Select Committee on Trade and Industry Minutes of Evidence

Examination of witness (Questions 1 - 21)




  1. I realise we have taken rather longer over that session than we had anticipated, but I think it was useful to clear up a number of points. We are very grateful to you this morning for agreeing to stay on for a bit longer to deal with this issue which has, you might say, literally appeared on our radar screen in the last few weeks. We are concerned about this question of industrial gas prices. Can you, perhaps, explain to us? When Mr McCarthy from Ofgem came to see us he indicated that he had no powers to regulate prices in this area and the assumption, therefore, must be that it is the responsibility of the DTI to police upstream supply. Has anything been done about the changes in gas prices? Can you perhaps tell us what your predecessor and yourself have been doing on this issue over the last few weeks?
  (Mr Hain) Chairman, yes, thank you. Can I just, for the benefit of the Committee, say that there are two systems of regulation, onshore regulation—which, as you know, is performed by Ofgem and the Office of Fair Trading—and offshore regulation, upstream. The DTI regulates access to pipes to and from the wells and so on, and the Office of Fair Trading also has a regulatory role in the sense of anti-competitive practices, and the EU has a role as well. So there are different regulatory regimes. Of course, there are two interfaces, the Interconnector, which is a link with the continental European markets, with which the British downstream market also interfaces, and then the offshore interface, which is the major source of the gas supplied to the downstream market. We have been very concerned, both my predecessor and I, and the Secretary of State, about the huge and difficult-to-explain increase in wholesale gas prices; they have gone up from 11p per therm in April/May 2000 to 27p per therm just last week. So it is a more than doubling. One of the factors, I think, involved is the arbitrage across the Interconnector between our coast and Belgium, the high oil-related gas prices in Europe (gas prices in Europe, in many respects if not universally, have been contractually linked to oil prices) and because of the lack of liberalisation and competition in Europe and the consequent gas to gas competition you have a situation where oil prices went up so European gas prices followed, and United Kingdom prices have followed them. So what are we doing about it? If I just summarise briefly and then invite any clarifying points. The first thing (which is, admittedly, a medium strategic objective) is to increase the liberalisation of competition within the European energy markets. So we have put proposals, and this has been agreed, for the Stockholm Summit in June to drive forward full liberalisation and reform of the gas market in Europe. We are pressing that very hard. The second thing we are doing is to look at ways of improving the functioning of all parts of the gas markets, which involves increasing the amount of information available to the market, both across the crucial onshore/offshore interface, where it is not clear what is going on exactly there, and from the Interconnector, so that we have full transparency. There is not full transparency at the present time. It is my belief that a well-informed market is the basis for an efficient market. So I think this will help the domestic market to work more effectively. The third issue is that we are acting strongly against potential anti-competitive behaviour, because the operation of the Interconnector, in particular, has been giving us a lot of cause of concern. The Secretary of State has asked Commissioner Monti to institute a European Commission Inquiry, and he indicated only the week before last that he would do that. We want a thorough and speedy inquiry because we are not satisfied that the Interconnector is operating in a way that is fully competitive—in fact, probably far from it.

  2. I take it that this approach you are adopting is, really, trying to meet Target 8 in the DTI Public Service Agreement for years 2001 to 2004, which says "ensure competitive gas and electricity prices in the lower half of the EU G7 basket as well as achieving security of supply and the environmental objectives." Are we still within the EU G7 lower half on prices?
  (Mr Hain) I am not sure, to be frank, but I would have thought so. Our prices are lower onshore, in our domestic gas market and we want them to stay very low. Centrica announced its price increase last Friday which, compared with the wholesale increases of more than double, is relatively modest, and under 5 per cent; 27p per customer, per week. So I think that that reflects the competitive pressures on the domestic market.

Mr Chope

  3. It also reflects what have to be long-term contracts. Transco has got the advantage of having some very long-term contracts. Is not, really, what the Minister is saying that there is nothing that can be done about this because the market is forcing up the price of gas in this country? If the people who are producing the gas can sell the gas on the continent at a price far in excess of what they can sell it for here then they choose to sell it on the continent using the Interconnector. Can I ask the Minister what he expects to come out of the Stockholm Summit, because the Government has been lobbying Europe for liberalisation of the gas and electricity market without success for donkey's years. Does he think that anything is going to happen this time?
  (Mr Hain) What has been encouraging is the attitude of the Swedish Presidency, who are very committed to the same agenda. Although there is some resistance, as you will be aware, there is a common acceptance that for Europe to become competitive—truly competitive—in energy internationally, then this has to be achieved. So we have high expectations of the Stockholm Summit, which we want to achieve. Can I say, nevertheless, that since we came into office domestic gas prices have fallen in real terms by about 10 per cent. So I think that is a good record, but it is not a question of saying it is just being prey to market forces, it is precisely because we do not think the market is operating efficiently and effectively that we have sought to achieve this investigation into the Interconnector, because some very odd things have been happening there.

Mr Laxton

  4. The latest study we have seen has indicated that the domestic consumer could see a rise in domestic bills of anything up to 10 per cent. I think the other impact as well is that from, I think, April non-direct debit price controls are lifted and that could possibly exacerbate the problem for some domestic consumers. Is there anything that you, the DTI, can do to protect consumers from these potentially spiralling domestic price increases?
  (Mr Hain) Yes, there is, which is why we have taken the action I have identified in those three areas. In respect, by the way, of the European dimension, if I just add to the point that Mr Chope raised with me, the Lisbon European Council agreed last year to speed up the liberalisation of the European Union energy markets, and the Commission is due to propose a Directive very shortly to bring about proper competition in the emerging markets, which we very much welcome. That is part of the background to Stockholm. Despite concerns, I think the fact that last Friday's announcement was under 5 per cent, meaning 27p per week for general consumers and 20p per week for pre-payment meter consumers, was a recognition of the situation of those on low incomes. I think that is better than might have been supposed. I would point out to the Committee that European domestic gas consumers have had sharp increases recently. For example, gas consumers in France have recently seen two successive increases of 5 per cent and then 19 per cent. It is our concern to make sure that nothing like this happens in Britain. That means that we are taking this vigorous action on those three points that I have identified.

  5. Can I focus in on the role of Ofgem? Do you think they have any ability, or would you expect them to have any ability, to intervene, particularly in the area I have identified, that is those people who are described as "fuel poor"; people who do not have the facility of direct debit payments and pay as they go? They could see, according to the study, some sizeable increases, notwithstanding the 4.7 per cent increase just referred to. Is there a role for Ofgem in that particular area?
  (Mr Hain) Yes, I think there is. Ofgem has a lot of discretion to act, of course, and it is Ofgem's duty to protect all consumers. As far as this Government is concerned, if poorer consumers were discriminated against and fuel poverty increased precisely when we are trying to tackle it, then that would be completely unacceptable.

Helen Southworth

  6. The predictions are for industrial prices to fall in the next 18 months to 15/16p a therm. That is pretty cold comfort when you consider that there is still a long period of high prices ahead, and that is going to include winter time as well. What is the DTI going to do to help industrial customers during that period of time?
  (Mr Hain) I am glad you raise it because I received a delegation from the Honourable Member for Chatham and Aylesford, Jonathan Shaw, of high intensive energy users from the paper and chemical industries. They have seen massive increases in gas prices as industrial users, and it was that kind of pressure and our awareness of it that led the DTI to take the initiatives which I have described. We do not want our industrial customers to be discriminated against, and that is why we are taking the action that we are.

  7. Are you confident that that is going to provide security for industry—particularly the kind of intensive energy users—who are crucial for our manufacturing base and who are in need of support?
  (Mr Hain) We are in a world gas market and it is not possible totally to insulate ourselves from that, as we have seen with the European link, but we have had much lower gas prices than all of our main competitors in Europe—Belgium, Germany, France, Italy and the Netherlands—and we aim to keep it that way, both to protect domestic customers and also to protect industrial customers.

  8. Within my own constituency there are a number of manufacturing industries in the chemicals and in the non-ferrous metals sectors. They are very heavily dependent on gas and are working extremely hard to ensure that British manufacturing in those areas is very competitive. Even if prices fall over the next 18 months, are you going to be making efforts to prevent that sort of severe spiking again?
  (Mr Hain) It is because we want a long-term strategy which avoids these kinds of blips which are not in line with what would be a fully competitive European partnership that we have instituted this three-pronged strategy to liberalise the energy markets of Europe, to make sure that the Interconnector is truly competitive and transparent and to make sure that the link between the onshore and the offshore markets is transparent as well, and that is not the case at the present time.

  9. Are you confident the DTI has a handle on this now?
  (Mr Hain) I am confident that we have identified the principal causes, and as a result of the action we have taken we can see the market operating—not just domestically but right the way across the board—in a fully competitive way. We are determined to achieve that and we will, as it were, worry away at that until we do it.

  10. Will you be keeping a close relationship with, particularly, the energy intensive users within manufacturing to make sure that the problems of gas prices are actually managed?
  (Mr Hain) Yes, we will, which is why I was happy to receive that delegation. I am very aware that for heavy energy users—paper and chemicals, for example, as you have referred to—this is a key problem which has to be addressed, and we are addressing it.


  11. Do you think, Minister, that given that the climate change levy was constructed to increase prices and, with the prospect of remission, increased energy efficiency on the assumption that an increase in prices will concentrate people's minds on being more efficient, given that gas prices have risen so substantially, is there not a case for the postponement of the climate change levy for twelve months until we can see stability in the gas market? It is fiscally neutral, so you are not losing any money.
  (Mr Hain) I do not think it would be wise for me to announce on climate levy changes, it is a matter for the Chancellor. As you say, it is fiscally neutral, and that is the important point. The Chancellor, as a result of detailed meetings that he had with high energy users from steel and other industries right the way through to chemicals and paper, did make changes which protected them, or at least gave them better protection.

  12. We know that the advice given to Government, even as joined-up a one as this one likes to think it is from time to time, and from one department to another is not made public, but maybe you would indicate in the appropriate quarters that at least some of us think that—worthwhile and meritorious though this piece of taxation might well be—the timing might have been better if it was delayed for twelve months until you get all the other things in the medium part of your three-pronged strategy into place.
  (Mr Hain) I cannot comment on the merits of—

  13. I am not asking you to comment on that.
  (Mr Hain) I will certainly undertake to draw the Treasury's attention to the point that you make.

  14. You were rather coy about the way in which the continentals are operating in the gas market. Can you be more specific here? Who are the people who should be named and shamed here? Is it Gaz de France, that traditionally any French company is normally fair game? Ruhrgas? Or is it even British Gas trading irresponsibly? Who is manipulating this market?
  (Mr Hain) We will wait, I think, for the European Commission's investigations to determine what specifically is going on with the Interconnector, which is what the focus of its attention is. Some very odd things have been happening in the Interconnector, if I can just identify a few of them. For example, our concerns are that the operation of the Interconnector does not always appear to have reflected market fundamentals. There have been, for instance, perverse flows. There are occasions when gas appears to have flowed from a higher price to a lower price. For example, on 15 January 2001, when it switched from importing into Britain to export mode, the United Kingdom price had been 31p a therm and 30.5p a therm at Zebrugge. So that is one instance that I think needs explaining. Then there is the other issue of spare capacity. The Interconnector has never, since it opened in 1998, operated at above 75 per cent capacity, and we have been told that some capacity owners deliberately keep their spare capacity out of the market rather than sell it at its market value in order to increase the long-term value of their total capacity. So I think, perhaps, at the heart of the problem is inflexible corporate governance, which has contributed to these problems, and which is why this investigation by the European Commission is so important from our point of view. What I mean by corporate governance is the rules; the Interconnector rules make its operation more inflexible than is technically necessary. I will not expand in too much detail, although it might be of interest to the Committee, but the direction of flow is set up to 7 days in advance, the direction cannot change more than three times in a week and the threshold for switching from import to export is significantly lower than for switching the other way. Export capacity and import capacity are bundled, and should be much easier to trade separately, in our view. Then desirable changes to the rules can be blocked too easily because they require unanimous agreement amongst the shippers involved in the Interconnector. I think it is also possible that some companies may have exploited their ability to influence the direction of flow into the Interconnector, for example by nominating uncontracted flows in their preferred direction. The Interconnector's operation is not transparent. The market, unlike the shippers involved, does not know about a change in direction until after it has happened.

  The information on expected flows is non-existent and the information on actual flows is such that it is of limited value to the market. I could go on.

  15. Could you, perhaps, provide us with a note on this? The criticisms you are making are fairly substantial. You have given us a flavour of this. Perhaps, you could indicate to us whether you want to see improvements. How did this come about? Was it the sort of thing, gas prices are not very high, so it does not matter? Now you realise that gas prices are higher than they should be because of the scope for manipulation in these rather bizarrely drawn regulations.
  (Mr Hain) The whole regulation of the interconnectors is subject to general competition legislation of the Competition Act 1998. It is also a matter of a Treaty between ourselves and Belgium, which was signed in December 1997. I do think that the operation of the interconnector, which came into being, if I am right, in 1998, when gas prices were pretty low. It is only now, when the situation has got as fraught as it has been, that these have been fully revealed. I would be happy to provide you with a full explanation of our concerns and our analysis of the situation, as we understand it to be.

  Chairman: It would be useful to get it on the public record, because there is a lot of concern.

Mr Chope

  16. Underlying all this is the fact that on the continent the gas market is much less liberal than it is here and, therefore, prices are higher. I heard you say that you want us to have the lowest gas prices in the single market. If the single market is working effectively, you would expect gas prices to be roughly the same throughout the market. We could get lower gas prices if these developments, that you refer to, of Lisbon and Stockholm actually amount to a row of beans. What is actually going to happen? What has happened since this Lisbon Declaration you referred to? Has anything actually happened to liberalise the domestic market on the continent in gas?
  (Mr Hain) As I indicated earlier, one of the concrete things to have happened is that the Commission will shortly propose a Directive in this area.

  17. Do you have a time scale for that? When will it be in effect?
  (Mr Hain) Shortly. That Directive, obviously, will be considered in the normal way. There is no difference between us. We want to see this come in as quickly as possible. I think it is an important test of the European Union's ability to reform itself and to operate in a truly competitive fashion, in the way that is required in a global economy, and that this should be carried forward quickly.

  18. We are relying on a Directive rather than empty declarations.
  (Mr Hain) We are relying on full declarations rather than empty declarations. I am just informed that the Directive is expected by 23rd March. That is little over a month away and well in time for the necessary attention to drive it forward to be given to it before the Stockholm Summit in June.


  19. When do you anticipate the report from the Commission on the operation of the inter-connectors?
  (Mr Hain) We want it to be thorough. Commissioner Monti has promised us that it will be. We want it as soon as possible.

  20. You do not have a date.
  (Mr Hain) Not a specific date, no. As you said earlier, this is affecting companies now. It is a very urgent matter. That is why we are pleased that the Commission has acted with such speed in agreeing to the sitting of this inquiry.

Mr Berry

  21. Just to clarify, the inter-connector, if it is subject to general competition legislation then that raises the question, given what you said, Minister, why that would be referred immediately. Is there anything the United Kingdom can do to act on this to speed things up, or does it have to be left to the European Commission? It is a prima facie case of minister referral.
  (Mr Hain) Because the inter-connector affects two Member States the European Commission has a major locus. I can give the authorities for that. The Belgium authorities also have a locus and could legislate on the inter-connector, they tended to adopt a more stand-off position. As I understand it, the United Kingdom/Belgium Treaty, which was signed in December 1997, does not confer any powers over third parties which did not exist independently of the Treaty. We decided that it would be better to refer this immediately to the European Commission rather than act unilaterally. It is interesting that the minute we have done that there have been signs that the market is starting to, as it were, react in anticipation.

  Chairman: On that note, Minister, can we thank you for your prolonged session this morning. We appreciate as you come in to the job you probably had to travel a great distance to get here this morning. Thank you very much.

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