Select Committee on European Communities Eleventh Report



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 raised.

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 activity.

  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 future structure.

December 1997

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