Eighth Standing Committee on Delegated Legislation
Thursday 14 March 2002
[Miss Anne Begg in the Chair]
Draft Electricity and Gas (Determination of Turnover for Penalties) Order 2002
Mr. Robert Key (Salisbury): On a point of order, Miss Begg. It is a pleasure and a privilege to serve under your chairmanship. I understand that it is the first time that you have chaired one of these Committees.
The Minister for Industry and Energy (Mr. Brian Wilson): Further to that point of order, Miss Begg. I entered just in time to hear that this is your first time in the Chair, and I am sorry to have added to any nervousness that you may have had. I extend fraternal greetings to the hon. Member for Salisbury (Mr. Key) who appears to have assisted me on this occasion. I apologise for my late arrival.
I beg to move,
That the Committee has considered the draft Electricity and Gas (Determination of Turnover for Penalties) Order 2002.
The order will complete the arrangements to provide for the imposition of financial penalties on gas and electricity licensees who breach licence conditions or certain requirements that are imposed by the Gas Act 1986 or the Electricity Act 1989, or who fail to achieve prescribed standards of performance. The financial penalties are intended to be a strong deterrent against breaches of conditions and requirements, and against the failure to meet standards of performance. They are important, as they will secure fair treatment for customers and fair competition in the market. Licensees who take care to meet their obligations have nothing to fear. Those who are less careful will need to take note and to mend their ways. We aim to have good standards of compliance, not lots of fines.
Many hon. Members will recognise the importance of achieving better standards for customers through better compliance by some gas and electricity companies. We hear of the adverse effect on customers of the poor practices of some companies in the market. That is not acceptable. It is bad for customers and bad for the companies, as it brings the market into disrepute.
The Utilities Act 2000 made provision for the Gas and Electricity Markets Authority to impose financial penalties, subject to certain safeguards. The maximum penalty is 10 per cent. of turnover as determined by the order. The amount of the penalty must also be reasonable in all the circumstances of the case. The authority must have regard to its published statement of policy when it decides whether to impose a penalty and when it decides the amount of any such penalty. Those principles are set out in the primary legislation
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and provide the significant comfort that any penalties imposed will be fair and reasonable.
The order provides for measures to determine turnover for gas and electricity licensees so that the maximum financial penalty that the authority may apply can be calculated in each case. Turnover may be defined by the scope and the period. The Act clearly states that the turnover of the licensee is to be taken into account. That defines the scope and is reflected in the order. The period of the relevant turnover is the financial year preceding the issue of a notice by Ofgem that it intends to impose a penalty.
Where there is no preceding business year, the order provides that the turnover should be the turnover of the licensee for the preceding 12 months. Where the applicable turnover is for a period of less than 12 months, the order provides that the turnover should be grossed up accordingly.
Finally, the order determines that the turnover should be calculated on an accruals basis and ascertained in conformity with normal accounting practice in Great Britain. Taken together, I believe that the measures represent a fair implementation of the Act's provisions, with appropriate safeguards in place. I draw the Committee's attention to the statement of policy on financial penalties by the authority, which has been published by Ofgem. Implementation of the measure will provide a sound and fair basis for calculating the turnover, and I have no hesitation in commending the order.
It is normal practice for a Minister inviting Parliament to approve a draft statutory instrument to volunteer a view on its compatibility with the convention rights as defined in section 1 of the Human Rights Act 1998, and I confirm that in my view the provisions of the draft order are compatible. I commend the order to the Committee.
Mr. Key: I have read the draft statutory instrument and regulatory impact assessment carefully. It took me back to the passage of the Gas Act 1986, on which I served as Parliamentary Private Secretary to the late right hon. Alick Buchanan-Smith, then a Minister at the Department of Energy. I remember clause 30A(8) as if it were yesterday. I referred to Halsbury's Laws of England in the Library a couple of nights ago to refresh my memory, and I am entirely satisfied that the draft statutory instrument meets the requirements and intention of the legislation.
I have only one question. The order sensibly recognises the importance of the penalty applying to the licensed entity only, and not an affiliate or otherwise related company, and we would be opposed to any change. I consulted some of the energy companies that the order will affect, and they told me of their concern that the decision to fine should be taken by the Ofgem management board as a whole. Will the Minister confirm my belief that the regulator is the whole board of Ofgem, not just the chairman? I raise that simply because some companies would be more comfortable if they knew that decisions on fining were taken not by the chairman alone, but by the whole board. I believe that to be true, but I should
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be grateful if the Minister would confirm it. With that question, I am happy to concur with the draft order.
Mr. Tony Banks (West Ham): I add my congratulations to those already given on your chairmanship, Miss Begg. I cannot understand why anyone would want to chair these Committees, but I am delighted that you do and I am sure that you will do it excellently.
I want to use the opportunity to ask my very good Friend the Minister—whom I am relieved to see here today, as we all are—one or two questions. This might be an opportunity to get some answers and save us writing letters. I have had an upsurge in complaints in my constituency about energy providers touting for business, and one person came to me about it on Friday. I have just realised that it is not all bad sitting on these Committees, as it gives me an opportunity to raise questions directly with the relevant Minister. A single women living on her own came to see me—I'm not going to get away with this, am I?
The Chairman: Order. The order is narrowly drawn and concerns the penalties for electricity and gas companies when they break regulations. I am afraid that the hon. Gentleman's questions are outwith the scope of the order.
Mr. Banks: Obviously, your ruling is final, Miss Begg, but the order mentions penalties and calculations based on turnover. Therefore, am I not allowed to talk about the circumstances under which penalties may be imposed on a particular company?
The Chairman: The order concerns how the penalties are calculated, not the penalties themselves.
Mr. Banks: May I then venture some ideas about how one might further increase the penalties, based on the scale of malpractice?
The Chairman: Again, the hon. Gentleman is pushing the boundaries of this narrowly drawn order.
Mr. Banks: Thank you, Miss Begg. In that case, I shall return to my original position on these Committees, which is that it is usually a waste of time turning up. [Laughter.] I will now have to write to my hon. Friend the Minister.
The Chairman: I thank the hon. Gentleman. That is the best idea.
Mr. Andrew Stunell (Hazel Grove): I, too, am delighted to serve under your chairmanship, Miss Begg. I hope to escape your wrath more effectively than the hon. Gentleman.
There are three issues for the Committee. The first is whether the purpose of the penalties is appropriate, and the second is the scale of the penalties. The third is what happens to the penalties, on which the order is remarkably silent. The Liberal Democrats certainly agree that it is appropriate to have penalties. It is important that the standards of performance of the gas and electricity companies are maintained and to be sure that, if companies breach the requirements, they are brought up short and made to understand their responsibilities. We further understand that, in a
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market economy, cash is the way in which that should be done. We do not, therefore, have a problem with the order's fundamental purpose; it is entirely appropriate.
I should like to hear more from the Minister about the scale of the penalties. The current limit is 10 per cent. of the licensee's turnover. The hon. Member for Salisbury pointed out that that would not be expanded to cover associated companies or linked parties, but would be tightly focused, and described that as appropriate.
At first glance, that seems appropriate, but I should like to know whether the Minister believes that he has excluded the possibility of an Enron or Turner and Newell situation, in which a licensee finds ways of minimising its liability in order to duck out of the regulatory environment. If the Minister says that the great majority of companies are highly responsible and sound and that that would never happen, I will say that I hope so, but he clearly thinks that there is sufficient risk to warrant introducing the order. In that case, it is worth his responding to my point, not least because I have heard from an employee of an energy company who was being questioned about its response to the recently introduced renewables obligation. I say ''recently''; the three of us were in a Room just along the Corridor only last week. That employee was quite upfront and said that the company had no intention of purchasing renewables unless that was cost-effective and that it would simply pay the penalty. In other words, that supplier has considered the renewables obligation and said, ''Blow that. We're not bothered about it and we'll pay the penalties.''
Is 10 per cent. of turnover the right figure? In the knowledge that at least some suppliers have considered the Government instruments and say that they would prefer to pay the penalties, we should bear in mind the possibility that companies might seek to subdivide or split their responsibilities or to set up separate operations or license their operations in different parts to minimise their liability.
As I said, the third point is what happens to the penalties. I want to draw attention to the difference between what appears to be in this order and what was in the parallel statutory instrument on the renewables obligation. In that case, penalties are recycled to the suppliers. That produces a double benefit or double whammy. Not only does a company pay the penalties, but its competitors receive the payments back. Therefore, they are at a double competitive disadvantage and there is a double incentive to comply. Of course, there is a further benefit to that system in the eyes of some of us in that there is no net benefit to the Exchequer. It is simply a redistribution mechanism. I want to know what happens here because as far as I can see, no redistributive effect is intended, and there is certainly none that I can see in the documents.
It is important to ensure that those performance standards are achieved. This is not only about salesmen and their methods; it is also about investment in reducing energy use, ensuring that there is energy conservation and helping poor consumers by minimising the costs of energy to
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them. A company that ducks out of meeting its standards of performance would not only jeopardise safety and consumer protection issues as we generally understand them, but it would disadvantage the efforts to contain energy use and to help poor consumers. If recycling fines is not part of the Minister's plans here, he should consider it, not least because refunding and recycling that money to assist energy conservation and poorer consumers would be a major benefit to the industry. I hope, with those few remarks, that the Minister can give us some satisfaction.