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Lord Jenkin of Roding: I have some difficulty because I do not know whether to support my noble friend Lady Miller of Hendon or whether to support her alter ego, my noble friend Lady Miller of Hendon. She put the case most charmingly, but it is clear that there is a distinct division of view between some of the operators and owners in this field. It is also clear that Scottish Power feels that it will be discriminated against by National Grid Transco if the separation system is extended to Scotland.

It would not surprise me in the least if this is an issue that has been under intensive discussion between the department and the relevant officials in Ofgem. They have a laudable ambition to ensure that all the arrangements are as transparent as possible. The public, particularly those concerned with the operation of the system, can then see how costs are allocated, how charges are made and how the different participants in the market are treated.

I also believe that Ofgem would want to ensure that this was as fair and even a market as possible. With the degree of intervention that may well be necessary in the complex electricity system that we have, it is most difficult to ensure that transparency. Where there is, as here, the merger of two different systems—the extension of NETA to include Scotland, under what in the Bill is called "BETTA", which will include the entire mainland of the United Kingdom—that will be difficult. I would have thought that when we debate the amendment tabled by the noble Lord, Lord Tombs, on transitional relief, there will be a strong case for that so as to enable the changeover to take place as smoothly as possible.

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I am told by NGT that the fears that Scottish Power may find itself the subject of adverse discrimination are considerably exaggerated. There may be a case to be met, but it is not simply by insisting that there should be a separation of the two systems so that what is sometimes called the SO/TO system—that is an integrated system that has been running in England and Wales—should not apply to Scotland.

I, too, shall be interested to hear what the Minister has to say in response to this. I feel equally divided, although if I have to express a view it is to come down in favour of a system that will ensure the greatest uniformity and transparency across the country as a whole. If, as the Minister has indicated, in order to achieve that there needs to be special provision to recognise, for instance, the transmission costs in Scotland, that should be done as openly and clearly as possible. At a later stage in Committee, we will come to an amendment tabled by the Government on that subject.

I hope that the principle for which Ofgem stands on this will be borne firmly in mind before decisions are taken. I believe that it is an effective regulator and that it has done extremely well over the years. It has made enemies along the way, but that is the nature of effective regulation. That is how I see the position and not seek some concealed way of ensuring a favourable position for Scottish Power and perhaps other Scottish generators in ways that would not achieve market transparency. That is my view and I have a feeling that it is the view of my noble friend Lady Miller, mark two. Like her, I do not feel myself sufficiently qualified to make a firm decision one way or the other. An interesting argument has arisen and we look forward to hearing how the Government come down in response to the representations made to them.

4.15 p.m.

Lord Tombs: During our discussions last week, I said that we should recognise that there are real differences in Scotland from England and Wales. They are differences of geography, history and organisation. Those lie at the root of the argument. National Grid Transco is a separate outfit and not at all connected with the generators in England and Wales. It has enjoyed a single transmission operator and owner organisation. The Scottish boards are commercially independent and are jealous, or suspicious, of the notion that their system will be controlled by someone who has a competing, in a sense, system. It does not compete geographically but in terms of arguments on tariffs and similar issues.

There is a real need for the Scottish concerns to be recognised and provided for. That can be done either by the creation of a separate Great Britain operator or by the incorporation of some duty on National Grid Transco to preserve, or have regard to, or to treat equally the concerns of the Scottish boards. That problem will not go away. It is not a take over or a merger, it is a trading arrangement between commercially independent organisations. We have to have regard to the fact that one part of that

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organisation wants to feel that it will have equal independence of treatment from the person designated to be the system operator.

The later amendment, to which this leads the way, goes one way towards achieving that and I would regard that as satisfactory. It would disappoint National Grid Transco, but so does the proposed system disappoint the Scottish boards. My judgment from having worked in both organisations is that the commercial imperatives should prevail. Either there should be a provision of this sort or a duty laid on National Grid Transco.

Baroness Carnegy of Lour: As these discussions continue, I hope that the Government will pay close attention to the noble Lord, Lord Tombs. His lifelong experience of the system all over the United Kingdom gives his wisdom a depth beyond that of other noble Lords, even those who have been Ministers. He knows the system from the inside.

On the wall of the Moses Room is a picture of Moses bringing down the Tablets of Stone. I rather wish that the noble Lord, Lord Tombs, was sitting underneath that picture, as well as our Deputy Chairman. I feel that he is able to illustrate these problems. We hear the arguments from both sides and those of us who live north of the Border are anxious that our generating companies should not operate on a playing field that is other than level.

I heard what my noble friend Lord Jenkin said about the need for transparency and I understand that. In all things, it is right to try to achieve as much transparency as possible. I cannot say whether I support my noble friend Lady Miller because she has not given us anything to support—she has presented two arguments.

Lord Whitty: I feel slightly redundant. The noble Baroness, Lady Miller, and the noble Lord, Lord Jenkin, have made cases for the defence and the prosecution and the noble Lord, Lord Tombs, has been cast in the role of Moses. However, I shall try to give the Government's view on these matters.

Amendment No. 116D would oblige National Grid Transco to create two separate group companies. That would be its effect, although it would not necessarily require a divestment of ownership. However, the starting point for the design of BETTA was, with substantial consultation, to do the minimum needed to be done to create the GB-wide competitive market for wholesale electricity.

There are a number of ways in which we could create a uniform structure. There is this way or, alternatively, Ofgem and the DTI could have proposed legislation which forced all transmission licensees to sell their transmission assets to the Great Britain Systems Operator, so that we create the same situation in Scotland as for in England and Wales. I suspect that had we proposed that there would have been the same reception as Moses received when he came down with the Ten Commandments. No way of altering the system to create exact congruence will be popular.

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However, this is not the most important problem in the sense that Ofgem and the DTI concluded that to force the private companies to sell part of their business was a disproportionate solution and that this issue is not the most important in relation to transparency and distinction between different roles. The most important issue is to operate a system independent of generation and supply. That is why the GBSO role is to be created. We concluded that it was not necessary for transmission licensees to sell their transmission assets to the systems operator, whoever that role was assigned to.

It was not an objective of BETTA to separate out the systems operating function from the systems providers, which is the logic behind the amendment. It was only to separate out certain transmission functions from those with generation and supply interests. The conclusion of all the discussions on this is that the DTI and Ofgem are of the view that certain synergies can be gained from having the same person undertake systems operator and systems provider functions. Of course, the National Grid in England has combined the two roles for 10 years and in general it has delivered considerable cost savings from being able to trade off the cost of taking an action on the operator side of its business with the cost of taking an action on the transmission owner or systems provider side of its business.

There is no particularly good reason for ending that synergy. It would be much harder to properly incentivise a company that simply operated the networks but owned no assets. We therefore need to be careful about putting at risk arrangements which have successfully delivered improvements in efficiency.

Just as we do not think that it is necessary to force the Scottish transmission licensees to sell their assets under BETTA, we do not think that it is proportionate to force National Grid, as the amendment suggests, to divide its transmission assets into separate companies. Of course, both the systems operator and the systems provider are regulated. They are monopoly operations and are therefore subject to heavy regulatory oversight, including provisions on transparency sought by the noble Lord, Lord Jenkin. Both Ofgem and the DTI believe that the systems operator can be prevented from discriminating in favour of its own transmission assets effectively through the conditions of the licence.

They propose that the condition in the licence would be not to discriminate between providers or in favour of their own comparable provider activities where it undertakes them. The transmission licence conditions to apply under BETTA would cover such a requirement. It would be better to locate them in the licence provisions rather than in the statute. The licence condition will set the legal and contractual context for the application of all relevant non-discrimination obligations and will form the basis on which the regulator would intervene to enforce such a condition.

We recognise the problem, but we believe that it is better to operate through licence provisions rather than in statute. Perhaps it is worth adding that in

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addition to this, given the nature of the monopoly position, competition laws apply in this context to any discriminatory conduct or arrangements, which provide an additional safeguard. I therefore recognise the problem of non-congruence between England and Wales, and Scotland. Nevertheless, I think that it is not appropriate to try to create a congruence that is not really justified in terms of efficiency or transparency.

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