Memorandum by Ofgem
INTRODUCTION
1. Ofgem is the regulator of the gas and
electricity industries in Britain. Our principal objective is
to protect the interests of present and future gas and electricity
consumers. We do this by promoting competition, wherever appropriate,
and regulating the monopoly companies which run the gas and electricity
networks. Other priorities include helping to secure Britain's
energy supplies and promoting more sustainable energy supplies
by, for example, helping to reduce carbon emissions to tackle
climate change. Our work on sustainability includes helping the
gas and electricity sectors to achieve environmental improvements
at the lowest possible costs to customers. We also work to make
sure that the interests of vulnerable and fuel poor customers
are protected by the energy markets.
2. Ofgem believes that well-functioning
and genuinely competitive EU energy markets, delivered through
strong and independent regulation at national and EU level, would
bring significant benefits to EU and UK consumers, and we therefore
support the Committee's important and timely inquiry. This memorandum
sets out our answers to the questions in the call for evidence.
In doing so it includes information that Sir John Mogg offered
to give the Committee during the course of his oral evidence.
We have not answered those questions that we think are beyond
the scope of our remit and expertise.
THE CURRENT
STATE OF
THE SINGLE
MARKET
3. Since 1 July 2007, all EU energy markets
have technically been open to competition. However, significant
barriers remain to energy suppliers being able to compete effectively
to offer new, cheaper energy products to customers across the
EU. We fully support the Commission's authoritative Sector Inquiry,
published on 10 January 2007, which highlighted a range of significant
problems that were preventing effective competition emerging.
These included: market concentration, collusion between incumbents
to share markets, vertical integration, lack of access to infrastructure
and lack of or delayed investment as the most serious barriers
to competition in the internal energy market and a lack of transparency
preventing new entrants assessing the scope for profitable entry.
The limited scope of existing EU rules to a subset of cross-border
issues, as well as their uneven and insufficient implementation
by Member States, also creates a "regulatory gap" which
acts as a serious impediment to investment and cross-border trade.
4. Consequently, we believe that further
legislative measures by the European Commission are necessary
for the completion of the single market in energy. Ofgem, as part
of the Council of European Energy Regulators (CEER) and the European
Regulators' Group for Electricity and Gas (ERGEG) have been working
very closely with the Commission on the development of the so-called
"3rd package" of EU energy liberalisation legislation.
We expect to see legislative proposals in late September. A comprehensive
EU and national level regulatory framework is required, built
around the principle of strong, independent regulation as fundamental
to the creation of a stable climate for investment by energy companies
in infrastructure and well-functioning markets. We believe the
core elements of such a framework are:
— increased powers and independence
of national regulators, from government as well as commercial
interests;
— the promotion of strong and independent
regulation at EU-level through the creation of an EU regulatory
function, with specific, defined powers;
— unbundling of transmission and transportation
from energy production and supply, preferably full ownership unbundling;
and
— much greater transparency.
5. It is clear that a part of this improved
EU regulatory framework should be improved co-ordination between
National Regulatory Authorities (NRAs). We will continue to promote
and take all practical measures through our membership of CEER
and ERGEG. Since regulators are statutory bodies, however, legislative
change is also required to ensure, for example, the ability to
share confidential information in cross-border market investigations.
6. The inadequate implementation of the
existing energy Directives, despite infraction proceedings launched
by the Commission, also highlights the difficulty in enforcing
single market legislation. In energy markets, however, the core
tools of strong, independent regulation ie the required "remedies"
are ex-ante oversight of the monopoly networks and rigorous ex-post
application of competition powers. The forthcoming legislative
proposals should ensure the former is possible for integrated
EU grids; and Commissioner Kroes has shown herself to be highly
determined to use her powers in the latter, including in the follow
up to the Sector Inquiry: the Commission is currently running
13 competition cases in the energy sector.
7. Market monitoring is a further, related
issue. Market monitoring is one of the core functions of Ofgem
both as a competition authority responsible under the Competition
Act 1998 for enforcing competition law and as a sector regulator
with powers under the Utilities Act in the gas and electricity
sectors. The substance of UK competition law is the same as Articles
81 and 82 of the EC Treaty except for geographical scope. However,
this is not the case in all Member States. Again, it is certainly
the case that co-operation could be improved, both between energy
regulators, between competition authorities, and between energy
regulators and competition authorities.
8. Finally, it is certainly a concern to
see growing political opposition to the single market in some
quarters. Ofgem and the European Regulators are clear that a well-functioning
single energy market is the cornerstone of achieving competitiveness,
sustainability and security, and therefore any protectionist measures
at national level will undermine the achievement of these shared
goals. We welcome the strong position taken by Commissioner Kroes
against such developments where they have arisen.
THE ENERGY
SECTOR
9. There has not been sufficient unbundling
of gas and electricity in all Member States. The Final Report
of the Commission's Sector Inquiry rightly noted vertical integration
between supply and generation and infrastructure businesses as
a major impediment to single energy markets. Network operators
have a central role in competitive wholesale gas and electricity
markets. Market participants, as network users, are their customers.
In their operational and investment decisions, therefore, they
must act—and be perceived to act—independently of
commercial interests and in a strictly non-discriminatory manner.
The potential for undue discrimination will always exist where
a vertically-integrated company undertakes both competitive and
monopolistic businesses. A network business can favour the competitive
company in its own group over other competitor businesses. Such
a perverse incentive will always exist when the competitive and
monopoly business has the same shareholders irrespective of what
other measures (for example, transparency or ring fencing) are
in place. Whilst the current "legal unbundling" regime
introduced in the 2003 Directives was motivated by such considerations,
its rules were too vague and their implementation in Member States
too weak. Ownership unbundling is the most transparent process
to ensure non-discriminatory operation and development of the
networks, and we would support new EU legislation requiring this
for all EU transmission networks.
10. The European energy regulators are unanimous
in their commitment to single EU markets in electricity and gas
as the cornerstone of achieving the EU's energy objectives of
"security, sustainability and competitiveness". We welcome,
therefore, the recent political commitments to this goal by the
Energy and European Councils, and the strong line currently being
taken by the Commission. The fact remains, however, that the current
system has not yet delivered, and Member States do now need to
be held to their promises, with good intentions matched by the
political will to deliver.
11. The Commission's commitments on climate
change also have implications for the single market. Ofgem recognises
that climate change is one of the greatest global challenges.
We strongly support the EU Emissions Trading Scheme as the best
way to reduce carbon emissions at the lowest cost to customers
and industry, and we have recently submitted our views to the
Commission on how this should be developed in phase III building
on experience to date to improve the long term incentives for
companies, including gas and electricity companies to innovate
and invest in low carbon technologies. Equally, a well-functioning
internal market will be an important part of the creation of a
liquid EU, and ultimately global carbon market which will help
to reduce the costs of tackling climate change. EU (and national)
political targets and initiatives to address climate change must
be implemented in such a way that they support the development
of effective markets and the stable regulatory environment necessary
for investment, and do not lead to unintended market distortions.
12. Ofgem supports the Commission's proposals
to build up and strengthen the powers of the European Regulators
Group, ERGEG, which Sir John Mogg currently chairs and in which
Ofgem plays a lead role. As the Commission have identified, the
EU's networks require massive investment in the coming years:
to join up national networks and create an integrated grid, to
facilitate the single market, to connect increasingly diverse
supplies eg renewables, liquefied natural gas (LNG) etc., and
to improve security of supply by diversifying risk. This requires
a comprehensive EU-level regulatory framework to ensure the stable
and predictable climate necessary for this scale of investment.
Strong and independent regulation must be guaranteed in two key
ways: by raising the powers and independence, from commercial
and political interests, of national regulators; and by establishing
an EU regulatory function that provides for independent, EU-level
regulatory decisions in certain, defined cross-border areas, as
well as improved co-ordination between national regulators. In
order to achieve this within the EU's legal and institutional
framework it may be necessary to replace ERGEG, which is an advisory
body to the Commission, with an independent EU regulatory agency.
However, it is vital this is built upon and comprises the National
Regulatory Authorities, who should remain primarily responsible
for regulatory oversight within their own markets/jurisdictions.
Hence we believe the necessary EU-level, independent regulatory
oversight should be achieved by enhancing the current structures,
but not by creating a single EU energy regulator.
13. Ofgem would be happy to provide any
additional information that the Committee may require in the course
of its inquiry.
10 July 2007
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