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Orders of the Day — Electricity Bill

Part of the debate – in the House of Commons at 4:28 pm on 13th December 1988.

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Photo of Malcolm Rifkind Malcolm Rifkind Secretary of State for Scottish Office 4:28 pm, 13th December 1988

The hon. Gentleman is right to say that specific powers in certain aspects of the industry remain available to Governments, but I hope that he is not suggesting that complete control over all the industry's investment decisions is preferable.

We have never said that the Government should wash their hands of all matters involving the electricity industry, which has strategic importance in the United Kingdom, as the Bill makes abundantly clear. My point is that, until now, all the industry's investment decisions have been subject to Government control. The fact that in future that will apply to one specific area—nuclear power—is considered a significant improvement by the industry.

Let me deal now with the specific conclusions that we have reached on the implications of privatisation for the electricity industry in Scotland. We start with three specific features that are peculiar to the industry in Scotland. First, Scotland has a diversity of resources for electricity generation hardly to be found in any other part of the United Kingdom. Oil, coal, hydro, and nuclear are in abundance. That is peculiar to north of the border.

Secondly, as I have already said, we have a surplus capacity which is unprecedented in the United Kingdom and which offers substantial opportunities, as the hon. Member for Cardiff, West (Mr. Morgan) said, through the development of the interconnector, for export to other parts of the kingdom which do not have such a surplus.

Thirdly, Scotland has a substantial nuclear capacity. Over 50 per cent. of Scotland's electricity requirements will be provided by the nuclear part of the industry when the Torness power station has been commissioned.

It is against that background that we examined the precise and proper way to privatise the industry in Scotland. The first question that had to be examined was vertical integration. For a number of years, Scotland's industry has been administered on the basis of vertical integration of generation, transmission and distribution. We did not automatically assume that that was essential; we looked at the matter with an open mind to see whether it made sense in the Scottish context to divide generation from transmission and distribution.

We came to the conclusion that that would be inappropriate, for two reasons. First, the size of the Scottish market makes it inappropriate. Electricity demand in Scotland is equal to about the equivalent of one English board. Therefore, to divide generation from transmission and distribution would have created relatively small companies whose prospects of economic viability would have been far more uncertain. In addition, we would have had to take into account the fact that, in the north of Scotland, in the area of the Hydro Board, a proportion of the hydro power is dedicated in terms of distribution to particular parts of the north of Scotland, from which it could not be physically separated. For those reasons, plus Scotland's particular demography, we concluded that vertical integration made sense and should be continued.

The next question was whether there should be a single Scottish private company or two. I am bound to say that our announcement that we had concluded in favour of two Scottish companies was widely welcomed on both sides of the House by all political parties. It was not an easy decision, because, while there was a natural desire to prevent the creation of a single private monopoly in Scotland of the kind that would have been achieved if the South of Scotland electricity board's proposal had been adopted, there was on the other hand a recognition that electricity generation in Scotland had been developed on the basis of a single market and, particularly with regard to nuclear power, on the basis that it would be available to consumers in all parts of Scotland.

It was on that basis that we put forward the proposals that we announced in the White Paper and subsequently —the creation of two companies in Scotland based on the SSEB and the North of Scotland Hydro-Electric Board, but with certain exchanges on a contractual basis of capacity and other such matters. In addition, a nuclear company was to be created, wholly owned by the south company and the north company, in order to ensure availability throughout Scotland of nuclear power in a form that meets the requirements of the Scottish consumer.

We took account of the fact that, until now, there has been a joint generating agreement which has had certain advantages through the application of the merit order scheme, but which has also had certain disadvantages because it has concealed the costs of the two parts of the industry, which is undesirable from the consumers' point of view. Therefore, we sought to develop a system which enabled the merit order approach to continue for the benefit of the consumer, but which created a new transparency with regard to the respective costs of the generation of electricity in the two companies. That can only be to the benefit of the public.

As a result of the decision to create two companies, we have had to consider the role of the regulator. We have accepted from the beginning that in Scotland, as in England and Wales, where there is not proper competition throughout the industry it is necessary to have a director general to deal with regulation and for him to have the primary responsibility of ensuring that, in those aspects of the industry where competition does not apply, the consumer should be properly protected and that other matters should be properly dealt with.

As we have made clear, the director general is a joint appointment by my right hon. Friend the Secretary of State for Energy and me. I noticed that last night the hon. Member for Cathcart expressed some anxiety, incredulity or dubiety about how the director general could be answerable to two Secretaries of State. This is not an unusual phenomenon. The Forestry Commission is answerable to three Secretaries of State in respect of its functions in the various parts of the kingdom. There is no reason why that should not apply in the case of the director general. He will have an office in Scotland, as in England, along with a staff to service the requirements of regulation north of the border. There is no reason to believe that his responsibilities will not be effectively carried out.

To consider, instead of that arrangement, having a separate Scottish director general would have been foolish because, in practice, they would have had to work so closely together as to make the separation of their responsibilities one of form rather than substance. If Scotland is to benefit from the substantial export of surplus electricity south of the border, clearly, the questions of regulation, especially of the interconnector and of matters of equal interest to consumers both north and south of the border point to the sort of system proposed in the Bill.