PART 3 OPINION OF THE COMMITTEE
GENERAL
COMMENTS
98. The Committee welcomes
the draft Directive as an important element in the extension of
the single market to the energy sector. Although we recognise
that the Directive will have only a limited impact on the United
Kingdom gas market, given the domestic legislation that has already
taken effect, we believe that it has the potential to yield general
benefits to the Community. In particular, the introduction of
competition to gas markets can be expected to lower the cost of
energy to industry and so improve Europe's industrial competitiveness.
Domestic consumers will also benefit from lower gas prices and
from the reduced levels of environmental pollution that can be
expected to result from a proportionally greater use of natural
gas for power generation.
99. We have noted the
criticisms that many witnesses, particularly from this country,
have made, many of them based on unfavourable comparisons between
the draft Directive and the liberalised regime being created here.
However, as the Commission pointed out in evidence to the Committee,
the text is a political compromise between the 15 Member States.
It has already been the subject of lengthy negotiations and in
our view it is not realistic to propose wide-ranging alterations
at this stage. We believe that, despite its evident imperfections,
it is better to have a Directive, subject to such amendments as
it may be possible to obtain, rather than have no Directive at
all.
100. The evident imperfections
of the draft Directive derive from the fact that there are only
two major gas producers within the Community, namely the United
Kingdom and the Netherlands. Given that the dependency of the
Community as a whole on supplies from Norway, Russia and Algeria
is expected to rise to about 55 per cent by 2010 and to 70 per
cent in 2020, it is clear that the import dependency of those
Member States without substantial gas production will be even
higher. The Committee believes that, as a result, these other
Member States will welcome imports from the United Kingdom and
the Netherlands with enthusiasm, as an alternative to the much
less secure imports from politically unstable countries such as
Russia and Algeria. In this context, a general question arises
about the extent of genuine cross-border competition that is likely
to develop. On the positive side, the Directive may help to stimulate
domestic competition by creating a climate which is favourable
to the growth of liberalisation and which may well help some Member
States to overcome their domestic opposition to liberalisation.
Impact of the
Directive on the UK gas market
101. Although the proposed
Directive will not have a significant direct impact on the United
Kingdom gas market, we believe it should facilitate the export
of gas from the United Kingdom to Continental markets. The completion
of the Interconnector pipeline, scheduled for 1998, will permit
the export of gas from the the United Kingdom to major European
wholesale gas buyers, some of whom have already signed contracts
with United Kingdom gas companies and producers. The Directive
would not apply to sales of this type as they are made to gas
wholesalers who already own transmission lines, but would permit
direct sales to final consumers which in most cases would otherwise
be impossible. The Government should recognise, however, that
exchanges of gas through the Interconnector will ultimately produce
a levelling of gas prices and that exports of gas from the United
Kingdom, which are likely to predominate over imports at least
in the medium term, could cause gas prices in the United Kingdom
to rise.
ISSUES
ON WHICH SUBSTANTIAL AGREEMENT HAS ALREADY BEEN REACHED
102. There are a number
of important aspects of the draft Directive on which the parties
to the negotiations have already reached substantial agreement.
We comment on these only briefly here (paragraphs 103-4), before
addressing the major issues on which negotiations are still continuing.
Regulated and
Negotiated Access to Pipelines
103. The proposed Directive
offers Member States the option of establishing a system of either
regulated access, with published tariffs, or negotiated third
party access (TPA) where tariffs are subject to negotiation. Member
States which opt for TPA must appoint a competent independent
national authority to deal expeditiously with disputes about tariffs.
We recognise the doubts expressed in evidence about whether such
authorities would be capable of adequately resolving disputes
about access and that they might reach decisions which conflicted
with those made in other Member States. Nevertheless, we believe
that the appointment of a competent, independent national authority
in each Member State to settle access disputes is consistent with
the principle of subsidiarity and would provide an acceptable
forum for resolving such disputes.
Transparency of
accounts and Chinese walls
104. We consider that
the proposed transparency arrangements, which would require only
accountancy separation between the transportation and supply operations
of gas companies, are inadequate to ensure the emergence of the
"level playing field" required for competition to emerge.
We therefore urge the Government to continue to press for amendments
to require management separation of these activities or, at the
very least, a comprehensive Chinese wall requirement to ensure
that pipeline companies are prevented from using information obtained
from other suppliers to benefit their own supply activities.
ASPECTS
OF THE DIRECTIVE STILL UNDER NEGOTIATION
105. We consider below
those aspects of the draft Directive on which substantial negotiations
are still in progress.
Application of
the Directive to upstream transmission pipelines
106. We sympathise with
the arguments of the Norwegian Government and gas producers about
the possible impact of the Directive on upstream activities, principally
access to transmission pipelines in the North Sea. In most cases,
however, pipelines are natural monopolies and the cost of transporting
gas onshore represents a significant part of the final price paid
by the consumer. As a result of the refinement of the definition
of transmission in the 6 October text (see paragraph 21 above)
it is now clear that, in the North Sea, only transmission pipelines
will be subject to the terms of the Directive. The Committee welcomes
this clarification.
Extent of market
opening and thresholds for eligible customers
107. Since the basic
structure of the arrangements for market opening is already agreed,
the negotiations relate to details rather than the principles
of the timing and extent of liberalisation. Our concern is that
competition should be introduced as rapidly and as widely as is
possible. While we accept that it would be difficult to obtain
any radical changes to the figures for market opening or thresholds
contained in the Luxembourg Presidency texts, including that of
6 October, we would still prefer to see either lower thresholds
defining eligible customers, or a shorter timetable, or both-perhaps
thresholds of 25 million m3, 10 million m3
and 1 million m3, with intervals of three years rather
than five between stages. Notwithstanding the possible price rises
noted above, maximum competition is in the interests of the United
Kingdom, which would benefit directly in the short term by increased
exports of gas to the Continent and from the export of its expertise
in operating in a competitive gas market.
108. We recognise that
negotiations between the major producers which provide most of
the Community's gas and the principal gas undertakings of the
Member States currently involve exporting and importing oligopolies
of comparable power. We have considered the argument that the
introduction of competition within the Community could seriously
upset the balance of power between these two groups and lead to
increased prices. However, we believe that a number of factors
will combine to prevent this from occurring. These include competition
arising from gas imported into the Continent through the Interconnector
pipeline, possible diversification of Norwegian suppliers (see
paragraph 8) and competition between oligopoly suppliers[19].
Take-or-pay contracts
and derogations
109. We have considered
carefully the arguments advanced by gas producers about the difficulty
of financing new gas developments without the security conferred
by long-term take-or-pay contracts, and by gas buyers about the
financial difficulties they might encounter under existing take-or-pay
contracts if they were not allowed derogations from the access
requirements proposed.
110. We recognise that
the introduction of gas-on-gas competition in a national gas market
inevitably causes anxiety amongst the buyers under long-term contracts
because of the risk that market share will be lost to competitors.
The reduction of the thresholds proposed in the Gas Directive
will, over a period of ten years, result in significant reductions
of monopolies of supply. Buyers are willing to accept long-term
take-or-pay contracts if they have either guaranteed markets for
the gas, for example because of legal or de facto monopolies
of supply, or if the contractual arrangements with the seller
provide for adjustment of purchase prices in the event of falling
resale prices in the competitive market. Such adjustment provisions
have been included in some recent British export contracts to
Community buyers. We can see no reason why such provisions should
not be included in any future long-term take-or-pay contracts
which Community buyers conclude with major exporting countries,
thus allowing those buyers to face the threat of reduced prices
in the competitive market without the protection of monopoly rights.
111. Despite claims
that long-term take-or-pay contracts are necessary to finance
the development of gas infrastructure, the oil industry succeeds
in achieving similar levels of investment without take-or-pay
contracts. We can see no difference between the two industries
that would justify treating gas production differently from oil
production in this respect. Nor do we accept that long-term take-or-pay
contracts are necessary to ensure security of supply or to enable
gas buyers to fulfil their public service obligations. We believe
that take-or-pay contracts are contrary to the spirit of competition.
112. We were alarmed
to note that, since the Luxembourg Presidency text of July 1997,
the draft Directive no longer makes a distinction between the
granting of derogations for contracts already in existence when
the Directive comes into force and those entered into at a later
date. If the latest text is accepted it will continue to be possible
for gas buyers to apply for derogations, with the consequence
that buyers who enter into new long-term take-or-pay contracts
might be able to delay indefinitely the granting of access to
their pipelines and consequently the introduction of competition.
We accept that derogations should be permitted in respect of
contracts already existing at the time it became apparent that
Community rules for an internal market in gas would be introduced,
but we do not accept that derogations should be allowed in respect
of take-or-pay contracts entered into more recently or in the
future. While there are no overwhelming reasons to choose any
particular date of those suggested for the point at which take-or-pay
contracts should cease to be eligible for derogations, we would
certainly accept that 25 July 1996, when a Common Position was
reached on the Electricity Directive, would be an appropriate
cut-off date.
113. The proposed derogation
arrangements have the merit that a final decision on whether a
derogation is to be granted lies with the Commission and not with
the Member State concerned. We also regard the new criterion for
granting derogations included in the 6 October text as a
useful addition. However, we think that, overall, the arrangements
proposed have a number of unsatisfactory features. In particular,
we believe that the provisions requiring examination of the extent
to which the contract conditions allow for market changes should
be strengthened to make it clear that the absence of adequate
provisions for such changes would be a bar to the grant of a derogation.
114. We consider that
a number of the procedural aspects are unsatisfactory. Our particular
concerns are as follows.
- The right
of the pipeline owner to refuse access to its pipeline before
a derogation is granted enables the pipeline owner to exercise
the right merely as a delaying tactic.
- Because
the text does not impose any time limit within which the Member
State concerned must decide whether it proposes to grant a derogation,
there are considerable opportunities for delay. (The Commission,
by contrast, is required to respond within four weeks to a notification
from a Member State of its proposal to grant a derogation.)
- The likelihood
that decisions to grant or refuse derogations will be subject
to legal challenge presents further scope for delay.
- Pending
final resolution of an access dispute, applicants for access would
be unable to obtain supplies of gas from any source other than
the owner of the pipeline to which access has been refused.
- Any legal
challenge by an applicant for access would involve the applicant
in expenditure of considerable management time and resources.
115. We strongly
recommend the Government to press for the inclusion in the Directive
of safeguards to protect the position of applicants for access.
These safeguards might include constraints on the rights of pipeline
owners to refuse access, such as a requirement that they act in
good faith, and the inclusion of a time limit on Member States,
similar to that imposed on the Commission, within which they must
decide whether to grant a derogation.
RECOMMENDATION
116. The Committee considers
that the draft EU Gas Directive raises important questions to
which the attention of the House should be drawn, and makes this
report for debate.
19
An example being a recent sale of Norwegian gas to the Czech Republic,
a market hitherto supplied exclusively by Russian gas. Back
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