Examination of Witnesses (Questions 200-219)
CHEMICAL INDUSTRIES
ASSOCIATION
25 JANUARY 2005
Q200 Chairman: Taking this a stage further,
one of the issues we raised this morning with the oil and gas
industry (UKOOA) was do you think there might a case for a regulator
for off-shore activities, an economic regulator to open up the
market in the way that Ofgem has done it for UK-based energy selling?
Ms Hackitt: Certainly I think
one of our observations would be that in our representations to
Ofgem, where we feel they have endeavoured to get to the answers
to some of these questions that we have posed, the limitations
on the scope of their remit has, indeed, not enabled them to get
to the bottom of some of the issues that they have tried to look
at. Whether the way forward is an extension of Ofgem's regulatory
regime to cover all that it needs to be able to cover the gas
market properly or whether it is a different way of regulating
the off-shore market, certainly I think we would have sympathy
with that view in some way or another, yes.
Mr Crotty: As a bystander, I am
not sure I fully understand why gas should be different from many
of the other commodities which are regulated where there is a
much more integrated approach to regulation than we have got in
the gas market.
Q201 Mr Hoyle: You have actually touched
on the gas supply and the problems you face, but when people look
and the industry look at people like yourselves who are actually
buying gas at prices, one wonders if there is a lemming instinct
within the industry, because it seems that in September, when
the prices were at their highest, there was a clamour by companies
who wanted to take forward prices. Why do they do this?
Ms Hackitt: One of the reasons
for the peak of contract negotiations in September is probably
historic, of that there is no doubt, but I think what we have
certainly seen this year is that many more companies have stopped
and questioned whether this is the right thing to do, and we have
an example here today of where companies have, indeed, decided
they have to place some distance between themselves; but I think
we need to be careful about seeing this as a solution to the problem.
What we suspect will happen is that we will see more spikes, if
indeed they are spikes, if we move.
Q202 Mr Hoyle: The thing is that prices
significantly fell afterwards, but why did not people take spot
prices for the time being, make temporary arrangements and wait
until the price was better: because all they have done is to hook
themselves in at the highest price possible, and companies are
now, quite rightly, letting lenders know that they are upset that
they have done this?
Ms Hackitt: Some have, but let's
be clear. We are actually describing two different types of phenomena
here. One is where companies have, rightly or wrongly, locked
themselves into high prices, and some would say they should not
have taken that action, or whatever, but equally I think many
of our member companies are not asking for that; what they are
asking for is greater certainty in the market.
Q203 Mr Hoyle: The question is: why did
they not make temporary arrangements?
Ms Hackitt: Many have.
Q204 Mr Hoyle: But many have not?
Mr Crotty: Some have not because
they do not have the capability to buy on the spot market, they
do not have the scale to purchase on the spot market, to go out
and tender for those contracts, so they are forced to make these
commitments. We are fortunate, because of our scale, in that I
can buy 100% spot, which is exactly what I have done this year.
It is not something I want to do, but something I am able to do.
If I was a very small user I could not do that.
Mr Calder: We are already seeing
winter prices next year in excess of 45p a therm right now, so
the spike is certainly significant, but it is only one element
of the high prices. We are still seeing fuller prices at a higher
level.
Mr Crotty: Worse than last year,
it is worth pointing out. If you look at Q1 winter, this time
last year we were looking at Q1 winter '05, the winter we are
in now, at 40 pence a therm. Q1 for '06 now is 48 pence a therm.
It is worse than it was this time twelve months ago. This is not
a one-off phenomenon. It is happening already for next year.
Q205 Mr Hoyle: Come September, let them
roll in. Here we are, let's sign the book again. Let's stitch
them up in whatever way we can. That is the question. I know you
feel there are alternatives, but I think the reality is that some
of those companies, maybe if they had not followed this lemming
instinct that they all signed up, it could have been better, rather
than complaining now?
Ms Hackitt: Certainly I think
there is scope for organisations like the Chemical Industries
Association to raise awareness among its membership around the
options they have, and we certainly have plans in place to do
that to try and assist our members in becoming more wise to the
various options that are open to them, but at the end of the day
companies will have to make a decision between certainty, and,
as Mr Crotty has already described, when you are settling contracts
for your finished products for a year or more ahead, if you do
not know the price of your raw materials, that becomes quite difficult.
Mr Hoyle: Hopefully we will not see many
of these blank cheques once you have told your clients.
Q206 Judy Mallaber: Is it just historic
that so many contracts fall to be renewed at the same time of
year or are there other reasons why that has happened?
Mr Crotty: I think it is primarily
historic. We are a large buyer and we do not commit all our products
in forward contracts in September; we will buy at different times
of the year. We buy in April, we will buy in September, October
time, so we do spread it out a bit, but it is generally historic.
If a company has been hooked into a 12 month contract starting
in October, it is hard to unhook yourself. By default, probably
a lot of people have unhooked themselves this year and probably
will think twice about hooking back in in September or October.
Q207 Judy Mallaber: Is it not inevitable
that if you have them all bunching like that you are going to
have a demand which will lead to a peak in prices?
Mr Crotty: Yes, but we have been
buying at that time of the year, the industry has been buying
at that time of the year for a long time and have not seen winter
forward gas prices at the levels we have seen them over the last
two years. This is quite exceptional.
Q208 Judy Mallaber: If some of them have
uncoupled themselves from that autumn date, you are not convinced
that in itself would—
Mr Crotty: The industry is buying
spot now—it did not commit last October time—and we
are already seeing prices for next winter at very high forward
prices now uncoupling has taken place.
Ms Hackitt: I know one member
company who is not with us today who, for all the reasons we have
described, chose not to renew either their gas or electricity
contracts in the autumn and to take the option of going to spot.
They have now come to try and renegotiate an electricity contract
and are experiencing price increases of twice what they were paying
this time last year, again, because of uncertainty among the people
who they are trying to purchase electricity from about prices
that they will receive. There is a still a problem with trying
to purchase a long-term contract when the people from whom they
are buying, in this case electricity producers, do not have the
data to accurately predict the future.
Mr Calder: I think there is also
a planning aspect to this which you should not forget. As well
as being historic it is convenient if you have a 12-month contract
from October; and that gives you a bit of certainty about what
your energy costs are going to be in the following year, and for
companies such as ourselves that is very important. It has been
difficult for us to explain to our Swiss masters, "No, I
am sorry, we cannot tell you what our budget is going to be this
year because we do not know what our energy prices are going to
be."
Mr Crotty: I think that makes
an important point about this issue of choice. A lot of companies
have a choice as to where they manufacture a product, and, risk
aversion being what it is, you tend to try and minimise it. If
you have got more certainty on your gas price in Germany or Italy,
then you will probably swing your manufacture in that direction.
We can make chlorine to make PVC in any of those countries, and
we have more certainty what we think the price is going to be
in Germany and Italy next year than we do in the UK. That cannot
be good for UK plc.
Q209 Mr Clapham: Before I return to transparency,
on the electricity price, I note from your submission you talk
in terms of "high gas prices have driven up electricity prices"
and you say that some of your members have actually found that
they have reported increases of 60% in fixed-term electricity
contracts. Obviously that is going to impact on competitiveness?
Ms Hackitt: Absolutely.
Q210 Mr Clapham: Has this information
been made available to government and, if so, what response have
you had from them?
Ms Hackitt: Yes, we have made
all of our evidence and all of our data from companies available
to government. Our primary contact has clearly been with DTI,
with the energy unit in DTI.
Q211 Mr Clapham: Have there been any
encouraging responses?
Ms Hackitt: I think it would be
fair to say that in the last month or so we have been very much
more encouraged than hitherto by the response we have had, but
I think it has to be said that we have found it somewhat frustrating
the length of time it took for us to get what we consider to be
a proper hearing within DTI about this problem. We were told for
far too long, in our view, that we were simply seeing price rises
that were going along with oil price increases, and, in spite
of our protestations to the contrary that this was something in
addition to that, it took quite some while for us to get what
we regarded as a serious hearing in the DTI, but we are now in
those discussions with DTI. We are having regular meetings with
them and we are presenting them with the data that we have, but
there is a long way to go because it is a complex issue and there
is a lot of data to be shared.
Q212 Mr Clapham: In any event, it is
good to hear that things are now continuing and that you are able
to relay your information through and get responses from the DTI.
Just returning to transparency, I note again in your submission
you refer to "small business users of energy not only suffer
from lack of market transparency but also very limited knowledge".
Again, this obviously affects new entrants into the market. It
does have an impact on the dynamism in the economy, particularly
in your sector. Has government been made aware of this and, again,
if so, what has their response been to this?
Ms Hackitt: Again, I think we
have made the point, as we always do in all of our representations,
that we see the effects of this across all sub-sectors of the
industry and that we are as concerned about the impact on small
energy users.
Q213 Mr Clapham: Is there anything the
Government could do to assist the small energy user in your sector?
Ms Hackitt: Certainly, for example,
we have discussed whether we should work together on education
of smaller businesses, and certainly in our industry we will take
the lead on that for member companies, but we would be happy to
work with anyone in government on spreading that message to other
parts of the industry who are not necessarily members of ours.
Q214 Mr Clapham: But it clearly needs
more information to be made available?
Ms Hackitt: Yes, it does. People
need to be educated about the market and the impacts and how to
deal with it. That is clear to me.
Mr Crotty: It is hard enough for
a large buyer, and we are one of the big three buyers in this
country of industrial gas. It is hard enough for us to have market
information available. For a small user it is just impossible.
Q215 Mr Clapham: What about help with,
say, purchasing cooperatives? Would that be a rational way of
proceeding, or is that, again, not something that could be brought
about?
Ms Hackitt: It certainly is something
that is worth considering, and if after appropriate education
some of our members were to ask us to investigate that, just as
we did previously with insurance, for instance, when we looked
at doing something similar when the market was very tight for
the membership, we would be prepared to investigate, but I think
those are the sorts of things that it is for trade associations
to consider more than it would be in government remit, for all
the reasons of potential conflict, of sponsoring of different
activities that could be considered to be at odds with one another.
Mr Crotty: I think the issue there,
though, is that what that would address immediately is it might
allow small users who cannot buy spot today to bundle and buy
spot as part of a cooperative. It does not address the problem,
which is they should be buying in a forward market because they
want to make a forward commitment and they want forward security.
Ms Hackitt: They want certainty.
Q216 Mr Clapham: Finally, are there any
consultants that are active in advising some of the smaller companies
on gas and on the energy market generally, and is that having
an effect? Is it helpful to the small companies?
Ms Hackitt: There are certainly
lots of consultants out there. The extent to which they are helpful
or otherwise is certainly not a question we have posed to the
membership, but I would imagine it would be a mixed response.
Mr Calder: You could probably
spend as much time talking to consultants as you could studying
the markets and maybe buy it yourself.
Q217 Chairman: I think someone spoke
about a conflict of interest. Do you think there is a problem
with the DTI in so far as what we are really talking about here
is opening up markets which involve big players who in many respects
are major tax-payers, the kind of people when Tony Benn was Minister
for Energy he felt should sit at the other side of the desk when
he came into the room? Do you think there is a kind of reluctance
on the part of a sponsoring department to come to grips with some
of the big bears that are going about, if bears can go about in
the North Sea! Do you see what I am getting at?
Ms Hackitt: I do not think we
would go so far as to say that there was clear evidence of reluctance.
What we can say though is that people who come from a business
background, as we all do, I know of very few, if any, private
companies who would not have better corporate governance arrangements
to separate responsibilities.
Chairman: A suitably diplomatic answer
and a good point.
Q218 Sir Robert Smith: I wanted to ask,
as it has come up a lot with other witnesses, what is your view
of part of the solution or package of response of reintroducing
a windfall tax on the producers?
Ms Hackitt: Certainly I can see
the attractions of a windfall tax in some respects, certainly
in the sense of where that money might be spent to help some in
the domestic market, particularly at the fuel poor end of the
market if the money were hypothecated in that way. Given the nature
of our concerns, though, as an industry, which is about the way
we want the market to operate and that we do want a market that
operates effectively, it is very difficult to see how the imposition
of a windfall tax would cause that behavioural change that we
are looking to come about.
Mr Hoyle: This applies to Robert!
Q219 Chairman: Let us not get into internal
politics.
Mr Crotty: These forward price
increases have cost us a lot of money over the last 12 months.
I am not sure I would feel any warmer were I to know that the
Government had that money rather than the oil producers. I still
do not have it.
Ms Hackitt: Exactly.
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