Dawn of a new era for Europe’s gas industry

Date: 27/07/00

By Renee Cordes

WHEN Dutch giant Gasunie signs a contract to supply gas to an industrial client in Germany, it often has to negotiate with up to five different German distribution companies to ensure delivery.

Germany, which has promised to liberalise 100% of its gas sector later this year as long as other EU countries do the same, has as many as 500 distribution firms within its borders, making it difficult for foreign companies to secure a foothold in the market.

"That is almost an impossible barrier to trade," complains Ben Warner, a spokesman for Gasunie, which claims it faces similar obstacles in other important European export markets. This is especially frustrating for a large integrated company which bears sole responsibility for transmission, distribution, storage and related activities in the Netherlands (albeit with 'Chinese walls' separating different divisions).

Berlin has also come under fire from the European Federation of Energy Traders, which wrote to the European Commission earlier this year complaining about plans to provide access to the gas grid based on transactions rather than pre-published schedules. The organisation argued that this arrangement would "serve to protect the incumbents' positions in their home markets rather than open these markets to competition".

From 10 August, when the Union's gas liberalisation directive comes into force, member states will be required to open up at least 20% of their domestic markets to competition. This initial phase of liberalisation will be followed by more gradual market-opening measures, with 28% of the sector due to face the chill winds of competition within five years and 33% within a decade.

Member states are, however, given the option under the legislation of setting a ceiling on market opening "in a balanced manner" to an initial level of 30%.

On paper at least, most EU governments have laid the groundwork for going well beyond the minimum requirements laid down in the directive, with a massive 77.9% of the sector set to be liberalised this year, according to the Commission's own estimates. Some countries have either fully or nearly fully implemented the directive well ahead of schedule, while others are putting the finishing touches to the national legislation needed to comply with the directive ahead of next month's deadline.

The UK gas market has been fully liberalised for more than two years and Germany plans to follow suit this year, subject to neighbouring countries making similar progress. By 2004, another three member states - Austria, Italy and the Netherlands - are expected to open their markets completely. If all goes according to plan, nearly half of the EU's 15 member states, including some of its largest markets, will be fully open to competition by 2008.

However, in practice, many countries still have several powerful tools at their disposal to prevent outside rivals gaining access to their networks. Some member states do not plan to go beyond minimum requirements for separating transport and commercial trading activities, and at least nine are either blocking or plan to block exports from countries which do not have fully liberalised markets, invoking the so-called 'reciprocity clause'.

In addition, experts point out that the structure of the European sector, with large conglomerates controlling all operations from exploration to marketing, is by nature anti-competitive.

By the end of May, not one member state had notified the EU executive that it needed more time to implement the new Union rules. However, France admitted this week that it could miss the deadline by up to four months, and Germany and Luxembourg have also been warned that they are lagging behind.

Commission officials say they will monitor the situation closely and initiate legal proceedings against any governments which do not put the new rules into practice. "We will make a point in September of seeing where we are and we will not wait one year to start legal proceedings for any country which is too late," said a spokesman for energy chief Loyola de Palacio, who has written to the trio expressing concern about the situation.

At their meeting in Lisbon earlier this year, several EU leaders called for a timetable to be set for full liberalisation of the gas market, as well as the electricity, postal services and air transport sectors, by 2004. After Paris blocked the move amid fears of social unrest, member states confined themselves to a commitment to speed up the process, albeit without a firm deadline, and called on the Commission to come forward with a new plan by next spring.

In the meantime, it will be up to regulators at national and EU level to ensure transparency in these new markets. There will also be a degree of self-policing by industry, which is establishing a new independent body to provide regulators with technical information on transmission systems within Europe. As a first step, the group plans to submit a report to the Union executive on the terms and conditions offered by gas companies by the end of the summer.

One of the key tests for newly liberalised markets will be the terms under which member states grant access to their networks. The directive gives governments two options when deciding how to do this. Under the first of these, known as regulated third-party access, everyone has equal rights to the distribution system, provided they pay a fixed, published fee. About eight member states are expected to choose this approach.

Under the second, known as negotiated third-party access, firms wishing to use a distribution network have to negotiate terms each time they wish to access the system. The gas company which owns the distribution network is required to publish details of the main commercial conditions attached to this, such as technical requirements for access to the network, samples of prices normally charged for using the system and the point of entry of the gas.

Only two member states - Belgium and Germany - appear to be opting for the latter approach. However, even in these countries, tariffs will be subject both to negotiation between individual parties and to prior regulatory approval or agreements between associations. Hence, no member state is expected to opt for a purely negotiated access regime - in other words, the regulator will always have some control.

Denmark and the Netherlands are moving towards choosing the regulated access system for the distribution network and negotiated access for the transmission network and storage. The draft French law foresees a system of access based on published standard tariffs approved by the regulator. Negotiations would be required only in exceptional circumstances although, even then, the regulator will be able to scrutinise agreements and intervene if necessary.

In the long run, liberalisation should result in lower prices both for ordinary consumers and large industrial users. But this has not happened yet.

In fact, the prices paid by industry for natural gas went up in most member states between January 1999 and January 2000, on top of a strong increase the previous year, according to figures released by the EU's statistical agency Eurostat last week.

The charges levied on industrial consumers have risen by as much as 25% in Denmark and Finland over the past two years, and the prices paid by households also increased on average, although they varied less.

Consumers in Belgium experienced increases of up to 7% and those in Sweden up to 4.5%, depending on the size of the household. In Italy, prices for small households rose by around 9.5%, but remained relatively unchanged for other consumers.

At the other end of the spectrum were France and the Netherlands, where consumers have benefited most from price decreases.

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