Energy Bill

Lord O'Neill of Clackmannan Excerpts

Tuesday 9th July 2013 Grand Committee

[Viscount Hanworth]

Clause 113, which makes provision for the sale of the Government’s pipeline and storage system, is the central clause of an extraneous part of the Bill, which should not exist and which the amendment seeks to remove. The provisions in Part 4 are enabling clauses designed to ensure that the future sale of the asset, were it to occur, would not be subject to any further parliamentary scrutiny but would be entirely at the discretion of the Secretary of State. As such, it is an affront to the rest of us.

We are told that the purpose of the sale would be to raise cash and to avoid the burden on the state of the costs of maintaining and investing in the pipeline system. Parenthetically, this declared intention of burdening the purchaser with the costs is liable to make the asset virtually unsaleable except at a knockdown price unless, of course, the purchaser can expect to extract exorbitant monopoly profits.

I should say briefly what the government pipeline and storage system—the GPSS—consists of. It is a pipeline system run by the Oil and Pipelines Agency in the Ministry of Defence. The network consists of 2,500 kilometres of pipeline and some 46 other facilities and is interconnected with several private networks. The pipeline was originally built before World War 2 and was used to supply oil for the Normandy invasion via Pluto, the pipeline under the ocean. Nowadays, in addition to supplying fuel required for defence purposes, it supplies fuel for civil aviation, which takes as much as 40% of the supplies.

The GPSS is what economists describe as a natural monopoly. It might be helpful if I were to supply a definition of a natural monopoly and provide further examples. A monopoly is a situation in which the majority of sales in a market are attributable to a single firm. A natural monopoly is a circumstance in which the technology of an industry and its associated costs imply that the most efficient form of production is to concentrate it in a single firm or organisation. Examples include the road and rail networks, the postal system, the provision of gas, water and electricity, the nation’s ports and much else besides. It is commonly agreed that in order to ensure the integrity of a natural monopoly and to ensure that it does not generate exorbitant profits, the state should play a leading role either by owning the monopoly or, at the very least, by regulating it closely.

The ideology of free market enterprise and the programme of denationalisation have come into conflict with the realities of the structure of industries, and there have been some absurd outcomes. Through the programme of denationalisation, which began under the Thatcher Administrations and which was intended to engender free market competition, the Government have succeeded, in the main, in creating collusive oligopolies. The electricity industry, for example, which is dominated by six large firms, is nowadays best described as an oligopolistic market. In the most misguided instances of denationalisation, the Government have created monopolies that are in the hands of foreign state-owned enterprises. A case in point is the British nuclear industry, which is in the hands of a French state-owned monopoly.

One of the motives of denationalisation, which I have already touched on, is the desire to remove the capital costs of state-owned industries from the Government’s net borrowing requirement. In Britain, we have been exceedingly inept at what should be a simple exercise of corporate structuring and accountancy. A previous Labour Government proposed to overcome the restrictions on the borrowing requirement by encouraging the formation of public-private partnerships. The outcome has been that in return for providing a share of the investment capital, the private sector partners have reaped exorbitant returns and, in doing so, run rings around public servants.

The successor Government should have endeavoured to find better ways of achieving the desired ends. Instead, they have reverted to an atavistic ideology that impels them eagerly to sell anything that amounts to public property. Governments in other countries have been far more adept than ours in the business of separating the finances of their state-owned industries from the finances of central government. A relevant example in the context of the Energy Bill is provided by the French state-owned electricity industry. The principal electricity companies of France, EDF and AREVA, work in close collaboration. They also work with central government to fulfil their strategic policies, but they have considerable commercial freedom. This freedom is exemplified by the fact that our Government have been relying on EDF to raise the capital from the financial markets for the construction of a new nuclear power plant at Hinkley Point.

I return now to the prospective sale of the GPSS. This should never be allowed to happen. One ought to consider the hazards that could arise from putting the network into private hands. The Bill would do nothing to constrain a private owner from abusing the monopoly position by reaping exorbitant profits, nor does it compel the private owner to undertake the necessary maintenance and investment. The consequences of the system falling into disrepair are obvious. Let us leave aside for the moment the consequences for our national defences to consider how this would affect the civil aviation industry. It would mean that aviation fuels that are presently pumped through the system would have to travel on our roads in tankers, which surely implies a major hazard.

Let us consider the possible private owners of the system. Who would they be? I am sure that we agree that we would not wish the owners to be venture capitalists intent on reaping major short-term rewards. We might prefer them to be enterprises that already have commitments to and experience of such aspects of fuel supply. In that case, the likelihood is that the owner would be a major oil or gas supplier or producer and, most probably, given the state of the ownership of the UK industry, it would be a foreign-owned enterprise. It could be Qatar Petroleum, for example, or the giant Russian Gazprom company. If it were the latter, we can imagine a fanciful scenario: there is a conflict in the eastern Mediterranean or the Middle East and various NATO allies have decided that the only viable intervention is to create a no-fly zone in the area. If we were to participate in this, the GPSS would be called upon to provide large quantities of aviation fuel to our Air Force, which would be a contingent of the international force. The owners of the erstwhile GPSS could then threaten a major embarrassment if we were to proceed with this interventionist military policy. They could threaten to bring our civil aviation to a halt unless we relented.

Such a scenario is not beyond the bounds of possibility and surely we would not wish to expose ourselves to such hazards. Were these hazards to be recognised and understood by the usual electorate of the Conservative Party, I am sure that there would be outrage. For this reason, I would expect that the proposal to sell the GPSS will go into abeyance.

I see the proposal as a throwback to a discredited programme of denationalisation that has been motivated by a combination of opportunism and ideology. On closer examination it seems to make no sense, and I beg to move that Clause 113 should not stand part of the Bill.

[Lord O'Neill of Clackmannan]

I would not perhaps go quite so far as my noble friend on these matters but it is important that we get from the Minister an indication of the regime under which a privatised gas storage and pipeline system would operate. Given that this will be a natural monopoly, as has been clearly explained, it ought to be under the regulatory scrutiny of Ofgem. If it is to be a natural monopoly, it should be regulated. At the moment, who owns it and for what purposes we leave other people to worry about. However, those of us who attended the talk last week by Peter Atherton might find it difficult to identify a potential purchaser of this system because it seems that it is a kind of secondary purchase, given the dire nature of a number of the obvious potential purchasers. They have far greater strains on their balance sheets than acquiring an asset like this, no matter how profitable it might be.

We may be worrying needlessly that this power will be granted as the Government may not do anything about it. However, were they to do so, it is important that an asset of this nature should not fall into monopoly hands of an unregulated character. Therefore, I certainly want to be given a clear indication from the Minister this afternoon that if this asset is to be privatised it will come under the scrutiny and regulation of Ofgem. I am not certain that such a move would raise sufficient money. It may be just another burden that DECC has to carry at present, and it feels that it would be simpler to transfer it. However, that is not the issue in question here: it is whether the people who buy the asset have unlimited powers to do whatever they wish with it or whether it should be subject to some kind of regulation. It need not necessarily be draconian but, rather, light-touch regulation—the kind which, in some respects, the regulator applies to National Grid and the wires and the pipes it owns and operates.

[Lord Howell of Guildford]

I am looking forward to the Minister’s reply. I am sure that he will have that sort of balance in mind. I reassure the noble Viscount, Lord Hanworth, that at the time of the fall of the Soviet Union I was approached by a Russian general who asked whether I or anyone I knew would like to purchase a fully integrated Russian military pipeline system throughout the Russian Federation, which he thought would become available and would be sold by the Soviet army. Therefore, the noble Viscount can be reassured that these ideas are not original and that similar ideas have been suggested in the past.

As the noble Viscount would expect, I wish to comment on his points about denationalisation, which is subtly different from privatisation, which was aimed at widening the ownership of the assets and taking them away from the giant nationalised corporations which were killing innovation and screwing the customer. That was the plan. To say that it is discredited seems odd when this plan has been adopted round the world including in China, Russia, the United States and every major economy throughout Europe. A more balanced approach than the one he adopted would help his case.

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[The Parliamentary Under-Secretary of State, Ministry of Defence (Lord Astor of Hever)]

My Lords, to date the clauses that are included within this Bill to enable the sale of the Government pipeline and storage system have received relatively little attention. Indeed, they were barely mentioned on Second Reading. This is why I welcome the clause stand part debate tabled by the noble Viscount, Lord Hanworth, as it provides an opportunity for us properly to scrutinise the proposals.

Clause 113 is crucial because it allows for the sale or lease of the GPSS or a part of it. At the current time, the rights to operate and maintain the GPSS and to access land for this purpose are personal to the Secretary of State for Defence. This clause allows the Secretary of State for Defence to transfer these rights, thereby enabling the system to be sold or leased. A decision on sale or lease will be made once further analysis has been undertaken and we have engaged with the market. The clause also allows the transfer of liabilities.

Having explained the intent of this clause, I would like to address a number of concerns that were raised in the other place relating to the sale of the GPSS so that I may demonstrate what progress has been made in these matters.

First, the strategic importance of the GPSS was raised, including the need for it to provide assured fuel supply to certain sites. Through the work conducted to date, we are confident that we will be able to put a contract in place to meet the continuing requirements of the Ministry of Defence and the United States visiting forces, which will offer the appropriate level of protection, including priority access when necessary. Similarly, the potential impact of sale on commercial customers has been raised. The Department of Energy and Climate Change and the Department for Transport have jointly reviewed the implications of a sale of the GPSS on the market, including access and charging, and concluded that while it transports a significant proportion of fuel to the major airports, existing regulatory provisions, particularly the Pipe-Lines Act 1962, are sufficient and no further regulation is required.

On physical security, I reassure noble Lords that we do not believe that the sale will make the GPSS any more vulnerable to terrorist attack than other equivalent infrastructure operated by the private sector, such as the electricity and gas distribution networks, particularly since the pipeline and storage tanks are predominantly built underground to make the system less vulnerable. Officials at the Oil and Pipelines Agency regularly discuss, with appropriate external organisations, measures to best protect the GPSS, including from the risk of cyberattack. We would expect a purchaser to continue these measures post-sale.

Questions were also raised regarding the impact on safety and the environment following the sale of the GPSS. Any owner has an inherent interest in running the system in a safe manner and would need to comply with the same legislation and regulations as the Oil and Pipelines Agency does at present, such as the regulations under the Environmental Protection Act 1990 and the Pipelines Safety Regulations 1996. Therefore, it is not believed that a sale would have any adverse impact in these areas.

Lastly, and quite rightly, the value for money of a sale has been raised. A final decision on sale is dependent on being able to strike the right deal with the private sector, and value for money is a key consideration. Work is ongoing to update the initial value-for-money analysis that was undertaken in 2011 and which underpinned the impact assessment published alongside these clauses. To refine these financial figures, we have appointed external advisers to undertake a forensic examination of the GPSS costs and revenues, including any potential liabilities associated with the ongoing operation of the system. This work will inform a final decision on sale, which we aim to make by the end of this year.

I shall do my best to answer any concerns or questions that were asked. The noble Viscount, Lord Hanworth, and the noble Lord, Lord O’Neill, were concerned that the GPSS would be seen as a monopoly. The GPSS does not supply Heathrow, Gatwick and Manchester directly—this is done via third-party pipelines. The GPSS provides direct to Stansted, and the DECC and DfT have looked at regulation and concluded that none is required. The GPSS has to compete with other privately owned pipelines.

The noble Viscount was concerned at the foreign ownership issue. Any buyer would need to be deemed competent to operate the GPSS in a safe manner and to be a UK-registered company. We are considering what other criteria any purchaser would need to meet, including restrictions on foreign ownership, and the options for posing these restrictions before any onward sale.

The noble Viscount and the noble Lord, Lord O’Neill, asked whether there would be any regulation of the GPSS post-sale to protect customers. The DECC and DfT have reviewed the implications of the GPSS sale on the market, including access and charging, and concluded that, while it transports a significant proportion of fuel to major airports, existing regulatory provisions, particular under the Pipe-Lines Act 1962, are sufficient and no further regulation is required.

The noble Lord, Lord O’Neill, was concerned that the sale might adversely impact on safety and the environment. Any owner has an inherent interest in running the system safely and there is no reason to believe that the sale will adversely impact on safety. Indeed, the OPA already has to comply with a number of safety regimes such as the Health and Safety at Work Act 1974, the Control of Major Accident Hazards Regulations 1999, regulations under the Environmental Protection Act 1990 and the Pipelines Safety Regulations 1996, which are overseen by the Health and Safety Executive and the Environment Agency. This will not change.

[Lord O'Neill of Clackmannan]

The Minister referred to a number of regulatory bodies on health, safety, the environment and so on. I was actually asking primarily about economic regulation. Can he flesh out rather more the information he has given us on the nature of the other competitors that the pipeline would be matched against to supply the relevant airports? Can he say whether these pipelines are subject to any kind of economic regulation, probably by Ofgem?

[Lord Astor of Hever]

My Lords, I hope to come back with a suitable answer quickly. In fact, I will write to the noble Lord on this issue.

The noble Lord, Lord Grantchester, was concerned that there are no additional clauses on conditionality. Clause 114 makes provision to modify the application of certain provisions of the Pipe-Lines Act 1962 to the GPSS, so that the GPSS, as far as possible, is treated post-sale as if it were a pipeline to which that Act applied. This is to ensure that it has neither a competitive advantage nor disadvantage to other such pipelines. Any conditions on sale will be contractual.

Finally, the noble Lord, Lord Grantchester, was concerned that there might be a conflict on the value consideration. We expect value to be positive.

I hope that apart from the one issue on which I will write to the noble Lord, Lord O’Neill, I have answered all noble Lords’ questions and concerns. I thank my noble friends Lord Howell and Lord Jenkin for their support.

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[Lord O'Neill of Clackmannan]

My Lords, I congratulate my noble friend on taking us through this tortuous issue with great clarity. I declare an interest as one of the vice-presidents of National Energy Action, as is, I think, the noble Baroness.

[Baroness Maddock]

My Lords, I should have declared that interest as well.

[Lord O'Neill of Clackmannan]

Given the large sums involved and our positions as members of that body, we must do that. There are various elements involved in fuel poverty: the condition of the house, the circumstances of the individual householder and the nature and size of the energy tariffs that the individual has to pay. Very often, people in fuel poverty are in comprehensively complicated social circumstances and the complexity of the tariff system just adds to their confusion. Quite often, they do not know what they are paying for. Quite often, they do not understand the bills. Invariably, they are unable to make full payment. If they are on the payment meter system—as has already been said—they pay rather more for the privilege of paying as they go but that normally enables them to self-disconnect, in the sense that if they cannot afford to pay they do not use electricity.

One of the statistics that is never given proper examination in arguments about privatisation is that we say there are not the disconnections that there were under public ownership. That is because nowadays people self-disconnect. There was a time when, certainly as a young Member of Parliament, I had a succession of cases where I would intervene with the nationalised industry, the utility, to ensure that the gas or electricity was restored and some kind of proper payment system introduced. In some respects, you might say that for a Member of Parliament that is a chore they no longer need to carry out but it was certainly one that enabled people to come to terms, at least for a period, with the straitened circumstances of fuel poverty. What we have to do here, regardless of the off-the-cuff remark from the Prime Minister, which I am sure he regrets having made—not because he did not believe in it but because of the complexity of the issue; this is a classic case of unintended consequences—is to take advantage of the legislation to make the tariff system for electricity intelligible, simple and, I hope, more affordable. My noble friend has addressed a number of the challenges that that remark presents to us.

We know that in some respects there has been a major shift. There has been the publication of a report, which I confess I have yet to read, and amendments, in which we will all take great interest. It is fair to say that the Hills report was a wee bit of a curate’s egg, but there are always problems with the oversimplistic definition of the 10% rule. Perhaps we can get a change in the definition that enables us to target and prioritise. I know that those are the kind of words that people like to use in these circumstances. In the previous debate, we discussed having an annual report on energy. We will be looking very carefully, maybe not next year but the year after next, when a number of these amendments will have kicked in.

It is important that we have a debate like this and that we get from the Minister a clear picture of the Government’s thinking in relation to tariffs. The remedies for fuel poverty in a broader sense will be debated later, but people know well enough that serious near-criminal activities have been undertaken by the oligopolies. People say that the market works, but it has not worked; it has been abused consistently and methodically by cynical people who at the end of the day pay the fines in the certain knowledge that we as consumers then have to make our contribution to the compensation of the poor shareholders, who have been happy to have these chancers running these businesses. That is where we are coming from on this; a group of cynical manipulators of the tariff system have made the plight of disadvantaged people even more disagreeable. The rest of us can probably say, “It serves us right—we should be looking after ourselves”. However, a lot of vulnerable people have not been given any protection by the market, and we are now looking to the Minister and her response to this debate to tell us how we are going to get tariffs that people can understand and perhaps pay a little more easily than they have been able to in the past.

[Baroness Verma]

My Lords, I thank the noble Lord, Lord Whitty, for his amendments relating to this very important area in the Bill. Like him and all noble Lords, I share huge concerns that the most vulnerable tend to be the ones who do not benefit from what should be a system in which they are able to easily access information. That is why I am going to start my remarks by responding to the noble Lords, Lord O’Neill and Lord Whitty.

When the noble Lord, Lord Whitty, opened his remarks he said that the Prime Minister threw this upon us. The Prime Minister, this Government and this department are all at one in making sure that we put into place a system that enables consumers to have choice, to be able to make decisions and to understand what they are paying for. The noble Lord cannot have it both ways; we want to have a stronger regulator and the Secretary of State therefore has to have a duty to ensure that the regulator has the powers to enforce. Of course, it is necessary to let the regulator be independent and do the job that it should be doing, but the real issue is that this is not a new issue; it is one that has blighted Administration after Administration. My noble friend Lord Cathcart said that time and time again we have failed. We bring in Energy Bill after Energy Bill or some form of Bill to try to address these issues, and we do not seem to be able to do it.

I hope that through this Bill, the powers that we are taking, the powers that we are giving to the regulator and the legislative framework that we are introducing to redefine fuel poverty, we can start to address some of the root causes of why we cannot get on top of something that I know every noble Lord in this Room is passionate about. Providing statistical backing to the Energy Bill has served to focus minds on avoiding delay in the implementation of the retail market reforms that Ofgem is introducing. Ofgem has committed to reviewing the RMR package of measures by 2017 to ensure that it is working efficiently. In addition, we will be able to check.

I shall speak to the noble Lord’s amendments as they came up, and then I shall answer some of the questions that the noble Lord raised. Amendment 50A would give the Secretary of State power to require licence holders to offer particular tariffs that are designed to reduce fuel poverty and energy consumption and to encourage consumers to use energy at off-peak times. We have a competitive energy market and we are looking to increase competitive pressure through these reforms. I understand the noble Lord’s desire to see the issues set out in Amendment 50A addressed, but I assure him that the Government are doing so, though through means other than mandating suppliers to provide particular tariffs. I shall quickly run through them. We are increasing energy efficiency and conservation though ECO and the Green Deal. We are facilitating consumers to change the time profile of their consumption through the rollout of smart meters. We are already addressing fuel poverty by reducing the bills of vulnerable customers with the warm home discount, and I shall touch on that a little later.

I hope that noble Lords will also welcome the amendments to this Energy Bill that the Government have brought forward specifically to address fuel poverty. We will come to them later in our Committee’s consideration. These are all important areas, and we are addressing all the concerns that noble Lords have raised with me in the Room and outside it. We do not think that mandating particular tariffs in a competitive market is the way to do it because ultimately the market has failed to provide that, as the noble Lord, Lord O’Neill, said. We need to make sure that we place a duty upon suppliers to ensure that consumers are able to generate the competition that suppliers need to be working towards to be able to give consumers the option to switch to a different supplier if they are not being served properly.

Amendment 50B seeks to require that tariffs offered do not discriminate between different methods of payment except where there is a clear reflection of differing costs or differing debt levels. We should guard against suppliers discriminating between customers using different payment methods. That is why standard supply licence condition 27.2A states:

“Any difference in terms and conditions as between payment methods for paying Charges for the Supply of Electricity shall reflect the costs to the supplier of the different payment methods”.

Ofgem’s proposed licence condition changes for the retail market review do not remove or alter this licence condition. We would not intend to alter it were we to use these powers to implement the proposals. The noble Baroness, Lady Maddock, asked whether consumers can be put on the cheapest fixed rate. Yes, they can if they chose to. It would be the cheapest tariff in line with the preferences that they decided on.

Amendment 50D would have the effect of requiring suppliers to include a signpost to the unit cost of each tariff on bills alongside the cheapest tariff message. I fully support the principle behind the noble Lord’s amendment. Improved transparency and information provision are key to helping consumers engage with the market, and that includes providing information about unit costs. However, the improvements that Ofgem is delivering through its retail market review will ensure that consumers have all the information to make those decisions. We are giving legislative backing to these proposals, which require suppliers to summarise these costs in a single figure in order to aid comparison. That figure will appear on bills and other regular supplier communications.

The noble Lord, Lord Whitty, mentioned the TCR, the tariff comparison rate. We think that the TCR is a useful prompt to encourage consumers to engage. Ofgem’s proposals are clear that the TCR will be indicative and based on typical energy consumption. It is intended as a prompt, a call to action. During the course of any sale, suppliers will also be required to give all consumers a personalised quote based on their consumption, which will tell them how much they will actually pay.

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[Lord O'Neill of Clackmannan]

Before the Minister sits down, when she says that the companies are “not obliged”, I find it difficult to understand her choice of language. It is as if we are asking them to do something difficult. At best, we could say that we will just aim at the top six, or top seven if we included First Utility. The other side of this is that, such is the stickiness in this market, most people do not switch, so that 60%-odd are receiving their bills from the same company year after year. We have been far too easy on these companies, and the Minister gives me no comfort whatever by using phrases such as “not obliged”. We should dashed well make them do it; we have the powers to do so. The regulator can do these things. It might be uncomfortable for the regulator but the consumer is entitled to know. I hope that she goes away and reflects on whether or not we should make the obligation rather more forceful than it currently is.

[Baroness Verma]

My Lords, as I said earlier, I am taking the amendment away and shall reflect on what the right reverend Prelate the Bishop of Chester has raised. Like noble Lords, I am very keen that information is available, simple and understandable, but I am also keen to ensure that I can deliver what I am able to. Part of that is by taking this away and giving it further consideration.