National Coal Board (Finance) (Hansard, 24 July 1969)

§ Mr. Mason

Following consultations with the National Coal Board, I have decided that the Board's objective for the period from April, 1969, to March, 1971, as a whole shall be to earn revenue not less than sufficient for meeting all their outgoings properly chargeable to revenue account.

In a number of recent years the Board's objective has been to meet all outgoings properly chargeable to revenue account and to contribute £10 million a year to the difference between replacement 478W and historic cost depreciation. The sum of £10 million was calculated in relation to 1961. Since then some £300 million of the Board's assets has been written off by way of capital reconstruction and the Board estimate that under half the remaining assets will need replacement at the end of their useful life. There has in addition been an acceleration in the rate of technical progress which must be set against the effect of rising prices when calculating any difference between historic and replacement cost. With these major changes it is clear that £10 million is no longer appropriate and I am advised by the Board that in so far as it is possible to estimate, the replacement cost of those assets which will need to be replace will be close to historic cost, when allowance is made for their increased efficiency. There could be a small difference, but it is impossible to provide any worthwhile estimate of the amount, and the Board do not think it necessary to add to their Fxed Asset Replacement Account which at present stands at £12.5 million.

I shall have further consultations with the Board about their objectives for the longer term.

§ Mr. Mason

Under the Coal Industry Nationalisation Act, 1946 the Board has the statutory duty ofmaking supplies of coal available of such qualities and sizes, and in such quantities and at such prices, as may seem to them best calculated to further the public interest in all respects, including the avoidance of any undue or unreasonable preference or advantage".

Its policy must be directed to securing that the revenues of the Board shall not be less than sufficient for meeting all their outgoings properly chargeable to revenue account on an average of good and bad years".

In present circumstances, the need for an orderly contraction of the coal industry and a controlled rate of manpower rundown are prime determinants of what coal is produced. Under these conditions it must be an important consideration of pricing policy to secure that this coal is sold. The Board's pricing policy is therefore designed to match sales as 479W nearly as possible with the production which is consistent with the manageable rate of rundown, while enabling them to meet their statutory obligations under the Act.

The Board's pricing system is, broadly speaking, a system of coalfield average prices. These prices are set at levels which are designed to produce in aggregate a total revenue which is sufficient to cover total costs; but coal is not a homogeneous product and different coals may have different properties, and hence be of differing value in use. This fact has been recognised for many years and is reflected in the Board's formal price structure, under which the prices chargeable differ from one type or grade of coal to another. Prices also vary geographically to take account of variations in production costs between coalfields and in transport costs to the main markets.

Under this system, which is complex, consumers pay prices which are an amalgam of the four main elements reflected in the price structure; quality factors, cost factors (comprising both production and preparation costs), transport factors and commercial factors. Consumers may thus pay different prices even for coals of the same quality—for example because some consumers receive coal from lower cost areas than others. Moreover there may be departures from the formal price structure, particularly in the case of consumers who are ready to make contracts with the Board or who represent new business, in order to hold the demand for coal of different qualities as nearly as possible in balance with the available supply, or to secure long term business which would otherwise be lost permanently.

The Government's policy, as stated in Cmnd. 3437, starts from the principle that nationalised industries' revenues should normally cover their accounting costs in full. Pricing policies "should be devised with reference to the costs of the particular goods and services provided". Short-run marginal costs are relevant to pricing when there is spare capacity, but long-run marginal costs are the main consideration for supply on a continuing basis. However, the White Paper recognises that 480W in some cases there will be good commercial reasons for charging prices which differ from costs The White Paper also states that, subject to the requirements of prices and incomes policy and to observance of the principles of the White Paper, nationalised industries should adopt pricing policies which are relevant to their economic circumstances; and that the Government would endeavour to leave management with the maximum discretion in adjusting their price structure to meet competition and to take advantage of commercial opportunities.

Given the circumstances of the industry and the nature of its product, I am satisfied that a degree of differentiation in the prices charged in different markets is both inevitable and proper; and flexibility in pricing is necessary to attain the short-run objective of maximising sales within the level of the unavoidable production, subject to covering total costs. In departing from the formal price structure, the Board does not charge prices which are below the short-run marginal costs of providing the coal.

Most coal contracts are relatively short-term, and it is with the short-run that my examination has been mainly concerned. As the industry moves towards equilibrium and the constraints imposed by the short-run situation cease to apply, its pricing arrangements will need to evolve in step with the changing circumstances, and I intend that pricing policy shall be reviewed as necessary.

However, the small proportion of coal which is sold on long-term contracts raises a special problem because its pricing impinges on the pricing structure which is appropriate in the longer term and the relationship of the prices charged to the industry's long-run marginal costs which are comple—to assess in present circumstances and will change through time: discussions are continuing with the Board on these points. Long-term contracts have advantages for the Board but because of the problems involved in their pricing, the Board have agreed to discuss with the Ministry all future contracts which are to last for more than five years.