Passing on the lessons of bitter experience

Date: 03/04/1997

By Tim Jones

WHEN European natural gas suppliers have nightmares, they imagine they are British Gas.

Faced with the arrival of liberalisation in Europe, reluctant continental companies could be excused for looking back at the experience of the UK's biggest supplier and saying 'no, thank you'.

Competition has not been kind to British Gas. Since privatisation in 1986, the company's share of the commercial gas business has dropped to 35&percent; and, since last year, it has lost its monopoly in supplying the country's 19 million residential customers.

Above all, the company is creaking under the weight of contracts worth 55 billion ecu for high-priced gas it no longer needs.

The situation became so parlous that British Gas was split. One part became a pipeline company and the rest - the domestic gas supply business, its service and retail interests, and liability for the contracts - was spun off into a new company, to be known as Centrica.

Peter Lehmann span off with it.

Until two months ago, he was British Gas' European director, but now he is commercial director of Centrica.

As the man responsible for selling gas into Europe, Lehmann takes a close interest in the talks on liberalising the sector and feels he has lessons for his counterparts on the continent.

“Our whole approach is to ensure that the transition to competition in Europe is managed sensibly because it was not managed sensibly in Britain,” he says.

“In our experience, the auth- orities were concerned to drive through change without giving enough thought to transitional problems. For our part as a company, we were too resistant to change and this meant that the authorities tended to ignore our calls for a transition because they saw rightly that we were trying to delay things.”

When it was a monopoly, British Gas signed 'take or pay' contracts with North Sea producers at a set price for up to 30 years. This provided the certainty the producers needed to invest heavily in gas fields and, in return for its readiness to sign such long and exclusive deals, British Gas received a discount.

Unfortunately, oversupply forced the gas price down to half the amount British Gas had contracted to pay. This was hard enough for the company but then, with the onset of free competition, it lost three-quarters of its industrial customer base.

European liberalisation should be better thought-out, says Lehmann. “Think it through and imagine what the transitional problems might be,” he advises politicians. “From that, build a framework of legislation that will allow these problems to be dealt with as they emerge.”

If that sounds as though Lehmann wants to soft-pedal on liberalisation, nothing could be further from the truth.

Centrica has a strategic interest in bringing Europe to market. It is a major shareholder in the 'interconnector' - a pipeline between East Anglia and Zeebrugge - which will allow 20 billion cubic metres of UK gas to be exported once it is finished in October next year.

At the moment, Centrica can sign agreements with Belgian operator Distrigas to transport gas through its pipelines, just so long as none of it stays in the country. “There are things you can do but, without a directive, you are induced to sell more to the existing suppliers,” says Lehmann.

A liberalisation directive would give Centrica access to the pipelines of another country and the right to sell its gas there.

Lehmann is uncompromising in his pursuit of full liberalisation. “The gas market is opening up whether or not there is a directive. This means that if the directive is not very liberal, it could actually hinder change. So if it is not a decent directive with teeth, then it would be better to have no directive at all,” he says.

For Centrica, this means upfront publication of indicative tariffs for gas transportation and a strong disputes settlement procedure in the event that a company is refused access to a pipeline. “There are a million and one things you can do if you are determined to prevent access. That is why it is vital to have a referee,” insists Lehmann.

He is also adamant that old-style exclusive 'take or pay' contracts should not be allowed in the future, since they could freeze an attractive national market for up to 30 years.

“In a liberalised market, new supplies will be developed,” he says. “If there is a profitable market and a profitable economic project, then contractual mechanisms will be found to bring the gas to market.”