118 Chapter 4 -Appciu (2) The Council and the European Parliament shall give their views on such proposals will two years of their submission. Article 28 concerns developments after the implementation of the Directive: The Commission shall review the application of this Directive and submit a report on experience gained on the functioning of the internal market in natural gas ami III implementation of the general rules mentioned in Article 3 in order to allow the Council I the European Parliament, in the light of experience gained, to consider, in due time, ii, possibility of provisions on further improving the internal market in natural gas, whli h would be effective 10 years after the entry into force of the Directive. Article 29 concerns the timetable for bringing the Directive into force: Member States shall bring into force the laws, regulations and administrative provillfld necessary to comply with this Directive no later than 2 years from the date speciln ,l Article 30. They shall forthwith inform the Commission thereof. When Member States adopt these provisions, they shall contain a reference to iiu Directive or shall be accompanied by such reference on the occasion of their officii publication. The methods of making such reference shall be laid down by the Mcnilli | States. Article 30 states that 'This Directive shall enter into force on the 20th day following (Itait n| its publication in the Official Journal of the European Communities'. There is also an Appendix to the Directive containing 'Statements in the Count ll'l Minutes' in which the Commission and individual member states made their own allcinnM to clarify specific points in respect of individual Articles in the Directive. Here wc ninkl reference to only a few of these statements. Re: Articles 8(2) and 11(2): The Council and the Commission state that the provision of Articles 8(2) and 11(2) shall not imply any duty on undertakings to change their li-jj«| structure or create new companies. Re: Article 18: The Council and the Commission consider that, since Member Slnltn are allowed to decide on a more extensive opening of the market, the concept of site mny also apply, if a Member State so chooses, where firms belonging to the same industiUl group or consumers forming a consortium or coming from the same industrial /oii# conclude natural gas supply contracts which in aggregate exceed the eligibility threshold! laid down in Article 18(2) and (6). The Council and the Commission consider that other final customers consuminn li'm than 25 million cubic metres of gas per year on a consumption-site basis but having a ijiii fired power production unit and/or a combined heat and power installation are only In Ihj eligible for the volume of gas required for this power and/or heat and power production lupter 5 Jrttional Institutional Developments: Competition and liberalization Experiences hi', chapter reviews the beginning of liberalization and regulation experi-Riruls in Europe. It begins with the most advanced of these experiments in 'in.mi and then looks at a number of national developments in both Importing and exporting countries. The theme of these experiences is not limply the focus of this study - competition and liberalization - but the ylricr context of institutional change which is permeating the industry oiighout the Continent. |lilfuin: regulation-driven competition and liberalization1 H/ic development of competition, liberalization and regulation mm 5.1 summarizes a complex history of competition in the British gas Industry in four phases. During Phase 1, 1982-88, despite the passage of (ryjslation and regulation, and the creation of a regulatory Office of Gas Nupply (Ofgas) there was little change in BG's monopoly/monopsony position. Phase 2, 1988-94, saw a determined effort by the government Mini regulatory authorities (Ofgas, the Office of Fair Trading and the Monopolies and Mergers Commission) to 'manage' competition into llistence by a series of regulatory measures designed to bring new rants into the gas market.2 This was achieved by forcing BG into the following sequence of measures: 1 This section draws heavily on the author's article, 'The British gas market ten years after |iilvalization: a model or a warning for the rest of Europe?', Energy Policy, March 1997, |i|i 387-92. It is important to stress that all of the competition and liberalization developments described here have occurred in the 'British' gas market, rather than 'UK', Which includes Northern Ireland, a region which - with its emerging and monopolistic gas iiniiket - will probably have to seek a derogation under the EU Gas Directive. ' M. Parker and J. Surrey, UK Gas Policy: Regulated Monopoly or Managed Competition?, K'lliEP Special Report No. 2, 1994, Science Policy Research Unit, University of Sussex. 120 timuil institutional developments Box 5.1: The evolution of competition and liberalization in Britain: four major phases Phase I. 1982-88: Monopoly and monopsony -1982 Oil and Gas Enterprise Act creates the possibility for competition -1986 Gas Act privatizes British Gas (BG) and creates the regulatory office (OFGAS) Phase 2. 1988-94: Managed competition -1988 Monopolies and Mergers Commission (MMC) report forces BG to publish price schedules -1990 First contract for transportation signed (Quadrant Gas) -1991 Office of Fair Trading (OFT) report forces reduction of BG's market share in industrial market and expands the competitive sector -1992'Release gas' programme commences -1993 MMC report recommends: demerging of BG's trading activities from transportation; delaying competition in the residential market until after 2000. Government rejects MMC recommendations. -1993 BG's share of the non-residential market falls to 70% Phase 3. 1994- present: Self-sustaining competition -late 1994/early 1995 surplus of supply over demand, spot market evolves -April 1995 sharp price reductions/distress sales -1995 suppliers/shippers in substantial commercial difficulty -1995 BG's share of the non-residential market falls to 35%, causing substantial 'take or pay' problems. Obligation to price according to schedules suspended -1997 (February) BG 'demerges' into two companies: Centrica (British Gas Trading), and BG pic (exploration and production, British Gas transportation and international activities) -1997 (June) Monopolies and Mergers Commission Report recommends new regime for transportation tariffs with separate storage tariffs Phase 4. 1996-98: Evolving competition in the residential market -1996 (April) first'trial area' opened to competition -1997 further 'trial areas' opened -1998 remainder of the residential market to be opened in stages by June 1998 • publishing schedules for industrial gas prices (from which the company was not allowed to deviate); • 'releasing' to new entrants some of the gas which it had purchased under long-term contracts. 121 || expanding the competitive sector of the market such that only residential Mini small commercial customers remained within the BG monopoly, while restricting BG's share of the contestable market to 55%. Mining 1994 (Phase 3) self-sustaining competition took hold and the Miniket no longer needed managing as BG's share fell extremely rapidly. Al ilic same time, a surplus of gas supply developed and prices fell »liiii|>ly. BG was locked into long-term 'take or pay' contracts at higher In i. es and began to experience serious financial problems. In early 1996 it Was announced that the company would be 'demerged' into a trading business (renamed 'Centrica'), and a transportation, exploration and Inlcinational business (renamed BG pic), and this was achieved in I'chruary 1997.3 In June 1997 a new charging regime for transportation mid storage tariffs was decided by the Monopolies and Mergers j -inmission (MMC), after BG had refused to accept Ofgas' proposals. I In- final phase of competition (Phase 4), opening up the residential gas ......ket, commenced in April 1996, with the first 'trial area'. After the first tear of the trial around 20% of customers had changed to other suppliers. II is planned that additional areas of the residential market be opened up Mich that by June 1998, the entire market will be open to competition.4 Stepping aside from the detail of this story, three groups of issues are critical to any appreciation of why the British system has evolved in this way: the changing context of government policy, the growing importance of regulation, and the impact on major players. The context of government policy ()ne of the most interesting aspects of the original privatization of the British Gas Corporation was the government's stubborn insistence that ' Aside from its gas trading business (which in Britain trades under the name of British Gas) Centrica also owns the Morecambe Bay gas fields, a very significant resource base from which to serve its customers. BG pic (which outside Britain trades under the name of Itritish Gas) has significant exploration properties on the UKCS and around the world. Hoth companies have capacity rights in the Interconnector pipeline. •' Further extension of competition, a consultation document, Ofgas, July 1997. Clinpi, i 122 competition would emerge despite the universally held view (even by I government's supporters) that it would not. Few observers believed tint, successive governments would subsequently have the determination lit -enforce competition by their own actions, and via the regulator, especially since this required overturning the entire policy context of privatization,m Even fewer could have expected that such action would be met by incl'I'eo* j tual protests from BG's management and shareholders, as the competilinn framework which had been set out in the privatization prospectus win virtually torn up.5 This change in the policy context was marked by: • an extremely rapid timetable for the preparation and passing interpret in the British context; • the question of whether the Office should be staffed with permanent and technically trained personnel. Aside from the Director General, III* Office has traditionally been staffed with civil servants seconded lu| periods of 3-5 years; • the resolution of overlaps with other regulatory bodies, principally \\\* Office of Electricity Supply (OFFER) but also, as noted, the Dcpwl ment of Trade and Industry which is in charge of offshore gas (and oil) regulation; • the continuing appropriateness of 'price cap' (RPI-X) regulation as l he dominant regulatory methodology, particularly in relation to Irani portation charges. All of these issues have, to some extent, contributed to the problem experienced over the past decade. For an industry to experience four majoi competition regulatory investigations within a decade is unprecedented. A common way of explaining these events is in the personalization of the relationship between the regulatory authority and BG. Certainly during the tenure of the first director general the adversarial nature of exchange* between BG and Ofgas grew to legendary proportions. This adversarial climate abated during the early years of the second director general'n tenure, but then flared again in the run-up to the 1996 MMC reference. These highly public exchanges were probably a symptom (rather than fl cause) of a regulatory framework, whereby a small office is required to J/ic impact of competition on industry actors (tniisli Gas The clearest impact of competition was on British Gas itself, Which ceased to exist as an entity in February 1997. As far as employees nine concerned, the impact was mixed: top executives - despite the Unpleasant press coverage they received - saw their salaries increase llnnificantly and retired on generous pensions. The rest of the workforce lined less well: at privatization, the company employed 90,000. At id-merger, just over a decade later the workforce had shrunk to 36,000. For limnagement and shareholders, the crucial issue has been how a company which, at privatization supplied 100% of gas to final consumers and which Hppcared to have been given a 25-year franchise to supply all but the liiif.est industrial customers, allowed its share of the non-residential iiuiiket to be reduced to 35%, and its entire franchise market to be opened up to competition within 12 years. Shippers and suppliers During the phase of managed competition, it was relatively easy to gain market share and sell gas at a profit. Until mid-1995, BG was required to publish price schedules and progressively to (•ive away its share of the industrial market. The first phase of the 'release r,;is' programme only required new shippers to present sufficient financial credentials to sign up for gas and sell on at a small profit. However, after 1994 and particularly as gas prices collapsed in the spring of 1995, this became a much more difficult and risky business. Shippers and suppliers which purchased gas in the early 1990s on long-term contracts with take or pay conditions have (like BG) encountered serious problems which were solved only after litigation.9 Others have suffered significant losses. By late 1997 aside from Centrica (British Gas Trading plus Accord linergy), 13 companies held market shares greater than 1% in the non- 8 In 1994/95, the staff of Ofgas was 68, compared with Oftel 162, Ofwat 178, Offer 215. "The two principal cases were between Enron and the owners of the 'J Block' field and By 1998 Ofgas staff had grown to 130 people. Ibid., Figure 8, p. 30. I^tween National Power and United Gas. /.Vi hi/ institutional developments residential sectors. These included eight producer affiliates, our |HM generation company, three regional electricity company (REC) n and one very small independent.10 It is clear that, aside from the vci \ i REC affiliate, producers dominate the gas market. During 19') / joint ventures serving the industrial market broke up including Ou.hIi (Shell and Esso), Alliance (BP, Statoil and Norsk Hydro) and Kim II (Conoco and PowerGen) with some companies withdrawing limn ill market. In the residential market a number of new alliances wen- I• ■• i between energy and non-energy companies." Further activity of tin*, hml can be anticipated. Customers In the decade following privatization, all classes of cusliuii saw a significant fall in real gas prices. For residential customers (and (■ others using less than 2,500 therms per year) the decline has been ' l 27%. For industrial customers, the decline has been greater than 50lfl These are impressive figures, widely quoted by government officials mill Ofgas. The official index of industrial fuel prices for 1996 (1990 = HMli shows gas at 66.1 compared with coal at 82.6, heavy fuel oil at 125.7, mill electricity at 105.3.13 The same index in 1994, as gas-to-gas compelii..... was starting in the industrial market, showed that with the exception of electricity, gas prices (relative to 1990) were significantly higher limn prices of competitive fuels (relative to 1990). It also shows that, relative In 1990, 1996 gas prices had returned to the levels of 1979, whereas ollin 10 These figures are based on a sample of customers. They identify companies with moll than 1% in any of the three non-residential sectors: interruptible, above 25,000 thcrnu, below 25,000 therms. Figures from John Hall Associates quoted in UK Gas Rqnm (Financial Times), 24 November 1997, p. 14. " For example the merger of Amerada Hess residential marketing operations with those ol SWEB; the marketing alliances of Yorkshire Electricity and Southern Electric with (lit supermarket chains Asda and Argos (respectively); Northern Electric with SAGA (a company which markets a range of products to elderly people). Also members of tradOl union organizations forming a marketing group, and local authorities joining together to purchase gas. 12 National Audit Office, op. cit. 13 Digest of UK Energy Statistics (London: HMSO, 1997), Table 85, p. 186. The gas index for the first three quarters of 1997 was at a similar level, but the indices of competing fuel* had fallen somewhat. 727 _ were still significantly above 1979 levels. In terms of prices there-li Ihi" coming of gas-to-gas competition has caused substantial falls, with respect to competitive fuels and in comparison with gas prices jhri European countries (see Table 3.13). A ii lilc from prices, the question of service standards became Mi miiic with BG's difficulty in billing and invoicing - partly due to |||i< mi induction of new information technology systems, and partly the iniliiii)' troubles' of a new system - reaching crisis proportions during " Although concerns have been raised regarding the conduct of Hi|i|ilurs in the residential market, it is too early to evaluate performance Mil regard to public service obligations - particularly in the area of liuli hied customers and services to vulnerable groups. The issue of how lllli icnl classes of customer will weigh the benefits of lower prices Ijimiist different levels and qualities of service delivery remains to be seen. A\ lucvements and unresolved problems I lie British experiment has produced a number of achievements of which ihr most important are that: • ,i competitive and extremely dynamic market has been created, even if its early development owed more to the management of government ;md regulatory authorities than to the forces of supply and demand. All market sectors, including a corner of the residential market, have been opened to competition, and by early 1998 no disasters had occurred, despite the dire warnings of technical experts; • prices paid by (particularly industrial) consumers have declined substantially. In the post-1994 period this can be largely attributed to the introduction of competition. Hut there were also a number of unresolved problems: • regulation: how the regulatory regime will evolve in terms of institutions, methodologies, priorities and timetables for implementing further liberalization measures; 'Gas Consumers Council, 1996 Annual Report. 128 Chapte • common carriage: whether the unique 'common carriage' regime sustainable;15 • decline in standards of service and social consequences: concerns ahoiil the decline in BG's standards of service may simply be due to Ilia enforced speed of the transition to a more competitive market, but il In difficult to be certain about how rapidly the situation will improve, Indeed as the residential market is opened up, with the problems u| adjusting to a system where large numbers of customers may changf their supplier (possibly more than once), service quality nuty deteriorate further. Public service (especially social) obligations are nil area where the ability and willingness of suppliers to fulfil their obligations, and the ability of Ofgas (or any other organization) Ul police their performance, remains uncertain; • information technology: the ability of information technology system* to deal with system balancing and large numbers of customer changing their supplier, especially during the introduction of residentiitl competition. One problem which appeared to have been resolved by late 1997 was th.ii of contractual liabilities arising from the introduction of competition. All of BG's contracts contained take or pay clauses placing long-term purchase obligations on the buyer. Most of these were entered into when BG had 100% of the market and an absolute obligation to provide a secure supply With BG's market share much reduced, the company was unable to take the volumes foreseen under these contracts and incurred serious financial penalties. By the end of 1997 British Gas and its successor company Centrica, the heir to these contractual liabilities, had completed the renegotiation ol those contracts at a cost to shareholders exceeding £750 million.16 15 Common carriage is a system whereby when the capacity of a pipeline system is over subscribed, the requirements of all shippers are scaled back on a pro rata basis. The mo»l common system is 'contract carriage' where capacity is (commonly) allocated on a Tirol come first served' basis. 16 'Centrica completes its renegotiation of take or pay supply contracts', UK Gas Report, 16 January 1998, p. 5. For a general account of this problem, see M. Stoppard, Today's Gas Glut and Yesterday's Contracts: The British Gas Predicament (Oxford: Oxford Institute for Energy Studies, 1996). Wailonal institutional developments 129 I'olicy on international trade I (cspite constant homilies about the merits of free trade and free markets horn British politicians since 1980, international trade in gas remained completely controlled by the government. The latter repeatedly refused to ullow any further import contracts for Norwegian gas to be signed, as of l°K4.17 Denial of imports was replaced by a determination to export gas as |he government forced companies to form a committee (chaired by a llritish civil servant) to create (what eventually became) the Interconnector |m|>eline project between Britain and Belgium.18 Any attempt to sponsor ilicrnative export lines - for example the Britannia field whose owners died desperately to obtain permission for their own export line direct to the Continent - was rejected. For the Interconnector pipeline, the government dictated the direction of gas flow, the route, the ownership structure I which could not be dominated by a single entity), and (a large part of) the commercial rules governing the pipeline. Only in April 1997, after const ruction of the Interconnector was well under way, did the government dually agree on a revision of the Frigg Treaty which will allow new gas to he piped through the existing system. The UK and Norwegian governments have also signed a framework agreement on other cross-boundary lines which will avoid the need for a separate treaty for future cases.19 While the main reason for the policy on trade was the promotion of maximum possible UKCS production on the fastest possible timetable, for laxation and balance of payments reasons the issue of liberalization has been of some importance. The creation of a grid-to-grid connection with a (Continental European country (Belgium), capable of carrying 20 BCM per year with fragmented (and tradeable) ownership of capacity, will constitute a considerable step forward in gas trading. The Interconnector was intended to provide a means by which the British could export both their gas and their liberalization philosophy to the Continent. " J. P. Stem, 'After Sleipner: a policy for UK gas supplies', Energy Policy, February 1986, pp. 9-14. 18 A useful summary of the Interconnector project can be found in James Allcock, 'The Interconnector: its origins and prospects', Gastech 1996 Conference Proceedings. " 'Fraser's Frigg footnote', Gas Matters, May 1997, pp. 30-31. John Michell, 'North Sea Gas Trade and Regulation in a New Era of Cooperation', a paper to the European Autumn Gas Conference, Barcelona, 4 and 5 November 1997. Chapter % Lessons from the British experiment The development of competition and the decline in prices, despite bciii| the most often-quoted lessons of the British experiment, may not be III? most important. For the development of competition, liberalization and regulation in Continental Europe, it may be of greater significance that: • the anti-competitive structure of the British gas industry required | period of 12 years from the passage of first legislation to the arrival of self-sustaining competition. This is a lengthy period considering the* passage of legislation, massively proactive regulation and a relatively compliant dominant player; • once it had been acknowledged in 1991 that competition had failed and could not succeed without a major change in market structure, the regulatory act of requiring the dominant player to withdraw from nearly half of the contestable market caused self-sustaining competition to develop within a 3-year period; • despite the initial proposition of 'light-handed regulation', the development of self-sustaining competition has required significant regulatory complexity. Even a specialized gas regulatory office has had greal difficulty in overseeing and implementing such complexities; • once the monopsony power of the gatekeeper performing the supply/ demand balancing role was removed, producers/suppliers quickly over-supplied the market, causing a sharp fall in purchase prices. Finally, the impact of the privatization of the electricity industry cannot be underestimated.20 At the same time as events in the gas industry were unfolding, a very large amount of baseload gas-fired generation was being constructed in Britain. Private electricity generation and distribution companies were becoming major actors in all segments of the gas chain. The impact of developments in electricity markets, including electricity regulation, on the liberalization of British gas markets continues to be enormous. Thus, one of the most important lessons is the swiftness of institutional 20 John Surrey (ed.), The British Electricity Experiment. Privatisation: the Record, the Issues, the Lessons (London: Earthscan, 1996). National institutional developments 131 i liiinge and market structure which has taken place in Britain starting in |990. Institutionally, there have been significant numbers of new entrants Home of which have already disappeared from the market). The roles of in.iiiy companies have changed and broadened to cover other parts of the . Ii.uii (again some have failed to profit from these activities and already 'Mihdrawn) and different ranges of services. The dominant player in the in.iiket, British Gas, has ceased to exist and a large part of its market share h.is been taken by others. From a position of almost zero in 1990, power generation customers account for nearly 20% of the gas market and this uliare will probably exceed 30% by 2010. From a market dominated by long-term contracts and confidential prices, short-term trades are now 1'iowing in importance and short-term prices - quoted daily and several months ahead on the International Petroleum Exchange Market - have hecome an important marker for all gas sales. In summary, the British gas market in 1998 is unrecognizable from that of a decade earlier. The Netherlands: from opponent to leader The implacable opposition of Shell and Exxon (the owners of the (ironingen field) and the Dutch government to liberalization proposals in early debates on these issues hardly suggested that the Netherlands would he in the forefront of radical change in this area.21 However, the 1995 Dutch White Paper on energy policy may prove to be a landmark document in the liberalization of Continental European gas and electricity industries.22 For the first time, the government of a Continental European country set out a policy for radical liberalization of both energy utility industries, starting with third party access to networks for large consumers, with an intention to extend access to smaller consumers in the future. ■'' See for example, Gasunie Annual Report, 1991 and 1992, p. 5. It is important to stress Hie opposition of Shell and Exxon in respect of the views of Dutch producers. Other producers had spoken in favour of liberalization. " Ministry of Economic Affairs, Third White Paper on Energy Policy (The Hague: 1996). Although we are focusing here on the liberalization provisions, it is important to recognize that the major focus of the White Paper is sustainability, and specifically the Dutch response to the challenge of climate change. II.' Structural changes in energy utility markets ChapH' The White Paper summarized the intended changes in the gas i electricity markets as follows: decision making will change from being 'supply driven' to 'deinaml driven'; network functions will be disengaged from production and supplj distribution, the exception being in gas where transmission and sail will remain under the Gasunie management; access to networks on non-discriminatory terms will be allowed; independent monitoring (regulation) of network functions will h* implemented; there will be a transitional process towards freedom of choice for all consumers; captive customers will continue to receive government protection; electricity generation, trade and supplies to non-captive customers art to be liberalized; energy utilities will separate their functions, creating single-function utilities as well as utilities with combined functions (e.g. generation, supply and service); greater competition will be promoted, not necessarily following Europe, but stimulating competition within the Netherlands. Table 5.1 summarizes some of the detail of these changes which will take place in the gas and electricity industries. While our concern here is with the impact on the gas industry, the main energy focus of the White Paper was the electricity industry. The document was produced because of the requirement for government to report to Parliament on the progress of the 1989 Electricity Act. As the White Paper was being prepared, the Minister of Economic Affairs decided to adopt similar measures for the gas industry. The gas industry The Dutch gas industry is the biggest in Europe in terms of production, exports and low-cost accessible reserves. The discovery of the giant Groningen mo/nil institutional developments 133 Initio 5.1: Principal changes to statutory framework and other preconditions trlcity Situation in 1996 Within five years Ii,Immission li .teto private generators free distributors >25MW approval by SEP minimum capacity public utilities transmission not transparent exports free (not distributors) imports free (not distributors) maximum tariffs I Ini entralised capacity cogeneration and renewables . equal mandated feedback to distributor, payment for 'avoided costs' private joint ventures: only with local distributor New distribution grids not regulated free non-discriminatory grid access independent regulation exports/imports free non-captives free captives protected (coverage plans, maximum tariffs) differentiated for cogeneration and renewables Cogeneration>2MW: free market cogeneration<2MW: regulated at market value joint ventures: freedom of choice renewables: stimulatory feedback payment regional decision based on nationwide criteria < .(IS 1'ioduction transmission I rade free (based on permit) not regulated producers must sell gas to Gasunie for domestic market New distribution grids not regulated free (based on permit) free non-discriminatory grid access, independent regulation/negotiated access' producers free non-captives free captives protected (coverage plans, maximum tariffs) regional decision based on nationwide criteria Source: Third White Paper on Energy Policy, 1996, p. 96 /1) Cliaptci 23 For background to Dutch gas policy see Javier Estrada, Arild Moe and Kare Dahl Martinsen, The Development of European Gas Markets: Environmental, Economic and Political Perspectives (Chichester: John Wiley, 1995), pp. 204-11. Niiiitmal institutional developments 135 held in the late 1950s gave rise to exportable surpluses of gas, whlo| allowed natural gas industries to be created in many Continental EuropcttiB countries. The Groningen discovery also provided the incentive to explorfl for gas more widely in the North Sea. Dutch gas exploration, production and exports have been relatively tightly controlled by government policy, \ However, this control has been exercised by means of informalB instructions; there is no legal restriction on access to high-pressur|l pipelines and, in the past, Gasunie has allowed access for specill|l producers to sell to specific customers. The Dutch government required Gasunie - the merchant transmission company - to operate a very strict depletion policy in order to maintain security of supply for domestic gas consumers. Remaining reserves miml be adequate to cover 25 years of Dutch domestic gas demand plus ex poll contract commitments.23 The Ministry of Economics has the power to earmark gas of Dutch origin for domestic use. For the gas (and electricity) market, the White Paper envisages a gradual move towards liberalization, Non-discriminatory 'negotiated' access to Gasunie's transmission system will be introduced immediately for non-captive customers with an annual demand above 10 million cubic metres. Captive customers with an annual demand below 170,000 cubic metres will continue to be supplied by their distribution company. Intermediate customers with an annual demand of 170,000-10 million cubic metres will be given an opportunity to become non-captive over the next 5 years. As Table 5.2 shows, this means that 40% of the gas market could be immediately liberalized and within 5 years, this figure could rise to 60%. As far as the domestic market it ■ concerned, there are important elements of continuity with current policy, Exploration and production policy will remain tightly controlled by the government in terms of allowed production levels. The 25 years' reserve coverage of internal demand will be retained, although this will be interpreted more flexibly than in the past, allowing for a change in policy towards international trade. nble 5.2: Captive, intermediate and non-captive gas and electricity riistomers % of market Gas Electricity Captive 40 40-45 Intermediate 20 30 Non-captive 40 25-30 hurce: Third White Paper on Energy Policy, 1996, p. 84. The impact of Dutch liberalization measures could be significant for the I uiopean gas market. Dutch exports amount to some 40 BCM per year, making the country the largest external supplier after Russia. However, [here is an important distinction between Groningen gas exports - which have a lower gross calorific value (9.24 kilowatt hours per standard cubic metre) than the majority of gas traded in Europe (10.78-11.55 kWh/Sm3) and exports of Dutch offshore gas with a higher calorific value (10.01 kWh/Sm3). This difference in calorific value has meant that gas from (Ironingen and offshore fields has been marketed through two separate pipeline networks, both within the Netherlands and throughout Europe. Prance, Belgium and Germany receive low and high CV gas from the Netherlands, while Italy and Switzerland receive only high CV gas. Traditionally all production for domestic Dutch use had to be offered to (iasunie, but this did not apply to exports. Nevertheless, over time Gasunie has come to manage all export contracts. In addition, despite being a major exporter, Gasunie also imports small quantities of Norwegian (and more recently British) gas on long-term contracts. Both Gasunie and the I Hitch government have also insisted that the country's long-term future will see an increase in gas imports as domestic reserves become further depleted. Less than six months after publication of the White Paper, (iasunie announced a contract with Gazprom, allowing for an import of •I BCM of Russian gas per year, with associated services to promote security for buyers of Russian gas in Europe.24 '' 'Gasunie opens new markets to Gazprom', Gas Matters, June 1996, pp. 1-2. / 111 Chapin Niiiional institutional developments 137 Developments since the White Paper My the end of 1997 contracts between large industrial and power-general ion customers and British producers through the Interconnector pipeline had already seen Gasunie sign transportation agreements to deliver gas In Dutch distribution companies and power generators (see Chapter 3). In addition, industrial users with a demand greater than 10 million cubic metre*/ year had a realistic opportunity to choose their supplier. Discussions wcrfj under way to introduce a similar choice for customers with an annual consumption of 170,000 cubic metres, accounting for 64% of the Dm. h market, by 2002; by 2007, the residential gas market would also liberalized.25 At the time of writing, such proposals are only in thfl discussion phase. But they are a great deal more radical than anything under consideration elsewhere in Continental Europe. Yet there is little indication as to how this radical liberalization will be implemented. The White Paper recognized that liberalization measure, would require a new regulatory framework. However, this framework wu discussed only in the following rather general terms: (1) at least once every four years a report will be published assessing the energy market with respect to security, sustainability, competitiveness and environment; (2) a transparent statutory and administrative framework is required foi existing and new electricity, gas and heat infrastructure. As well as access to networks, the issue of construction of new infrastructure will also be dealt with; (3) statutory arrangements for liberalization of electricity and gas markets will be devised, with rights and duties of suppliers vis-a-vis captive customers; (4) regulation will relate first to network access issues and supplies to captive customers. This regulation will be permanent. There will also be government regulation of supplies to captive customers which will cease when these customers no longer have the status of 'captives'.26 25 'Dutch unveil competition plans', International Gas Report, 9 January 1998, pp. 20-21. 26 White Paper, op. cit., pp. 115 and 137. In late 1997 the Electricity Act was passed which included provisions I hi regulation of the electricity and (potentially) the gas industry. At the nine of writing, this was being formulated but it appeared that the new n igulatory body would be part of the Ministry of Economic Affairs for at least 5 years, at the end of which it would become either independent or part of the (newly created) Competition Office.27 The general impression is that Dutch regulation will be reactive rather than proactive, and that i emulators will not intervene unless absolutely necessary. (>rigins and consequences of the Dutch position As far as the liberalization of Continental European gas and electricity industries is concerned the Dutch White Paper has already proved to be a landmark document. This was the first example of a government of an important Continental European country (and EU member state) publishing a policy document which included a commitment to radical liberalization of both major energy utility industries. However, alongside I his commitment, there are questions to be asked about the strategy and luetics of the Dutch government. First, it is interesting to examine the reasons behind the sea change in I )utch government policy. Five major points seem to have been particularly influential in the decision making of the new government: • the apparent willingness to exchange a reduction of upstream revenues (from taxation) for the competitive advantage to industry which would result from a fall in gas prices to consumers; • the fact that the electricity situation, particularly in respect of overcapacity in cogeneration, required a major reform. There is evidence that gas was considered as an afterthought to electricity;28 • the fact that the British-Belgian Interconnector pipeline would be likely to make the Dutch position against liberalized access increasingly 27 'Electricity in the Netherlands: balancing liberalization with defence', Financial Times, EC Energy Monthly, August 1997, pp. 6-8. 28Gertjan Lankhorst, The Dutch White Paper: What it Means for the European Gas Industry, a paper to the European Autumn Gas Conference, Copenhagen, November 1996. 138 Chapwi untenable and prevent Dutch producers and Gasunie from reali/.inn significant commercial opportunities; • the arrival of a new Minister of Economics (Wijers) who was strongly in favour of liberalization. • the Dutch Presidency of the EU (the first six months of 1997). Throughout the White Paper there are references to conditions which may be used to guide the pace of liberalization. First, the speed of a European Union commitment to liberalization measures, and the regulation of utilities, Second, and related to the first, an issue of 'reciprocity' of measun within other European Union member countries. The White Paper gave the impression that the progress of Dutch liberalization reforms will be conditional on the progress of EU legislation and regulation, and tho willingness of other European countries to introduce similar liberalization measures. In that respect, discussions which were taking place at the end of 1997 were extremely radical in comparison to those being held in othci countries in Continental Europe. Under these proposals, liberalization ol the Dutch residential gas market could be taking place at the same time ai other EU member states are reducing eligibility thresholds to 5 million cubic metres/year. However, before leaving the impression that the Dutch will inevitably hurtle down a liberalization path similar to the British, two caveats should be noted. First, the Dutch White Paper was principally about sustainability and climate change policy. It will be interesting to see whether, as they unfold, the Dutch sustainability and liberalization initiatives in the White Paper will be compatible or conflicting. Unless new entrants in the gas and electricity markets can be persuaded to concentrate their competitive activity in the area of conservation and efficiency packages, rather than simply offering reduced prices (which may remove the incentive of consumers to save energy), liberalization could prove to be the enemy of energy conservation. Second, Dutch liberalization initiatives have been strongly identified with a particular government and a particular minister. Political changes within the Netherlands could see changes in the country's liberalization agenda. National institutional developments 139 tier many: pipeline competition with strong resistance to liberalization29 In November 1989, as the fall of the Berlin Wall signalled the beginning nl the reunification of Germany and the end of the postwar era in Europe, Mil equally dramatic event occurred in the German gas industry. Wintershall, a hitherto small West German gas producer, announced that it Iil.mned to build a pipeline - the Midal line - from Emden (the landfall of Norwegian gas supplies to Continental Europe) via Kassel to Ludwigshafen, ilie headquarters of Wintershall's parent company, the chemicals giant MASF.30 This action followed fierce price disputes between BASF and its Mipplier Ruhrgas over a period of years.31 These disputes essentially locused on the prices which BASF had to pay as a result of the Anleg-biirkeitsprinzip - pricing according to the market value of competing fuels 11 ii a specific industrial customer (see Chapter 2). During this period, IIASF took the decision that it would need to become directly involved in l he gas market in order to improve its commercial position vis-a-vis the transmission companies. The events of 1989-91 changed the political Inndscape, presented opportunities which could not have been imagined, mid opened up a new chapter in the German gas industry. The announcement of the intention to build the Midal line amounted to 'it declaration of war' on the market domination of Ruhrgas in West < icrmany.32 With the reunification of Germany, however, the gas industry of the former German Democratic Republic (GDR) became available for acquisition. In July 1990 'the pre-emptive strike' of Ruhrgas and BEB, purchasing 35% and 10% respectively of the East German transmission company VNG, appeared to signal the 'takeover' of the eastern part of Germany by entrenched dominant companies in the Federal Republic.33 "'The early paragraphs of this account are reproduced from the author's earlier work: Third Party Access in European Gas Industries: Regulation-driven or Market-led? (London: EEP/RIIA, 1992), pp. 88-89. "' 'Wintershall plans major German trunkline', 1GR, 10 November 1989, pp. 1-2. " 'German giants engage in a little hardball', Gas Matters, 30 November 1991, pp. 3-5. 12 Burkhard Richter, 'Recent developments in Germany concerning competition in the gas industry', Oil and Gas Law and Taxation Review, No. 4, 1989/90, pp. 91-96. 13 In the German Democratic Republic the gas transmission company was known as Schwaitze Pumpe. The new company formed after reunification was named Verbundnetzgas