§ 6.8 p.m.
§ Lord Ezra rose to call attention to the operations of the privatised utilities, with particular reference to the role of the regulators; and to move for Papers.
§ The noble Lord said: My Lords, between 1984 and 1989 the previously publicly-owned utilities of telecommunications, gas, electricity and water were privatised. Hitherto the economy had been divided into two parts: the public and private sectors. Within the public sector were comprehended those activities which were either directly or indirectly controlled by government. Within the private sector were those enterprises which were subject to the rules of competition as interpreted by various Acts of Parliament and supervised by such bodies as the Monopolies and Mergers Commission and the Office of Fair Trading. Since the privatisation of the public utilities a third sector has emerged; namely, the regulated sector. That has arisen because of the regulatory systems incorporated in the privatisation Acts of those enterprises.815
§ Thus, a major change has taken place in the structure of the British economy. The enterprises which form part of the regulated sector are of particular importance because they meet basic needs and each of them is very large by normal commercial standards. Last year they had a combined pre-tax profit of over £5 billion. They employ over 500,000 persons. Regulation on this scale is an entirely new phenomenon in British economic experience. It is therefore not surprising that many issues have arisen which are as yet unresolved. The purpose of the debate is to examine some of those issues.
§ Before doing so, I think it is only fair to consider where the privatised utilities have made positive achievements. They lie particularly in the areas of service and standards. A new impetus seems to have been developed in this direction. Complaints are generally dealt with more rapidly. As regards British Telecom, there has been a noticeable reduction in the time taken over new installations. Maintenance and repair arrangements have been tightened up. Major efforts are being made concerning gas and electricity to promote energy efficiency. The Energy Savings Trust has been set up. British Gas has worked closely with Neighbourhood Energy Action—an organisation with which I am personally involved—in stimulating insulation especially in low income homes. As regards electricity, East Midlands Electricity is pursuing a policy of least-cost planning. London Electricity has launched a campaign for low energy housing.
§ The water companies have made an important start in dealing with the backlog of investment which has built up over many years. Service and standards are rising in consequence. For example, Severn Trent is investing at double the rate of its profits. It has kept its charges competitive with other companies and raised the water quality. Thames Water has made good progress with its regional grid. These are examples chosen at random.
§ Despite these positive aspects of the operations of the privatised utilities, they remain highly regulated. Why is that? One would have assumed that if they had made such progress there would be no need for regulation; but it is because an inadequate competitive framework was provided for in the privatisation legislation even in those cases where that was technically feasible. For example, many of your Lordships will recall that during the course of the debate on the Telecommunications Bill there was much pressure on the Government to extend the process of liberalisation further before privatisation. There had been a degree of liberalisation, but there was pressure to extend it. That was resisted by the Government. In the case of the Gas Bill, much anxiety was expressed about the privatisation of the industry as a single monopolistic enterprise. As regards electricity, while a degree of restructuring was incorporated in the legislation, many felt that it did not go far enough in dividing up the electricity generating sector.
§ Water is more of a natural monopoly than the other three, but there were nevertheless ways in which, 816 during the course of debate, it was indicated that a degree of competition could have been introduced in the privatisation measures. The reason for the neglect of this competitive element seems to have been that the Government were keen to proceed with privatisation as soon as possible and major restructuring would have held up the process. Furthermore, they appeared to want to earn the maximum proceeds from flotation and these could have been diminished if the enterprises had been changed too much.
§ The result has been the elaborate and intensive system of regulation which now applies in all four industries. There can be no criticism of the regulators. In each case they have been faced with a difficult and uncertain task. At one and the same time they have had to ensure that the regulated enterprises have been able to operate in conditions which would enable them to run the business efficiently and to invest adequately in the future. They have had to ensure that the consumers' interests were adequately safeguarded and protected. On top of that, they have been committed to introduce competition wherever possible. Furthermore, as concerns the energy industries, they have had to promote the concept of energy efficiency. Any one of these objectives would be daunting in itself, but to have to undertake all of them has led to a complex web of regulatory decisions and injunctions.
§ The regulators have indeed already made progress in stimulating competition in the industries for which they are responsible. That is particularly so in the case of the gas industry where the legislation did not envisage competition within the sector itself, but only as between gas and other forms of energy. That is the response which I personally received to the speech that I made during Second Reading of the Bill. Subsequently, due to pressure from the regulator and to interventions by the Monopolies and Mergers Commission and the Office of Fair Trading, a degree of competition has been introduced into the contract market for gas. That is the market supplying the industrial and commercial sectors. The upper limit of the tariff market, which is mainly the domestic market, has been substantially reduced. There have also been moves towards greater competition in the other three industries. However, it may be doubted whether regulatory pressure alone can introduce sufficient competition into these industries. I shall return to that point a little later on.
I now turn to pricing, on which recently there has been much concern. The prices charged by the privatised utilities are based on the price formulas incorporated in the licences at the time of the legislation. These are of extreme complexity. In a speech on 11th February Professor Littlechild, the Director General of Electricity Supply, stated that,
price controls are not easy to understand, nor is it straightforward to check whether or not a licensee is complying with them".
§ Those of us in this House who, at the time the legislation was being debated, tried to understand the formula for electricity prices will certainly not be surprised at that view.
§ The steep increase in electricity prices in April 1991 was a matter of much anxiety to consumers. In the 817 event, it was unjustified because it assumed too high a level of inflation. Furthermore, there is concern about the automatic pass-through of electricity purchase costs in accordance with the pricing formula. Similar problems have arisen as regards the prices of the other utilities. In all instances the regulators have been constrained to intervene in more detail than was implied in the legislation.
Doubts have been expressed about whether the regulators can at the same time create the conditions for the efficient running of the industries for which they are responsible and safeguard consumer interests. During the debate in this House on the Competition and Service (Utilities) Bill these doubts were clearly felt. It was proposed that greater powers should be given to consumer organisations. Among the relevant consumer bodies it was considered that the Gas Consumers Council was in the best position to operate as an independent guardian of consumer interests. As regards the other sectors, the relevant bodies were much weaker. The National Consumer Council has expressed the opinion that,
the regulators need to be under-pinned by a strong system of consumer representation which is independent of (and yet complementary to) them".
§ The NCC is also concerned about the level of disconnections and the special problems of low income and elderly consumers and consumers with disability. The citizens advice bureaux have similar concerns. The Consumers' Association has drawn attention to the rising number of complaints.
§ Those are some of the issues which have arisen during the course of the first few years of the operation of the regulated sector. There are no doubt many others which will be referred to by noble Lords participating in this debate. The underlying issue is this. In all four cases the regulators have found that in order to carry out the functions entrusted to them in the legislation they have had to intervene more extensively and in greater depth than was at first envisaged. The question is whether detailed and continuous regulation is seen as a permanent feature in these industries. If so, that in turn raises the issue of the ultimate accountability of these powerful regulators and the role of Parliament therein. That was mentioned during the debate on the Competition and Service (Utilities) Act. It was proposed that there should be a standing parliamentary committee to which the regulators should render account, but that was not accepted by the Government.
§ If, on the other hand, it is intended that the present degree of regulation shall be a temporary phenomenon while competition is progressively introduced into those industries where it is feasible to do so, then the question is whether this further degree of competition can be introduced without major structural change in the industries concerned. If that is the preferred route, I believe that such structural change is inevitable. Indeed, there seems to be a strong case for doing so in the gas, electricity and telecommunications industries. In all three industries a dominant market power is exercised by a limited number of enterprises. Those enterprises have retained a degree of control over the networks through which 818 their products or services are supplied. There is thus, in my opinion, a case for hiving off the networks entirely and for diminishing the size of the dominant enterprises.
§ In view of the vital economic and social role that is played by the regulated sector, in my opinion this is a subject that merits serious and continuing discussion. I am obliged to those noble Lords who will be participating in this debate.
§ My Lords, I beg to move for Papers.
§ 6.21 p.m.
§ Baroness Seccombe
My Lords, I thank the noble Lord, Lord Ezra, for giving the House the opportunity to debate this matter. I welcome the chance to highlight the achievements of the privatisation programme over the past 13 years and the considerable benefits that this has brought for the customers of the privatised industries.
The transfer of two-thirds of the state-owned sector of industry into private hands has been a key expression of the Conservative belief that many areas of economic activity are carried out better by private individuals and companies than by the state. Forty-six major businesses have been released from state control, bringing new standards of service, quality and efficiency for the benefit of the customer, and realising proceeds of about £42 billion for the taxpayer. I draw your Lordships' attention to the fact that the privatisation of those companies stopped the drain on the public purse, so enabling a massive increase in funding for such priorities as the National Health Service.
Privatisation has also played an important part in advancing the objective of the broader and deeper spread of wealth through the community: from around one in 20 adults holding shares in 1979, share ownership now extends to almost one in four. About two-thirds of shareholders come from outside the ranks of professionals and managers. More than 2 million employees now own shares in their own companies. I welcome the Government's commitment to make provision for the workforce to hold a stake in the soon to be privatised British Coal.
I should like to address a criticism that is often levelled at the privatised utilities. In recent days we have heard much comment about the level of profit that has been achieved by these utilities. Companies need to be profitable to achieve the improved standards that the customer and the environment rightly demand. It is true that BT makes a pre-tax profit of £97 per second, but BT is investing £77 per second—around £2.5 billion per year—in improving the network by installing fibre-optics and digital exchanges. In addition, it pays £38 per second to the Government in tax, and dividends to shareholders. Last year the 10 water companies had combined profits of about £1.5 billion, but they invested over £3 billion—part of the record 10-year £28 billion investment programme that is needed to make up for the years of inadequate funding when investment in water quality was controlled from the Treasury.
In the quest to improve services for the customer, I believe that there is no substitute for competition. One 819 area of which I have some slight experience is the electricity industry. For nine years I was a member of the Midland Electricity Consultative Council. Before privatisation the old Central Electricity Generating Board was an unaccountable state monopoly. Today Britain has perhaps the most competitive electricity market in the world, and that is good news for customers. Not only is there real competition between the three largest generators—National Power, PowerGen and Nuclear Electric—but there is also competition with the Scottish electricity companies. I welcome the rapid progress that has been achieved by the independent generating companies, many of which will soon be providing an additional competitive spur to the market.
This competition is placing a significant downward pressure on prices. Figures from the Director General of Electricity Supply show that some industrial customers have achieved savings of as much as 15 per cent. as a result of competition. This year every one of the 12 regional supply companies has announced price rises for domestic users that are below the rate of inflation.
Competition is advancing in other areas also. The Minister for Energy has announced plans to reduce to one-tenth of its present level British Gas's monopoly for the supply of gas to larger users under the Competition and Service (Utilities) Act 1992. Provisions under this Act to increase competition in water supply come into force this very day, and the development of competition in the telecommunications industry continues apace. Mercury and the personal communications companies have already claimed a substantial share of certain areas of BT's operation and eight new licences to run fixed-line networks have been issued since last year's duopoly review.
In those areas where the scope for direct competition is limited or where competition will take time to develop, there is a need for effective regulation. It is important to remember that when the utilities were under state control, there was no effective regulation, and that the regulators have helped to ensure a continuous improvement in the standard and good value of service for utility customers.
I should like to pay tribute to the work of Sir Bryan Carsberg who recently finished his term as Director General of Telecommunications. As the first of the utility regulators, he led the way in what was a new field when Oftel was set up in 1984. It is a mark of his achievement in encouraging greater efficiency that his proposal for a new BT price formula of RPI minus 7.5 per cent. will mean that the cost of a range of BT services will have fallen by 40 per cent. in the 10 years following privatisation. I wish him every success in his new role as Director General of Fair Trading.
Twelve months ago, the Citizen's Charter announced measures to improve the quality of public services; to increase the choice available to citizens; to improve the value for money offered by the public services; and to ensure that everyone knows what standards of service to expect and what to do if 820 something goes wrong. Under the Competition and Service (Utilities) Act 1992, these principles are already at work in the utilities.
I shall take the example of the electricity industry once again. OFFER has introduced 10 guaranteed standards of performance which the electricity supply companies must meet. The supply companies have to make payments to customers of between £10 and £50 for failure to meet the standards, including restoration of supply within 24 hours of a fault and turning up for appointments. Acting on its own initiative, East Midlands Electricity has introduced appointment times rather than just morning or afternoon appointments. What is more, it will pay compensation if those appointments are not kept. London Electricity has announced that it will move to appointments guaranteed within a two-hour time band. I look forward to other companies following these excellent examples, thereby bringing to an end the need to he at home all day waiting for the engineer, which was so much a symbol of the low priority given to customer services by the utilities when they were nationalised.
I remind the House that we have come a long way from the days when more than a quarter of a million homes had to wait for more than two months for a telephone line; when more than one in four telephone boxes did not work; and when domestic electricity prices went up by 2 per cent. every six weeks. Therefore the huge advances that have been achieved would not have been possible without privatisation and effective regulation. The regulators now have extensive powers to make sure that the improvements continue. The often quite public disputes with the companies in their charge are proof that they are prepared to use their powers. They are not complacent about the need to keep up the pressure for improvements, and nor should we be but neither should we fall into the trap of over-regulation and thereby kill off the incentive to improve that continues to benefit customers every time they deal with a privatised utility.
I believe that the regulators are serving us well, with the whole community benefiting as quality of service improves with higher standards, more choice and better value for money.
§ 6.31 p.m.
§ Lord Hampton
My Lords, I too am very grateful to my noble friend Lord Ezra for putting down this Motion about the privatised utilities and the role of the regulators.
I was brought up firmly to believe in the advantages of competition and to distrust monopolies, which can bring excessive power—and power, as we are reminded, corrupts. But in certain cases monopoly may seem inevitable. I was advised that in that case a state monopoly was better than a private one. So I am somewhat ill at ease with the privatised utilities, and particularly with the water industry, because whereas there is often some choice as to whether one uses gas or electricity, no one can do without water. Its use is inevitable. Although this can be limited to some extent, it is impossible totally to do without it. However, I do not believe—and nor does my party 821 —in renationalisation with any swing of the political pendulum. We want, as my noble friend Lord Ezra mentioned, to encourage competition wherever possible.
I should perhaps declare an interest. I have a very modest investment in a personal equity plan or PEP. My stockbroker persuaded me to do this and then informed me that he would have full managerial powers. He immediately went off and bought, as I would never have suggested, shares in both gas and water. However, as those holdings are very small and as my speech will be in defence of the consumer rather than the shareholder, I speak with an easy conscience. So let me come quickly to the point on which I ask clarification. I shall be dealing mainly with the water companies, but I believe this to be relevant to the other utilities also.
On 11th March this year we discussed water pollution and shortages in a debate opened once again from these Benches, on that occasion by my noble friend Lady Robson. I ended my speech with this question:what incentive do the privatised water companies have, even with Ofwat on their backs, to encourage sensible economies in the use of water and to educate the public in possible methods of so doing?" [Official Report, 11/3/92; col. 1383.]The noble Baroness, Lady Blatch, replying for the Government, said:In assessing the K factor, pass through costs are allowed for. We must link in the minds of people the cost of those improvements. That must be part of the downward pressure on bringing that message to bear".—[Official Report, 11/3/92, col. 1402.]I wrote to the noble Baroness on 17th May, saying:I did not understand your answer then and I do not understand it now. I would be most grateful for clarification".Unfortunately, she seems never to have received that letter so I am still in the dark. I do not in any way blame her. I believe that she was under almost intolerable pressure, dealing, as she was then, with both environmental and educational matters. But my submission is that, in saying what she did in her reply, she was not very well advised. I have given the noble Baroness, Lady Denton, notice that I would ask her the same question and I shall be most grateful to hear the reply.
Quite frankly, when K factors were mentioned during that previous debate I had no idea what was being talked about. I asked a number of friends later and was relieved that they did not know either. So I turned to the rather impressive modern dictionary I have. This did not give me the answer I wanted but told me that the letter K stands for many things; among those are a kilo, a king at chess and the symbol—heaven knows why—for the element potassium. But its most intriguing meaning is apparently:The llth in a series: 10th when J is omitted".Bemused, I found myself wondering whether the noble Baroness had included J or not!
But, to be serious again, I now have to hand an information sheet from Ofwat entitled The K factor—What it is and how it can be changed. I am rather better informed. I hope noble Lords will bear with me if I quote from the first two paragraphs of the information sheet. It states: 822The formula which limits the charges water companies can make for their services is laid down in the licence under which each company operates. The formula is the Retail Prices Index (RPI) plus K".The information sheet goes on:K is a charging limit. It represents the amount by which average charges can rise in any one year".Now I have to admit that I still do not see what control in the increase in charges really has to do with encouragement of the public to use less water and their education as to why it is desirable, and how to achieve this. I am also uncertain what powers, if any, the regulator has in this field and whether they are sufficient. Will the Citizen's Charter have any influence on the running of privatised utilities?
Some people still seem to refuse to face facts and believe that the present water supply is somewhat short only because in recent years there have been droughts and that with a return to usual rainfall the problem will go away. But the Council for the Protection of Rural England—CPRE—believes that we really are approaching a crisis and that it is time to stop abusing our amazing good fortune—I paraphrase those words from memory—in having what is by world standards a plentiful, but still not a limitless, supply of water.
Nearer home, the noble Lord, Lord Nugent of Guildford, was not long ago arguing the need to build a number of large reservoirs. He is an expert on water matters, and I certainly am not, but I still wonder whether he is right. Unfortunately, he is not with us here these days.
Another suggestion to relieve a shortage of water in the South is a massive diversion of water from the North. But here again it could be a very costly process —and arguably damaging to the environment—and who is to pay? Obviously, it would be the consumer. The citizens advice bureaux are, as my noble friend Lord Ezra has already mentioned, pointing to a good deal of hardship caused through water supplies to houses being cut off where people cannot pay and then only reconnected at high cost.
I was also concerned by a letter in The Times of 27th June from Mr. Derek Braggins, which claimed it was wrong that South West Water should have been granted a renewal, by temporary licence,to enable them to continue abstracting water from the River Axe with a reduced flow, in effect enabling them to continue taking water from the river under summer drought conditions".He concluded:Last week, despite strong public objections and another dry summer with extremely low water levels, the NRA Southwest region approved the licence".I do not know the background to this controversy, but it further emphasises, if emphasis is needed, that we really do have a water shortage problem that must be tackled. As I understand it, there are no plans at present to introduce compulsory general water metering, but I was interested to see a television programme which said that water metering was widespread in West Germany, which has no problems with supply. It also showed a young, newly wed German couple—your Lordships may have seen the programme—asking advice in the shops as to which 823 equipment used least water. That seemed a highly desirable result. I was also interested to read in a news release by Ofwat of 12th May this year:All customers have a right to ask for a meter. Many pensioners and those living alone would be amongst the large number of customers to gain from having a meter. Metered customers can control what they spend, rather than paying for high consumption by others".Then came some rather sinister words:Too often they are deterred by unreasonable installation charges, by inflexible company procedures and by unfavourable tariffs".If that is true, something is wrong.
The darkest, but still possible, scenario that I foresee is: first, no steps are taken to encourage economy in the use of water. A "remedy"—I put the word firmly in inverted commas—is sought in building some more enormous reservoirs as well as putting in hand an extremely expensive operation to divert water from the North to the South; next, it is found that further steps are necessary to check consumption, and water metering becomes widespread; next, the whole operation has turned out to be extremely expensive and charging now has to be much higher; and, finally, large and poor families are very hard hit by what they have to pay and have to practise painful economies. I hope that I am wrong, but I foresee difficulties ahead. We must keep a careful check on what is happening through the regulators and through Parliament.
§ 6.42 p.m.
§ Lord Skelmersdale
My Lords, while listening to the noble Lord, Lord Ezra, I remembered the great 18th century French philosopher Voltaire. The noble Lord is looking puzzled, and I am not surprised. He may well ask what on earth that has to do with his timely and important Motion. The answer is quite a lot. One of Voltaire's letters contains the thought that if God did not exist, it would be necessary to invent him. That leads me to wonder which senior civil servant in the early 1980s came up with the philosophy that since competition in the soon-to-be privatised utilities did not exist, it was necessary to have a surrogate. The questions we have to ask are whether that surrogate is working as it should, whether or not it is based on the original criteria of Professor Littlechild, or are the United Kingdom regulators increasingly trading certainty for flexibility, and, in the process, risking stop-go regulation; and, at the same time, is it evolving into a discretionary system where negotiations and personality are becoming its most important features? I suggest that the second concept is closer to the truth than the first.
In the water industry, for instance, the director general is now, after hectoring and badgering the 10 large and 29 original private sector operators—an operation which has led some, but not me incidentally, to question whether it is the regulator or the boards which run the water industry of the 1990s—in full possession of their cost data for water treatment, and, where appropriate, for sewage treatment, as well as the results of the pre-privatisation scrutiny into efficiency and capital investment targets. It was those that persuaded the Government to set strict limits on the amount by which they can be allowed—by differing amounts incidentally—to increase their 824 charges. We are talking about increases in this case—and this answers the noble Lord, Lord Hampton—because, as we know, there is a vast capital programme of £25 billion over 10 years with possibly a further £10 billion after that to be paid for out of profits, plus borrowings, required by the EC and national legislation, to say nothing of the need to provide more water for impoverished parts of the country and to reduce the 25 per cent. leakage rate.
In a speech that I made outside the Chamber some 18 months ago, I said that in my view the biggest barrier to planning in the 1990s would be the absence of new supplies of water to support the industries and houses that required it. That is not necessarily a bad thing. It could well be that market forces will force construction projects away from the comparative drought areas of the South and East to places such as Wales and the North of England where there is almost a superfluity. Even so, can Southern Water plc support the enormous expansion of business and housing which will result from the Channel Tunnel, for example? Will the regulators allow it even if the company wants to do so?
Yes, regulators in the plural. That is a point that the noble Lord, Lord Ezra, made in part. The water industry has to contend not just with the economic regulator (Ofwat), with the possible intervention of the old economic regulators, the Office of Fair Trading, with ultimate recourse to the MMC, as he said, but also with the environmental regulators; namely, its sponsoring department, the NRA, the Drinking Water Inspectorate, Her Majesty ;'s Inspectorate of Pollution, and, last but not least, the Ministry of Agriculture, Fisheries and Food. Over and above that, and most important of all in the context in which I am now speaking, there are the planning Acts, passed by Parliament over the years and administered by the DoE. That is a heavy load of regulation; and not all those bodies pull the same way. I find that a heavy irony.
For many years now we in the House have called for more reservoirs in the South East. They have been planned but never built due to the negative activities of the very people who now complain of low river levels, water rationing, hose-pipe bans, and the like. That reminds me of a story in the current issue of the magazine Police. At two o'clock on a Sunday morning, two constables were checking the driver and contents of a van. After some time they professed themselves satisfied and told the driver that he could proceed. As they settled themselves into their police car, the van driver ran back and said, "Can you give us a push? My battery has gone flat because I left the headlights on." The police driver replied, "You've got to be joking. It's your fault for leaving your lights on". Whereupon, he turned the key in his ignition only to find that, due to leaving the lights on … "Oh well" as Frankie Howerd used to say, "please yourselves!" That said, despite undoubted strides in efficiency and environmental improvements, even by gazing deep into my crystal ball I cannot see any prospect of regulation in the water industry being removed, at least for water delivery, although one could argue differently for water supply and treatment. At the 825 moment though, as the noble Lord, Lord Hampton, said, it is a monopoly, but does it need so many regulators? If the excellent and increasingly effective activities of the NRA are to stay, and I hope that they will —having played a part in creating it, I have more than a soft spot for it despite its teething troubles, —do we need the activities of HMIP, or the environmental agency as it will become, as well as the Drinking Water Inspectorate? All those regulators could and should be rolled into one which, for my money, would be an expanded NRA which could, but need not necessarily, also comprise the regulation of land disposal of sewage sludge under the firm policy discretion of the DoE, which is not, as it is regularly accused by the water companies, creating policy itself and then operating it. What is certain is that Sir Ian Byatt must be right when he says in his annual report:Companies and the regulators"—again, note the regulators—should concentrate on the service provided to customers and the recoverable costs of achieving specified levels of service, rather than on the achievement of particular levels of spending".He is doubly right if that is a veiled way of saying that all the regulators should pull in the same direction, which is what I understand him to mean. Even with the current system however, it is noticeable that Switzerland and Britain are the only European countries that exceed a 99 per cent. compliance rate for sewage treatment works and drinking water.
The debate initiated by the noble Lord, Lord Ezra, goes much wider than the water industry. If competition in the water industry will never arise, the same cannot be said of telecommunications or the gas industry, or, slightly further down the track, the electricity generating industry. In all those industries fledgling competition exists. We all applaud the efforts of my noble friend Lord Young who, as chairman of Mercury Communications, has shown in his recently published annual report that even in the deepest recession since the war it is possible to take on a vast company, making vast profits, and dent them substantially. More power to his elbow. I should like to see the day come when Oftel will no longer be necessary. In order to achieve that it is essential to introduce more competition into the industry with more operators coming on stream and competing successfully. They will be helped, of course, in the early stages by the regulator who has, after a settling down period, seen the need dramatically to change the permitted pricing formula by increasing the X factor from 3 to 7½ per cent. At the same time, he has attempted to promote investment in infrastructure like optical cabling and underground lines. All this has to be paid for out of the very profits of which people complain. My noble friend Lady Seccombe made that point.
In this connection, I was particularly interested to note a comment in the brief of the director general of OFFER, circulated for this debate, that today's profits are the result of yesterday's prices. Both a threat to the utilities and their investors, and a promise to their customers are contained in those words. Those profits also have to cover dividends to the 826 shareholders, large and small—the Ernies and Sids of this world whom the Government successfully succeeded in persuading to invest in dynamic companies—and, of course, corporation tax.
The Government have a vested interest here. Despite the efforts of the past 13 years to restrain government borrowing, the need for an increasing total tax take is readily apparent. Therefore, the regulator at the moment has an enormous job in squaring the circle. Does this lend weight, I wonder, to Plato's comment, "God is a geometrician"?
To be serious, though, the economic regulators face many pressures at the moment, not least from customers who simply do not seem to understand that in order to invest in the very things about which they care, large profits have to be made. The press were until recently similarly confused. They delighted in knocking the utilities. I wonder whether the tide of opinion is now turning. In a leading article in the business section of the Evening Standard last Friday, I detected the sentences:No doubt the regulator will want to take due credit for his part in ensuring that British Gas serves its customers well. However, the law of diminishing returns suggests that at some point it becomes counter productive to try and improve that performance any further. That point is close to being reached".Whether I am right or wrong about that, the debate on the activities of the regulators is increasingly swinging round to the complex and controversial problem of the cost of capital. This is central to the future well-being of all the utilities, with possible significant long-term consequences to investors. Regulators already have to form some view about the acceptable rate of return for companies and I have to ask my noble friend how real is the danger of a change in emphasis from price regulation to rate of return regulation. Certainly, the writing is on the wall as concerns Ofwat. I understand that Sir Ian Byatt is consulting on this point at the moment. That would be contrary both to the original policy intention and to the expectations of investors. Has the policy of the DTI changed since the election or does my noble friend's department still believe that regulation will be better focused on what the customer wants and expects?
That is all very well, but regulation is here to stay, at least for the moment. A level playing field and an open framework are essential. This, of course, means that there should be no sudden swings in direction by anyone—the regulator or the regulated. The utilities are under huge pressures from regulators, in turn resulting from just as great pressures from the media, politicians and customers—populist pressures, one might call them, which are in danger of forcing the pace of benefits in the environmental, competitive and consumer fields, faster than was originally intended. I believe that the utilities would accept that, so removing an unnecessary layer of tension between them and the regulators, if they saw economic regulations being removed at some time in the future.
Let us take, for example, gas. If my honourable friend Mr. Eggar, in his review of the monopoly threshold in gas in 1993, which has already reduced tenfold since 1991, were to say that he would wait to 827 see how his new and as yet unspecified reduction was working before he would consider removing the regulator, it would be a step in the right direction. The question is: can he ever afford to do it politically? What about the public interest? My answer is yes, he can and that the latter is already covered. Anti-competitive practices are already controlled by the Monopolies and Mergers Commission and the Office of Fair Trading, as the gas industry knows well. Regular reviews are undertaken into all these industries. The brewery and the petroleum industries spring readily to mind. My noble friend may remember the cement industry some years ago. Consumer legislation remains, environmental legislation remains. Competition would be in place. If he were not satisfied, he would not do it, for gas, telecoms, electricity generation or whatever. If he is satisfied, there is a positive danger in not doing it, a danger already identified in depressed share prices.
My final question is: is it true that because competition already exists, there are no plans for the establishment of Offcor—the Office of Coal Regulation? If it is true, my case is made.
§ 6.56 p.m.
§ Viscount Hanworth
My Lords, before considering how the electrical generating and distribution industry is progressing since privatisation I think we should consider government policies in this respect. It seems to me that governments become extremists in some of their policies. We have moved from the socialist doctrine of nationalisation to that of Thatcherism, where anything which trades should be privatised, regardless. We still seem to be stuck with that dogma. Where there is adequate competition, privatisation does have advantages, but there is always the danger that a decision made for commercial interests will be short-sighted and not always in the national interest.
In the electrical generating and distribution industry very little competition is possible; and none at all in the 12 regional distribution boards. I remember during the passage of the privatising Bill the Government argued that comparison between different distribution boards could provide a measure of competition. Since local conditions vary enormously I think that argument is largely invalid.
As regards generation, it must be realised that with an alternating current grid it is technically impossible to move large quantities of power—say, one megawatt or more—further than about 120 miles without destabilising the grid. Thus, here again competition is limited.
Already, I think it is quite clear that without an independent director general or regulator the new privatised system would be in real trouble. The pool system of payment for electricity generated and for allied or independent contracts is thought to need complete overhaul. It is in any case very complicated.
The director general has considerable powers but, even so, whether these are adequate is another matter. If not, where is privatisation leading? If we read the conclusions and recommendations of the report of the House of Commons Select Committee on Energy, entitled Consequences of Electricity Privatisation, we 828 see the amount of action suggested for the director general. Although the move towards combined cycle gas generation stations has the advantage of reducing pollution, I think we should not allow this tendency to go too far. This is, first, because gas is a premium fuel —its reserves are limited and prices will undoubtedly rise—and, secondly, although at present we have spare generating capacity several large stations are nearing the end of their lives. I am concerned that the siting of new stations must take that into account.
Most unfortunately, I missed introducing my short debate on 10th June. Perhaps I may be forgiven for mentioning briefly two subjects which I then intended to raise. There is a need to encourage the market by introducing a system for assessing house insulation without waiting for an EC standard. I believe that at least two other countries have already done that. There is an environmental limit to the amount of power which we can provide from on-land wind turbines. In the end we may have to pay the extra cost of putting them out to sea; for example, in the Wash. If I am right, we need to try this out now and perhaps the extra cost in adverse sea conditions may not be as large as at first thought.
On another matter, I am concerned that, since privatisation, research and development in the industry have been greatly reduced. I should like to know what arrangements there are to ensure that these limited resources are targeted to what is in the best interest of the industry as a whole. I must say that in my view the Government's commitment to energy conservation is not well served. The power and importance granted to the Government's energy department are wholly inadequate, as its performance in the past seems to demonstrate.
Finally, the picture is gloomy as regards gas with hardly any of the objectives of privatisation within sight. The situation has only been saved from disaster by the regulator.
§ 7.1 p.m.
The Earl of Lindsay
My Lords, I am grateful to the noble Lord, Lord Ezra, for raising such an important subject. I must also declare an interest, even more modest than the personal equity plan of the noble Lord, Lord Hampton, in that I have 100 shares in Scottish Power. However, much of what I shall say is based on my experience of environmental issues.
When vital industries evolve from being state-owned monopolies to private sector concerns, some safeguard may be needed against those elements of monopoly or duopoly that remain. The role of the regulators in preventing abuses and inefficiencies on behalf of the customer is therefore clear.
However, in the case of energy and water it may well be that the regulators should be looking much further if they are properly to protect the best interests of the customer and the public. For both those industries the next two decades will present a significant challenge. New levels of demand in terms of both quantity and quality, and increasingly costly environmental requirements, will force considerable investment in capacity, supply and their associated technologies.
829 In electricity generation, for example, we currently derive 77 per cent. of our electricity from coal-fired power stations, but two-thirds of those stations will be at or beyond the end of their designed lifespans early in the next century. Investment in new power generation, whatever its fuel, takes not only considerable sums of money but also a considerable amount of time. Such long-term undertakings require both a strong financial base and substantial confidence in the future viability of the industry. Strategic undertakings of a similar magnitude will also he involved in obligatory environmental improvements. With progressively strict limits on emissions coming into force, the generators will face bills of some £1.6 billion to reduce the sulphur emissions by just 8,000 megawatts.
National Power is spending £700 million at Drax. Scottish Power estimates an investment of up to £400 million in flue gas desulphurisation despite 60 per cent. of Scottish Power's electricity coming from nuclear and hydro sources and also despite the fact that Scottish coal has one of the lowest sulphur contents of coal in Europe. It is imperative for us all that these environmental obligations are properly met but the financial commitment they entail is both sizeable and continuous.
Scottish Power's £400 million investment or the industry's £1.6 billion investment cover only the first of a progressive series of obligatory sulphur dioxide reductions. That investment does not cover the other constituent of acid rain, nitrous oxide—National Power will spend £100 million reducing nitrous oxide emissions—nor does it tackle the emissions of the main greenhouse gas, carbon dioxide. Nor, furthermore, does such expenditure cover the protracted parallel funding involved in the development of new processes. A further 18 years of investment are needed, for instance, before clean coal technologies will be suitable for a 1,000 megawatt power station.
I have used electricity generation as one example of the scale and complexity of the challenges that face energy and water companies. If one accepts that these challenges exist, one has to hope that the companies involved are in a position to respond effectively. If they are not, it is the customer and our environment that stand to suffer most. Therefore the customer and the environment should welcome the profitability of the water companies. Some 70 per cent. of their profits are being reinvested in a £28 billion programme over 10 years.
A similar welcome should be given to National Power's ability to fund a £1 billion investment in the more efficient and environmentally preferable combined cycle gas turbines and its £40 million investment in sophisticated dust removal equipment. It is therefore vital that the regulators incorporate a strategic view into their assessment. This is the context within which the pricing, profits and performance of private utility companies must be judged. The exercise of such judgment must in turn be the vehicle by which regulators actively encourage long-term planning by the companies.
830 One has to question the wisdom of those opposition commentators who indulge in snapshot swipes at retrospective balance sheets without any assessment of forthcoming obligations. The shadow Minister for Trade and Industry, for example, moans about last year's water profits amounting to £68 per household and ignores last year's investment programme which was worth £126 per household. An obsession with profits demonstrates a failure of vision. However, it may also suggest that one of the challenges facing the privatised companies is one of public relations.
As both a customer of private utility companies and, more importantly, as someone who has some experience of the environmental field, I strongly believe that if there is an obsession it should be that investment, technology and practice are the criteria for assessing performance and that the regulators should assume a responsibility for encouraging a commitment to these principles within their industries.
There are legitimate fears, for example, that the demise of the CEGB's technical research departments is one factor that will seriously exacerbate anticipated electricity supply problems towards the end of this decade and that the consequence will be an increased likelihood of widespread power cuts during periods of peak demand. However, I see no reason why the method by which the industry's prices and profits are regulated should not directly ensure both the necessary research and the necessary capacity.
It is certainly in the national interest that the profit motive is harnessed to the incentive to invest. If a regulator sanctions energy prices and profit levels on the basis of impending obligations and improvements, he is effectively guaranteeing funds to the future well-being of that industry, its customers and the environment.
There is, in addition, one more important dimension of water and energy which the noble Lord, Lord Ezra, has already mentioned and which falls neatly to the regulator. In privatised industries it is difficult to motivate effective conservation and efficiency of use when those industries are driven primarily by the commercial incentives of increased consumption. Why strive for reduced consumption among one's consumers if that simply represents lost revenue at the end of the day.
In the United States of America conservation and efficiency measures have been successfully introduced through the regulators. That deserves careful study. The essential factor is that investment by energy companies in the promotion and installation of energy saving is taken into account by the American regulators in their assessment of acceptable profits. The larger and more successful a utility company's commitment to savings among its consumers, the larger the permissible return on capital for that company.
The California Energy Commission, which is the equivalent of our Office of Electricity Regulation, went further. After convening a group from all parts of its energy industry, it identified two additional motives. The first was that the power companies themselves should expand their services to include the sale or rental of the expertise and facilities needed for 831 conservation. A similar approach is evident in the Netherlands where the energy companies will install solar panels for their customers on a rental basis, the rent being charged on to their electricity bills. The means for conservation therefore are made commercially attractive in their own right quite apart from the bonus points they score with the regulator when he assesses acceptable profit levels.
The second initiative in California, although more intrusive and more ad hoc, is nevertheless revealing as a procedure. On being faced with a proposal for a new power station to meet an anticipated rise in demand, the California Energy Commission identified the potential for an equivalent amount of energy savings through conservation and efficiency measures. Given that demand could be stabilised, it queried the huge costs the power company was bringing on both itself, in terms of new plant and new infrastructure, and on the environment in terms of land take and emissions.
The commission acted prudently and everyone gained. Demand was stabilised through energy savings; those savings qualified the company for a greater return on capital and the power company avoided the costs of an additional power station, as did the environment. Although net total demand stablised, the number of customers rose and therefore so did the revenue earned from standing charges and connection charges.
It seems sensible that one of the criteria for judging the acceptability of profits should be a successful commitment to conservation and efficiency, whether it he water or energy. For both industries such an approach will be the most cost-effective method of tackling environmental problems. It is undoubtedly the case that in relation to carbon dioxide emissions the answer is reduced consumption.
I believe that the regulators have a crucial and demanding role to play. That will not be made any easier by external distractions. It is likely that they will attract vocal opposition from one quarter or another, however shrewd their policies. They will also have to contend with the repercussions within their own markets of government policy on, for instance, nuclear power and coal privatisation. What are the regulator's duties if the Government's views on how much of each fuel source should be used for generation are at odds with either the views of the generators or the regulator's own assessment of what is in the customer's best interests.
I welcome the privatisation of British Coal. However, are the short-term requirements of a successful privatisation distorting the regulation of an energy industry which has signalled a growing preference for gas-fired generation? Such questions arise given that the regulators have a duty to promote independent sources of generation. Some 6,000 megawatts have been approved, but applications for a further 14,000 megawatts appear to have been lost in the DTI's pending trays. I believe that that is a contradiction of the duties of the regulators. It may be that in the energy field the regulators as well as the companies at present have to contend with a government long-term energy strategy which is either 832 poorly formed or poorly explained. I should be delighted if my noble friend the Minister could show that assertion to be false.
The final intrusion upon the regulators comes, of course, from the European Community. EC pronouncements on water are already plentiful. Energy generation, energy use and associated issues such as the carbon tax are the type of macro-subjects that are likely to transcend any claims to subsidiarity and tempt the use of EC regulations rather than directives. I believe that those will cut into the regulators' duties in coming years.
In conclusion, the water and energy industries face challenges which they must be able to meet and must be made to meet. Much of the responsibility, however, will fall on the regulators. The noble Lord, Lord Ezra, posed some interesting questions about the long-term status of regulators. I do not believe in the existence of regulators as an end in itself. I do, however, believe in achieving strategic objectives where regulators provide the necessary means. It is in that role that I see them being a permanent fixture.
It is the regulators who are in the best position to insist on and foster investment in better capacity, better technology, better usage, better service and better environmental practice. For the sake of the custonier and the environment, therefore, it is not only the water and energy companies which must be preparing for the next decade but the regulators as well.
§ 7.12 p.m.
§ Lord Holme of Cheltenham
My Lords, I am sure that the whole House will want to thank the noble Lord, Lord Ezra, not only for introducing the debate on this extremely important subject but also for the authoritative and comprehensive way in which he set out some of the issues. I hope that he is not too disappointed by the relative paucity of speakers who wish to contribute to the debate. If he is, I expect that he will be consoled by the quality of contributions made by noble Lords in the past hour.
I should like to speak in particular about the role of the regulators because it seems to me that what we are discussing here is one of the most important developments in our public life, which in a sense has crept up on us. Ten years ago although the word regulator was familiar in the United States it was barely known in this country. Yet now there are regulators on the interface between the economy, the Government and the consumer, playing a vital role and one which I suspect is now permanent. The reason I suspect it is permanent is that we have seen in this country, as in all advanced economies, the comprehensive defeat of state direction, of state intervention and of collectivism. Yet, when the state has been defeated, or, as the Government would put it, rolled-back, a case still has to be made for the public interest. Nowhere does the case for the public interest have to be made more strongly—and I am sure that this is what the Government had in mind with the Citizen's Charter—than in the case of privatised utilities, particularly of the genuinely natural monopoly.
833 Although I speak as a supporter of privatisation, in the case of every industry which the Government privatised, I am one of those who does not believe that the Government handled privatisation particularly well, for this reason. I believe that under the malign influence of the Treasury the Government were more concerned in each of those privatisations with the revenue which was immediately received by the Exchequer than with ensuring, for instance, access to services for the poorest and most distant or with enlarging competition.
Even in relation to the sale of the shares themselves I believe that the Government were not genuinely concerned with dispersing long-term ownership so much as with offering the prospect of short-term speculative gain. Paradoxically, most of the people who bought privatisation shares would have been better off taking the short-term speculative gain; but, nevertheless, I believe that the aim would have been better achieved if more people had been given the incentive to hold on to their shares for a long time so that the genuinely share-owning democracy which the Government said that they wished to create would have had a better chance.
That in a sense, is a digression. I am simply trying to say that the process of privatisation was confused by the Government's mixed motives.
Therefore, as my noble friend Lord Ezra said, the regulators have in some instances been handed for resolution fundamental issues of policy which the Government should have addressed at the time of privatisation. Perhaps I may just instance Part I of the Telecommunications Act 1984. The director of OFTEL has been left with extremely difficult policy questions to resolve in the course of day-to-day regulation relating to securing universal access, promoting competition, promoting the interests of the consumers and, for instance, of promoting the interests of BT abroad. That is a very mixed bag of responsibilities for one regulator, some of them matters of policy which the Government themselves should probably have resolved at the time of privatisation.
In that instance, we have been very fortunate in the first regulator, Sir Bryan Carsberg. I should like to associate myself with the remarks of the noble Baroness, Lady Seccombe, on that point. I should like to ask the noble Baroness, Lady Denton, to say when she replies whether it is the Government's intention to ensure that Sir Bryan's successor is as committed to competition as the first holder of the OFTEL job.
We have seen a great change in governmental culture. I remember that when privatisation started, regulation was almost a dirty word. In those days the Government said that they wanted "light touch" regulation. It would be interesting to hear from the Government whether they now accept that the regulator has a vital and permanent role to play in the public interest, and that the touch should be as heavy as the situation demands.
Where there is not a natural monopoly, which is the case in some privatised industries, there should be more competition. That has been our position on 834 these Benches consistently, as my noble friend said at the beginning of the debate. Where there is a natural monopoly, I still believe that there is scope for more prompting of the best instincts of commercial practice on the part of those monopoly interests. There could be more regionalisation so that benchmarks are provided against which progress could be measured. There could be more franchising and more open networks to provide the benefits of discipline within natural monopoly industries.
On the whole, in the case of the genuine natural monopolies, I am inclined to believe that the price cap works best. However, I was struck by the point made by the noble Earl concerning the whole question of rate of return calculations as generally used by US regulators. Rate of return seems to offer an interesting prospect where heavy capital investment is required, as in the case of the water industry. I should be interested to know—sharing the Government's apparent prejudice, as I do, in favour of price caps as the best way —whether it is in their mind to look in certain industries where heavy investment is necessary (for instance because of environmental demands), more closely also at the rate of return calculation. This is a question to which the noble Lord, Lord Skelmersdale, referred.
I should like to raise a specific point about the regional electricity companies and British Gas, where it seems to me that household consumers are particularly vulnerable. There are a large number of disconnections, and disconnections in the case of water have been referred to by my noble friend Lord Hampton. I have two questions to put to the Government.
First, would it not be better if all privatised industries had some kind of code on the basis of the guidelines that Ofwat have prepared, dealing with the very difficult question of disconnection? It often happens to the poorest customers and those who are least able to cope with the whole process of billing and invoicing, let alone paying the bills. Every attempt should be made to contact the delinquent consumers and talk to them directly to see what provision can be made for payment of one kind or another.
Competition in the utility sectors will not always happen of its own accord, even when regulatory rules preventing entry into the market are removed. The reason is that the dominant incumbents have enormous market power. My noble friend Lord Ezra referred to that point. Even when those dominant incumbents are theoretically open to challenge, they stand astride the market. Therefore it seems to us on these Benches that proactive policies are necessary to promote competition and to tilt the playing field in favour of new entrants. The promotion of competition and tough regulatory action go hand in hand, for example, to prevent discriminatory pricing by a dominant incumbent against new rivals. For instance, in telecommunications the crucial issue is BT's monopoly of interconnection. To give new competitors a fair chance, restructuring the privatised industries is likely to be necessary because a perfectly integrated utility has tremendous power to manipulate prices to its own advantage.
835 Another point is that in our opinion the regulators of privatised utilities need to be granted wider and tougher powers in order to do their job more effectively. We believe that they should be given the powers given to the European Commission under the Treaty of' Rome to obtain access to company records and to impose penal fines for anti-competitive behaviour. They should be properly staffed with professional economists, accountants and industry engineers.
Even if the regulators stay separate—I believe it is right that there should be a separate regulator for each of those great industries—I wonder whether more could be done to pool their professional support staff in some sort of office of utility regulation, so that each industry, continuing with its own regulator and clearly independent of government, nevertheless should have the ability to respond to special demands upon it.
I come to the question of environmental regulation to which the noble Earl referred. I do not believe that the separate roles of economic and environmental regulation of privatised utilities should be confused. Decisions about the environmental standards to apply should be made on a social cost/benefit basis by environmental regulators. For example, standards of drinking water quality should be set independently of the regulator responsible for determining increases in water charges.
If greater competition in energy leads to lower prices and higher levels of consumption than are environmentally sustainable, the issue should be tackled through the energy tax mix. Or, when there is a need to subsidise rail services, either on regional policy grounds or because in urban areas car users do not pay the full social and environmental costs they impose, that should not be a barrier to the operation of a franchising system if it is right on other grounds.
Perhaps I may offer a final and radical thought. I wonder whether regulators, who after all are the servants of the public interest and originally had their duties defined by Parliament, should not report regularly either to a Select Committee of both Houses of Parliament or a standing committee and include in their annual reports recommendations for any change in the regimes that would make it easier for them to exercise their responsibilities.
I believe that there is not only a danger for regulators in being co-opted into the culture and assumptions of the dominant suppliers with whom they deal, but an equally great danger of them forming too close an incestuous relationship with Whitehall, as though they were quasi-civil servants. They are not quasi-civil servants; they are the servants of the public interest. I believe that Parliament has a legitimate interest in the exercise of their duties.
The experience of utility regulation has important lessons for the approach that the Government should adopt to the economy. It should focus on the need for an armoury of weapons to attack monopoly power. It demonstrates how important public interest objectives can be achieved by effective regulation, without the need for public ownership or day to day ministerial and Whitehall interference. Finally, it highlights the 836 centrality of the commitment to competition as ultimately being the best guarantee of efficiency and consumer choice.
§ 7.26 p.m.
§ Lord Clinton-Davis
My Lords, perhaps I may say at the outset that I agree with a very large number of the points made by the noble Lord, Lord Holme, and that means that I do not have to rehearse some of them now. There is little doubt that there is growing concern about certain developments and trends in the operation of the privatised utilities and the role of the regulators, even though many of the points have gone unrecognised by noble Lords on the Government side of the House. The House is indebted to the noble Lord, Lord Ezra, for having initiated this debate.
The noble Lord, Lord Holme, mentioned the importance of investing the regulator with additional powers. It is extremely important. I shall not say any more about it but I hope that the Minister will reply specifically to that point.
I want to take up the point made initially by the noble Lord, Lord Ezra, who argued forcefully for a strong system of consumer representation. I go along with that wholly. There is no independent national body to represent consumer interests in some of the privatised utilities. That needs to he addressed, particularly in regard to the energy industry.
There is another issue which was not mentioned in the debate other than in passing: namely, the conflict of interest that sometimes arises between the national interest and the public utility involved. Prior to this debate I received a considerable volume of material from consumer organisations and some public utilities. Over and over again we hear the Government say that they are committed to the Citizen's Charter for public utilities so far as concerns setting service standards and causing them to adopt and publicise complaints procedures which should be adequate. We shall wait to see how efficacious are those developments. I wish them well. They are important in terms of consumer protection.
If one reflects on the material that has been sent to noble Lords, for example by citizens advice bureaux and national consumer councils, it is clear that at the moment there are real concerns, which for the most part afflict the most vulnerable members of society: the poor, the aged and the disabled. I believe that the Minister will share that concern as I know her well enough and have a high regard for her. But the test lies in what she will be able to accomplish in addressing those concerns. At all events we wish her well in that endeavour.
The citizens advice bureaux have cited some telling and deplorable examples of hardship on the part of consumers. Noble Lords opposite have not mentioned that at all. They have not said one word about it. I find that extraordinary. I refer to people who have been denied access to a telephone service because of the imposition of deposits, installation or reconnection charges which are out of sight for them.
Let me give an example of the kind of thing that occurs in the water industry. A CAB in the West Midlands reports that South Staffordshire Water 837 Company disconnected a water supply of a client with a seriously disabled child. The company required a reconnection fee of £94 which the client could not afford. Mid Kent Water disconnected the supply of a client who was over 80 per cent. disabled. The company then refused to negotiate with the CAB, requesting instead that the social services should intercede on the client's behalf. A large number of cases have been cited but not addressed.
The setting of performance standards which affect the vulnerable people to whom I have referred needs further attention. However, disconnections constitute the major issue which we in this House need to consider. I hope that the Minister will do so. The deprivation of water supplies can be a devastating blow to someone's quality of life, health and even self-respect. I have seen much material from the privatised utilities. I fear that others have not bothered to forward it although I should have thought that they would have taken the opportunity of this debate to ensure that noble Lords know about their case. However, I have received little evidence that the essential anxieties that I have addressed have been noted, let alone dealt with adequately. I ask the question: why not? Did the Government not know? Did they not bother to find out? Did they care too little or are they prepared to ride over the hostile criticism which sometimes might emerge? It is simply not good enough. Those cases, after all, arise against a background of quite extraordinary rises in profits and increases in salaries of chairmen and senior executives almost across the board with regard to the monopoly suppliers.
I hear the arguments about investment. In part they are true, but not completely. Let us take, for example, the National Grid Company. It has had a 30 per cent. profit increase. No one can doubt that it is a monopoly on which consumers are totally dependent for supplies. Let us take the example of the Merseyside and North Wales Electricity Board (rejoicing under the highly appropriate acronym of Manweb). Profits increased by 16 per cent. to more than £94 million. That represents about £72 for each of the companies' customers. A privatised monopoly purveying services on which families and businesses have to rely comes within that category. Can it really justify to the satisfaction of the public that the huge increases across the board are reasonably appropriate in the circumstances against which this country battles at present? There is the deepest, most enduring recession; a massive number of insolvencies, and vast unemployment, with 70,000 families having their homes repossessed. That is the background. It is little wonder that there is considerable bitterness and worry by many consumers, in particular those whom I have identified.
The common denominator which worries the ordinary consumers is that they are at the mercy of the privatised monopolies. For most people there is simply no competition for telephone services. It is true that there is a kind of choice for people between whether they use gas or electricity in their homes. But once the choice is exercised as to which route one goes 838 down then to all intents and purposes a monopoly exists for the customer. Relatively few people in this day and age use gas rather than electricity to light their homes.
I say that the consumers are at their mercy because very few people can comprehend the pricing formulae used by the services. That is a real handicap to being able to challenge the pricing formulae. The cost of electricity is essentially geared to the generating process. There is therefore little control by OFFER over National Power and PowerGen. Useful ideas have been advanced by the National Consumer Council for dealing with a number of important issues. I refer to excess profits made during a recession and excess profits based on wrong inflationary predictions. The council argues that we ought to be exploring ways and means of ensuring that those excesses should result in compensation for the customer. I should like to hear the Minister on that.
I do not believe that in most instances the criteria for disconnections have been explained properly or at all. I ask the Minister a number of questions of which I have given her notice. Why should not the Government, in the light of the experience that we have had since the enactment of the Competition and Service (Utilities) Act at least state in the debate tonight that they will consider the proposals that have been made by a number of consumer bodies? I repeat them. First, deposits charged should be reasonable. Secondly, there should be a definition of low income consumers in order further to clarify the position. Thirdly, there should be no disconnections—in particular with regard to water because that is the most important of all the services offered—unless a customer has wilfully refused or culpably neglected to pay the charge in question. I believe that those are perfectly reasonable propositions. I await with interest what the Minister has to say.
The fact remains that there are far too many disconnections at present. Water disconnection figures for 1991–92 show a rise of 177 per cent. over last year. Nearly 22,000 households have been disconnected. Surely that requires some urgent attention. It surely requires attention along the lines that I have been suggesting.
Up to 31st March 1992, gas disconnections were running at the rate of nearly 20,000 a year, up by 21 per cent. over the previous year. I again ask: why have we not heard anything from the other side of the House about that? Does it not worry them? If noble Lords on the other side were in another place they would have had a sheaf of letters from constituents complaining about such issues. The fact that we are in this Chamber should not insulate us from that situation.
While this state of affairs persists it is obvious that the regulators—whose job unquestionably is very difficult indeed—must be seen to be doing more to protect the vulnerable, and Government have a role in that respect too.
I end on this note. I suggest that a national conference should be convened by the Government at which there would be a full exchange of views by the 839 utilities—privatised companies or privateers—customer bodies and the regulators. I commend that idea to the Minister. Again, I have given her notice of it.
§ 7.40 p.m.
§ The Parliamentary Under-Secretary of State, Department of Trade and Industry (Baroness Denton of Wakefield)
My Lords, I welcome the opportunity provided by the noble Lord, Lord Ezra, to debate an important subject of wide public interest. As was said by my noble friend Lady Seccombe, it is appropriate that we should do so today when the first part of the Competition and Service (Utilities) Act comes into effect. Furthermore, as requested by the Director General of Ofgas, the British Gas tariff reductions also come into effect today. I hope that that will go part of the way to convince the noble Viscount, Lord Hanworth, that the picture is not as gloomy as he would have us believe. Perhaps in passing I may say how pleased I am that the noble Viscount is present today. We missed his input on the previous occasion on which the House debated the energy issue.
A large number of important points have been raised and I shall endeavour to answer as many as possible. Since having had the privilege of replying for the Government I have discovered that noble Lords have never been short of questions for me to answer.
The privatised utilities touch everyone and every company in the country. All of us take a keen interest in their prices and quality of service. The Government are well aware of that. Indeed, it was a desire to improve the performance and service of the utilities that led the Government to privatise them. The same concern about the quality of public services lies behind the Citizen's Charter. I am pleased to be able to reassure the noble Lord, Lord Clinton-Davis, who was kind enough to recognise my concern for the consumer, that we take the matter seriously. We are anxious to ensure that the regulators have close links with the consumer bodies. In the evidence which the noble Lord brought to his speech he showed that there are strong consumer representations. However, it was sad that the briefing from the Citizens Advice Bureaux was not also sent to the Government, although I accept that we are in constant communication.
The noble Lord, Lord Holme, made some interesting points about privatisation. It is, of course, easy to comment on some of those with hindsight. I can assure the noble Lord that decisions were taken by the Secretary of State in agreement with the Treasury and in the light of much expert advice.
We should not in this debate lose sight of the purpose of privatisation. It has resulted in major improvements in the services provided to domestic and commercial consumers and in the efficiency of the utility businesses, as was pointed out by some of my noble friends. The utilities are now subject to commercial disciplines and we are making them compete for the market wherever possible. It must be remembered that before privatisation standards of service were poor and there was frequent government interference with prices and the running of the htlinesses. That often occurred due to public 840 expenditure constraints and political decisions about priorities which could not be described as being customer-driven.
I was grateful to the noble Lord, Lord Ezra, for recognising some of the substantial achievements and improvements that have been made. For example, under all governments before privatisation the public funding found for investment in water and sewerage services was very limited. Now investment is at record levels and more than twice the average level of the late 1970s. The water companies are investing nearly £1,000 per household in the five years to 1995. We should be most careful about arguments that government should again become closely involved in regulatory pricing decisions. That is not the way to secure efficient services.
The role of the regulators has been questioned by your Lordships. It was the Government's view that it was not sensible at the outset to try to establish full competition in all the utility markets. In our view the transition from state monopoly to competitive supply must be managed in steps. I am sure the Russians would agree with that. Therefore, we provided for the progressive development of competition and introduced independent regulators to foster, among other things, competition and the protection of consumers against the abuse of monopoly power while competition develops.
The Government believe that it is for the independent regulator to judge how to balance his —and perhaps some day her—various responsibilities when reaching a regulatory decision with the minimum political interference. The regulators have been given strong powers to match their responsibilities. They administer the licence regimes for the utilities and those can include fixed-period caps on price increases and controls on the terms of access to the wire and pipe networks through which services are delivered.
The regulator can propose changes in the licence conditions, including the price controls. If the company does not agree the regulator can refer those proposals to the Monopolies and Mergers Commission to take a view on the public interest. The regulator can also refer a company to the MMC to consider whether its monopoly position is itself working against the public interest. Those are considerable powers and, like the Director General of Fair Trading, the utility regulators have discretion over their use. I am grateful to the noble Lord, Lord Ezra, for pointing out the contribution made by the regulators and the enormous amount of work and effort they have put into taking their roles seriously.
The noble Lord, Lord Hampton, drew attention, correctly and with great concern, to the water shortage issue. Perhaps that is a subject for another debate and not one on which I wish to dwell too long tonight. The Secretary of State for the Environment is preparing a consultation paper on water conservation, to be published soon. There is a great need to encourage people to take seriously water conservation. All water companies are required to adopt efficient and 841 economical practices in the use of water and to encourage economy on the part of users. However, there is a huge task to be undertaken.
The noble Lord, Lord Hampton, also asked about K factors for the water industry price caps when the present regime was introduced. Those K factors were set during 1989/90. There was extensive consultation at that time and account was taken of all known commitments which could be quantified. Where an item could not be fully costed, provision existed for a cost pass through revision of K to reflect that individual cost. That was a matter that I had to investigate. The type of situation we are talking about is when compliance costs of sewerage treatment could change or when, in the period 1989/90, investment factors were based on original costs which could have increased and were not as had originally been supposed. The operating licences for the companies also provide for an interim review by the regulator should any relevant change in circumstances occur outside the control of the companies. I am sure that the noble Lord, Lord Hampton, will agree that my noble friend Lady Blatch is one of the most courteous Members of this House and I am sure that she would not have wished to be unable to reply to his letter.
In a most interesting contribution my noble friend Lord Skelmersdale asked whether, when full competition has emerged, the regulators will still be required or will disappear. As competition strengthens the need for regulation should diminish. But careful regulation—or, as was said, the light or heavy touch of regulation—will still be necessary to protect competitors and consumers while companies have dominant market positions.
There are also the natural monopoly networks, to which many of your Lordships have referred, of the wires and pipes which carry utility services to the consumer. As far as we can see, those elements will always need regulation. However, the coal industry is already competitive and will become increasingly so. It will not necessarily have the same needs as other utilities.
My noble friend Lord Skelmersdale also drew attention to Mercury's recent report. My noble friend Lady Seccombe drew attention to the fact that although Mercury was the one licence issued originally, eight new licences have been issued. I am pleased to say that the DTI has received well over 30 applications for new telecommunications licences from companies wishing to take advantage of further liberalisation.
The noble Lord, Lord Holme, asked whether it would not be better for regulators to be automatically answerable to Parliament rather than to departmental Ministers. The regulators are appointed by Ministers with the intention that they will carry out their duties independently of government Ministers. The intention at privatisation was to take the provision of utility services and their regulation as far out of the political arena as possible. The regulators report each year to Ministers on their activities and that report is laid 842 before Parliament. The regulators can, through the Public Accounts Committee, be subject to the scrutiny of the House.
We must not forget that the regulators' decisions are also subject to thorough public scrutiny and debate in the press and elsewhere. Such debate keeps the regulators on their toes. Perhaps sometimes they wonder whether there are not other subjects to be debated. The power of public opinion should not be under-estimated.
We attach great importance to transparency and I know that the regulators do too.. They have taken pains to consult and explain their decisions publicly and to encourage public debate. Indeed, Ofgas holds a series of public meetings around the country as part of its review of the British Gas price cap, and all the regulators issue public consultation papers on regulatory issues.
To foster competition, the regulators have insisted that British Telecom and British Gas offer fair terms to their competitors for the use of their networks. That must be a major contribution. Of course, British Gas has given the regulators an undertaking to reduce its share of the contract gas market to less than half its present level by 1995. The evidence shows that under the regulatory regimes the gas and telecoms utilities are delivering major benefits in terms of increased competition, improved quality of service, and price reductions.
Praise has rightly been given to the strongly pro-competitive policies of Sir Bryan Carsberg. I am sure that those will be maintained by his successor. I cannot speak for Sir Bryan's successor, and indeed no decision about the successor has been made, but Sir Bryan's approach was based on his statutory responsibilities to promote competition and to protect consumers. His successor will have the same responsibilities and we would fully expect him to maintain a similar pro-competitive approach.
Anxiety was expressed about increased profitability reported by the water and electricity companies, at a time when the economy as a whole is in recession. Several noble Lords pointed out the need for investment to improve services, to stimulate competition, and to be able to examine in greater detail some of the issues raised by the noble Lord, Lord Clinton-Davis, to which I shall come later.
Regional electricity company profits and price rises were higher last year, but these were not simply the result of excessive price rises or lack of control by the regulator. The regulator has explained that he allowed price rises above the cap in 1991–92 to offset low increases in 1990–91, when inflation forecasts, which are used to set annual price increases, were well below outturn inflation levels and cost increases. Profits accordingly rose quickly last year compared to the year before. This year price increases will be much lower—around 2 per cent. on average—and I was pleased to see that South Wales Electricity was able to announce a price cut.
Perhaps I may quote from the report of the South Western Electricity Board which reported yesterday. The chairman was able to say that the excellent results came from a combination of cost-cutting, better 843 management of assets and higher sales. That is what we should like to see from companies. Nevertheless, as has been said, marked year to year fluctuations in prices are not desirable and I know that the regulators have technical aspects of the price cap formulae under review to see whether improvements can be made.
I believe it would be a mistake to introduce more frequent price reviews in response to the higher profit levels this year. It would be based on a misunderstanding of the reasons for those profits. It would take away the incentive for companies to invest for efficiency improvements if the potential profit was quickly passed on to customers in lower prices. We must make sure that those industries provide efficient services.
My noble friend Lord Skelmersdale and the noble Lord, Lord Holme, asked whether there is a case for some privatised utilities to be looked at with regard to rate of return criteria. When the Government decided to adopt a cap on prices to final customers as the means of regulation, it was with the benefit of experience gained by other countries where rate of return regulation had been common, particularly in the United States.
While rate of return regulation may keep profits down, its drawback is that it provides no incentive to the utility to keep down costs and prices. It can also lead to expensive, intrusive and bureaucratic regulation of company investment: something which I am sure all noble Lords agree should be avoided.
Regulation by direct price controls can provide incentives for companies to invest to increase efficiency, by allowing them to share the benefits. There is also the opportunity to reduce prices in real terms for consumers when the price cap is reviewed every few years. Noble Lords will be interested to hear that regulators in other countries, including the USA, are now turning to price cap regulation as a result of our experience. That said, I am sure that the regulators do have regard for rates of return when setting new price caps; indeed, the Water Act requires the regulator to act to help secure reasonable rates of return on capital for water undertakers.
It was not unexpected that reference was made to the salaries of the chief executives of private utilities. They are private companies and the salaries are primarily a matter for the shareholders, and certainly not directly for government. The Government recognise that those salaries are not out of line with those of other big private sector companies. However, they expect top executives to exercise leadership and show restraint over pay, and lain Vallance's 3 per cent. rise this year is a very welcome lead which I hope will be followed. I am sure your Lordships will agree that that is a trend which we should all like to see.
As I say, many points were raised and I shall quickly try to mention a few of them. My noble friend Lord Skelmersdale suggested that the three regulators for the water industry were not necessarily always pulling the same way. They have different responsibilities and objectives, which is why the Government believe that the interests of the environment, customers and the water industry would be best served by keeping the responsibilities separate. However, they are all conscious of the environmental 844 improvements that must be paid for by the industry and eventually by the customers. My noble friend Lord Skelmersdale drew attention to the high standards we achieve in sewage management.
The noble Lord, Lord Holme, referred to the accountability of regulators. The regulators operate within a statutory framework and their decisions can be subject to judicial review.
My noble friend Lady Seccombe drew attention to the investment necessary to achieve improvement and also to the fact that there are welcome examples of best practice which may be copied. I doubt that my noble friend realised, when propounding the advantages of wider share ownership which privatisation has brought, that she was directly speaking to Members of your Lordships' House.
I agree with the noble Lord, Lord Hampton, that water meters, and the benefits they bring, should be easily accessible without the handicaps he mentioned. I am sure that is a matter which will be taken on board. Once again my noble friend Lord Lindsay shared his considerable experience of the energy industry, expressing recognition of the need for an investment programme and for energy conservation. Much work is being carried out in the Department of the Environment on those issues.
The noble Lord, Lord Clinton-Davis, raised the question of deposits, disconnections and low income families. I should like to conclude by dealing with some of those issues. It is right that companies should be able to charge deposits where there is a significant threat of the customer defaulting on payment. But the regulators are concerned to ensure that that is done in a fair way. The Competition and Service (Utilities) Act brings all regulators' powers up to the level of the strongest on the matter of determining disputes over deposits and on the provision of supply. There is a recognition of the need for work in that area. British Telecom has already changed its deposits policy in agreement with the Director General of Telecommunications. I am pleased also that that organisation has special arrangements for the disabled.
We heard of the number of disconnections. It is something about which the regulators are concerned, but the numbers have substantially reduced in recent years. The Government believe that those who can pay should do so. That view is shared by the regulators. The water companies drew up codes of practice setting out the procedures to be followed where a customer falls into debt. That provides that customers will, in virtually every case, only be disconnected when they fail to comply.
§ Lord Clinton-Davis
My Lords, I am obliged to the noble Baroness for giving way. In fact, disconnections have increased. I cited figures from two specific industries. That is why it is giving rise to anxiety. Either the regulators have not done their job properly or do not possess the powers.
§ Baroness Denton of Wakefield
My Lords, I was quoting other industries. As I said earlier, there is now good practice for others to follow. There is also a constant communication between regulators and a 845 strong awareness on the part of the Government in regard to the issues. Some companies carry out extremely few disconnections; other companies seem to have a less concerned involvement with their customers. It is on the latter that we should focus and I can assure the noble Lord that we shall do so. Discussions are already under way.
I assure the noble Lord that the regulators are taking steps to reduce the level of disconnections in all industries. The general approach is that disconnections should be limited to those who will not pay. Were we to extend it to those people on low incomes who, as a matter of pride, do pay and abide by their commitments, they would be the ones to suffer in the long term.
The noble Lord asked about definitions of low income users and whether we should be looking at that. It would not be practicable or appropriate to levy different charges according to consumer incomes. The social security system exists to provide support for those who need it. Again, all regulators have a duty to ensure that services are provided to all who require them. To that end the regulators ensure that residential prices remain at a fair level. I am not being complacent about the issue. The suggestion of a conference will be drawn to the attention of the parties concerned and that possibility will be examined. What is extremely important at this stage is that the regulators are talking to each other.
Any points that I have not covered I will examine and write to noble Lords as I do not wish to leave insufficient time for the noble Lord, Lord Ezra, to sum up. I simply repeat that the Government are not complacent. I accept that the anxieties raised this evening are genuine and serious. We shall continue to watch carefully the operations of the utilities and their regulators and the progress towards a more competitive market.
§ Lord Ezra
My Lords, I thank the noble Baroness, Lady Denton, for the comprehensive way in which she commented on the many points raised in the debate and I thank noble Lords for participating.
It has been a reflective debate. The purpose has not been to criticise either the enterprises or the regulators, both of whom have done a good job. However, we are in a new phase of economic development and a number of issues have arisen. There is the question of how far competition is to be further extended; the complexity of the pricing formulae; the representation of consumers; the treatment of consumers on low incomes and of the disabled. All those issues were raised.
It is accepted on all sides of the House that they are issues needing still further consideration. I hope therefore that we shall be able to return to the matter at regular intervals. In the meantime, I beg leave to withdraw the Motion standing in my name.
Motion for Papers, by leave, withdrawn.