Lord Berkeley
Main Page: Lord Berkeley (Labour - Life peer)
Lord Berkeley
My Lords, I shall intervene briefly because I do not want to pre-empt what I am going to say in moving Amendment 53.
The noble Lord, Lord Deben, and my noble friend Lord O’Neill both hit the nail on the head when they emphasised the problems that we are facing in the market. However, whatever else we do with other amendments, it is important that we have an amendment such as Amendment 52, which puts a duty on government and regulators to promote competition and look after the interests of consumers. There is similar wording in legislation relating to water and the railways but it is the principle on which all other negotiations and discussions are based. It may be meaningless but it is there. There have been many occasions when I have used the railway principle against a particular Government who seemed to do something stupid or something that I did not like, but it is a very important principle. Whatever we do later as we go into more detail, it is very important that we have this kind of policy right at the top to show where the Government and the regulator should be going.
Viscount Ridley
My Lords, I had not intended to intervene on this amendment and I shall do so extremely briefly, mainly because I have been moved by the words of my noble friend Lord Deben and the noble Lord, Lord O’Neill, to say that I heartily agree with them. As I do not always agree with them on everything, I suspect that that is terrible news to them, but I think that this little outbreak of what one might call “free-market anti-capitalism” is a very good point. The point of competition is to drive co-operation between producers and consumers—to cause producers to do things that help consumers both by innovation and by the lowering of prices. I shall not go on any further; I just wanted to record that fact.
Lord Berkeley
“Divestment of retail business
(1) Any electricity generator which also supplies electricity to either domestic, commercial or industrial users shall, within two years of this Act coming into force, divest itself of its supplier business so that—
(a) an electricity generator shall have no financial interest in, or exercise any right over, a supplier of electricity or gas;(b) a supplier of electricity or gas shall have no financial interest in, or exercise any right over, an electricity generator;(c) no person may hold a directorship of an electricity generator and a supplier of electricity or gas concurrently,and any contracts entered into between any of the divesting parties shall cease to have effect when this section comes into effect.(2) Generators which have a direct contract to supply the majority of their output to a defined site through a private transmission scheme are exempt from this section.”
Lord Berkeley
My Lords, to some extent, we started discussing the issue of fair competition in the debate on Amendment 52. I certainly welcomed the comments from the Minister in her response, but I think that this issue, which is designed to require the big six generators—those who own both generating and retailing—to separate, is probably separate from all the other discussions about pricing, who gets what, guarantees and everything else. However, unless we achieve the separation, I do not believe that we will get fair competition.
My reason for saying that is that I believe we will have higher costs, a lack of transparency, which one can widen out to cover a lot of things, and added risk for the independents in selling to the retail market. I am sure we have heard it before but when the big six, according to Ofgem, are producing something like 72% of the generating capacity and a percentage in the high-90s of the domestic retail, it is quite a challenge, as my noble friend Lord O’Neill mentioned earlier. He also mentioned that there is a similar experience in Germany, with the three major suppliers inhibiting competition, and the comments that I get from Germany indicate that there are similar high prices and a lack of choice.
I find it very interesting that on the railways—I declare an interest as chairman of the Rail Freight Group and I am on the board of the European Rail Freight Association, which is an association of small, independent operators—we are finding exactly the same problem. At the moment, the European Commission is trying to drive what it calls the “fourth railway package” through Parliament and the Council, and Germany is again opposing any attempt to remove vertical integration, which Germany has at the moment. It has got to the stage where the Commission has accused the German Government of allowing the infrastructure manager to make a profit on its access charges and transfer the profit up to the holding company and down to its own train operating company. In effect, independents who want to run trains on a line are paying an access charge, an element of which—the profits—may well be going to subsidise their competitor. The two parties to it in electricity are different, but I suggest that it is the same problem. It is resulting in a loss of competition because the smaller operators get swallowed up by the bigger ones, which happens in France as well, and it is difficult to know what can be done without insisting upon this total separation.
Baroness Worthington
In response to the Minister’s direct question, we would have a regulator which, when it is asked, “Why can’t you split vertical integration?” answers, “That is a good idea and we will look at it in more detail”, instead of “Because the industry doesn’t like it”. Quite frankly, as I said earlier, when it did a review into liquidity and competition in the market, eight recommendations were made but I think six of them were dropped and the two that were moved forward were watered down. As soon as Ofgem goes and consults its friends in the industry, it gets told, “That’s too difficult—we couldn’t do that”, so things get watered down. That is what we have to break.
For example, the noble Baroness quoted the suggestions that Ofgem has come up with for solving this problem. The market-maker proposals are frankly ludicrous. They are so complex and so against a normal, natural market that I really cannot believe that that is our solution to this issue—actually, I can believe it since it is Ofgem—when the real solution is staring us in the face: no more vertical integration. However, I will sit down.
Lord Berkeley
I am very grateful to all noble Lords who have spoken in this debate. We have had a very wide-ranging debate with a wide range of opinion. It is really good that we have been able to air it. We have not all agreed but at least we have discussed it. I will not respond to every noble Lord who has spoken—to whom, many thanks—but the noble Lord, Lord Oxburgh, asked particularly how one decides whether six generators are sufficient for competition. There is no number bigger than three where it matters very much, in my experience. The key is that they are all able to act fairly, simply and transparently.
We have six at the moment, and whether they are in a cartel is not for discussion tonight. That is something for the regulators and the Competition Commission, if there is a complaint. However, what motivated me to put down this amendment is the problem of having a complaint from some of the other generators, which do not have retail outlets, that the system is not fair. They have to be convinced that it is fair because otherwise they will not invest. The proof of the pudding will be in the eating, but will the lights have gone out before we see the answer? On competition generally, my belief is that it is much better to have a simple structure than devising all kinds of rules and regulations to make sure that a mixed structure will work.
My noble friend Lady Worthington suggested Chinese walls as an alternative to complete separation. Chinese walls work if they are properly policed, so that may be another answer which we should discuss later on. To me, the key is to have a strong and effective regulator that is not captured by the industry. I am not saying that the present one is captured, but the key will be whether we end up with a system where all the independent and other new generators that do not have retail outlets feel so comfortable that they will continue to invest. I hope that they will also multiply rather than what happens on the other side, when they all get bought up by one or two big ones and there is no actual competition. I shall read the Minister’s response with great interest.
Lord Teverson
I hope that the noble Lord will not mind me intervening. I thought that the noble Lord, Lord O’Neill, asked a very interesting question about the decade when there was effectively this separation. Does the noble Lord, Lord Berkeley, have any thoughts about whether it was better then, or does he have any other answer to that? It is quite an interesting issue that came out of the debate.
Lord Berkeley
I do not think that it was particularly perfect then. We thought that it would get better, but what is probably different between then and now is that the technology has moved on. We are able to trade and the physical network has got a lot better, so I am not sure that the situation is quite the same. However, I am sure that my noble friend will have more to say on that.
Lord O'Neill of Clackmannan
I just want to make the point to my noble friend that, of the six companies that currently exist as vertically integrated companies, two of them started off as vertically integrated companies because of the difference between the jurisdictions in Scotland and England and the desire of the Secretary of State for Scotland to have vertical integration. Therefore, we have always had that vertical integration for two of the companies. The interesting thing is that one of the two is still British-owned, whereas all the other companies are now in the hands of foreign owners. Scottish and Southern Energy is located in Perth; it may have major shareholders across the world but it is still a Scottish company, or a UK company based in Scotland, which is something that we tend to lose sight of.
Lord Berkeley
I am grateful to my noble friend. He is absolutely right. It is good to have Scottish companies. It is also good to have companies that all pay their tax, wherever they are based, although that is probably a slightly separate subject. My concern is whether the companies, whether they are Scottish, English, British or whatever, are behaving fairly with the generators that do not have access to the retail market. As I said, it would be perfectly possible to have a Chinese wall rather than total separation if that could be worked. I am not sure what the disadvantage of that is but it is only one small cog in the whole jigsaw puzzle—I am mixing the metaphors nicely—of making fair competition that works and which is for the good of the consumer. I beg leave to withdraw the amendment.