Energy Bill [ Lords ] (Third sitting)
Thursday 25th May 2023
(11 months, 1 week ago)
Public Bill CommitteesEnergy Act 2023 View all Energy Act 2023 Debates Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Public Bill Committee Amendments as at 25 May 2023 - (25 May 2023)
The Chair
Before we begin, I remind Members that Hansard colleagues would be grateful if Members could email their speaking notes to hansardnotes@parliament.uk. Could you please switch electronic devices to silent? Tea and coffee are not permitted during sittings; the only thing allowed is the water that is liberally sprinkled around the room.
I understand that the Government wish to move a motion to amend the programme order agreed by the Committee on 23 May, to cancel this afternoon’s sitting. Because this motion has not been agreed by the Programming Sub-Committee, it may proceed only if everyone is content. Does anyone object to the motion? No takers?
Ordered,
That the Order of the Committee of Tuesday 23 May be amended, in paragraph 1(b), by leaving out “and 2.00 pm”.—(Andrew Bowie.)
Clause 32
Enforcement of obligations of licence holders
Question proposed, That the clause stand part of the Bill.
The Chair
With this it will be convenient to discuss that schedule 3 be the Third schedule to the Bill.
The Parliamentary Under-Secretary of State for Energy Security and Net Zero (Andrew Bowie)
It is a pleasure to serve under your chairmanship, Dr Huq.
I rise to speak to clause 32. To ensure that the economic regulation framework operates as intended, the economic regulator requires appropriate powers of enforcement to ensure licence conditions are adhered to, and there must be appropriate redress for regulatory breaches. The clause gives effect to schedule 3, which enables the economic regulator to enforce the conditions of licences and other obligations on licence holders. These enforcement powers are equivalent to those available to the economic regulator in the enforcement of conditions of gas and electricity licences.
Schedule 3 sets out the procedural and other requirements relating to the conduct of licence enforcement in relation to the economic regulation of carbon dioxide transport and storage. It includes the procedure that Ofgem should follow when making an enforcement order; limits on the size of financial penalties that may be applied for breaches of licence conditions or other relevant requirements; the method by which penalties may be appealed; and, in the case of the non-payment of penalties, the use of civil proceedings to recover the penalty and any interest as a civil debt. I commend the clause to the Committee.
Dr Alan Whitehead (Southampton, Test) (Lab)
It is a pleasure to serve under your chairmanship, Dr Huq. Hopefully, the passage of the rest of the Bill will be pacific and friendly under your chairmanship and that of the other Chairmen. Members know how closely I was kept to order by the Chairman we had earlier this week, and I am sure you will do exactly the same, Dr Huq, although I do not intend to stray off today’s exciting business.
The clause and schedule are concerned with the enforcement of licence holders’ obligations. The schedule goes into greater detail about how that enforcement works. I do not have any particular objections to them, but I would like to know from the Minister what the process for a final order under the schedule will be. We talked in Committee previously about termination events, and the subject raises its head again this morning. As I understand it, a final order under this schedule may or may not precipitate a termination event. Is that right?
There is a process in the schedule for provisional orders and final orders. A final order is presumably where a termination event occurs. Perhaps the Minister can say something about whether there are any procedures beyond that final order for the persons to whom the order has been served. We will come to some of the reasons why orders may be made in the next clauses, but it is important to clarify at what point that final order is operational, what happens then and what happens up to a termination event. I would be grateful for the Minister’s clarification.
Andrew Bowie
I thank the hon. Member for his questions. It is important to get the definition absolutely right. When Ofgem is satisfied that a regulated person has contravened or is contravening any relevant condition or requirement, it may impose a financial penalty or, in the words of the Bill, issue a “final order”. In terms of the appeal process, before imposing that financial penalty or issuing the final order, the economic regulator must publish a note stating its intentions and the relevant condition of requirements to be imposed. The notice should also specify the act or omissions that, in the economic regulator’s opinion, justify the penalty, and there should be a period of at least 21 days from publication in which objections can be made. The economic regulator must consider any objections made before imposing the penalty.
Schedule 3 provides for regulated persons to be able to appeal to the courts against the imposition of a penalty by Ofgem, the amount of the penalty or the timeline within which any penalty is required to be paid. An appeal must be made within 42 days of the penalty notice.
Question put and agreed to.
Clause 32 accordingly ordered to stand part of the Bill.
Schedule 3 agreed to.
Clause 33
Making of false statements etc
Question proposed, That the clause stand part of the Bill.
Andrew Bowie
To ensure that the Secretary of State and the economic regulator can secure the provision of information necessary to conduct their respective functions in relation to carbon dioxide transport and storage, the clause establishes an offence if a person, either knowingly or recklessly, provides false information. A criminal sanction ensures that there is suitable redress for the making of false statements and should act as a disincentive to doing so. This is important and necessary as falsifying information could conceal issues or concerns that would otherwise be material to the decision making of the economic regulator or Secretary of State. Without knowledge of such information, there could be less effective decisions and less effective protections for users of the networks.
Dr Whitehead
Yet again, the clause appears to be relatively straightforward, but I would like to unpack the meaning of “false statements”. The Minister has given a general outline of what it means, but as far as I can see it potentially concerns the making of false statements or declarations, or whatever, at all stages of the licensing process. Presumably, that could be where a false statement is made in order to receive a licence, and the false statement comes to light after the licence has been provided. In that case, I presume the licence would be terminated on the basis of the false statement. Alternatively, it could apply to false accounting or false statements during the carrying out of the licence. Does the clause concern false statements made at the commencement of a licence or the granting of a licence, or does it concern false statements made during the operation of the licence as well? What procedure does the Minister envisage for those false statements coming to light?
The clause states that a person who makes a statement that that person
“knows to be false in a material particular, or recklessly makes any statement which is false in a material particular, is guilty of an offence”,
and is liable on summary conviction to a fine. Presumably the question of whether a false statement is sufficient for a process leading to a conviction is in the hands of the regulator. That is, if the regulator is worried about a false statement, it presumably has some discretion about the extent to which that false statement invalidates the process of the licence. Is that the Minister’s understanding? Is the process on a conveyor belt, as it were, such that a statement that appears to be false leads absolutely to a conviction? Or are there shades of grey about what a false statement is, how false that statement might be and how material that is to the continuation of the licence?
Andrew Bowie
Again, I thank the hon. Member for his questions. On his question about when a false statement might be made, it can be throughout the entire licence. On when an offence might be deemed to have occurred, it would be at the point that the statement was made. Schedule 2(10)(4) establishes that it is an offence to wilfully alter, suppress or destroy a document that the Competition and Markets Authority has required a person to produce as part of considering an appeal against a licence qualification decision by Ofgem. I think that what we seek to define as an offence and when we expect that offence to have been determined to have been made are quite clear.
Question put and agreed to.
Clause 33 accordingly ordered to stand part of the Bill.
Clause 34
Liability of officers of entities
Question proposed, That the clause stand part of the Bill.
Andrew Bowie
Part 1 establishes certain criminal offences in relation to the economic licensing of carbon dioxide transport and storage, where transport and storage activities can take place both onshore and offshore. Clause 34 clarifies that, where an offence is committed by a corporate entity with either the consent or collusion of an officer of the company, or as a result of neglect by an officer, that officer, as well as the company itself, is culpable of the offence. The clause defines a company officer as any director, manager, secretary or similar officer of the body corporate, or any person purporting to act in that capacity.
Clause 35 clarifies that proceedings under part 1 can be brought anywhere in the UK. That ensures that an offence arising by virtue of the provisions of this part that is committed in an offshore place may be prosecuted in the United Kingdom. Criminal proceedings in relation to offshore activities may be instituted only by the Secretary of State or by, or with the consent of, the Director of Public Prosecutions.
Dr Whitehead
This is another fairly straightforward clause about criminal proceedings, but we ought to focus on the statement at the end of clause 35 about the definition of “offshore place”. Obviously, in the context of carbon capture and storage, there will be considerable concern about offshore places as well as onshore places, because presumably criminal offences can be committed during the transportation and sequestration of the carbon dioxide. As we know, those offshore places may be in repositories that are fairly far offshore but within the UK zone as far as, in principle, jurisdiction is concerned. However, as the Minister will know, there are different definitions of the territorial waters of the United Kingdom. Indeed, the Bill describes them as
“the territorial sea adjacent to the United Kingdom”.
Andrew Bowie
I thank the hon. Member for his pertinent and important question. For the purposes of the Bill and the industry we are discussing, the territorial sea is up to 12 nautical miles. The Gas Importation and Storage Zone (Designation of Area) Order 2009 sets that out, which is why we have taken the step of disapplying, for the purposes of the Bill, section 3 of the Territorial Waters Jurisdiction Act 1878. That section requires the consent of a principal Secretary of State, or a Governor in the case of the dominions and overseas territories, to institute proceedings for criminal offences within scope of the Territorial Waters Jurisdiction Act 1878. Disapplying section 3 enables proceedings for an offence that is alleged to have been committed in an offshore place to be instituted without the consent requirement. As set out in the 2009 order, offshore waters are defined as up to 12 nautical miles.
Dr Whitehead
That is a bit of a worrying definition, because it suggests that outside the 12-mile zone, the offence would not be prosecutable. A lot of carbon capture and storage installations are in the UK economic zone but outside the territorial zone, so there appears to be a bit of dissonance between what the Bill says about offences that may occur at any stage of proceedings, and these provisions, which, as the Minister says, cover the territorial 12-mile zone. Of course, the 1878 Act did not take any account of economic zones. Territorial waters were closely defined under that Act, but since then, we have moved considerably on what we might regard as territorial waters for the purpose of economic activity; that might not be the same as territorial waters as defined by the 12-mile limit. Is there a gap there that needs filling?
Andrew Bowie
I thank the hon. Gentleman for his question. While I understand the concern, it is important to stress that the zone, which is up to 12 nautical miles from shore, is a continuation of the gas importation and storage zone as designated under the 2009 order. It would be outwith the scope of the Bill to change the 2009 definition, because that is the definition with which the industry has been working since then.
Dr Whitehead
That does not address the fact that carbon capture and storage, and the repositories for it, are way out to sea. Putting a pipe at the bottom of those repositories, and connecting it to an evacuated oil field or whatever, may mean that there is a platform at the head of the pipe on which offences could be committed. The Bill does not appear to get up to speed with where carbon capture and storage will take place, where the repositories will be, and what the jurisdiction of the UK will be in those circumstances. Is that not a problem? Does the definition require further amendment?
Andrew Bowie
It is important to stress that the definition in the Bill is not only a continuation of the definition in the 2009 order, but the same as that used for other gas activities in the North sea. It is important that we stick to the same definition.
Andrew Bowie
Yes.
Question put and agreed to.
Clause 34 accordingly ordered to stand part of the Bill.
Clause 35 ordered to stand part of the Bill.
Clause 36
Functions under the Enterprise Act 2002
Question proposed, That the clause stand part of the Bill.
Andrew Bowie
Ofgem has the power, concurrently with the Competition and Markets Authority, to carry out market studies and make market investigation references in relation to the gas and electricity markets in Great Britain under part 4 of the Enterprise Act 2002. Other sectoral regulators have the same powers in relation to the sectors for which they are responsible. Under the Enterprise Act, the CMA and Ofgem may undertake market studies in relation to the gas and electricity markets in Great Britain, and may make market investigation references to the chair of the CMA for the constitution of a CMA group to conduct an in-depth market investigation of competition in the market or markets concerned. The purpose of those investigations is to examine the markets and implement appropriate remedies where competition problems are identified.
Clause 36 confers the same powers on Ofgem in its capacity as the economic regulator for carbon dioxide transport and storage. That will enable Ofgem to undertake market studies and make market investigation references to examine potential distortions that may give rise to restrictions in competition in relation to carbon dioxide transport and storage. As provided for in clause 38, neither the CMA nor Ofgem shall exercise functions under part 4 of the Enterprise Act in relation to any matter if such functions have been exercised in relation to that matter by the other. Clause 37 additionally provides for the economic regulator to exercise certain functions under the Competition Act 1998 concurrently with the CMA. Enabling the exercise of those Competition Act functions allows the economic regulator to deal with anti-competitive agreements or abuses of a dominant position in the carbon dioxide transport and storage sector.
To ensure that the powers are used efficiently, clause 38 requires the economic regulator and the CMA to consult each other before exercising the functions. Clause 38 is also clear that the power may be used only by either the economic regulator or the CMA in relation to a particular matter. If there is a question as to whether the economic regulator has concurrent powers under clauses 36 or 37 in relation to a particular case, this clause provides for the Secretary of State to make that determination.
Dr Whitehead
Try as I might, I cannot find much at fault with this chapter of the Bill. On the contrary, I actually think it is rather well drafted. I am happy to sit down, having said nothing about these clauses whatsoever, and allow business to proceed.
Question put and agreed to.
Clause 36 accordingly ordered to stand part of the Bill.
Clauses 37 and 38 ordered to stand part of the Bill.
Clause 39
Forward work programmes
Question proposed, That the clause stand part of the Bill.
Andrew Bowie
As these are significant clauses, I will speak for slightly longer than I have done thus far this morning. Clause 39 provides for the economic regulator to publish the transport and storage forward work programme before each financial year. This will generally contain a description and objectives of the relevant projects that the regulator intends to undertake. A forward work programme should include estimates of the expenditure that will be incurred in connection with the programme.
Before publishing the forward look programme for any year, the regulator must give notice containing a draft of the transport and storage forward programme, and must specify the time in which representations on the proposals may be made. The regulator must consider any representations or objections that are submitted.
Clause 40 provides for the economic regulator to publish a document setting out required information relating to the carbon capture, usage and storage strategy and policy statement. This document must include information about the strategy that the economic regulator intends to adopt to further the delivery of the policy outcomes in the statement, and how the strategy will be implemented. The clause also confirms the circumstances in which that duty does not apply, and the circumstances in which the economic regulator may choose not to include certain information in a forward work programme for a particular financial year. That includes circumstances in which the economic regulator does not think it is reasonably practicable to publish the document before the next required time, or circumstances in which the economic regulator has included that information in the forward work programme.
The Secretary of State may give notice to the economic regulator, Ofgem, that the statement’s designation will be or is expected to be withdrawn before the beginning of the year. That will exempt the economic regulator from the duty to publish information in relation to the CCUS strategy and policy statement.
Clause 41 provides for the economic regulator to make a report to the Secretary of State at the end of each financial year. This annual transport and storage report must include information on progress made during the year on the objectives in the forward work programme, and a summary of orders made and penalties imposed, and may cover any other matters that the Secretary of State may require. The economic regulator must also include an assessment of how it has contributed to the delivery of the policy outcomes set out in the CCUS strategy and policy statement, if such a statement has been designated.
If the economic regulator has failed to do anything that was set out in its forward work programme, it must explain why, and say how it intends to remedy that. The economic regulator must exclude, where necessary, any matters relating to the affairs of a particular individual or body of persons, in order to protect their interests.
The Secretary of State must lay a copy of each annual transport and storage report in each House of Parliament and share a copy of the report with Scottish Ministers, Welsh Ministers and the Department for the Economy in Northern Ireland. The report must also be published in a manner that the Secretary of State considers appropriate. I urge that clauses 39 to 41 stand part of the Bill.
Dr Whitehead
As the Minister says, these clauses are important in establishing reporting requirements relating to carbon capture and storage strategy and policy statements, and the requirement to report how the policy is going and what the problems are. It is important that we establish proper mechanisms for ensuring that the report is properly brought before Parliament. Given the interest of Members in the progress of CCUS, they may well want to debate the report in the House, and to have the Minister answer questions on it.
Clause 41(7) states:
“The Secretary of State must”—
it is nice that the provision has the word “must” in it—
“lay a copy of each annual T&S report before each House of Parliament”.
As the Minister will know, the phrase “lay before” has a lot of possible interpretations, just as “publication” does; we discussed the general question of publication in a previous sitting. Just laying a report before each House of Parliament has, potentially, a number of problems attached to it. Is it likely to be flagged up in any way that the report has been laid before Parliament? Is the onus on every Member of Parliament to find out whether that has happened? Do the Government intend to be proactive about laying reports before Parliament, and in offering opportunities to debate the report, or at least answer questions on it? Those are all extensions of the idea of laying a report before the House.
I do not want to say that the wording is inadequate, because it is the general wording on laying reports before the House, but the Minister will appreciate and understand that some legislation enters into greater detail on how a report is to come before Parliament. It would be helpful if the Minister gave his interpretation of the provision and said how he intends to transfer or convey the policy report from the regulator to the Floor of the House.
Alan Brown (Kilmarnock and Loudoun) (SNP)
It is a pleasure to serve under your chairmanship, Dr Huq. I will make only a few comments. I will not object to these clauses, which I realise are important, but I share the concerns expressed by the hon. Member for Southampton, Test. It is critical that we have confidence in proper parliamentary oversight, and in Parliament being able to hold the regulator and particularly the Secretary of State to account. I am slightly concerned that the clauses give the regulator too much power to decide what they report on, how they report and what information they bring forward. As the Minister described, it is up to the regulator to explain why they have not brought forward a statement, for example. We need more than that. It should not be at the whim of the regulator whether to bring forward a statement; if they do not bring one forward, they should say why. It is for the Secretary of State to make sure that these things happen, obviously with parliamentary oversight.
Subsection (2) says:
“That description must include the objectives of each relevant project.”
Clearly, we need a lot more than just the objectives; we need to know how the objectives are being met. I know that the Minister will not want to make the Bill too prescriptive about what goes in the report, but we need that to include, for example, details of the efficiency of the project. Cynics say that carbon capture does not capture enough of the emissions, whereas obviously the industry says that we can capture 95% of them. I want to see how efficient projects are, and how they contribute to meeting net zero.
There are concerns that carbon capture might lead to the burning of more fossil fuels, so we need to understand the level of extraction of fossil fuels, what the inputs and outputs are, the emissions from any extractions of fossil fuels, and where the fossil fuels come from, including whether they come from other countries; we need to know that when it comes to meeting that wider net zero objective. Those are the things that I would want set out, so that I could question the Secretary of State in Parliament on them and make sure that we have confidence in how these objectives will be met.
Andrew Bowie
I thank the hon. Members for Southampton, Test, and for Kilmarnock and Loudoun for their questions.
I am very glad that the hon. Member for Kilmarnock and Loudoun has spoken, because it gives me a chance to congratulate him on his team’s success last night, which probably staved off their relegation from the Scottish premier league. They are not quite making Europe, as some other teams did last night, but that is still quite good. On his questions about what should be in the annual report, that is already set out. It should be: progress on activities described in any forward work programme for that year; the extent to which activities proposed in the forward work programme for the previous year had not been delivered, and the reasons for that, as well as the proposals to remedy that; how the delivery of the programme’s functions have been contrary to any strategy and policy statement that has been designated; and any enforcement action pursued by the economic regulator.
Of course I share the concerns that both hon. Members expressed that any report laid before Parliament should be open, accessible and visible. Of course, there is precedent for this; reports are laid before Parliament by Government all the time. Of course, it is incumbent on Parliament to hold the Secretary of State to account once the report is laid before Parliament. It is in the gift of this Parliament to call any Secretary of State to the Floor of the House, as we have seen over the course of the past six years in particular, to explain in detail any reports that have been laid before Parliament and to take any questions from any Member of the House from any party. That process, which is well established in our Houses of Parliament, is the one by which we will proceed with this report.
Question put and agreed to.
Clause 39 accordingly ordered to stand part of the Bill.
Clauses 40 and 41 ordered to stand part of the Bill.
Clause 42
Transport and storage administration orders
Question proposed, That the clause stand part of the Bill.
Andrew Bowie
I am happy to speak to clauses 42 to 49. Chapter 4 of the Bill provides for a special administration regime for licensed carbon dioxide transport and storage companies. In the unlikely event that a carbon dioxide transport and storage company becomes insolvent, the Secretary of State, or the economic regulator with the Secretary of State’s permission, may apply to the courts for the appointment of a special administrator. The objective of the administrator would be to ensure that services continue until it is unnecessary for the administration order to remain in force for that purpose.
Given the importance of carbon dioxide transport and storage networks to support carbon reduction from a range of emitters—many of which will be supported by Government—the importance of those networks in delivering net zero and the need to ensure that networks are maintained and decommissioned safely, in a company insolvency scenario the interests of creditors, which usually take priority in a normal administration, may not align with the public interest in keeping the network operating. The ability to apply a special administration regime in the event of a carbon dioxide transport and storage network company insolvency would enable services to continue for emitters connected to a network.
Clause 42 defines some of the relevant terms for this chapter that are necessary for the effective functioning of the legislation. It also requires that the relevant administrator must perform its functions as administrator to achieve the objectives set out in clause 43.
Clause 43 establishes that the objective of transport and storage administration is to secure that the activities authorised by the licence commence or continue in a manner that is efficient and economical, and that ensures the safety and security of the transport and storage network, or the part of the network to which the licence relates, until the company can be rescued as a going concern. The administrator also has the option to transfer all or parts of the undertaking to run as a going concern. Special administration is intended to act as an interim solution, rather than a long-term fix. If the ongoing operation of the transport and storage network is no longer viable in its form, the Secretary of State may wish the Government to take ownership and/or transfer the network assets to facilitate a restructuring or the safe decommissioning of the assets, using the statutory transfer scheme provided for in chapter 5 of this part of the Bill.
I turn to clause 44. Under the proposed special administration regime, if a carbon dioxide transport and storage company is running out of funds or likely to become insolvent, the Secretary of State, or the economic regulator with the consent of the Secretary of State, can apply to the High Court for a special administration order, which will allow a special administrator to be appointed. The Energy Act 2004 provides for special administration regimes in the energy sector. In order to establish the process and procedure for carbon dioxide transport and storage administration orders, the Bill extends the provisions of the Energy Act 2004 to transport and storage administration, with the appropriate modifications. As provided for by these amendments, the detailed procedural rules governing the establishment of a transport and storage administration will be set out in secondary legislation.
At present in the energy sector, section 159(3) of the Energy Act 2004 applies the power in section 411 of the Insolvency Act 1986 to make separate insolvency rules for each of the supply, network and smart meter communication device company special administration regimes. Clause 45 amends section 159(3) of the Energy Act 2004 to allow the Secretary of State additionally to make company insolvency rules for carbon dioxide transport and storage.
Clause 46 enables the Secretary of State to modify the conditions of a carbon dioxide transport and storage company’s economic licence while an administration order is in force. As the Secretary of State may provide financial support to a transport and storage company that is subject to an administration order to secure the objectives of the special administration regime, the power is intended to allow the Secretary of State to recover any financial support provided. Under that power, the Secretary of State may modify the licence to include conditions relating to the recovery of amounts owed to the Secretary of State in relation to financial assistance given while an administration order is in force, and the raising of funds for the purpose of meeting expenses arising in relation to the administration order. Before making any licence modifications, the Secretary of State must consult the economic regulator and any relevant carbon storage licensing authority.
The Enterprise Act 2004 conferred powers on the Secretary of State to make consequential amendments to insolvency legislation. As the special administration regime for carbon dioxide transport and storage companies contains several provisions from the ordinary administration and insolvency regimes, the use of those powers in the Act may affect the special administration regime in the Bill. Clause 47 therefore extends the power of modification or application conferred on the Secretary of State in sections 248, 254 and 277 of the Enterprise Act to make such consequential amendments to chapter 4 as the Secretary of State considers appropriate in connection with any other provision made under those sections of the Act. That will ensure that the special administration regime for carbon dioxide transport and storage is maintained as broader insolvency law evolves, and that it adopts the same approach taken in other recent special administration regime legislation. Not providing for such a power could have detrimental impacts on the operability of the special administration regime in the event of a relevant company’s insolvency.
Alan Brown
The Minister mentioned special admin-istration regime legislation. Given the Government’s review, I wondered how the special administration regime process worked for Bulb Energy, and what lessons had been learned? Has that had an impact on the legislation?
Andrew Bowie
I can confirm to the hon. Gentleman that it has had an impact. Obviously, we continue to assess the impact of the special administration regime in the instance that he refers to. Lessons learned from that process and procedure feed directly into how we have thought about and developed the process for the Bill.
Clause 48 grants the Secretary of State the power by regulations to apply or make modifications to existing insolvency legislation in relation to this chapter of the Bill. The power will help to ensure that the special administration regime for carbon dioxide transport and storage networks fulfils its purpose to protect users of the network.
The power enables the Secretary of State to make modifications to insolvency legislation should, for example, practical experience highlight difficulties in the application of the regime, or should a change in general insolvency law necessitate a change to the special administration regime. The ability to do that is important given the expected long operational lifetime of a licensed carbon dioxide transport and storage network, and the potential for changes to broader insolvency law during this time.
Clause 49 defines relevant terms for interpreting chapter 4 of part 1 of the Bill. The terms refer to definitions in relevant existing primary legislation where it is appropriate. I commend clauses 42 to 49 to the Committee.
Dr Whitehead
We are now dealing with orders that follow from material we have considered previously in relation to false statements, the insolvency of companies and various other things. Clause 42 provides for orders to be made through the court that effectively place the licence holder into administration.
Under what circumstances can a transport storage and administration order be made? In view of what we have discussed, I assume that in addition to the insolvency of a company, a number of offences could lead to such an order. Normally, if a company cannot meet its obligations under the licence and therefore has effectively wound itself up, or seeks to do so, an order will be made through the courts to set up the regime that the Minister has described.
However, I am not entirely clear about the triggering point at which an order will be applied for and put before the court, who does that or the criteria under which the order is put into action. There are a number of circumstances in which one might concede that an order may be appropriate, but it might not have been applied for yet. The question that needs some clarification is when one might think that such an order is appropriate. Under what criteria may an order be offered before the court?
It will be pretty straightforward when a company has completely gone bust and someone has to rescue it, its assets or its operations. However, other circumstances under which an order may be required are less clear. Although this chapter provides that an order may lead to the rescue of the company as a going concern, other provisions—particularly clause 42(3)—show that an order may be used to transfer the operation of that company to another company. That is reasonably standard in provisions concerning the administration of a company, but it is not entirely clear how the treatment of the company will be decided. The court will make an order, but a decision will have to be made about whether the company should be salvaged or its assets transferred to another company.
We had a similar debate in the Bill Committee for the Nuclear Energy (Financing) Act 2022. We discussed what happens when a company that is developing a nuclear reactor goes bust during development or operation, and how we may have to deal with different circumstances surrounding the transfer of assets and ongoing activities depending on which stage the company is at. That will be more complicated during a production and operation phase than in a development phase.
It is important to be clear about the decision making process for what is done with each company, and it does not seem to me that the Bill gives the courts a view. I presume it is more likely that the Secretary of State or the regulator will say, “It looks like the assets need to be transferred to another company, rather than the company being salvaged, and that is how we will proceed.”
That leads to a further issue. If a decision is made to transfer the licence to another company, or to two or more companies, who decides which companies will take it over? Is that done on a tender, or is it done administratively by the appointment of a company to take over the licence arrangement? If the latter, who takes the administrative decision to appoint that company, and what are the criteria by which it is appointed? The provisions do not quite run to a fit and proper persons test, but they constitute a test on the suitability of a company to take over. Presumably, the scrutiny of that is in the purview of the Secretary of State, but it may be for the regulator or a combination of both.
Finally, I echo the point that the hon. Member for Kilmarnock and Loudoun made in his intervention about the status of the special administration regime. Before I do that, it has been remiss of me not to congratulate him on the relative success of his team.
Dr Whitehead
I was about to say that. I can reveal that the hon. Member for Kilmarnock and Loudoun was seen in the Library yesterday evening wearing a Kilmarnock shirt, which attested to his slight nervousness and fervour for his cause. I would not have worn a Southampton shirt in the Library, bearing in mind our ignominious exit from the premier league this year, but we will let that pass.
I want to mention the lessons learned from the special administration regime as it applied to Bulb. The Minister was not in post then, but I spent a lot of time tabling successive written questions to try to get some clarity and transparency about the process. I appreciate that under those circumstances, and quite possibly under these, considerable matters of commercial confidentiality and various other things might be involved in an order, including a transfer to another company, but I found the special administration regime as it applied to Bulb to be completely non-transparent.
We did not know what the Government’s liabilities were for the special administration regime; we did not know when it was likely to come to an end; we did not know how the decisions on the assets and arrangements related to Bulb were going—that is important, in terms of transfer to another company—and I got pretty frustrated trying to get any light into the proceedings. I would not like to think that that is how these arrangements might be conducted if it were necessary to transfer assets to another company. Indeed, the opacity of the Bulb proceedings led to an unsuccessful High Court challenge from several companies that felt they had been excluded from the transfer of liabilities and assets.
A clear intention that these proceedings will operate with the utmost transparency would help the progress of the Bill. The lesson that may be learned from Bulb is that it is generally not a good idea to undertake proceedings as if they were a state secret. On the contrary, disclosure and transparency, within the limits of commercial confidentiality, should be the watchword for such proceedings. When the Minister undoubtedly enlightens us with comments on my previous points, will he also reflect on how the regime might work best?
Andrew Bowie
Let me answer the hon. Gentleman’s questions in order and, I hope, in enough detail to satisfy him and the Committee. The aim is for a special administration regime to be used only in the instance of an insolvency. As we all know, it allows for the protection of essential services in a company solvency scenario to ensure that those services continue.
It is worth reflecting on the fact that in the absence of such a regime, if a carbon dioxide transport and storage company were to become insolvent, an administrator or liquidator working under the standard objectives—they include achieving a better result for creditors than winding up—would not necessarily have cause to keep transport and storage services running, or to secure the ongoing safety and security of the network. That is why we believe an SAR is relevant, and it would only be used in the instance of insolvency.
The Chair
With this it will be convenient to discuss the following:
Clauses 51 and 52 stand part.
Schedule 4.
Andrew Bowie
The regulator will have the power, under clause 17 of the Bill, to terminate a carbon dioxide transport and storage licence in certain circumstances. The circumstances in which the economic regulator can terminate a licence will be set out in the licence itself. Those circumstances could include where a licence holder has contravened or failed to comply with enforcement orders made by the regulator, or by the courts where the licence holder has ceased to carry on as a transport and storage business or has become insolvent.
If a licence is being terminated due to company insolvency, the economic regulator or the Secretary of State have the option, under the provisions of chapter 4, to apply to the courts for a special administration order, as we have just discussed. Where a licence is to be terminated for non-insolvency reasons, clause 50 allows the Secretary of State the option to make a statutory transfer scheme. A transfer scheme would allow the Secretary of State to transfer relevant property, rights or liabilities of a licence holder either to another appropriate body or to the Secretary of State himself.
The aim of the transfer scheme is to secure the ongoing operation of the network, so that emitters that are attached to a network can continue to have their carbon dioxide emissions transported and stored in an economic, safe and secure manner. Where the ongoing operation is no longer viable, a transfer scheme would enable the Secretary of State to ensure that the safety and security of the network is maintained. As set out in clause 50, the Secretary of State cannot make a transfer scheme without the consent of the current licence holder and the persons to whom the licence and associated property, rights or liabilities are proposed to be transferred.
Clause 51 states that, before making a statutory transfer scheme under clause 50, the Secretary of State must consult both the licence holder—the transferor—and the person to whom the licence and associated assets are to be transferred—the transferee. If the proposed transferee is not a public authority, the Secretary of State must consult the economic regulator and other listed public bodies before making such a scheme, as well as the relevant carbon storage licensing authority. That is intended to ensure that the proposed transferee is able to meet the requirements of the licensing authorities.
Clause 52 gives effect to schedule 4, which makes further provision about transfer schemes made under clause 50. Schedule 4 sets out the scope and obligations for any statutory transfer that is made by the Secretary of State in relation to a carbon dioxide transport and storage licensed company. The schedule sets out that a scheme is capable of transferring property, rights and liabilities, including those that would not otherwise be capable of being transferred or assigned.
The provisions of the schedule enable transfers that are affected by the scheme to take effect as if there were no requirement to obtain a person’s consent under the relevant contract, licence or permit that is being transferred, and the transfer will not create any liability due to the apparent contravention of restrictions on transfer that would ordinarily apply. The exception to that is that the transferor and transferee company would be required to provide consent to a transfer. The intention is that, in effect, a transfer scheme is capable of seamlessly parachuting the transferee in the place of the transferor.
On the day on which a scheme comes into force, which would be the date appointed in the scheme, the transferee or transferees must pay to the transferor, or the transferor must pay to the transferee or transferees, such sums as may be agreed.
Dr Whitehead
Yet again, there are some sound provisions in the Bill on transfer schemes and how they might work. We have had the debate about how transfer schemes might follow from orders and how that all works through. As I have said, it is important, however, to think about the circumstances under which transfer schemes might arise. Normally, as the Minister has outlined, transfer schemes will come about because the company was unable to fulfil its obligations as the licensee because it did not exist any more or was in such a dire financial situation that it could not be seen as properly carrying out its licence obligations.
As I have said, there are other circumstances under which a transfer scheme could arise. Clause 51 sets out the question of consultation on transfers and that the company that is subject to having its assets and activities transferred has to be consulted. Obviously, if the company no longer exists, it might be difficult to consult that company. Clause 50 goes further and states in subsection (5):
“The Secretary of State may not make a scheme without the consent of…the licence holder”.
It appears that the licence holder—the company having the assets transferred from it—has a veto on whether the transfer scheme goes through.
If a company exists in reasonable working order, but it has contravened its licence for reasons that are not wholly to do with insolvency, that company might be pretty aggrieved about the process of the transfer. Under those circumstances, it might simply refuse to co-operate. The clause appears to confirm, in the way it is written, the potential non-co-operation of that company.
I do not know whether there is anything elsewhere in the Bill that modifies this statement, but it does look rather stark as it stands:
“The Secretary of State may not make a scheme without the consent of”
that company. I do not know whether that needs to be looked at, or whether there are circumstances—say a company is unreasonably refusing to co-operate or unreasonably withholding consent—in which that can then be overcome. I frankly do not know whether those circumstances or arrangements exist.
Deep in the recesses of schedule 4 is paragraph 10, on compensation for third parties. It deals with circumstances in which an innocent third party, as it were, has had dealings with the licensee that has gone bust or otherwise failed to carry out the terms of its licence, and is financially or otherwise inconvenienced—or has a loss attached to it—as a result of a transfer scheme.
For those who are desperate to read it, paragraph 10(1) on page 269 says that, under those circumstances,
“the third party is entitled to compensation in respect of the extinguishment of the third party’s entitlement.”
That means that when the third party had a reasonable expectation that something was going to happen as part of the licence arrangement, which has been extinguished because of a transfer scheme, and, I assume, it has not proved possible for the entitlements and expectations to be transferred to, say, another company that will undertake the licence activities, with all the procedures we have discussed, that third party is entitled to compensation.
Further down in the schedule, though, we see where that compensation comes from. Paragraph 10(3) states:
“A liability to pay compensation under this paragraph falls on the Secretary of State.”
Does it not in any way fall on the recovery of some of the assets of the company that failed to carry out its licence? Are there procedures whereby that might be done first, perhaps by the Secretary of State? Or is it an absolute requirement that if compensation is required, that is the end of the involvement of the company that is losing its licence and the Secretary of State must find that compensation, howsoever that has been arrived at? I do not know the answer to that—I am not asking the Minister a trick question—but it seems to me that a company that is losing its licence should be expected to provide at least some of the compensation to which the third party is entitled.
Andrew Bowie
I thank the hon. Gentleman for his questions, which again are pertinent and important to the Bill’s passage and implementation. I will answer them in turn.
When the Secretary of State considers making a transfer scheme, he may opt to do so when a network operator’s licence is expected to revoked. The purpose would be to transfer the ongoing operation of the transport and storage network to another operator. Pertinent to that is the hon. Gentleman’s question about the balance of power between the economic regulator and the Secretary of State. He asked whether they will both have the power to initiate a transfer scheme. Only the Secretary of State has the power to make a statutory transfer scheme under the provisions of chapter 5. Unless the Secretary of State is proposing to bring the assets within his own control, he must consult the economic regulator, Ofgem, when making a transfer scheme under the provisions of chapter 5.
On the question of whether the provisions go against the rights of a private company to which the assets belong, clause 50 confirms that the transfer scheme should take effect only with the consent of the transferor and the transferee. The consent of a licence holder to a statutory transfer scheme in the event of a licence termination, and the basis for the valuation of any compensation in the particular circumstances, is expected to be agreed to as part of the licence condition.
Dr Whitehead
With respect, that slightly misses the point about the question of the consent of the pre-existing licence holder. My question was: does the fact that the Bill says the Secretary of State
“may not make a scheme without the consent of”
the pre-existing licence holder mean that the pre-existing licence holder effectively has the whip hand as far as any subsequent scheme is concerned? In other words, if the licence holder simply says, “No, I’m not going to consent,” is that the end of the matter, or are do other things happen? I am not clear about that. If other things can happen, how can they?
Andrew Bowie
The hon. Gentleman asks another appropriate question. It is my understanding that, under the Bill, that would be the end of the matter. However, as he says, there is a more general point, and we will be working to add more detail to the procedure in future. I am happy to keep in touch with the hon. Gentleman as we do that over the next few months.
Andrew Bowie
I am terribly sorry; I missed the hon. Gentleman’s question about the schedule.
Dr Whitehead
I was getting so into the weeds that that is not surprising. My question concerns compensation for third parties and the extent to which the Secretary of State appears to be liable for that compensation, rather than at least attempting to involve the previous licence holder, who may have assets that could add to that compensation. Schedule 4 appears to provide that the previous licensee has no part in the proceedings. It states at paragraph 10(3):
“A liability to pay compensation under this paragraph falls on the Secretary of State.”
Are there circumstances in which the force of that particular statement may be mitigated? Alternatively, does the Minister regard it as good practice that, as far as the previous licensee is concerned, that is the end of it?
Andrew Bowie
As with my answer to the hon. Gentleman’s previous question, there are details that still need to be worked through. On his specific question, there will be mitigations in terms of the responsibility being wholly on the Secretary of State and in terms of whether the previous licence holder should be responsible for paying that compensation. I will keep in touch with the hon. Gentleman about the issue as we work up the specifics of the provision.
Question put and agreed to.
Clause 50 accordingly ordered to stand part of the Bill.
Clauses 51 and 52 ordered to stand part of the Bill.
Schedule 4 agreed to.
Clause 53
Cooperation of storage licensing authority with economic regulator
Question proposed, That the clause stand part of the Bill.
Andrew Bowie
Clause 53 inserts new sections into the Energy Act 2008 to provide for co-operation and information sharing between the economic regulator and a carbon dioxide storage licensing authority. As both an economic licence and a carbon storage licence will be required to operate a carbon storage site, the provision is intended to support the exercise of the functions of the economic regulator.
The clause ensures that a storage licensing authority must inform the economic regulator if it becomes aware of circumstances that have arisen, or are likely to arise, that may affect the activities carried out under the economic licence. In particular, it requires carbon storage licensing authorities to notify the economic regulator if a carbon storage licence, or a storage permit granted under the storage licence, that is held by a licensed transport and storage company may be terminated. That is important and necessary because a carbon storage licence or permit revocation would remove the right to operate a storage site.
Dr Whitehead
I think we have identified the relevant notifications on the termination event. The clause seems to be an admirable way to do it, particularly in respect of the co-operation with the economic regulator. I am happy for it to stand part of the Bill.
Question put and agreed to.
Clause 53 accordingly ordered to stand part of the Bill.
Clause 54
Amendments related to Part 1
Question proposed, That the clause stand part of the Bill.
The Chair
With this it will be convenient to discuss the following:
That schedule 5 be the Fifth schedule to the Bill.
Clause 55 stand part.
Andrew Bowie
Clause 54 gives effect to schedule 5, which makes amendments to other Acts that result from measures in part 1 of the Bill.
Schedule 5 makes consequential amendments to existing legislation to reflect the functions and powers conferred on Ofgem as the economic regulator of carbon dioxide transport and storage under part 1. They include amendments to the Utilities Act 2000 to make it clear that requirements in that Act relating to Ofgem’s work programming and annual reporting functions do not include the functions in relation to carbon dioxide transport and storage conferred on Ofgem by the Bill. That is necessary because the Bill makes separate provision for Ofgem to prepare a forward work programme and annual report on its transport and storage functions, as we discussed earlier.
The restriction on the disclosure of information in section 105 of the Utilities Act is amended to provide that the unauthorised disclosure of information obtained under the provisions of part 1 is a criminal offence, except where disclosure is for the purpose of facilitating the performance of Ofgem’s statutory functions under part 1. Amendments are also made to the Enterprise Act 2002 to reflect the market investigation powers being given to Ofgem in respect of the carbon dioxide transport and storage sector. The Enterprise and Regulatory Reform Act 2013 is amended to ensure that appeals to the CMA in relation to licence modification decisions are heard by a specialist panel. That will ensure that people with the most appropriate expertise are involved in an appeal.
Clause 55 sets out the definitions of terms used in part 1, including include technical definitions relating to the geological storage of carbon dioxide, which are consistent with definitions used in the existing carbon storage licensing legislation.
Dr Whitehead
We come to the part of the Bill where we go through all the definitions and talk about the various amendments that have been made to other pieces of legislation. I always worry slightly about that, in as much as that without actually referring to those bits of legislation, we do not quite know whether someone has smuggled through the revocation of our rights under Magna Carta or whatever in a small amendment to a Bill far away. As far as I can see, everything is in order and the Bill does the right thing to tidy up all the relevant ends, so I am very happy for it to proceed.
Andrew Bowie
I confirm that we are in no way revoking the hon. Gentleman’s rights under Magna Carta.
Question put and agreed to.
Clause 54 accordingly ordered to stand part of the Bill.
Schedule 5 agreed to.
Clause 55 ordered to stand part of the Bill.
Ordered, That further consideration be now adjourned. —(Joy Morrissey.)