeguard the nation against a terrorist threat without having due regard to the security of supply of essential energy.
It was suggested that we ought to diversify our energy supply. That is exactly what the Energy White Paper did. It recognised the significant role which gas would provide, but nevertheless, the emphasis on renewables would help to meet our Kyoto targets and mean increased investment in new sources of energy.
Today, the emphasis has been rather more upon whether the nuclear option should make a rapid reappearance on the scene. Let me make the obvious point first: as the Energy White Paper spelled out all too clearly, new nuclear build is currently economically unattractive. If it were not unattractive, we would have proposals before us and proposers coming to government with their indication that they would want to build such a plant and seeking some positive government response to it. There are none such proposals.
Therefore, the market is clearly identifying that at the present time the actual costs of electricity generated from nuclear energy are still deplorably high.
As the noble Earl, Lord Attlee, will remind me, there are outstanding issues with regard to the disposal of nuclear waste still to be resolved. So the Government are taking the obvious and proper line; namely, that we intend to keep the nuclear option open. It would not be in the nation's interest to suggest that nuclear energy might not play an enhanced part in the supply of energy at some potential stage in the future.
However, it is not viable at the present time and the Government are keeping the option open. They are ensuring that the research and skills support is there to ensure that the industry can pursue its present objectives. Of course the rundown on nuclear power is over a long period of time; in total it still has more than two decades to go. So we have time in which to consider these issues, although I hear those noble Lords who advocate nuclear power—and I think that the noble Lord, Lord Swinfen, was eager to emphasise that point again today.
This has been a most interesting debate. I hope that I have given most of the arguments in the debate reasonable consideration. I am all too well aware that with so many expert contributors I cannot meet every single point, but I want to emphasise again that the

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contribution of this report to the ongoing assessment of securing the UK's future energy and gas supplies is very much welcomed by the Government.
I hope that the House will agree that the priority given to this issue by the Government more than adequately reflects its importance and that some of the concerns raised by the committee have been assuaged. I would be optimistic in the extreme if I thought that I had allayed all anxieties; that is not in the nature of those who address themselves to such fundamental issues as all members of the committee have done and as the report accurately reflects. But I am very grateful for all their valuable work. The report reflects the most careful study. I congratulate its chairman, my noble friend Lord Woolmer, on the work of the committee
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and its report. I hope that on that basis it will be recognised that the Government takes these issues very seriously indeed.
Lord Woolmer of Leeds: My Lords, this has typically been a wide-ranging debate. The noble Lord, Lord Walpole, even managed to bring in Norfolk—not to my surprise. I thank all noble Lords that have contributed so fully and for the contributions from the Front Benches and my noble friend the Minister. It has been a very useful debate and I am grateful that the report of the Select Committee was so well received.
On Question, Motion agreed to.
House adjourned at one minute before three o'clock.

  Equality and Human Rights Commission
  Equality and Human Rights Commission
  Mobile Phones: Use on Petrol Station Forecourts
  Mobile Phones: Use on Petrol Station Forecourts

  Gulf Veterans' Illnesses
  The Parliamentary Under-Secretary of State, Ministry of Defence (Lord Bach)
  My honourable friend the Parliamentary Under-Secretary of State for Defence (Mr Ivor Caplin) has made the following Written Ministerial Statement.

  As part of the Government's commitment to investigate 1990–91 Gulf veterans' illnesses issues openly and honestly and to learn the lessons of the past, the Ministry of Defence has today published the paper The 1990–1991 Gulf Conflict Health and Personnel Related Lessons Identified. The purpose of the paper is to focus on the health and personnel-related issues
  WS 14
  resulting from the First Gulf Conflict (Operation GRANBY), with the key aim of learning from the problems identified. In producing the paper, we have attempted to be as open and forthright as possible in examining the health problems experienced by serving personnel, veterans and civilians since the first Gulf conflict.

  The paper identifies what the Ministry of Defence has already done to improve procedures and assesses how these have been applied to the current Iraq deployment (Operation TELIC). It also indicates where improvements are still required. In making these assessments it has been acknowledged that during operations it is not always possible to achieve the ideal situation; inevitably, in the heat of battle there will always be some things that do not go as intended. The aim of this paper is not to seek to attribute blame but to identify how the Ministry of Defence can do better in future. I am today placing copies of the paper in the Library of the House and it is also being placed on the Ministry of Defence website at: www.mod.uk/issues/gulfwar.