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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