Examination of Witnesses (Questions 1-19)
ENERGYWATCH AND
FUEL POVERTY
ADVISORY GROUP
25 JANUARY 2005
Q1 Chairman: Good morning, ladies and
gentlemen. Perhaps, Mr Asher, you could introduce your colleagues
and then we will get started.
Mr Asher: I am Allan Asher, Chief
Executive of energywatch and accompanying me is Lesley Davies,
Director of Policy and Research at energywatch.
Mr Lehmann: I am Peter Lehmann,
Chairman of the fuel poverty Advisory Group, and this is Gill
Owen who is a very active member of the Group.
Q2 Chairman: We have been doing reports
on energy or alluding to energy prices for some time and it is
certainly clear that prices have been very low for a while. Indeed,
it could be argued that some electricity producers have either
gone bust or withdrawn from the market. What is your response
to the argument that there are always going to be swings in prices
and that this is part and parcel of a competitive market and really
we consumers just have to ride the punches, as it were, and adjust
to it? We have seen an era of low prices. We have heard of people
forecasting that with certain shortages in UK gas supplies that
they were anticipating increases in prices. Do you think we are
over-excited about it?
Mr Asher: In a well-functioning
market of course prices will go up and down and of course that
is the way you send signals for new investment. You also expect
in a well-functioning market companies to come and companies to
go. What we have seen though in the wholesale market is not that
at all. There is no evidence of a large increase in demand or
a shortage of supply and it is those things that create those
market dynamics. Instead we have seen in this market huge wholesale
price rises that are half unexplained. The Ofgem report could
only find an explanation for about half of that and the rest of
that was market fear, uncertainty and doubt. Another thing you
do not see in well-functioning markets is statements such as that
of Lord Browne in The Times at the weekend saying that
the company has a staggering amount of cash flowing in every door.
He speaks of billions of pounds of extra revenue pouring in. That
is not being competed away and it is a sure sign that there is
something seriously wrong with the upstream market.
Q3 Chairman: Which upstream market are
you talking about because I am not here to defend BP, they will
get the chance later this morning, but I do think there are a
number of markets in which they operate. We are talking primarily
here about the UK Continental Shelf and perhaps the market in
Europe. I think those are the areas that your own evidence referred
to.
Mr Asher: That is right.
Q4 Chairman: To what extent do you think
the staggering increase in profits or cash flow that he refers
to is attributable to the North Sea as distinct from the rest
of his business?
Mr Asher: I am not able to break
that down. I am able to say that BP is the largest owner and largest
producer of gas that is supplied to the UK, they have the largest
share, and that the wholesale prices for gas have risen considerably
more than oil prices and that a material portion of those increased
cash flows which will translate into profits—a profit I
might say of almost 10 per cent of assets—is attributable
to gas supplies to UK consumers and businesses.
Mr Lehmann: Perhaps I can come
in on that because there was some information in the Treasury
Pre-Budget Report, as we said in our supplementary submission,
on the extra profits made from oil and gas in the North Sea. We
can derive from their numbers that the extra profits are about
£2 billion per annum over and above their normal profits
that they had been making before.
Q5 Chairman: We did a report about three
years ago on security of supply and we predicted that there would
be the ending of the era of cheap gas and electricity. Do you
think that the Government should be intervening at this time since
it has been flagged up that there are going to be rises and they
may be higher than had been anticipated? What do you think government
should do to intervene here? I am not necessarily talking about
fuel poverty because we can come on to that in a little while,
we have got some specific questions on that, but just as a general
warning should there be any form of intervention by the state
in these matters?
Mr Asher: In the first place,
the role of governments in a market economy is to ensure that
the markets work efficiently and effectively. It is our contention
that that is not the case here. Sadly, the regulatory system is
discontinuous. It turns out that the part of government that regulates
the offshore production of gas is not the same as the one that
has prime regulatory authority. In other words, Ofgem does not
have the regulatory authority to do this job. Its recent report
in three places pointed to lack of information, lack of jurisdiction,
lack of understanding and that they were not even in their own
report after a year able to come to a conclusive view. We say
that the Government needs firstly to ensure that the regulator
has the right tools to do the job. Secondly, we have to recognise,
as everyone says, that increasingly the UK is importing gas and
yet our regulatory system does not recognise that. We are not
properly integrated into the European regulatory system. We have
not been able to use those Europe-wide tools for market analysis.
Then thirdly, information flows to consumers domestically,
especially commercial consumers, are badly skewed. The producers
in the case of gas have tonnes of information that the consumers
do not and, unlike electricity, the market is uninformed and that
leads to the fear, uncertainty and doubt that has pushed up the
prices.
Q6 Chairman: We will be taking evidence
in due course from the European Commission, but are you suggesting
that Britain is not taking advantage of the regulatory tools which
exist in Europe or are you saying that the regulatory tools themselves
are inadequate?
Mr Asher: It is a bit of both,
in my view. We have recommended in our submission that there be
a number of European Commission initiatives. One that is being
taken up is that DG Competition should investigate some of the
contractual issues to determine whether there is evidence of cartel
behaviour or of unlawful agreements by upstream suppliers. That
is one issue, but a second pressing issue is for the European
Commission more generally, perhaps the Energy Directorate and
others, to have a look at the workings of other bits of the market—access
to storage facilities, access to the transmission lines and the
way in which suppliers of the wholesale gas work together—to
determine whether there are structural features of that market
that are not working, because it seems to us that that is the
case and that we have not properly engaged in Europe in that way.
I am not saying that people are not making initiatives, but years
on from earlier reports we still do not see any outcomes in that
area.
Q7 Mr Clapham: Would you say that UK
electricity generation is too dependent on gas?
Mr Asher: I would not say it is
too dependent. It is dependent to about 40%, and that has led
to huge prices rises in electricity as well, but if the gas market
were properly functioning we would not have seen that. It is certainly
true that market information in electricity is much better, so
it is at the moment a more competitive market.
Q8 Mr Clapham: Given that, as you say,
regulation does not seem to be having the effect that it ought
to have had, is there a case for government to intervene to ring-fence
certain energy mixes? For example, coal is the cheapest electricity
on the wires, should we be putting more investment in clean coal
technology and ring-fencing part of the market for, say, UK deep-mined
coal?
Mr Asher: I would say that it
is very important for us to ensure that the incentives for all
innovations in production of new fuels, such as clean coal, wind
power, or whatever, are done in a planned and level playing field
way, so that market initiatives can work. I guess I would be a
little wary of governments deciding which technology is the winner,
but instead to allow full scope for markets to work effectively
in that area. The prime role of government, as I said before,
is to stop informal agreements which fix competition, deter investment
or stop innovation.
Q9 Mr Clapham: I heard you say that you
wanted to see the market working well, but there are situations,
as we have experienced of late, where it does not work well.
Mr Asher: Yes.
Q10 Mr Clapham: And there does need to
be, perhaps, some intervention.
Mr Asher: Yes.
Q11 Mr Clapham: Turning to another side
of the market, we often hear consumers complain that prices go
up but the generators are rather slow to bring prices down once
they have increased. Is there any clear evidence that that is
the case?
Mr Asher: There is. In a report
last year of competitiveness of the market, Ofgem showed that
in electricity, even though wholesale prices fell something like
60% over a couple of years, the domestic prices fell a mere fraction
of that, less than 10%. In gas, the evidence was not so strong:
the price reduction seemed to flow through a bit more. But you
can bet that energywatch is watching very carefully, as we expect
some of the wholesale prices to start falling now, and we will
be hounding the UK suppliers to make sure those savings are passed
through.
Q12 Mr Clapham: Is there anything more
that could be done to ensure that they are passed through?
Mr Asher: There certainly is.
There are lots of imperfections in the market now. We still see
UK suppliers having premium rates for their old monopoly areas,
often up to 10% higher than when they are selling out of area.
Their sales out of area seem to have slowed down for quite a few
of them. There are lots of areas of the market that are not working
well and we think that greater degree of domestic competition
is going to be called for.
Q13 Sir Robert Smith: Before I ask my
question, I need to let the Committee know of my entries in the
Register of Members' Interests relevant to the inquiry: a shareholding
in Shell Transport and Trading, which is an oil integrated company,
and, also, as vice-chairman of the All-Party Group of the Offshore
Oil and Gas Industry, I took part in a visit to the Offshore Northern
Sea's Conference and Exhibition which was sponsored by UKOS, Statoil
and ChevronTexaco. In your evidence (from energywatch) you are
talking about your scepticism of Ofgem's view that `market sentiment'
played a considerable role in the spike in the forward wholesale
price. If you do not think it was market sentiment, you must think
it was some sort of market fundamental. What do you think was
the cause of it?
Mr Asher: The point of our scepticism
is that Ofgem went to great lengths to apportion the price rises,
even down to very fine elements: 5% for increased storage costs,
20% for lower than expected beach deliveries. They were able to
divide it up in that very fine way, and then, 46%, "Ah, that
is market sentiment." We are not saying it is not market
sentiment, but, to disaggregate that market sentiment, we are
saying that is largely about the fear and uncertainty of large
buyers who have no idea what is happening on the production side.
As you may know, in electricity markets anyone can log on to websites
to be able to see the generation profiles, bid profiles, and know
just where there are advantages or problems in generation. In
gas, there is this huge silence until sometime after. However,
on the supply side, the suppliers, the producers, are regularly
swapping that information. If you went out to one of the platforms,
you would probably notice that they even have a fax network amongst
all the offshore platforms, where they regularly fax one another
about production problems and things like that—which I am
not saying is an unnecessary thing: it is important for stable
delivery. They are the ones who have that information. Buyers,
such as the NHS here, do not know anything about that. Even the
voluntary arrangements proposed by the industry are not going
to give that to consumers in real time; they are going to keep
it to themselves, make the best of the market, and people like
the NHS are paying an extra £41 million a year because of
the fear.
Q14 Sir Robert Smith: Your concern is
the forward market price not the actual price.
Mr Asher: Two things. The forward
market price clearly has a big impact on prices that people have
to pay. True it is that actual spot prices and day-ahead prices
are set on slightly more rational grounds, but with the very thin
trades that go into that forward market we have seen some prices
that have hit something like 80 pence per therm, which is totally
irrational and built on fear, uncertainty and doubt. That is the
bit of market sentiment that we think is bad.
Q15 Sir Robert Smith: The evidence from
the Department of Trade and Industry shows a graph where the spot
price here, in Zeebrugge, and the Dutch equivalent of our price
are all very close together. In that sense, do you accept the
market is working fairly efficiently?
Mr Asher: I have not seen that
particular DTI graph. I have seen a thousand others. One thing
on which I hope this inquiry is able to make some finding is what
the reliable price comparisons are that we can use. I have
spoken to a dozen business representatives who attest that the
prices they are paying are considerably higher than in Europe,
whereas the DTI asserts that it is the opposite. I do not know
which is right but I do know they cannot both be right.
Q16 Sir Robert Smith: It could be that
some people are talking about forward prices and some people are
talking about actual prices.
Mr Asher: The business people
to whom I have spoken are talking about the prices they are paying,
the jobs they are losing, and the markets they are losing.
Q17 Sir Robert Smith: Is that because
they want a forward certainty and are therefore paying a premium?
Mr Asher: There is no doubt that
certainty costs a premium. You would expect it in a market where
there is volatility, where there are threats to supply or demand.
But, remember, in this market—and the Ofgem report points
that out—there is no problem with supply or demand. I think
that is something that we have to nail down. It is true that we
are more dependent now on imported gas than before but, on the
whole, there is no shortage of supply and there is no increase
in demand that would lead to those spikes or panic buying.
Q18 Sir Robert Smith: You talk about
Ofgem not being able to take enough information offshore, and
the regulator for the offshore market is the DTI. Are you suggesting,
therefore, that there is a lack of co-operation between the DTI
and Ofgem?
Mr Asher: No, I am not saying
there is a lack of co-operation; I am saying that the jurisdiction
of the prime regulator is not adequate. Have a look at their report,
where they talk about attempts to understand the shortages, trying
to understand what happened when there was downtime in plants.
They got all the data, but they said, "Sadly, we have no
idea what this means. We have not had it before and we don't know
how it works. We don't know what the supplies are and we are not
able to express views on those things." The DTI has a very
vital role in encouraging investment and exploration, but it seems
to me a conflict of functions for that same team also to be responsible
for regulation and providing market information. Both functions
are important but they should not be done by the same people.
We have got a regulator. Why not give them the jurisdiction?
Q19 Sir Robert Smith: Is it not the reality
that in the North Sea hydrocarbons and all sorts are being explored
for use, and not just dry gas for the energy market?
Mr Asher: Sure.
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