Liberalisation of the European
gas market
81. Ofgem thought that one of the major destabilising
influences on the UK gas market was the lack of liberalisation
in Continental Europe.[208]
All our witnesses agreed. In much of the Continent, the gas industry
is still dominated by a few powerful incumbents, who own the networks,
and often also the storage facilities; retain a very high percentage
of the supply market; and tend to trade upon the basis of contracts
of several years' duration. BP described the current situation
as follows.[209]
The market was still in its infancy. Though there was an
emerging spot market at the Zeebrugge hub, "the reality of
an inter-connected network of Continental trading hubs remains
a distant goal." Significant barriers to liquidity persisted,
including: difficulties in obtaining economic access to gas storage
facilities; issues concerning gas specification; and access to
transportation networks. Among the improvements required were:
full legal separation of the transportation and supply businesses;[210]
'equivalence' of transmission and distribution services when provided
by a regulated company to third parties;[211]
and freedom of parties to buy gas from and sell gas to anyone
else.[212]
82. All those giving oral evidence who commented
on the situation in Continental Europe called for liberalisation
to be speeded up, in terms of not only agreement on the Gas Directive
currently under discussion[213]
but also practical implementation of the existing legislation.[214]
Free and fair access to transmission networks and storage was
considered crucial.[215]
Centrica noted, for example, that third party access to storage
should have been implemented on a fair and non-discriminatory
basis throughout the EU from July 2004, but in November 2004 the
gas storage operators had still not agreed how to implement it,
and some Member States (notably France and Germany) had made no
attempt to regulate such access, despite the fact that the incumbent
transmission companies owned all the gas storage connected to
their pipelines.[216]
E.ON UK, whose parent company was formed from the merger of two
large German companies, E.ON and Ruhrgas, argued that progress
was being made in Germany: an extensive energy liberalisation
law was being discussed in the Bundestag (the lower house of the
German Parliament), and an energy regulator had been established.
Moreover, the transmission owners had already agreed a large number
of contracts for the transportation of third party gas.[217]
Ofgem and the DTI, in contrast, felt that, although there had
been some progress, it was very slow.[218]
83. A number of witnesses also suggested that none
of the changes to the Continental market would be of much effect
without a significant increase in the transparency of that market.[219]
One witness argued that it was not enough simply to know how much
gas was available at Zeebrugge: traders needed information about
availability all the way through the gas pipelines from Russia.[220]
84. Ofgem and the DTI assured us that they were urging
the European Commission not only to make progress with the new
Directive but also to carry out a thorough review of progress
to date in energy liberalisation. The Government has made it clear
that energy liberalisation would be a key component of the UK's
programme for its Presidency of the EU in the second half of 2005.[221]
We therefore asked the European Commission what were its plans.
85. Our witnesses from the Competition and Transport
and Energy Directorates General of the Commission ('DG Competition'
and 'DG TREN') admitted that progress on implementing existing
Directives had been slow so far. It had been five years since
the electricity market and three years since the gas market had
been opened to competition, and the Commission was disappointed
by progress to date.[222]
However, while the first 'package' of liberalisation Directives
had started the process of separation of supply functions from
the ownership and management of transmission networks, these Directives
had required such 'unbundling' only in budgetary terms: incumbent
companies had not been required to make practical changes that
would increase cross-border flows of energy or enable customers
to switch suppliers. The European Commission had therefore brought
in a second package of measures in 2003 to require functional
and legal unbundling. At the time of our evidence session with
the Commission officials, the European Parliament and the Council
of Ministers were still considering the final element of the second
gas package: a Directive on access to the grid, which—according
to the Commission officials—contained improved 'use it or
lose it' mechanisms to prevent pipeline capacity from being under-used.[223]
The European Commission expected this Directive to come into operation
by July 2005.[224]
DG TREN intended to wait to see whether this legislation would
have the desired practical effect; if not, it was willing to consider
the next stage: forcing the incumbents to break up into separate
supply and network operator companies.[225]
86. The officials reported that ten Member States
had yet to transpose the Directives into national law, let alone
implement them.[226]
Germany lagged significantly behind the others.[227]
However, the officials believed that even the most reluctant Member
States were starting to notice the advantages gained by other
Member States that liberalised early, and were making efforts
to catch up. In Germany, for example, although the legislation
to transpose the European Directives was still under discussion,
it would, if agreed, not only cover the measures intended to be
transposed by 1 July 2004 but also some of those for which the
deadline was 1 July 2007.[228]
87. Despite these promising signs, there still remained
much to be done. Although all 25 Member States now had energy
regulators, their powers varied in respect of the relationships
with the national Governments and the incumbent operators. The
German Government had only recently appointed an energy regulator,
and this regulator also had to deal with the telecommunications
and postal services sectors.[229]
The regulators met regularly to discuss progress and best practice,
and the Commission officials felt that, as a result of these meetings,
the introduction of competition was speeding up.[230]
The officials believed there was no need for a pan-European regulator.
The national regulators had a better knowledge of conditions within
their countries, and were therefore able to judge potential harm
more easily and react more swiftly.[231]
DG Competition was also trying to establish better co-ordination
between the European and the national competition authorities
so that it could more quickly and easily identify problems that
had cross-border effects.[232]
88. We asked which areas still to be fully implemented
would have most impact on practical liberalisation. We were told
that, apart from the vital question of third party access to transmission
networks[233] and storage
facilities, the most significant were connected with ensuring
that consumers had and could exercise choice of supplier: the
problems of tackling dominant incumbents in many Member States,
and in particular the anti-competitive nature of many of the long-term
contracts for gas supply (which often, for example, contain clauses
forbidding the onward sale of gas).[234]
However, Mr Lowe, Director General of Competition, was of the
view that even if the Directives had been implemented fully, it
would still take time for companies to change their behaviour
in such a way that they would respond to the opportunities and
problems of a competitive market.[235]
He foresaw a continuing need for the competition authorities,
both national and (where cross-border issues arose) at EU level,
to monitor the energy markets closely; and he noted that the new
Competition Commissioner had stated that one of her main priorities
would be the promotion of further competition in the energy sector.[236]
89. The European Commission officials announced that
the two Directorates General which they represented intended to
launch investigations beginning in May 2005 into the operation
of the gas and electricity markets within the EU. They hoped to
publish some preliminary results by the end of 2005, and final
conclusions in 2006. DG Competition thought that the inquiry might
discover areas of anti-competitive behaviour where either it or
the national competition or regulatory authorities could take
action, but it also might highlight a need for further legislation.[237]
Meanwhile, the DG TREN had already been given the task of producing
a report on behalf of the Commission in 2006 reviewing the general
situation of both gas and electricity markets.[238]
90. We welcome
the European Commission's announcement of these parallel inquiries.
We note the timetable announced to us, and look forward to the
completion of both inquiries by the end of 2006. We are also pleased
that the UK Government has taken such a firm stand on the centrality
of energy liberalisation to the whole Lisbon Agenda. However,
we recognise that both the Commission and the UK Government will
need to exercise considerable persuasive powers to convince other
Member States of the need to take prompt action.
91. Without further
real (not just cosmetic) liberalisation of the European gas market,
the wholesale market in the UK will malfunction: it will continue
to be difficult for buyers to access adequate supply and, because
of this and other distortions caused by the mismatch between the
liberalised market in the UK and the more rigid contractual arrangements
on the Continent, there will be a tendency for prices to diverge
significantly. Even on the most optimistic forecast, it is unlikely
that the Continental market will be functioning as a fully liberalised
one before about the end of this decade. Moreover, as BP reminded
us, "Liberalisation does not, per se, lead to lower
prices. Rather it gives consumers the freedom to choose suppliers,
encourage the development of new products and services and lets
the market react more quickly to changes in supply/demand fundamentals."[239]
European liberalisation is not a complete answer to the problems
in the UK gas wholesale market. In fact, the Director for Conventional
Energies, Directorate General for Transport and Energy, observed
that the object was not cheap energy but rather a more efficient
mechanism for establishing energy prices.[240]
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