Ofgas "drives coach and horses" through CO2 strategy

A central plank of the Government's strategy to control the UK's carbon dioxide emissions has been removed by the refusal of the gas industry regulator Ofgas to provide any further funding for the Energy Saving Trust (EST) via higher gas prices. The House of Commons Environment Committee heard in April that the funding shortfall may only be made good by new legislation a year or two hence.

The crisis has been provoked by Clare Spottiswoode, who took over from Sir James McKinnon as Director-General of Ofgas on 1 November last year. She has since made it clear that, as a former Treasury official, she came in with the prejudice that taxes should not be raised without explicit Parliamentary authority - and that what her predecessor had done was analogous to taxation.

Sir James had authorised the raising of some £2 million from gas consumers to support two EST pilot programmes via a new "E" factor in the tariff formula which regulates gas prices. The schemes provide grants towards purchases of gas condensing boilers and the installation of combined heat and power systems in domestic premises.

This initial sum was always expected to be the precursor of a substantial build-up of funds for EST programmes over the next few years. With additional cash raised from electricity consumers, the EST had been planning to increase its spending to £125 million in 1995/6 and £400 million in 1997/8 and the two subsequent years - with gas consumers contributing up to 70% of the total.

This programme was incorporated in the official UK strategy on climate change, published in January (ENDS Report 228, pp 21-24 ). The EST's activities are expected to contribute 25% of the saving in CO2 needed to stabilise these at 1990 levels by 2000, in line with the main requirement of the UN Convention on Climate Change.

The Environment Committee's probing of Ms Spottiswoode and civil servants has brought some highly embarrassing disclosures. She revealed, and officials confirmed, that she had "voiced my concerns in week one, the day when I arrived", about the role Ofgas was expected to play in raising money for the EST. None of this, however, filtered through into the climate change strategy, which proceeded as if the EST's funding sources were secure.

Ms Spottiswoode's evidence was not outstanding in its consistency. At a parliamentary inquiry in January she had alleged that her predecessor had exceeded his powers by sanctioning the raising of funds for the EST. But within a couple of minutes in front of the Environment Committee on 30 March, she first retracted this statement, then repeated it, and finally qualified it by claiming that he had "unconsciously" exceeded his powers. However, a week later, she wrote to the Committee to withdraw the allegation, conceding that since the schemes were so small they had had no noticeable effect on gas prices.

At the heart of the dispute are the nature and inter-relationship of the Director-General's duties and the extent of his or her discretion in exercising them. The two key duties, laid down in the Gas Act 1986, are to "protect the interests of consumers of gas..in respect of the prices charged", and "to promote..the efficient use of gas."

Ms Spottiswoode has taken the stand that she has no authority to raise "taxes" for the EST which would result in any "significant" increase in gas prices. Moreover, she told the Committee, "my definition of 'significant' is zero, and that is because I believe very strongly that Ofgas is not a tax-raising authority and the only way in which 'significant' can be anything other than zero is if you give in on that principle." Her duty to promote energy efficiency, she added, took second place behind that consideration.

But this interpretation of her legal duties has been disputed during the inquiry. On 27 April, John Michell (Head, Oil and Gas Division, Department of Trade and Industry) said that while it was "permissible" for her to conclude that "significant" equals zero, "it is our view that it is not necessary for her to take that view."

In a written submission, the EST also noted that Ofgas does not have absolute discretion in exercising its duties. The courts' approach would be to ask whether a reasonable person would have come to a particular decision, and "a person might be treated as misdirecting himself if he failed to take account of a relevant consideration, gave undue weight to a relevant consideration, took account of an irrelevant consideration or applied an over-rigid policy, thus fettering his discretion."

Ms Spottiswoode may, the EST suggested, have misdirected herself in one or more of these ways.

The matter can only be resolved by the courts, but Mr Michell admitted that the idea of seeking a judicial review of Ms Spottiswoode's policy had not been considered by the Government.

The only durable way in which the EST can be rescued appears to be by an amendment of the 1986 Act. The earliest this is likely to be done is in the next session of Parliament, when the Government is expected to bring forward a Bill to introduce competition in the gas supply industry.

Unless this is done, Ofgas has made it clear that it is prepared to raise a maximum of £200,000 per year for the EST, increasing gas prices by 0.003%. Other ways of raising funds in the interim are being explored by the Government but, one MP suggested, these amount to "grasping at straws".

There is, of course, another way in which the Government could seek to extricate itself from its embarrassment: the overall reduction in CO2 emissions needed to comply with its international obligations could be trimmed, and with it the contribution expected from the EST. Indeed, a broad hint that the targets will be reviewed was given to the inquiry, and the Government is known to be taking a fresh look at the energy and emission scenarios which underlie them.

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