Examination of Witnesses (Questions 163
- 179)
MONDAY 16 JULY 2007
Ms Nicola Pitts, Mr Jake Ulrich, Mr Mark Akehurst,
Ms Florence Fouquet and M Bernard Brelle
Q163 Chairman: Good afternoon,
and a very warm welcome. Thank you for the effort you have made,
both in terms of the written submissions but also we have three
coming from Gaz de France itself which is much appreciated. For
the record, may we just ask Nicola Pitts, Jake Ulrich and Bernard
Brelle to introduce themselves for the record and then we will
ask you if each of you would like to make a brief opening statement.
Can we take Nicola first.
Ms Pitts: I am Nicola Pitts. I am Head of UK
and EU Public Affairs at National Grid.
Mr Ulrich: I am Jake Ulrich, the Managing Director
of Centrica Energy. My responsibilities include all the upstream
businesses, power production, trading and operations and I am
also responsible for our European operations.
M Brelle: I am Bernard Brelle. I am the Deputy
Vice President for strategy in Gaz de France. I am accompanied
by Florence Fouquet, who is responsible for European Affairs,
and Mark Akehurst, who is our representative in the UK
Q164 Chairman: The acoustics
in this room are not good, so I would strongly recommend raising
your voices a little bit.
Ms Pitts: I want to explain National Grid's
relevance to this debate. We are the transmission system operator
in England and Wales on electricity, we are the Independent system
operator in Scotland on electricity, we are the Transmission system
operator in gas across the whole of Britain and in terms of our
businesses in the US, we are also a transmission operator operating
under two different independent system operators in the US, in
the New England area and the New York area. We also half own the
Anglo French electricity interconnector. We have just announced
that we are going to build another electricity interconnector
to the Netherlands and we also own a gas LNG importation facility
at the Isle of Grain. That is a bit of context as to where I am
coming from.
Mr Ulrich: At Centrica we operate in the UK
under the name British Gas and Scottish Gas. We are the largest
gas supplier in the UK. We are also a major electricity supplier
in this area. We also do business in North-West Europe and Spain.
We have operations in the Netherlands, Belgium and Germany.
M Brelle: It is a great honour for us to have
been invited by the House of Lords. French energy companies are
often considered to be against the liberalisation process of energy
markets in Europe. I would like to give evidence that Gaz de France
has experienced huge changes over the last 10 years and is now
a European group which realises 40% of its turnover outside of
France, essentially in Europe. We consider liberalisation as an
opportunity and strongly support the objectives of markets opening
and integration. In France. both the state and the operators fully
implemented the European directives in the field of energy. A
strong regulator was created, legal unbundling was put in place
and we strongly supported the work on new regulatory rules by
the European network of energy regulators, ERGEG. If you would
allow me, I would like to say a few words about the single market
in gas and specificities of gas. The first point is that Europe's
security of supply in gas must remain one of the major points
of attention. Diversification of routes and sources is part of
the solution, but Europe's gas supply will become increasingly
dependent on a small number of foreign suppliers. In 2030 Europe
will import 80% of its needs and Europe will be increasingly in
competition with other consuming regions and countries for access
to gas resources. The other key challenge for Europe's security
of supply is the timely realisation of necessary infrastructure,
LNG terminals, pipelines and underground storage. In trying to
improve our legal and regulatory framework we must ensure that
our decisions are consistent with these challenges. In this context
we are hoping to work with the Commission to define what the options
could be and how to best ensure both security of supply and competition.
We look forward to an open discussion on the ways to ensure effective
unbundling, including the issue of ownership unbundling, which
are most likely to secure these objectives. Thank you for your
attention.
Chairman: Thank you. Each member of the
Committee is going to look after a different group of questions.
The first group is on regulation, Lord Dykes.
Q165 Lord Dykes: I would like
to ask members of the panel, and already M Brelle has very kindly
referred to ERGEG, do they themselves, perhaps from slightly different
vantage points, because they are representing their different
companies, really welcome wholeheartedly the idea of the creation
of a European regulator rather than just national regulators?
Added to that, should the national regulators in different countries,
again with different legislation, be given stronger powers with
new fresh national legislation co-ordinating with the Commission's
documentation to achieve the appropriate level of interaction
with a European regulator? I am sorry if that is a rather complex
combination of questions, but I think it is better if we deal
with both of them in the same context.
Ms Fouquet: Europe has experienced important
changes in the last 10 years in the field of regulation. National
regulators were created and ERGEG's network was created as well.
For Gaz de France, we really support this because we think that
regulation is a key element to progress towards an open and integrated
market, so for us regulation is very important. We realise currently
40% of our turnover outside of France, essentially in Europe,
so we are a new entrant in a lot of European countries. We do
notice and experience that national regulators' powers and prerogatives
are very different in the different countries and it is a huge
preoccupation as a European actor. That is why we think the current
situation in regulation needs to be improved and for that we think
that two actions have to be carried out. The first one is to harmonise
national regulators' powers because the differences are too huge
between the different countries. Some Member States fully implemented
the current directive but others did not, and it is a real problem
for operators like us because we are obliged to deal with 25 or
27 regulatory frameworks and it is a real technical barrier for
us. The second action which needs to be carried out is to strengthen
regulation at the European level. We think that ERGEG was the
first step and that ERGEG is not sufficient anymore. It is very
difficult to make a decision when you are 27 around a table and
Europe really needs a European agency specialised in regulation
which could have powers on cross-border subjects when several
Member States are involved and could as well be in charge of defining
new guidelines in regulation in order to have less differences
between Member States. We think that this European agency could
work together with strong national regulators. We think that we
need two levels, firstly, a European agency and, secondly, strong
and independent regulators. Your question on regulators' independence,
we think as well that it is very important. In France, the regulator
is an independent administrative authority, which means that this
regulator is independent both from the energy sector and from
the state. We think as well that in certain Member States regulators
are not strong enough and that maybe new guidelines could be developed
in order to be more precise on the powers that the regulator has
to have. We know, for example, in the UK guidelines exist on good
regulatory practices and maybe that could be an appropriate solution
in order to have strict rules about regulators and their organisations.
Mr Ulrich: I would say that we concur with ERGEG
and with the Gaz de France representative that there needs to
be harmonisation amongst the various national members and there
needs to be a levelling up of power to do that, not a levelling
down. Because of the importance of cross-border energy flows and
the levels of congestion which do occur at the borders, we think
it is necessary to improve the co-operation amongst the various
Member State regulators. In that context, again, the regulators'
powers should be looked at on a pan-European level as opposed
to a national level. If there are some explicit provisions for
cross-border intervention, either from ERGEG, known as ERGEG+,
or from the Commission, we think that is all a good idea. As far
as a specific regulator for all of Europe, we are not convinced
of the need for that yet. We are open to that suggestion, but
it does depend on how well the current rules are implemented and
how strong the national regulators are.
Q166 Lord Dykes: Of course
I suppose if the national regulators were strengthened individually,
however long the process might take, and particularly say in the
ten new Member States, no criticism of them because they are coming
newer to the scene, you could have the gradual accumulation or
co-ordination between the national regulators, so much that there
might be a kind of quasi-ERGEG system in its own right. Do you
feel that might be a possibility?
Mr Ulrich: Possibly.
Q167 Lord Dykes: Time will
tell.
Ms Pitts: Could I add to that. I concur with
most of the points which have been made. I think we have to recognise
that there is a huge amount of investment which needs to take
place across Europe in terms of both electricity and gas and in
terms of the networks which will connect all of those. We are
seeing a great coming together of the various markets within Europe
and I think that interconnection and greater interconnectivity
is critical. Can you do that without having some form of pan-European
regulation? I think it would be very hard to deal with those cross-border
issues. That then leads us to another question about how do you
get this pan-European regulation to be accountable? I presume
it would have to be accountable to a range of authorities within
Brussels.
Q168 Lord Dykes: Coming back
to 10 January this year, everybody, almost universally, welcomed
the idea of the Common Energy Policy but, of course, it was mainly
taken up in the newspapers by the people concerned with the ecological
aspects of it—climate change, global warming, greenhouse
gases—whereas really for you and the practitioners in the
industry, the producers, suppliers and distributors, the main
concern would be the genuine creation of a European single energy
provision market in the different products. Do you feel that the
Commission has got sufficient powers either yet or potentially
under the Common Energy Policy formulations to really ensure that
there is a genuine single market created throughout the 27 Member
States?
Ms Pitts: Certainly I would feel disappointed
if they launched a third legislative package and did not try to
make sure that every Member State fully implemented it, which
I think has been a problem with the last two. I think the powers
are there. It is very helpful that DG Comp are doing their investigations
and I hope that both of these things together and a very strong
commitment from the Commission to absolutely implement whatever
the third package is would be fine.
Q169 Lord Dykes: Are you optimistic
that will work out all right?
Ms Pitts: I hope that it will work out.
Chairman: We have got some supplementaries,
Lord Haskel and then Lord Geddes.
Q170 Lord Haskel: My question
follows on from exactly what Lord Dykes' question was. A number
of Member States still have not implemented the 2003 Energy Directives
fully and appropriately into their national law. Now we are going
to have a third set of directives, do you really feel that they
can be implemented, because if the national states do not implement
these directives, then we will never get a single market and how
can they? How would you suggest the Commission can persuade the
Member States to implement these directives?
Ms Fouquet: I think it is a very good question
because very often we say to the Commission that we are in favour
of liberalisation, in favour of progress in the internal market,
but that the previous directive was taken in 2003 and it is only
three years ago and we know that liberalisation takes time. For
example, in the UK you began 20 years ago; in the United States
it took 20 years as well, so it is quite a slow process. Maybe
we think that for this third package the priority should be to
give the Commission more tools in order to reach the harmonisation
in the different countries. For example, this third package could
be very interesting if it could lead to a European agency in regulation
and to more precise rules for regulation. It was one of the problems
of the previous directive in 2003 because some measures were too
vague and it left too much freedom to the Member States to implement
them. If we want this third package to be efficient, we need tools
in this package for the Commission to help harmonisation. It is
not a question of stronger rules but it is a question of harmonisation;
we think it is a priority.
Q171 Lord Dykes: You would
give more power to the Commission to insist?
Ms Fouquet: To insist, yes.
Mr Ulrich: I think there are two issues for
us, one is the power of the national regulator and one is the
power of the Commission. One thing which is evident, in the UK
we have a very strong regulator who is completely independent
of the government and that has been at the very core of why the
UK market has been so competitive. We do not see that in any other
European country, none that I am aware of, I may be corrected,
but only in the UK, have you had customer choice, 50% of customers
have actually changed suppliers at least once. In the UK, Ofgem
also has powers around competition as well as powers around regulatory
issue tariffing and in most other countries those are completely
separate jurisdictions, the competition issues and the regulatory
issue. As far as retail tariffs, in some countries the regulator
only has an advisory role, again in the UK you have one independent
regulator who has the right to discuss or to look into any of
those factors. Again, I think that is one of the great things
about the UK system. There would need to be further legislation
strengthening the national regulators to get to that point. We
are somewhat frustrated by the Commission's lack of progress,
as has been mentioned, the 2003 Energy Directives have not been
fully adopted in a number of countries. An investigation was launched
in 2005 and it is still ongoing, so here we are four years later
without any conclusive evidence. The Commission has started infringement
proceedings, we see that against ENI and RWE. I do not know how
long that is going to take, but currently it is very difficult
for the Commission to proceed with any rapidity when it is a Member
State that is under investigation versus an individual company.
There needs to be some strengthening allowing the Commission to
have greater powers in regard to implementation.
Q172 Lord Haskel: A comment,
politically it would be very difficult to persuade the British
people to give more powers to the Commission.
Ms Pitts: I think it is a question of using
the powers that they do have and using them as fully as they can,
that would be the starting point for me.
Q173 Lord Geddes: My question
is extremely brief and one for definition at this stage. All three
of our groups of witnesses have used the word "European",
can I take that throughout as being European Union or, in the
case of Gaz de France, you said that 40%of your turnover comes
outside France but mostly from Europe, again, European Union or
geographical Europe?
Ms Fouquet: European Union.
Q174 Lord Geddes: Is that
the same throughout, just so we know where we stand?
Ms Fouquet: Yes.
Chairman: If we can move on to the second
group of questions, unbundling, Lord Geddes.
Q175 Lord Geddes: My first
is a rather controversial question. Would you say, and please,
do not answer this immediately, unbundling has always seemed to
me to be a rather difficult word, is separation the same thing?
What we are talking about is the division between transmission
assets and competitive business, and that really is what the whole
of the question of opening the market seems to hang on. If there
is going to be fair and equal access to the networks and central
to effective competition in Europe, do you agree that such—you
are now going to use my word—separation is necessary?
Ms Pitts: I absolutely think that it is. Looking
at our experience within Britain and also within the US, we feel
that full separation of the Transmission system operator, and
Transmission system operator as a whole, should be separated out
from the competitive activities, whether it be in gas or electricity.
We think that it has brought about a number of benefits which
certainly England and Wales have seen, but I do think that it
needs to be coupled with, as Jake was saying, strong regulation
to make it work. The experience that we have seen in the US where
there has been some degree of separation without the Regulatory
Framework to back that up, I do not feel that has been a success.
I think if you have a proper degree of separation and you have
strong regulation, that can bring benefits in terms of making
sure that the network investment is delivered according to demand.
It allows confidence that there will be proper third party access
to the market. It brings an air of transparency to the whole system
because the transmission system operator has no incentive to hide
anything. In terms of dealing with tricky issues across Europe,
like congestion management and delivering the right size network,
I think it has proven itself in England and Wales and in Britain
to some extent to work in that regard.
Q176 Lord Geddes: If I may,
I would like to come back to this question of congestion because
when we took evidence, when we were doing a specific inquiry on
the single market in energy, this question of congestion transporting
particularly gas across continental Europe became a very important
point. Can I park that for the time being and I would like to
come back to it. Centrica, would you like to comment?
Mr Ulrich: We certainly agree, and I think it
is a consensus across Europe that unbundling is necessary for
effective competition. The question now has turned on, what is
separation or unbundling? How is that implemented?
Q177 Lord Geddes: That was
my next question.
Mr Ulrich: We will get to that. There are a
number of elements to this. One thing I want to bring up though
is separation or unbundling currently does not apply to storage
and storage is just as essential for a new competitor or for a
competitive environment. We would like to see any unbundling legislation
or regulation extended not only to the transmission system but
also to the storage system, otherwise there are many Member States
where storage is operated to the benefit of the incumbent which
does not allow new parties to come in. Very quickly you are buying
gas, long-term contracts with fairly set volumes and you have
to supply both winter peak, seasonal peak, as well as short-term
peak. It is very difficult to do under the contract, it is necessary
to have some sort of storage to do that. That is certainly one
point. Ownership unbundling was not mandated in the UK and yet
it has come about at the transmission level. I would point out
again, the shareholders of the old British Gas have reaped a very
sizeable reward from having Transco, BG International and Centrica
focused on different parts of the value chain, a different risk
profile and thereby different financing. Clearly separating the
networks from the supply business with the more volatile business
would allow more efficient financing and lower rates to consumers.
Q178 Lord Geddes: From that,
do I take it you do not think that absolute clear ownership unbundling
is necessary?
Mr Ulrich: I think it is easier because the
regulation required to make sure that the Independent system operator
is acting outside the incumbent or state interest is difficult,
not to say that it cannot be done, I would not go that far.
M Brelle: I would like to start from what I
said as an introduction regarding security of supply and the high
and increasing degree of dependency of Europe on imports. We believe
that it is very important not to weaken the European operators
in order to allow them to be able to negotiate with producers
which are big companies with very strong market powers. It is
important not to weaken these operators, taking into account that
for some of them the network is a very important part of their
assets. Separating or unbundling the ownership of the network
from the ownership of the company would weaken the financial structures
of these operators which would weaken the degree of security of
supply of Europe. We believe that ownership unbundling can be
applied, but that it is not the only solution to have the necessary
independence of network operators. We believe that there are different
possible models which can achieve the same results. Up to now
there has been no demonstration that ownership unbundling would
better achieve these objectives than other systems. We think that
this should be left to subsidiarity on the basis of a common framework
for all European countries. We would like to illustrate that with
the example of Gaz de France and its subsidiary which is in charge
of transmission in France, which is GRT Gas. This affiliate has
taken into account all the rules for a transparent and non-discriminatory
access to the network. There have been no complaints from any
operator regarding access to the gas network in France. There
are more than 30 competitors active on the French market and we
believe that this is proof that you can have transparent, non-discriminatory
and efficient access to the network without having ownership unbundling.
Mr Ulrich: I would take exception to one point
and that is the one about companies not being able to negotiate
gas contracts and deal with larger companies. There are two points
to make. If you look at the size of Shell and BP, for instance,
how much has that size helped in negotiating Russian gas supply
issues? I do not think that size per se is a matter. We have been
able to sign £12 billion of gas supply contracts without
any pipeline system and the credit worthiness is not based on
assets but on the fact that we have market shares. I do not believe
you have to have the integrated utility to buy the gas and I do
not believe that the producers or sellers feel that way either.
Ms Pitts: Just on that point, I would say that
having a separated transmission system in both gas and electricity
has not weakened our security of supply. I think the fact that
we have seen a huge amount of gas investment coming to Britain
is probably due to the fact that we have a very open market underpinned
by an absolutely clear third party access system, which is underpinned
by having an ownership unbundled Transmission system operator.
M Brelle: If I can add two points. I would like
to say that to our knowledge there is no example in the world
of mandatory ownership unbundling: neither in the US nor in the
UK, there are obligations to ownership unbundling. The second
thing is that European Parliament has in its report on 10 July
recognised that there are specific solutions which have to be
found for gas and Parliament urged the Commission to propose appropriate
solutions on that topic.
Ms Pitts: Under our licence, which I suppose
is a form of legal obligation, we are precluded from having any
generation of supply interest or, indeed, getting involved in
upstream or downstream gas. We are an example where the Government
has taken action to ensure that we are very, very, if I can use
the word, pure in our approach or focus and only focus on the
transmission side of business.
Mr Ulrich: Again, I will re-emphasise, the decision
in the UK to unbundle was not driven by regulation or it was not
mandatory but it was perceived, I believe correctly so, to be
in the best interest of consumers. It was driven by commercial
interest by the old British Gas.
Q179 Lord Geddes: Can I come
on to this question of congestion and I think my colleagues who
were on the Committee at the same time may well want to come in
on this also. If my memory serves me right, we received evidence
which said in an unbundled situation in a time of congestion there
was a real risk, and indeed it did take place, where national
interests superseded contractual interests, and therefore the
legal obligation to transmit gas from A through B to C was in
the time of congestion superseded by national interest where gas
was wanted in the country of B. Have you come across this particular
one? Would you like to comment on that?
Mr Ulrich: Not that specifically. There have
been two cases referred to by the Commission. One is where a company
did not invest in infrastructure to relieve congestion because
it was discovered that it would hurt the earnings of one of their
subsidiary companies and that is the ENI investigation where they
were fined €250 million for not proceeding with increased
infrastructure. The second one I am aware of, which the Commission
pointed out, is there are three TSOs in Germany which made €400
million because of congestion charges and high prices on capacity
and have invested less than €40 million to try to alleviate
that. I do believe that it is in the interest of the incumbent
to under-invest in order to keep margins higher for the subsidiary
companies. Clearly that is not true everywhere and I am not familiar
with your specific case.
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