Minnows face defeat in power battle

Date: 12/02/1998

By Chris Johnstone

A DAVID versus Goliath battle in which small distributors and environmentally friendly gas-fired generators win their share of market-opening despite opposition from some EU governments and big producers is an attractive end-game scenario for gas liberalisation.

Attractive as it may be, it is a script which is unlikely to be followed in the next few weeks when the European Parliament delivers its verdict on the compromise gas market-opening formula worked out at the end of last year.

Principles and pride are likely to take second place to pragmatism when parliamentarians decide whether to accept the agreement. On the face of it, neither the maths nor the motivation appear to promise an upset which will benefit the market minnows.

The UK presidency has so far refused to pencil in a date for the additional meeting of energy ministers which might be needed if the Parliament did call for serious enough changes to the deal to force inter-institutional negotiations. This in itself reflects the widespread belief that MEPs will not upset the apple-cart.

In spite of the proposed directive's faults, they are expected to accept the December agreement with only minor modifications when they vote on it at their plenary session in March.

To do anything else would put a painfully-arrived-at compromise in jeopardy. Both analysts and opponents of the deal agree that anything beyond the most superficial tinkering would be likely to unravel the accord.

The Parliament has been here before. Faced with liking or lumping the formula agreed by governments for electricity liberalisation, which many MEPs disapproved of, they nonetheless opted to give the deal a grudging go-ahead.

All indications suggest a repeat performance in the 16 March vote on the gas directive.

Two groups are nevertheless attempting, against the odds, to steer Parliament into making fundamental changes to a liberalisation package which they believe either goes too far or not far enough in certain areas.

Both maintain that the final deal was drafted mainly with the intention of benefiting Europe's biggest national gas companies.

Small, mostly town or region-based gas distribution companies, and co-generation plants which produce power and heat, are leading the attempts to alter the course of a ministerial agreement which appears to have almost no in-built elasticity.

Their pleas for changes to the proposal were rebuffed by governments in the negotiations leading up to the 8 December deal setting out a staged liberalisation which will benefit large industrial users of gas.

The question of how far co-generation plants will be able to share in market liberalisation emerged as a tricky side-issue during the initial ministerial discussions, with France firmly opposed to concessions to the distributors and Spain setting its face against co-generation companies.

A compromise deal was declared at one ministerial meeting only for the issue to be raised again, albeit rather sheepishly, at the next.

The only hope now for gas distribution companies and co-generation plants is to persuade MEPs to support their case.

But, although Socialists are largely sympathetic, centre-right MEPs from the European People's Party (EPP) will be particularly reluctant to over-turn the ministerial agreement, according to a spokeswoman for Cogen, the co-generation lobby. "They want to have a directive," she explained.

In spite of such pessimism, Gert de Block, secretary-general of the European Confederation of Local Public Utilities, still hopes that MEPs will consider wider principles.

Local distribution firms, which are sometimes responsible for supply in cities as big as Cologne and Munich and account for one-third of all gas distributed across Europe, have two main problems with the current deal.

They want the text rewritten to include a clear ban on gas producers building direct pipelines to serve large industrial customers. Although constructing your own pipeline is an expensive business, distributors still maintain that the failure to spell out such a ban in the proposed directive provides an opportunity for producers to by-pass distribution companies and cherry-pick the best customers.

"At the moment this could allow producers to take control of transport and distribution in a clear case of vertical integration. Instead of increasing competition there is the risk that the opposite will happen," said De Block.

He points out that a ban on building direct connections was included in the directive to open up Europe's electricity market, which provided the model for gas, and insists it should be replicated in the gas directive.

The second problem for local distribution companies is their exclusion from automatic qualification to benefit from the basic freedom provided by liberalisation to shop around for the cheapest gas supplies.

Under the current deal, distributors will be able to buy gas to pass on to so-called eligible customers (big industrial companies), but will not be able to purchase and re-sell in their own right.

With the big industrial companies likely to be snapped up under the new competition formula, all that would be left for the distribution companies would be smaller firms and residential customers, and it is they who will bear the brunt of the higher prices created by discounts for big customers, according to De Block.

He points out that the existence of national gas import monopolies and the informal carving-up of the supply market mean distributors in most countries have no choice over where to buy their gas.

"I do not think our members will go out of business, but they will get stuck with the high prices caused by competition," he added.

De Block says the two-stage US model of gas liberalisation, where distribution companies were allowed to shop around for the cheapest gas supplies before individual users, has much more to recommend it than the formula chosen by European ministers. "Eligibility will be a very difficult issue," he predicted.

On co-generation, the ministerial deal will only allow plants which consume more than 25 million cubic metres of gas a year the right to tap the liberalised market for the cheapest supplies.

National governments will be allowed to extend that right to smaller plants if they want to, but a number of countries, led by Spain but believed to include France, Italy, Austria, Belgium and Ireland, are adamantly opposed to doing so.

Spain argues that its co-generation plants already benefit from a guarantee that they can sell surplus power to the grid at favourable prices. Allowing them to receive cheaper gas would give them a double advantage and distort the market.

Yet one factor bound to be at the back of MEPs' minds as they prepare for the March vote is the public stand taken by the European Commission and ministers in favour of co-generation as a more energy-efficient form of power generation whose spread could help Europe to meet its climate change promises.

Major feature. Council agreed Common Position on the draft Directive liberalising national gas markets.