D. CORRESPONDENCE ABOUT COMMITTEE REPORTS |
67. EU GAS DIRECTIVE (7TH REPORT, SESSION 1997-98)
Letter from John Battle MP, Minister of State for Science,
Energy and Industry, Department of Trade and Industry, to Lord
Geddes, Chairman of Sub-Committee B
I promised to write reporting the outcome of discussions
on the Gas Directive at the Energy Council on December.
As you will no doubt be aware from press reports, the Council
was, in the event, successful in agreeing a draft common position.
I will, therefore, set out below the main details of this agreement
and my assessment of the result.
The Council reached agreement on a minimum initial market
opening of 20 per cent, rising to 28 per cent five years after
the Directive's entry into force and 33 per cent after 10 years.
It also agreed that all gas fired generators should have access
to competitive supplies. There will be an initial threshold of
25 million cubic metres (MCM) a year for eligible industrial customers,
falling to 15 MCM at five years and five MCM after 10 years. Member
States have the option of setting an eligibility threshold of
up to the same levels for CHP projects if this is required to
safeguard the balance of their electricity market.
On third party access, the Council has agreed to a chinese
walls provision requiring network companies not to abuse commercially
sensitive information provided to them by third parties. There
was, however, a long discussion on whether or not to include a
requirement for network companies to publish a range of indicative
tariffs for use of their systems. The result was a compromise
under which there will be an obligation to publish the main commercial
conditions" for use of the system.
The Council agreed to a compromise proposal, based on a UK
suggestion, which will provide for access to upstream pipelines
on a basis which properly reflects the differences between upstream
and downstream activity. This will enable the current North Sea
regime to continue. More generally, no other changes were made
to the Presidency's proposals which will affect existing arrangements
for the promotion of competition in the UK gas market.
On the possibility of granting derogations in respect of
serious problems relating to take or pay contracts, the Council
agreed to the proposals presented to it by the Presidency. These
comprise a common procedure for considering requests for derogations
in respect of existing and future contracts. The criteria to be
applied to requests concerning future contracts will, however,
be tougher in practice than for existing contracts. Compared with
the Presidency proposals available to the Committee in finalising
its report, it was also agreed to include a proposal to the effect
that derogations should not be refused if, as a result, it would
be impossible to find economically viable alternative outlets
for the gas concerned.
In addition, the Council agreed to the Presidency's proposals
permitting transitional periods for emergent markets before they
will be required to implement the market opening provisions of
the Directive. The Presidency's proposal for Member States to
be able to apply to the Commission for derogations for geographically
limited areas" in order to promote investment in new infrastructure
development was also accepted.
Discussions, particularly on market opening and indicative
tariffs, were difficult. I sought a more ambitious result on the
level and pace of opening. However, other Member States were not
prepared to go further. The Council faced a choice between reaching
an agreement on the lines I have described and the uncertainty
of further negotiation which might have brought little benefit
compared with the delay involved.
On this basis, my judgement was that it was better to agree
to the deal on offer now even though I would have preferred a
somewhat better overall outcome. My view, as experience is already
demonstrating with the Electricity Directive, is that the most
important objective is to secure the first opening of the door
to competition. Once there is partial market opening, the pressures
will grow for more and faster change. My hope, therefore, is that
we can look beyond the relative disappointment of the headline
figures agreed on 8 December to a process which pushes beyond
the formal requirements of the Directive.
I hope you will find this report helpful. I am also taking
this opportunity to enclose my response to the report of your
Committee on the European Communities on the EU Gas Directive.
I found the report an extremely helpful analysis of the main issues
and am very grateful to the Committee for the thorough way in
which it carried out its work.
14 December 1997
Memorandum from the Department of Trade and Industry
The Government thanks the Committee for its thorough and
helpful report and has the following comments on the main issues
Impact of the Directive on the UK Gas Market and Prices
The Government does not anticipate that the proposed Directive
will have a significant direct impact on the UK gas market. The
UK is already on course to open its gas market fully to competition
next year. The Directive will not prevent this. Neither is it
anticipated that the Directive will require the Government to
make any changes to the principles of the legislative and regulatory
framework underpinning the operation of the UK gas market.
As to the possible impact of the Bacton-Zeebrugge Interconnector
on UK gas prices, the Government anticipates that overall the
Interconnector will be to the long-term benefit of UK gas consumers.
A physical connection between UK and European gas markets is likely
to lead to more stable UK prices than in the past and enhance
the UK's security and diversity of supply. Liberalisation of the
UK market will continue to ensure that consumers here benefit
from competitive prices.
Regulated and Negotiated Access to Pipelines
The Government agrees with the Committee that the appointment
of a national authority to settle disputes is consistent with
the principles of subsidiarity. No Member State has been arguing
for a central disputes settlement authority.
Transparency of Accounts and Chinese Walls
The Government has supported proposals to provide for unbundled
accounts and Chinese walls. There has been some support among
other Member States for the unbundling of accounts but not for
the Government's proposal for publication of such accounts. Nor
has there been any support among other Member States for the separation
of the functions of transportation and supply. However, the UK
has to date been successful in arguing for a Chinese wall provision
under which transmission and distribution companies would be required
not to abuse commercially sensitive information obtained from
third parties in undertaking their own gas sales activities (the
fall back option identified in the Report).
Application of the Directive to Upstream Transmission Pipelines
The Committee will also be aware that there was recent movement
in the possible treatment of upstream pipeline networks. The UK
supports the promotion of competition in upstream activity and
the availability of third party access to upstream pipelines.
However, we have been concerned that the text of the Directive
(even that of 6 October 1997) did not sufficiently reflect the
substantial differences between the nature of upstream and downstream
We have made good progress in explaining the nature of our
concerns. The Government is therefore hopeful that it will be
possible to arrive at an outcome which makes full allowance for
the various factors affecting access to upstream pipelines and
allows the existing UK offshore regime to continue.
Extent of Market Opening
The Government shares the Committee's wish to see competition
introduced into the European market as widely and rapidly as possible.
We have therefore pressed for more ambitious targets than those
proposed by the Luxembourg Presidency. In contrast, some Member
States have pressed for more modest targets, citing a range of
political difficulties. However, the Government believes that
the commencement of competition at even a comparatively modest
level will act as a catalyst for a greater degree of marketing
opening in the future.
Take or Pay Contracts
Discussions on the possibility of derogating from the Directive
in respect of problems arising from long-term take or pay contracts
have been one of the most difficult areas of negotiation. The
Government shares the Committee's concern about the potential
for such derogations to delay the establishment of a competitive
market. There has, however, been a strong political wish on the
part of other Member States to include such provisions for both
existing and future contracts.
The UK has continued to argue that there is less justification
for allowing possible derogations in respect of future contracts.
We have also sought to strengthen the criteria that need to be
taken into account in determining whether a derogation should
be granted (including the different circumstances applying to
future contracts), to provide that the granting of derogations
is effectively policed and dealt with in a timely manner.
The Government agrees with the Committee that long term take
or pay contracts are not a pre-requisite for ensuring security
of supply or for fulfilling public service obligations. Indeed,
it can be argued that such objectives will be more effectively
realised in a competitive market. The Government believes that
trading and arbitrage is likely to develop around the Interconnector
and this will help promote similar developments in the European
industrial supply market. While there is likely to remain a place
in the European market for take or pay contracts, the changing
shape of that market could lead to substantial changes in their