PART 2 VIEWS OF WITNESSES
Future take-or-pay contracts
72. Most witnesses made
a clear distinction, in relation to the granting of derogations,
between existing and future take-or-pay commitments. Those who
dissented from this consensus-Professor Desama, the Norwegian
Government and Gaz de France-thought the distinction unnecessary
since, rather than derogations, the Directive should provide a
legal and economic framework in which future agreements could
be agreed (pp 115, 98, 70). But for GasNatural, a Directive that
distinguished existing and future contracts would help Member
States negotiating with outside suppliers to show that "something
was changing in the European gas market and that `take-or-pay'
commitments could be, eventually, substituted by the guarantee
offered by an open market" (p 74, Q 246).
73. Centrica regarded
derogations for future contracts as "a serious threat to
the extent of liberalisation", while a Directive containing
such derogations would only be worth signing, according to Ofgas,
if the provisions were "as constrained as possible",
with beneficiaries "required at least to demonstrate genuine
financial hardship" (Q 12, p 41). The Minister was very sceptical
about supporting any derogations for future contracts, unless
they were "very tightly controlled" but was not yet
sure that he could persuade other Member States of this position
74. A wide range of
dates was proposed for when take-or-pay contracts should cease
to be eligible for derogations, based on varying estimates of
when it became apparent that the Community was intent on liberalising
the gas market. Although Shell argued that "any new regulations
should not be retrospective", most witnesses agreed with
Enron that, unless the cut-off date was earlier than the date
on which the new Directive came into force, the effect would be
to "invite incumbent market players with monopoly positions
to try to pre-empt EU legislation by signing long-term deals in
advance of a political agreement" (p 125, p 119).
75. Wintershall advocated
15 October 1996, the date when the first draft Directive was published
under the Irish Presidency (p 131). Enron and GasNatural both
chose 25 July 1996, the date on which a Common Position was reached
on the Electricity Directive (p 119, p 74). BG wanted to exclude
contracts signed "since negotiations on the Directive restarted
in 1996 and probably earlier" (p 106). For Ofgas, the
cut-off date should be no later than summer 1996, while Centrica
proposed 1 January 1994, but both recognised that a particular
date was less important than the principle that the cut-off should
apply from when it became "fairly clear that change was coming"
(p 41, Q 192; p 3, QQ 5-6). For the Electricity Association, the
relevant date was January 1992 when the first draft Directive
was published, while for Mr Stern it was arguably as early as
1988, when the Commission published its first document on the
internal energy market (p 116, p 25). IFIEC wanted derogations
for existing contracts to be limited to a maximum of five years
starting from the date on which the contract was agreed (Q 58).
76. Centrica was one
of a number of witnesses convinced that take-or-pay contracts
would not cause the same problems in Europe as they had in the
United Kingdom and North America since, as Mr Stern also pointed
out, Continental contracts tended to be more flexible to changes
in the market (pp 4, 25). According to Ofgas, the difference was
that British Gas had agreed take-or-pay contracts which specified
fixed prices and volumes, while there was a tradition elsewhere
in Europe of contracts where, in general, the producer took the
price risk and the gas company the volume risk. This was principally
achieved by "price re-opener clauses" which allowed
prices to be re-negotiated where the market price changed substantially
and which Ofgas believed benefitted the gas companies at the expense
of the consumer. Ofgas found it surprising that the governments
of import-dependent Member States relied on take-or-pay contracts
to protect their monopolistic industries against price risks,
when such contracts principally protected producers' interests
(p 41, Q 191).
77. Various suggestions
were made as to how gas companies with take-or-pay commitments
could insulate themselves against the price risks involved in
the introduction of competition. Centrica was one of a number
of witnesses who believed that greater use could be made of price
re-opener clauses, and also suggested the introduction of "hardship
clauses" that could be invoked when one party suffered hardship
as a result of changed circumstances. Supplier countries could
offer reductions in take-or-pay commitments in return for pipeline
access rights, while gas-importing countries could require new
entrants to share take-or-pay commitments, or impose levies on
gas transported to spread take-or-pay costs (Q 13). BG proposed
"margin sharing", where gas could be sold by mutual
agreement in markets other than those originally envisaged if
the price was higher, and gas swaps, which could help to overcome
the costs of transporting gas over long distances (p 106).
78. For IFIEC, the alternative
to take-or-pay contracts lay in improved negotiating and contract
skills, including re-opener clauses. Both gas producers and purchasers
had too easily assumed that traditional take-or-pay contracts
were the only option available (Q 71). Ofgas saw some reassurance
in the over-supply of gas in western Europe, while financial mechanisms
for hedging against risks were likely to become available in a
liberalised market (p 41). Professor Desama saw as a possible
solution a clause allowing both sides rights to re-negotiate in
the light of exceptional events (p 115).
security of supply
79. The Commission believed
that take-or-pay contracts had been important in addressing the
issue of security of supply and would continue to play a role,
but they were likely to become more flexible and short-term as
gas-on-gas competition developed. Other means of ensuring security
of supply included underground storage, flexibility of production,
interruptible contracts, greater integration of the pipeline network
and developing trading arrangements with external suppliers (QQ
80. Enron rejected as
a myth the idea that take-or-pay contracts were necessary to finance
production and downstream investment, arguing that in a liberalised
market, appropriate financial instruments would emerge. Centrica
agreed, pointing out that other industries undertook massive capital
investment without comparable guarantees, but recognised a particular
problem with building gas pipelines which tended to be specific
to particular large customers and where the investment depended
on assurances that the customer would continue to buy the gas.
Take-or-pay contracts might be necessary in such cases, but if
they were more flexible and shorter-term they could be compatible
with a liberalised market (Q 4).
81. But Professor Desama
was concerned that "long-term considerations might be forgotten
in the light of the temporary situation of surplus" of the
next few years. Future reserves would be further away and technically
more difficult to exploit, requiring enormous investments with
extremely long repayment periods, and Europe would continue to
need operators capable of signing long-term contracts (p 115).
TO THE GAS NETWORK
82. The Directive would
offer Member States the option of establishing a system of either
regulated or negotiated third party access (TPA). The Commission
expressed no preference, but anticipated that most Member States
would opt for negotiated TPA (Q 107). Mr Stern saw the lack of
detailed regulation on access to the pipeline system as a major
weakness of the draft Directive and described the option of negotiated
access as "a recipe for discrimination and legal/regulatory
stalemate" (p 24). IFIEC favoured regulated access which
it believed would "accelerate the opening of the gas markets
in a transparent way" (p 12).
83. The markets in which
third party access had been introduced were associated by Ruhrgas
with over-supply, indigenous sources and low integration with
other energy markets. Germany, by contrast, imported 80 per cent
of its gas from a limited number of suppliers, while gas-to-gas
competition took place at pipeline level, without the natural
grid monopoly that existed in the United Kingdom. To the private
companies who had developed the German pipeline network, the freedom
to build pipelines was as important as access to the system and
should be enshrined in the Directive. Ruhrgas was prepared to
transport gas for other companies subject to commercial agreement,
and there were national competition laws to prevent it abusing
its dominant position, but third party access would "threaten
the very fabric of this structure" (pp 64-6, QQ 236-40).
84. Ideally, the Government
would prefer a system of network access based on the separation
of transportation and supply, as in the United Kingdom, but if
this could not be achieved, it was "absolutely vital"
that there were mandatory provisions to expand pipeline capacity
to meet "reasonable economic demands" (QQ 247, 252).
But Ruhrgas strongly objected to these investment obligations,
saying that such rules contradicted the principles of the free
market (p 66).
85. For Ofgas, the German
attitude to network access presented "a real cultural problem".
Regulation was seen as expropriation and Ruhrgas assumed it had
a right to refuse access to protect its commercial interests.
But Wingas, the joint venture company formed by Wintershall and
the Russian company Gazprom, argued that, since the "established"
German gas industry had benefitted from government authorisation
and even expropriation to create its monopoly position, it could
"reasonably be expected to grant third party access"
to unused capacity for an appropriate fee, as a matter of social
responsibility (p 130). Conoco supported the provisions of Article
4, requiring authorisations to build and operate transmission
and distribution pipelines to be granted on a non-discriminatory
basis, despite moves to remove distribution pipelines from the
scope of this Article (p 113).
and public service obligations
86. There was some concern
among witnesses about a potential conflict between access to gas
networks and public service obligations. Centrica saw no incompatibility
in principle, but was concerned that Article 17 of the draft Directive
might be interpreted to allow companies to refuse access to competitors
on the grounds that their ability to fulfil their obligations
would be undermined (Q 17).
UNICE was concerned that public service obligations "should
not be used as a pretext for preventing access to the network".
Like Wintershall, it believed the burden of proof should be on
the party seeking to refuse access, which should be subject to
strict and objective criteria (p 126, p 131). IFIEC suggested
that the verification of public service obligation status should
be assigned to the "competent authorities" envisaged
in Article 21.
Ofgas believed that liberalisation was compatible with public
service obligations that were enshrined in legislation, together
with a means of implementing and policing them, but not with a
concept of public service that involved protecting high employment
levels in public utilities (Q 186).
87. Some of the concerns
expressed related to the interpretation of the word "prevent"
in Article 17, which would allow gas companies to apply for derogations
where granting access to competitors would prevent them fulfilling
their public service obligations. The Commission expected "prevent"
to be interpreted in absolute terms as equivalent to "stop",
so that derogations would be granted only where access would make
the fulfilment of these obligations impossible, rather than simply
more difficult (Q 98). For Mr Chichester, while it was obvious
that "prevent" should mean "only when impossible,
not when a cosy monopoly is threatened by attempted market entry",
there was a danger of the Article "being interpreted in a
way that would thwart the spirit and intent of the draft Directive"
emergent markets and regions
88. Most witnesses recognised
the case for offering derogations to emergent markets and regions,
but many, including Centrica, felt that if the relevant provisions
were loosely worded, they could be used to delay or prevent large
parts of the Community benefitting from liberalisation (Q 42).
Gaz de France wanted to ensure that derogations for emergent markets
were not used to avoid competition and were able to take account
of the wide range of cases that existed, from the most underdeveloped
to fully mature gas markets, a concern shared by Ruhrgas (Q 228,
p 67). IFIEC wanted to see the transitional period for emergent
markets reduced from 10 years to 5, with a maximum extension on
review of a further 5 years (p 13, QQ 68-9).
89. A number of witnesses
objected to the definition of emergent regions in the April draft
text, but this was replaced in the June and July texts by reference
to an Annex in which qualifying regions would be listed.
For GasNatural this was an improvement, but it believed that once
a region qualified for inclusion in the Annex, the Member State
concerned should be entitled to approve a derogation without further
approval by the Commission (Q 227). Ruhrgas felt that special
provisions for emergent regions were unnecessary (p 67).
and the Commission's role
90. The Commission recognised
from the consultations it had had that a detailed system of regulation
would be unpopular among the Member States, who preferred "a
broad but effective framework Directive at EU level with room
for manoeuvre at national level in the form of subsidiarity"
(Q 112). There was "a very strong feeling among Member States
that the dispute settlement body should be at national level",
following the precedent set by the Electricity Directive. The
Commission did not therefore anticipate having a formal supervisory
role, but would monitor how effective national bodies proved to
be and would exercise its Treaty powers to consider any complaint
that might be made about the settlement of a dispute (Q 105).
91. Mr Chichester accepted
that the principal responsibility for dispute resolution should
rest with competent national authorities, but if they proved not
to be competent the Commission should intervene. In practice,
there was no "other means of regulating the regulators than
the Commission, as the guardian of the Treaty, taking action and
doing so through the European Court of Justice" (QQ 166-7).
92. The European gas
industry was terrified of a strong regulatory role for the Commission,
according to Mr Stern, but he believed they would come to realise
that their own position was vulnerable without clear rules and
an authority to which to appeal when national decisions were taken
against them. The idea that "light-handed regulation by a
small regulatory body would be adequate to provide a competitive
market" had been tried in the United Kingdom and found wanting
(p 24, QQ 120-1).
93. The Government (giving
evidence in July) hoped to tighten the provisions relating to
transparency, including a requirement for separate management
of transportation and supply activities, the publication of unbundled
accounts and the inclusion of "Chinese walls" provisions
to prevent pipeline companies using information obtained from
other suppliers to benefit their own supply activities (p 88,
94. Centrica supported
the Government's position, saying that Chinese walls had worked
well in British Gas before the de-merger (Q 32; p 3).
Ofgas agreed, but said this was only because the barriers established
between its transportation and supply operations had involved
more than the accountancy separation envisaged by the draft Directive
and had extended to employees, buildings and computer systems.
By preventing British Gas gaining any competitive advantage from
remaining as a single company, this policy had been a major reason
for its de-merger (QQ 198-9).
95. Transparency was
important to the Electricity Association, which wanted integrated
gas companies to keep separate accounts for production, transmission,
distribution and supply, in addition to unbundling the management
of their transportation and marketing divisions (p 116). Enron
adopted a similar approach, citing a 1993 Monopolies and Mergers
Commission report which concluded that BG's dual role as both
a seller of gas and owner of the transportation system "gave
rise to an inherent conflict of interest" (p 117n). Centrica
did not believe that separate accounts for transmission and distribution
were necessary, but it supported the publication of indicative
transport tariffs to give users confidence that they were being
treated equally and to allow them to quote realistic prices to
their customers, despite some concerns about commercial confidentiality
(p 3, Q 36).
96. The CBI was broadly
in favour of greater transparency within integrated gas companies
as a way of ensuring that natural monopolies satisfied customer
needs. But some CBI members felt that forcing companies to publish
details of their costs would damage their commercial interests,
and that they should be required only to make the figures available
to national authorities (p 111). Confidentiality was "the
overriding priority" for Ruhrgas, which regarded Chinese
walls provisions as "a severe and unfounded intervention
in entrepreneurial freedom". Unbundling provisions might
be appropriate for regulating a monopoly operator such as British
Gas, but would have a very negative impact on Ruhrgas, the success
of whose operations depended on "optimisation" between
its purchase, sales and transport departments (p 66, Q 247).
97. Mr Stern was concerned
that the present draft Directive, unlike the 1992 version, offered
no guidance on price or tariffs and that, as a result, the various
Member States would set up different and incompatible tariff systems
that would be difficult to harmonise at a later date. There was
a good case for looking to the expertise that existed in North
America on regulation based on rates of return (QQ 131-2).
Article 17 permits natural gas undertakings to refuse access to
the system "where such access would prevent them from carrying
out the public service obligations" which are defined in
Article 3(2) as obligations "which may relate to security,
including security of supply, regularity, quality and price of
supplies and to environmental protection". Back
Article 21(2) requires Member States to "designate a competent
authority, which must be independent of the parties, to expeditiously
settle disputes relating to the negotiations in question [ie negotiations
on access to the system]". Back
The September and October texts reverted to a definition of emergent
regions rather than an Annex (see paragraph 21 above). Back
The September and October texts included such provisions for the
first time. See paragraph 21 above. Back