EIUG calls for Major Investigation into UK Gas Market

EIUG has renewed its call for the regulatory authorities to initiate a formal, comprehensive investigation into the UK gas market. Despite the recent, welcome news that the European Commission is investigating the role of the UK-Belgian interconnector and its effect on prices, EIUG doubts that this will provide the whole solution to the problem. EIUG made its call in letters to DTI Secretary of State Stephen Byers, the OFT and the Competition Commission.Wholesale prices, which doubled over the last 12 months, have massively increased costs for industrial consumers and are now starting to drive up domestic bills. Higher costs for gas-fired generators may follow, putting upward pressure on electricity prices and wiping out many of the benefits from the new electricity trading arrangements launched yesterday (28 March).

Key factors behind the rise are undoubtedly the influence of artificially high, oil-linked continental prices, coupled with the strange, as yet unexplained operation of the UK-Belgian interconnector. However, other equally important concerns remain such as market concentration, suspicious behaviour in the traded markets and the role of capacity auctions (see details on following page). These concerns can only be addressed by an enquiry that encompasses the entire gas chain, i.e. from the production at the well right through to the retail market.

Jeremy Nicholson, EIUG’s Economic Adviser, said: “It is not good enough simply to blame Europe – reforms on the continent will take years to achieve, as the disappointing news from the Stockholm summit makes abundantly clear. We need a comprehensive, formal enquiry to get to the bottom of the problem. The Government should instigate an enquiry without delay to ease the crippling effect on British industry, and to avoid any further impact on household bills.”

Key factors that the EIUG wants investigated include:

  • Market Concentration – following recent mergers and acquisitions, offshore market power is now worryingly concentrated. Some producers have stakes in the interconnector and in continental gas supply companies who are perpetuating the artificial link to oil. The investigation should determine the effect of this concentration on the wholesale market (the key determinant of prices in the retail market), the effect of cross-ownership on competition and the consequent potential for abusing dominant positions.
  • Traded Markets – rumours continue to circulate of irregular behaviour in the spot, forward and futures markets. Price movements have often been difficult to explain, yet clearly detrimental to UK consumers. The investigation should determine whether the trading regime in the natural gas market is being adequately policed, with the same vigour as would be expected in the financial markets.
  • Capacity Auctions – under Ofgem’s ‘reforms’ of the gas trading arrangements, shippers have been paying very high prices merely to land gas at terminals at the beach. Much of the North Sea gas is landed at St Fergus in Scotland, where entry costs alone now reach 12p/therm, as much as end-users were paying for fully-delivered gas a little over a year ago. These entry costs inevitably exert upward pressure on wholesale gas prices. The original purpose of these reforms was to reduce costs to end-users but the reverse appears to be happening. The investigation should determine the extent to which capacity auctions sparked off the rise in gas prices, and continue to exert avoidable upward pressure.

Notes to editors:

  1. The EIUG recently met the OFT (23 January) and DTI Energy Minister Peter Hain (15 March) to press the case for a comprehensive investigation into gas prices.
  2. Wholesale gas prices have doubled since last year, adding over £500m to energy-intensive industry’s annual gas bills. Domestic customers will be subjected to rising bills in April, when price caps are lifted.
  3. Contact EIUG for details of previous EIUG press releases on the subject:
    31 January 2001 – New Energy Minister hints at Action on Gas Prices
    16 January 2001 – Gas Market Price Spikes – Market or Manipulation?
    22 December 2000 – Soaring Gas Prices already hitting Industry
    11 October 2000 – What happened to Gas Competition?
  4. For further information please contact Jeremy Nicholson on 020 7343 3159 (direct line), 07785 280 568 (mobile) or secretary on 020 7343 3161.