Examination of Witnesses (Question Numbers
100-119)
MR ALISTAIR
BUCHANAN
25 NOVEMBER 2008
Q100 Mr Bailey: I would stress urgency
because some of these businesses are really up against it now
and may not survive.
Mr Buchanan: I will take that
away.
Q101 Chairman: I have just had a
constituency experience: the collapse of E4B has meant the transfer
of the book to another supplier and I have had a complaint from
a farm business that there has been very sharp practice from the
organisation that is on the book in terms of what new contracts
she had signed up to, unbeknowingly, with the new outfit. Again,
it is this point, where does someone like that, who thinks they
have been treated harshly, go for redress?
Mr Buchanan: I followed that up,
too, because I had a similar example raised directly. The information
is provided, in that case, in fact, in both cases, E4B and British
Gas, the information is provided about their rights to move, etc.,
but one of the concerns—and we are doing a "lessons
learned" on this, as you would expect, on a whole range of
issues—is how do we make sure that the customers really
do understand what their rights are at that moment and do they
need a particular piece of information from us—a flyer to
them immediately from the administrator? How do they make sure
that they know that they have a right to move at that moment of
administration? I welcome your observations; I have had it as
well, and our team is looking at that.
Q102 Miss Kirkbride: I will send
you details of my two companies so that you can have a look and
see what the problem is. Going on to the gas wholesale market,
the particular problem seems to be—please tell us how you
see it—where the supply is more than a year in advance because
there is not sufficient market liquidity. What are your observations
on that?
Mr Buchanan: As far as gas is
concerned, you have covered the ground and got a lot of very useful
feedback within your own survey. As far as we can see at the moment,
the churn is at quite a healthy level, there is a market that
goes out to 54 months, I was looking at the chart again this morning,
in terms of forward gas trading. It is not a huge market, but
there is regular churn and visibility in the market. I know Shell
and ExxonMobil came to talk to you and said that the market is
not stitched up in unfair or restrictive long-term contracts,
which was a real concern of this Committee. It seems to me that
the gas wholesale market is working quite well. The electricity
market, I am afraid, is a completely different kettle of fish
and I am happy to go onto that. With the gas market, from what
we can see, the dynamics of it are working quite well.
Q103 Miss Kirkbride: But there seems
to be a problem when people want a supply that goes over a year.
That market does not seem to be working very well, if the feedback
we get is correct. So, how can you say it is working well when,
if you want a longer-term contract and for big energy users that
might be appropriate, that is not working?
Mr Buchanan: One of the concerns
that I have—and this may lead to it not working so well—is
that one of the outcomes from the credit crunch is that apparently
the suppliers—if you are seeking more than a one-year deal—are
saying that life is so uncertain that they are going to require
a degree of premium for that supply two or three years out. Now,
is that a short-term phenomenon, or are the companies taking advantage
of the credit crunch? Is it real? Those are the things we are
having to think about at the moment. There is a whole range of
credit crunch-related issues for the sector but this is just one
of them. I am not hearing the same kind of messages as you are
about the gas wholesale market per se, but I am hearing this very
worrying message about the premium that industrial consumers are
having to pay because of the credit crunch if you are looking
for a two or three-year deal, and that is a concern; prices are
going up.
Q104 Miss Kirkbride: We have a chart
here—it is probably better if I come and show it to you.
Mr Buchanan: Yes, do.
Chairman: Basically, you have a market,
if I remember, of about 3% of trading in a year. With the chart
from the Energy Intensive Users' Group, which shows significant
premiums for British industrial consumers over European and United
States consumers, at a time of economic challenge, those price
differentials could be very serious.
Q105 Mr Binley: It could be 50% even
next year.
Mr Buchanan: They could be. Sorry,
I thought you were talking about the liquidity of the market.
This will come down to how the market dynamic works and I would
need to have a bit more information on what is built into the
European line, because Europe differs quite significantly. For
example, if you are using Italy, their prices are quite high and
quite similar to ours. If you are using Germany, which is indexed
off a different index, because they have their contracts with
Norway and Germany, then there would be a different price. When
I look at this, what do I say? I look at America. America, at
the moment, and for some time, has been significantly below us,
as it is within this chart. That may give you some comfort. It
is small and it is cold comfort that if the United States came
into the marketplace at the moment, it does not appear that it
needs to because the LNG market is very high indeed. So, we do
not appear to be having competition there from the United States
for global LNG. The United Kingdom price is a combination of the
fact that we take European index to gas on the margin and we are
exposed to the global LNG market, which is a higher price. That
is why you have the higher price over the European line.
Q106 Miss Kirkbride: Is that because
we do not have enough energy gas storage?
Mr Buchanan: I am afraid that
is one of the issues, yes.
Q107 Chairman: Which we examined
extensively with the Minister yesterday.
Mr Buchanan: Yes. It is one of
the issues, we cannot get round that.
Q108 Miss Kirkbride: What were you
saying earlier, then, about we cannot be sure why higher gas prices
for a period longer than a year is to do with the credit crunch,
is that mirrored in what you see happening in Europe; perhaps
not from those figures there, they still seem to be having an
easier deal?
Mr Buchanan: These would be market
prices. I would anticipate if we are seeing two, three, four-year
contracts having some kind of extra premium put into them by the
suppliers for uncertainty. I suspect you would get that if you
were in mainland Europe as much as in the United Kingdom. These
are the underlying prices upon which a contract would be structured.
The message this sends to me is, first of all, the point that
you have raised: can we get some storage? How fast can we get
the storage available? Can we at last try and break the German/Norwegian
contracts because this is really important. DG Competition has
done very well in attacking, unbundling, and the structure of
the electricity industry; it has gone after some pipelines, like
the MEGAL pipeline, which is Gaz de France and RWE, but what really
is so important for the United Kingdom customer is that relationship
and the contract which has very rich terms in it between Norway
and Ruhrgas. The concern that we have is until the first Directive
goes through next year, and even then you are going to need to
get progress at what is called the North West European Transparency
Group, we do not know how much gas is going down to Sleipner in
the North Sea, then going into Germany, sitting in German storage
or line pack and then coming to the United Kingdom at the times
we most need it. In other words, that is the charge that we have
to take. In terms of the tick-sheet that we need to go for, we
need to have a look at storage and try and push that on, although
it does not directly relate to Ofgem but we, like you, can urge
action. We can, part of our job as part of the European regulators,
keep the pressure on Brussels to try and open up those contracts,
to try and break them, to ensure that we get the Third Directive
passed next year under the Czech presidency and that we then pursue
that through the regulatory bodies to open up the European market
to transparency. When we look at this chart, I do not think that
Ofgem should sit back and say that there is nothing we can do;
I think we can and we have to.
Q109 Miss Kirkbride: Is enough gas
storage being planned?
Mr Buchanan: Gas storage at the
moment—I am not happy to talk about this—but those
of you who were here four or five years ago, we were talking about
4 bcms in 2004 and we were hoping it would be 10 by 2009, and
we have barely moved.
Q110 Chairman: I do not want to do
gas storage, as we did that at length previously and we are short
of time, but I am glad you enforced this Committee's concerns
about gas storage.
Mr Buchanan: Yes.
Q111 Mr Weir: You have said a lot
about things to be done in the future to deal with this, but looking
at this graph, it shows massive increases above European prices
in the tail end of next year and in the winter of 2010. The Chancellor
told us yesterday that the economy would start to recover at the
tail end of next year. Is this not going to strangle any sense
of recovery and is there anything being done in the short term
to ameliorate these huge price rises that will be hitting our
businesses in the tail end of next year?
Mr Buchanan: I understand your
observations and it is a very great concern. I probably bring
you small comfort here because what I am hearing is that the suppliers
are saying—and they are running businesses as well—that
the uncertainty that we now have in the marketplace: liquidity
has dried up; spreads have widened; some of our largest utilities
have been struggling to refinance debt and these are companies
that are generating—as we have already talked about—substantial
cash flow. There are tremendous pressures into this sector and
that is in the short term, that is not even talking about whether
the gas is going to arrive in time at the end of the next decade,
or whether companies will be building power stations quick enough—that
is the medium-term issue. The short-term issue is really concerning
and therefore businesses—and I have got this directly from
the Large Users Group—are seeing additional premiums being
asked by the supply and generation companies because of that degree
of uncertainty that they as businesses are having to endure. I
wish I could be more optimistic.
Q112 Mr Weir: Basically, what you
are saying is that businesses in this country will be at a considerable
disadvantage coming out of a recession because of the differential
on prices between Europe and the United Kingdom.
Mr Buchanan: Yes.
Q113 Mr Binley: I want to make a
similar point because the Chancellor is gambling big time with
the future of this country and he tells us we are going to come
out of recession in the third quarter of 2009. He is also telling
us that much of that pressure is going to be on small and medium-sized
businesses. That is the information we are getting. This graph
tells us something different, quite frankly. This is of vital
importance, particularly to those small businesses that are being
kicked in the butt again and again; they are the real victims
of this situation. What else can we do to ensure that we relook
at this as a matter of extreme urgency?
Mr Buchanan: I take your point
entirely. In order to get that top dark line down to the middle
European line, which would be a success in itself, we have got
to do at least two things. One is to push forward on storage and
the other is absolutely to keep the foot down on the floor of
the European car because we have got to get under these contracts,
we have got to get transparency to work out what is happening
within north-west Europe. It is absolutely vital. The Third Directive
will help; the Commission has come quite a way, but I still think
there is a big, big win for us there otherwise we are going to
get this compare and contrast. I should also say this, and I said
it to the Large Users two weeks ago when I saw them, we have to
be very careful because in France, the large users are given a
substantial subsidy, as they are in Germany. Therefore we have
to make sure we are comparing apples with apples.
Q114 Chairman: What subsidy is that?
Mr Buchanan: There are local tax
subsidies to many businesses in Germany. Very interestingly, the
Commission was so agitated by the French tariff structure that
the Commission in France very much put pressure on the French
Government to put up prices to industrial and commercial customers
but, arguably, they did not go up by the level that they should
have done. We have to be very careful about comparing and contrasting:
if someone says they are taking their business to the Ruhr, well,
ok, but let us just work out what it is that you are getting in
the Ruhr and whether certain taxes are being waived. I would urge
some caution; it is not a straightforward switch of moving a business
to Rotterdam or Dusseldorf.
Q115 Chairman: We would like to pursue
that at much greater length and will rely on a written note from
you.
Mr Buchanan: I would be happy
to do that.
Q116 Mr Binley: Bearing in mind the
rather horrifying picture that graph produces for us, you would
have thought that liquid natural gas was one of the answers. But
we know that the Isle of Grain import terminal has seen little
use this year and there is a suggestion that particular under
usage will continue, even though we are talking about improving
the amount of resource we have to accept the stuff in the country.
Can I ask what assessment you have made of why the Isle of Grain
LNG terminal has continued to see relatively little third party
use in 2008?
Mr Buchanan: The issue for the
current usage is simply one of price. Typically, I looked at these
prices a month ago for a speech I was making then. At that time—and
it has not changed the dynamic but it is a price point that I
can use—British prices were trading 90/95 pence a therm.
The price that was being paid for global LNG was 120 pence a therm.
It would not arrive here because the market is not the right price,
it is going to Korea and Japan.
Q117 Mr Binley: The Government makes
a slightly different point. In answer to us, it made the point
that there are currently a limited number of LNG tanker cargoes
that are free to sail to any destination in response to price
signals because many of them are locked up in contracts. Is your
answer the correct answer?
Mr Buchanan: I believe it is.
I believe it is price driven.
Q118 Mr Binley: This is what the
Government's response to us tells us, quite frankly. Can we look
into that and can you come back to us?
Mr Buchanan: I am happy to look
into it.
Q119 Mr Binley: There is an important
difference here, Chairman, that we need to be aware of because
it impacts upon those two peaks that we have just been talking
about.
Mr Buchanan: Indeed.
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