Examination of Witnesses (Questions 534-539)
MR ALISTAIR
BUCHANAN AND
DR ANDREW
WRIGHT
17 JUNE 2008
Q534 Chairman: Gentlemen, thank you for
coming to this important session of evidence of the Committee's
inquiry into energy prices. We know who you are. In particular,
I have met Alistair Buchanan both formally and informally on a
number of occasions, but nonetheless perhaps for the record you
would introduce yourselves.
Mr Buchanan: I am Alistair Buchanan,
chief executive of the industry regulator Ofgem.
Dr Wright: I am Andrew Wright,
managing director of markets at Ofgem.
Q535 Chairman: Thank you for all
you have done to assist this inquiry and the informal session
we have had with you. We also thank you for your written evidence
and further written submissions which have been genuinely helpful.
Why did you change your mind? On 16 January you told the Chancellor
of the Exchequer that there was absolutely no problem and a few
weeks later you launched an inquiry.
Mr Buchanan: On 16 January we
went to see the Chancellor following a letter we received in early
January inquiring about two things, first as to what was going
on with regard to increased prices because Npower had put up its
prices in early January; second, we had an invitation to give
the Chancellor a range of ideas, which we did, with regard to
fuel poverty. At that meeting we basically outlined two issues.
First, we believed that the markets were working well with regard
to investment coming into the marketplace, innovation both upstream
and downstream, choice and quality. We also felt that with regard
to the patterns of pricing strategy we had seen in the sector
at the end of 2006 and through 2007 when prices were falling the
confidence that Ofgem had had in markets remained. We also wanted
to respond specifically to the claim made in the Sunday Times
which we were concerned about on behalf of consumers that there
was overt collusion and meetings on motorways by the `Big 6' so
prices were being fixed in that respect. We confirmed that we
had no evidence of that, and such evidence still has not been
presented to us. In terms of our decision on 23 February at the
Board's monthly meeting—these meetings are arranged well
ahead—as an executive team the Board confirmed its concern
that the pricing pattern as announced effectively by the industry
in late January/early February suggested two things and one additional
factor: first, that the pricing strategies we had seen from the
companies before with regard to the timing of pricing announcements
had changed. If you look at when they dropped prices, effectively
there was a period of nearly eight months between the first company
announcing its drop and the last company effectively, largely
under name and shame from Ofgem, following suit. Equally, the
amounts by which they dropped their prices had a range suggesting
a product offering to the consumer. This time round the companies
went roughly at the same time. There were immediate price increases
and on a national average you will see that the charts suggest
very little differentiation between them. That is combined with
the third factor which is very important and comes back to our
statutory duty to represent consumers. There was tremendous consumer
concern, including obviously this Committee's, that this needed
to be reviewed. Clarity over the word "this" did not
matter because there was a lot of concern. We had similar concerns
in 2004 when we announced our previous probe in the upstream market.
We felt that the combination of those three factors led us with
confidence to go to the court and take time out to look at the
marketplace particularly with regard to retail pricing, which
is what we are doing at the moment.
Q536 Chairman: There are two concerns
about the integrity of your inquiry. Let us deal with the first
one. The fact that our decision to launch an inquiry was followed
two weeks later by yours is also quite interesting. We are pleased
that you followed our precedent. What about the fact that you
have said effectively there is no problem but you will investigate
it anyhow? How can you say there is no problem? You have given
part of the answer in response to the previous question in that
you have said that prices are moving more closely together, but
there is a view out there that really your heart and soul are
not in it because you do not believe you will find a problem.
By the way, we agree that there is no collusion; we have had no
evidence of it, but imperfect markets deliver imperfect outcomes.
Mr Buchanan: Ofgem frequently
hears this accusation. If one goes back to 2004 when we conducted
a probe, that was an inquiry which arguably stretched outside
our normal activity. I know that today you are taking evidence
from witnesses from BP, Shell and ExxonMobil. They were not thrilled
about a downstream regulator coming into their business. Generally,
when we started that probe there was a similar degree of cynicism,
which was that it would be a whitewash; it was not because we
came out with some very substantial findings with regard to both
the Sean field and why it was not running but also the missing
£1.4 billion that appeared to be being lost to the British
consumer in the very uncomfortable gas/oil indexing contracts
on the Continent. I have to say: judge us on what we have done
before. I feel confident that when we produce our results you
can judge us on the quality of the work we have done.
Q537 Chairman: You will have followed
the evidence we have had so far. The other way you seem to prejudge
your outcomes is by not looking at the wholesale markets this
time. A lot of the evidence we have had so far indicates that
the wholesale markets are the real problem and that is one of
the reasons we want to talk to the oil and gas companies after
you. Why not look at the wholesale markets?
Mr Buchanan: You will see within
our terms of reference that we have clearly indicated that will
not be excluded. Indeed, within the terms of reference we are
looking at the vertically integrated companies and that will be
taken into the review.
Q538 Mr Clapham: Mr Buchanan, I want
to ask questions regarding the way in which the European gas market
impacts on gas prices in the UK. For example, we see that in the
summer gas is pushed down the interconnector into Europe. That
gas then bears the European price which is increased, but at the
same time we see gas going into storage also taking the European
price. In winter time we then have higher gas prices because gas
has gone into storage at the same price as European gas. What
can be done about that?
Mr Buchanan: I think we have come
quite a long way. Your Committee and the British Government have
helped in terms of the pressure exerted both by DGCOMP and DGTREN
in the past two to three years in Europe but also the pressure
we have brought to bear individually on companies. Therefore,
we have seen substantial advances. You are absolutely right that
markets work with quality and transparency of information. In
France and Belgium we have had substantial advances in information
flow. That has been a big success in the past couple of years.
DGCOMP has cracked the whip over some of the companies about which
we have been most concerned, the E.ONs and RWEs. In reaction to
that they are looking at unbundling voluntarily, but does that
get us to the information we need from Germany in particular at
the moment? It does not. We need to keep the pressure on DGTREN
and, if need be, to do it by DGCOMP cracking the whip over them
and threatening them with articles 81 and 82 and serious fines—10%
of global turnover—if they do not provide us with this information.
You are right that at the moment Germany has the benefit, due
largely to historical reason, of 18 BCMs of storage compared with
Britain's 4 BCMs. That is due largely to the fact that Germany
has two large umbilical cords, one to Russia and one to Norway.
You can see why they needed that storage, but we do not know what
is in it, when it is there and what the flow of gas is. You are
absolutely right that it leads to great uncertainty in the marketplace
and is something on which we need to keep pressure.
Q539 Mr Clapham: But there is greater
uncertainty for consumers. It is a real worry when one looks at
the oil and gas linkage. We see gas prices linked via the oil
contracting indexation system. Talk of oil probably reaching $200
a barrel by the end of the year means that again consumers will
be on the receiving end of hefty price increases. Why can we not
break that link? For example, we have heard from energywatch that
the link is irrational.
Mr Buchanan: All of us—the
British Government, the Committee, the MEUC and Jeremy Nicholson
who came to see you on behalf of industrial consumers—are
trying to bring pressure on Europe. I know that Philip Lowe of
DGTREN is trying to break this down so we get quality information
and we can identify what is going on. We can then start to work
out how we treat that going forward. I do not downplay what Neelie
Kroes is doing at DGCOMP. It is rather like looking at what happened
in the UK energy scene in the 1990s when on the one hand the vision
side was pushing market and transparency of information and, on
the other hand, Steven Littlechild was regularly thumping the
companies, forcing divestment and getting action that way. One
needs both the soft glove and the hard fist and I believe we have
both in Europe at the moment. The key is that with the third directive
going to the Council of Ministers this week what we must not do
is say, "Phew! Now we can worry about something else";
we have to keep pressure on energy.
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