Examination of Witnesses (Questions 300-304)
ENGINEERING EMPLOYERS
FEDERATION
25 JANUARY 2005
Q300 Mr Berry: If Mr Sikorski is a power
consultant, he must know the answer.
Mr Sikorski: Your faith in me
is probably misplaced. If you had efficient markets you would
say it does not actually matter when contracts have been done,
and in some ways your question is almost: "Could you make
the use of market power less by staggering contracting and having
people contracting throughout the year?" because you would
have to be fixing the market all the way through the year, which
is probably more complicated than fixing the market at a given
time.
Chairman: Roger Berry was not here this
morning. Had he been here he would have heard that, in fact, the
reason for this, if I can put you all out of your misery, was
that British Gas did it when it was a public monopoly and it did
it because it suited their purposes. That could have been in order
to get all the contracts in before the end of the financial year,
or something like that. I can imagine that if it was British Gas
under public ownership it would not necessarily be the acme of
economic sophistication.
Q301 Judy Mallaber: Can I go back to
the discussion right at the beginning of the session about your
call for a more comprehensive investigation into the reasons for
the price hikes? What do you think went wrong with Ofgem's investigation?
Why has it not met what you wanted?
Mr Sikorski: I guess there are
two points. The first one, to directly answer your question, is
there is a lack of information about what is happening offshore.
Some people could say it is all about what is happening offshore
not onshore, whereas Ofgem is the onshore regulator. I think a
wider point is more in terms of it is always hard ex post
to prove something, so it is always better ex ante to set
up regulations that prevent that. There was a question, in one
of the things you talked about when you were talking to Shell,
about: "Would you prefer having regulation?" I do not
think it is a question of economic regulation, which would be
Ofgem, (that is really the key issue of what we saw last Fall),
but it is actually financial regulation because, essentially,
this is a commodity market that trades like a commodity market
but is not regulated by financial services regulation. I think
the really, really big doubt on energy markets at the moment is
that they have a very light hand of financial regulation, and
this means that the kind of trading and risk management reporting
and compliance disciplines which are required of every other commodity
market in the UK is not actually applied to energy. I think that
is a really big issue.
Q302 Judy Mallaber: You are asking the
DTI to get somebody to have a look into what happened, even though
you accept it is quite hard to find out. You must have some idea.
Clearly, you are saying, basically, you do not like Ofgem's conclusion
that it cannot be just down to market forces. What are you getting
at? Do you have some explanation? Are you saying it is manipulation
of the market or something underhand or what is the suggestion?
What is it that this independent investigator is meant to investigate
and what are the questions you want them to ask?
Mr Temple: First of all, we think
the DTI should ask, very firmly, the gas producers much more clearly
why this price hike took place. We do not believe they have been
asked directly to explain that. We find that surprising and we
think it is an important question to ask. Thereafter, the Ofgem
report still seemed to leave almost 50% of the price change with
inadequate explanation, it just was not clear. We analysed this
quite deeply and we still cannot fit it to typical market fundamentals.
For example, we spoke earlier about the fact we cut back production
to do repair in the North Sea, you can see that—but there
has not been a similar price hike over every previous summer,
so that was not the explanation. We can see where that sort of
thing is factored in. There are lots of questions about the degree
to which it is impacted by oil prices, for example. Then, you
find these prices are not typically matched against something
like Brent Crude, they are matched against other things like gas-oil
and heavy fuel-oil, which did not show anything like the differences
which the other oil prices showed, so you question that sort of
thing. At the end of day you have got to say: "Why were the
gas producers reluctant to enter the forward market themselves?".
This is a massive thing, this is very typical of what happens
in commodity markets, but not one single producer went into the
forward energy market. Surely, they must have been potential market
makers in this respect. I think we say there are questions which
go beyond, perhaps, the DTI and you need somebody looking more
at commodity markets. You need somebody who can take every facet
of how a market has operated, including the competition end of
it, to try and find out what really went wrong. It was such a
big change, there has to be something pretty special which took
place, surely, and we have not found out what that was. We spent
quite a lot of time and money trying to find out what it was.
Q303 Judy Mallaber: What are your suspicions?
Do you have a hypothesis? I am not quite clear what you are getting
at or what you think happened.
Mr Temple: We have lots of suspicions
but without the proof, it is not appropriate to comment. We think
that somebody with the authority to do so would be the best people
to pursue that.
Mr Radley: I would not want to
offer any suspicions either. I think the important point is that
somebody takes an overview of the whole market. The problem is
Ofgem only looks at one part of the market, for very good reasons;
you have the DTI as well and the Financial Services Authority
looking at the trade side. I think you need an independent organisation,
perhaps the Competition Commission, to take a thorough overview
of the workings of all of the market to see what has been happening
there.
Mr Temple: That is our position
today because if it happens again we will all be kicking ourselves
for not understanding what happened because we will pay the consequences
again.
Q304 Chairman: I think on that note,
Mr Temple, you have probably raised as many questions as we have.
It has been very helpful and useful. As ever, you know quite often
after we have thought over what you have told us, other questions
might well arise and we will be in touch. Equally, if you think,
on your way back down the road, that you get a blinding flash
of light, then please share it with us because I think part of
our job is to put light into dark corners.
Mr Temple: I will do that. Can
I say we are incredibly grateful, frankly, that this Committee
has decided to look at this issue. I think it is a massively important
issue today, but it is not going to stop, this we see as the next
few years' issues as well. It is very right that we try and wrestle
with them today as we need to answer them for the future. Thank
you very much.
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