EIUG Calls for OFT to Investigate Gas Market

IUG members have been hit hard by high gas prices over the last two years. The reasons for the high prices have still not been fully explained. EIUG fears that the root cause – inadequate competition in the UK wholesale market – remains unaddressed. It has therefore asked the OFT (Office of Fair Trading) to investigate.The price rises, which began in 2000, followed the opening of the Interconnector with Belgium, allowing the perception of a linkage between gas and oil prices to be re-established. This linkage had been broken with the opening up of the UK gas market, but remains a feature of mainland European markets that have yet to be liberalised.

Wholesale prices, which had been stable at around 11p/therm, doubled in under a year. At the DTI’s request, the European Commission held an enquiry into the operation of the interconnector. As a result, a number of improvements were required in the interconnector’s operating rules and its commercial regime. Wholesale prices for the October 2002 gas year currently stand at 20p/therm, around 80% above the level of two years ago. In EIUG’s view, wholesale prices no longer adequately represent the cost of production or the balance of supply and demand.

In response to widespread concern, DTI launched a consultation on gas prices and improvements to market efficiency in November last year. The consultation ended two months ago and the DTI is currently considering what action is required. A copy of EIUG’s response is now available. In its response to the DTI, EIUG said:

  • The OFT should investigate the state of competition in the wholesale market, which is dominated by five large, vertically-integrated players, whose interests are commercially aligned, and whose trading effectively sets the market price.

EIUG also wants to see:

  • Increased investment in onshore transmission capacity.
  • Improvements in customer access to gas market information.
  • Recognition that European gas market liberalisation will take years to achieve.
  • Changes to DTI’s dual role as regulator and sponsor of the offshore gas industry by extending the role for Ofgem (the independent market regulator).

Notes to editors:

  1. EIUG represents energy-intensive industries whose business depends on competitive energy supplies, which purchase around half of the UK’s industrial gas.
  2. Wholesale prices rose from around 11p/therm in January 2000, reaching a peak of nearly 30p/therm by the end of 2000, adding around £500m to energy-intensive users’ annual gas bills. Prices currently stand at around 20p/therm for the October 2002 gas year.
  3. The DTI announced a consultation on gas prices and possible improvements to market efficiency in November 2001 and ended its consultation period on 28 February – it has yet to announce what further action it intends to take.
  4. For further information, please contact Jeremy Nicholson, EIUG’s Economic Adviser: (tel. 07785 280 568).