Select Committee on European Communities Seventh Report



  98.    The Committee welcomes the draft Directive as an important element in the extension of the single market to the energy sector. Although we recognise that the Directive will have only a limited impact on the United Kingdom gas market, given the domestic legislation that has already taken effect, we believe that it has the potential to yield general benefits to the Community. In particular, the introduction of competition to gas markets can be expected to lower the cost of energy to industry and so improve Europe's industrial competitiveness. Domestic consumers will also benefit from lower gas prices and from the reduced levels of environmental pollution that can be expected to result from a proportionally greater use of natural gas for power generation.

  99.    We have noted the criticisms that many witnesses, particularly from this country, have made, many of them based on unfavourable comparisons between the draft Directive and the liberalised regime being created here. However, as the Commission pointed out in evidence to the Committee, the text is a political compromise between the 15 Member States. It has already been the subject of lengthy negotiations and in our view it is not realistic to propose wide-ranging alterations at this stage. We believe that, despite its evident imperfections, it is better to have a Directive, subject to such amendments as it may be possible to obtain, rather than have no Directive at all.

  100.    The evident imperfections of the draft Directive derive from the fact that there are only two major gas producers within the Community, namely the United Kingdom and the Netherlands. Given that the dependency of the Community as a whole on supplies from Norway, Russia and Algeria is expected to rise to about 55 per cent by 2010 and to 70 per cent in 2020, it is clear that the import dependency of those Member States without substantial gas production will be even higher. The Committee believes that, as a result, these other Member States will welcome imports from the United Kingdom and the Netherlands with enthusiasm, as an alternative to the much less secure imports from politically unstable countries such as Russia and Algeria. In this context, a general question arises about the extent of genuine cross-border competition that is likely to develop. On the positive side, the Directive may help to stimulate domestic competition by creating a climate which is favourable to the growth of liberalisation and which may well help some Member States to overcome their domestic opposition to liberalisation.

Impact of the Directive on the UK gas market

  101.    Although the proposed Directive will not have a significant direct impact on the United Kingdom gas market, we believe it should facilitate the export of gas from the United Kingdom to Continental markets. The completion of the Interconnector pipeline, scheduled for 1998, will permit the export of gas from the the United Kingdom to major European wholesale gas buyers, some of whom have already signed contracts with United Kingdom gas companies and producers. The Directive would not apply to sales of this type as they are made to gas wholesalers who already own transmission lines, but would permit direct sales to final consumers which in most cases would otherwise be impossible. The Government should recognise, however, that exchanges of gas through the Interconnector will ultimately produce a levelling of gas prices and that exports of gas from the United Kingdom, which are likely to predominate over imports at least in the medium term, could cause gas prices in the United Kingdom to rise.


  102.    There are a number of important aspects of the draft Directive on which the parties to the negotiations have already reached substantial agreement. We comment on these only briefly here (paragraphs 103-4), before addressing the major issues on which negotiations are still continuing.

Regulated and Negotiated Access to Pipelines

  103.    The proposed Directive offers Member States the option of establishing a system of either regulated access, with published tariffs, or negotiated third party access (TPA) where tariffs are subject to negotiation. Member States which opt for TPA must appoint a competent independent national authority to deal expeditiously with disputes about tariffs. We recognise the doubts expressed in evidence about whether such authorities would be capable of adequately resolving disputes about access and that they might reach decisions which conflicted with those made in other Member States. Nevertheless, we believe that the appointment of a competent, independent national authority in each Member State to settle access disputes is consistent with the principle of subsidiarity and would provide an acceptable forum for resolving such disputes.

Transparency of accounts and Chinese walls

  104.    We consider that the proposed transparency arrangements, which would require only accountancy separation between the transportation and supply operations of gas companies, are inadequate to ensure the emergence of the "level playing field" required for competition to emerge. We therefore urge the Government to continue to press for amendments to require management separation of these activities or, at the very least, a comprehensive Chinese wall requirement to ensure that pipeline companies are prevented from using information obtained from other suppliers to benefit their own supply activities.


  105.    We consider below those aspects of the draft Directive on which substantial negotiations are still in progress.

Application of the Directive to upstream transmission pipelines

  106.    We sympathise with the arguments of the Norwegian Government and gas producers about the possible impact of the Directive on upstream activities, principally access to transmission pipelines in the North Sea. In most cases, however, pipelines are natural monopolies and the cost of transporting gas onshore represents a significant part of the final price paid by the consumer. As a result of the refinement of the definition of transmission in the 6 October text (see paragraph 21 above) it is now clear that, in the North Sea, only transmission pipelines will be subject to the terms of the Directive. The Committee welcomes this clarification.

Extent of market opening and thresholds for eligible customers

  107.    Since the basic structure of the arrangements for market opening is already agreed, the negotiations relate to details rather than the principles of the timing and extent of liberalisation. Our concern is that competition should be introduced as rapidly and as widely as is possible. While we accept that it would be difficult to obtain any radical changes to the figures for market opening or thresholds contained in the Luxembourg Presidency texts, including that of 6 October, we would still prefer to see either lower thresholds defining eligible customers, or a shorter timetable, or both-perhaps thresholds of 25 million m3, 10 million m3 and 1 million m3, with intervals of three years rather than five between stages. Notwithstanding the possible price rises noted above, maximum competition is in the interests of the United Kingdom, which would benefit directly in the short term by increased exports of gas to the Continent and from the export of its expertise in operating in a competitive gas market.

  108.    We recognise that negotiations between the major producers which provide most of the Community's gas and the principal gas undertakings of the Member States currently involve exporting and importing oligopolies of comparable power. We have considered the argument that the introduction of competition within the Community could seriously upset the balance of power between these two groups and lead to increased prices. However, we believe that a number of factors will combine to prevent this from occurring. These include competition arising from gas imported into the Continent through the Interconnector pipeline, possible diversification of Norwegian suppliers (see paragraph 8) and competition between oligopoly suppliers[19].

Take-or-pay contracts and derogations

  109.    We have considered carefully the arguments advanced by gas producers about the difficulty of financing new gas developments without the security conferred by long-term take-or-pay contracts, and by gas buyers about the financial difficulties they might encounter under existing take-or-pay contracts if they were not allowed derogations from the access requirements proposed.

  110.    We recognise that the introduction of gas-on-gas competition in a national gas market inevitably causes anxiety amongst the buyers under long-term contracts because of the risk that market share will be lost to competitors. The reduction of the thresholds proposed in the Gas Directive will, over a period of ten years, result in significant reductions of monopolies of supply. Buyers are willing to accept long-term take-or-pay contracts if they have either guaranteed markets for the gas, for example because of legal or de facto monopolies of supply, or if the contractual arrangements with the seller provide for adjustment of purchase prices in the event of falling resale prices in the competitive market. Such adjustment provisions have been included in some recent British export contracts to Community buyers. We can see no reason why such provisions should not be included in any future long-term take-or-pay contracts which Community buyers conclude with major exporting countries, thus allowing those buyers to face the threat of reduced prices in the competitive market without the protection of monopoly rights.

  111.    Despite claims that long-term take-or-pay contracts are necessary to finance the development of gas infrastructure, the oil industry succeeds in achieving similar levels of investment without take-or-pay contracts. We can see no difference between the two industries that would justify treating gas production differently from oil production in this respect. Nor do we accept that long-term take-or-pay contracts are necessary to ensure security of supply or to enable gas buyers to fulfil their public service obligations. We believe that take-or-pay contracts are contrary to the spirit of competition.

  112.    We were alarmed to note that, since the Luxembourg Presidency text of July 1997, the draft Directive no longer makes a distinction between the granting of derogations for contracts already in existence when the Directive comes into force and those entered into at a later date. If the latest text is accepted it will continue to be possible for gas buyers to apply for derogations, with the consequence that buyers who enter into new long-term take-or-pay contracts might be able to delay indefinitely the granting of access to their pipelines and consequently the introduction of competition. We accept that derogations should be permitted in respect of contracts already existing at the time it became apparent that Community rules for an internal market in gas would be introduced, but we do not accept that derogations should be allowed in respect of take-or-pay contracts entered into more recently or in the future. While there are no overwhelming reasons to choose any particular date of those suggested for the point at which take-or-pay contracts should cease to be eligible for derogations, we would certainly accept that 25 July 1996, when a Common Position was reached on the Electricity Directive, would be an appropriate cut-off date.

  113.    The proposed derogation arrangements have the merit that a final decision on whether a derogation is to be granted lies with the Commission and not with the Member State concerned. We also regard the new criterion for granting derogations included in the 6 October text as a useful addition. However, we think that, overall, the arrangements proposed have a number of unsatisfactory features. In particular, we believe that the provisions requiring examination of the extent to which the contract conditions allow for market changes should be strengthened to make it clear that the absence of adequate provisions for such changes would be a bar to the grant of a derogation.

  114.    We consider that a number of the procedural aspects are unsatisfactory. Our particular concerns are as follows.

    -    Because the text does not impose any time limit within which the Member State concerned must decide whether it proposes to grant a derogation, there are considerable opportunities for delay. (The Commission, by contrast, is required to respond within four weeks to a notification from a Member State of its proposal to grant a derogation.)

    -    The likelihood that decisions to grant or refuse derogations will be subject to legal challenge presents further scope for delay.

    -    Pending final resolution of an access dispute, applicants for access would be unable to obtain supplies of gas from any source other than the owner of the pipeline to which access has been refused.

    -    Any legal challenge by an applicant for access would involve the applicant in expenditure of considerable management time and resources.

  115.    We strongly recommend the Government to press for the inclusion in the Directive of safeguards to protect the position of applicants for access. These safeguards might include constraints on the rights of pipeline owners to refuse access, such as a requirement that they act in good faith, and the inclusion of a time limit on Member States, similar to that imposed on the Commission, within which they must decide whether to grant a derogation.


  116.    The Committee considers that the draft EU Gas Directive raises important questions to which the attention of the House should be drawn, and makes this report for debate.

19   An example being a recent sale of Norwegian gas to the Czech Republic, a market hitherto supplied exclusively by Russian gas. Back

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Prepared 27 November 1997