Select Committee on European Communities Seventh Report



  25.    The European Commission (Directorate-General XVII) explained that the motivation behind the Directive was both political and economic. The energy sector was one of the few remaining in which an internal market was still to be achieved, and gas was the last major component of the energy sector not yet subject to common rules at Community level. Although introducing competition into the gas market was intended to lower prices to consumers and increase the competitiveness of European industry, like any other aspect of Community energy policy the Directive also had to be consistent with the aims of environmental protection and security of supply. The Commission recognised that the final Directive would be a compromise among the views of the 15 Member States with their "widely different political and economic environments", but expected it to achieve a significant market opening as a first step towards liberalisation. There had been "a considerable convergence of view" in the earlier part of 1997 and the Member States were "very close to an agreement" (QQ 79-81, 91-2).

  26.    Mr Jonathan Stern, an independent gas analyst, said that the Commission had faced "a carefully orchestrated campaign" of concerted opposition from the gas industry which "regarded the introduction of liberalisation as the equivalent of the end of civilisation". Opposition to liberalisation was difficult to understand from a British perspective, but the debate had now moved beyond the stage when it would be an option to have no Directive in preference to a very weak one. Now that the rest of the single market was in place and the Electricity Directive agreed, a Gas Directive was inevitable, despite the predictable difficulties involved (pp 24-6, QQ 114, 118).

  27.    Mr Giles Chichester MEP, a member of the European Parliament Committee on Research, Technological Development and Energy, took a similar general view, attributing the weakness of the Directive to the "powerful and entrenched interests" opposing it (Q 135). The European Parliament had only reluctantly accepted the modest market opening provided by the Electricity Directive, and Mr Chichester doubted whether it would accept the Gas Directive without amendments aimed at achieving greater liberalisation and a shorter timescale. There was, however, no overall consensus among MEPs, with supporters and opponents of liberalisation from all parts of the political spectrum (QQ 141-3).

Liberalisation in the United Kingdom

  28.    Following the privatisation of British Gas in 1986, a competitive market had developed in gas supply to non-domestic customers. Centrica plc, one of two new companies created by the de-merger of British Gas plc in February 1997, estimated that it had lost around 70 per cent of its share of the industrial and commercial market to competitors, many foreign-owned. Competition was also now being introduced in the domestic market, beginning with pilot projects in parts of southern England and extending to the whole country by the end of 1998.

  29.    Centrica said that, together with its sister company BG plc, it owned 40 per cent of the Interconnector, the gas pipeline under construction from East Anglia to Belgium, and was already developing opportunities to sell gas on the Continent. In doing so, it was relying on the Gas Directive to secure a degree of market opening in other European countries, thus giving reciprocal access to their markets (pp 1-2, Q 19). But the Electricity Association, representing companies interested in selling gas in Europe, believed the draft Directive would allow Member States to continue to protect their home markets, either by restricting eligible customers or by giving preferential treatment to existing contracts (p 115).

  30.    The Office of Gas Supply (Ofgas), the United Kingdom gas regulator, was confident that nothing in the Directive would limit or slow down the process of liberalisation in Britain, which had reduced gas prices to major consumers by half. Other Member States were paying more than they needed to for gas, even though supply exceeded demand, but their dependence on Russian gas with its high transportation costs meant that prices were never likely to fall to current British levels. The Interconnector, together with pipeline links with Norway and Ireland, would allow gas to be imported or exported to even out price fluctuations. The extra demand might push up prices to domestic consumers, but the exports would benefit the country as a whole. Since any commercial benefits for British companies would probably be offset by restrictions on future take-or-pay contracts, which were against Britain's interests as a gas-producing country, the Government were supporting liberalisation in Europe "to be good Europeans" and because it was "just a good thing to do" (QQ 173-6, 189-90, 200). Mr Stern also saw little commercial benefit for the United Kingdom. Domestic liberalisation had given British companies a considerable competitive advantage, and since they had no difficulties selling gas in European markets at present they were unlikely to benefit from improved rights of access to those markets (Q 122).

  31.    The Minister for Energy, Mr John Battle MP, believed that British firms seeking to export gas would benefit from rights to compete in other European markets and saw his role in Europe as being to convince other Member States of the benefits of liberalisation. The United Kingdom now had an energy market driven by consumer demand rather than by power generators. The transformation had not been easy and was not yet complete, but the result would be that consumers would benefit from cheaper prices and better access. The Minister did not expect the completion of the Interconnector to force domestic prices to rise, and anticipated that it would act as a two-way channel, carrying imports as well as exports (QQ 252, 261-4).

Positions of the Member States

  32.    According to Mr Stern, the United Kingdom, Germany, the Netherlands, Sweden and Finland could broadly be described as "pro-liberalisers", although the German gas industry remained hostile, at least in its declared position, and the United Kingdom was essentially disinterested, having already liberalised to a far greater extent than the Directive proposed. Spain, Greece, Italy, Belgium and France were "anti-liberalisers" for various reasons, including understandable concerns about the impact on their national gas investments. Belgium, however, opposed liberalisation despite having a great deal to gain from it, simply because the government was "locked into a corporatist view of the world" (Q 115).

  33.    Mr Chichester offered a very similar analysis of the "pros" and "antis". As well as a general north/south divide, there was a widespread suspicion of ideas associated with the United Kingdom and an assumption that services were delivered more securely and efficiently when controlled by a state monopoly rather than by a competitive market. Some Member States might argue that, with the United Kingdom market already fully liberalised, a sufficient degree of liberalisation of the European market had already been achieved. But Mr Chichester believed that the benefits of competition to consumers and industry should be extended further, partly to offer British companies reciprocal access to the markets of other Member States (QQ 137-8, 148-50).

Security of Supply

  34.    The abundance of gas in or near Europe meant that, for Ofgas, security of supply was "not an issue in the long term" (Q 203). According to the British Petroleum Company plc (BP), the gas industry agreed that security of supply concerns were "overstated", given that there had been no major supply interruptions despite the high and growing dependence on imported gas (p 108). But the assumption that security of supply could be equated with dependence on non-European sources was rejected by Mr Stern, who said that European companies had encountered greater security of supply problems with European sources than with imports. The key issue was how well a particular country could cope in the event of disruption to a major source of supply, and the development of a trading market in gas would rapidly reduce reliance on indigenous reserves or particular suppliers (QQ 123, 129).

  35.    A number of witnesses, including BG, Centrica and Ofgas, were convinced that the security of supply of the United Kingdom and elsewhere had been improved by liberalisation (p 105). The single market was the best means of achieving "diverse, secure and sustainable supplies", according to the Minister, who rejected the "insular mentality" which assumed that, without our energy supplies "literally in our own back yard" the lights would go out as soon as anything went wrong. Europe's increasing reliance on gas imported from or through politically unstable areas presented some potential problems, but a degree of medium-term security was offered by North Sea supplies (QQ 263-5).


  36.    The Minister warmly welcomed the Luxembourg Presidency text, saying that it represented progress in the right direction. Although it fell short of the Government's aspirations in some respects, he recognised the "negotiating realities" involved in encouraging other Member States of the benefits of competition to industry and consumers. The Government were committed to the single market and to gas liberalisation, but it was "a mammoth task" and the Directive would only be one element in an ongoing process (p 87, QQ 247-50).

  37.    Most British companies which gave evidence offered a cautious welcome to the draft Directive. BP, for example, believed that, although its direct effect would be limited, the Directive would increase competition and transparency, while establishing "a clear benchmark for national legislation" (p 109). Centrica supported the Directive because, although much less far-reaching than the measures implemented in the United Kingdom, it represented a small step towards redressing the balance and because liberalisation would enhance European competitiveness. But there was a danger that the final Directive might be so weak, particularly in relation to take-or-pay derogations, that it would be worse than no Directive at all (QQ 39, 43). This last point was echoed by Enron Europe Limited, who warned that the Directive would have only a "very marginal impact" and might "have the effect of legitimising the status quo in Europe" (p 117).

  38.    Shell UK Exploration and Production (Shell) believed that the Commission, in pursuit of its objectives of improving industrial competitiveness, security of supply and the free movement of gas, had attempted to reconcile two contrasting approaches: on the one hand, liberalisation by deregulation, and on the other, new regulations to ensure third party access and unbundling and transparency of accounts. Shell supported the objectives but preferred the former rather than the latter approach on the grounds that regulation tended to lead to increased bureaucracy and slower market development (p 124).

  39.    The International Federation of Industrial Energy Consumers (IFIEC), which represented major gas consumers in 12 European countries, said that energy accounted for 50 per cent or more of the production costs of some of its members, many of whom were in direct competition with US companies whose energy costs were 30-50 per cent lower. Liberalisation in the United Kingdom had led to energy costs that were among the lowest in Europe. IFIEC saw the Directive as a step in the right direction, but was concerned that recent changes in the text made it too weak to achieve the expected market opening. The underlying question was whether Europe still wanted heavy industry, which might relocate to other parts of the world if European energy costs were not reduced (p 12, QQ 45-7, 64, 70, 73).

  40.    A number of witnesses took the view that, while the draft Directive would not itself be sufficient to create and sustain a significant competitive EU gas market, it would act as a catalyst for change. Mr Stern, for example, said that it provided a "minimum pace of change to which Member States must adhere" and was already forcing changes in legislation, taxation and the status of companies. Although the number of derogations and "other instruments of procrastination" would make it very difficult for the Commission to impose competition on reluctant Member States, the value of the Directive was to make it clear to governments and industry that they could not forever resist the market forces that were hastening the pace of change. The result would be, at least, markets opened to competition, if not full liberalisation (p 24, QQ 117, 127-8).

  41.    Ofgas also felt that "the demands of the market may well prove a more powerful force for change than discussions at a bureaucratic or legalistic level in Brussels" (p 40). The Directive might "force some countries to be more liberal than they would have been otherwise" while others, including France, Germany and the Netherlands, were using it "as an excuse for introducing the liberalisation they wanted to introduce anyway" (QQ 180-1). Given the chance to rewrite the Directive, Ofgas would "rip it up completely and start again", separating the natural monopoly from its competitors and transportation from supply, building in the principles of non-discrimination and transparency and establishing a strong regulator to police the system. Despite the imperfections of the draft Directive, however, it was still "better to have one than not" (Q 194).

  42.    The Committee heard directly from the principal French, German and Spanish gas companies. Of the three, the Spanish distribution company GasNatural was probably the most positive about the draft Directive, seeing it as a sound compromise which would "help to clarify the uncertainties of the future framework of the gas sector". A Directive that left room for subsidiarity while preventing different legislation in each Member State and which adopted a gradual and prudent approach to market opening stood a reasonable chance of political agreement (p 73, Q 210).

  43.    Ruhrgas wanted a Directive that balanced a market-driven and a regulated approach, and sought further changes on take-or-pay, market opening and emergent markets to reflect the diversity of the Member States' gas industries. The Electricity Directive had illustrated the importance of subsidiarity by showing that "any attempt to introduce uniform rules throughout Europe while simultaneously respecting a wide range of national interests must necessarily end in spiralling regulation and dirigism". The main aim of the Directive should be to strengthen entrepreneurial activity and market development (p 65, QQ 205-6).

  44.    According to Gaz de France, the Directive would create "costly and bureaucratic constraints" on gas undertakings that would jeopardise quality and increase prices. It wanted commercial confidentiality to be guaranteed and gas companies not to be hindered by internal unbundling of accounts and obligations to publish indicative tariffs (pp 70-1).

  45.    Norway, although not an EU Member State, was obliged by its membership of the EEA Agreement to implement any Community legislation involving the single market which was adopted by the EEA Joint Committee. As a result, Norway was likely to be significantly affected by the Directive, despite having no direct influence in the negotiations. The Norwegian Ministry of Petroleum and Energy said that gas had been a success story in Europe and had the potential to provide a larger share of future energy needs, with benefits for the environment and security of supply, but the investments that were necessary to secure the future development of gas would be jeopardised by the uncertainty that the draft Directive would introduce. Some amendments were needed to secure a long-term regulatory regime and to guarantee the contracts that were needed (pp 97-8).


  46.    One of Norway's key concerns as a major European gas producer was with the scope of application of the Directive, which it proposed should be limited to "the outlet flange of the ultimate landing terminal", thus excluding offshore production-related pipelines[13]. Without such a change, which was supported by the oil industry and was consistent with existing EC and Norwegian legislation, Norway believed its existing integrated production system would have to be split up under different regulatory regimes. The resulting increases in costs and loss of efficiency would put Norway at an unfair disadvantage compared with other non-EEA producers (p 97, QQ 277, 292-5).

  47.    Norway's view was widely supported by gas industry witnesses. Extending the scope of the Directive upstream "would do little to contribute to the EU's objectives of increasing competition" in gas markets, according to BP, while adding technical complexity and delaying agreement (p 109). The Oil Industry International Exploration and Production Forum (the E&P Forum) went further, believing that extending the Directive upstream could even be counter-productive in encouraging market opening, given the lack of any upstream monopoly and the presence of many smaller, cost-sensitive enterprises. Unbundling upstream accounts was unnecessary, difficult and misleading, the additional regulatory complexity and uncertainty would increase costs and levels of investment could fall (pp 122-4).

  48.    Conoco Europe Gas Limited explained that the upstream sector handled a raw product of variable composition that was only later homogenised into a standard product suitable for final consumption. The company strongly supported the fact that a definition of processed natural gas had been included in the Directive, but recognised that the definition might need to be refined (p 113). Shell agreed, saying the proposed definition could extend the scope of the Directive to pipelines designed to transport gas from offshore production fields to onshore facilities in a partially processed state, and to offshore storage facilities which used depleted fields to store processed gas on a seasonal basis (p 125).

  49.    The Government were cautious about extending transportation rules to offshore operations, given the important differences between offshore production and onshore distribution (Q 267). But Ofgas was prepared to accept an extension of the scope of the Directive to apply offshore "as long as it was worked through properly" (Q 177).

  50.    The E&P Forum suggested that proposals to apply competitive rules upstream were motivated by political expediency. Failed attempts to apply a common approach to the gas and electricity sectors were being revived, "with little justification", in order to secure a "quick" solution to gas liberalisation (p 122). Professor Claude Desama MEP, Rapporteur for the European Parliament Committee on Research, Technological Development and Energy, also criticised the extent to which the draft Directive was modelled on the Electricity Directive. With electricity the aim was to introduce competition in production, but with gas it was to diversify distribution networks while leaving production in the hands of a few enterprises. By allowing producers to take control of transport and distribution networks, the Directive risked increasing vertical integration and concentration of the market at the expense of consumers (p 114).

  51.    Whatever its application upstream, the Directive would not be effective in creating and sustaining a competitive market in gas demand, according to Gaz de France, unless it also addressed the issue of competition in supply. The question was how Europe would "obtain a new equilibrium by keeping the oligarchy of producers and destroying the oligarchy of buyers" (p 69, Q 213). GasNatural wondered whether producers would "take a controlling role in the market in the long term" by exploiting their strong negotiating position in relation to a fragmented market and their rights to supply final consumers directly (pp 72-3, Q 212).

  52.    For the German company Ruhrgas AG, it was precisely in order to "preserve the balance of interests between importers and powerful, centrally-controlled producers from outside the EU" that take-or-pay contracts remained necessary. The failure to extend reciprocity to non-EU undertakings was a serious defect of the draft Directive (pp 66-7). But the British Government were not convinced, saying there would be "difficulties of principle in terms of the European Union's international trade and other obligations". A Directive for gas competition rules was "not the appropriate vehicle for addressing the problems which may be thought to arise" in relation to third countries (Q 269).

13   Since this evidence was taken, the application of the draft Directive to upstream production has been clarified (see paragraph 21 above). Back

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