Internal Gas Market in the EU

This European Energy Foundation dinner event sponsored by Eurogas, the European Union of the Natural Gas Industry, was scheduled to address the internal market aspects of gas developments, as a preliminary to the wider-scoped Eurogas-EEF Conference “Natural gas, the sustainable energy bridge into the next millennium” held on 5 November, the following day.

The President of Eurogas, Mr. Verberg, addressed three points in his introduction: the proposed gas Directive, the need for co-ordination of Community policies in relation to energy and the environment, and the promotion of realistic concepts on liberalised gas markets. He referred to the European Court of Justice’s recent decision which rejected the European Commission’s case against the gas monopoly in France, arguing that special rights or derogations given to a gas company exercising public obligation duties are not incompatible with the Treaty (Art.90.2). The burden of proof against the need for such special rights lies with the Commission, not inversely with the accused government. This would go to emphasise that decisions on gas market liberalisation could not simply derive from the Treaty, but would have to be of a political nature.

The gas industry, nonetheless, was hoping for a prompt decision on the proposed gas Directive providing realistic conditions for security of supply and for reciprocity of competitive conditions both within the EU, and between EU and non-EU gas supplying countries. On account of its energy efficiency and benign environmental impact, natural gas use ought to be promoted by coherent EU policies. Still, there was a lack of consistent purpose in the various proposals and programmes affecting gas : the proposed Directive on rational planning of resources was incompatible with a liberalised market and irrelevant for gas ; the energy taxation proposal would make gas less competitive with other fuels ; EU funding of energy research and development should be more balanced and give due weight to natural gas as a sustainable transition energy on the way to renewables.

In regard to consequences to be expected from gas market liberalisation, there is a strong need to be realistic: gas liberalisation in continental Europe would not result in the automatic huge gas price reductions projected in many political speeches. Yes, gas-to-gas competition would be a new factor in gas pricing in a number of countries, but additional only to the existing price factors of commodity (the gas itself), transport and capacity facilities (availability of network facilities for given load profiles). Moreover, downward gas price developments since 1987 in the liberalised UK, often quoted as a consequence of liberalisation, were matched by similar gas price trends in the Netherlands in conjunction with oil prices. Consumers, who should not expect price wonders, should realise that systems with postalised prices (“péréquation”) would disappear in a liberalised market, exposing many users to price increases. Such negative effects should be put against the positive effects expected from a free market in order to create a balanced picture.

Mr. Faross, Head of Unit on General Policy, at the European Commission, DG Energy (XVII), and in charge of the gas Directive proposal, gave his views on the progress in hand with the on-going negotiations. A political decision was expected at the Energy Council planned for 8 December, with quantified market opening targets and schedules. The conditional protection of take-or-pay (TOP) contracts was now an accepted requirement justified by the continental gas market’s functioning. The Commission together with the Member States have a decisive role on any derogations possibly to be given in the framework of the Directive. Among many aspects of the proposal still to be discussed and agreed, the treatment of off-shore pipelines was a difficult issue.

Mr. Faross noted that the Court of Justice’s verdict on the French monopoly question had not caused any comment in the Council energy working group, and it had not given any clue to the substance of the matter.

He also noted, in reply to earlier criticism of the current energy tax proposals, that the earlier, combined and more balanced energy and CO2 tax proposals promoted by his energy Directorate General had been refused by the Member States.

During the ensuing discussion, Mr. Balocco (IFIEC), while agreeing that market prices would go up and down for a number of reasons, argued that tax differentials on oil products and gas caused windfall profits for gas. He also expected that the elements of transport and capacity in future European gas prices would be regulated and less prone to fluctuation.
Mr. Verberg, in replying, pointed to the “market value” system of gas pricing in relation to oil and other energies, not causing excessive profits against the high cost of gas transport in particular.

Mr. Faross commented that in regard to the question of “level playing field” expected in a liberal market, the experience being gained with the implementation of the electricity Directive would be the subject of a Communication to be issued in February 1998.
Prof. Chesshire (University of Sussex) questioned the measure of existing level playing fields, with different tax systems in different parts of the same sector (off-shore vs. on-shore), and different costs of capital for different types of companies (size; monopolies vs. non-monopolies).

Mr. Parker (UEAPME) spoke up for the small and medium size companies which had a strong interest in the development of energy systems and appliances, and were major contributors to technological innovation and new business creation.

Mr. Lyle (BG plc), commented on the UK gas market situation, with domestic gas users now choosing their suppliers and postalised prices actually not fluctuating very much.