Select Committee on Trade and Industry Minutes of Evidence


Examination of Witnesses (Questions 60-72)

ENERGY INTENSIVE USERS GROUP

25 JANUARY 2005

  Q60 Sir Robert Smith: Is it the fallback position that we move to the current European model?

  Mr Nicholson: Our thinking is not fully developed on this, not least because our preferred position is to see liberalisation. We hoped we were never going to be in this position.

  Q61 Sir Robert Smith: Obviously if the whole of Europe had the same market as us then your close competitors on mainland Europe would be facing the same (and your investors in America the same within Europe). Would there be any problems for Europe on a global scale, or is your market the kind which would still be located in Europe somewhere?

  Mr Robertson: I would refer to published statistics. Europe seems to us to be very well provided with gas. There is Norwegian gas; there is Algerian gas; there is Russian gas; there is Ukrainian gas. I think someone used the expression that "Europe is an island surrounded by a sea of gas". In a truly competitive market I think Europe should be well placed, as an opinion. Clearly we do not have a truly competitive market.

  Mr Farrell: I think in addition, if you make the comparison between the UK and Europe some of the gas that has actually been sold at the prices that have been set the way they have been set in the UK is being sold by the same companies or the same ownership in Europe very nicely, thank you very much. It is not that they are being deprived of the revenue or the profit in Europe; it is actually the reverse: there seems to be a degree of excess or exploitation about what is happening in the UK.

  Q62 Sir Robert Smith: Is it the forward price?

  Mr Farrell: The forward price sets everything else effectively, virtually. We want the security of knowing there is an open and transparent market—and we are not sure we have got it at the moment. We want real competition so that within the various markets it is the majority of the capacity that sets the price; and it is then the competition that gives us the security that we are paying the proper and fair price.

  Q63 Sir Robert Smith: Surely with that supplier selling in mainland Europe or on Island UK, because of what we discussed earlier—depending on their assumptions on winter weather and the physical capacity—those are two different markets at that forward price. Therefore, a supplier would say to someone on mainland Europe, "This is the price I am going to sell it to you because this is what I will predict the market will do"?

  Mr Farrell: There is no forward price in Europe is the reality. If you accept my premise, that the forward price in the UK is artificially high, we will automatically pay more than anybody on mainland Europe.

  Mr Robertson: I understand your question and I think it is valid for a few extreme days in an extreme winter, because what you are speculating about is a situation where UK production, the Norwegian pipeline (which already exists), the storage, Brough and Hornsea, and all the liquefied natural gas (LNG) facilities are all working flat out and the Interconnector is importing. Under that scenario for a few days, if it was very cold, what you are describing would undoubtedly lead to price rises. What we are talking about in the forward market right now is 45p for the months October through to March, for a six-month period—against a Europe price which is round about 30p.

  Mr Nicholson: It is an interesting question why the forward market appears to be expecting a 1:30 or 1:50 winter in advance of it occurring. I would imagine, unless there was some forecast or particular reason to expect dire consequences that would not be what the market would predict in advance. That is another observation.

  Q64 Chairman: What happens next September if people say, "Look, you got it wrong last year; there's nothing statistically to prove you're going to get it right this year", and they refuse to pay? Do you think they will get away with this market manipulation?

  Mr Farrell: I would hesitate to speculate, but if nothing changes we will actually see the same again next autumn. In principle the combination of circumstances will be the same so the malfunction is just as capable of recurring.

  Mr Robertson: The price is already in the market for the next winter and it could get worse. It is speculation.

  Chairman: Lord Browne will be working hard with his abacus to count how much he is making!

  Q65 Linda Perham: When you answered the Chairman a few questions ago about the concentration of market power problems (and in paragraph 11 of your submission you also talk about  inequitable access to market information, fragmentation and regulatory responsibilities) you say you called for a comprehensive investigation of the wholesale gas market to be carried out by the  Competition Commission or European Commission. You called for it but who have you been lobbying about that? You are asking us to recommend a referral as well.

  Mr Nicholson: We have naturally started some time ago talking to Ofgem and the DTI about this. We have spoken to all sorts of other interested parties. A number of us have had contacts ourselves with the Commission for some time, both at the European level and representing our UK members. I have to say there has not been any evidence of enthusiasm of going down that route from the DTI. However, I think there is concern from across the consumer base, from energywatch as well, that unless we get to the bottom of what is going on here we are unlikely to arrive at the right solutions, assuming there is a problem. Indeed, I would have thought the offshore operators and others themselves might want the air cleared one way or the other. I do not think these doubts are going to go away without something approaching a comprehensive investigation. I have to say, this Committee's inquiry we would see as a useful step along that road.

  Q66 Linda Perham: If there was such an investigation how long would that take to report, do you think?

  Mr Nicholson: That is very difficult to answer. If it is going to be thorough it cannot be that rapid. That raises problems for whether it is going to solve the immediate difficulties which our members are facing, of course. Ultimately, if the UK is going to become increasingly dependent on gas—the more so if certain elements of our generating base switch to gas, if that happens—it is absolutely imperative that we get a properly functioning market because we all get hit twice, not just through gas prices but necessarily the generators have no option but to pass those fuel costs through as well.

  Q67 Linda Perham: You are also concerned about the DTI's role as a sponsor and a regulator of the offshore gas industry. Do you think the sponsorship role has altered or affected in any way its regulatory approach?

  Mr Nicholson: I do not wish, on behalf of our group, to criticise the sponsorship role. We think it is an important one. The offshore industry is vital to our economy and to our energy supplies. It is not the existence of that role we have any quarrel with. We have described it as an uncomfortable set of responsibilities. Drawing a parallel with it—if a private business had this kind of conflict of interest it might be regarded as being rather improper. A good question was raised earlier on about how do you address questions of the oil market and so on? There are oil-related responsibilities which are directly related, in the case of the associated gas and oil fields—and we have never argued that there needs to be a change in the licensing arrangements for those fields which are properly DTI responsibility. When it comes to the equivalent functions that Ofgem carries out, or generators of electricity, we see no reason in principle why that should not apply to gas production in the wholesale end of the market.

  Mr Farrell: If I could add, one of our worries is that if you actually look at what happens with gas it is actually subject to three regulators: it is subject to the DTI, as far as the offshore operations are concerned; it is subject to Ofgem; and it is actually subject to the Financial Services Authority as far as the functioning of the market is concerned. Where you have the sort of complex issues we have been presenting today, what you actually really need is a degree of competence and coherence that can look at all of the issues at the same time and take a fair view. What we have had each time it has been referred to somewhere is almost the hand saying, "Not me, guv", and you move on to the next one. There has been no ability to look at the whole of the picture and get a fair view.

  Q68 Linda Perham: You have mentioned Ofgem's regulatory powers are limited to onshore, but one of the difficulties in extending those powers offshore would be that it could not regulate gas production without affecting oil production; and there are also the international dimensions of offshore working. If we are going to get the better, comprehensive regulation you are talking about, Mr Farrell, I am just wondering who the regulator should be? Or  would this investigation throw up a recommendation on that even as far as having a European regulator?

  Mr Farrell: There are two answers: one would be that where there are greater powers, or wider powers in the case of electricity, that certainly would be beneficial in the case of gas. It is also a very real possibility that any one of the regulators really ought to be guaranteed the cooperation of the others, and our impression at this stage is there is no real link—there is not actually joined-up scrutiny between the three aspects of regulation. In response to your point, if it interfered with parts of the market it should not, at least there ought to be the ability for all of the regulators to ensure cooperation and the release of information. One of the things that has given us the greatest problem in looking at the whole thing is the lack of information. Some of it is commercial; some of it is confidential; some of it we could not have but at least the regulator should have it. They should have access to all of it, and they could be capable of taking a fair view.

  Q69 Sir Robert Smith: On that information point, have you had a chance to assess the agreement between Ofgem, DTI and the offshore operators about the information they are providing and are about to once the computers are working a) to the regulator but b) to the market? Do you see that information as being any help?

  Mr Nicholson: Yes, certainly. I have to say it has been a battle (certainly as far as the offshore is concerned and, to some extent, the DTI) to get progress on this. I do pay tribute to the fact that things have moved on. As you say, some of that   information—the so-called phase three information—has yet to be released. This is information that is available to some market participants, producers essentially, and not to others. There are some useful initiatives going on to extend that; energywatch propose modifications to the network code that might take things a stage further. Even that relatively modest step seemed to be greeted with threats from some (whether they were credible ones or not) that the voluntary agreement might be put in jeopardy if there was too much attempt to extend their access to market information elsewhere. I think that is a rather worrying sign about the extent of power offshore and what threats might be being made behind the scenes.

  Q70 Sir Robert Smith: In your submission you do not seem to want a windfall tax on the North Sea?

  Mr Nicholson: Explicitly we have rejected that approach. We are not a fan of taxation for the sake of it. Even in this case, when we fully understand the concerns of the fuel poverty lobby, how would such a tax do anything for the large industrial consumers' competitive position? Perhaps more worrying, what on earth would it do for investment in the North Sea and our growing dependence on gas? I would have thought it would be wholly counterproductive for that to be seen as the solution. If there is a problem with the market, the solution is sorting that out.

  Q71 Chairman: What has been your reaction to the response of the DTI to the increase in prices? There has been a kind of underlying theme in your remarks but it has not been explicit. I find it difficult to understand the attractiveness of the advice that the DTI was giving to all and sundry several months ago, that if there is a problem switch to a cheaper supplier?

  Mr Farrell: I think our answer, being kind, was that we did actually find what the DTI was saying nearly up to late November, early December, both unattractive and basically wrong. We did actually go to see Patricia Hewitt. We had a very good and a very cordial meeting and I think for the first time—precisely because of the representations that had been made—they were looking directly at the issue. Although they actually disagreed with the form of words—we said the "forward market was broken", they would prefer the "forward market is malfunctioning"—they actually accept there is something wrong. They actually agreed that Jeremy and the others would sit down with them and their specialist to agree a report to say both what had happened, what was wrong, what the solutions were and how it could be taken forward, and that process is ongoing.

  Mr Nicholson: I would add to Kevin's points. If the reluctance to take our concerns on board at a certain stage earlier last year appeared to border on the hostile I have to say that has changed enormously in recent months. One can speculate the reasons for that, but clearly our members have been lobbying the DTI. There have been representations through and by other MPs, and doubtless from Committee members as well. Coincidentally or not, when it became clear that this Committee was going to investigate fuel prices, we certainly saw a sharper response from the DTI. I would not wish us to come across as too critical about this. One recognises that the DTI has a wide range of responsibilities—it has got the environmental concerns on energy—and, frankly, if one's perspective was driven by where wholesale prices and gas and electricity prices were two or three years ago, one can understand why they might not have thought this was going to be so much of a problem. The world has moved on much more rapidly than any of us expected it would. I would certainly be pleased to report that the DTI appears to be taking our concern much more seriously than they were. Hopefully, the result of the exercise that we have talked about—trying to identify possible areas for further analysis and action to improve gas market efficiency—will produce something useful.

  Q72 Chairman: We are like the people who are still loath to pass an opinion on whether or not the French Revolution was a good thing! Certainly the Rip Van Winkles in Victoria Street do seem to be waking up, but they seem to have lost four or five months in which their mouthpieces (the ministers) have steadfastly refused in this House to recognise there was a problem. One just worries about the extent to which people lay off folk and orders have been lost because of the uncompetitiveness of your pricing. I think that is the worry which required this Committee to hold the hearing.

  Mr Farrell: Yes, we would agree with you; but the scale of the changes is much quicker than anything we have seen in the past. Everybody thought privatisation and liberalisation had actually cured the problem; and the degree of volatility is much greater than we have seen before. So you have a set of circumstances, in a way, to prevent the adverse effects; almost immediate action was required but the information was not there; and almost willingness to secure the information and work it through to the sort of solutions that will be required. It is perhaps a lesson that we actually do live in a much more quickly changing world. You cannot wait for things to happen; there have to be some influences that both monitor and change what happens

  Chairman: On that note I think we will finish the questions. Thank you for your help. We have your number and we might come back to you again. Thank you very much.





 
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