Memorandum by Centrica
A. THE CURRENT
STATE OF
THE SINGLE
MARKET
Note: Centrica has answered the questions most
relevant to it from the perspective of an energy company operating
in the UK and continental Europe.
Are there significant barriers to firms seeking
to offer their goods or services, or to consumers accessing these
goods or services, in other Member States of the European Union?
If so, what are the most important of those barriers? What measures
are needed to overcome those barriers?
Centrica agrees with the Commission energy sector
inquiry in January 2007 which confirmed serious competition problems
in continental Europe. The final report concludes that consumers
and businesses are losing out because of inefficient and expensive
gas and electricity markets. Particular problems include high
levels of market concentration; vertical integration of supply,
generation and infrastructure leading to a lack of equal access
to, and insufficient investment in infrastructure; and, possible
collusion between incumbent operators to share markets. To tackle
these problems, the Commission noted that it will pursue follow
up action in individual cases under the competition rules (anti-trust,
merger control and state aids) and act to improve the regulatory
framework for energy liberalisation. The Commission has already
conducted raids on the premises of a number of companies and more
recently has commenced formal investigations in a number of instances.
The market in the UK is fiercely competitive,
evidenced by the recent round of price reductions for domestic
customers. However, a report by Global Insight estimated that
in 2006 importing European oil-linked gas cost UK consumers over
£10 billion.
Do you consider further legislative measures by
the Commission to be necessary for the completion of the single
market? If so, what measures would you consider appropriate?
Our response to energy sector specific questions
in Section B of this evidence highlights the range of measures
necessary for the completion of the single market. These consist
of a Third Energy Package and in the interim, in light of the
time that it will require for this package to be implemented,
a binding regulation on legal and functional unbundling.
Are the current provisions for monitoring market
functioning and performance effective? What evidence is there
that Member States are honouring their obligations equally?
The Commission repeatedly points to the need
for the second electricity and gas Directives to be implemented,
not just in their letter but also in their spirit. The Commission
has initiated proceedings against many Member States for non-compliance
with those directives. However, Commission investigations are
time consuming and constrained by resources.
The UK is generally compliant in this area,
but in other Member States, regulators are also often resource-constrained,
and may lack the necessary independence or powers to act. Greater
market transparency would make the process of monitoring market
functioning easier, as well as helping market access itself.
Is there a need for greater co-operation between
National Regulatory Authorities?
Because of the importance of cross-border energy
flows and the significant levels of congestion at borders, it
is essential to improve cooperation between National Regulatory
Authorities. This has been recognised by ERGEG (the group of European
energy regulators) and could be further strengthened by a harmonisation
of regulators' legal powers/duties within a "third package"
of EU legislative measures, as well as by explicit provision for
cross-border intervention under what has come to be known as "ERGEG+".
As evidenced by the Global Insight report in 2006, UK consumers
can be severely impacted by partial or ineffective regulation
in other Member states.
Are the current remedies available to the Commission
to enforce single market legislation adequate; and are they used
effectively?
Existing Commission remedies are extremely slow,
particularly those aimed at member states rather than companies.
For example, a number of Member States have still not implemented
the 2003 Energy Directives fully and appropriately into national
law.
Do the concepts of the "national champion"
and "economic nationalism" pose a threat to the single
market?
Spain's recent intervention in the takeover
of Endesa has proved a timely reminder of how the desire to protect
national interests can override the need to create and defend
free markets. In the UK foreign ownership is an economic reality
which has helped deliver jobs and growth.
The UK is one of the most economically liberal
markets in the world. It is no coincidence that the UK is forecast
to have the strongest business environment of all major European
economies from 2005-09 (source, EIU 2005) or that it leads Europe
in Foreign Direct Investment with an FDI of $170 billion in 2006.
There are signs that the rate of progress in
Europe towards liberal markets is slowing in favour of a swing
towards national champions. These national champions mean a lack
of access on an equal basis to national and regional markets and
to important Trans European pipelines, including those which are
important for UK suppliers seeking to access gas supplies from
the East.
B. SECTOR SPECIFIC
QUESTIONS
Energy
Has there been sufficient unbundling of gas and
electricity markets in all Member States?
There are two key issues here. First, the existing
provisions of the 2003 Directives for internal (legal, accounting
and management) separation have not been effectively enforced
and complied with in a number of Member States. Second, even if
they had been properly implemented, the provisions do not go far
enough to resolve the serious deficiencies identified by the Commission's
recent inquiry.
The European Commission repeatedly points to
the need for the existing unbundling provisions to be properly
implemented. The Commission goes on to note "it is essential
to resolve the systemic conflict of interest inherent in the vertical
integration of supply and network activities, which has resulted
in a lack of investment and discrimination"; to this end
the Commission makes a clear preference for ownership unbundling
though it also considered the alternative model of Independent
System Operator (ISO). ERGEG state "In principle, regulators
consider ownership unbundling to be the preferred model".
There are many problems with the existing unbundling
structures. "Chinese walls" in most cases do not address
conflicts of interest at Board level. For example, in Italy ENI
was fined Euro 290 million for delaying necessary cross-border
pipeline development as it would have had a negative effect on
its own gas sales. Addressing these concerns involves a heavy,
ongoing regulatory burden on both the company and the regulatory
authority.
Full ownership unbundling has many benefits.
There are clearer capital and financing structures which reflect
the relatively low-risk capital intensive activity of network
ownership. There is no risk of investment decisions being inappropriately
influenced by internal generation or supply interests. There is
a distinct and independent management focus on the network and
the needs of network users.
The Scottish electricity ISO model was not established
to address a conflict of interest in the common ownership of generation
and networks. Not surprisingly, therefore, the ISO is not a solution
to this problem and transposing this Scottish ISO model across
Europe would not work. In the UK we have a strong regulator that
is independent of government. Similarly we have an independent
Office of Fair Trading and Competition Commission and a vigorous
consumer lobby. All of this is against a background of a political
ideology that opposes national champions and puts consumer needs
ahead of those of companies. This is simply not the case in much
of the rest of Europe.
The regional ISO model that transcends national
borders is fraught with practical difficulties and is merely being
advocated to delay the necessary liberalisation.
The situation is more urgent in gas because
of the need to import gas across several Member States and due
to the slower progress in achieving effective third party access
to gas networks, compared to electricity.
As the required changes will take some time
to implement, it is important that the draft and non-mandatory
ERGEG guidelines on Functional and Informational Unbundling are
quickly transposed into a binding set of regulations.
It is clear that the internal market framework
to support healthy competition does not exist. Unless there is
urgent reform, customers will continue to pay higher prices than
necessary and energy security of supply will be undermined. While
the focus has been on transmission, effective distribution unbundling
is necessary for retail competition. Effective unbundling of both
transmission and distribution is no panacea on its own but it
is an essential part of the solution.
Is there agreement on the fundamental importance
of a genuine single market to support a Common European strategy
for energy?
Centrica agrees with the UK government and the
Commission on the importance of this issue. Moreover, contrary
to recent reports, there appears to be a clear majority of member
states in favour of fundamental reform because of the recognition
of the failings of the existing arrangements. Unfortunately, a
minority of countries—including some of the largest Member
States—vigorously oppose the necessary changes.
What are the implications for the single market
of the Commission's commitments on climate change?
Collective international agreement and action
is required on climate change. The Commission's commitments on
climate change are an essential part of that collective agreement.
The substantial reductions in green house gas (GHG) emissions
place an increasing need for a stable long term carbon price to
allow the necessary industry investments. The EU Emissions Trading
Scheme (EU ETS) should be a key means to ensure the necessary
GHG reductions as this market mechanism will ensure that reductions
take place at least cost.
Estimates produced for the DTI show that total
UK power generator windfalls from free EU ETS allowances were
up to £1 billion per annum. The German Environment Minister
claimed that the four biggest European Power producers—EON,
RWE, Vattenfall and EDF—were profiteering from the EU ETS
at the expense of consumers by between Euro 6 billion and Euro
8 billion per annum. Recently the Commission rejected many Member
States' proposals for GHG emissions.
A reformed EU ETS is critical to the creation
of an effective (global) carbon market, to the elimination of
these problems in Europe and ensuring we get the greener yet diverse
power generation mix that UK customers need. A move to full auctioning
of allowances to emit CO2 from 2012, rather than free handouts,
plus a commitment from all EU Member States to the ETS and to
cut emissions, will trigger the billions of pounds of investment
needed. It is important the UK government continues to battle
hard in Europe to make this happen.
The renewables energy target is particularly
challenging. There is a danger that this is an overly prescriptive
solution to the need to reduce GHG. It will be important to understand
how this target will operate alongside the EU ETS.
Should there be a single EU energy regulator?
There are currently three important areas where
Member States have to date shown a reluctance to resolve in a
satisfactory manner. These are market dominance and national champion
issues, exemptions from Third Party Access for new infrastructure
and regulation of end-user prices. It is important that regulators
act swiftly to resolve such issues.
To do this, the powers and resources of many
national regulators need to be increased and harmonised and there
is a need for their independence from government influence. Regulation
also increasingly needs to be extended from a national to a European
context and the existing working arrangements of regulatory co-operation
via ERGEG need to be formalised and enhanced because of the importance
of cross-border flows.
3 July 2007
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