Examination of witness (Questions 1 -
21)
WEDNESDAY 14 FEBRUARY 2001
MR PETER
HAIN
Chairman
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.
Chairman
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.
Chairman
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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