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Lord Skelmersdale: My Lords, perhaps I may interrupt my noble and learned friend. I made no allegation that it was a poor substitute. I said that it was sold as a substitute.

Lord Fraser of Carmyllie: My Lords, whether or not my noble friend believes that it was a substitute, it is the improvements in competition rather than regulation which we see as being a key to obtain further benefits. There is no doubt scope for more competition and more consumer choice.

Competition between suppliers is already a fact of life in telecoms; and for medium and large users of electricity and gas. We are determined to press ahead with further opening up of these markets. Next year we shall see the first phase of the introduction of competition to the domestic gas market. The gas and electricity markets will be fully open for competition in 1998.

None of this will be easy. The progressive opening of markets does bring with it problems, including those of adjustment for a dominant player. The noble Lord, Lord

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Ezra, the noble Baroness, Lady Seear, and my noble friend Lady Platt, raised the particular point of British Gas's long-term contracts for gas purchases. The Government are aware that British Gas is committed to taking gas at a price for which it does not have the customers. That is why the Government have been expressing the view for some time that some adjustment to contractual arrangements is no doubt inevitable and in the best interests of all concerned.

In spite of the invitation extended by the noble Lord, Lord Ezra, the Government do not seek to impose a solution. We believe strongly that commercial discussion between the parties concerned is the only sensible way forward. The department is monitoring the situation and will continue to encourage all parties to engage in sensible re-negotiations. Despite apparent difficulties, there is also scope for extending competition in the supply of water and waste water services, in the first instance, for large users. The Government are working on proposals with the Director General of Water Services and will publish a consultation paper early next year.

A number of noble Lords pointed to the criticism that executives are paying themselves too much at the expense of consumers. While I am aware of that criticism, perhaps I may say that this is primarily a matter for the shareholders not the regulators. The regulators should concentrate on controlling prices. It is prices which matter to consumers. It is the shareholders, led primarily by the institutional investors, who should press for a proper balance between profits and pay. As the Greenbury Report rightly stated, this is an issue which goes far beyond the issue of utility regulation. The utilities should be treated in exactly the same way as other companies.

The noble Lord, Lord Ezra, the noble Baroness, Lady Hamwee, and the noble Lord, Lord Haskel, also pointed to the criticism that shareholders are gaining at the expense of consumers. It is sometimes argued that the regulators have allowed the utilities to make too much profit. The initial price caps were set by government. With hindsight it is all too easy to say that some were too generous. At the time it was difficult to predict the extent and speed of the efficiency improvements which have since been achieved. The profits declared by these companies should be welcomed. Today's profits turn into tomorrow's price cuts for consumers; and profits finance investment in new infrastructure for the future, sometimes at substantial levels.

The utilities' success has enabled the regulators progressively to tighten the price caps, facilitating the large drops in prices to which I have already referred. Without the possibility of making profits, it is doubtful whether the companies would have had sufficient incentives to improve their efficiency.

The noble Lord, Lord Ezra, referred to the decision of the electricity regulator, earlier this year, to re-open a price review as a result of an REC takeover bid. The Government's view is that it was entirely appropriate for the electricity regulator to decide to re-open the electricity distribution price review in March, in the

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light of new information that had become available. With respect to the noble Lord, the customer is, I emphasise, benefiting. The electricity regulator's original proposals meant that from April this year an average annual domestic bill is £12.50 lower in real terms. His revised proposals, published in July, will reduce an average bill by a further £9 in real terms from April next year. We welcome that review, and the further benefits that it will bring for electricity customers.

The noble Lord, Lord Ezra, raised the issue of a windfall tax on excess profits. Apart from re-nationalisation, it is difficult to imagine what more could be done to destroy the incentives to improve efficiency, which provides the basis for further price reductions. A windfall tax also damages millions of small shareholders and--if the noble Baroness, Lady Hamwee, will allow herself to be included--pension fund beneficiaries who have invested for their future.

The noble Lord, Lord Ezra, the noble Baroness, Lady Hamwee, and the noble Lord, Lord Skelmersdale, also pointed to the apparently gentler reform of incorporating profit sharing into the present price caps so that customers would share profits above a specified level every six months or so. I understand the argument that profit sharing might appear more fair, acceptable and sustainable. It might also reduce the pressure on regulators to intervene between announced reviews of the price caps, so reducing uncertainty and the cost of capital. And, unlike the windfall tax, the beneficiaries would at least be the customers. But against that, there is a risk that profit sharing would also, like a windfall tax, reduce the incentives on the companies to cut costs and to be efficient. The present price controls already do share profits with customers in a way which preserves the companies' incentives to make them in the first place. Nevertheless, it is not for the Government to decide how the price caps should be reformed. We will not seek to impose solutions. It is for the regulators to initiate changes. Their final views are not yet clear.

Mr. Byatt, to whom the noble Lord, Lord Ezra, referred, has indicated that the regulatory system should evolve, but he has also warned on a number of occasions against radical change on the basis of short-term experience. Other regulators are consulting publicly about the desirability of change. I stress that this is an example of where there is scope for change within the existing legislative system. But gone are the days when Ministers intervene or change prices at a whim while bowing to the political pressures of the day. We have moved properly towards a more stable, independent and transparent system.

Concern was expressed that too much power has been given to the regulators; and the noble Lord, Lord Ezra, drew attention to the proposal that they should be made accountable to a new Select Committee. That is not a matter for government but is for Parliament to decide.

The noble Lord, Lord Ezra, referred back to the debates that we had on the Gas Bill and suggested that there may still be insufficient safeguards to protect consumers in a competitive gas market. I cannot agree with the noble Lord and I repeat my objections. There

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is a statutory duty on the regulator to protect consumer interests. The standard conditions of a gas supplier's licence contain an important protection for consumers. All suppliers are required to publish their prices and principal terms; to supply on those terms any customer in the licensed area who requests a supply; and to provide special services to more vulnerable customers, as British Gas does now.

The regulators also have a duty to facilitate or promote competition which should benefit both customers and competitors. It is interesting to note that the Director General of Telecommunications is seeking to use his greater powers to ban anti-competitive behaviour as a result of pressure from non-dominant competitors.

My noble friend Lord Skelmersdale and the noble Baroness, Lady Hamwee, argued that regulators' decisions should be more transparent. Over the years the regulators have put increasing emphasis both on consultation before taking decisions and on explaining their decisions in published reports.

I turn to an issue raised by both the noble Lord, Lord Ezra, and my noble friend Lord Skelmersdale; namely, the criticism that too much power lies in the hand of an individual and that individual regulators should be replaced by boards with non-executive directors, panels, or commissions. There is something to be said for these proposals, but I entirely agree that such devices are likely to slow the regulatory process, once again putting at risk the promotion of competition.

My noble friend Lord Skelmersdale suggested that there are too many regulators and, in particular, that there should be only a single energy regulator. There is, of course, an inter-relationship between the energy markets. The present regulators work closely together. I agree with my noble friend that the major changes in prospect in the gas and electricity markets require the undivided attention of specialist regulators to assist the transition to competitive markets in 1998. After 1998 there could be stronger logic in having one regulator covering the markets. Indeed, the Government welcome with open arms the prospects of fewer regulators and less regulation. There will, of course, always be the need to regulate the natural monopoly elements of the utilities; for example, the gas and electricity transmission systems. But elsewhere we look forward to increasing competition in telecommunications, gas, electricity, railway services and even water. That is where the Government's priorities lie. If further legislation is needed, it will be primarily directed towards the promotion of competition.

As has been indicated, the regulatory structures we introduced were innovative. Both the Government and the regulators recognise that the arrangements are not perfect, but I believe that the existing arrangements are highly flexible. The system is in an evolutionary phase. This process will no doubt continue, and rightly so. I am grateful to the noble Lord for introducing the debate. I hope that I have indicated sufficiently that we are in no sense complacent. We shall continue to keep the system under review to ensure that, as this House would wish, it develops in line with the needs of the market and consumers.

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5.37 p.m.

Lord Ezra: My Lords, I thank all noble Lords who have taken part in the debate. In view of the importance of the subject, I had hoped that more noble Lords would participate but that has been more than compensated for by the contributions of those who have taken part.

We have had a wide-ranging review. I am most grateful to the noble Lord, Lord Harmar-Nicholls, for his kind remarks at the beginning of his speech when he said that this is just the sort of debate which one would expect in this House: that we take a subject and have a close look at it; we suggest various courses of action; we put suggestions to the Government; and we hope that the Government will take up some of them. We watch and see what happens thereafter.

Many suggestions were made today as to how the regulatory system, which the noble and learned Lord admitted is innovative, could be improved. For example, when I referred to the windfall tax, I said that that was a suggestion made with regard to what were deemed to be the excessive profits of the companies.

Many other suggestions were made about the system of regulation and about how consumers should have a larger share of the profits which are being made by the various companies. Because those criticisms and suggestions are being made, we suggest that there should be a review of how the system is working.

As I pointed out in my speech, there are to be two major reviews--one by the Hansard Society and the other by the National Audit Office. Once those reviews from such eminent bodies are completed, perhaps it would be a good idea if we had another look at the subject. We could then ask the Government, in the light of whatever conclusions they come to, what they propose to do about it. I conclude by saying that I consider we have had an extremely useful and timely debate. I beg leave to withdraw the Motion.

Motion for Papers, by leave, withdrawn.

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