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Privatised Utilities

3.54 p.m.

Lord Ezra rose to call attention to the case for a review of the regulation and operation of the privatised utilities; and to move for Papers.

The noble Lord said: My Lords, in introducing this debate on the privatised utilities, I wish to declare that I am chairman of a group of energy companies which, among other activities, are involved in the distribution and usage of gas and electricity. I have other energy interests including membership of a number of voluntary bodies. I am also associated with a group which has interests in the water and cable sectors, although I am not involved in those operations. I may add that my activities and connections have given me the opportunity to study the subject under debate at close quarters.

Over three years ago, in July 1992, I introduced a similar Motion in your Lordships' House. I concluded that the subject of the privatised utilities merited "serious and continuing discussion". It has certainly received it since. Not only has there been substantial press coverage in recent months but there have also been numerous studies and conferences on the subject. Two major reviews have been started, one by the Hansard Society and another by the National Audit Office. Therefore, there can be no mistaking the lively and sustained interest in the matter. I consider that it is timely that we should be looking at the situation again in your Lordships' House.

It is now 11 years since telecommunications were privatised; gas followed in 1986, and water and electricity in 1989. The enterprises involved supply basic services and are substantial in size. They represent together about 10 per cent. of GDP, have a

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stock market valuation of some £70 billion and employ 400,000 people. They are all subject to regulatory control. In recent months there has been mounting public concern about how these industries are regulated and operated. There has been much criticism of the alleged inconsistencies and other shortcomings in the system of regulation. The operation of the enterprises is widely considered to favour shareholders at the expense of consumers. These are the essential issues with which I shall deal.

It is my opinion that many of the problems besetting the privatised utilities have arisen from the way in which they were privatised in the first place. Like other noble Lords who have an interest in the subject, I participated in the debates on the privatisation legislation. Although the Government stated that the objective was to subject the utilities to the competitive pressures of the private sector, little was contained within the privatisation legislation to bring this about. There were many proposals from the Floor of the House--and I moved some amendments myself--for the industries to be restructured before they were privatised. The Government rejected those proposals. British Gas and the water companies were privatised in their existing form. One competitor operating on a limited scale was allowed in the case of British Telecom. Although there was some restructuring of electricity, the regional distribution companies were privatised as they existed and the generation of electricity was left in a limited number of hands.

There were clearly two reasons why the Government acted as they did. One was to get the privatisation measures through with the minimum of delay; and the second was to achieve the maximum financial benefit. Major restructuring before legislation would have introduced delay and uncertainty and would undoubtedly have had an adverse impact on the financial markets. The restructuring came later and in a somewhat haphazard manner. This sequence of events is in my opinion the main reason why the privatised utility sector is under such controversy at the present time.

Because of the way in which the utilities were initially privatised with the minimum of restructuring, there had to be safeguards that there was not an abuse of monopoly or quasi-monopoly power. This was provided by a regulatory system. The intention was that the regulator in each case should be given broad duties and considerable discretion to carry them out. However, increasingly the system of regulation has come under criticism. For example, it is argued by some of the enterprises that political intervention, which was the bugbear of the nationalised industries which I well know from my own personal experience, is being replaced by ad hoc regulatory intervention. Other criticisms are made of a lack of accountability and transparency. It is also contended that the present system depends too much on the personal inclinations of the regulator. For example, in the case of gas, the previous regulator, Sir James McKinnon, and the present regulator, Ms. Clare Spottiswoode, have taken radically different views of the way in which they

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should exercise their duty to promote efficiency in the supply and use of gas under Section 4(2)(b)of the Gas Act 1986.

A number of proposals have been ventilated for changing the regulatory system in order to overcome those problems. One proposal is that there should be a regulatory board with non-executive directors. The regulator would act as a chief executive, having powers over day-to-day issues, but referring larger decisions to the board. That would have the advantage of de-personalising the regulatory relationship and limiting discretion.

Another suggestion is that there should be a small regulatory panel rather than a single regulator. There has also been the suggestion of a regulatory commission which would amalgamate the existing individual regulators and, as a variant of this, the merger of the regulation of the gas and electricity industries.

Those various suggestions have emerged because of concerns about the way in which the present regime works, leaving too much discretion in the hands of a single regulator. The disadvantage of the alternatives is that they could lead to delay and greater bureaucracy. It is my opinion that the two aspects of the problem need to be balanced to find a solution.

There is mounting pressure also for greater transparency and accountability for the regulatory system. The Gas Act 1995 moved in the direction of transparency, and that needs to be applied more generally. As to accountability, the favoured solution is to appoint a Select Committee on regulation through which the regulators would be accountable to Parliament as a whole.

The essence of the regulatory system in the UK is that the regulator sets the annual rate at which prices may rise by an amount linked to the retail prices index. That amount, expressed in the form "RPI-x" (x being the figure below the retail prices increase that would be allowed) is reviewed at fixed intervals, usually every five years. That system, as opposed to the American system of controlling the rate of return, is considered to provide a major incentive to increase efficiency. The fixed five-year term between reviews is intended to enable companies to plan their operations effectively.

While the system of price control has undoubtedly stimulated greater efficiency, the consumer has not necessarily been the main beneficiary. For example, during the recent spate of takeover bids certain regional electricity companies have been able to draw substantially from their resources to safeguard their position with shareholders. That caused the regulator to intervene unexpectedly to announce that he would re-examine a recent price review which in the normal course of events would not have been looked at again for another four years.

Those and other circumstances have led to the proposal for a windfall tax or for more equitable profit sharing as between shareholders and consumers. The concept of profit sharing depends upon the definition of what should be a normal level of profits above which

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customers would get an extra share. However, the concept underlines the point gaining widespread acceptance that consumers are not getting a fair deal.

Mr. Ian Byatt, the regulator for the water industry, suggested in a speech last October, that the interests of consumers in receiving a wider share of the profits should be met by voluntary action on the part of companies. He instanced as an example that six water companies have committed themselves to additional cash payments amounting to £252 million. Others have undertaken to provide benefits in kind.

What that serves to demonstrate is that the RPI-x regime, with its fixed five-year period, does not sufficiently benefit the consumer, otherwise those massive reserves for further distribution would not be available. Therefore, whether by voluntary or other means, consumers seem entitled to a larger share of the profits of the privatised utilities than they are getting at the moment.

That leads to the wider question of the protection of consumers' interests. The legislation varies considerably in that regard. The Gas Consumers' Council is an independent body with considerable authority. There is no similar body in the case of the other industries. Furthermore, the Government have been reluctant to make safeguarding the interests of consumers a primary duty for the regulators. That came out clearly during the various stages leading to the passing of the Gas Act 1995, which the noble and learned Lord will recall. In spite of efforts by myself and others to introduce amendments to that effect, the Government resisted.

There is increasing concern that in the forthcoming opening up of the gas and electricity markets to domestic consumers special protection for the interests of consumers is required. That is a totally untried area and there could be serious problems, particularly in the early years. Examples of those problems are the major difficulties which could arise in changing the invoicing and metering systems on a substantial scale due to the entry into the market of a large number of new suppliers. There have already been such problems in the much lesser range of difficulties arising from the opening up of the industrial and commercial markets. Those problems will be much greater when the much larger domestic markets are opened up.

British Gas has been the subject of much criticism in recent times. However, it has suffered particularly from the policy of the Government to restructure the market after privatisation rather than before. At privatisation British Gas retained responsibility for supplying the whole of the gas market; and while the intervention of other suppliers was possible, the nature of the legislation made it unlikely. In order to meet the market requirements and discharge its responsibilities in addition to its existing commitments, British Gas entered into a number of long-term contracts with North Sea gas suppliers. Due to regulatory changes, British Gas has since lost a large part of its market share in the industrial and commercial sectors and by 1998 will be subject to full-scale competition in the domestic sector. In the meantime, gas prices have fallen. British Gas is therefore left with onerous contracts. The producers

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claim that the contracts were willingly entered into at the time. It is difficult to see how this problem, which results largely from changes in government policy, can be resolved without some form of government intervention. No doubt the noble and learned Lord will enlighten us on that when he speaks later.

In the light of the issues that I have indicated and of others which will no doubt be raised by noble Lords in the course of the debate, it seems clear that the time has come for a major government review of the way in which the privatised utilities are regulated and operated. Let us also be clear that there has been a noticeable increase in efficiency, and consumers have benefited to some degree as a result. Nevertheless, there is growing public disquiet and there are many matters of principle which need to be re-examined. I hope that we shall be assured at the end of the debate that the Government take these problems seriously and that they will urgently consider proposals for dealing with them. I beg to move for Papers.

4.8 p.m.

Lord Skelmersdale: My Lords, I should like to begin by congratulating the noble Lord, Lord Ezra, on achieving this debate. Having been a micro-wheel in the usual channels in the past, I know how difficult it is to get a subject that you know well debated in your Lordships' Chamber.

However, I note that the list of speakers in this debate is on the flimsy side. I wonder whether some noble Lords, like me, have had second or even third thoughts about speaking in it. I welcome the debate. As the noble Lord, Lord Ezra, said, it is over three years since we last discussed the matter in depth. I had no inhibitions then about referring to individual firms or their regulators. Today I have two problems: one about the debate itself; and one which I shall shortly explain.

First, my position has changed somewhat because of the standing order to which we recently agreed which states that it is forbidden to speak on a firm that you have declared in the mandatory section of the Register of Members' Interests. By virtue of my employment with British Gas, that bars me from referring to it. That is quite straightforward. Since it is currently the only large company regulated by Ofgas, and since this is a debate about regulators, it would seem by extension that the word or semi-acronym Ofgas should not pass my lips.

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