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Energy Bill

I thank my noble friend for his patience in sitting through this afternoon’s events and for the way in which he moved his important amendment. It deserves a full answer, so I do not apologise for the fact that, even though we are close to the time limit, I shall not shorten my answer but will try to give a full answer, whether satisfactory or not, to the Committee. Everyone shares the noble Lord’s desire to ensure that our regulatory framework has robust powers to address takeovers of UK energy assets where they may operate against the public interest and, in particular, to address any concerns arising from energy mergers. Maintaining the security of our energy supplies as we, as a country, make the difficult transition from being a net exporter of energy to being a net importer brings new and difficult challenges. As part of the Government’s response to those challenges, much of the Bill, which we have now been debating for five days, is about ensuring that we have the right legislative environment to support the investment in the new kinds of infrastructure and technologies that we will need to cut carbon emissions and ensure security of supply. Much of this will involve foreign direct investment. Maintaining the UK’s long-standing policy—a policy that we should defend—of being open to inward investment, while also ensuring that, where necessary, action can be taken to protect legitimate public interests requires a careful balance to be struck in the formulation of our regulatory framework; that goes almost without saying. It is also agreed that we need certain standards in ownership takeovers, and I hope that my response may go some way to persuading the Committee that the right safeguards already exist within the Enterprise Act and within European law. Why we allow foreign companies to invest in our economy is sometimes asked. The answer is, in short, that we are open to foreign investment in our economy for the obvious benefits that it brings in capital and expertise. As long as there are appropriate protections, it is the Government’s firm view that we should remain open to foreign investment and resist protectionism, which is a disease that many countries find themselves prey to, particularly when economic circumstances are difficult. We have resisted it over many decades, and we should continue to do so. It has always been in our interest as a country to be free-traders. The aim of Amendment No. 76A is to insert into the Enterprise Act 2002 a new public interest consideration in relation to energy security. My noble friend’s Amendment No. 76B would see the plurality of persons controlling energy enterprises become specified grounds on which the Secretary of State may intervene in mergers. We agree that we must ensure that the UK has robust powers to address takeovers in this sector. I assure the Committee that we do not believe that that is either necessary or appropriate. Two concerns are key to energy in this concept. One is ensuring a competitive market and choice for the consumer. The other is ensuring a secure and dependable energy supply. Under UK and European merger laws, independent competition authorities are responsible for ensuring the protection of competition, while our Enterprise Act also addresses wider issues of public interest. Currently, through the powers in the Act, there are two specified public interest considerations. One is national security and the second is plurality in the media. The national security provision references the definition of public security in the European merger regulation. Recent case law of the European Court of Justice—the ECJ—confirms that the public security or public interest consideration includes energy security in cases where there is a genuine and serious threat to what is described as societal needs, such as energy supply. Let me put it another way. It is fair to say—I have to concede this—that there are not a great many ECJ cases on the issue, but our view is that, having considered what case law there is, it is highly likely that energy security would be within the ambit of public security. In particular, that view is supported by paragraphs 43 and 46 in the Commission of the European Communities v Kingdom of Belgium case regarding Distrigas. In that case, the Court indicated in paragraph 47 of its judgment that exemptions to general principles must be ““interpreted strictly”” and that ““public security”” could only be invoked if the threat was genuine and sufficiently serious, affecting a fundamental societal need. In paragraph 48, the ECJ further indicated that the restriction must be the minimum necessary to meet that need. In the earlier case of Campus Oil, which is also relevant to the meaning of the expression ““public security””, the European Court found in favour of the Irish Government. It was accepted that their concern about energy supplies could transcend matters of purely economic interest and intrude on the security of the nation. So we are of the view that recent case law confirms that the public security or public interest consideration includes energy security. If that is right, it means that, should the acquisition of a UK energy company or assets raise a genuine and serious public interest concern about the lasting security of energy supply in the UK, the Secretary of State will be able to have those concerns examined by the OFT, and, if appropriate, the Competition Commission, and he can ultimately intervene in the merger if he considers it necessary. I add one final but extremely important point. Since public security is a term which appears in the European merger regulation, which has been held by the ECJ to include the security of energy supply, we think it inappropriate for the UK to introduce its own national provision. To do so would cast doubt on the breadth of the term ““public security”” as it appears in the European merger regulation. If I am asked, ““Why do you not want an energy security public interest consideration for the UK?””, let me try to answer like this. First, seeking an energy security public interest consideration would indicate that we do not believe that it falls within the ambit of the existing national security consideration. That would have obvious implications for other sectors, such as telecommunications, which are not specified in the legislation, but which, like energy security, we believe fall under the wider concept of national security. Secondly, there is the open markets issue, which would indicate that we believe that it is legitimate for Governments to consider mergers in the energy sector differently from any other mergers. Thirdly, we could not rely on it to intervene in larger mergers that fell to the European Commission to review unless it—the European Commission—approved the new consideration, which is far from certain. The second amendment relates to the need to ensure plurality of ownership of energy assets and companies. I again suggest that the existing provisions, which are designed to prevent excessive concentration of ownership, are sufficient. Where a merger raises concerns around the possibility of an insufficient number of enterprises operating in the market, such concerns would be addressed by the competition assessment of the merger. In relation to the energy sector, these provisions would prevent any one company from dominating our energy market and as a result creating risks of disruption to supply. The arguments which were made to support a separate power for the Secretary of State to intervene in media mergers—I pay great tribute to my noble friend for the part he played in that legislation—on grounds of plurality cannot be transferred directly to this energy sector. Energy is different in this context. The key concern beyond the economic one of maintaining competition is ensuring security of supply. As distinct from the issue of media plurality before 2003 and the Enterprise Act, a serious threat to energy supply is covered by national security considerations as set out in that Act. In considering the proposals, it may assist if I briefly outline how the present regulatory process works. Mergers in the UK and the EU are regulated by the relevant independent competition authorities, whether it is the Office of Fair Trading and the Competition Commission in the case of a UK merger, or the European Commission in the case of a merger involving large enterprises. Mergers are considered by the competition authorities on the basis of their impact on competition in the relevant market, but, in addition, I emphasise that, on the announcement of a proposed merger or takeover, the Secretary of State has the power to issue an intervention notice for any such merger if he considers that it may raise particular non-competition-related concerns falling within the scope of a public interest consideration that has been specified in the Enterprise Act 2002. Following a Secretary of State’s intervention on public interest grounds, the OFT is under an obligation to investigate and report on the issues that have been raised. The details of this OFT report may also include representations from other organisations with an interest in the specific sector—in this case, Ofgem. This provides these organisations with the opportunity to provide information and advice regarding the energy market. If on receipt of the OFT report and the other advice that the OFT has received, the Secretary of State decides to refer the merger to the Competition Commission, the commission has 24 weeks to make its recommendations to government on the relevant non-competition, public interest considerations. This would be in addition to any competition issues that it was already looking at. The Secretary of State must then decide whether to make an adverse public interest finding and, if so, whether to allow the merger to proceed, to impose conditions or to block it altogether. Even if the parallel competition investigation by the authorities does not find against the merger, the Secretary of State may none the less decide to act on public interest grounds. However, of course, any remedies imposed following such an intervention would have to be reasonable and proportionate. For example, depending on the case, this could include a requirement to hold an asset separately or to divest certain interests, such as an interconnector, a storage facility or generation capacity. A decision by the Secretary of State on whether to intervene in any merger would have to be considered on a case-by- case basis. My noble friend asked at the start of his speech about Ofgem, in relation particularly to proposed new subsection (4) in Amendment No. 76A on Ofgem’s advice. I am advised that financial liability, transparency and security of supply are considerations that Ofgem could under the present law look at in the scenario that I have just described. I have gone on quite long enough; it is half-past seven. It is such an important issue that it has been worth trying to describe the Government’s position on it. I hope that I have to some extent reassured the Committee that the existing national security public interest consideration provides adequate scope to take action as necessary to intervene on public interest grounds, and not just on competitive grounds, in mergers in the energy sector. The plurality of energy ownership is not a distinct public interest consideration in its own right but is contained within the competition scrutiny that any merger must undergo and the energy security aspect of national security.