Reactions to Ofgem's report
8. A number of gas customers doubted that Ofgem had
discovered the real reasons for the extent of the rise. They accepted
the importance of oil in determining the price of imported gas,
but argued that Continental gas prices were indexed to heavy fuel
oil which had not increased` in cost by anything approaching the
rate in relation to crude oil.[10]
The Engineering Employers Federation (EEF) was also sceptical
about the role played—in Ofgem's view—by planned maintenance
and unplanned breakdowns in supply from the UKCS. The EEF argued
that facilities were closed for maintenance in the North Sea every
summer but similar price spikes had not occurred previously.[11]
The EEF went so far as to say that it had spent a lot of time
and money trying to find out what had really caused the perceived
supply problems but, although it had suspicions, it had been unable
to find proof.[12] Most
commonly, customers expressed surprise that Ofgem had been able
to account for only about 50 percent of the price rise in terms
of physical supply and demand ('market fundamentals') and had
attributed the rest to 'market sentiment'. They suggested that
either this assessment was wrong, or—if correct—then
a market so vulnerable to ill-founded sentiment was in effect
malfunctioning.[13] The
Energy Intensive Users Group (EIUG) argued that the problems with
the market included a concentration of market power, an inequitable
access to market information and a fragmentation of regulatory
responsibilities.[14]
The EIUG made a striking comparison. It suggested that the current
situation in the gas market was like that in the car industry
20 years ago, when, while a number of companies were selling cars,
the price of cars to the UK consumer was still 30-40 percent higher
than the same models cost in Belgium or Germany: in other words,
a 'competitive' market was not delivering internationally competitive
prices.[15]
9. The gas production companies accepted Ofgem's
analysis. Although there were problems with the availability of
gas from Continental Europe, they believed that the dangers of
a shortage of supply in the UK and the likelihood of an unusually
cold winter had been over-estimated by the media in the autumn
of 2004.[16] As a result,
customers had been faced with a market that took an excessive
view of future risks, and prices for forward contracts reflected
this.[17] The Department
of Trade and Industry (DTI) also concurred with Ofgem's conclusions:
the Minister believed the spike in forward prices being offered
in October 2004 were caused by a 'rush' of purchasers to the market
at a time when there were concerns about a tight gas supply and
the possibility of a cold winter, which pushed prices up, which
in turn made shippers wary of committing themselves to forward
contracts at those prices so they withdrew from the market, and
as a consequence prices rose further.[18]
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