§ Mr. Peter Lloyd
asked the Secretary of State for Energy what response has been made by the Central Electricity Generating Board to the recommendations made by the Monopolies and Mergers Commission in its report of 20 May 1981; and if he will make a statement.
§ Mr. Lawson
I have now received the response of the Central Electricity Generating Board to the 1981 report of200W the Monopolies and Mergers Commission. This report was part of the Government's policy under which the activities of the major nationalised industries are to be scrutinised by the MMC approximately every four years. I anticipate that my right hon. Friend the Secretary of State for Trade will wish to refer the efficiency and costs of the CEGB to the Monopolies and Mergers Commission again in two to three years' time. I am placing copies of the board's response in the Library of the House. This gives the board's comments on the MMC's findings and describes the actions which it has since taken to meet the commission's recommendations.
The commission found that in most of the areas within its terms of reference, particularly those relating to cost control, the management of plant maintenance, and management information systems, the CEGB's practices were broadly satisfactory. A number of fields were identified where improvements could be made, and in one area, namely the appraisal of new investments, the commission found that the board showed serious weaknesses; in this respect its conduct operated against the public interest. The most important part of the CEGB's response is therefore addressed to this finding.
Against the background of my statutory responsibility to approve the board's investment programmes, my Department has had discussions with the board about its approach to investment appraisal, paying particular attention to methodology and the assumptions employed. The board in its response confirms that it has now adopted techniques whereby new investment is assessed against a wide range of possible economic futures, and against similarly wide ranges of assumptions. It has also amended its practices in determining for investment purposes all the central estimates of the cost and performance factors that are relevant to major capital projects. Its statement of case for Sizewell B reflects this approach. I consider that the board's appraisal practices should benefit considerably from the changes it has introduced in order to meet the commission's criticisms. Accordingly I do not propose to issue a direction under section 12 of the Competition Act.
Nevertheless my Department will continue to explore with the board its development of investment appraisal techniques, and to scrutinise carefully its application to particular projects, within the framework of my responsibility generally to monitor the performance of the CEGB and the electricity supply industry. We shall also continue to set the industry demanding financial targets, external financing limits and performance aims. I look to the industry to continue to improve the efficiency with which it uses its capital and manpower resources, and generally to reduce its costs so that electricity prices to consumers can be kept as low as possible.
The board's response also covers a number of areas such as demand forecasting, quality assurance, stock control, manning levels for engineering and management staff and power station construction to which the commission drew attention and where it considered the board's policies and procedures could profitably be reassessed. The commission also commented on the board's bulk supply tariff which has since been the subject of a review by the industry and on which I made an earlier statement to the House on l2 November.
Parts of the commission's report were addressed to the CEGB's relationship with various public sector trading bodies. In particular, the commission criticised the basis of the joint understanding between the CEGB and the 201W NCB, under which, in return for guaranteed quantities being taken by the CEGB, the NCB undertook to maintain its price increases at no more than the inflation rate. The new coal supplies arrangement negotiated between the two boards with effect from November 1982 reflects the continuing development of their commercial relationship.
The commission also saw defects in the present trading arrangements between CEGB and British Nuclear Fuels Ltd. It noted that the relationship was predominantly of monopoly supplier and purchaser and was concerned that the terms of trading might not sufficiently promote efficiency. This matter is being studied urgently in the re-negotiation of the terms of trading between the two organisations.
The commission criticised the agreement between CEGB and British Rail for the carriage of coal to power stations. This can be pursued through the normal channels of commercial negotiation between the two boards but the Government are keen to ensure that here, as in other fields, there is increased efficiency and cost-cutting.
The board's detailed response to the MMC report reflects the importance that the new CEGB chairman, Sir Walter Marshall, attaches to the issues raised by the Monopolies Commission. He and I regard as particularly important the CEGB's responsibility for the timely and successful completion of major construction projects, and I note with approval the strenuous efforts the board has been making to improve performance at its construction sites and the management of its major projects.