Examination of Witness (Questions 260-267)
28 JUNE 2004
MR DAVID
GREEN OBE
Q260 Mr Challen: I hope that they will
take note of the amended form of Clause 84 of the Energy Bill,
even if it does not survive the next three weeks.
Mr Green: I am sure they will
take note of Parliament's intent, Chairman.
Q261 Mr Challen: You say in your memo
that OFGEM are operating the Climate Change Levy exemption system
for CHP, but a protracted failing in OFGEM's software means it
remains a dysfunctional system. I wonder if you could tell us
just a little bit more about that?
Mr Green: It is not for the Business
Council, Chairman, but, as many of you are aware, it is the work
I have done historically on CHP, but just to explain, because
most of you here were helpful in encouraging the Chancellor to
give, I think it was in the Budget two years ago now, full exemption
to CHP for the Climate Change Levy. For that to happen, OFGEM,
under the Finance Act, were given a statutory duty, just as they
are for the Renewable Obligation Certificates, of operating the
virtual depository through which trading takes place in Levy-exempt
certificates, the certificates for a supply which does not have
the Climate Change Levy on it. First of all, according to OFGEM's
annual review, the delivery of the software was some six months
behind schedule and that caused the delay in getting the website
for it up and running. Certainly, as of last week the transactions
were still not taking place because there were still continual
technical difficulties in the operation of OFGEM's trading system.
What a number of companies in that sector have been pressing for
is to get an ability to do manual transfers introduced because
of the software defects which OFGEM have had. I learned recently
that colleagues in the renewables community appear to be having
similar problems with trading Renewable Obligation Certificates
and it is to do partly with the volume of trade which goes on
and the settlements which go on. It does not seem to be quite
geared up to that, as yet. Certainly there has been quite a lot
of pressure on OFGEM from Ministers to make sure they do tighten
up their performance in this area, because Parliament legislated
to give the exemption but if the administrative systems do not
deliver then companies do not get the full benefit. OFGEM have
made it clear that the full benefits will flow back to companies
from the date Parliament passes the enabling legislation, so they
are not going to lose out ultimately. It is just very frustrating,
the cash flow implication of not being able to do it smoothly
and efficiently.
Q262 Mr Challen: Do you think the appropriate
lessons are being learned in the right places?
Mr Green: Yes, they have been.
The software engineer who did it had been brought back from India,
to where he had moved, actually to do the software upgrade, so
we hope that it will lead to some improvement. For some reason
I do not understand, Chairman, it all appeared to depend upon
one person. I think it is a classic example of "just in time"
delivery.
Q263 Chairman: Just going back, if I
may, to the question of the priority, or otherwise, that OFGEM
accorded to sustainable development and whether or not it should
be embedded in the remit, it was very encouraging to hear what
you had to say about that from the industry's point of view. I
wonder to what extent you would be involved in telling the Government
those opinions which you have expressed to us?
Mr Green: We have communicated
them to Government in the meetings which we have had with Ministers
and we have collaborated with a number of research bodies which
have produced this information. I could never quite understand
why ministers were so resistive of it. I can only put it down
to historical legacy from the previous incumbent at OFGEM, who
tended to be slightly resistive to this. Reading between the lines,
I think there is a hope from Ministers that with changes of personality
and the balance of people in OFGEM it will be easier for these
things to happen and might lead to less resistance. I have to
say, Chairman, and maybe I have done this job for too long, there
is a slight history of Parliament being ahead of Government on
these matters. I can think of a number of cases, in the 1989 Electricity
Act and subsequently, where Parliament has had ruled out of order
the machinery at the time and subsequently it has come back in,
in later legislation and after pressure from various Select Committees.
I can only think that if the amendment which various Members on
the Energy Bill got in this time eventually does not come to pass,
and it may indeed do so, who knows, we may well see it re-emerging
in the future because that seems to happen with energy legislation.
Q264 Chairman: You do not think that
they are worried about the impact that including sustainable development
might have on their Fuel Poverty Strategy, particularly in the
context of rising prices?
Mr Green: Separate concerns have
been expressed to me about the relevance of some of the departmental
PSRs, some of the departmental targets, in relation to the fuel
poverty target, in an era of rising prices. Given that sustainable
development is more than just about price issues, I suspect the
worry is that if you have a general function such as sustainable
development it will lead to a lot of organisations, environmental
NGOs, business NGOs, etc, pressing OFGEM to do more in the environmental
field. Historically, that was why OFGEM used to resist it. I do
not know if you have noticed, Chairman, but John Mogg, the Chairman
of OFGEM, in his recent announcement, welcomed the fact that very
shortly the number of non-executive directors on OFGEM's Board
will exceed the number of OFGEM employed staff on the authority,
and it may well be that balance of power has an effect. I noted
with interest, that the Chairman welcomed that trend.
Q265 Joan Walley: I want just to press
you a little bit further on this issue about whether or not the
regulator should have as a primary function the sustainable development
remit. Given what you have said in your reply both to Mr Challen
and the Chairman, and given that there might be a change of heart
which is emerging at OFGEM, what do you think the timing of that
change of heart could be in respect of Government? Is it not the
case that it can be done only when there is the legislative opportunity
to do it, and so presumably we are locked into a system whereby
there would be a five-year waiting period for the review if, somehow
or other, the Government did not find a way of looking again at
the legislation currently going through Parliament? Have you got
any comments about that?
Mr Green: It used to be the view
that we had major energy legislation in the UK about only every
ten years, but given we had a 2000 Utilities Bill and now we have
got an Energy Bill four years on the gap between legislation seems
to be getting a lot shorter. If the pressure which you and your
colleagues exert on the Energy Bill does not come to pass, it
will not surprise me, if there is enough will, that some other
opportunity emerges, either through a Private Member's Bill or
through some other bit of legislation that is going through, for
some changes to occur. I hope that the Government would feel able
to commit to accepting at least the sustainable development element
of the amendment which was introduced in the Energy Bill, because
I think that would send a powerful message about the long-term
commitment of the Government. What everyone is worried about,
particularly in the renewables community, is that we do have robust,
long-term commitments, because on those robust, long-term commitments
companies have to raise capital to fund their developments. The
more we can do to ensure that we do not get unexpected surprises
coming from parts of Government, including the regulator, the
better, and one would hope that actually it may make it easier
to have more consistent messages coming from the regulator if
they have got more effective legal cover to enable them to move
forward.
Q266 Joan Walley: I think it would be
helpful for the Committee to know as well whether or not this
is something about which you have had discussions with the Sustainable
Development Commission, and whether or not, in the view of the
Sustainable Development Strategy at the moment, this is something
which you are seeking to take forward?
Mr Green: We have not had a formal
opportunity to appear before the Sustainable Development Commission
to argue our case. Certainly, personally, I have had discussions
with the Chairman of the Sustainable Development Commission and
one or two of their members, drawing their attention to this clause
and hoping that the Sustainable Development Commission will want
to take an interest in it. It strikes me as their classic territory
but we have not been invited formally to give evidence and make
representations to them. Certainly, personally, I have talked
to the Chairman and a number of their members about it to make
them aware of the work which has been done.
Q267 Joan Walley: You would see that
as being relevant to the current review of the Sustainable Development
Strategy, per se?
Mr Green: Absolutely. It would
strike me as slightly odd if, on the one hand, the Government
is consulting on a broader Sustainable Development Strategy for
the UK and on the other hand is ruling it out of court for one
of the major economic regulators which affects the economic behaviour
of a large part of the UK economy.
Chairman: Such contradictions are becoming
familiar to this Committee. David Green OBE, thank you very much.
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