MONDAY 23 JULY 2007

Mr David Halldearn

  Q240  Lord Haskel: You do not think that the powers of the Commission need to be increased so that they could be more effective in this area?

  Mr Halldearn: I have a view that as far as anti-competitive practices are concerned we are quite happy that DG Competition has a role to play. As far as the regulation of the carbon market is concerned and, going on from that, the regulation of renewables derivatives, I find it much more problematic. For the same reasons I argue that I have some concerns about the Commission acting as the regulator directly, I think those concerns apply equally in the area of sustainability derivatives.

  Q241  Lord Powell of Bayswater: Just asking you for a moment to take off your ERGEG hat and to put on your Ofgem hat, do you think British energy companies are seriously disadvantaged in Europe by the present market and regulatory situation? Do you think British consumers are at all disadvantaged vis-a"-vis consumers of other European countries, or do you think we are quite nicely placed and should be reasonably content with our lot?

  Mr Halldearn: I think if you look at our position as an island, if you were to cut away from the rest of Europe I think you could say that the market in Great Britain is working quite effectively at the moment, but if you look a little bit more widely then you see that Britain is quite dependent on imports of gas and, therefore, we are tied partly by pipelines to the sources of the gas which are the other side of Continental Europe. Of course, potentially British consumers are quite badly disadvantaged by events in Europe and, therefore, it is quite important to get the framework in Europe right. As far as the companies are concerned, no doubt you will be asking this question yourself, from my observation companies corporately and the message I get they would like to see more liberal markets in Europe. They are companies that are used to operating in a liberal environment. Those few that remain in independent ownership would very much like to get access to Continental European markets. I think the answer is that there are clear advantages for British consumers, and British companies as well, in having more liberal European markets.

  Lord Powell of Bayswater: At the moment we are probably relatively well-placed vis-a"-vis others. I absolutely accept your main point, which I agree with.

  Q242  Lord Whitty: Following on from that, we have moved away from state-owned national providers, although not entirely from that, but certainly not from national champions. Insofar as we have moved, we have moved into relatively few large companies dominating the energy supply market. Whereas you may say that the British competition system works for the consumer in terms of ability to switch and relatively low prices, until recently, actually the market structure is not that competitive, there are relatively few companies across Europe which provide energy. If the regulators are not able or the politics are not right for a European-wide regulatory policy to drive this, do you foresee more mergers in order to get into the markets or do you see possible investment from outside Europe to dominate the energy markets from energy rich countries? If so, do you think that the energy regulators and the competition side are strong enough at the moment?

  Mr Halldearn: DG Competition, of course, undertook a sectoral inquiry into energy, the results of which were pretty stark in terms of the degree of market concentration, the difficulty of companies being able to get into the market, getting access to gas and areas where the market is essentially foreclosed. Whilst it is impossible to comment on any individual merger case in advance, I think that we would be very concerned if there were further mergers which meant that the market became more concentrated. That is a general concern that we have. We are very supportive of the efforts of DG Competition at the moment to try to address some of those concerns, particularly in the area of contracts. On the question of whether there needs to be more empowerment of regulators, I think that DG Competition does a very good job and I am very pleased that they are now starting to look at energy which is something that is a relatively new thing for them. If I could come back to my home turf, if you like, of ex-ante regulatory authorities, if one looks at the UK where we have a strong independent regulator, our regulator—Ofgem—has managed to act as what you might call a catalyst for promoting competition in our market. Do other regulators have the power to be able to play that role within their own markets or, indeed, perhaps slightly more widely within a European context? Today the answer to that question is pretty much no, they do not have sufficient powers for independence. It would be possible to draw up a list of the ways in which regulators are short of the powers they need to be able to do that but in many cases they are either dependent on their ministry to endorse the decisions they take or in other areas in the first place they do not have the powers at all to address some of these concerns.

  Q243  Lord St John of Bletso: Lord Whitty asked the question I was going to ask.

  Mr Halldearn: I see. It is moving down the table!

  Q244  Lord St John of Bletso: It is inevitable that we will see more mergers in the European energy sector. As he has asked that question I will ask another question, which is what role does the European Court of Justice play and is it changing?

  Mr Halldearn: Of course, the European Court of Justice has played a role and I guess it will play a role in relation to the infringement proceedings for non-implementation of the second package of legislation. It is an interesting question because I rather thought of the European Court of Justice as being a rather, if I may say, ponderous mechanism in order to get decisions. If we were to rely on the more regulatory decisions to be appealed to the European Court of Justice then I think we would end up with a regulatory framework which would be sclerotic. It is not the kind of certainty that one would like to see within an effective regulatory framework and it seems to me, and to ERGEG more widely, if we are to have an effective framework for Europe then having clean decision-making with a quick and effective appeals process with ultimately and inevitably a backstop of the European Court of Justice, which I do not think one can avoid, that would be a better mechanism than relying on the European Court in the first instance.

  Q245  Lord Powell of Bayswater: This is probably outside the ambit of our inquiry but, out of interest, what do you think would be the view of European energy regulators if major companies outside the European Union waded in to buy energy suppliers within the European Union? I was thinking of Gazprom and others.

  Mr Halldearn: How can I put this? I think that there would be a serious concern among energy regulators if there were a significant move from upstream players into downstream, a significant concern. That is probably understating it actually. They would be very worried.

  Q246  Lord Powell of Bayswater: They would be a flurry in the chicken coop?

  Mr Halldearn: Yes, I think so.

  Q247  Baroness Eccles of Moulton: When you were talking earlier about how dependent or otherwise we were on the success of the market in Europe, I thought we were going to be pretty independent in the liquid natural gas plants that we were building and we were going to be importing the gas from somewhere like Algeria, which is way away from being dependent on what is coming through Europe from Russia and in that way we were going to be less dependent on supplies coming through Europe than might otherwise have been the case. Is that correct?

  Mr Halldearn: I think the UK is very well-placed in relation to having terminals which would give Britain access to the liquid natural gas market, which is more a global market. However, the underlying point I was trying to make was that for Europe more widely having access to diverse sources of gas is going to be important and that argument applies to Britain as well. If we have access to piped gas and access to LNG then that must be better for Britain than just having access to LNG and relying on that totally. Although I think that Britain is quite well-placed now in terms of diversity, if we can improve access through our piped gas supplies then that will be better still. For many continental countries they are still very, very heavily dependent on gas coming through the eastern pipes and, therefore, it is to be welcomed that there is a new gas pipe coming from the Caspian and there are proposals for gas coming from Morocco and there is a lot of investment in LNG terminals. Because these events are happening so quickly and the investments are happening now, the whole debate on how one gives certainty to these investors about how secure their investment is, is a really important debate to have now. I am hoping when the Commission present their package of legislation it will have a very clear picture about how the regulatory framework is going to provide that regulatory predictability and certainty that we think is absolutely fundamental.

  Q248  Baroness Eccles of Moulton: A word that has not been raised at all which has got a lot to do with private sector confidence in investment is nuclear, of course. That is a subject we have not touched on at all and that has to be quite key, does it not?

  Mr Halldearn: Yes. I find nuclear is such a difficult debate to have around European tables. From the perspective of the regulatory framework, we would be unhappy if there were a framework which discriminated against nuclear or did not provide the same amount of certainty and predictability that investors in nuclear developments need. Of course, for national countries and within the ambit of their own national energy policy they are free to choose how they want to develop their generating capacity. We would like to see a framework which would not discriminate.

  Q249  Chairman: Mr Halldearn, thank you very much indeed. You have answered our questions with great clarity. We will send you the transcript for correction, although I am sure it will not be needed because you spoke so clearly. Thank you very much indeed. Could you give our regards to Sir John and thank him for his earlier evidence.

  Mr Halldearn: I will do that, thank you very much indeed.

  Chairman: Thank you.