Energy Bill

Viscount Hanworth Excerpts

Tuesday 9th July 2013 Grand Committee

Debate on whether Clause 113 should stand part of the Bill.

[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.