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Session 2007 - 08
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European Standing Committee Debates

Regulation of Electricity and Gas

The Committee consisted of the following Members:

Chairman: Mr. Bill Olner
Atkins, Charlotte (Staffordshire, Moorlands) (Lab)
Clark, Ms Katy (North Ayrshire and Arran) (Lab)
Clarke, Mr. Charles (Norwich, South) (Lab)
Clifton-Brown, Mr. Geoffrey (Cotswold) (Con)
Cunningham, Tony (Workington) (Lab)
Kawczynski, Daniel (Shrewsbury and Atcham) (Con)
Kirkbride, Miss Julie (Bromsgrove) (Con)
Lepper, David (Brighton, Pavilion) (Lab/Co-op)
McFadden, Mr. Pat (Minister for Employment Relations and Postal Affairs)
Southworth, Helen (Warrington, South) (Lab)
Stunell, Andrew (Hazel Grove) (LD)
Webb, Steve (Northavon) (LD)
Wright, Jeremy (Rugby and Kenilworth) (Con)
Hannah Weston, Committee Clerk
† attended the Committee

European Standing Committee

Tuesday 5 February 2008

[Mr. Bill Olner in the Chair]

Regulation of Electricity and Gas

4.30 pm
The Minister for Employment Relations and Postal Affairs (Mr. Pat McFadden): I am grateful for the opportunity to set out the Government’s views on the papers before us, which deal with the European Commission’s proposals for liberalising the internal European energy market.
As Members will be aware, the Government support the development of competition within the internal energy market. We believe this to be essential if we are to ensure more consumer choice, more competitive prices and greater security of energy supply. We have supported the Commission’s efforts to introduce competition into European Union energy markets from the beginning. The first two packages of legislation on this question, in the late 1990s and in 2003, were a significant step forward. They put in place the regulatory and structural framework needed for functioning EU energy markets, and in 2007 all EU consumers were given the right to choose their energy supplier.
However, although these measures made some progress, it became clear by 2005 that the 2003 legislation was not delivering the level competition across the EU that had been expected and hoped for. This resulted in a sectoral inquiry by the Commission’s competition directorate-general. The report of this inquiry highlighted a number of areas where further action was necessary. Vertical integration, a lack of access to infrastructure, a lack of transparency and weaknesses in the regulatory framework were all identified as barriers to competition.
The Commission took up the issues identified by the sectoral inquiry in the strategic energy review of January last year, and proposed further legislation to tackle the problems highlighted. The Commission’s thinking was endorsed by the 2007 spring Council, and the Commission subsequently published a proposal for further legislation on the internal market through two directives and three regulations.
The proposals effectively revised the 2003 legislation, notably by requiring ownership separation of transmission networks that are part of vertically integrated companies, and by giving energy regulators greater independence from government and stronger and wider powers. In addition, energy regulators are given a new duty to take account of the development of Europe-wide markets when making decisions, rather than merely their national markets. An agency for the co-ordination of energy regulators is also proposed to promote the co-operative action needed to establish integrated European gas and electricity grids and to integrate national energy markets.
The Government welcome these proposals, which, if implemented in full, would deliver a better-functioning EU market. We are, however, pressing for the regulatory agency to be given greater powers to make decisions on certain cross-border issues. The proposals are currently being considered by the Energy Council and the European Parliament.
Progress is being made and there is considerable support for much of the package in other member states; however, it is not universal. There is significant resistance from a number of member states—most prominently, Germany and France—to the proposals on ownership unbundling. These countries have put forward an alternative proposal, which will be considered. However, the Commission has already said that any alternative unbundling model to the one proposed in these papers would need to deliver an effect equivalent to its proposals, and that it should include structural measures. The end result must be the removal of any incentive by the transmission system operator to discriminate in favour of particular generation and supply businesses. That is the rationale behind unbundling, and we support the Commission fully in that view.
Despite the opposition to parts of the Commission’s package, we hope that it can be adopted before the European Parliament is dissolved for the 2009 elections. If it is not, European consumers will have missed out on a major opportunity—the potential savings to be made Europe-wide, which have been calculated at tens of billions of euros a year. It is precisely because the Government want to secure the best deal for those consumers that we are keen to proceed with the proposals.
The Chairman: We now have until 5.30 pm for questions to the Minister. I remind Members that questions should be brief and asked one at a time. There is likely to be ample opportunity for all Members to ask several questions.
Mr. Geoffrey Clifton-Brown (Cotswold) (Con): It is a pleasure to serve under your chairmanship, Mr. Olner. I thank the Minister for the courteous way in which he introduced this complex subject, for which there are a lot of supporting documents. I refer him to the Minister for Energy’s statement, on page 354 of the documents, which I should like to quote in order to get his reaction:
“In particular, the Commission’s proposals would curtail the ability of governments to influence regulators’ decisions. They also include a duty on regulators to cooperate with their counterparts in other Member States within the proposed Agency for the Cooperation of Energy Regulators...on cross-border issues”.
May I have the Minister’s absolute assurance that these proposals are not a precursor to a Europe-wide regulator for energy?
Mr. McFadden: Yes, I think that these are two different things. The role of the agency is to encourage cross-border co-operation between different national regimes—to encourage national regulators to engage in that. A Europe-wide regulator’s replacing the functions of those national regulators would be a different thing, and that is not what is intended here. As my hon. Friend the Minister for Energy set out in his statement, it is about encouraging co-operation for the benefit of the consumer, not replacing the work already done by national regulators.
Andrew Stunell (Hazel Grove) (LD): It is a pleasure to be here talking about energy again. What exactly did we—the United Kingdom—ask for, and are there things that the Minister wishes were in the document that are not there?
Mr. McFadden: As I said in my opening statement, we are supportive of the proposals, so it is not that we have argued for an entirely different direction of travel. We have been consistent supporters of liberalisation of EU energy markets, so we are going in the same direction as the Commission. As I also said, however, there are one or two areas where we think that more action could be taken. The agency mentioned a moment ago could have its powers strengthened even further; reference is made to that in the motion before us. There are one or two issues on which might want to push the Commission even further in the direction that it is going, but broadly speaking, the UK supports the proposals. If there is opposition, it comes from other member states.
Andrew Stunell: The Minister made it clear that France and Germany were hostile to the proposals. The United Kingdom is a keen advocate of this measure. The paperwork refers to this being a decision to be taken by qualified majority voting. Can the Minister confirm that, should this measure receive assent from the other members of the European Union, Germany’s and France’s concerns will be overridden and we will get what we are looking for?
Mr. McFadden: We could doubtless have a long debate on the merits or demerits of QMV, but that is perhaps being discussed elsewhere. I hope that it does not come to the scenario that the hon. Gentleman sets out; we should move forward in a unified way. He is technically correct, in that QMV can mean that member states can be outvoted, but it would be preferable for Europe to come together on such an important question for the benefit of its consumers, and that is why France and Germany have raised the proposal. As major member states, their proposal of course deserves serious consideration, but we and other member states will judge it on whether it achieves the outcome that will deliver the best deal for the consumer, because that is the final aim. I therefore hope that it does not come to a division on the basis set out by the hon. Gentleman, but we will be consistent in our direction of travel regarding globalisation and the benefits for consumers.
Daniel Kawczynski (Shrewsbury and Atcham) (Con): From what the Minister has said, my understanding is that this is moving us closer to a common energy policy across the European Union. Germany wants to construct an oil and gas pipeline directly from Russia under the Baltic sea, bypassing another EU member, Poland. What sanctions will be taken against Germany for doing something that is obviously against the common EU energy policy?
Mr. McFadden: I am not sure what sanctions we would have against that member state in those circumstances. The driving force of the proposals is to ensure that we do not have, in the vertical integration that is a feature of some energy markets in Europe, incentives for co-operation between different parts of such companies that might not produce the best deal for consumers. Whether sanctions against a member state might transpire in the future is not something that could be quoted here.
Mr. McFadden: That is two questions. One related to the potential for the measure to be retrospective, and I think that the correct answer is yes, it could be retrospective. The other question related to the capacity for people to negotiate the best price. The precise intent of the proposals is to enable companies to do that more freely in a genuinely competitive market, and the problem with the regime across Europe as it currently operates is that that is sometimes not the case.
Because the market is not as competitive or liberalised as it might otherwise be, it is not clear that the price negotiated is the best possible price. We know the wider environment on energy prices and that some forces cannot be controlled, such as worldwide demand. However, it is important that companies secure the best price. The proposals in the Commission’s documents should lead to a market in which companies can negotiate better prices on behalf of the consumers whom they serve, precisely because they are closer to the real market price.
Mr. Clifton-Brown: May I probe the Minister’s reply a little more, because the provision will be quite far-reaching if it is retrospective? Let us take the example given by my hon. Friend the Member for Shrewsbury and Atcham regarding Germany’s relationship with Russia. If we suppose that Germany has already signed a long-term gas contract with Gazprom at a highly advantageous rate for the German people—one that will not be distributed to the rest of the EU—will that contract continue, or will these measures allow the European agency to intervene?
Mr. McFadden: I am reluctant to be drawn too much on the hypothetical situations that hon. Members are asking about. It is important to stress that the agency will deal with cross-border issues in a separate framework; it will not govern individual commercial decisions negotiated by energy companies.
Andrew Stunell: There seems to be some hesitation in the Minister’s paperwork regarding third-country ownership. Will he elaborate on the UK Government’s view on the Commissions’ proposals in that respect? Third-country ownership might mean, for example, United States ownership of energy companies in this country; we might suppose that to be a routine outcome, following privatisation. Perhaps now, with sovereign funds and what is happening with China and some of the middle eastern states, there might be some concerns even for the UK. Can the Minister outline the Government’s approach to that issue in EU negotiations?
Mr. McFadden: Generally speaking, we are in favour of the free movement of capital and investment decisions, but I am sure that the hon. Gentleman is aware that some EU member states are concerned about third-country ownership. I expect that, although the UK takes a generally benign view, the debate—including in connection with the proposals—will continue, because there is no denying that some countries have concerns about third-country ownership.
Andrew Stunell: May I press the Minister to say more? Imagine, for example, a Russian sovereign fund buying up British Gas: would the UK Government have a view on that and would they seek some sort of protection via the directive?
Mr. McFadden: Again, I am being asked to go down a hypothetical road, and I am reluctant to do that. I hope that the Committee does not mind if I rest on the general position that the UK favours the free movement of capital and takes a generally benign view of cross-border investment. However, there is no doubt that some states have concerns about third-country ownership and the UK, like any other country, would always have an eye on its own best interests when making a judgment on such a issue.
Miss Julie Kirkbride (Bromsgrove) (Con): Further to that point, do the Government see no difference between sovereign fund investments by countries that do not have democratic processes, or have some question marks around them, and energy companies being bought by our European friends and allies? Is there no difference?
Mr. McFadden: Two different issues are being raised: the extent to which that impacts on the proposals before the Committee, and more generally the UK’s attitude to foreign investment. Any Government of any country, including the UK Government, will rightly look to their country’s best interests when judging that. In that context the UK takes a generally liberal view towards cross-border investment; that has been our position to our benefit for some time.
Mr. Clifton-Brown: The Minister and the hon. Member for Hazel Grove referred to the fact that the Governments of some other European member states are close to their power distributors; that is presumably what the measures are trying to unbundle. Can the Minister give the Committee an idea of which countries are particularly opposing the measures and what is being done to overcome their objections?
Mr. McFadden: As I said in my opening remarks, France and Germany are probably the two member states that have raised the most direct concerns. They put forward alternative proposals just last week, I think, so it is too early to judge their merits or demerits. The Commission’s view, as I understand it, is that it is prepared to consider alternative proposals, but with the crucial proviso that their outcome is equally as beneficial as that of the proposals in the papers. We agree with that approach. It is the outcome that matters; we believe that the proposals in the Commission’s papers are a credible means of reaching the desired outcome. If there are other proposals from other member states, particularly from the two member states that I have mentioned, we will consider them, but we will judge those proposals against the yardstick of the contents of the Commission’s papers.
Mr. Clifton-Brown: May I ask the Minister about the regulatory impact costs? He states in his papers that the UK will benefit to the tune of £145 million. Will he give the Committee more information about how that has been calculated? In particular, will he comment on the proposals that we should move from our current quarterly billing system to a monthly billing system, which it is estimated will cost the country £35 million?
Mr. McFadden: The hon. Gentleman is right to say that there is a suggestion of monthly billing. Let me be clear: the UK sees no need for that and it is a part of the proposals that we will resist. Our present system operates fairly well. Monthly billing would add to costs and take away from the regulatory benefits that he outlined. There could be support for monthly billing, but it is not central to the proposals, which are about the liberalisation of markets rather than the time between consumers receiving one bill and the next. We will have allies in trying to ensure that that idea is not pressed, as it would add to costs unnecessarily.
Mr. Clifton-Brown: Will the Minister give us an idea of how the proposals will affect a company such as the National Grid, which is vertically integrated? It has gas customers, but equally it is responsible for high-pressure gas mains distribution in England. Will those arrangements be able to continue?
Mr. McFadden: Vertical integration is not impossible under the proposals. The Commission’s clear goal is to ensure that if there is vertical integration—I understand that there is not quite vertical integration in the National Grid, but some countries do have it—there is a proper separation between the different parts of the company that would result in an equivalent outcome to the one mentioned in the papers. Vertical integration is not impossible, but the Commission is quite rightly asking whether it creates incentives to have a lack of transparency between different parts of the operation, to the detriment of the consumer. That is the driving force behind the proposals.
Mr. Clifton-Brown: The UK became a net importer of gas for the first time in December last year, so clearly we will become increasingly dependent on imports of gas. I think the Minister said that he hoped that the regulations would be in place in two years, before the European elections. How does he think they will affect the European energy market and will they operate in time to prevent some severe repercussions of energy shortages in this country?
Mr. McFadden: I do not accept the notion that if the proposals were not adopted, we would have severe energy shortages in this country. However, the hon. Gentleman asked a couple of questions. We hope that the time scale will be agreed by the European Parliament by the time it dissolves. The measure will not come in until 18 months after final agreement. That gives him some idea of the time scale. He was right to say that in the coming years the UK will be a greater importer of gas than we are now That is precisely why we have a strong national interest in having a properly competitive European energy market. Our energy companies will be able to negotiate the best price for the energy that has to be imported, which in turn will lead to a better deal for the consumer.
The Chairman: If no more Members wish to ask a questions, I call the Minister to move the motion formally.
Motion made, and Question proposed,
4.54 pm
Mr. Clifton-Brown: The Opposition broadly welcome the proposals. We welcome a deregulated European energy market, which is clearly in this country’s interest. We want an energy market that operates more effectively, without any form of cartels between or among European states, and we believe that the measures have the capacity to do that.
The proposals raise some important issues, and my hon. Friend the Member for Shrewsbury and Atcham mentioned one of them: control of European energy networks. Sovereign wealth funds, for example from Russia and perhaps in due course from the middle east and China, where there are some very large amounts of money, will test the European regulatory regime to the full. Having said that, I repeat that we broadly welcome the proposals.
We would be concerned if we moved from the current quarterly bill to a monthly billing system. As the Minister outlined, that would involve further costs in this country and further inconvenience to consumers. However, he did not answer the first part of my question, which was about the £140 million benefit of a better operating energy market in Europe, which we warmly welcome.
We also welcome the fact that negotiations for the best possible terms, in the Minister’s words, on energy from all sources and suppliers will increasingly be Europe-wide. I had a an interesting meeting with National Grid the other day. I found out how the company is increasingly sourcing its liquefied natural gas into the Grain terminal, a few miles up the Thames from here, and how it is having to develop mechanisms to source LNG from the best possible supplier. Who would have thought 10 years ago that we would be an importer of LNG to the extent that we are now, or to the extent that we will be in 10 years’ time?
I thank the Minister for his courtesy and his civil servants for their support. Let us hope that they proceed in the way that he has described for the Committee today.
4.57 pm
Andrew Stunell: The Liberal Democrats also broadly welcome the proposals. We hope particularly that the chauvinistic behaviour of some of the other European countries on energy can be overcome, to the benefit of Britain and of Europe as a whole.
I have three brief points to make. First, on page 346 of the documents, in point 11, the explanatory memorandum makes in half a line a very important point, that
“This legislation will apply to the EEA”.
Those who think that we would be “better off out” and perhaps to become the Norway of Europe need to remind themselves that Norway is required to comply with the measure, but it does not have a seat at the table or any votes in the European Parliament. Sometimes, it is just as well to be there to know what is going on.
Secondly, it is right to tackle unbundling and the existence of state-owned monopolies of energy supply in Europe. Those things are no longer found in this country, and it is right that we tackle them on a Europe-wide basis as quickly as possible. To some extent, we are the victims of that work here in this building. We have lights on in the room, the electricity for which is supplied by a company that is owned by Electricit√(c) de France. The profits from the electricity burnt in this room therefore go to the French Exchequer. There is a long way to go to make a transparent and open market for the benefit of all consumers, including people in this building, who are currently supplying a tax rebate to the French authorities.
Mr. Clifton-Brown: I am slightly puzzled by the hon. Gentleman’s last point. I do not think that he would object, for example, to Barclays bank owning a range of banks in France, and for the money from the tax on those going to the British Exchequer. I cannot see what the difference is between that and the tax on the French company that is responsible for the burning of the lights.
Andrew Stunell: I am a bit surprised by that intervention because I thought that the Conservatives would have a more sophisticated understanding of how the capitalist system works. I was not talking about the taxation on the energy in this building. I am talking about the company’s profits, which are going to the French Exchequer, although obviously they are taxed in this country, just as any of its operations in France will be taxed by the French authorities.
My third point is about monthly billing, which it is estimated would cost UK consumers up to £41 million a year. I understand the Minister’s argument why he wants to resist it but I remind him that during the passage of the Sustainable Energy Act 2003—I believe that the Committee on the Bill met in this very room—my hon. Friends and I moved amendments about the introduction of smart metering. Had he accepted them, we would have a system in which anyone could know their bill whenever they pressed the button because their smart meter would tell them, minute by minute, how much they had spent and what their bill would be. Assuming that the stupid meters were replaced by smart meters at the same rate as they are now, it would cost about £5 million a year. In his negotiation with the authorities on the other side of the channel in the coming months, the Minister should suggest to them that, instead of and better than introducing a monthly billing system, there should be a Europe-wide introduction of smart meters, which would give far more flexibility and far better returns to the consumer and to the carbon output of the United Kingdom and the European Union.
With those straightforward points, I am happy to support the proposal.
The Chairman: Before I call the Minister I want to make a point of correction. It is not only this building that burns electricity from companies run by other people, but domestic properties outside here. I would not want it to be on the record that it is just this building that pays profits to French companies.
5.2 pm
Mr. McFadden: I thank all hon. Members who spoke in the debate and asked questions, and I also thank the hon. Members for Cotswold and for Hazel Grove for the constructive spirit in which they posed questions. There is not a great deal between us on the merits of the proposal. We enjoy some of the benefits of a liberalised market at present—you referred to domestic consumers and others, Mr. Olner—and the thrust of the proposals is to have greater liberalisation across Europe so that we, our consumers, and other countries gain more benefit from the liberalised European market. That was the spirit in which the questions were put.
I fear that one or two issues raised at the end of the debate may go beyond our terms of reference, so I will leave those aside. I was, however, asked to come back on the regulatory impact costs. The amount is calculated from the Government’s estimate of the improved flows of gas from the continent in response to demands where supply more accurately meets the demand, and in a more liberal market where the market price for that gas better reflects the real market conditions. We are not convinced that that is the case at the moment.
Mr. Clifton-Brown: A fundamental point has occurred to me. Although the Minister hopes that the regulations will be in place in two years’ time, it has taken this country a decade or more to achieve vertical unbundling. How long does he think it will take countries such as France and Germany to implement the regulations?
Mr. McFadden: As I explained in response to the hon. Gentleman’s question about timing, the regulations are intended to come into force 18 months after they are agreed. I agree with his general argument that it has taken some time for this country to reach that point. The reason why we are returning to the issue at European level is that earlier attempts have not produced quite the results for which people hoped. That is Government’s intention regarding the regulations and why we give them our general backing. If we have one or two points of detail to rise, we shall do so.
Question put and agreed to.
Committee rose at four minutes past Five o’clock.

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