Laidon Hydro-Electric Scheme (Hansard, 22 January 1964)

§ 1943 Mr. Noble

The texts are as follows:

Hydro-Electric Development (Scotland) Act,

Constructional Scheme No. 38: Laidon Project

Constructional Scheme No, 39: Fada-Fionn

Project Public Inquiry: Memorandum of Reference

1. The Secretary of State has caused an inquiry to be held into these Constructional Schemes, partly because certain persons who have maintained objections to Scheme No. 39 have requested that an inquiry shall be held, and partly because he wishes to be more fully informed as to the economics of both Schemes in comparison with alternative methods of generating electricity.
2. So far as concerns amenity and allied matters, no question of policy appears to arise on which guidance from the Secretary of State seems necessary.
3. As regards comparative economics, how-ever, the Secretary of State invites attention to the principles laid down in the White Paper on the Financial and Economic Obligations of the Nationalised Industries (Cmnd. 1337 of April, 1961). As explained in that Paper, the State expects capital employed in the fast- expanding nationalised industries to earn a higher rate of return than the cost of the money to the Exchequer. The White Paper visualized that objectives for each undertaking would be determined in the light of its own circumstances, needs and capabilities in relation to the criteria set out therein.
4. No such objective has been established for the North of Scotland Hydro-Electric Board. To assist the inquiry on this point, therefore, the Secretary of State thinks it right to explain that electricity boards other than the North of Scotland Hydro-Electric Board are to earn gross returns on their average assets of the order of 12½ per cent.; and that this is equivalent to a net return (i.e., after charging 125 depreciation, but not interest on capital or loan repayment) of about 6¾ per cent. This rate of return has not yet been achieved in Scotland, and it is therefore desirable that new capital projects should earn a return which will raise the over-all figure to nearer this target. In these circumstances, the Secretary of State considers that the minimum net return on a new major capital asset in the electricity supply undertaking should be of the order of 8 per cent. on its depreciated value over its lifetime.
5. The Report from the Mackenzie Committee on Electricity in Scotland (Cmnd. 1859 of November, 1962) sets out a method of assessing the comparative costs of different methods of generating electricity. This was however based on the use of current interest rates, the Committee taking the view that it was not their task to judge on what terms capital should be offered to finance electricity projects. It is accordingly necessary to adapt the recommendations of the Committee so as to take account of the rate of return on capital that is now expected; or else to approach the problem in some other way.
6. An economic assessment of comparative costs of hydro-electric and thermal generation, based on the policy indicated in paragraphs 3–5 of this memorandum, will be an important factor in the Secretary of State's decision on the Schemes under inquiry. But in addition he will of course have regard to all other factors, whether of an economic character or otherwise, bearing on the question whether these Schemes should or should not be con firmed. He trusts therefore that the parties concerned will bring to notice at the inquiry all considerations of any kind that they may consider relevant.

Scottish Development Department.

23rd December, 1963.

Supplementary Memorandum of Reference

1.This Supplementary Memorandum deals with certain points on which it appears that the Memorandum of Reference dated 23rd December 1963 may be open to misunderstanding.
2. The figure "of the order of 8 per cent." given in paragraph 4 of the Memorandum, as the minimum net return to be expected in future on a major new capital asset in the electricity supply undertaking, is a quite different thing from the overall return that any Board may be expected to obtain on its aggregate assets. The aggregate of a Board's assets include items which, by reason of their age or character or because their purpose is related to necessarily uneconomic obligations, are not capable of earning the average target rate of return. In order to produce an overall return of the order of 6⅗ per cent., it is thus necessary that the return on major new assets by themselves should be higher. It is this higher rate with which paragraph 4 of the Memorandum deals.
3. Nor is paragraph 4 of the Memorandum to be read as implying that the North of Scotland Hydro-Electric Board are in future to work to an overall net return of 6⅗ per cent. The Secretary of State recognises that the necessarily uneconomic activities of this Board bulk relatively larger than those of most other 126 Electricity Boards, and allowance for this will be made in any target that may be settled to cover its operations as a whole. But this does not mean that a specially low rate of return is appropriate on major new generating projects in the Board's area.
4. The main significance of the figure of 8 per cent in the present context is however in the economic assessment of comparative costs of different methods of generation, to which paragraphs 5 and 6 of the Memorandum refer. The Secretary of State hopes that the inquiry will establish, among other things, the cost of the power which would be provided by the Laidon and Fada-Fionn projects, on the alter native bases of:
1. (a) generation by these projects, with an 8 per cent net return on capital investment, and
2. (b) generation by other means, whether or not in the area of the North of Scotland Hydro-Electric Board, again with an 8 per cent. net return on capital investment, and of course including any proper allowance for extra transmission costs.
5. Nothing in this Supplementary Memorandum detracts in any way from what is said in paragraph 6 of the principal Memorandum, about the relevance of factors other than this economic assessment of comparative costs.

Scottish Development Department,

Edinburgh, 1.

8th January, 1964