Examination of Witnesses (Questions 446-459)
MR CALLUM MCCARTHY, MR JOHN NEILSON, MR NICK SIMPSON AND MR JOHN SCOTT
TUESDAY 30 APRIL 2002
446. Welcome, Mr McCarthy. It is nice to see you again, and your colleagues too. Thank you also for the memorandum which you let us have. We are delighted to have it. As you know, we are looking at renewable energy or sustainable energy, whichever you like to call it. Is there anything you would like to add to your memorandum before we get into cross-questioning you on it?
(Mr McCarthy) No, Chairman. I think the only thing I can do is introduce my colleagues. On my right is John Neilson, the Managing Director within Ofgem whose responsibilities include both fuel poverty and our work on the environment. He chairs, with a colleague from the DTI, the Distributed Generation Co-ordinating Group. On my left is Nick Simpson, the Director of Industry Codes Development within Ofgem, responsible for work on modifications to the Balancing and Settlement Code within NETA. On his left is John Scott, Ofgem's Technical Director who is intimately involved in the arrangements for distributed generation, including domestic CHP. We are delighted to attempt to answer your questions.
447. I know that Ofgem's primary duty is to safeguard the interests of consumers, including something called future consumers. I wonder if you would like to explain to myself and the rest of the Committee what you understand "future consumers" to mean?
(Mr McCarthy) I think those who are not yet born, so not yet in a position to pay for the energy that they are at present consuming, or their parents are consuming.
448. This is a kind of supplementary. You are also required to promote the elements of competition for efficiency purposes. How do you take into account their interests, as it were, having determined what consumers' interests are? Are they merely the narrow interests of immediate economic advantage for that particular consumer, or are you concerned with the longer, wider interpretation of that?
(Mr McCarthy) I think we are indeed concerned with a wider interpretation than the narrow, immediate economic interests. What we try and do is to identify as much as possible those occasions when economic efficiency and other objectives, either the social objectives or the environmental objectives that Ofgem has, can be reconciled. If I take one example in relation to the environment, the work that has been done to make the generating sector a more efficient sector has led to pressures which have resulted in a very substantial improvement in the efficiency of generators with all the advantages for the environment that arise from that.
449. You do not see any possible contradictions between the two roles of, for example, defending the environment and the future environment and the immediate need for economic advantage, short term efficiency?
(Mr McCarthy) I think there are instances when economic efficiency can be contrary to long term benefits and there is clearly, for example, if there is increased use of energy as a consequence of lower energy prices, some effect on the environment. That is certainly the case.
450. I would like to turn to the impact of the PIU Review. To me one very encouraging aspect of the report suggests that the DTI energy policy should give a much higher concentration to environmental objectives in, shall we say, trade-offs with social and economic ones. How would this change in emphasis affect you? Would it, for example, mesh in with your current duties under the Utilities Act?
(Mr McCarthy) I should make the point that the PIU Review report has been described as a report to Government, not a report of Government, but if the Government decides to make changes in its policies and in its priorities as a result of the PIU report, or of any other new view that it takes, we could expect that to be reflected either in new statutory obligations on Ofgem or in the social and environmental guidance which the Secretary of State has consulted on but not yet given.
451. You have just drawn me straight into my second question. Do you think it would be a good idea to have an alteration in primarynot secondarylegislation to enable you to give a higher priority to environmental objectives?
(Mr McCarthy) I think that if the Government wishes Ofgem to give a higher priority
452. What do you think?
(Mr McCarthy) I am sorry. I think it is very important in one sense for an appointed official, which is the position of all the members of the Authority who direct Ofgemnone of us is electednot to take views which are fundamental political decisions on the transfer of wealth between generations. I think it is absolutely appropriate for elected representatives to take those decisions but I do not think it is appropriate for somebody like me to take them.
453. Could I ask any of your colleagues if they would like to answer that question? Is primary legislation needed? Would anybody like to put themselves on the line here?
(Mr Neilson) I agree entirely with what Mr McCarthy has just said.
454. You agree? Okay. Everybody else?
(Mr Simpson) Yes.
(Mr McCarthy) Sorry to disappoint you.
455. We have got a full house here. Could I ask you how closely you relate to DTI on some key points? For example, do you meet with the DTI to perhaps discuss some friction points (if possible) between the Government energy policy and regulation?
(Mr McCarthy) I have initiated a process in which I see the Energy Minister on a monthly basis. I and my colleagues throughout the organisation have repeated conversations with the DTI and other parts of Government. I think it is very important that we do not surprise Government, that they understand our thinking, that we understand other parts of Government thinking, but it is also important to recognise that the justification and the legitimacy of Ofgem depend upon its statutory duties, and there can be occasions when there are questions which are entirely appropriate for Government to consider which have nothing to do with Ofgem.
456. So there are probably some friction points?
(Mr McCarthy) If I can take an example which is not environmental, I think it is entirely appropriate for the Government to take a view on questions of reciprocity in terms of EDF in France and the opening up of the French market. It would be illegal for Ofgem in considering particular takeovers in this country to have a view to the nationality of the prospective bidder, so there are differences and it is important that we recognise them.
457. And those are thrashed out in a constructive way?
(Mr McCarthy) We try always to be as constructive as we can.
458. Absolutely. Finally, the purpose of the draft Social and Environmental Guidance issued by the DTI at present is to ensure that your approach marries with Government policy. Would you agree with that?
(Mr McCarthy) It is to make sure that there is full understanding on the part of Ofgem of Government policy in those areas and we have a legal duty when the guidance is issued (and it has not been issued) to have regard to it. We will discharge that legal duty very carefully.
459. We as a Committee interviewed the Minister, Brian Wilson, last week and he was very firm about, in his view,and I am stressing his viewthe need to strengthen the guidance. Is he right?
(Mr McCarthy) I would say that that is a question for Brian Wilson rather than for me. It is guidance from Government. What I think it is important to recognise, as the prologue to the draft guidance (as it is) makes clear, is that it is guidance; it is not instructions. There was a clear choice that the Government had when the Utilities Bill was going through Parliament. They could have taken power to give instructions and chose not to. They will give guidance and whatever guidance is given we will very carefully have regard to it, but that is different from instructions which we will follow.