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1.12 pm
The Minister for Science, Energy and Industry (Mr. John Battle): I thank my hon. Friend the Member for Hornchurch (Mr. Cryer) for securing a debate on these matters, and my hon. Friend the Member for Norwich, North (Dr. Gibson) for his remarks. Some of our debates on energy have not raised the wider questions, so I am grateful to my hon. Friends for the context in which they have set the debate. I appreciate the forthrightness and consistency of my hon. Friend the Member for Hornchurch in calling for renationalisation. I respect his position, but I say at the outset, as he perhaps expected, that I do not agree with it, as I shall explain.
The previous Government's privatisation programme massively changed the shape of the industry. There are now 63 licensed electricity suppliers, some of which were not traditionally involved in the industry, such as catalogue companies, supermarkets and banks. The shape has changed since the days of the Central Electricity Generating Board, for which my father worked. The industry has been broken into fragments: generation--the range of fuel sources--the distribution and grid system, and the regional electricity suppliers have been separated.
The change and dynamism in the sector have been far greater than was anticipated. Buying back and piecing together the industry would not be as easy as my hon. Friend the Member for Hornchurch suggests, and it is not one of the Government's priorities--it is not on our agenda. We want competition where possible, but regulation where necessary.
My hon. Friend referred to regulation of the industry, which I believe to be of vital significance not only to consumers but to the economy as a whole. Given the impact of the regulated utilities on our lives, work, homes, environment and public services, it is crucial that we ensure that the regulatory relationships are right.
We recognise, for example, that when a licensed utility, such as a regional electricity company, is acquired by another company, whether British or foreign, there may be vertical, horizontal or diagonal integration--water or gas companies buy electricity companies and regional electricity companies break away from the generators. Whatever the merger or takeover, it raises the key issue of regulation, on which we should focus. We want to ensure that any utility can be regulated after an acquisition as effectively as before. My hon. Friends are right to emphasise that consumers should not lose out.
In all mergers, all aspects of United Kingdom public interest, including safety, can be considered under the Fair Trading Act 1973. I want to move on and suggest that there is more for us to tackle. When the Government came to office, we said, on the basis of the preparatory work that we had carried out in opposition, that we were not happy with the regulation regime in place. We believed that the dynamism, the fragmentation and the maelstrom of change in energy markets meant that we had to get regulation right; we did not think that the current system was appropriate.
In opposition, we set up a consultative review of regulation, to determine whether we could get the shapes right to take us through into the brave new world of these changing markets. We said that, in government, we would review the system of utility regulation that we inherited, to set the new shapes that could provide a transparent and accountable regime for the industry in the 21st century.
Regulation used to be rather limited; it was focused on stimulating a market--I think that that was the expression--and introducing competition, and it existed mainly as price regulation. The classic economic definition was narrow; regulation mattered only in getting the price right. The price formula--retail prices index minus X--and driving prices down were emphasised.
We want new elements to come into play. I see regulation as a triangle. At the apex is an emphasis on prices--of course, prices are important; we want a reduction in prices rather than the profiteering that my hon. Friend the Member for Hornchurch mentioned. The triangle has two other corners, however: social obligation and environmental responsibilities. We have a three-pronged approach to regulation, as opposed to a narrow focus on prices.
My hon. Friend mentioned disconnection and pre-payment meters. He was right to say that we did not have to wait for a review of utility regulation to tackle the question of pre-payment meters. In opposition, I shouted from the rooftops about the fact that people were disconnecting themselves because of pre-payment meters, which was why the real toll that they took was not known. People were dying from hypothermia because they did not have fuel to heat their homes in the winter; if they did not have money to put on the cash card, they could not clock up the meter and had to go without energy.
What are we doing now? Now that we are in government, we have already challenged the pre-payment meters and the fact that people who use them effectively subsidise those with direct debit accounts at the top end of the scale. That was a classic case of the poor subsidising the rich, rather than the other way round. We have asked the regulator to move in and ensure that that injustice is not perpetuated.
Social obligations form one corner of the triangle. Another is environmental responsibility. It means that we must match our targets for carbon dioxide emissions, as well as ensuring that the wider responsibilities to which my hon. Friend referred--in connection with safety as well as with the environment--are built into regulation.
That is precisely why we set up the utility regulation review announced last year by my right hon. Friend the President of the Board of Trade. The review is aimed at ensuring open, predictable regulation that is fair to everybody, promotes environmental objectives and sustainable development, and ensures that there are investment incentives.
Why are investment incentives important? I must tell my hon. Friend that they mean, for example, ensuring that companies have the people working for them and invest in keeping the system going. As he may know, there was a debate in January in which some of our hon. Friends asked about wires that had come down in the Norweb area, in Wales and elsewhere, over Christmas.
The question asked was: had those companies stripped and outsourced to such an extent that there were not enough people--that is, enough engineers--to keep the power lines up? The whole purpose of the system is that companies can be regulated under the price formula only if they invest and employ the right-sized work force for the job that needs to be done.
After the review of regulation, we shall produce a consultation document setting out our proposals, which I hope will appear in the near future. It will set out and sharpen our approach to regulation, and set it on a footing that will take us into the future.
Seven of the 12 regional electricity companies in England and Wales are now owned by American companies. That is the right figure for the present, but the Energy Group, which owns Eastern, is the subject of a takeover bid by a United States company. It is important to remind ourselves that it would not be the first time that Eastern has been acquired, because it was previously taken over by the Hanson group.
That merger was considered and cleared under the Fair Trading Act 1973 by the previous Administration, at which time the regulator made several modifications to the conditions of the licence to ring-fence Eastern's regulated electricity activities from the rest of the group.
The ring-fencing is important, because the changes were made to ensure that Eastern would continue to have access to adequate financial and management resources to fulfil its obligations as a public electricity supplier and to maintain standards and the quality of supply. Actions by the parent company that could have prevented that were prohibited. The ring-fencing was set up precisely to ensure that companies could not whisk the money straight across to America without falling under regulation. Otherwise, even price regulation could have been undermined.
The key, of course, is to ensure that regional electricity companies remain within the reach of the regulator. That is why we are examining the structure of the regulatory regime, to ensure that we can insist that that happens. At the time of the bid by Hanson, Eastern was required to trade at arm's length from other group companies, and if the licence conditions are breached, the Director General of Electricity Supply has statutory powers to take enforcement action. In the last resort, the licence could be revoked.
As my hon. Friend said, the key is to ensure that the companies remain within the reach of the regulator and abide by our structure and our arrangements covering price, social obligation and environmental responsibilities.
As for recent bids, in the short time available, I cannot go through the whole history of the bids for Eastern. I know that hon. Members are concerned that electricity companies must have particular duties and responsibilities that follow through from their role in ensuring secure supplies of electricity. Of course, that factor must be considered in any decision about mergers that the President of the Board of Trade has to take in connection with regional electricity company takeover bids.
The director general has proposed that should Pacificorp's bid for the Energy Group proceed to acquisition, he will further strengthen the ring-fencing conditions by inserting additional safeguards against cross-default provisions. As hon. Members may be aware, the director general has published a consultation paper suggesting further modifications to the licences of the public electricity suppliers that have already been subject to takeovers. There is a proposal to require other public electricity suppliers in every case to seek and maintain investment-grade credit ratings, and to prohibit cross-default provisions in any borrowing agreement.
The paper also mentions ensuring that the investment plans are there, and that the people are working in the company to carry the work and the investment forward. That means checking actual investment against the plans and measuring the quality of the service that regional electricity companies provide for their customers. The director general would be able to revoke the licence if the requirements were not met.
Pacificorp has made a bid. I understand that a statement of interest by Nomura, which my hon. Friend raised in early-day motion 710, with my hon. Friend the Member for Norwich, North, has now been withdrawn, and it is uncertain whether the American Texas Utilities is still interested. But it is clear from the press speculation that Pacificorp is still interested, and the question now is whether the shareholders will accept, so I cannot comment.
What we need to be sure of is that if a deal takes place, the assurances agreed between Pacificorp and the regulator on the licence conditions proposed are accepted and respected. The Monopolies and Mergers Commission had several important concerns about the merger originally proposed, but concluded that the licence conditions meant that the proposed merger would not operate against the public interest. None the less, it said that it wanted to stiffen the licence conditions to take that possibility on board.
Among other possible bids is one for the Energy Group by Texas. The company has announced that it is in talks with the Energy Group that may lead to a bid. Were there to be a bid that fell to be considered under the Fair Trading Act, it would have to be treated on its merits in the usual way. I am sure that my hon. Friend understands that I am not in a position to comment in detail on whether such a bid would be approved. The President of the Board of Trade would decide, in the light of the advice received
from the Director General of Fair Trading and of the views of the electricity regulator, whether it should be referred to the MMC.
In formulating that advice, the regulator will take account of any representations received from parties to the merger or from any other third party. That is an important point. It is not only companies that can put in evidence; it is open to any third party to give evidence and say why it does not believe the deal to be in the public interest. That opportunity should be taken more often.
Nomura suggested at one time that it would be interested in a bid, but it seems that it has now stated publicly that it is no longer in talks. I hope that my hon. Friend will understand that it would be inappropriate for me to comment specifically on any particular bid.
As for the multilateral agreement on investment, to which my hon. Friend referred, there was a debate earlier this week, on 23 February, in which the Minister for Small Firms, Trade and Industry spoke at length about it and spelt out the fact that it does not prevent sensible regulation of the environment. Decisions on whether to allow orimulsion or any other fuel to be used would not be affected by that agreement.
I must remind my hon. Friend that it was the present Administration who, when we came to office and were faced with the possibility of an orimulsion plant--in Pembroke, I believe--insisted on a public inquiry before the project could go ahead. I understand that as a result of that decision, the company pulled out of the proposal. So there is no orimulsion plant in Britain now, and I do not know of any current bid for one. Questions were asked at the time and we took the relevant action.
The MAI is not yet settled and there is still work to be done, but we shall press hard for an unambiguous reaffirmation in the agreement of commitments to sustainable development and to core labour standards; for close association of the MAI with the OECD guidelines for multinational enterprises, which are collective recommendations by all the OECD Governments to multinationals on good corporate behaviour; and for strong and binding provisions on not waiving environmental or labour standards to attract particular investments, which is one of the matters on which we shall take a strong line in negotiations. It was our Government who proposed the review of the MAI and its environmental policy, and we shall continue to press on those matters.
The debate has given us a welcome opportunity to hear my hon. Friend's views--
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