House of Commons - Explanatory Note
Utilities Bill - continued          House of Commons

back to previous text

Clauses 25 - 35, 62 - 63, and 65 - 69: Electricity licensing and (where appropriate) Gas licensing

52. Clause 25: Prohibition on unlicensed distribution of electricity. Section 4 of the Electricity Act 1989 "the 1989 Act") provides that it is an offence to generate, transmit or supply electricity unless authorised by virtue of a licence or exemption under the Act. The activity of electricity distribution is not defined in the 1989 Act and it is currently regulated only through conditions in the licences of electricity suppliers (especially the public electricity suppliers who operate the distribution systems serving the great majority of customers). This clause amends section 4 of the 1989 Act in order to make unauthorised electricity distribution a prohibited activity and to define that activity. The unauthorised distribution of electricity will become an offence in the same way as the other activities referred to above. Distribution will be authorised by means of either a licence granted by the Authority or an exemption order made by the Secretary of State (see clauses 26 and 27 respectively). Additionally, the clause substitutes a revised definition of "supply" which accommodates the creation of the new prohibition on unauthorised distribution.

53. Clauses 26 (Exemptions from electricity licensing), 63 (Exceptions from s.5) and 66 (Exemptions from gas licensing). These clauses all deal with the case in which a person is carrying out one or more of the activities for which a licence would normally be required but where licensing would be an inappropriate requirement. Examples might be the owner of a caravan site who resupplies power to each of the caravans, or a local authority which operates a combined heat and power scheme for a block of flats. Exemptions can only be granted by the Secretary of State, and may be granted either to a class of persons or to an individual person. In order to protect the interests of consumers and to allow the Authority to perform its duties, the Secretary of State may attach conditions to any exemption, and may withdraw the exemption and require the person or persons to obtain a licence if such a condition is breached, or if for any reason it becomes inappropriate for the exemption to continue in force.

54. Sections 6A of the Gas Act 1986 ("the 1986 Act") and 5 of the 1989 Act contain similar provisions, although the opportunity has been taken to clarify the ability of the Secretary of State to attach conditions to exemptions and to align the provisions in the two Acts. Section 5(2) of the 1986 Act, which introduces Schedule 2 of that Act, provides another method by which certain classes of person may be excepted from the requirement to hold a licence. There is no obvious advantage in having two methods of achieving the same result, and clause 63 therefore repeals s.5(2) and Sch 2 of the 1986 Act. But it is the Government's intention to make exemption orders under the new powers which will replicate the exceptions currently provided for by Schedule 2.

55. Clause 27: Licences authorising supply etc of electricity. This clause replaces section 6 of the 1989 Act with three new sections. The new section 6 reserves to the Authority the power to grant electricity licences, bringing electricity into line with gas in this respect. It also achieves several important effects relating to the separation of supply and distribution, namely the creation of:

  • a power to grant a licence authorising electricity distribution (see clause 24);

  • a single category of electricity supply licence and, thereby, the removal of the concept of geographically exclusive "authorised areas" from public electricity supply licences; and

  • a statutory bar on the same legal person holding both an electricity supply and an electricity distribution licence.

56. The new section 6A lays down the procedures to be applied in respect of the grant, extension or restriction of electricity licences and provides a power for the Authority to make regulations governing these procedures. The introduction of these provisions will bring the 1989 Act more closely into line in this respect with the 1986 Act (subject to relevant amendments to that Act which are being made by other clauses of this Bill). The new section 6B sets out the additional procedures which apply in the case of electricity transmission, where the concept of geographically exclusive "authorised areas" is retained.

57. Clause 28: Enactments referring to public electricity suppliers. This clause does three things:

  • Subsection (1)(a) provides that sections 23 and 24 no longer apply to public electricity suppliers (which are abolished by this Bill). Section 23 provides for disputes between customers and distributors or suppliers under certain provisions of the 1989 Act to be determined by the regulatory Authority. Section 24 brings into effect Schedule 6 of the 1989 Act (the public electricity supply code).

  • Subsection (1)(b) provides that all references in the 1989 Act and other legislation to public electricity suppliers are to be read as references to electricity suppliers as defined by section 6 of the 1989 Act as amended by this Bill.

  • Subsection (2) repeals sections 18 and 22 of the 1989 Act. Section 18 makes provision for the recovery of charges for electricity supplied by a public electricity supplier to be made in accordance with tariffs fixed by him. In the absence of such provision, terms of supply will in future be governed by contract. Section 22 provides for supply by contract as an exception to tariff supply and is no longer required for the same reason.

58. Clauses 29 and 62: Electricity licence conditions and Gas licence conditions. These clauses amend section 7 of the 1989 Act and section 7B of the 1986 Act respectively. The purpose of these amendments is to clarify the powers in the two Acts in relation to the inclusion of conditions in licences and to bring the two Acts more closely into line with one another.

59. Clause 30: Standard conditions of electricity licences. This clause brings the 1989 Act into line with the 1986 Act (as amended by the Gas Act 1995) by introducing the concept of standard conditions of licences into electricity. Standard conditions of licences help to ensure that all holders of a particular licence type are subject to the same licence conditions as far as appropriate and facilitate a procedure whereby licence conditions may be modified collectively (see clause 31). Subsection (1), which follows the model established by the Gas Act 1995, section 8(2), gives the Secretary of State the power to draw up and publish the standard conditions of the licences before a specified date. After that date, the Secretary of State - as in gas - will have no further role in the making of licence conditions, save that he may veto proposals made by the Authority to modify the standard conditions he has established, either when granting a licence (see below) or subsequently.

60. Subsection (2) incorporates the standard conditions established under the power in subsection (1) into all future licences by reference. (Part I of Schedule 6 provides for the incorporation of standard conditions into existing electricity licences). It also gives the Authority a power to modify the standard conditions established by the Secretary of State when granting a licence and sets out the due process required for this.

61. Clauses 31 and 32:. Modification of licences. These clauses implement revised arrangements for the modification of electricity licence conditions by the Authority.

62. Clauses 31 replaces subsection 11(1) of the 1989 Act. In pursuance of the introduction into electricity licences of standard conditions (see clause 30) and in order to bring electricity into alignment with gas in this respect, it provides that any modification of a standard condition of an individual electricity licence should not unduly discriminate against any holder of a licence of that type.

63. Clause 32 provides for the collective modification by the Authority of the standard conditions of all electricity licences of a given type and for the making of any such incidental and consequential modifications as the Authority deems necessary. It establishes that the proposed modifications may not be made if the proportion of licence holders who register an objection to the proposal exceeds either of two blocking minority thresholds. These thresholds relate to: (i) the proportion of objecting licence holders; and (ii) the same proportion, weighted by a measure of the market share of the objectors. The clauses provide that the Secretary of State may establish by order the values of the blocking minority thresholds for each test for each licence type, and the means by which licence holders' market share is to be determined.

64. Clause 33 (Transfer of electricity licences) and 65 (transfer of gas licences). Currently, section 8AA of the 1986 Act permits a licence to be assigned, with the consent of the Director General of Gas Supply, to another party. In deciding whether to consent to assignment of a licence, the Director has to take into account the same considerations as he would take into account if he were granting a new licence to the assignee. There is no corresponding provision in the 1989 Act.

65. These clauses provide for a similar procedure (now described as "transfer" rather than "assignment") to be adopted for both gas and electricity licences. In addition, the opportunity has been taken to amend the procedures set out in section 8AA of the 1986 Act, both to remove unnecessary procedural hurdles (such as the requirement that the licence must contain a condition authorising assignment) and to ensure that there is proper consultation in appropriate cases before the Authority consents to a transfer. The purpose is to simplify procedures in cases of restructuring within the industry without removing any necessary consumer protection.

66. Clauses 34 and 67: Reasons for decisions under the 1986 Act and the 1989 Act. These clauses require the Authority and the Secretary of State to give reasons for certain of the key decisions that each of them take. The decisions caught by this obligation are those taken pursuant to the statutory powers specified in clauses 34 and 67 in relation to their functions under the 1989 Act and the 1986 Act respectively.

67. Where the obligation bites, the Authority (or Secretary of State, as the case may be) is required to produce a notice giving the reasons for its decision and a copy of the notice should be sent to any licence-holder directly affected by the decision. The Authority (or Secretary of State, as appropriate) should publish the notice in a manner that it considers appropriate for bringing it to the attention of those likely to be affected by the decision and/or the reasons contained in the notice.

68. Clauses 35 and 68: Altering activities requiring licence or exemption in electricity and gas. Under the current gas and electricity regimes, neither the Secretary of State nor the regulator has the ability to add to the list of activities prohibited without a licence or exemption, or to remove activities from regulatory control. The only means currently available to achieve this is primary legislation. The purpose of these clauses is to introduce more flexibility into the regulatory system to adapt to developments in the structure of the electricity and gas markets. Clause 35 covers the case of electricity and Clause 68 covers gas, the provisions being identical in substance.

69. The effect of the clauses will be to give the Secretary of State an order-making power to create new licensable activities for gas and electricity, within certain restrictions, or to remove the need for a licence or exemption. Any order would be subject to affirmative resolution.

70. The key restrictions on the ability to create new licensable activities are :

  • the Secretary of State may only exercise the power at the instigation of the Authority;

  • activities may only become licensable if they are activities connected with those already within the scope of existing licences or exemptions (generically described in the Clauses);

  • before the power can be exercised, notice must be given to those carrying on, or intending to carry on the activities, and to the Gas and Electricity Consumers Council and, if a reference to the Competition Commission is made as a result of an objection (from a person carrying on or intending to carry on the activities) or for any other reason, the Commission must have concluded that the absence of a requirement operates against the public interest.

71. In the case of a proposal to de-regulate an activity, either the Secretary of State or the Authority may initiate the process; all those likely to be affected, the Council (and in the case of gas, the Health and Safety Executive) would be consulted before any decision to proceed with an Order.

Clauses 36 - 41: Duties of electricity distributors

72. Clause 36: Duty to connect on request. This clause replaces the existing sections 16 and 17 of the 1989 Act with new provisions. The new section 16 places on electricity distributors an obligation to provide, and subsequently to keep in good repair and not sever, a connection between their systems and premises when requested to do so either by the owner or occupier of the premises or by an authorised electricity supplier acting on his behalf. This provision includes a duty to provide connections on request to embedded generation plant. Electricity distributors are also required to provide a connection to a distribution system run by an authorised distributor at his request. The clause establishes the procedural arrangements relating to the duty to connect, including arrangements whereby the distributor must notify the party wishing to be connected of his charges and of any security he may require in advance. Powers in relation to the setting of charges and the requiring of security by the distributor are provided in clauses 38 and 39.

73. The new section 17 establishes the circumstances in which the duty to connect does not arise. This is where:

  • the making of a connection is prevented for reasons beyond the distributor's control;

  • the making of a connection would or might breach electricity safety regulations (and the distributor has done all in his power to ensure that this would not be the case);

  • it would be unreasonable to expect the distributor to make a connection;

  • to do so would require the powers set out in Schedules 3 and 4 of the 1989 Act and the electricity distributor has not been given those powers in his licence.

74. Clause 37: Power to recover expenditure. This clause amends section 19 of the 1989 Act, so that public electricity suppliers' powers to recover expenditure for the provision of plant and line, in order to make a connection, apply to distributors instead, as the duty to connect now lies with them.

75. Clause 38: Power to require security. This clause amends section 20 of the 1989 Act, so that the public electricity suppliers' powers to require security for payment in respect of the provision of plant or line to make a connection apply to distributors instead. The deletion of subsection (2) is a consequential amendment. The deletion of subsection (4) removes the prohibition on a distributor requiring security from a person prepared to install a pre-payment meter.

76. Clause 39: Additional terms of connection. This clause amends section 21 of the 1989 Act so that it relates to the provision of a connection by a distributor rather than, as before, to supply by a public electricity supplier. It allows for the imposition by a distributor on a person requesting a connection of any restrictions made necessary by the Electricity Supply Regulations made under section 29 of the Act. It also makes provision for the Secretary of State to make orders providing for a distributor to restrict liability for economic loss resulting from negligence with respect to the operation of a distribution system.

77. Clause 40: General duties of electricity distributors. This clause sets down the general duties of licensed electricity distributors in respect of the development of their systems and the use of them to facilitate competition in supply and generation (including embedded generation). These duties are the same as those which already apply to holders of electricity transmission licences. The existing reference to the general duties of public electricity suppliers is repealed.

78. Clause 41: Powers of licence holders. Section 10 of the 1989 Act gives effect to Schedules 3 and 4. These Schedules confer substantial powers which impact on the rights of third parties: the compulsory purchase of land; street works; protection from electrical interference; the acquisition of wayleaves; the felling and lopping of trees; and the entry upon land for the purposes of exploration. The new clause amends section 10 to reflect the creation of the licensable activity of distribution and to remove references to public electricity suppliers. Subsection 2 of this clause allows for these powers to be made available to electricity distributors to the extent specified in their licences.

Clauses 42 - 46 and 69 - 74: Electricity and gas performance standards

79. The existing performance standards provisions in gas differ in scope from those in electricity. The ability to set performance standards for the gas sector is also time-limited by a "sunset clause" (section 10 of the Gas Act 1995). The main purpose of these clauses is to provide the regulatory authority with powers which are not time limited, and which are the same for gas and electricity, to set standards of performance which companies should meet in dealing with consumers.

80. The scope of the existing powers is being extended to include all licensed (but not exempt) suppliers of electricity (currently only Public Electricity Suppliers "PESs" are covered); licensed distributors of electricity (PES distribution arms are covered by the current legislation); and licensed gas transporters. The provisions cover all companies which may come into direct contact with consumers, and do not distinguish between ex-PES suppliers and distributors and others. Some distribution activities, such as restoring supply after a fault, are currently subject to performance standards; the regulatory authority will continue to be able to set such standards. In gas, similar functions are carried out by transporters, and so the powers will be extended to cover them.

81. At present, performance standards may only be set with regard to those activities of companies which affect domestic customers in gas (Gas Act 1995 section 33A) and tariff customers in electricity (Electricity Act 1989 section 39). The powers are to be aligned so as to cover the same class of customers and potential customers in each sector.

82. In gas, the current provisions are due to lapse as a result of the "sunset clause" in section 10 of the Gas Act 1995. To date, the gas regulator has not used these powers, instead relying on licence conditions to set broadly similar standards. Nevertheless, the Government wishes to continue these powers, which have been used in electricity. Clause 69 provides for the continuation of the powers.

83. These clauses set out procedural requirements that apply to the Authority in relation to the exercise of its powers to set performance standards. They require the Authority, prior to setting new performance standards, to conduct appropriate research and to go out to consultation on the basis of a notice giving the Authority's reasons for proposing the new standards.

84. One of the Bill's broader purposes is to ensure that customers should only need to have contracts with suppliers and should not have to deal with distributors or transporters. Therefore, subsection (5) of the new section 33AA of the 1986 Act (inserted by clause 70 of the Bill) and subsection (5) of the new section 39A of the 1989 Act (inserted by clause 42 of the Bill) make provision for compensation from distributors/transporters to reach customers via the latters' suppliers. Similarly, subsection (2)(c) of section 42A of the 1989 Act (as substituted by clause 46) and subsection (2)(b) of section 33D of the 1986 Act (as substituted by clause 74) for information about performance by distributors or transporters against the standards to be passed to customers via suppliers.

Clauses 47 - 48, and 75 - 76: Enforcement of obligations of electricity and gas licence holders

85. Clauses 47 and 75 - Financial penalties. These clauses apply respectively to the electricity and gas sectors. The powers are similar to powers proposed for the Strategic Rail Authority and the Rail Regulator in the current Transport Bill. The clauses introduce a power for the Authority to impose financial penalties on companies for past and current contraventions of their licence conditions, of other specified statutory requirements, and of standards of performance (both overall - i.e. aggregate - standards and standards set to apply in individual cases). The purpose of the new power is to give the Authority an additional mechanism for ensuring compliance with these conditions, requirements and standards of performance, and to deter future contraventions. The power does not apply to contraventions committed before the power comes into effect. Receipts from financial penalties will be paid into the Consolidated Fund.

86. The new power will operate alongside the Authority's existing order-making powers, but is not to be tied to them. Hence, a financial penalty may be imposed alongside a provisional or final order, or equally, where no enforcement order has been issued (this might be, for example, where a contravention has already taken place but did not come to the Authority's attention at the time). However, there are time limits for the imposition of a penalty, related to the time at which the contravention occurred or, where applicable, the time at which enforcement action was initiated.

87. The penalty must be of a reasonable amount in all the circumstances of the case. The Authority is to be required to consult on and publish its policies with regard to calculating the amount of a penalty, and to take account of those policies with regard to penalties.

88. There are procedural requirements for the imposition of a penalty, including requirements on the Authority to publicise its intentions, give notices with prescribed information, and receive and consider comments from interested parties; procedures for modifying the penalty in the light of representations; and procedures for notifying the company concerned and interested parties of the final decision on the imposition of a penalty. The company may apply to the Authority to pay a penalty in instalments.

89. The company may also make an application to the court to question the validity of a penalty order on prescribed grounds. The grounds are that procedural requirements have not been followed and that this has substantially prejudiced the company's interests, or that the imposition of the penalty - including its amount since this is required to be reasonable in the circumstances of the case - was not within the Authority's powers. The requirement to pay a penalty is suspended until the case is determined. The court may cancel or reduce the penalty or extend the timescale to pay. It may also require interest to be paid on the penalty, including on a reduced penalty.

90. In the gas sector, the existing power to impose a monetary penalty as part of a final order imposed by the regulator under section 28(7A) of the 1986 Act as amended, will be repealed.

91. Similar provisions will apply in the telecommunications and water sectors (see below).

92. Clauses 48 and 76: Licence enforcement. These clauses which apply to electricity and gas respectively (and equivalent clauses for the other sectors), reduce inconsistencies between the utility sectors in terms of the general enforcement (order-making) powers already in force. They also accelerate the enforcement process by reducing the period for making representations in response to a notice of intention to issue an order from 28 days to 21 days. The new time limits will not apply to orders issued before the entry into force of the new provisions.

93. The water regulator currently has discretion to make an enforcement order, even where a company is taking steps to comply with its obligations, or where the contravention in question is trivial. The gas regulator is currently precluded from taking such action. Clause 76 will give the Authority, in respect of the gas sector, the same discretion as the water regulator to make enforcement orders to ensure compliance with licence conditions and other specified statutory requirements ("relevant requirements"). Clause 48 gives the Authority, in respect of the electricity sector, a similar discretion to make an enforcement order, even where a company is taking steps to comply, or where the contravention is trivial. The electricity regulator does not currently have this power. These changes also achieve partial alignment with the duties of the telecoms regulator, who is not under a duty to impose an enforcement order (but may) where the contravention is trivial.

Clause 49 and 77: Remuneration and service standards

94. The intention of these clauses, which apply to the electricity and gas sectors respectively (with equivalent provisions for telecommunications and water), is to achieve transparency as to the relationship between directors' remuneration and customer service standards in markets which are not fully competitive. The clauses require companies that provide any price-regulated services to disclose whether or not they link the remuneration of the directors of their price-regulated businesses to levels of customer service attained in these businesses, and to give details of how any links affect remuneration.

95. The clauses insert new sections, largely identical to each other, into the relevant utility acts. Sub-sections (2) - (4) of the new sections require the disclosure described above to be made as soon as reasonably practicable after the end of the disclosing company's financial year, and specify what information must be disclosed. The intention is that the information should enable anyone inspecting it to understand the relationship between the level of service provided and directors' remuneration, including how the company decided what level of service had been achieved.

96. Sub-sections (5) and (6) of the new sections require price-regulated companies, when they make their disclosures about the last financial year, to state the links between directors' remuneration and service standards that are in place for the current financial year. If they have no links, but have decided to introduce them in future, they must describe these. If the current or planned links are different from last year's, then the company must explain what differences may be expected to result from the change.

97. Under sub-sections (7) and (8) of the new sections, licence-holders will have to make their disclosures in a form with which the Authority is content, and publish them. The Authority can also publish them, though the intention is that it would not do so unless it felt that the publication by the company was in some way unsatisfactory (for example, because it was not accessible enough).

98. Sub-section (10) of the new sections defines certain terms used. Definitions include:

  • activities subject to price regulation: the intention is to cover price regulation which constrains companies' freedom to raise prices, of the sort imposed because a company is not exposed to full competition for a service. Price controls such as RPI - X (whether on a single service or basket of services) are thus included, as are specified maximum prices. On the other hand, other sorts of price regulation, for example an obligation to charge the same price throughout a geographic area, are not covered by the definition;

  • remuneration: this includes all the remuneration received by a director from the price-regulated company including pension benefit;

  • service standards: the sections apply to any standards of customer service imposed by the regulator or Secretary of State, as well as any which the company may have set itself.

The regulator is to enforce the disclosure requirement, in the same way as if it were a licence condition.

previous Section contents continue
House of Commons home page Houses of Parliament home page House of Lords home page search Page enquiries

© Parliamentary copyright 2000
Prepared: 25 January 2000