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5.16 pm
Dr. Vincent Cable (Twickenham): As one of the economists in the Chamber, I hope that I shall not distress the hon. Member for Ochil (Mr. O'Neill) by complicating the arguments even further. In the broad sweep of the debate, the key fact is that after three years of Labour Government we are not considering a Bill to renationalise water and electricity. The Secretary of State is honest about his reappraisal of the arguments on public ownership, which is extremely important and to his credit. It would help the debate if there was open-mindedness on all sides because this issue is not best discussed in an atmosphere of ideological tribal warfare.
Experience of privatisation has been mixed. There have been success stories, but also a lot of blemishes. It is best to be frank about them. The Bill does not deal with the railways, but I find it difficult to believe that anybody would argue that privatisation has helped any public transport user. All kinds of questions have to be asked about some of the supposed success stories. For example, BT is regarded as a top company with world-class management and a history of reducing prices to consumers. Most people consider it to be one of the more successful privatised utilities, but why did the number of telephone disconnections rise from 330,000 to 700,000 between 1995 and 1998? Some people are disconnected because they are careless, but large numbers are low-income consumers--many of them elderly--for whom access to telecommunications is a lifeline. BT's aggressive, commercial approach to generating cash often causes considerable social distress. The company is not universally a success story. The telecommunications industry is high-tech, costs are falling everywhere, and even France Telecom, which is nationalised, is experiencing falling prices. The story is mixed.
Under privatisation, British Gas and Transco have produced a professional operation in many respects and their prices are also falling, although that is partly due to the availability of gas upstream. However, since 1995 the number of consumer complaints in the gas sector has risen
from virtually nil to about 70,000 because of aggressive marketing. The complete collapse of the labour force, which is down from about 94,000 to 34,000, is another feature of the industry since privatisation. A large section of the British Gas maintenance labour force has been disbanded. Some though not all of that may be due to efficiency measures, but any hon. Member who has had a problem with a gas leak or tried to have a central heating boiler installed will know that, post-British Gas, we have rapidly found ourselves in the heartland of rip-off Britain as freelance plumbers with poor standards have replaced a somewhat slow but generally reliable system. There is a downside to the increased efficiency of British Gas.
In the case of the water utilities, the benefits are even harder to identify. Before Ian Byatt got stuck in last year, water prices had risen by an average of 55 per cent. since privatisation, with relatively little compensating advantage. It is a very mixed story.
However, let us look to the future. The hon. Member for Tiverton and Honiton (Mrs. Browning) presented her argument in a somewhat ideological spirit, but the issue that she raised--that of regulatory risk and its effects on the cost of capital--is crucial. I broadly support the Bill, and will vote for its Second Reading, but we must try to ensure that the pendulum does not swing too violently towards tougher regulation.
When utilities were under-regulated, they were often sold at undervalued prices. The pendulum has been swinging in the other direction, in many cases rightly. There has been tougher regulation: the windfall tax was introduced, and we now have tougher social and environmental regulations. The Bill will provide a tougher system of licensing and fines. It is tempting to say that the utilities deserve it--that they had it easy, and that now the authorities are getting tough with them. That is an understandable human reaction, but there is potentially a high price to be paid.
If the pendulum swings too far, equity prices may collapse, as has already happened with water and the railways. That will make it difficult to raise risk capital, and the utilities will have to borrow. They are already highly geared in many cases, so they pay a high premium on their borrowing costs. We are beginning to see that happening in the market now. It means that the utilities must either stop borrowing and underinvest--in which event we shall experience shortages in the future--or continue to borrow, with the result that future generations must pay through higher charges.
Regulatory risk is a real issue, and our attitude to the Bill will be governed partly by how the Government handle it. Some subtle but important questions will determine how well they do handle it. There is, for instance, the question of how they deal with fines. Large fines may be right in some cases, but it is important for fines to be imposed only when there has been negligence, or a deliberate intent to abuse the powers of the utility concerned. There must also be a proper system of appeals. If the balance is right, the arrangement may be acceptable, but regulators cannot be allowed to impose fines indiscriminately under an opaque system of regulation. Furthermore, we need a proper system of regulatory impact assessment to govern what will no doubt be a
swathe of secondary regulations following the Bill's enactment. If we do not get the balance right, more harm than good will be done.
The key new element embraced by the Government is competition, taken in conjunction with the Competition Commission's new powers for utilities. In principle, it is right for there to be more competition--I welcome that general slogan--but the detail does not always make it clear what the commitment to competition actually means. There is, for example, an interesting disparity, which has not been explained, between the energy sector, in regard to which the Bill is committed to facilitating competition, and water, in regard to which it is committed to encouraging competition wherever possible. In the case of telecommunications, there is an odd exemption providing for the continuation of appropriate distortions. It is not clear why certain industries have been allowed to insert these words qualifying the provision for competition, although no doubt it will become clear as we work our way through the clauses.
I have a more fundamental problem with simply accepting the competition slogan as the be-all and end-all of the new approach to the utilities. Competition may well be desirable--it often is, in fact--but in some cases there is no competition, and is not likely to be; there is a natural monopoly. There can be common carriage in the water pipeline system, the ring main and the electricity grid system. Those are natural monopolies, and they will always need regulation.
More important, the way in which competition operates in relation to many of the products that we are discussing does not provide some of the advantages of a competitive market. Throughout the Secretary of State's speech the hon. Member for Rutland and Melton (Mr. Duncan) heckled, saying that electricity, water and gas were just like any other commodities. They are not. Electricity and gas contracts are very complicated: we know that, because 30 or 40 per cent. of those who change their suppliers opt for the first who telephoned them. It is rather like buying a private pension or an insurance policy. They are complicated products. Similarly, in many cases there are costs in switching those items. If people buy into a year's contract, they will not know what will happen next year. Charges may improve dramatically.
In many ways, the competitive market for gas, electricity and water, and the market for financial products, are analogous. One of the things that we recognise and which the Government have recognised in the Financial Services and Markets Bill is that, although it is important not to overregulate the wholesale bit--the City--it is important to have a tough and quite detailed regulatory system for the final products.
I think that the Government have recognised that by giving consumer councils strong status in the Bill. That is right. I take issue with Conservative Members emphasising the danger of consumer councils leaking information. There is a genuine problem, which the Secretary of State acknowledged. If consumer councils become a source of information that can be used for competitive positioning, it will be dangerous--but there is a greater danger that consumer councils will be starved of information.
The Bill contains a gagging clause on the consumer councils. What will happen if there is a conflict between a consumer council's demand for information and a
regulator's willingness to release it? Who will be the final arbiter? Much detailed argument will be needed to ensure that the balance is right. There are concerns not simply about the competing company aspect, but about consumer protection.
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