Select Committee on Constitution Minutes of Evidence

Examination of Witnesses (Questions 300-310)



  300. I can see the value from your point of view of that degree of clarity, because you need it for planning purposes, it is really how one gets there, is it sufficient to rely on agreements, protocols, because you were implying at the beginning, when I asked about statute, that there might be a downside as well as an upside?
  (Mr Armour) The alternative is perhaps a super regulator that regulates everything, but that simply internalises the problem of trade-off inside the regulator. I think actually we are more comfortable with a variety of regulators, where there is a degree of focus on what they are trying to achieve, and then a work-out of the trade-off between the regulators.

Chairman: Yes, fine; thank you very much.

Earl of Mar and Kellie

  301. From what you said, I am getting the impression that probably you are unable to make any changes in your site, or the equipment on it, without the consent of one of the regulators; is that the correct impression? And a second question I would like to ask is, on occasion, you must need planning consent from the local authorities; how do the regulatory authorities mesh in with that, and are they helpful, or unhelpful, in that process, or how does it work?
  (Mr Armour) Two questions. In terms of the sites, yes, effectively, any material change on the site does require regulatory approval. It may require it from the NII on safety grounds, and it may require it on environmental grounds. Similarly, any change in manning on the site has to be evaluated on its safety implications, and effectively that is under a regulatory regime. So we are fairly closely regulated in all these aspects. In terms of the planning regime, we have the option of going under the normal planning law or under what is called Section 36 of the Electricity Act, which creates a separate regime for the electricity industry for major projects; now it may or may not involve EU approval as well, because of the nuclear nature of our business. In practice, we have a good relationship with local authorities, but the local authorities will rest heavily on the opinion of the safety regulators as to the appropriateness of, let us say, the construction or development that we are looking at on our sites, and they will rely heavily on the expertise of the regulators in coming to a view on the process.

Lord Elton

  302. I confess to being surprised by your suggestion, in paragraph 27, that Ofgem should be obliged to publish its annual accounts, I am surprised, and I was not aware that it did not. Is this the same with other regulators?
  (Mr Armour) It publishes an annual report, but the report does not give the figures. It publishes an annual plan which says what it forecasts spending. I am not entirely sure. I suspect Ofgem returns its accounts to the Treasury, or to some other accounting body within government, but it is not something that is open to the scrutiny of the regulated bodies at this point in time. I think generally we feel transparency would be helpful; there is a variety of practice we see among our regulators. To take one extreme, SEPA, in Scotland, holds its board meetings partially in public, it will publish its papers, its minutes, and there is a fairly clear view as to the general debate; now if it is dealing with specific companies then that comes out and effectively is redacted, but otherwise it is in the public domain to see the regulatory consideration of trends going on. Other regulators, inevitably, the security regulator does not publish anything in that way, so there is a broad spectrum. I think, in this one, we are saying it would be helpful, having said "There's the plan, this is what we forecast spending," to know what we actually spent it on; in the same way as we are all publishing accounts.

Lord Elton: I quite understand that. Thank you.


  303. If I can come on to another aspect, you have emphasised particularly the importance of transparency and accountability in the process, and quite naturally the focus of the paper essentially is the relationship between yourselves and the regulators. You touch upon, in response to other questions, and our core premise, the relationship between the regulator and the Government, and you accept the point there that, on the one hand, the regulator needs to be independent, yet, at the same time, there has to be some relationship to Government, or at least Government policy, in delivering the Government's energy policy. I wonder how you ensure that there is a correct balance, that the regulator is not too much influenced by Government, and, indeed, what principles ought to govern the relationship, because the Government is the Government, it is the people's elected representative, so there is going to be some public policy within the context in which the regulator operates? I just wondered if you had a view on that, because you touch upon it in the paper, but there is not actually a recommendation that really derives from that? Is the present relationship sufficiently satisfactory, or is there a need for change, and, if so, what should it be?
  (Mr Armour) It is quite difficult. I have some sympathy for the regulators. Government sets the policy, the regulators effectively are required by statute to follow the statute and powers that they are given. I think the difficulty comes for us where that takes you down a single route, in the case of British Energy. One of the issues for us has been that the current market in electricity prices does not value sustainability, does not value the environmental benefit of our generation being CO2-free. It is economic regulation, but no value is put on the environment. That may change over time, depending, if a trading scheme comes in, or carbon taxation, or whatever, but at this point it has not. And, therefore, regulation, naturally enough, is focused on the remit that the regulator is given, it does not reflect the wider realities of the market of government policy. Now how you reflect that, and, of late, Government has said, "We want regulators to take more account of social and environmental and other factors;" in the past it has not, and the regulator has said, rightly, "I have been given no guidance, I have a remit that is competition, therefore I will follow that remit." So I have a degree of sympathy with the regulators, but somehow the regulatory remit must keep up with the agenda; now if it keeps up with the agenda too much there is no certainty, and, secondly, if it becomes too wide and woolly there is no accountability, because a regulator can say, "Well, actually you can't challenge me on anything because I'm following X, Y and Z, and you'll never pin me down." So there is a difficulty. And equally it is important that a regulator has the ability to say, "I am here charged with the interests of consumers," or whatever it is, "and I am not going to be swayed by a pressure from time to time to take me away from what I think actually is the right way going forward." You are flagging up the problem and I am not sure we have a solution.
  (Mr Love) I think it is a very difficult area. The Utilities Act changed the statutory duties of Ofgem, effectively, or the Authority, as it was defined, basically to say a primary duty is to protect the interests of consumers, wherever possible, by introducing competition, whereas the previous duty was to promote competition. And also they were given a kind of secondary level that said, "You must be mindful of guidance on social and environmental issues given by the Government." Now "being mindful" is about as low as it gets, in terms of giving a priority, and, to be honest, the guidance that Ofgem received from the Government on social and environmental issues was woolly. I think, as Robert said, I do not think it really helped Ofgem in terms of trying to prioritise where it should be putting its efforts, and it is a very difficult area. Clearly, the Government should be setting policy and Ofgem should be carrying out their statutory duties. It is that grey area in-between; that is difficult unless you were to consider a change in the statute that said, "Wherever possible, by introducing competition," and adding "Wherever possible, in a manner consistent with Government energy policy," or something like that, but that does not exist at the moment. Possibly it is something for consideration.
  (Mr Armour) It is something that is touched on in the Trade and Industry report that came out the other day.[5] If one takes the case of a specific example, which is current, looking at proposals to put in transmission access and loss arrangements and zonal pricing. From an economic point of view, this may have some particular logic, in trying to reduce losses; there is a question as to whether the benefits are worth the cost of implementing the arrangement, and we would argue not. But, in moving forward with that, effectively, it will have an impact on the viability of generation in the north, compared with generation in the south. Now what that does then is discourage renewable development in the north east and north west, or CHP development in various parts of the north of the country, so there is an incompatibility with government promotion for renewables and, at the same time, discouragement through the transmission charging. We have seen it in NETA, in the sense of saying, "This is a regime that is put in to provide competition," but, if you happen to be a very small generator, the idea of manning your trading operation 24 hours a day, if you have only one wind farm, is a hugely onerous task. So how you get these compatibilities and put the two together, and the regulator has said, rightly, "That's not my problem, that's Government's problem," but somehow these things must be joined up, otherwise you get unintended consequences.

  304. Presumably, the nature of the structure, where it operates, there is always going to be the danger of that happening, for the reasons you have given, and you provided a very clear and succinct analysis of the problem, in terms of the relationship between the regulator and Government policy. As you have indicated, there is not necessarily a clear answer as to how you resolve it; so does it mean therefore that one is dependent, essentially, upon the quality of the regulators. And I suppose that does raise the wider question in that context, it is one we have been looking at, and various witnesses have commented upon, the choice between an individual regulator and a board?
  (Mr Armour) And the quality of the remit that is given to the regulator, as well.

  305. Yes; so if you put the two together. And do you have a view, you could say it is academic now, in terms of what the statute provides, and so on, between an individual regulator and actually a board for undertaking the regulation?
  (Mr Love) Yes. One rationale in energy for moving from an individual regulator to a board was to try to depersonalise the regulatory role and to put some checks and balances by having appropriate corporate governance, in terms of executives and non-executives, into that board, into the Authority, effectively. I think, broadly speaking, it has worked well. I think the concerns, if we have any, would relate to the size of the board. Does it become unwieldy? And the appointment of another non-executive director of Ofgem, last week, means that the balance looks like it might become four executives and eight non-executives on the board. It is a large board, and splitting the chief executive and chairman role, of course, creates another member of the board as well, which we fully support, that one. So broadly it has worked well. The area where perhaps we would have some concern would be in the transparency of the operation of the Authority, and we mentioned in there, and Robert has already mentioned, the comparison with SEPA, where perhaps it would be helpful if they could publish agendas of their Authority meetings and suitably-amended minutes of the meetings, so the industry could see the issues that they discussed, how they balanced their various duties, in coming to their decisions, and it would help lower the regulatory uncertainty that we suffer.

Lord Jauncey of Tullichettle

  306. When it becomes necessary, in a regulatory decision, that social consequences should be taken into account, for example, provision of payphone boxes in remote rural areas, where they are certainly not going to pay, possibly running train services, again in rural areas, will not pay, how do you feel that should be dealt with? Do you think it should be left to the regulator to make the balance, or do you think that there should be a firm decision by the Minister as to what the social consequences are to be, leaving it to the regulator to operate, so to speak, one debt?
  (Mr Love) I do not think it is the regulator's job to make social policy. The economic regulator is responsible for primarily economic regulation. I think it is a matter for the Government to set the framework correctly. If the Government decide that protecting the interests of people in rural communities, or protecting the fuel-poor, is a priority then they should make sure that the framework that the regulator operates within makes that absolutely crystal clear, that his job is defined within the statute to do that, or through secondary legislation, or secondary advice or guidance, given by Government to the regulator, so he is absolutely clear.
  (Mr Armour) If I take an example, which probably is close to home for you, in the Electricity Act, there was special provision made for the hydroelectric franchise area, in the sense of, here was the largest franchise area in the country, with a much higher cost of maintaining the electricity wires, and indeed one of the few areas in the country where you are still trying to connect people, and therefore the regulator was empowered to make some allowance in setting the targets for returns in that area that was differential from the rest of the country. So there you have a specific remit that said, "Okay, there's a competition floor, but here is something else you can take into account appropriately." I think that worked quite well.

Earl of Mar and Kellie

  307. I would like to go back to the remarks you were making about the connection charge to the National Grid, and I think that Mr Love said that it was £35 million a year?
  (Mr Love) Of that order. It is not just connection charges, that is for the use of the Grid as well.

  308. Yes; connection and use. It is my belief that you sell electricity wholesale to distribution companies, but from that sale you must then pay for the connection and use from the National Grid. What I am really interested in is whether the connection charge is related to the amount of electricity actually flowing into the Grid, and whether the regulator gets involved with that?
  (Mr Love) Yes; taking that in order. We sell our power that we produce in a fully competitive, wholesale market. There is a variety of purchasers of that power: The ultimate use of it is to supply electricity to customers, so suppliers buy our electricity ultimately, it may go through traders, who package up parcels of power they buy from different generators, but ultimately it ends up supplying customers.
  (Mr Armour) But it is not necessarily linked to actual use of the Grid; it is related to the amount of volume that we put in, but we are deemed to sell it to the national balancing point, which is somewhere between—
  (Mr Love) It is somewhere near Coventry.
  (Mr Armour) So it is deemed to trundle down there and trundle back up. Now, in practice, we produce 50 per cent of the electricity in Scotland, and we sell that to Scottish Power, and Scottish and Southern; whether actually it trundles down to Coventry or not is perhaps a moot point, but, nevertheless, that is the way the system operates.
  (Mr Love) The connection charges we pay relate to the assets that are on the ground, the wires that are required to provide the connection, they are not related to the electricity that we put in. The use of the Grid is related to the extent to which we use it, effectively, it is based on the energy that flows into the Grid, so there are two components.

  309. Right; but, in arriving at the idea that you should pay £35 million a year, is that at a standard rate, or did the regulator pull that figure out of the sky?
  (Mr Love) No; it is at a standard rate, but the standard rate is approved by the regulator.

  310. And it does not matter how you generate it; if the electricity is generated, for example, on a wind farm, the connection and National Grid charges are going to be the same?
  (Mr Love) No. There will be a different regime, depending on the voltage at which you are connected. A wind farm is very unlikely to be connected to the very large wires, the big towers and the very large wires, that we are connected to; they are more likely to be embedded in the local distribution network and connected at a much lower voltage. Typically, we are connected at 275,000 volts, or 400,000 volts, to the Grid.
  (Mr Armour) If you compared us with a coal plant or a gas plant going on to the high Grid, it would be per unit of electricity.

Earl of Mar and Kellie: I think that we could get very bogged down in that. Thank you, My Lord Chairman.

Chairman: Yes; I might say, we might even get a shock. Right; thank you very much, Mr Armour and Mr Love. I am conscious of the time, and you have been very generous, both with your time and the effort you have put into preparing the paper for us, which has been extremely valuable for our purposes; we are extremely grateful to you. Thank you very much indeed.

5   House of Commons Trade and Industry Committee, 5th Report (HC468, 2002-03). Back

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