APPENDIX 27
Memorandum by ScottishPower
I refer to recent announcements by the House
of Commons Trade and industry Select Committee regarding their
decision to conduct an inquiry into the effects of energy price
rises on customers. I believe that over the next few weeks, the
Committee will be taking verbal evidence. I would therefore like
to pledge ScottishPower's support to this process and offer any
assistance that might be required.
ScottishPower notes that the Committee intends
to look at both gas and electricity price increases and their
impact to customers through retail prices. It has already been
established by Ofgem through their competitive market review,
that there is robust competition in electricity and gas retail
markets. Given our experience in these markets we entirely agree
with this finding and therefore encourage the Committee to focus
its investigations on the wholesale gas market and its effects
on the electricity wholesale price and downstream gas pricing.
With gas prices now trading at almost four times
the levels seen at deregulation, it would seem entirely appropriate
for the Committee to examine the functioning of the UK wholesale
market in more detail. The gas market increase has been the primary
driver behind the rising wholesale electricity price. ScottishPower
buys around two billion therms of gas in a typical year for our
customers and generation stations, and we are therefore heavily
exposed to price fluctuations in the wholesale market. As Executive
Director with responsibility for ScottishPower's UK Energy Business,
I am deeply concerned at the speed and extent of the wholesale
price rises and the risks that these present to our own business
and to our customers.
On comparing with electricity market operation
and transparency within it, I would like to suggest some aspects
of the functioning of the gas market that the Committee might
want to consider as part of its deliberations.
The recent investigation by Ofgem identified
high oil prices and a tightening supply demand position in the
UK, as the primary drivers behind the rising gas price in the
UK. ScottishPower would agree with this conclusion but ScottishPower
does not believe that the high gas prices are entirely explained
by these two factors.
ScottishPower has found no evidence of any market
manipulation in our dealings, but it is clear to us that the gas
wholesale market has been exhibiting very low liquidity for some
time now, mainly due to an absence of sellers and market-makers.
Part of the reason for this may be a desire on the part of the
Producers not to sell gas forward at a fixed price, but rather
to sell on a gas-market index basis through structural contracts.
The Committee may wish to consider the effect of these contracts
and Producer behaviour on overall market liquidity.
The gas market, when compared with the electricity
market places lower requirements on market participants for information
disclosure. In the electricity market, the network operator, NGT,
publishes data on plant availability, physical flows and balancing
activity. ScottishPower feels that it would be beneficial to the
operation of the gas market, if participants were required to
produce the same level of detail. The Committee may also wish
to consider the benefits of better information flow to the gas
market participants.
Finally I welcome the Committee's interest in
the longer term supply issues for the UK. ScottishPower has been
concerned for some time that the UK is becoming over-reliant on
gas at a time when indigenous reserves are in decline. A wider
review of energy sources for the UK is merited to ensure security
of supply and fuel diversity.
We would be happy to provide more formal evidence
to the committee, should this be required in due course. In the
meantime, I would like to reiterate our full support for this
important initiative.
Charles A Berry
Executive Director, UK
24 November 2004
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