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Response to Utilities Review

Response to Utilities Review

Part 1: General remarks

The Green Paper "A Fair Deal for Consumers" is generally welcomed and the measures it proposes much needed.

It is worth considering some general principles of regulation, combining price control, social and environmental matters. For example, in my submission to the fourth consultation paper of OFFER’s Transmission Price Control Review (Enclosure 1) I suggested:

(a) the costs of transmission should bear upon the industry so as to resist those costs, including costs of losses;

(b) market distortion should be removed, with reference to competition between generators and to CHP;

(c) environmental costs, including dumping waste heat and the intrusion of powerlines, should be reflected in charges and internalised in project evaluation;

(d) the costs of developing assets should bear upon the industry so as to resist such development, so that there is a disincentive to unnecessary development;

(e) imports from interconnectors should be subject to the same principles and equivalent charges equitably with domestic power.

These principles should all be capable of generalising to utilities more widely. Given the experience of National Grid’s review of its own security standards (conditions of its licence), subject only to minimal oversight by OFFER, and of the inability of OFFER to detect serious overestimates in National Grid’s claims for approved expenditure, as evidenced in Enclosure 2 sections 5 and 9, particularly 5.3, I would add a two further general principles:

(f) licence holders should not conduct the review of any part or condition of their licences;

(g) regulators should avoid reliance on licence holders or utility companies for estimates or technical advice, especially where they are monopolies, but should use independent consultants.

Part 2: Comments on the Green Paper

Paragraphs numbers in the Green Paper are given in brackets.

(2.16 and Proposal 2.1) There is a difficulty with secondary duties, a reflection perhaps of the MAFF-BSE syndrome. OFFER has given very little weight, if any, to its environmental duties. A joint delegation of local authorities and public objectors, together with John Greenway MP, met Professor Littlechild on 9.2.95 and were shocked that Professor Littlechild was unaware of his own environmental duties under the Electricity Act. It was reported that Professor Littlechild suggested that as pylons were ubiquitous there was no problem of impact on the landscape or environment. John Greenway subsequently wrote to Secretary of State Michael Heseltine to question how he ensured his regulators fulfill their duties. The proposed new primary duty in Proposal 3.1 is to protect the interests of consumers. The ultimate interests of consumers and the public (which greatly overlap) are in quality of life, as acknowledged in environmental policy. In this, environmental quality must rank alongside the other defined interests in Proposal 3.1.

I therefore strongly recommend that environmental duties be elevated to primary status. This should still allow the proposed use of statutory guidance determined by government.

(2.17 and Proposal 2.2) It may be helpful to restate the existing duties in a common form with the proposed ones, at the same time introducing the relation with statutory guidance.

(Proposal 3.1) See proposal 2.1 above.

(Proposal 3.2) It is vital in order to ensure effective consumer advice to regulators that representative bodies are independent. The present arrangement where OFFER appoints the Electricity Consumer Committees is thoroughly unsatisfactory. The northern ECC has been defensive when approached ("who wants to know") and seems to act like an arm of the industry. I am not confident that ECCs seek out or represent consumer opinion, although the chair of the ECC chairs’ group has been more effective. It would help to inform ECCs if they were responsible for consumer complaints. Certainly OFFER is not an adequate forum for complaint, as it will only investigate a complaint if it has a statutory duty to do so, as evidenced by its response to a serious complaint against National Grid (Enclosures 3 and 4).

(Proposal 3.5) The suggested principles seem to be appropriate. At present there is an incentive on companies to mislead the regulator, particularly where a monopoly is funded by a system of approved income. Introduction of the principles should alleviate this incentive. See also the evidence cited in Part 1 above. The principles given in Part 1 are also relevant.

(Proposal 3.6) The utilities are in a special position. They have enjoyed the formative benefits of privatisation as well as monopolistic features. They play a special role akin to a public service. There is a case for requiring more than the weak and voluntary measures suggested by Greenbury. I recommend considering making Remuneration Committees a statutory requirement together with representation on them from regulators and consumer representative bodies. Of course, this is rather closing the door after the horse has bolted!

(Proposal 3.9) Some sectors, like the ESI, are mixed. Generation is in emerging competition, transmission and distribution are monopolies, and supply is in embryonic competition.

(Proposal 4.1) Strongly supported.

(Proposal 4.3) In line with general devolution of government to the provinces to reduce costs and economic concentration in the south east, I would support Birmingham.

(Proposal 4.6) Strongly supported.

(6.2) See Proposal 2.1 above and the general principles in Part 1.

(6.5) Views are sought on the content of new guidance relating to the Government’s environmental objectives. The principles in Part 1 above apply, but they are also more general than environmental. Principle (c) is in accord with EU environmental principles in relation to the Polluter Pays Principle. The cost of pollution should be borne by the developer. Utilities enjoy special powers reflecting their public service aspects, such as the compulsory powers under the Electricity Act for wayleave and purchase rights. These have now been used for motives of profit. Although not specifically a matter for regulators at present, this problem needs addressing. Principle (d) relates to the present incentive on NGC to develop the grid excessively, backed by its powers to put its own interpretation on licence standards in making a case on need, and by its powers to seek compulsory rights. The cost of excessive development is then approved by OFFER and passed on to consumers. NGC thereby acquires a free asset while facilitating its own profitable contracts. Control of these matters is a combination of regulatory decisions and Secretary of State consents. Government policy needs to bear upon both. Utility developments should be the minimum necessary to achieve the primary objectives. Supporting evidence and other content for the new guidance may be derived from Enclosures 5-7. There is not time here to formulate specific proposals. It would be helpful to provide regular consultations on this content with time to consult interested groups.

Professor M J O’Carroll

I am chairman of Rural England Versus Overhead Line Transmission and a member of the National Federation of Consumer Groups and other relevant bodies, but have not had time to consult them.

Enclosures:

1. Response to Fourth Consultation, 10.9.96

2. Lackenby-Picton-Shipton Powerline: New Developments to October 1996

3. Complaint against NGC, 25.10.96

4. Letter to OFFER, 14.11.96

5. Response to the House of Commons adjournment debate 24.7.97

6. Response to DETR Developing an Integrated Transport Policy, 14.11.97

7. Response to DTI Review of Energy Sources, 14.4.98

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