Regulation of the gas market

‘(1) Section 23 of the Gas Act 1986 is amended as follows.

(2) Omit subsections (6) to (8) and (10).’.—(Simon Hughes.)

Brought up, and read the First time.

I beg to move, That the clause be read a Second time.

With this it will be convenient to discuss

New clause 11—Regulation of the electricity market—

‘(1) Section 11A of the Electricity Act 1989 is amended as follows.

(2) Omit subsections (6) to (8).’.

These two new clauses go together. They relate to the way in which licence conditions are modified. New clause 10 is about the Gas Act 1986 and new clause 11 is about the Electricity Act 1989. They would amend those two Acts to change the rules about the process for the modification of licences. The current position is that Ofgem regulates the activity of the gas and electricity markets. Companies involved in those activities must be licensed by Ofgem. The Utilities Act 2000 amended the procedure for the collective modification of gas licences in line with new arrangements that were being introduced for electricity licences. It removed the need for each standard condition in each licence to be modified on an individual basis.

Section 11A of the Electricity Act 1989 and section 23 of the Gas Act 1986, as amended by the Utilities Act 2000, state that Ofgem must consult with the licence holders on any collective modifications proposed to the standard licence conditions. If enough objections are officially lodged by the consultees, Ofgem cannot proceed with the collective licence modification. Those sections in the 1986 and 1989 Acts also gave the Secretary of State power to prescribe the market share calculations—the blocking minority—that is to be used by Ofgem to determine whether a collective licence modification can be made.

In July 2002, the Department of Trade and Industry consulted on a draft statutory instrument that set out the proposed market share calculations and blocking minority threshold percentages. The Electricity and Gas (Modification of Standard Conditions of Licences) Order 2003 SI No. 1746 came into force on 16 July 2003. It provides for two blocking minority thresholds. If those thresholds are exceeded, Ofgem may not make the modification. Ofgem then published guidance alongside the regulations to explain how the two blocking minority tests work. The guidance states:

“The Order prescribes that if the number of relevant licence holders that have made a statutory objection is equal to or greater than 20 per cent of the total number of relevant licence holders, the proposed modification cannot be made. If the number of relevant licence holders that have made a statutory objection is less than 20 per cent then the second test will be considered.

The second test will consider the market share of relevant licence holders that have made a statutory objection to the proposal. In this second test, the market share of licence holders will be calculated with reference to a specific time and date (referred to in the Order as the ‘relevant time’). If the market share of objectors so calculated is equal to or exceeds 20 per cent the proposed modification cannot be made.”

It is possible, in some circumstances, for a modification to be made even when the blocking minority threshold has been met.

The guidance’s last point on the subject states:

“As set out in Section 11A(8) of the Electricity Act and Section 23(10) of the Gas Act, Ofgem may make a collective licence modification even if one or both of the two blocking minority thresholds have been met provided that Ofgem is satisfied that...the existing SLC imposes a burden which affects relevant licence holders in the carrying on of their activities... the proposed modification would remove or reduce the burden without removing any necessary protection, and...no holder of that type of licence would be disadvantaged in competing with other holders of such licences...Ofgem will indicate at the earliest practicable stage whether it considers that these tests are likely to be relevant. This may be during an informal consultation. Ofgem will in any event indicate this in the statutory notice so that interested parties can comment on whether they consider that the tests are satisfied.”

The guidance also states that

“section 12 of the Electricity Act and section 24 of the Gas Act would still enable Ofgem to make a reference to the Competition Commission on a proposed licence change in respect of any matters relating to activities which are authorised or regulated by a particular licence which operate or may be expected to operate against the public interest.”

The blocking minority test does not preclude Ofgem from making a reference to the Competition Commission, which can then order changes to the licences if the existing arrangements were found to restrict or distort competition.

As far as I can tell, we are unique, with the possible exception of Ireland, which followed our legislation, in having that blocking system. In the UK, one of the big utility companies can block a change to the licence condition. The proposal is to remove that right of veto. It is not in the interests of consumers and it does not give equity to the system. At the moment, if Ofgem proposes a licence change, energy suppliers have the opportunity to block it, but consumers do not have an equivalent power. Some consumer organisations, such as Consumer Focus, argue that they, too, should have the power to block licence changes. If the Minister is not willing to go as far as to accept that proposal, I hope that she will consider positively that the position should change so that nobody, as a matter of right, should be able to block the licence changes. I hope she sees the logic of the proposal, which is significantly supported by consumer organisations.

New clause 10 aims to make it easier for Ofgem to change the standard conditions of gas licences by removing the condition that such amendments cannot be made if a specified proportion of relevant licence holders object. New clause 11 has the same aim with respect to electricity licences, as the hon. Gentleman has said. I sympathise with the need to ensure that Ofgem can make timely changes to further its remit. However, that needs to be done in a way that also gives companies a way to object when licence conditions have, or could have, significant implications for their operations. To remove that recourse altogether could reduce regulatory certainty, increasing costs and therefore prices. It could also act as a deterrent to new entrants.

The current rules allow the industry to block the introduction of licence conditions by ensuring that a change to a standard condition of a gas or electricity licence is subject to its not being objected to by 20 per cent. or more of the licence holders, measured by market  share and the number of licence holders. The collective licence modification process was introduced by the Utilities Act 2000.

Previously it was more difficult for Ofgem to change standard licence conditions, because each modification had to be agreed with every individual licence holder. The Electricity and Gas (Modification of Standard Conditions of Licences) Order 2003, to which the hon. Member for North Southwark and Bermondsey referred, sets out the proportion of licence holders needed to prevent a standard licence condition being adopted or amended. Before that order was made, there was a consultation on what that proportion and the method of calculation should be. The changes introduced strike a balance: they have made it quicker and easier to alter standard licence conditions, while ensuring that when a significant proportion of licensees object to a proposal, their objections are taken into account.

If a significant share of licensees wish to object to a proposal, their objections must be taken into account. It is not necessary for a majority of licensees—whether by number or by market share—to object, only a significant number or a significant player. As the hon. Gentleman said, Ofgem can appeal to the Competition Commission when a modification to a standard licence condition is blocked.

In considering any such appeal, the Competition Commission will consider whether the modification is in the public interest, with Ofgem’s remit in mind. That means that a change vital to the interests of current and future consumers can be made, even when licence holders object. The effect of the new clauses would be to remove that safeguard for companies holding electricity and gas transmission and supply licences, and their only recourse would be a lengthy and costly judicial review.

Changes to licence conditions could have significant implications for companies’ operations and profits, which in turn could affect their willingness to invest or even participate in the market. It is therefore appropriate that they should have a means of challenging the decisions. The collective licence modification process provides a balance, as it requires there to be significant concern about an issue across the industry. It therefore provides an appropriate mechanism whereby companies can block a licence condition that causes them legitimate concern, without unduly fettering Ofgem’s ability to act.

It is also worth remembering that if the Government consider that market arrangements are not delivering essential change, there is the option of legislating for amendments to licence conditions, as we are doing with the introduction of a market power licence condition in the Bill. For those reasons, I put it to the hon. Gentleman that the matter is not as straightforward as he suggests. I understand where organisations such as Consumer Focus are coming from, but we must have some regard to the complexities of the market that Ofgem regulates.

May I ask the Minister two factual things before I conclude on the new clauses? First, will she confirm the implication of what I understand her to have said—that it would be possible for one of the big six to exercise a blocking veto under the current system? Secondly, even if she is not willing at the moment to deal with that blocking veto threshold issue, will she  consider whether there might be the ability for an organisation—logically, Consumer Focus—to have an entitlement either to veto or at least to trigger a review process, so that the consumer is directly represented in the licence modification system, rather than just the companies?

I understand that because of its market share, British Gas is in a position to exercise that power in relation to the licensing. However, the hon. Gentleman is wrong to represent it as a veto, because there is a mechanism whereby Ofgem can go to the Competition Commission. It is not an absolute block. The block is not a veto as one understands a veto in other forums.

On his suggestion about the ability of Consumer Focus, he almost implies that Ofgem in its primary aim of protecting consumers should have to be second-guessed by another organisation. On the face of it, that does not seem to be an appropriate way to proceed, but I will reflect on what he has said.

I am grateful for the Minister’s last comment, and I will reflect on what she has said in answer to my original proposal. I am still concerned about the current system, but the sensible thing is to go away, look at the exchange on another day and reflect on where we go next. On that basis, I beg to ask leave to withdraw the motion.

Clause, by leave, withdrawn.