PART 2 VIEWS OF WITNESSES
BACKGROUND
TO THE DIRECTIVE
25. The European Commission
(Directorate-General XVII) explained that the motivation behind
the Directive was both political and economic. The energy sector
was one of the few remaining in which an internal market was still
to be achieved, and gas was the last major component of the energy
sector not yet subject to common rules at Community level. Although
introducing competition into the gas market was intended to lower
prices to consumers and increase the competitiveness of European
industry, like any other aspect of Community energy policy the
Directive also had to be consistent with the aims of environmental
protection and security of supply. The Commission recognised that
the final Directive would be a compromise among the views of the
15 Member States with their "widely different political and
economic environments", but expected it to achieve a significant
market opening as a first step towards liberalisation. There had
been "a considerable convergence of view" in the earlier
part of 1997 and the Member States were "very close to an
agreement" (QQ 79-81, 91-2).
26. Mr Jonathan Stern,
an independent gas analyst, said that the Commission had faced
"a carefully orchestrated campaign" of concerted opposition
from the gas industry which "regarded the introduction of
liberalisation as the equivalent of the end of civilisation".
Opposition to liberalisation was difficult to understand from
a British perspective, but the debate had now moved beyond the
stage when it would be an option to have no Directive in preference
to a very weak one. Now that the rest of the single market was
in place and the Electricity Directive agreed, a Gas Directive
was inevitable, despite the predictable difficulties involved
(pp 24-6, QQ 114, 118).
27. Mr Giles Chichester
MEP, a member of the European Parliament Committee on Research,
Technological Development and Energy, took a similar general view,
attributing the weakness of the Directive to the "powerful
and entrenched interests" opposing it (Q 135). The European
Parliament had only reluctantly accepted the modest market opening
provided by the Electricity Directive, and Mr Chichester doubted
whether it would accept the Gas Directive without amendments aimed
at achieving greater liberalisation and a shorter timescale. There
was, however, no overall consensus among MEPs, with supporters
and opponents of liberalisation from all parts of the political
spectrum (QQ 141-3).
Liberalisation
in the United Kingdom
28. Following the privatisation
of British Gas in 1986, a competitive market had developed in
gas supply to non-domestic customers. Centrica plc, one of two
new companies created by the de-merger of British Gas plc in February
1997, estimated that it had lost around 70 per cent of its share
of the industrial and commercial market to competitors, many foreign-owned.
Competition was also now being introduced in the domestic market,
beginning with pilot projects in parts of southern England and
extending to the whole country by the end of 1998.
29. Centrica said that,
together with its sister company BG plc, it owned 40 per cent
of the Interconnector, the gas pipeline under construction from
East Anglia to Belgium, and was already developing opportunities
to sell gas on the Continent. In doing so, it was relying on the
Gas Directive to secure a degree of market opening in other European
countries, thus giving reciprocal access to their markets (pp
1-2, Q 19). But the Electricity Association, representing companies
interested in selling gas in Europe, believed the draft Directive
would allow Member States to continue to protect their home markets,
either by restricting eligible customers or by giving preferential
treatment to existing contracts (p 115).
30. The Office of Gas
Supply (Ofgas), the United Kingdom gas regulator, was confident
that nothing in the Directive would limit or slow down the process
of liberalisation in Britain, which had reduced gas prices to
major consumers by half. Other Member States were paying more
than they needed to for gas, even though supply exceeded demand,
but their dependence on Russian gas with its high transportation
costs meant that prices were never likely to fall to current British
levels. The Interconnector, together with pipeline links with
Norway and Ireland, would allow gas to be imported or exported
to even out price fluctuations. The extra demand might push up
prices to domestic consumers, but the exports would benefit the
country as a whole. Since any commercial benefits for British
companies would probably be offset by restrictions on future take-or-pay
contracts, which were against Britain's interests as a gas-producing
country, the Government were supporting liberalisation in Europe
"to be good Europeans" and because it was "just
a good thing to do" (QQ 173-6, 189-90, 200). Mr Stern also
saw little commercial benefit for the United Kingdom. Domestic
liberalisation had given British companies a considerable competitive
advantage, and since they had no difficulties selling gas in European
markets at present they were unlikely to benefit from improved
rights of access to those markets (Q 122).
31. The Minister for
Energy, Mr John Battle MP, believed that British firms seeking
to export gas would benefit from rights to compete in other European
markets and saw his role in Europe as being to convince other
Member States of the benefits of liberalisation. The United Kingdom
now had an energy market driven by consumer demand rather than
by power generators. The transformation had not been easy and
was not yet complete, but the result would be that consumers would
benefit from cheaper prices and better access. The Minister did
not expect the completion of the Interconnector to force domestic
prices to rise, and anticipated that it would act as a two-way
channel, carrying imports as well as exports (QQ 252, 261-4).
Positions of the
Member States
32. According to Mr
Stern, the United Kingdom, Germany, the Netherlands, Sweden and
Finland could broadly be described as "pro-liberalisers",
although the German gas industry remained hostile, at least in
its declared position, and the United Kingdom was essentially
disinterested, having already liberalised to a far greater extent
than the Directive proposed. Spain, Greece, Italy, Belgium and
France were "anti-liberalisers" for various reasons,
including understandable concerns about the impact on their national
gas investments. Belgium, however, opposed liberalisation despite
having a great deal to gain from it, simply because the government
was "locked into a corporatist view of the world" (Q
115).
33. Mr Chichester offered
a very similar analysis of the "pros" and "antis".
As well as a general north/south divide, there was a widespread
suspicion of ideas associated with the United Kingdom and an assumption
that services were delivered more securely and efficiently when
controlled by a state monopoly rather than by a competitive market.
Some Member States might argue that, with the United Kingdom market
already fully liberalised, a sufficient degree of liberalisation
of the European market had already been achieved. But Mr Chichester
believed that the benefits of competition to consumers and industry
should be extended further, partly to offer British companies
reciprocal access to the markets of other Member States (QQ 137-8,
148-50).
Security of Supply
34. The abundance of
gas in or near Europe meant that, for Ofgas, security of supply
was "not an issue in the long term" (Q 203). According
to the British Petroleum Company plc (BP), the gas industry agreed
that security of supply concerns were "overstated",
given that there had been no major supply interruptions despite
the high and growing dependence on imported gas (p 108). But the
assumption that security of supply could be equated with dependence
on non-European sources was rejected by Mr Stern, who said that
European companies had encountered greater security of supply
problems with European sources than with imports. The key issue
was how well a particular country could cope in the event of disruption
to a major source of supply, and the development of a trading
market in gas would rapidly reduce reliance on indigenous reserves
or particular suppliers (QQ 123, 129).
35. A number of witnesses,
including BG, Centrica and Ofgas, were convinced that the security
of supply of the United Kingdom and elsewhere had been improved
by liberalisation (p 105). The single market was the best
means of achieving "diverse, secure and sustainable supplies",
according to the Minister, who rejected the "insular mentality"
which assumed that, without our energy supplies "literally
in our own back yard" the lights would go out as soon as
anything went wrong. Europe's increasing reliance on gas imported
from or through politically unstable areas presented some potential
problems, but a degree of medium-term security was offered by
North Sea supplies (QQ 263-5).
GENERAL
RESPONSES TO THE DRAFT DIRECTIVE
36. The Minister warmly
welcomed the Luxembourg Presidency text, saying that it represented
progress in the right direction. Although it fell short of the
Government's aspirations in some respects, he recognised the "negotiating
realities" involved in encouraging other Member States of
the benefits of competition to industry and consumers. The Government
were committed to the single market and to gas liberalisation,
but it was "a mammoth task" and the Directive would
only be one element in an ongoing process (p 87, QQ 247-50).
37. Most British companies
which gave evidence offered a cautious welcome to the draft Directive.
BP, for example, believed that, although its direct effect would
be limited, the Directive would increase competition and transparency,
while establishing "a clear benchmark for national legislation"
(p 109). Centrica supported the Directive because, although much
less far-reaching than the measures implemented in the United
Kingdom, it represented a small step towards redressing the balance
and because liberalisation would enhance European competitiveness.
But there was a danger that the final Directive might be so weak,
particularly in relation to take-or-pay derogations, that it would
be worse than no Directive at all (QQ 39, 43). This last point
was echoed by Enron Europe Limited, who warned that the Directive
would have only a "very marginal impact" and might "have
the effect of legitimising the status quo in Europe" (p 117).
38. Shell UK Exploration
and Production (Shell) believed that the Commission, in pursuit
of its objectives of improving industrial competitiveness, security
of supply and the free movement of gas, had attempted to reconcile
two contrasting approaches: on the one hand, liberalisation by
deregulation, and on the other, new regulations to ensure third
party access and unbundling and transparency of accounts. Shell
supported the objectives but preferred the former rather than
the latter approach on the grounds that regulation tended to lead
to increased bureaucracy and slower market development (p 124).
39. The International
Federation of Industrial Energy Consumers (IFIEC), which represented
major gas consumers in 12 European countries, said that energy
accounted for 50 per cent or more of the production costs of some
of its members, many of whom were in direct competition with US
companies whose energy costs were 30-50 per cent lower. Liberalisation
in the United Kingdom had led to energy costs that were among
the lowest in Europe. IFIEC saw the Directive as a step in the
right direction, but was concerned that recent changes in the
text made it too weak to achieve the expected market opening.
The underlying question was whether Europe still wanted heavy
industry, which might relocate to other parts of the world if
European energy costs were not reduced (p 12, QQ 45-7, 64, 70,
73).
40. A number of witnesses
took the view that, while the draft Directive would not itself
be sufficient to create and sustain a significant competitive
EU gas market, it would act as a catalyst for change. Mr Stern,
for example, said that it provided a "minimum pace of change
to which Member States must adhere" and was already forcing
changes in legislation, taxation and the status of companies.
Although the number of derogations and "other instruments
of procrastination" would make it very difficult for the
Commission to impose competition on reluctant Member States, the
value of the Directive was to make it clear to governments and
industry that they could not forever resist the market forces
that were hastening the pace of change. The result would be, at
least, markets opened to competition, if not full liberalisation
(p 24, QQ 117, 127-8).
41. Ofgas also felt
that "the demands of the market may well prove a more powerful
force for change than discussions at a bureaucratic or legalistic
level in Brussels" (p 40). The Directive might "force
some countries to be more liberal than they would have been otherwise"
while others, including France, Germany and the Netherlands, were
using it "as an excuse for introducing the liberalisation
they wanted to introduce anyway" (QQ 180-1). Given the chance
to rewrite the Directive, Ofgas would "rip it up completely
and start again", separating the natural monopoly from its
competitors and transportation from supply, building in the principles
of non-discrimination and transparency and establishing a strong
regulator to police the system. Despite the imperfections of the
draft Directive, however, it was still "better to have one
than not" (Q 194).
42. The Committee heard
directly from the principal French, German and Spanish gas companies.
Of the three, the Spanish distribution company GasNatural was
probably the most positive about the draft Directive, seeing it
as a sound compromise which would "help to clarify the uncertainties
of the future framework of the gas sector". A Directive that
left room for subsidiarity while preventing different legislation
in each Member State and which adopted a gradual and prudent approach
to market opening stood a reasonable chance of political agreement
(p 73, Q 210).
43. Ruhrgas wanted a
Directive that balanced a market-driven and a regulated approach,
and sought further changes on take-or-pay, market opening and
emergent markets to reflect the diversity of the Member States'
gas industries. The Electricity Directive had illustrated the
importance of subsidiarity by showing that "any attempt to
introduce uniform rules throughout Europe while simultaneously
respecting a wide range of national interests must necessarily
end in spiralling regulation and dirigism". The main aim
of the Directive should be to strengthen entrepreneurial activity
and market development (p 65, QQ 205-6).
44. According to Gaz
de France, the Directive would create "costly and bureaucratic
constraints" on gas undertakings that would jeopardise quality
and increase prices. It wanted commercial confidentiality to be
guaranteed and gas companies not to be hindered by internal unbundling
of accounts and obligations to publish indicative tariffs (pp
70-1).
45. Norway, although
not an EU Member State, was obliged by its membership of the EEA
Agreement to implement any Community legislation involving the
single market which was adopted by the EEA Joint Committee. As
a result, Norway was likely to be significantly affected by the
Directive, despite having no direct influence in the negotiations.
The Norwegian Ministry of Petroleum and Energy said that gas had
been a success story in Europe and had the potential to provide
a larger share of future energy needs, with benefits for the environment
and security of supply, but the investments that were necessary
to secure the future development of gas would be jeopardised by
the uncertainty that the draft Directive would introduce. Some
amendments were needed to secure a long-term regulatory regime
and to guarantee the contracts that were needed (pp 97-8).
APPLICATION
TO UPSTREAM PRODUCTION AND COMPETITION IN GAS SUPPLY
46. One of Norway's
key concerns as a major European gas producer was with the scope
of application of the Directive, which it proposed should be limited
to "the outlet flange of the ultimate landing terminal",
thus excluding offshore production-related pipelines[13].
Without such a change, which was supported by the oil industry
and was consistent with existing EC and Norwegian legislation,
Norway believed its existing integrated production system would
have to be split up under different regulatory regimes. The resulting
increases in costs and loss of efficiency would put Norway at
an unfair disadvantage compared with other non-EEA producers (p
97, QQ 277, 292-5).
47. Norway's view was
widely supported by gas industry witnesses. Extending the scope
of the Directive upstream "would do little to contribute
to the EU's objectives of increasing competition" in gas
markets, according to BP, while adding technical complexity and
delaying agreement (p 109). The Oil Industry International Exploration
and Production Forum (the E&P Forum) went further, believing
that extending the Directive upstream could even be counter-productive
in encouraging market opening, given the lack of any upstream
monopoly and the presence of many smaller, cost-sensitive enterprises.
Unbundling upstream accounts was unnecessary, difficult and misleading,
the additional regulatory complexity and uncertainty would increase
costs and levels of investment could fall (pp 122-4).
48. Conoco Europe Gas
Limited explained that the upstream sector handled a raw product
of variable composition that was only later homogenised into a
standard product suitable for final consumption. The company strongly
supported the fact that a definition of processed natural gas
had been included in the Directive, but recognised that the definition
might need to be refined (p 113). Shell agreed, saying the
proposed definition could extend the scope of the Directive to
pipelines designed to transport gas from offshore production fields
to onshore facilities in a partially processed state, and to offshore
storage facilities which used depleted fields to store processed
gas on a seasonal basis (p 125).
49. The Government were
cautious about extending transportation rules to offshore operations,
given the important differences between offshore production and
onshore distribution (Q 267). But Ofgas was prepared to accept
an extension of the scope of the Directive to apply offshore "as
long as it was worked through properly" (Q 177).
50. The E&P Forum
suggested that proposals to apply competitive rules upstream were
motivated by political expediency. Failed attempts to apply a
common approach to the gas and electricity sectors were being
revived, "with little justification", in order to secure
a "quick" solution to gas liberalisation (p 122). Professor
Claude Desama MEP, Rapporteur for the European Parliament Committee
on Research, Technological Development and Energy, also criticised
the extent to which the draft Directive was modelled on the Electricity
Directive. With electricity the aim was to introduce competition
in production, but with gas it was to diversify distribution networks
while leaving production in the hands of a few enterprises. By
allowing producers to take control of transport and distribution
networks, the Directive risked increasing vertical integration
and concentration of the market at the expense of consumers (p
114).
51. Whatever its application
upstream, the Directive would not be effective in creating and
sustaining a competitive market in gas demand, according to Gaz
de France, unless it also addressed the issue of competition in
supply. The question was how Europe would "obtain a new equilibrium
by keeping the oligarchy of producers and destroying the oligarchy
of buyers" (p 69, Q 213). GasNatural wondered whether producers
would "take a controlling role in the market in the long
term" by exploiting their strong negotiating position in
relation to a fragmented market and their rights to supply final
consumers directly (pp 72-3, Q 212).
52. For the German company
Ruhrgas AG, it was precisely in order to "preserve the balance
of interests between importers and powerful, centrally-controlled
producers from outside the EU" that take-or-pay contracts
remained necessary. The failure to extend reciprocity to non-EU
undertakings was a serious defect of the draft Directive (pp 66-7).
But the British Government were not convinced, saying there would
be "difficulties of principle in terms of the European Union's
international trade and other obligations". A Directive for
gas competition rules was "not the appropriate vehicle for
addressing the problems which may be thought to arise" in
relation to third countries (Q 269).
13
Since this evidence was taken, the application of the draft Directive
to upstream production has been clarified (see paragraph 21 above). Back
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