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Lord Triesman: My Lords, I thank noble Lords for a very useful exchange on the regulations. I am pleased
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that the House has again had an opportunity to devote further attention to company law, even if it is in a somewhat piecemeal way. I understand the point made by the noble Lord, Lord Razzall. I suspect that more comprehensive codification of many of these matters will always have to be undertaken, at least periodically, if they are to be coherent. But I believe that the change before us has the merit of adding a bit of coherence.

Accounting requirements might not be the subject of wide public discussion, but they are vital to our companies and therefore important to the economy as a whole. It is even more important, when people feel that there is turbulence or difficulty in understanding what companies are doing, to be able to see from companies' accountancy practices what they are doing, so that there is security for investment, and so on.

I strongly agree with the noble Lord, Lord Razzall, that the extension of the standard accounting procedures across the European Community—something we would probably have taken as axiomatic in this country—must be of benefit across a trading bloc of that size, even if there may have been some imperfections. I call to mind once again the fact that this process started with 90 jurisdictions. It went well beyond the European Community, but the European Community made sure, in the course of events, that it was carried into the EU to make sure that it happened in the EU as a result of discussions in Lisbon.

Let me turn to the remarks of the noble Baroness, Lady Noakes. On IAS 39, the UK would have unquestionably preferred full endorsement, but it has not proved possible. The key short-term priority was to provide companies with clear guidance on the implications of the partial endorsement decision. We are working with the ASB on this guidance. We encourage all parties to work towards a position in which the full version of IAS 39 can be endorsed as soon as possible. We certainly share the view that it should be.

The European Commission has said that this is an exceptional case. We hope that it will stick to this and that in future, the IASB standard will be endorsed without amendment. That is the clearest way in which I can express the matter.

I was asked whether the existing principles of realised and unrealised profits will continue to apply where profits are determined in accordance with international accounting standards. Dividend planning is one of the factors to be taken into account in deciding whether or not to opt to use IAS in companies' individual accounts. The Government are aware of the problems; the link between accounts and distributions is required by the second company law directive. Encouraging the European Commission to re-examine this in the light of the move to IAS must remain an important factor.

We were also asked to say something about the regulatory impact assessment. We do not believe that it was an underestimate of costs. It was subject to wide consultation. The respondents to those consultations commented on the costs and benefits of the changes.
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Most comments were used in the preparation of the final regulatory impact assessment. The benefits will unquestionably outweigh the costs.

The costs will vary greatly from company to company, but, overall, it is plain that the benefits will outweigh the costs. One of those benefits goes to the heart of one of the points made by the noble Lord, Lord Razzall. It must be right—and the noble Baroness, Lady Noakes, made the same point—that the complexity of the arrangements would be a huge burden for some small companies and would take them considerable periods of time to implement. That is why they must be left with a choice about when the cost justifies the benefit that will flow before making the change.

On the question of whether the Government's accounts, including accounts like the NHS, will conform to the same standards, I want to say because I believe it to be true that the accounts of the NHS and other government departments and operations under government departments have become more transparent. I do not think they are hard to follow any longer. Indeed, some of the more robust debates that take place across the House flow from the fact that people can see and understand the accounts and argue not about whether the accounts are accurate or transparent, but whether they reflect matters that are of benefit to the United Kingdom. That has tended to be the tenor of most of the major debates.

I want to address a final point with the caveat I expressed for the first regulations, that after a study of Hansard if I have missed things I shall make sure that I come back to them. The point made was that the standard setting process has become politicised in some way. The UK Government believe that the accounting standards are essentially technical matters. They should be independent, set by independent setters following the process, and subject to effective oversight. The UK has a long history of independent standard setting with the ASB. We agree that on occasions there may be evidence of some political interest in those matters in other states, but we do not have that fault-line in our approach to it. It is done without political intervention and by those who should do it. I completely agree that those independent standards are critical to us.

We appreciate that as a result not everybody will be happy with every IAS. The big picture is unquestionably one that noble Lords have reflected on in this debate—that this is by any standards an advance. Regulations build on the framework of company law by providing our companies with the opportunity to use high-quality, globally accepted principles based on financial reporting frameworks. The permissive regime for IAS is flexible, as it should be, it is business friendly and it will be market led. The Government are introducing one of the most flexible systems for the use of IAS in Europe. I applaud that fact.

It will give our companies the opportunity to have consistency of reporting frameworks across groups and across geographical boundaries. The use of global standards by our companies will give them greater
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access to global markets and global investment. That must benefit UK companies. Managing the accounts of our companies in a more transparent way and encouraging investment into our companies will create stronger financial markets, both at home and, as we have explored the matter, in Europe. It will ease the burdens on multi-nationals and it will keep our companies in the forefront of global investment in global markets, contributing to the UK economy by encouraging innovation, investment and employment.

We have ensured in these regulations that there is a level playing field between companies and also that we will in due course benefit buildings societies, allowing them to continue to contribute to providing for greater choice and diversity in the financial services sector. I recommend these regulations to the House.

On Question, Motion agreed to.

Gas (EUC Report)

Lord Woolmer of Leeds rose to move, That this House takes note of the report of the European Union Committee on Gas: Liberalised Markets and Security of Supply (17th Report, HL Paper 105).

The noble Lord said: My Lords, I should like first to thank my fellow members of Sub-Committee B for their support, hard work and contributions to this inquiry. I know that they will join me in expressing our deep appreciation and thanks to our specialist adviser, John Wybrew, and in conveying our warmest thanks to Patrick Wogan, who was our Clerk for this inquiry and who retired from the service of the House last week. He was a tower of strength and an inexhaustible source of wisdom and sage advice throughout his time with the House. We are indebted also to our secretary, Marilyn Byatt, and I thank her for her unstinting endeavours on our behalf.

I should also like to record our thanks to all those who submitted written evidence and to those who additionally appeared before us. Finally, but not least, I thank the Government for their positive and constructive response in September to our report.

The background to your Lordships' committee inquiry has two elements, both of which affect producers and users of gas. The first is the drive within the European Union towards a liberalised gas market. The second is concern about the availability of gas—the security of supply—as gas becomes an increasingly important source of energy and as net imports into the UK and the EU as a whole become substantial. We sought to consider both of these matters and, where appropriate, the interrelationship between them.

The reason for liberalising gas markets, after all is said, is to ensure that consumers of gas have a choice of competing suppliers who themselves are free to enter the market and who have transparent access to a transmission infrastructure. A single liberalised market within the EU should enable the most efficient and competitive gas businesses to emerge offering the best
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deal for gas users. Your Lordships will be well versed in these matters. Our report itself deals with the details in Chapters 1 and 2 and in Appendix 4.

The European Commission first addressed these issues way back in 1991, but the first gas directive emerged only in 1998. Your Lordships' committee reported on that in its 7th Report of Session 1997–98. Little progress occurred, and the Lisbon Council of March 2000 urged rapid liberalisation of the gas and electricity sectors as part of a drive to complete the single market and improve EU competitiveness in the global economy. A second gas directive emerged and was agreed in 2003.

That directive requires a legal unbundling of the transmission companies from companies supplying gas to consumers, but vertically integrated companies are still allowed to own both types of business within the same group. To ensure that new-entrant supply companies are able to compete, they must have equal rights of access to the transmission network on fair and transparent terms. There must also be an energy-specific regulator in each member state. Member states are required to ensure that all non-household gas customers have free choice of supplier by July this year and all customers not later than July 2007.

Finally, since the directive was agreed, political agreement has been reached among member states on a draft regulation that sets out the detailed rules governing conditions of access to the transmission network. The United Kingdom, of course, liberalised its gas market some years ago. However, as the UK rapidly becomes a substantial net importer of gas, access to a liberalised and competitive gas market in the EU will be one aspect of ensuring the security of gas supplies to this country.

Your Lordships' committee welcomes the second directive and the proposed regulation governing third party access to the gas transmission network. There are, however, some issues that still concern us. Many, though not all, member states have managed markets with dominant vertically integrated companies, often seen as "national champions". Governments are often protective about national champions in what they see as a key strategic sector.

At a time of rising energy prices, uncertain energy markets and increasing global competition for energy, we expect member states to resist a speedy movement to a liberalised, internal single market and to fight their corner hard in the detailed discussions about the implementation of changes. The Government, Ofgem and the industry must ensure that we are fighting our corner with sufficient resources in the corridors of Brussels and in the committee rooms of comitology.

The Commissioners told us that they were,

We hope they are right. The history of gas market liberalisation to date has been one of foot-dragging and procrastination in many member states. Indeed, Mr Monti, the outgoing EU Competition Commissioner, is reported as saying on 21 September that the level of competition in the energy sector is "not encouraging". He spoke of highly concentrated
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market structures and the prevalence of vertically integrated companies. He reiterated his preference for the mandatory ownership unbundling of transmission operators. I agree with him. Is my noble friend the Minister able to tell us the Government's view on this point? Do the Government know if the Commission is considering a further directive on this or other aspects of gas liberalisation?

I turn now to security of supply. Chapters 3 and 4 of our report deal with these issues. In the simplest of terms, the EU as a whole imported 45 per cent of its gas demand in 2001, a figure forecast by the Commission to rise to 59 per cent in 2010 and to 77 per cent by 2020. The UK, after a long period of self-sufficiency, will become a net importer by 2006 and we are expected to import 50 per cent of our requirements by 2010.

The committee asked whether there was a danger that the UK, and more widely the EU, would face difficulties in ensuring that future demand for gas can be met by a combination of domestic and imported gas supplies. The evidence we received is set out in our report and in the written and oral evidence. Virtually all witnesses agreed that there are ample supplies of gas available throughout at least the next 20 to 30 years and probably well beyond. The Commission told us that 80 per cent of total world gas reserves are within economic reach of the European market.

Increasing the diversity of supply sources will contribute to security of supply. Rising imports of liquefied natural gas, LNG, will contribute to that diversity and to flexibility of supplies. For the UK, increased supplies will come from Norway and more interconnectors with Europe. Significant increases in LNG are likely to come from such diverse sources as the Middle East, North Africa, Nigeria, the Caribbean and possibly from the Pacific.

What are the risks? One might be an over-reliance on a small number of countries as sources of supply. Russia provided 20 per cent of gas consumed in the EU15 member states in 2002. The Commission told us that Russia and Algeria have delivered natural gas to the EU since the 1960s and have acquired a strong reputation as fully reliable suppliers of gas. Producer countries certainly depend as much if not more on revenues from gas exports as Europe depends on gas imports. Even so, diversification of supplies is important and will add to security of supply. Security of sources of gas supply must be high on political and diplomatic agendas. As one witness observed, it is important not to be complacent.

The International Energy Agency has estimated that the investment requirement in gas infrastructure to cope with the large increases in gas imports in OECD Europe countries will be some 465 billion dollars between 2000 and 2030. Witnesses emphasised the critical importance of a flexible but stable and predictable regulatory framework within the EU if this investment is to be forthcoming. Given that, witnesses were confident that the necessary finance would be forthcoming. This emphasises the need for the European Union to make steady but speedy and consistent progress in liberalising its gas markets.
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Our report sums up our view on these issues in paragraph 88. The benefits of rapid implementation of the internal market in gas outweigh the dangers. The EU needs legal and regulatory certainty for investors. The risks inherent in greater dependence upon imported gas can be balanced by greater diversity of supply.

There is one issue that the Government might still usefully revisit. From now on the UK will be increasingly dependent on imported gas. We face a period of tight gas supplies globally and rising prices. Back in June our committee forecast real price increases of 25 per cent over the coming years; that now looks modest. Prices have risen by more than that in the last 12 months although many commentators expect prices to fall back somewhat. In tight markets fully liberalised markets struggle to deliver sufficient insurance against shocks and fluctuations in the supply/demand balance.

The response in much of the EU to heavy dependence on gas imports with long supply lines has been to hold much bigger strategic stocks than in the United Kingdom—up to 20 per cent of annual demand compared with 4 per cent in this country. Until now we were self-sufficient and our own gas reserves were almost literally on our doorstep. The Government have consistently taken the line that this is a matter for the market and that even to talk about strategic stocks would interfere with that market response. However, massive import dependency will now become a new reality. The question of a strategic stockpile or other possible safeguards needs at least to be discussable. A blanket "no intervention in the markets" may not be the best way forward even if it served in a period of surplus gas and self-sufficiency. I do not ask for a response to this today from my noble friend the Minister but I urge the Government not to close their mind in the face of a changing world.

I turn finally to the matter of low probability/high impact shocks to the supply system. This is the subject of Chapter 4 of our report. Our committee was concerned about the security of gas supply over the next two or three winters. Demand for gas in the UK continues to grow as we phase out nuclear and coal-fired power generators, and production from our own gas fields is now falling. The increased physical gas infrastructure to facilitate the necessary large increases in imports of gas is now taking place. By 2007 our infrastructure capacity to import gas will be more than sufficient but the demand/supply balance for the next two or three winters will, in the view of the committee, be tight, especially if we have a prolonged severe winter. We hope that this does not arise but there is always that slight risk.

The forward market for gas prices for the coming winter shows very large rises on last year. Ofgem has recently investigated the causes of this and concluded that 30 per cent of the large rise in forward market prices has been caused by higher oil prices, 19 per cent by faster than expected decline in North Sea production and that much of the rest might be caused by the forward market's view of the risk of extremely cold winter weather.
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The Government's response to this aspect of our report is, in summary, that in a very severe winter the market would be able to deliver the required level of demand-side response through gas-fired power stations and large industrial users reducing their demand for gas in response to higher prices.

On this point, Platts UK gas report of 18 October reports that the National Grid Transco mid-October review of the forthcoming winter said if there was a one in 50 severe winter the cut back in gas consumption would be the equivalent to,

On the face of it that would be a massive cost to impose on the business community. Is there no insurance policy worth considering to avoid those costs? Will the market alone make adequate provision for such low probability but high impact events?

With astute caution the government response concludes in masterly fashion that,

We do not suggest that, but we do believe that changing net import circumstances and rising global demand in energy markets requires a willingness to review past policy that was based on past circumstances. We were not completely reassured by the government response.

These are important issues and I look forward with great interest to your Lordships' contributions today.

Moved, That this House takes note of the report of the European Union Committee on Gas: Liberalised Markets and Security of Supply (17th Report, HL Paper 105).—(Lord Woolmer of Leeds.)

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