Electricity Industry (Hansard, 22 March 1990)

Mr. Rilkind

I am making available to the House today model drafts of the licences to be issued to Scottish Power and Scotish Hydro-Electric, to independent generators including Scottish Nuclear Ltd. and to second-tier suppliers in Scotland. The licences for Scottish Power and Scottish Hydro-Electric are now largely in final form and ready to be granted shortly before vesting. Other generation and second-tier supply licensees will receive a licence based on the published drafts but adjusted to meet their particular circumstances and requirements.

The public electricity supply, transmission and generation licences for the Scottish vertically integrated companies are contained in a composite licence document. They reflect the wider Great Britain framework but have been tailored where appropriate to meet specific Scottish circumstances. A particular example of this is the provision which will be included in the licence for Hydro-Electric to secure that the benefit of cheap hydro power will be applied to maintain transmission and distribution costs in the Highlands and Islands of Scotland at levels comparable with those in other parts of the country, thus underpinning our commitment to maintain common tariffs for customers throughout that area.

The composite licence document includes provisions to control the maximum average prices charged by Scottish Power and Scottish Hydro-Electric. The average distribution, supply and transmission prices will be capped and indexed annually by an RPI-X formula. This will create incentives on the industry to improved performance and cost efficiency. The objective is to replicate market pressures to cost reduction on these monopoly services.

The vertically integrated structure of the Scottish industry also requires that, within the overall prices charged to customers, there should be direct regulation of generation prices. We have decided that the maximum average generation price to customers should not be allowed to increase beyond changes in RPI over the next four years. During a further four-year transitional period, regulation will move over progressively to an index derived from average generation prices in the England and Wales competitive market. In this way, the disciplines of the wider market will be impressed upon the Scottish companies.

Prices to consumers taking 10 MW or more will not be directly regulated in Scotland, nor will sales by the Scottish companies outside their areas. Prices in this part of the market are already being determined, quite properly, by competitive forces and this will continue to offer customers the best form of protection. To protect smaller customers who do not have a choice in their supplier, there will be a subsidiary cap on average prices to all consumers taking up to 1 MW which will restrict maximum average price rises to the movement in the overall price cap.

Taken together, these regulatory controls will mean that average electricity price rises to customers in the regulated market in Scotland will be held below the rate of inflation over the next four years and thereafter they will increasingly reflect the downward pressures on prices in the fully competitive Great Britain market. The companies will, however, be free, subject to their licence conditions, to 706W set different tariffs to each individual group of consumers within the average price cap to reflect the economic costs of supply.

For the more immediate term, I expect average tariff increases in Scotland next year to be about the rate of inflation. For larger customers above 1 MW, including contract customers, the Scottish industry does not expect that any customer will experience increases much out of line with inflation over the next year.

It is important for the stability of prices and the industry's finances that there should not be excessive disruption in the market. We have, therefore, decided to introduce arrangements in Scotland which will ensure a smooth transition to a competitive market similar to those announced last month for England and Wales by my right hon. Friend the Secretary of State for Energy. These provisions will allow all suppliers to compete for supply to premises taking more than 1 MW at the outset of the new regime, for premises taking more than 100 KW after four years, and for all customers after eight years. While my right hon. and learned Friend the Secretary of State will be disposed to act in accordance with the above restrictions, he will require to exercise discretion taking account of the specific circumstances of each case in its merits and the advice of the Director General of Electricity Supply.