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Mr. Gibb: My hon. Friend makes a good point, and I shall deal with some of the comments in the newspapers and on Second Reading.
That pamphlet is, in essence, a blueprint for the Bill. The key point is that the Government believe that, because the regulators exist for those industries, they should be used to deliver some of the Government's social and political programmes. If the Government had their way, we would also have a regulator for the supermarkets, for car retailers and for a number of other things.
The interventionist instincts of the Labour party and of those who share its philosophy are alive and kicking and prevalent in the Bill. The amendments are the key to that philosophy. That is why the order of the objectives for the regulator has been changed. That is why the Bill gives the Secretary of State the power to direct the authority to take into account directives from the Secretary of State on social matters when regulating the utilities.
That is the fundamental difference that the Bill brings to the role of the regulator. It begs the question: what happens when the market, the industry or a sector of the industry becomes fully competitive? If we believe that the regulator's role is to mimic competition, once a sector becomes competitive, the regulator's role is effectively redundant and should disappear. The Health and Safety Executive can deal with safety issues; the Competition Commission can deal with any anti-competitive forces or alliances; but the specific role for a regulator of that particular sector of that industry should go. The electricity supply industry is one such example. It is highly competitive, so now is the time to remove the regulator from that sector altogether.
If one believes, as the Government seem to, that the regulator has a wider role even in a fully competitive market--even when competition has fully arrived--there can be no rolling back of the regulator's role. That point was put to the Secretary of State during the Second Reading debate. He was asked whether he believed that
- there is still a role for the regulator when the utility sector involved . . . is fully exposed to fierce competition.
-
His answer was:
As a general rule, my personal view is that regulators are not appropriate in those circumstances, and I should much rather have the discipline of an effective market.--[Official Report, 31 January 2000; Vol. 343, c. 793.]
It is that to which my hon. Friend the Member for West Worcestershire (Sir M. Spicer) referred when he wrote in The Daily Telegraph that the Utilities Bill and the Financial Services and Markets Bill
- will establish an entirely new form of government, the like of which this country has not experienced before: rule by regulator.
- the near renationalisation of the gas and power industries.
- regulators are being given social and political objectives, which are antithetical to competition. We are witnessing a parallel system of government emerging.
- That is socialism by regulation; it is socialism on the sly and it is nationalisation by the back door. I hope that one of our first objectives when we return to government will be to dismantle all the regulatory apparatus, except for that which focuses on competition because competition is the true friend of the consumer.--[Official Report, 31 January 2000; Vol. 343, c. 828.]
I have tried to establish that the Bill creates a whole new type of industry regulator, with wide new objectives, obligations and powers. It is those extra duties that the Government have imposed on it that will involve Ofgem--or GEMA as it should now be called--in higher cost, all of which will be passed on to the industry and thence on to the consumer.
In fact, industry will suffer three forms of increased costs as a result of the Bill. The first is higher licence payments to cover the increased costs faced by the regulator himself. The second relates to the higher cost incurred directly by industry as it implements the social and other obligations required of it. The third is the higher cost of capital that results from greater regulatory risk. That is why the Bill has been so poorly received by industry, despite all the alleged consultation. Indeed, Ian Byatt, the erstwhile water regulator, said of the Bill when it included water:
- The Bill's enlargement of the scope for discretionary intervention by regulators, politicians and advocates is likely to extract a high price from utility industries, and all consumers will pay it.
5.30 pm
The Gas Act 1986 and the Electricity Act 1989, which privatised the industries concerned, are similarly worded, setting out the regulators' objectives as established at the time of privatisation. Three key objectives were specified. The first was to secure that all reasonable demands for electricity were satisfied. The second was to secure that licence holders were able to finance the carrying on of the activities involved. The third was to promote competition. There were three equal duties, relating to security of supply, financial viability and the promotion of competition.
That is the current regulatory regime. Under the Bill, however, the primary objective is to promote consumers' interests. Issues such as security of supply and financial viability have been downgraded to second place.
The great achievement of the current regulatory regime is this. The RPI minus X formula gave industry incentives to reduce costs while maintaining financial viability, at the same time as delivering lower prices to the consumer. Everyone knows--even Labour pretends to accept--that the private sector is more efficient than the state sector. The RPI minus X formula was established to ensure that a proportion of that saving was passed on to the consumer.
Of course, once a fully competitive market has been established there is no need for a formula, because the market itself will deliver the price reduction. The RPI minus X formula is only a mechanism enabling the benefits derived from efficiency savings to be shared; it does not, in itself, deliver efficiencies. It is the effect of being in the private sector that delivers the forces leading to greater efficiency.
The regulator needs to be aware--this is the point of the amendment--that he cannot simply pluck the "X" figure from the air, and expect efficiencies to be delivered. There comes a point at which diminishing returns start to kick in. After a number of years in the private sector, the huge efficiency savings resulting from release from the lethargy of the state sector will no longer be kept up. Efficiency will continue to increase, but not at the same dramatic rate. That is why, under the existing system, there was always a prime duty to maintain the financial viability of the companies. Demoting that objective means that the regulator is almost forced to put such concerns very low on his list of considerations--which leads to the real danger of over-prescriptive and draconian regimes.
There is another real danger, of which we are beginning to see signs in the utilities even before the implementation of the Bill. In Yorkshire, for example, Kelda, which owns Yorkshire Water, has sought to transfer all the assets of its business to a mutual trading company. Ofwat has said no to that, but the proposal is significant.
Because of what is now widely regarded as an excessively draconian regime, the returns--the income--that Ofwat is allowing the water companies to make are so low that the market value of shares in the companies is below the book value of the assets that they own. If they simply sold all their assets, such as buildings and pipelines, and deposited the money in a building society, they could generate a significantly higher income than they are making from the provision of water services.
Yorkshire Water wanted to sell its assets, and to sell them to a mutual trading company. The assets would have been sold in exchange for debt, so the mutual trading company would have been 100 per cent. debt financed. There is no doubt that interest on debts must be paid, although there is an element of choice governing whether a company pays a dividend. In this case, the regulator would not be able to force the funders of the asset to take a lower return.
The regime has therefore become so unattractive that equity capital--entrepreneurial, innovative, private-sector business--does not want to run the business. It wishes to withdraw and to leave the supply of water to a mutual trading company. The danger of large mutual companies is that they have reduced incentive to innovate and to provide improved services. Philosophically, they are in many ways akin to the state sector. As the Financial Times said yesterday in an editorial:
- mutual ownership . . . leaves big questions as to how the new managers could be kept sharp in pursuit of efficiency.
Mutualisation is effectively the renationalisation of those industries by over-regulation. If the Bill results in over-burdensome regulation in electricity and gas, as there is in water, we could see--I am not sure, but we may already be seeing it in gas distribution--similar trends in those industries. The replacement of equity funding with debt is the first step in that process.
The purpose of our amendment in lieu is to put financial viability higher up the regulator's consciousness. It is important that the regimes are carefully balanced. The Bank of England has a similar imperative. Anyone can cure inflation by raising interest rates to 100 per cent. and killing the economy totally. The truth is that, to get interest rate policy right, we have to keep inflation down and growth steady. That is the trick of economic policy. That is also why the Governor of the Bank of England has to write to the Chancellor explaining why inflation has fallen to below 1.5 per cent. Similar constraints have to be imposed on the utility regulator, to ensure that the regulator does not drive out equity capital in the provision of investment funds to electricity and gas. Our amendment would help to achieve that.
Our amendment in lieu is important and could do much to save the gas and electricity industries from the problems being faced in water. Without it, we run the risks associated with mutualisation and the effective renationalisation of those industries. I hope that the
Government will accept it at this late hour. However, I suspect that the words of the Prime Minister back in 1988, may prevail. He said:
- We are proud that we took the--
- industry into public ownership. When we come to power it will be reinstated as a public service for the people of this country, and will not be run for private profit.--[Official Report, 12 December 1988; Vol. 143, c. 681-84.]
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