House of Lords - Explanatory Note
Utilities Bill - continued          House of Lords

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Clauses 53 - 57 and 88 - 93: Electricity and gas performance standards

106. The existing performance standards provisions in gas differ in scope from those in electricity. The ability to set performance standards for the gas sector is also time-limited by a "sunset clause" (section 10 of the Gas Act 1995). The main purpose of these clauses is to provide the Authority with powers which are not time limited, and which are the same for gas and electricity, to set standards of performance which companies should meet in dealing with consumers.

107. The scope of the existing powers is being extended to include all licensed (but not exempt) suppliers of electricity (currently only Public Electricity Suppliers "PES"s are covered); licensed distributors of electricity (PES distribution arms are covered by the current legislation); and licensed gas transporters. The provisions cover all companies which may come into direct contact with consumers, and do not distinguish between ex-PES suppliers and distributors and others. Some distribution activities, such as restoring supply after a fault, are currently subject to performance standards; the Authority will continue to be able to set such standards. In gas, similar functions are carried out by transporters, and so the powers will be extended to cover them.

108. At present, performance standards may only be set with regard to those activities of companies which affect domestic customers in gas (Gas Act 1995 section 33A) and tariff customers in electricity (Electricity Act 1989 section 39). The powers are to be aligned so as to cover, in principle, all customers and potential customers in each sector.

109. In gas, the current provisions are due to lapse as a result of the "sunset clause" in section 10 of the Gas Act 1995. To date, the gas regulator has not used these powers, instead relying on licence conditions to set broadly similar standards. Nevertheless, the Government wishes to continue these powers, which have been used in electricity. Clause 88 provides for the continuation of the powers.

110. These clauses set out procedural requirements that apply to the Authority in relation to the exercise of its powers to set performance standards. They require the Authority, prior to setting new performance standards, to conduct appropriate research and to go out to consultation on the basis of a notice giving the Authority's reasons for proposing the new standards.

111. One of the Bill's broader purposes is to ensure that customers should only need to have contracts with suppliers and should not have to deal with distributors or transporters. Therefore, subsection (4) of the new section 39A of the 1989 Act (inserted by clause 53 of the Bill) and subsection (5) of the new section 33AA of the 1986 Act (inserted by clause 89 of the Bill) make provision for compensation from distributors or transporters to reach customers via the relevant supplier. Similarly, subsection (2)(b) of section 42A of the 1989 Act (as substituted by clause 57) and subsection (2)(b) of section 33D of the 1986 Act (as substituted by clause 93) provide for information about performance by distributors or transporters against the standards to be passed to customers via suppliers.

Clauses 58 - 59, and 94 - 95: Enforcement of obligations of electricity and gas licence holders

112. Clauses 58 and 94: Financial penalties. These clauses apply respectively to the electricity and gas sectors. They introduce a power for the Authority to impose financial penalties on companies for past and current contraventions of their licence conditions, of other specified statutory requirements, and of standards of performance (both overall - i.e. aggregate - standards and standards set to apply in individual cases). The purpose of the new power is to give the Authority an additional mechanism for ensuring compliance with these conditions, requirements and standards of performance, and to deter future contraventions. The power does not apply to contraventions committed before the power comes into effect. Receipts from financial penalties will be paid into the Consolidated Fund.

113. The new power will operate alongside the Authority's existing powers to make orders requiring compliance where non compliance is continuing or likely, but is not to be tied to them. Hence, a financial penalty may be imposed alongside a provisional or final order, or equally, where no enforcement order has been issued (this might be, for example, where a contravention has already taken place but did not come to the Authority's attention at the time). However, there are time limits for the imposition of a penalty, related to the time at which the contravention occurred or, where applicable, the time at which enforcement action was initiated.

114. The penalty is limited to an amount which is reasonable in all the circumstances of the case. The Authority is to be required to consult on and publish its policies with regard to determining the amount of a penalty, and then to take account of those policies.

115. There are procedural requirements for the imposition of a penalty, including requirements on the Authority to publicise its intentions, give notices with prescribed information, and receive and consider comments from interested parties; procedures for modifying the penalty in the light of representations; and procedures for notifying the company concerned and interested parties of the final decision on the imposition of a penalty. The company may apply to the Authority to pay a penalty in instalments.

116. The company may also make an application to the court to challenge the validity of a penalty order on prescribed grounds. The grounds are that procedural requirements have not been followed and that this has substantially prejudiced the company's interests, or that the imposition of the penalty, including its amount - since this is required to be reasonable in the circumstances of the case - was not within the Authority's powers. The requirement to pay a penalty is suspended until the case is determined. The court may cancel or reduce the penalty or extend the timescale to pay. It may also require interest to be paid on the penalty, including on a reduced penalty.

117. In the gas sector, the existing power to impose a monetary penalty as part of a final order imposed by the regulator under section 28(7A) of the 1986 Act as amended, which is superseded by the new power, will be repealed.

118. Clauses 59 and 95: Licence enforcement. These clauses which apply to electricity and gas respectively, make minor amendments to existing enforcement provisions to give the Authority greater discretion to make enforcement orders in certain situations where they would previously have been precluded from doing so. They also accelerate the enforcement process by reducing the period for making representations in response to a notice of intention to make an order from 28 days to 21 days. This aligns the time periods for making representations in relation to enforcement orders with those which apply in relation to financial penalties. The changes will not apply to orders made before the entry into force of the new provisions.

119. At present, the regulator cannot make or confirm an enforcement order in respect of a contravention where he is satisfied that he is precluded by his general duties from doing so; where the company has agreed to take and is taking steps to remedy the contravention; where the contraventions in question are trivial, or where he is satisfied that the Competition Act 1998 is the most appropriate way of proceeding. The Bill changes this prohibition on action into a discretion not to take action in cases where the contravention was trivial or where the company was taking steps to comply. The Authority would not be compelled to make an enforcement order in such circumstances, but would be able to do so if it considered it appropriate.

Clause 60 and 96: Remuneration and service standards

120. The intention of these clauses, which apply to the electricity and gas sectors respectively, is to achieve transparency as to the relationship between directors' remuneration and customer service standards in markets which are not fully competitive. The clauses require companies that provide any price-regulated services to disclose whether or not they link the remuneration of the directors of their price-regulated businesses to levels of customer service attained in these businesses, and to give details of how any links affect remuneration.

121. The clauses insert new sections, identical in their effect, into the Gas and Electricity Acts. Subsections (2) - (4) of the new sections require the disclosure described above to be made as soon as reasonably practicable after the end of the disclosing company's financial year, and specify what information must be disclosed. The intention is that the information should enable anyone inspecting it to understand the relationship between the level of service provided and directors' remuneration, including how the company decided what level of service had been achieved.

122. Subsections (5) and (6) of the new sections require price-regulated companies, when they make their disclosures about the last financial year, to state the links between directors' remuneration and service standards that are in place for the current financial year. If they have no links, but have decided to introduce them in future, they must describe these. If the current or planned links are different from last year's, then the company must explain what differences may be expected to result from the change.

123. Under subsections (7) and (8) of the new sections, licence-holders will have to make their disclosures in a form with which the Authority is content, and publish them. The Authority can also publish them, though the intention is that it would not do so unless it felt that the publication by the company was in some way unsatisfactory (for example, because it was not accessible enough).

124. Subsection (10) of the new sections defines certain terms used. Definitions include:

  • "activities subject to price regulation": the intention is to cover price regulation which constrains companies' freedom to raise prices, of the sort imposed because a company is not exposed to full competition. Price controls such as RPI - X (whether on a single service or basket of services) are thus included, as are specified maximum prices. On the other hand, other sorts of price regulation, for example an obligation to charge the same price throughout a geographic area, are not covered by the definition;

  • "remuneration": this includes all the remuneration received by a director from the price-regulated company including pension benefit;

  • "service standards": the sections apply to any standards of customer service imposed by the regulator or Secretary of State, as well as any which the company may have set itself.

The regulator is to enforce the disclosure requirement, in the same way as if it were a licence condition.

Clauses 61 - 66: Electricity from renewable sources

125. These clauses replace the Secretary of State's powers to impose obligations designed to promote the generation of electricity from non-fossil sources with a power for the Secretary of State to impose obligations in relation to renewables generation only (i.e. excluding nuclear and fossil generation) on all licensed electricity suppliers. An obligation will be based on the requirement that a proportion of total supply of electricity to consumers must be renewable electricity.

126. Clause 62 provides flexibility in imposing an obligation in relation to its duration and size, including the possibility that it can increase or decrease over time, the types of generation that may be used in its fulfilment, and the provision of information necessary to set and determine the fulfilment of suppliers' individual obligations.

127. Clause 63: Green certificates. This clause provides for 'green certificates', which will be tradable certificates of the production of renewable electricity issued by the Authority, the possession of which will count towards a supplier's obligation.

128. Clause 64 provides an alternative way of meeting an obligation by making a payment to the Authority. The Authority must pay the amounts received to electricity suppliers in line with a system of allocation specified by the Secretary of State.

129. Clause 66: Supplementary. This clause provides powers for the Secretary of State to make orders for the purpose of ensuring the continuation of outstanding contracts entered into by the public electricity suppliers with renewables generators in compliance with non-fossil fuel orders (in Scotland, Scottish renewables orders) made under section 32 of the 1989 Act. In particular it will enable provision to be made for the continuation of the fossil fuel levy with respect to the outstanding contracts and for the transfer of the contracts themselves from the public electricity suppliers to nominated successors.

Clauses 67 - 72 (electricity) and Clauses 97 - 98 and 101 (gas): Miscellaneous

130. Clause 67: Modification of licences: electricity trading arrangements. This clause provides the power for the Secretary of State to modify electricity licences and the standard conditions of electricity licences for the purpose of implementing the new electricity trading arrangements. (These are set out in 'The New Electricity Trading Arrangements - OFGEM/DTI Conclusions Document' published in October 1999. The document can be accessed on the OFGEM website - The power will be exerciseable at any time within a period of two years from the commencement of the section.

131. Clauses 68 and 97: Assistance for disadvantaged groups of electricity and gas customers. These clauses which apply to electricity and gas respectively insert new sections into the 1986 and 1989 Acts permitting the Secretary of State, by order, to make schemes which have the effect of providing a cross-subsidy in favour of disadvantaged customers in relation to the charges they pay for their electricity or gas. This is intended to be a reserve power. The clauses provide for consultation on any proposal to make an order; for the information necessary for the running of any schemes to be passed between the various parties; and for the Authority to have a role in monitoring and reporting on the operation of the schemes and enforcement of breaches of them.

132. Clauses 69 and 98: Energy efficiency requirements for electricity distributors and suppliers and for gas transporters and suppliers. These clauses replace the existing provisions of the 1986 and 1989 Acts allowing the relevant Directors-General to impose standards of performance on gas suppliers and public electricity suppliers in connection with the promotion of the efficient use of gas and electricity by consumers. The clauses provide that the Secretary of State, rather than the Authority, may make orders imposing obligations on licensed gas and electricity suppliers, gas transporters and electricity distributors, to meet targets for the promotion of improvements in efficiency in consumers' use of energy. A target will be to carry out activities to achieve the saving of a specified amount of energy. It will be for the licensee concerned to choose the activities (for example installations of home insulation or promoting the use of energy efficient appliances) it will undertake to meet the required energy saving. There is provision to specify the way in which the amount of energy that will be saved by a given activity will be calculated. The Authority is to be responsible for the calculation and enforcement of the requirement, using its normal enforcement powers, including monetary penalties.

133. Clause 70: General duties of transmission licence holders in Scotland. Section 9(2)(b) of the 1989 Act imposes on any holder of a transmission licence a duty to facilitate competition in the supply and generation of electricity. Subsections (3) and (4), however, qualify this duty in the case of persons in Scotland who hold both a transmission licence and a licence to supply or to generate electricity. In the case of any such person, the duty is to make the transmission system available to competitors on terms which neither prevent nor restrict competition.

134. As competition in the Scottish market has developed it is thought that there is no longer any justification for treating transmission companies in Scotland on a different basis from the transmission company in England and Wales. This clause therefore repeals subsections (3) and (4) of section 9.

135. Clause 71: Uniform prices etc: Scotland. Section 2(2) of the 1989 Act puts the Director under an obligation to ensure that the prices charged to tariff customers in any area of Scotland specified in an order by the Secretary of State do not discriminate (whether directly or indirectly) between different parts of that area (the so-called "Common Tariff Obligation"). The abolition of tariffs effected by this Bill means that the desired effect of ensuring that remote Scottish areas do not suffer discrimination can no longer be achieved in this way. Instead, this clause provides a power for the Secretary of State to make orders requiring holders of transmission, distribution, and supply licences to charge prices and, in the case of suppliers, to offer contract terms which do not discriminate between customers in different parts of the specified area. The existing Common Tariff obligation is limited to tariff customers: essentially domestic and small business users. It is expected that the orders to be made under this clause will be restricted to a broadly similar group of consumers (by virtue of the power in sub-section (4) to make different provisions for different cases).

136. Clauses 72 and 101: Maximum prices for reselling electricity and gas. The existing provisions in the 1989 Act and the 1986 Act share the overall objective of preventing excessive prices being charged when electricity or gas is resold (e.g. by landlords to tenants), but differ in their details. These clauses reconcile the differences so that the powers granted to the Authority are the same for the two fuels (except for the exemption for gas used for propelling motor vehicles).

137. Clause 72: Maximum prices for reselling electricity. This clause makes the power in the 1989 Act more flexible:

  • instead of having to fix actual prices, the Authority will be able to set a formula by which maximum prices are calculated;

  • the Authority may direct that interest be paid on sums charged in excess of the maximum price, and not just the value of the overpayment itself as at present; and

  • the Authority may direct that resellers provide information on their prices to purchasers (and the Authority may direct that the maximum price be reduced by an amount or percentage if the reseller fails to comply with this requirement).

These three changes align electricity with the relevant aspects of the current position in gas.

138. Clause 101 changes the existing duty on the regulator to set maximum resale prices in gas into a power. This will allow the Authority to choose not to set a maximum resale price in relation to certain suppliers which may be useful where, for example, supply is unmetered. It also extends the ambit of the current power to include gas originally supplied by an exempt supplier (at present only gas supplied by a licensed supplier which is subsequently resold is covered). Both of these matters are already covered in the parallel electricity legislation.


Clauses 73 - 87: Gas licensing

139. The commentary on Clauses 73 (Gas licensing conditions) and 74 (Exceptions from section 5 of the 1986 Act) is provided in paragraphs 56, 57 and 61 above.

140. Clauses 75 - 77 (and Schedule 6, paragraphs 4 - 6 and 18): Gas transporters. These clauses end the geographic exclusivity of public gas transporters (PGTs) and make consequential changes to certain procedures. Section 7(2)(a) of the 1986 Act has the effect that any given area may only be within the "authorised area" of a single public gas transporter, so that only that PGT may convey gas to premises through pipes in that area. In other words, PGT licences are currently geographically mutually exclusive. The main purpose of this clause is to end that exclusivity (with the intention of promoting competition and, in this respect, to comply with the EC Gas Directive (98/30/EC)). The amendments to section 7(2)(a) of the 1986 Act in subsection (3) of clause 75 achieve this purpose by removing the reference to PGT licences relating to areas which are not specified in the licences of other PGTs.

141. Subsection (6) repeals section 7(7) of the 1986 Act, so that a gas transporter may if it wishes apply for a licence covering a large area (e.g. all of Great Britain) without being required to prove that it intends to operate in every part of that area. Section 7(7) prevents a transporter with no plans to lay pipes within a certain area depriving another transporter, who does have such plans, of that possibility by allowing for the removal of that area from the latter's licence. But, in future, including an area in a second transporter's authorised area will not prevent the first transporter from continuing to be able to lay pipes there, and so this subsection is no longer required. The change will enable transporters to apply once for a licence covering a large area, rather than having to request piecemeal extensions only when able to prove the intent to operate in each particular area.

142. Subsection (5), removes from the face of the 1986 Act the procedures to be followed when granting an extension, thus allowing greater procedural flexibility. The procedures to be followed when first granting a licence remain on the face of the Act. Subsection (6) also repeals section 7(8) of the 1986 Act. This is discussed further under clause 77 below.

143. Subsection (4) is intended to allow the authorised area of a transportation licence to be restricted. In other words, it can be made smaller, as well as extended, as is the case with other types of licence.

144. Subsection (7), in conjunction with paragraphs 4 - 6 and 18 of Schedule 6, changes the terms "public gas transporter" to "gas transporter", in reflection of the fact that the sector is open to competition.

145. Clause 76: Restriction on use of certain pipelines for providing a supply of gas. Under the system of geographic exclusivity, it was possible for a transporter to construct a pipe outside his authorised area (and thus in the authorised area of another transporter, the "incumbent"), not for the purpose of supplying premises but in order to convey gas through the other transporter's area. In the absence of this clause, such a "pass-through" pipe might be able to be used for supplying premises (ie might be a "relevant main"), thus posing a threat to the incumbent who may not have organised his business accordingly. Therefore this clause, which is a transitional measure, provides that the consent of the incumbent transporter is required if a pass-through pipe, which was built before the abolition of geographical exclusivity, is to be used for giving a supply. If the incumbent refuses consent or fails to give it, the Authority may intervene. Once it has been declared to be a relevant main, certain rights of consumers, and rights and duties of the transporter (for example the duty to connect), arise in respect of it which should not be taken away, and so subsection (3) does not allow the incumbent's consent to be withdrawn after it has been given.

146. Clause 77: Construction of pipelines by gas transporters. This clause concerns what is known as the "23 metre rule". Currently, the authorised area of one transporter may not include areas within 23 metres of a main belonging to another transporter, unless the incumbent agrees or else certain conditions are met. When authorised areas are able to overlap completely, as proposed in clause 75 above, they may include areas within 23 metres of someone else's mains. The 23 metre rule in subsection (8) of section 7 of the 1986 Act, the section which concerns licences, will therefore be repealed by clause 75(6). This clause introduces a new version of the rule.

147. Subsection (2) contains a general prohibition on constructing pipelines within 23 metres of another gas transporter's pipeline, unless certain conditions are met. If the transporter is proposing to construct a service pipe because he needs to do so in order to comply with his duty to connect, the prohibition does not apply (and nor do the other requirements in 22A(1)). If the pipeline is to be constructed within 23 metres of an ordinary pipeline of another transporter (which, broadly, is a pipeline other than a main which is being used to give a supply to premises), the existing duties in section 22A to consult and notify the other transporter will apply. If the pipeline is to be constructed within 23 metres of another transporter's main, then in addition to those duties, the other transporter's consent to the construction will be required (except in the circumstance described in the next paragraph).

148. Under the existing 23 metre rule, if the incumbent refuses consent to another transporter's authorised area being within 23 metres of his main, the regulator can over-ride him, and give consent anyway, subject to a number of tests. Under the new rule, subsection (1C) empowers the Authority to over-rule a refusal or failure to give consent by an incumbent "where it considers it appropriate to do so". The Authority, in making a decision on any such case, must have regard to its general duties.

149. The incumbent will be able to place conditions on the construction of the new pipeline, including conditions as to the future use of the pipeline (for example, that it may not be used to give a supply). If the transporter constructing the pipeline objects to such conditions, the Authority can either accept them or over-ride them in their entirety if it feels that they are unfair, but it may not modify them. If the incumbent neither consents nor refuses to consent, then the Authority can effectively treat that as a refusal of consent and then over-ride it. These aspects are covered by subsections (1B), (1C) and (1D).

150. Subsection (1E) provides that if the two transporters agree to conditions, but then the one who has laid the pipe breaks them, then the other transporter can take civil proceedings to rectify the breach or obtain appropriate compensation. The conditions are not subject to enforcement by the Authority by way of enforcement orders and cannot give rise to financial penalties under the Bill.

151. Clause 78: Duty to facilitate competition. The principal purpose of this clause is to place on gas transporters a duty to facilitate competition in the supply of gas. This is similar to the duty in electricity already placed on transmitters and to be placed on distributors. Under the 1986 Act, transporters are under a duty "to avoid any undue preference or undue discrimination in the connection of premises to any pipeline system operated by him or in the terms on which he undertakes the conveyance of gas by means of such a system" but are not under a positive duty as introduced by this clause.

152. Subsection (2) and (4) of this clause extend the existing duties on a gas transporter (contained in section 9(1) and (2) of the 1986 Act) to comply, so far as it is economical to do so, with any reasonable request for him to connect premises to his pipeline system, and to "avoid any undue preference or undue discrimination" in the terms of connection, so that those duties apply equally when the request is made by another transporter, whether licensed or exempt, who wishes to connect a system to the existing system.

153. Clause 79: Gas transporters' duty to make a connection. The proposals in this clause clarify that when pipes laid by the owner of premises ("self-lay" pipes) vest in a transporter on connection to the latter's system, the responsibility for maintaining the reinstatement of the ground containing the pipe, and any other liabilities, also vest in him (see subsections (4) and (5) which amend section 10 of the 1986 Act). Subsection (2) inserts a new subsection 3(A) into section 10 which allows the transporter to protect himself if, for example, the owner has not sought the necessary permissions. The subsection gives the transporter the right to require self-layers to accept terms indemnifying him in respect of such liabilities in connection with the laying of the pipe. Subsection (3) clarifies that transporters can charge for making connections between their systems and self-lay pipes.

154. The commentary on clause 80: (Standard conditions of gas licences); clause 81 (Modification of standard conditions of gas licences); clause 82: (Gas licence conditions); clause 84: (Transfer of gas licences); clause 85: (Exemptions from gas licensing); clause 86 (Reasons for decisions); and 87: (Altering activities requiring gas licence) is provided in the 'Electricity licensing' section (paragraphs 62 - 81 above).

155. The commentary on clause 83 (The gas code) is provided in the 'Electricity licence holders' section (paragraphs 102 - 103 above).

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Prepared: 25 April 2000