Select Committee on Trade and Industry Minutes of Evidence


  1.  This Memorandum addresses two related issues arising from the oral evidence by the Minister of State for Energy and Competitiveness in Europe on 14 February. First, it summarises the issues that have given concern in relation to the operation of the interconnector, as requested by the Chair of the Committee (see Q.15). Second, it outlines the European Commission's locus in the regulation of the interconnector, as well as the other regulatory arrangements, in response to the Minister's undertaking (answer to Q. 21).

Concerns with the operation of the interconnector

  2.  The Government is concerned that the operation of the interconnector does not always appear to have reflected market fundamentals. In particular, there is a history of spare capacity—the interconnector has never, (since commissioning in 1998), operated above 75 per cent capacity; there are occasionally perverse flows, when gas appears to have flowed from a higher price to a lower price; and, despite the interconnector's significance to the rest of the gas market in Great Britain ("GB"), its operation has not been transparent. Some of these problems appear to be linked. The Department suspects that inappropriate operational rules, supported by inflexible corporate governance, have contributed to these problems.

  3.  Some examples of specific problems follows:

    (a)  Corporate governance and rules

    —  the interconnector rules make its operation more inflexible than technically necessary;

    —  the direction of flow on a specific day is set up to seven days in advance;

    —  the direction cannot change more than three times in a week—though this would be less of a constraint if there were improved arrangements for trading inventory in the interconnector;

    —  the threshold for switching from import to export is significantly lower than for switching the other way;

    —  export capacity and import capacity are bundled—it should be possible to trade them independently;

    —  changes to the rules require unanimous agreement amongst interconnector shippers, with the effect that desirable changes can be blocked too easily.

    (b)  Direction of flow

    —  it appears that some companies may have exploited their ability to influence the direction of flow of the interconnector, for example by nominating in their preferred direction in excess of their contracted flows (and reducing the nomination on the actual flow day).

    (c)  Transparency

    —  the interconnector's operation (including for example the procedures which determine the direction of flow) has not been transparent;

    —  the market (unlike interconnector shippers) does not know about a change of direction until after it has happened;

    —  information on expected flows is non-existent;

    —  and information on actual flows (which appears at best 6-10 weeks in arrears) is such as to be of limited value to the market.

    (d)  Unused capacity

    —  capacity ownership in the interconnector changes regularly (and information about current ownership has not been readily available to the market—an issue about transparency);

    —  there are a number of factors (rules, practices and opacity) that impede or restrict the access of third parties to spare capacity;

    —  it appears that some capacity owners have been unwilling to sell spare capacity.

  4.  The Government's concerns are illustrated by the events of 15 January 2001, when the interconnector switched from import mode (ie into GB) to export. There was no obvious cause for the switch in terms of market fundamentals; below average temperatures in Great Britain were contributing to high gas demand, and the GB spot price had been at 31p/therm, compared with 30.5p/therm at Zeebrugge. The switch to export mode, at a time of high demand, had the following harmful effects:

    —  price spikes in the GB wholesale gas market, from 31p/therm to nearly 50p/therm, which increased costs for gas market players (and may have increased perceived risk for the future);

    —  the price spikes also increased gas purchase costs to those industrial/commercial consumers with exposure to the spot price;

    —  because of the physical supply tightness (reflecting a high level of temperature-related demand), commercially interruptible gas supplies to a number of industrial/commercial consumers were interrupted;

    —  some of those consumers were gas-fired power stations, bringing a knock-on effect in the electricity market—higher pool prices, and an increased risk of power cuts (though no power cuts actually happened).

  It appears that the switch to export mode, with the harmful real consequences in the GB gas and electricity markets summarised above, reflected in part the way the interconnector rules work, rather than market fundamentals.

The regulation of the interconnector

  5.  The main competition authority in relation to the interconnector is the European Commission. This is because the interconnector directly affects trade between Member States, so that it is subject to Articles 81 and 82 (formerly 85 and 86) of the Treaty establishing the European Community. Following public consultation, the Commission issued a comfort letter to Interconnector (UK) Ltd, in relation to Article 85(1) (as it then was) of the Treaty, on 17 May 1995. In the subsequent press release (1 June 1995) the Commission confirmed that it had cleared the arrangements between the interconnector shippers for the construction and operation of the interconnector.

  6.  The interconnector is subject to UK general competition legislation, notably the Competition Act 1998 (which is enforced by the Office of Fair Trading). The arrangements for the sectoral regulation of the interconnector have reflected the European Commission's established locus as the principal competition regulator.

  The main provisions are:

    —  an exemption (subject to conditions) from the requirement for a Public Gas Transporter licence for Interconnector (UK) Ltd (SI 1998 No 1779);

    —  provision for statutory negotiated third party access (with appeal to the Secretary of State) under the "Gas Directive Implementation Regulations" (SI 2000 No 1937).

  7.  The Belgian authorities have a locus. However, they have not legislated for the regulation of the interconnector under Belgian domestic law. They have taken the view that the interconnector is already subject to the Gas Transit Directive (Directive 91/296/EC).

  8.  There is also an inter-Governmental Treaty with Belgium, signed in December 1997 (see Cm 3943, April 1998). It is not yet formally in force, because awaiting ratification in Belgium. However, under Article 17(2) both Governments agreed to apply the Agreement provisionally from the date of its signature. The Agreement sets out how the two Governments will work together on certain matters affecting the interconnector, but it does not confer any powers over third parties.

26 February 2001

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