Examination of Witnesses (Questions 320-339)
MR HUGH
CONWAY, MR
JEREMY NICHOLSON
AND MR
CHRIS TANE
3 JUNE 2008
Q320 Mr Binley: That is my next question.
Given that our European partners are not doing what they said
they would do and there is no liberalisation of the markets, it
is clearly having an adverse effect on industry within the UK
and on domestic customers in the UK, so what should the UK Government
do about it, should they be rowing back from the liberalisation
that they have already gone down?
Mr Nicholson: We are not arguing
to go against the liberalisation agenda but we do feel that we
may need to modify our somewhat fundamentalist market stance,
which in an ideal world would not be problematic, to fit the reality
that we are hooked up to and import dependent on a less liberalised
European market and unless and until that changes we might need
a more interventionist stance, for example on gas storage and
other measures in order to make sure that we are not at a disadvantage.
Q321 Mr Weir: To go back to Miss
Kirkbride's earlier question then, whose responsibility is it?
Should the UK Government be taking this action or should it be
Ofgem the regulator?
Mr Nicholson: I guess ultimately
it is a political decision. We do not fault Ofgem for presuming
that the best solutions are likely to lie in the market. In an
ideal world that is true but a political judgment needs to be
made about what realistically is going to happen within the rest
of the European Union within the foreseeable future.
Q322 Mr Weir: Given the difficulties
which we have heard particularly from Mr Tane about whether this
will impact upon manufacturing and industry usage in the UK, what
sort of timescale are we talking about for something to be done
about this? We have talked about the liberalisation of markets
in the rest of the EU for years now. We visited the EU Commission
and I do not think those of us who were there are in any way surprised
at what you are saying about the attitude of some other EU countries,
despite what the Commission may be saying. What timescale are
we talking about for something to be done about this and to stop
chasing a dream that is never going to happen to liberalise the
European market?
Mr Nicholson: When we gave evidence
to the Trade and Industry Committee a few years ago, our view
was that it could take ten years before we sorted out the market
liberalisation, and that is still our view a few years later.
Who knows whether that will actually be achieved. The problem
is to effect more changes on gas storage and so on, and there
are lead times there and there is a limit to what can be done
in the short term, but at least we can be planning within the
investment horizon ahead of us over the next three, four or five
years to ameliorate some of this risk.
Mr Conway: We have to accept the
fact that some countries regard their energy suppliers as strategic
assets. It is not three months ago that Suez and Gaz de France
merged; that would have never been allowed in this country.
Q323 Mr Oaten: Could you just repeat
what you said; I did not quite catch it.
Mr Conway: Suez and Gaz de France
have merged.
Q324 Chairman: Giving them what market
share?
Mr Conway: I do not know what
the market share is but it is a very big gas supplier in France.
I am not arguing that they are right or wrong; it is just a fact.
Q325 Mr Weir: But is that not indicative
of the fear that many of us have that despite what is being said
publicly about European liberalisation, on the European mainland
it is actually going the other way, with indications for example
of EDF trying to take over Iberdrola which would have a knock-on
effect on Scottish Power in the UK?
Mr Nicholson: I think that is
correct. However, we should not generalise too much. There has
been progress in some European markets. The Netherlands for example
is moving in the right direction on liberalisation and there has
been some progress, more so on electricity than gas in some other
markets too. It is not universally negative but in terms of what
is material and affects the UK market there are no grounds for
optimism there at the moment.
Mr Tane: If I may come back to
your earlier question, speaking as a company competing in Europe,
it is perfectly clear that the liberalisation of the Continental
markets will not happen for the next ten years. It seems really
clear to me that British industry, unless something significant
is changed during that ten-year period, will be damaged irreparably
because once these kinds of assets close down they are not going
to come back to the UK and, as we have already heard, in the last
major crisis two years ago 100,000 manufacturing jobs went. My
own company had to cut back production for four months; we were
very, very close to stopping production altogether. Those kind
of issues will keep on recurring unless something happens and
saying that it will all be solved in ten years' time when liberalisation
happens on the Continent is far too far away.
Q326 Miss Kirkbride: So in your view
what should happen now?
Mr Tane: It is a complex question.
There are a number of ideas which industry and the different bodies
here have suggested, relating to things like storage, access to
import assets, and strategic stocks for example. There are a number
of different ideas which have been floated, many of which I am
sure will not be the answer or will not be the only answer, but
I think the starting point would be that government, BERR and
Ofgem actually recognise that there is a problem that needs solving
here rather than telling us that it will be all right on the night,
which is what we have had for the last few years.
Mr Nicholson: And I would add
that critical to that is making sure that our electricity supplies
diversify away from gas as well.
Chairman: We are going to move on to
electricity now because we are getting a bit short of time and
it is Mr Binley's set of questions now.
Q327 Mr Binley: I am coming on to
that but I want to ask a question at the end of the other bit.
Are not the next ten years the most vital ten years in the next
50 years with regard to the global challenge?
Mr Nicholson: Yes.
Q328 Mr Binley: I wanted that on
the record, that is really why I asked it, Chairman. Can we now
move on to this whole question of vertical integration and the
need for competitiveness in the British market because the whole
of the British market has closed down over the last five years
not increased. We have now got six major suppliers. I think that
the number of smaller suppliers has gone down dramatically and
in fact people cannot now get into the market, in truth, because
it is so wrapped up. This is a pretty dire situation, is it not?
What can we do to change that and make this a more competitive
market on that level? I have got some ideas but I wanted yours
first.
Mr Nicholson: I should say that
we have been raising repeated concerns with the energy regulator
and with BERR about increasing concentration in the power market
for some time now. If you asked us I would rather not be in this
position to start with but at least let us not make it any worse.
You will be hearing from the independent generators shortly, but
our expectation is that we are going to lose one of them and there
are precious few independent generators left within the market,
so I do think it is timely to assess whether the markets have
already become too concentrated in power generation and, to the
extent that vertical integration has become an issue, we do not
have a fundamental view that vertical integration is necessarily
bad, it is the extent of it and the fact there are so few independents
that worries us. Perhaps you heard some suggestions from Allan
Asher of energywatch, some of which are worth pursuing, about
the extent to which vertically integrated players might be encouraged
by one means or another to sell power outside their own business.
Q329 Mr Binley: Can I ask the other
two gentlemen to comment on that because it seems to me to be
a vital issue, and thereafter can we talk about what we might
do.
Mr Conway: I think there is one
other point that needs to be made. As far as we understand it,
the independent generators do not trade their electricity; they
actually sell on bilateral, over-the-counter deals and of course
it is totally opaque. We have no idea really what is going on
and in fact I have been talking to one or two of our members one
of whom buys at least £50 million worth of electricity a
year and he has tried to persuade one of the independent generators
to sell his electricity through the market but they said, "We
will go and talk to"—I am being a bit naughty here—"our
friendly supplier," sort of thing, and it is worrying. I
think our view is that there needs to be more liquidity even if
it is forced.
Q330 Mr Binley: I have got a seller
of energy who sells about £100 million a year to about 40,000
business clients. He would argue that the vertical integration
integrated market is in fact a very unhelpful trend and he fears
that there will not be room for his £100 million a year supply
business to operate unless we do do something. Do you think that
is so?
Mr Nicholson: It is a genuine
fear. In response to your earlier question I said we should look
at whether concentration had gone too far, but perhaps a bigger
question is why that concentration has occurred in the first place
and what are the drivers behind it. One of them is the complexity
of operating in the market and in our evidence, I think probably
consistent with that which you may have received from the power
industry itself, the barriers to entry to this market, the complexity,
the costs of ensuring your demand and supply portfolio are in
balance have now become a big deterrent to new entrants to the
market and independents in particular.
Q331 Mr Binley: It is even worse
than that because the big suppliers in order to guarantee supplies
are now demanding shares of that business, are they not?
Mr Nicholson: Yes.
Q332 Mr Binley: Is there not a monopolist
problem here that we ought to be dealing with?
Mr Nicholson: Clearly we have
got a market that is dominated by an oligopoly and much though
all players in markets like to moan about regulation, the brutal
truth is that large oligopolistic players quite like regulation
as a means of keeping competition out. In our view, we fully understand
the theoretical arguments in favour of refining the market and
so on but sometimes you need to recognise there is a trade-off
between theoretical market efficiency, which Ofgem is very keen
on, and transaction costs, which are a big problem for the energy
industry and the costs of which ultimately get passed on to us
as consumers. We are not clear that we have got that balance right.
Q333 Mr Binley: What if we legislated
to require all generators to auction 20% of their capacity.
Mr Tane: I would be delighted,
to put it simply. One of the very strange characteristics of this
market in my opinion is the absence of small independent players.
Any other market I buy in, if I buy raw materials, if I buy steel,
or whatever, one of the things you find in a properly functioning
market is the core producers but also traders and independent
operators. They are pretty much absent in the UK energy market
and the key question for further consideration is what could be
done to create that secondary market, or to bring it back, because
I believe that if there were a bigger independent traded sector,
whether that is by forcing a percentage to be sold or whatever,
that would give companies like mine and industries like ours the
opportunity to make choices where at the moment we have one choice
and one choice only.
Mr Binley: I am perfectly happy and I
think we all know about integrated markets.
Q334 Chairman: Can I put a contentious
proposition to you: the sale of British Energy to a existing vertically
integrated supplier should only be permitted if a volume of its
production is traded openly.
Mr Nicholson: I think that is
an idea well worth pursuing. We should say that we value the role
of British Energy not just as a key base load supplier but also
as the largest supplier to the industrial sector. We do not want
to lose that from the market, we do not want to see a further
reduction in liquidity in the market, and if as a result of a
takeover there were some compensatory arrangements which ensured
that market competition and volatility were not adversely affected
I think we would welcome it.
Q335 Mr Binley: May I go on very
quickly to the question of British champions. You have already
made the point that the European market is becoming more monopolistic
and the French example is not surprising because the French do
those sorts of things, quite frankly, irrespective of what the
EU says. Given that scenario, should the Government be putting
much more pressure on the creation of a British champion?
Mr Conway: I do not think that
it would achieve anything necessarily. The important thing is
the result rather than the action, if I can put it that way.
Mr Nicholson: We do not favour
the national champion route, as you might not be surprised to
hear. However, there are means of supporting a nationally based
industry short of subsidy or unfair interference in the market,
not least facilitating the sort of investment and reducing barriers
on planning and so on that some of those companies wish to pursue,
and especially on the nuclear issue, so there are areas of technology
where British Energy for example has experience and some other
players like Centrica have a very experienced role in the gas
market, that could theoretically be extended elsewhere in Europe.
I think they deserve support in the broadest sense and it is a
shame that they do not have the opportunities to explore that
experience as we would like elsewhere in Europe. I think we should
be very wary of going down the national champion route.
Q336 Mr Binley: Okay but importing
one from France, is that going to be any better?
Mr Nicholson: It would be unwise
of us not to take advantage of inward investment from France or
elsewhere or indeed their expertise in new build in a number of
technologies.
Q337 Miss Kirkbride: It is quite
clear that you see market consolidation as yet another problem
in terms of what is happening in the gas and electricity markets.
Why do you think that has happened? Do you agree, for example,
with energywatch that it should be a Competition Commission inquiry
that breaks all this up?
Mr Nicholson: My colleagues may
go further than me in saying this but it was not central to our
submission that we were calling for a Competition Commission referral.
We said that if others had evidence it is required we would obviously
support it; equally if it was felt necessary to clear the air,
we would support it too. What we would say is that we think that
the market, for whatever reason, has become too concentrated.
The regulator, even if it felt it could have done more to fight
against this trend in the past, may find it difficult to admit
that it has got things wrong in the past, so an independent investigation
could have advantages. There are disadvantages as well given that
we are moving into a very big investment phase of power generation
which has implications for our security of supply. We recognise
that the timing of such an investigation might be unhelpful from
the point of view of putting in tens of thousands of megawatts
of new capacity onto the system. On the other hand, maybe that
will not happen sufficiently as it should do or in as timely a
manner without an efficient market.
Q338 Miss Kirkbride: I would like
to hear everyone else but your point of view is that you think
the regulator has basically been sleeping on watch?
Mr Nicholson: All I can say is
that the regulator put out a public statement in January this
year reassuring the Chancellor that the market was working and
then five weeks later announced an investigation to see why it
might not be working (incidentally, leaving out the industrial
sector as part of that investigation). At least one of those two
announcements must have been flawed. I do not think that was the
regulator's finest hour and that these problems have been creeping
up on us for some time. We should say we are strong supporters
of Ofgem and independent regulation but no organisation is perfect
and I think the evidence that is staring us in the face from prices
now should give them and us reasons to reconsider our views on
this.
Q339 Miss Kirkbride: Again just going
back to what you have just said there, you say you are strong
supporters of Ofgem and an independent regulator, but from everything
that you have said today, which I think is frankly quite alarming
in terms of UK plc, somebody has to take responsibility for all
of this and so if the regulator is a good idea in principle but
is not doing it, should they not have been sacked? I just think
this is such a serious situation that has been allowed to develop
and yet I can see the buck been passed quickly round the table
as fast as possible so that no-one ends up taking responsibility
for what is a very serious situation. Where do you think the buck
stops?
Mr Nicholson: You might say ultimately
that the political buck stops with the government department but
certainly there are devolved responsibilities for the regulator
and if a market is becoming too concentrated, if it is not demonstrating
in its operation that it is efficient (not within its own internal
terms but by comparison with our immediate neighbours) and the
empirical evidence is there that our prices are not competitive
in our market, that is what matters to us as consumers, and if
that is the benchmark we are judging ourselves against, our market
is currently failing.
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