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2.48 pm

The Parliamentary Under-Secretary of State for Trade and Industry (Miss Melanie Johnson): I congratulate my hon. Friend the Member for Milton Keynes, North-East (Brian White) on securing this debate and on managing to find a title that met the needs of the House. He raised a number of issues covering a wide range of bodies. I may disappoint him to some extent, as I shall obviously need to focus on some of those bodies. As a Minister in the Department of Trade and Industry, it has struck me that I might focus on the regulatory bodies that relate to my Department and especially the utility regulators, which are at the heart of his concerns. He will appreciate that I cannot cover the wide-ranging brief with which he dealt.

I take my hon. Friend's point that different regulators are set up in different ways, but there is a reason for that. It is understandable, given that different sectors have different characteristics and policy objectives. Neither I nor the Government believe in a one-size-fits-all model.

One of my hon. Friend's principal questions was whether the current regulatory structure is correct—in particular, is it right to have independent regulators at arm's length from the Government, and is it right to give them so much freedom and discretion? Those are important issues, but they are not new, as my hon. Friend would agree. They were considered as part of the work that was done in preparation for the Utilities Act 2000, which he knows well from having served on the Committee that considered the Bill.

The Government launched a review of utility regulation on coming to power in 1997. That was a major exercise involving substantial analysis and consultations with a wide range of stakeholders. It dealt with the role of the regulators and endorsed the existing framework, as did the Government's Green Paper, "A Fair Deal for Consumers: Modernising the Framework for Utility Regulation", which explicitly considered the role of regulators. It stated:


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On Wednesday this week, the Second Reading of the Enterprise Bill provided more evidence that the Government are taking the right steps to put regulators on a fully independent basis in relation to competition regulation.

A structure with independent regulators at arm's length from the Government helps to reduce regulatory risk and to provide a stable climate for investment. That is vitally important, because these sectors are characterised by extensive physical networks and are highly capital-intensive. Let me illustrate that with some figures from the National Audit Office's report "Pipes and Wires", which was published this week—my hon. Friend has already referred to it. That report sees the regulatory framework as a great success story. It says that the electricity transmission and distribution assets in England and Wales are valued at £16.5 billion and that the combined value of the 23 water and sewerage companies in England and Wales is £30 billion. A significant proportion of the ongoing costs of running such businesses is based on the financing costs for the assets. The greater the certainty about the regulatory system, the less expensive the financing costs. The end result is that regulatory certainty feeds through into lower bills to customers.

The regulatory system for these industries has already delivered significant benefits to customers in the form of price reductions as well as improved services. Regulatory independence is a vital part of the system.

Brian White: The regulatory system protects and works well for existing companies, but new market entrants and very small players lose out. Have the Government considered that, as well as the totality of the regulatory regime, which is right in principle?

Miss Johnson: It is difficult to generalise across such a wide area, but all the issues are kept under review. The way in which the system is working is constantly monitored in any given sector, but, as I said, they are all different and have different characteristics. Different issues may arise even in capital-intensive areas such as the main utilities. As for new entrants coming into the markets, the competition authorities must also help to ensure that that is always possible.

As well as paying the financing costs of previous investments, companies must be able to access capital in order to make new investments. There has been significant investment in the industries since they were privatised. For example, according to the National Audit Office, more than £31 billion has gone into the gas and electricity industries, more than £50 billion into water, and similar amounts into telecommunications. These figures compare very favourably to the investment in the decades before privatisation. Further investment is still required as we go forward. The regulatory certainty provided by having independent regulators gives investors the confidence to provide money for vital investment in these industries.

Giving regulators independence is not about giving them carte blanche to do things however they please. The fundamental principle is that Government set out an overall regulatory framework through legislation. This sets out the overall parameters by which regulators are to operate, constraining their discretion. Regulators must

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carry out their responsibilities according to a set of objectives or statutory duties. Having set this overall framework, Ministers can then rightly take a step back, removing politicians from day-to-day decision making, thus giving business greater confidence.

None the less, Government remain responsible for the framework as a whole and will still take an active interest in whether the system is operating properly. Frameworks evolve over time, following the appropriate consultation and parliamentary process. They are not set in stone for ever. As my hon. Friend has said, we have moved on from the model of a one-person regulator to regulatory boards. This helps give greater predictability to decision making and reduces the risk of significant policy shifts when the head of an organisation changes.

I shall take up some of the specific points that my hon. Friend raised. He referred to social and environmental guidance. I am pleased that he believes that the delay in issuing guidance is for justifiable reason. The Department has consulted on drafts of the guidance and is now considering the matter afresh in the light of the energy review report that was published on 14 February by the performance and innovation unit, which has implications for the guidance.

We have made it clear that that is not the method for implementing social and environmental policies, which would have significant financial implications. Where such implications are at stake, the Government need to take forward such policies by introducing appropriate legislation. Examples of this would be the vulnerable groups regulation in the water industry, the requirement to provide free postal services for the blind or partially sighted, or the renewables obligation in electricity.

My hon. Friend is clearly interested in renewables, so I shall say more about the subject in response to his remarks. As an example, the renewables obligation is the Government's single most important measure to develop the increased uptake of renewables electricity. We have set a target of 10 per cent. renewables electricity by 2010, and from 1 April licensed electricity suppliers are required to provide an increasing proportion of their supplies from renewable sources.

Ofgem is administering this arrangement for us. It is accrediting generating stations to ensure that they meet the eligibility criteria of obligation, issuing renewables obligation certificates, or ROCs, for renewable electricity actually supplied and assessing and monitoring suppliers' compliance with the obligation.

Ofgem will also recycle to electricity suppliers the buy-out payments that can be made by suppliers, in proportion to the number of ROCs that each supplier has presented compared to the number presented overall. Ofgem has also played a key role in working with the Department on the drafting of the necessary legislation to introduce the renewables obligation. That illustrates that a regulator can be involved in taking forward Government environmental policies, playing an invaluable role in helping the UK reduce its greenhouse gas emissions through the greater use of renewable energy.

My hon. Friend referred to RPI-X, and that is shorthand. The system of price regulation that regulators use now has been developed significantly from the formulas that were used at the outset of privatisation. I am sure that my hon. Friend would recognise that fact. The NAO is much aware that some observers claim that

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RPI-X is no longer appropriate. However, its report notes how regulators are already working to address risks in the system, and they suggest further improvements. The National Audit Office is certainly not advocating abandoning the system, which has served us well so far and delivered significant investment as well as price cuts.

I turn to another point that my hon. Friend raised, which is the question of cross-subsidy powers in the Utilities Act 2000. For me to access the powers to require suppliers to adjust charges where particular groups of consumers are treated less favourably than others under sections 68 and 98 of the Act, there must be evidence of disadvantage. Ofgem's position is that pre-payment meter customers will not be penalised by increased prices as a result of the removal of price caps.

There is no evidence that the position of pre-payment customers in relation to standard credit customers and that of standard credit customers in relation to direct debit customers has worsened. Indeed, I am pleased to say that during 2001 it marginally improved. If pre-payment meter customers are not disadvantaged within the meaning of the cross-subsidy regulations, I would have no basis for accessing those provisions. Like Ofgem, we monitor developments in the market, but I stress that the cross-subsidy provisions are very much reserve powers.

It is interesting that my hon. Friend thinks that we need to address the problems caused by the independence of regulators. Certainly not everyone shares that view. Last year, the better regulation taskforce published a report on economic regulation which looked at that issue. The taskforce found that some stakeholders felt that Government needed to do more to underpin the independence of the regulators. My hon. Friend raises his points for understandable reasons. The Government have objectives in these industries, and it is important to look at how best to achieve them.

I pick up my hon. Friend's point about assessing risk and ensuring that regulation has as light a touch as possible. I confirm that it is the Government's view that risk is a relevant issue in all areas where regulation is proposed. It is certainly the Government's view that regulators need to ensure that the touch that they apply in

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order to achieve competition and level playing fields is as light as possible—indeed, that is implemented by regulators.

When I was a Treasury Minister, the Financial Services Authority was set up with exactly those parameters at the heart of the way it works. It has been operating under those since it became a fully fledged body at the end of last year.

I firmly believe in the need for independent regulators to give us a predictable and stable framework. That is not to say that regulation should not be mindful of the wider context in which regulatory decisions take place. The Ofgem social action plan and environmental action plan are examples of initiatives taken by the Gas and Electricity Markets Authority to consult on and establish its own work plan in areas that reflect the contemporary needs of society. That complements the guidance that will be given by Government on their social and environmental objectives.

However, Parliament has given only very specific powers to the sectoral regulators, and specific objectives to tackle a defined area of work. The sectoral regulators are neither equipped nor intended to develop and implement policy on their own behalf on issues, however important, which touch on the regulated utility sectors.

There is a clear need for Government, as well as the sectoral regulators, closely to monitor developments in the markets. There are important initiatives on which it is right that Government should work closely with the sectoral regulators and with the industries to bring changes to the utility market frameworks. As we have shown, it is right that Government should take the opportunity to address the need for change in legislation where that is necessary but the role of Government in markets should be guided by the need for transparency and a self-denying ordnance to avoid short-term reaction to what may be symptoms of longer-term problems with the market framework.

I believe that the utilities review—

The motion having been made after half-past Two o'clock, and the debate having continued for half an hour, Madam Deputy Speaker adjourned the House without Question put, pursuant to the Standing Order.



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