APPENDIX 26
Memorandum by Scottish and Southern Energy
Thank you for the opportunity to provide evidence
to the Committee's inquiry into the effects of the recent increases
in gas and electricity prices.
Scottish and Southern Energy (SSE) is the UK's
fourth largest supplier of energy, with more than 5.7 million
electricity and gas customers. While the other major energy supply
companies have raised their prices at least twice during 2004,
SSE gave a commitment in August 2004 to maintain domestic gas
and electricity prices at their current levels until at least
early 2005, despite rising wholesale energy prices, particularly
gas. The actual duration of this commitment into 2005 is dependent
on trends in wholesale energy prices.
SSE is also involved in the generation, transmission
and distribution of electricity and in the storage of gas. It
owns over 4,000MW (megawatts) of gas-fired generation capacity.
SSE provided comments to Ofgem throughout its
most recent investigation into wholesale gas prices. In summary,
we believe that the gas market has the following problems:
— Lack of upstream information.
While this is improving, it is still only provided on a voluntary
basis. It is imperative that the regulatory regime offshore is
brought into line with that onshore, and that offshore information
is made available to the market. This lack of offshore information
itself makes it difficult for individual companies without upstream
facilities to make sense of, and comment on, what might be causing
high wholesale gas prices. In addition, the lack of this information
to the whole market gives a significant advantage to those companies
with combined upstream and downstream operations.
— A fundamental lack of liquidity
in the market. There are two factors in particular which we
believe are contributing to a lack of liquidity. First, a change
in behaviour of certain players. We are concerned that the major
producers who would have been expected to be "long"
and selling into the market that are in actual fact buying from
it. Second, it is very difficult to contract long term for gas
at fixed prices; rather, long-term contracts are generally only
available based on a floating prompt month index price. Since
the majority of contracts are long-term it leaves little volume
in the prompt market, which levers up the effect on the long-term
contracts hrough their indexation.
We believe that both of the above are a function
of the market structure in gas, and we believe that they warrant
a more fundamental review.
Whilst some of these factors may only have a
small volumetric effect, we believe that there is a non-linear
relationship between capacity levels and prices and that, therefore,
the last few percent of gas volumes—for example, caused
by the contractual sterilisation of capacity utilisation at the
Bacton sub-terminals—can have a disproportionately large
increase in prices.
More generally, Ofgem's most recent the third
investigation into these activities was the third since 2001.
At the end of 2001, the DTI consulted on "Concerns about
Gas Prices and Possible Improvements to Market Efficiency".
This followed a similar investigation by the European Commission.
Ofgem also wrote to the industry concerning events that led to
unprecedented gas interruptions by Transco in June 2003.
These investigations have variously attributed
high gas prices to supply/demand fundamentals, manipulation by
producers or European interconnector effects. This latest investigation
by Ofgem has resulted in another "not proven" verdict.
What is apparent, however, is that these high prices are no longer
isolated incidents that, for whatever reason, continue to plague
the market.
As noted above, we do not have sufficient information
on the market, particularly that offshore, to be able to conclude
what is the root cause of continuing high prices. We also acknowledge
the constraints that Ofgem was working to in its most recent investigation.
Nevertheless, given their seriousness and frequency, we believe
that it is time that Ofgem and the other authorities conducted
an investigation on a more formal footing, under either the Competition
Act or a complex monopoly reference to the Competition Commission.
With regard to the effect on customers, it is
clear that high wholesale gas prices are feeding through to end
customer prices. As stated above, we have resisted increasing
customer prices in the face of these high wholesale gas prices.
This has been made possible through the benefits of owning and
operating an integrated and diverse portfolio of electricity generation
and from an effective gas procurement strategy. Our overall approach
is designed to minimise our customers' exposure to commodity prices.
In addition, we believe that companies have a responsibility to
pass as few costs as possible onto customers. In line with that,
SSE has, for some years, been the most efficient supplier of electricity
and gas in the UK.
It is clear that rising electricity and gas
prices could undo some of the recent progress which has been made
in reducing the number of households in fuel poverty, given lower
energy prices helped to bring a significant proportion of households
out of fuel poverty in recent years. If the Committee wishes to
explore the implications of this, SSE devised earlier this year
a proposal for a "Social Obligation" designed to encourage
energy suppliers to play their part in tackling fuel poverty by
helping to make the private sector housing stock more energy efficient
so that homes are easier to power and heat. Further information
is available on this proposal if the Committee would find it helpful.
Ian Marchant
Chief Executive
24 November 2004
Letter from Scottish and Southern Energy
to Martin O'Neill MP
DOMESTIC ELECTRICITY AND GAS PRICES
As you will know, we gave a commitment in August
2004 to maintain domestic electricity and gas prices at their
current levels until at least the end of 2004. This commitment
was given despite rising wholesale gas prices.
In our interim results statement this morning
we have re-affirmed the commitment we gave in August. Indeed,
we have said that we will maintain domestic electricity and gas
prices at their current levels until at least early 2005. As you
would expect the actual duration of this commitment into 2005
is dependent on trends in wholesale energy prices. In any event
it means that SSE is the only major energy supplier which has
not subjected its customers to two or more price increases in
2004.
This has been made possible as a result of our
business model, which seeks to minimise customer's exposure to
commodity prices. In addition, we believe we have a responsibility
to pass as few costs as possible onto our customers. In line with
that we have, for some years, been the most efficient supplier
of electricity and gas in the UK.
Fundamentally, we are determined to resist the
creep of "petrol pump pricing" in domestic energy supply
in the UK. We believe that customers should assess their gas and
electricity suppliers against a number of criteria including value,
service and the package of products on offer. This, in turn, means
that they should seek a responsible energy supplier, capable of
managing the whole supply chain, in a way that protects customers
from excessive volatility.
I have no doubt that there will come a point
in the first half of 2005 when we shall have to increase gas and
electricity prices, although I am working to ensure that any increase
is delayed for as long as possible. I hope that, in the meantime,
you will agree that this responsible approach to domestic energy
pricing is one which is in the interests of customers.
Ian Marchant
Chief Executive
4 November 2004
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