6 The role of the regulator
92. A number of those dissatisfied with Ofgem's conclusions
about the causes of the recent price spikes pointed to sections
of Ofgem's report where the regulator had admitted that it did
not have access to all the information required or did not have
the necessary expertise to form a judgement on certain issues.[241]
All such sections related to the functioning of the offshore market.[242]
93. Ofgem's remit over the gas market starts when
gas from the UKCS enters the national pipeline network after landing
at the beach-head terminals. The production industry is subject
to health and safety legislation and some regulation (by the DTI)
in respect of the proper exploitation of oil and gas reserves,[243]
to the oversight of the Financial Services Authority in respect
of trading, and to general competition law as enforced by the
Competition Commission. However, it is not the object of sector-specific
economic regulation, unlike the rest of the gas market and the
whole of the electricity market. A number of those who gave evidence
to us argued that the offshore industry was an integral part of
the gas market, and should be regulated accordingly.[244]
They suggested that the DTI had a conflict of interest, in that
it both promoted the offshore industry and regulated it: the EIUG,
for example, referred to this as an "uncomfortable dual responsibility."[245]
They also felt that the division of responsibilities between the
existing regulators led to a lack of clarity, and the danger that
no one was monitoring important aspects of the market.[246]
The oil companies—not surprisingly—maintained that
the industry was already adequately regulated, and were firmly
opposed to the idea of another regulatory body in addition to
those with which they already dealt.[247]
94. However, those critical of the current system
of regulation had differing views about the solution. Some argued
that Ofgem's remit should be extended to the offshore industry.[248]
They recognised certain difficulties in this: for example, how
to limit the regulator's role to the gas market when the industry
produces both oil and gas; and the fact that the offshore industry
is not solely a UK concern but other countries (especially Norway)
play a significant part in delivering supplies from the North
Sea to the UK.[249]
Others argued that the Competition Commission should be given
the task of maintaining an overview of the gas market,[250]
or, because of the UK's increasing dependence on gas imports,
for a "European regulatory system".[251]
The EIUG called for better co-ordination among the existing regulators
(the DTI, Ofgem and the FSA).[252]
95. Far from accepting the suggestion that its investigation
revealed 'gaps' in the regulation of the gas market, Ofgem stated
its confidence that it had both the powers it needed and—due
to the increasing flow of information over the past year—the
information it required to monitor the market properly.[253]
When we pressed Ofgem over whether the fact that it had had to
launch an investigation did not itself show that there had been
a failure to monitor the market, Ofgem responded that it needed
no extra powers or responsibilities in respect of the offshore
industry in order to regulate the onshore industry properly.[254]
96. The DTI denied that it was either the sponsor
or the regulator of the offshore industry in the traditional sense
of either term. The Minister summarised the DTI's over-riding
objective as "to make sure that we get every last economic
drop of oil and gas that we reasonably can out of the UK Continental
Shelf."[255] The
DTI asserted that the offshore industry was competitive, and pointed
out that the oil industry was also global and mobile, and that,
in the Government's view, any attempt to impose significant regulation
on operators in the UKCS would lead them to move to other oil
provinces.[256] The
DTI's approach was therefore to impose 'light touch' regulation:
apart from its role in licensing operations, the Department had
launched various initiatives in co-operation with the industry,
under the PILOT programme, to ensure maximum exploitation of the
UKCS. The two areas where the DTI intervened under these initiatives
were, first, the moves to encourage (and, if necessary, compel)
the oil majors to release to smaller, more specialised companies
reserves that were under exploited as the majors considered them
uneconomic.[257] Secondly,
there had been difficulties with ensuring fair and timely access
by new companies entering the UKCS to infrastructure built, owned
and operated by the incumbent oil majors. The DTI had helped the
industry to negotiate a protocol for such access under which,
if there was a dispute that the parties could not resolve, it
could be referred to the DTI.[258]
Although the Department prided itself upon its 'light touch' approach,
this did not mean that it was a 'soft touch' for the industry:
the Minister said that it was putting a lot of pressure upon UKCS
incumbents to release fallow assets for exploitation in order
to ensure that the UK extracted as much oil and gas as possible
from its reserves.[259]
97. The DTI and
Ofgem consider that the current regulatory regime is robust; they
base this view on their assessment that the gas market is competitive.
As we have already indicated in this Report, we believe that some
of the peculiar aspects of gas production and trading militate
against full competitiveness at present. The result is a loss
of confidence in the market, and suspicions by gas users that
those benefiting from price spikes have somehow engineered them.
None of our witnesses suggested any failure of the market in respect
of areas wholly subject to the sectoral regulator, Ofgem: concerns
focussed on the supply of gas to the wholesale markets, not the
'downstream' operations. We acknowledge that any extension of
Ofgem's remit would require primary legislation, which would mean
delay, when the problems of supply/demand balance in the gas market
are likely to be at their worst over the next two years or so.
Furthermore, attempting such legislation would undermine investor
confidence at this crucial time.
98. We
therefore recommend that the DTI itself should take a more active
role—not necessarily by increasing its intervention in the
offshore industry but by monitoring the situation more closely
to ensure that there are no activities which would warrant referral
to the Competition Commission. We accept that such an increase
in activity may require greater staff resources within the DTI;
we would expect extra resources to be made available, if required.
241 Q5 (energywatch) and App 12, Qq 47 and 67-68 (EIUG) Back
242
For example, the scheduling of offshore maintenance in the summer
of 2003: Ofgem report paras 1.41, 1.47, 7.7 and 7.10
and Q 18 (energywatch) Back
243
See paragraph 96 below for more on this Back
244
Qq 67-68 (EIUG), 200 (CIA), 363-365 (NGT), and 447 (SSE), and
App 5 (CIA), para 26 Back
245
App 11 (EIUG), para 12 See also Qq 18 and 20 (energywatch), and
217 (CIA) Back
246
Qq 67 (CIA), 301 and 303 (EEF), 447 (SSE) Back
247
Qq 142 (UKOOA and BP), 274-275 (Shell) Back
248
Qq 18-20 (energywatch), 66-67 (EIUG) and 447 (SSE) Back
249
Qq 20 and 23 (energywatch) Back
250
Q 303 (EEF) Back
251
Qq 5 (energywatch) and 65-66 (EIUG) Back
252
Q 68 Back
253
Qq 460 and 463 Back
254
Q 464 Back
255
Q 522 Back
256
Qq 515, 514, 522 and 526 Back
257
Qq 514 and 516 These initiatives fall into two broad categories:
the 'fallowfields' initiative for new fields (usually small-scale
and where extraction of reserves presents significant technical
difficulties), and the 'brownfields' initiative for recovering
remaining, difficult to access reserves in fields from which oil
or gas has already been extracted. Back
258
Q 524 Back
259
Q 522 Back
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