Select Committee on European Communities Seventh Report


Letter from the Chairman of Sub-Committee B to Mr John Battle MP,
Minister of State for Science, Energy and Industry

Amended proposal for a European Parliament and Council Directive concerning common rules for the internal market in natural gas

  I am writing to inform you of the preliminary conclusions reached by Sub-Committee B after its deliberations this morning on the above draft Directive.

  As you know, the Sub-Committee conducted an enquiry on this subject in the weeks preceding the summer recess, taking evidence from a wide range of UK and Continental witnesses, including yourself and officials from your Department. Most of that evidence referred to the Dutch Presidency texts of 25 April and 6 June, but we also received, just a few days before the meeting you attended on 26 July, the Luxembourg Presidency text of 18 July. We now understand that, during the course of the summer, further texts (including one dated 6 October) have been circulated in preparation for an extraordinary Energy Council meeting scheduled for 27 October, at which the Presidency hopes that a Common Position might be reached.

  The Sub-Committee aims to agree a report based on its enquiry for presentation to the Select Committee and subsequent publication within the next few weeks. Since this process will inevitably not be complete until after the 27 October Energy Council meeting, we set out here the preliminary conclusions reached by the Sub-Committee. Although conscious that these may differ in some respects from the final conclusions adopted by the Select Committee, we hope they will be of some benefit to you in preparing your negotiating position for the 27 October meeting. You will of course be sent a copy of the Select Committee's final report as soon as it is available.

  The Sub-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 some benefits to the Community. We have noted various criticisms of the text based on unfavourable comparisons with the liberalised regime being created in this country, but 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.

  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 you 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.

  On market opening, 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 text of 18 July, 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 any possible price rises that may result, 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.

  After careful consideration of the arguments advanced in evidence, we have concluded that considerations relating to security of supply and investment are not sufficient to justify indefinite special treatment for companies which enter into long-term take-or-pay contracts. 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. As to the proposed derogation arrangements, they 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, they 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.

  We consider that a number of the procedural aspects are unsatisfactory. Our particular concerns are as follows.

  -  The right of the buyer to refuse access to its pipeline before a derogation is granted enables the buyer 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 intends to grant a derogation, there are considerable opportunities for delay.

  -  The likelihood that decisions to grant or refuse derogations will be subject to legal challenges 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.

  Finally, 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; the inclusion of time limits on Member States to reply to applicants for derogations; and the inclusion of a specific right to damages for applicants who have been denied access in circumstances where a derogation is subsequently refused either by the Member State concerned or by the Commission.

  I hope that you will find these preliminary views helpful, and I look forward to hearing from you on the outcome of the 27 October meeting as soon as possible thereafter. We shall maintain a scrutiny reserve for the time being.

16 October 1997

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