COMMITTEE FOR ENTERPRISE, TRADE & INVESTMENT

OFFICIAL REPORT

(Hansard)

Energy Costs

24 April 2008

Members present for all or part of the proceedings:
Mr Mark Durkan (Chairperson)
Mr Paul Maskey (Deputy Chairperson)
Mr Leslie Cree
Mr Simon Hamilton
Ms Jennifer McCann
Dr Alasdair McDonnell
Mr Alan McFarland
Mr Gerry McHugh
Mr Robin Newton

Witnesses:
Mr Brian McHugh ) Northern Ireland Authority for Utility Regulation
Mr Iain Osborne )

The Chairperson (Mr Durkan):
The focus of today’s briefing will be on spiralling energy costs, the main drivers for energy prices in Northern Ireland, and the role of the regulator. People want to know what lies behind the price increases that have already been introduced, and they will want to hear from the regulator whether those price rises are simply cost recovery or whether there is anything else being built into them. Householders and businesspeople are worried and want to know what lies ahead, because they are concerned about what will happen, not just what has happened.

Mr Iain Osborne ( Northern Ireland Authority for Utility Regulation):
A few weeks ago we spoke to you about a sense of the overall energy policy scene. I think that today’s announcement puts some clear focus on that. There is a good deal that we need to talk about, including energy, environmental issues and security of supply. We need to talk about those issues because they set prices. You do not need to be a paid-up green to recognise that the environmental issues are real. Even if Northern Ireland wanted to ignore them, the UK is setting a quite aggressive climate-change policy and the EU is at the forefront of the world in doing so.

Northern Ireland is going to have to change. The only questions we have on environmental issues are whether we start preparing now or do it in a hurry some years from now. It will cost more if we do the latter. The same is true of security of supply. You can prepare and have a steady approach or you can have a panic approach, which will cost more. Ultimately, it is all about prices.

Why are bills rising? Today’s price increase from Phoenix Natural Gas is driven entirely by wholesale costs. If the wholesale cost of gas were the same as that which underlay the existing tariffs, we would be seeing a reduction. As a result of the Phoenix distribution price control and the mutualisation of the remaining transition assets, which we agreed with Phoenix in our November 2006 deal, which was completed just a few weeks ago, we have seen the network costs coming down. Obviously, however, that has been completely wiped out many times over by the firestorm that we are seeing in international fossil-fuel markets.

What are the drivers of that? They are many and various. Northern Ireland gets all of its gas from the British market. We can talk about that, if you are interested. We think that there would be strong advantages in having a system where gas could flow across the whole island. At the moment we depend entirely on the direction of British prices. British prices were low for a long time because the UK had strong sources of its own. The North Sea is in sharp decline now and, therefore, we are importing more from the Continent. Continental prices are typically very heavily influenced by oil prices in a way which is not particularly competitive. I do not think that you have to see any kind of conspiracy there. There is a link to oil in the pricing clauses in the contracts, and oil is trading at record levels. There are complex reasons for that, such as the political situation in the Middle East and transport and refining bottlenecks in the delivery chain. The link to oil is important, and Northern Ireland consumers experience that directly because 70% of households burn oil as the main source of heat. That is a key driver of the developing fuel poverty problem.

We import more by tanker because the supply of pipeline gas into Britain is falling, which is positive and means that we will not suffer an absolute shortage of the commodity. However, it costs more and increases volatility because a tanker, unlike a pipeline, can be diverted and therefore, we will have to compete with the US and other European countries — particularly Spain and Italy, which buy large amounts of gas in liquefied form.

The increase in gas prices has arrived at a time when there are similar pressures on other fossil fuels. Coal prices, particularly this winter, are at record levels. That is partly influenced by the fact that China has experienced a cold winter. China is normally a substantial exporter of coal; this winter it has not exported much. There are supply factors, demand factors and political factors. The tightening of the supply of emissions permits under the Europe Union emissions trading scheme — which took effect from 1 January 2008 — has impacted significantly on wholesale electricity prices.

There has been no announcement from NIE as yet, but it wants to talk to us formally about a price increase. Electricity is exposed to the same underlying factors as gas. There is a combination of factors; some are short-term but most are not. The future does not look pretty. I cannot predict next year’s gas prices; if I could, I would be a rich gas trader. Oil prices might fall slightly, but there are so many factors that it is difficult to predict in the short term. However, in the medium to long term, we must consider fundamentals such as the emergence of massive new markets in China and India and the globalisation of gas prices, as liquefied natural gas becomes the marginal unit that can be transported in a way that pipeline gas cannot.

Climate-change policies are maturing and biting much more — those issues will not go away. We are also experiencing depletion. It is not so much the depletion of the UK continental shelf — that was always predicted and is not a major long-term issue. However, oil is moving into a mature phase. Expert predictions suggest that it will take five years to 50 years to reach peak oil. The experts who think that it will take longer think that because they believe that prices will be high, which will enable production from newer, more expensive sources. There is nothing to suggest that prices will remain significantly lower over anything other than the short term.

What can we do about that? There are some things that we can do, and we are doing them. We assure the Committee that we have scrutinised the price increases to ensure that only genuine costs pass through. We have addressed monopoly costs that arise in Northern Ireland. I have told the Committee about the substantial costs that we removed from the Northern Ireland gas network. As part of the regulatory strategy, competition should be encouraged as a vehicle for maintaining efficiency incentives and ensuring that consumers benefit from any improvements higher up the value chain. Sustainable development can be achieved by ensuring that environmental imperatives are addressed sooner rather than later, and in a steady way that ensures the lowest lifetime cost. The social dimensions must also be taken seriously.

There are half a dozen issues that we could talk about, but I do not want to go on for ages. We can come back to the efficient use of the all-island gas infrastructure; how Northern Ireland can buffer itself from fossil fuels by promoting renewables; the competition agenda; the need to accelerate gas roll-out to drive out the most carbon-intensive fuel and reduce the dependency on oil; and energy efficiency, which is an important factor.

I have put together a policy agenda and identified why Northern Ireland’s energy policy must be clarified urgently. If the prices of fossil fuels remain high and the targets for wind generation or renewable generation set by the UK, and particularly by the EU, become much more ambitious — and there is every sign that that will happen under the new renewables directive — several things are likely to happen.

If carbon prices quadruple, as they would need to in order to bring them close to the real social cost of carbon, as calculated by the Treasury and the Department for Environment, Food and Rural Affairs, or even if they rise significantly, what will that mean for people who use dirty, carbon-rich fuels? If the EU or the UK decides that households must pay the cost of the carbon that they generate — and I would put money on that happening in the next decade — will Northern Ireland be ready? At the moment, it is not.

Three quarters of households use the most carbon-rich fuels as their main heat source. Northern Ireland households are much more exposed to carbon costs than anywhere else in the UK or Ireland. The grid is weak in the west, and it is not capable of receiving the large expansion of wind generation that is likely to be required. The planning system will make it difficult to respond rapidly to that challenge. There is currently one interconnector to the GB, with a second one planned. However, it is questionable that even two interconnectors would be sufficient to facilitate the use of Northern Ireland’s large wind resources as a commercial resource by exporting the power generated, or to import when required to keep the grid stable.

At the moment, Northern Ireland has no gas storage. There is a proposal to construct one liquefied natural gas terminal in Shannon. That may proceed, but it is vital to accelerate the maturity of the infrastructure. If gas is to be an important part of the fuel mix, which it is because two thirds of electricity is produced from gas, a certain amount of infrastructure must be built quickly. Progress on energy efficiency must also be accelerated.

The main issue is rising prices and how to insulate Northern Ireland from what looks like being a cold and unfriendly future. However, the short-term issue is fuel poverty. The Executive must regard today’s news as a call to action. There are only six months before the new prices mean that large numbers of people will be cold, damp and unhealthy in their homes. I have not yet seen a recalculation of the fuel poverty figures in the light of the new prices, because it is too early. However, the most recent set of figures showed one third of households in Northern Ireland in fuel poverty, with an extra 28% in crisis. I do not know what the new figure will be, but I suspect that it will be over 40%. The political question is whether that is acceptable. We have a duty towards consumers, and it appears to us that that situation ought not to be acceptable.

There are all sorts of things that could be done with public money; potentially, better-off consumers could pay to support the less well-off. However, a regulator cannot do something like that without clear political direction. We are talking about social policy; we must have a serious conversation about our next steps in combating fuel poverty. That may not mean the introduction of social tariffs; it may well be that the most efficient way to tackle fuel poverty is to make public money available through the benefits system.

We are relatively open-minded about how to approach the problem, but we must determine how much is possible, what public money is available, and what targeting is going to be necessary. When such a proportion of the market is in fuel poverty, it is clear that a single step is not going to abolish it.

[INAUDIBLE DUE TO MOBILE PHONE INTERFERENCE]

The Government has most of the data on vulnerable customers, so that will require political leadership. Whatever is put in place must be competition-neutral.

The Chairperson:
Thank you very much. There is much to consider. You mentioned that you will be talking to NIE soon. Is it normal for NIE to want to talk you at this point?

Mr Osborne:
No, it is not. Price changes normally occur in October, so we would not expect to talk to NIE for another couple of months. However, if wholesale price increases are big enough — 2·5% of its total revenues — NIE’s licence allows it to come back to us to ask for an in-year price change. It may well do that.

The Chairperson:
There could be an interim price change now, and then, possibly —

Mr Osborne:
We have not had formal proposals from NIE yet. I am loath to speculate, but there may well be a price change in June or July. Between an interim change and something in October, they are exposed to the same trends as gas, so unless the wholesale markets come off, we expect a change of the same order of magnitude.

Mr Newton:
It has been well trailed that there was going to be a price increase. We have been given copies of your media release. The public need to be convinced that the price rises are not the fault of the gas company and that there is nothing that can be done about it. It is about getting that information into the community. You are absolutely right; 39% of consumers in Belfast are in fuel poverty, and other parts of Northern Ireland are even worse off. However, the people who are being asked to pay £130 extra on their gas bill because, as we are told, “it is a global thing”, remain to be convinced that there is an open and transparent process, and that what they are being told is the truth.

There is a case to address when it comes to disabled people, chronically ill people, individuals of pensionable age and those on low incomes. They must be convinced of the truth, and there are ways of doing that. However, there are people at the higher end of the scale whose payments could be reduced to the normal level immediately. For example, I do not understand why people pay a higher premium simply because they are on the pay-as-you-go system.

The Chairperson:
Given that several members wish to ask questions, we will take three questions at a time.

Mr P Maskey:
This is not a good-news story; in fact, for many people, it is quite the opposite. After the news broke yesterday, several people in my constituency told me that they will find it hard to survive. Given that we are coming into a period of good weather, the timing of the announcement means that the situation might not appear to be so bad. Nevertheless, many people are wondering whether you, as the regulator, will ensure that Phoenix Natural Gas and the oil companies reduce their prices when wholesale prices fall.

You said that, although you usually meet NIE representatives in October, you will be meeting them n the next few weeks. Although the Committee is involved with other inquiries, we should also consider meeting NIE and, in order to investigate rising fuel prices, perhaps we should set up an all-party working group on fuel poverty.

As elected representatives, we should be taking this issue seriously. You said that, given that more than 40% of consumers are fuel-poor, you are unsure about the best way to ensure that the worst-off people do not fall into the fuel-poverty trap. Obviously, therefore, we must consider ways to help the most vulnerable people in society — usually pensioners, single-parent families and people with young children — who might fall into such a trap. Fuel poverty is an important issue, and the Assembly should consider ways to proactively and urgently address it. If an all-party working group were set up, hopefully, Mr Osborne might advise it.

You mentioned that we do not bring gas from the South of Ireland, and that currently, it all comes from Scotland. What benefits would an all-island approach bring? Would alternative gas imports be cost-effective, and could we lobby to bring them in? I would appreciate some detailed information about how such a proposal might be of assistance.

Mr Cree:
Price rises at this time of year are most unusual — usually, the reverse happens. You said that you are not a betting man; but many people are speculating in that market. How much of an effect does such speculation have on pricing structures? In order to save a lot of money, most oil and gas companies buy fuel on contract or in exchange.

You mentioned cryogenic gas storage. Although there has been much experience of that in GB, it has not been a hedge against rising gas prices in the past. Natural gas, which was introduced in 1966, was always differentiated as being cheaper than oil, and, indeed, for the first 35 years, it was. Why has that changed?

Finally, given that the phenomenon of high fuel prices is a reality and will not just be with us for a short time and that the Reconnect programme has been discontinued, how might we make progress with alternative fuels? We cannot pin all our hopes on electricity, which is impractical for ordinary households.

Mr Osborne:
I recognise that fact that people must be convinced, and, given that members of the Committee are professionals in such matters, I would welcome your advice about how we might do that. Producing a fact sheet is not the kind of thing that we have done before, although we recognise that we must step up to the challenge.

We are proud of the fact that we do much more than the rest of the UK in the fight against fuel poverty. For example, we do not have higher pay-as-you-go tariffs; in gas they are the same price, and in electricity they are cheaper. Electricity pay-as-you-go tariffs are cheaper because the technology is better, and that is very much to the credit of the Northern Ireland energy industry.

Paul Maskey asked whether we will ensure that the benefit of falling wholesale prices will be passed to customers. We will ensure that customers benefit, as we did last year. Last year, we saw a reduction in Phoenix’s prices, and that was the driver. We have two mechanisms in place to help customers. There is a supply price control, which sets a maximum supply price, and there is a consultation mechanism, whereby when a company changes its prices — up or down — it must consult us and the Consumer Council and satisfy us both.

I would very much welcome the Assembly’s setting up an all-party group. I have made it very clear that we must have political leadership. Whether it is a question of using public money or of asking some customers to fund benefits for others, it is not a technocratic issue. I would be delighted if the Assembly were to take up the matter, and we would help in any way in which we were invited. We are fundamentally accountable to the Assembly, and that would be part of our role.

As for the benefits of an all-island approach, at the moment, gas cannot flow commercially from the South of Ireland to the North, which means that, for example, we will not have access to natural gas from the Corrib field when the Scotland/Northern Ireland pipeline starts to fill up in four or five years’ time. We will need to use the pipes into Dublin as a substitute, but we do not have commercial arrangements to do that at present. Therefore, the minimum measures that we must take are, in a sense, no-brainers. It is still incumbent on us to do the work carefully and to produce the cost-benefit analyses to demonstrate that there is value in such arrangements.

The two regulators have signed a joint memorandum of understanding to enable us to establish what opportunities exist. We are not committed to doing anything, and everything will be subject to proper cost-benefit analysis. However, it seems that there clear opportunities.

Leslie Cree was absolutely correct to say that it is unusual to see price increases now. Most energy professionals have been staggered by the way in which oil and gas prices have moved recently. You asked me to speculate about gas prices, but that is very difficult. The short-term price outlook for next winter will be influenced by all sorts of things. Because liquefied natural gas is so important now, literally anything could happen, across the western hemisphere, to drive up gas prices in Britain. The hurricane in the Gulf of Mexico three years ago had a big impact on our prices. Such events are unpredictable, and it is difficult to speculate. Therefore it is important that we encourage Phoenix to hedge as much as it sensibly can. Part of the difficulty with the judgements that Phoenix is making is that the forward prices that are being quoted — that is the price that one would have to pay now to get a guarantee of delivery next winter or further ahead — are so high that it may feel that it is more prudent not to hedge and to hope that the prices will be lower next year in the hope that oil will have come off, or whatever.

Mr Cree:
That would force an on-the-spot mark-up.

Mr Osborne:
That is the trouble. It is a question of how much risk Phoenix thinks that it is sensible to take and how much we are willing to allow it to take. There is no obvious right answer to that; it is tricky.

I do not share the view that the availability of storage makes no difference to prices. For most of the last 15 years, continental markets have had less volatile prices, because they have much more storage than the UK as a whole. Essentially, other countries inject it in summer when it is cheap and take it out in winter.

At the moment, part of the difficulty with the British market — which we share — is that people are taking gas out of the UK in the summer and not sending it back in the winter. We have a more liquid market and, therefore, summer prices are lower. That means that it is cheaper for people to buy gas here, rather than to keep taking the flows from Russia, which are based on a more stable price. If you cannot beat them, join them. We are now integrated into a European market that uses long-term contracts and has large amounts of storage; therefore, it seems important to create an infrastructure that enables us to compete on the same basis.

You mentioned the discontinuation of Reconnect. As I said, the promotion of renewals is one of the fundamental strategies to create a buffer between our consumers and international fossil-fuel markets. However, what is the most effective way to have renewables built? It remains to be seen whether driving installations at the household level is the most effective way to do that, or whether support should be given in other ways. However, as the scheme has come to an end, I imagine that the Department of Enterprise, Trade and Investment (DETI) intends to do a post-project evaluation. It is important to have a rigorous evaluation before we decide where next to spend public money.

The Chairperson:
So, you are clear that Phoenix Natural Gas is passing on direct wholesale costs. Is Phoenix future-proofing against possible further costs?

Mr Brian McHugh ( Northern Ireland Authority for Utility Regulation):
We have taken Phoenix’s proposals for gas production, which is the main element, and they are set against volumes per month and prices per month in the forward market. Those volumes and prices are checked against where the forward market is. Phoenix will have its own gas-purchasing strategy where it buys forward a certain percentage in the market, and it has done that. That is certainly not future-proofed and will still, to a large extent, depend on what happens with gas tariffs between now and next winter. If the tariffs fall, Phoenix’s costs will reduce, and we will ensure that those prices are passed through to customers.

The Chairperson:
What happens if prices continue to rise?

Mr B McHugh:
If prices continue to rise, and depending on how much it has bought in the forward market, Phoenix’s prices will, to some extent, be fixed. However, a significant proportion of the rise will be passed through to customers.

The Chairperson:
How quickly can you ensure that any reductions are passed through to customers? How long do you have to wait before you can say that the price is not a blip and that it is a stable reduction that should be passed on?

Mr B McHugh:
Phoenix ’s tariff is reviewed annually, so it will be reviewed again in a year’s time. However, we will, and have, looked at Phoenix’s increases and decreases as the markets move. If markets move, and if there is a need to pass that reduction through to customers, we will have that discussion with Phoenix.

The Chairperson:
Can Phoenix can come back to you in-year — just as we heard earlier about NIE — and can you go back to it in-year?

Mr B McHugh:
Yes.

Mr G McHugh:
Increases are always passed through to customers speedily. The increase in the wholesale cost of gas is based on the raw material, oil. Can you explain to customers the effect that the price of oil has on the delivery or generation of gas? Although you have given us some answers, people still do not know why there is a need for an increase of 40% overnight, and how wholesale prices increase by 30% overnight. People need to know why that is the case, and they have not been told just yet.

Gas was supposed to be cleaner and to encourage people to move away from coal. People want coal, or anything else they can get their hands on, at the moment, as an alternative to the so-called better ways of doing things. The Northern Ireland Housing Executive removed the facility for burning solid fuels from pensioners’ housing, closed up the chimneys and converted the houses to oil, as part of a strategy which was supposed to be modern and futuristic.

One wonders what Government and everyone else is doing, with their so-called strategies, when these things happen. People are now sitting in the cold. Will there be a proportionate increase next winter in cold-weather payments to the vulnerable? Can you do anything to allay fears on that score? Protection of the environment, and matching-up of the market, is often used as a smokescreen for Government and everyone else to increase prices to a certain extent, and people will swallow it for those reasons. People expect low prices, and industry depends on it. I foresee a meltdown of industry here, on the basis of these increased costs.

In relation to land use — for renewables or food production — you did not mention the possibility that food production in Ireland or England will suddenly stop due to increases in costs. Does that not run against protection of the environment? Government are not up to speed with any of that.

Mr Hamilton:
Ian gave us several pieces of alarming news, the most immediate of which is the possibility of an increase in NIE prices. That will affect not only households, but businesses, which is important from the perspective of this Committee. In this country, electricity prices for businesses are recognised as being significantly higher than elsewhere. That is worrying.

As to the increase in the price of Phoenix Natural Gas, it is important that the regulator provides assurance. Your analysis should be made freely and fully available. An important aspect of that — and one that I must ask you to comment on — is the degree of profit for Phoenix. We have nothing against companies’ making profits: that is what we want, in order that they can reinvest. Can you reassure the public that this is caused by the wholesale gas price increase, and that the 30% increase passed on to the public is not to protect profits? Is some of the impact absorbed by the company?

Ms J McCann:
My comments follow from those made by Simon. Phoenix has a responsibility to make the public aware of its profit margins. People should not be expected to pay the price increase solely on the basis of an assertion that it reflects the wholesale price increase. The company must be transparent about this: those profit margins must be made public. Given that Phoenix has a monopoly on the domestic market, and that social housing was converted to gas several years ago, there is an onus on the company to make it clear where that cost has come from.

On the wider issue of fuel poverty, I find it alarming that, with the possibility that NIE will put up its prices, over 40% of the population — almost half — will be in fuel poverty. I agree that Government must act decisively. The Programme for Government contains a pledge to eradicate fuel poverty for vulnerable households by 2010, yet fuel poverty is rising in 2008.

People are seeing the cost of food, and the cost of living generally, going up. People in constituencies like West Belfast are constantly feeling the pinch. It does not only affect people on benefits — people on low incomes are similarly affected, so I do not know about looking at benefit possibilities there. There has been some discussion on social tariffs and how that could be incorporated in order to create a uniform social tariff. Working people on low incomes are also facing fuel poverty. Maybe help can be offered to these people as well. What is your view on progressing that, and how do you think we could work together on that?

Mr McFarland:
Your chart shows that energy and electricity costs in Ireland are higher than in Northern Ireland. How, then, can it be possible for anyone in the South to sell electricity to Northern Ireland on the all-Ireland grid?

Secondly, oil prices have traditionally been dealt with by international agreements — when there is a crisis, the producers increase supply. That usually balances the market. It may be that it is useful for prices to shoot up. If fossil-fuel-based energy is expensive, countries will be obliged to look at renewables. Is there, somewhere behind all this, a quiet word with the Saudis and other oil-producing countries? Obviously, they have tons of oil. If they increased production, the price would go down. Has someone, or some group, decided that it is time to put the focus on this drama such that people cannot ignore it?

Dr McDonnell:
This is an old chestnut – do the electricity-generation contracts have much impact on electricity price pressures, and will the ending of those contracts in 2010 or 2012 release this pressure? These questions were considered to be an old chestnut eight or 10 years ago, but the question remains — are they of less significance now because of the increase in prices? Are they still of major significance? Will their ending create downward pressure rather than upward pressure?

Mr Osborne:
As of today, gas is cheaper than oil. Both are very expensive, and both have increased a lot in price. In my personal opinion, if a customer considers the lifetime of a new boiler — roughly 15 years — when making the buying decision, gas is a good bet. The fundamental point about oil is that it is a depleting fuel, whereas I think that gas will progressively be separate from it. It will be a bumpy road.

In terms of the wholesale effect, the main point is that there is no longer enough oil being produced in the North Sea to supply the UK during the winter, and consequently, it is being brought in from the Continent. Therefore, we import not just gas, but prices. Continental prices are set in relation to oil.

Before I took up this job, I worked for the European Commission. An inquiry was carried out there — all the contracts were pulled in, and some data was published about the way those contracts work. If the Committee is interested, I can dig up that study. It is still relevant — those contracts have not changed. They were mostly struck at a time when there was no liquid market for gas on the continent of Europe at all — no hubs, and therefore no reference price. They do not refer to a gas reference price. Instead, the contracts determine the price of gas in reference to the price of crude, heavy-fuel or light-fuel oil. There are usually a number of different indicators.

As a result, when the price of oil goes up, crude goes up, and the price of all those products that are made from crude go up. That immediately means that the price of gas on the Continent increases, which affects our price when we are importing it during the winter.

You commented on the effect of energy-price increases on food producers, which is very much the point that Simon Hamilton made about the effect on other businesses. That is a significant issue. We have had several meetings recently with the Confederation of British Industry about the effect of fuel prices on its members — an effect that is already being felt. Today’s announcement about gas concerns the domestic tariff, and, when we eventually have a conversation with NIE, it will be about the regulated tariff. Most large businesses do not buy gas on the regulated tariff, and it is the same with electricity. They go to Phoenix or Firmus and buy it at a price linked to the wholesale price on the day. Large businesses are, therefore, also feeling the effects of these rises, and in a much more direct way.

Simon Hamilton and Jennifer McCann both mentioned profits. In Northern Ireland, people form their views partly from the local media and partly from UK-wide media, which often report the situation in GB. In GB there are competitive companies that are not price-controlled, and it is, therefore, something of a mystery as to how they end up with their profit margins. In Northern Ireland, we have network monopolies, and there is no competition for selling to household consumers. These monopolies are regulated very directly. They are given a 7·5% return on their distribution network, and a 1·5% profit margin on the supply side. Therefore, there is a transparent set-up in respect of profits.

The lack of competition is worth talking about. The wholesale drivers are something to which all energy companies are going to be exposed, and which they will have to pass through. Nevertheless, consumers would like to have a choice. They expect that in this area of the economy, as in the rest of the economy, once there is competition there will be, if not necessarily big price savings, then better service and more innovation so that the consumer benefits from competition.

The household markets in gas and electricity are now legally open to competition, but there is no activity. As the regulator, I am keen to accelerate the development of that market, and published a consultation yesterday on what regulatory steps can be taken to reduce entry barriers and bring in competitors.

Jennifer McCann said that we are talking about not just fuel poverty, but poverty. I agree entirely. The other part of my job concerns water, where we have the same debate. Part of the challenge in getting to grips with fuel poverty, whether through social tariffs or by making more money available in other ways, is targeting the money and deciding who gets it. I have neither the political mandate nor the expertise to take those decisions. The Department for Social Development (DSD) understands the breakdown of poverty and how poverty matches to benefits. There is only so much that we can do. However, the utility companies know even less than us. Therefore, to give a remit to the industry to do something about fuel poverty is clearly not the right answer, because that would be asking them to take political decisions in an inappropriate way. I have no idea what the outcome of such a move would be, because they have no expertise in that area. Therefore, fuel poverty needs to be tackled by those within Government who have the understanding. A partnership is needed. There are things that we, as the regulator, can do, and the same is true of the companies. I am calling for the Executive to step up and deliver.

The Chairperson:
We sometimes hear UK Ministers say that they are talking to the companies in the UK — certainly in GB — about some of the issues. Are you able to track those discussions? Are they relevant to Northern Ireland?

Mr Osborne:
The discussions are quite separate to what is happening here. None of the GB companies that they are talking to operate in our market. When there is a vigorously competitive market there can be a supplier-driven solution.

The Chairperson:
But the Ministers seem to be discussing some of the issues with those companies.

Mr Osborne:
It is a completely different market structure. There cannot be a supplier-driven solution when there is no competition; any discussions would simply reinforce the monopoly. Those Ministers are talking to the gas and electricity customers because gas and electricity are the main household fuels in GB; oil is completely marginal. Here, oil is used in 70% of households. There is no point expecting Phoenix Natural Gas to solve the problem of fuel poverty — we need to talk to the oil companies, and we need a solution that encompasses oil.

How little we expect of the oil industry is one of the bees in my bonnet. I do not want to regulate their prices — it is a competitive market, and that is a much better solution than regulation. However, I want the oil companies to have the same obligations as the network companies to participate in the fight against fuel poverty, to put in good-quality installations and to be driving energy efficiency. At the moment, that is a gap in energy policy that must be filled.

Ms J McCann:
Why are there no such regulations for the oil industry?

Mr Osborne:
That question should be addressed to DETI rather than to me. As far as I can see, regulators are needed for the network industries because they face difficult issues relating to natural monopolies. If there were not a regulator there would be a serious risk of people getting ripped off because of the inherent monopolies. Oil is not a monopoly, and I am happy not be involved in the economic side of regulating it. Historically there has been a drift — new policy objectives have been introduced, but there has not been a vehicle to deliver them.

Mr McFarland asked about the chart. It shows 2007 prices. I believe that there will be some alignment under the single electricity market (SEM), although Irish prices and prices in Northern Ireland will not be the same, because the network practices are different. However, the fundamental wholesale drivers are now the same across the whole island.

Mr Cree:
Does that mean that the price has gone up, or will go up, because of that, or will it come down?

Mr Osborne:
I think that the answer to that is that there will be a bit of both. Electricity prices are driven by wholesale factors, which would have applied anyway. The SEM is just the mechanism by which they pass through. The existing prices include a small amount of cost for the SEM. If we had not merged the market, those costs would not have been incurred, but we would have had to have done something else, because we need a mechanism to drive investment in Northern Ireland. Over the long run, we estimate that we will see lower prices. However, this year the SEM is neither a driver nor a mitigating factor, it is simply the vehicle through which the higher wholesale costs have been passed.

Mr McFarland asked whether someone has had a quiet word with the energy Minister in Saudi Arabia — truthfully, I do not have a clue. The Organization of the Petroleum Exporting Countries (OPEC) says that that higher prices are not being driven by its actions; it argues that the refining process is bottlenecked, meaning that not enough oil is getting refined and, therefore, even if it produced more raw crude, supplies would still not be increased. To some extent, it blames speculators for that.

Traditionally, OPEC has not been amenable to “quiet words”. I should have thought that it would be a bit worried about demand destruction. It is hard to see how OPEC would fall in with that. Since the 1970s, it has tried to stabilise oil prices, but has not been particularly successful. There is only so much that even a cartel can do. At times, it has tried. It seems that it has lost control to some extent. That is not really something that I have expertise in.

The long-term contracts are relevant to the extent that they are part of the mix. When there is a big fluctuation in the overall energy price, you tend to see it partly cancelled out by the public service obligation (PSO) levy. When the companies are making a lot of money, they do not get to call on the PSO. When they are not making so much, they do. Therefore, if anything, it tends to be a stabilising factor.

You pointed out that some of the contracts will come up for potential cancellation between 2010 and 2012. We will take the decision about whether we want to cancel them when the time comes. If there are high and volatile prices, we might decide that we do not want to cancel them. You must recognise that because of the existence of those contracts, Northern Ireland’s consumers do not pay the full price for carbon. The value of the carbon permits associated with that generation is recycled through the PSO to the benefit of consumers. As we go forward, we will also have to take a view on the cost of carbon. If the contracts were cancelled, the market would end up being simpler, with some of its buffers removed. It is, therefore, difficult to say whether there would be higher or lower prices. The market would be slightly more volatile.

Dr McDonnell:
Your answer is, therefore, that the contracts are less threatening now than they were four or five years ago.

Mr Osborne:
They are part of what keeps prices relatively high. However, they have relatively little impact on fluctuation.

The Chairperson:
Firmus has locked itself into a price cap. How is it airing that?

Mr Osborne:
Firmus is launching a business. When a business is working hard to pick up customers, and when the gas volumes that it sells are not that large, it can afford to take more of a hit per firm than if it already has 100,000 customers and a large business.

The Chairperson:
Is it currently not in its interest to get new customers on the basis of the price cap?

Mr Osborne:
No —

Mr B McHugh:
It is incentivised heavily by its licence to develop the market and to connect customers.

The Chairperson:
Even in circumstances when it must bear costs that it cannot pass on?

Mr Osborne:
The incentive outweighs that quite a lot. Ultimately, the matter of whether to maintain a price cap is in its own hands. I believe that it is incentivised to grow.

Mr McFarland:
This morning, I heard on the radio that Firmus had bought an enormous amount of gas when prices were low and that because most of its customers are businesses. With only a small domestic base, for the moment, it is all right. Clearly, eventually it will not be all right.

Mr Osborne:
It must be recognised that Bord Gáis Éireann, its parent company, has access to long-term contracts for Irish gas, which gives it some buffer. Therefore, it is in a slightly different place from Phoenix.

Mr Newton:
The point that I made at the beginning was that the public’s trust in the office of the regulator will depend very much on communication. That point was made by Simon Hamilton and Jennifer McCann with regard to profit margins, and so on. To an extent, you have thrown the matter back to politicians. I suppose that the purpose of this meeting is, indeed, to test that everything that has been done. It is incumbent upon the regulator to communicate effectively with the public in an open and transparent way, and to ensure that it has pushed the companies to do everything that they can to absorb any price increases and to minimise the effect of those increases on the buying public, particularly on people who are on lower incomes or on benefits.

It is a huge issue, particularly if there are increases coming from other utility sources. Trust must be ingrained in the public, and the communication exercise must take place.

The Chairperson:
You referred to continental gas prices being handcuffed to oil prices. Whose decision is that, and will that situation change?

Mr Osborne:
It will be the decision of the large continental gas companies. Change will come, but it will be slow.

The Chairperson:
Do the Governments or the European Commission not have any influence?

Mr Osborne:
The European Commission has influence to the extent that the arrangement is anti-competitive, but I am not sure whether it is any kind of abuse — it is merely a different way of structuring the market. Governments have quite a lot of influence in the sense that they own quite a lot of the gas companies, and they have a lot of pull over them. We might be suffering from the downside of that, but many people in the continental industry say that you have to take the rough with the smooth. By and large, linking gas prices to oil prices has given the industry a platform for investment that has enabled it to grow.

The mood on the Continent is that there is not a huge problem in the way in which they buy gas. In fact, GB is out of step. In the 1990s, there was a gas bubble and there was major production in the North Sea, but there was no way of exporting as there was no pipeline to take the gas out of the UK. Therefore, there was an opportunity to drop prices dramatically. Wholesale trading was created, which saw prices coming down to extraordinarily low levels of between 7p and 9p per therm, whereas now it costs £1·30 per therm. The supply part of British Gas was sold off with its long-term contracts intact. Therefore, it had to renegotiate them or it would have gone bankrupt, and it successfully renegotiated them.

For reasons that made a lot of sense in the 1990s, the UK industry as a whole has ended up without many long-term contracts. We structured our market differently from the market on the Continent, but now we are suffering some of the downsides of that. It is not that there is wickedness on the Continent; we merely have a different market structure.

The Chairperson:
Will those downsides continue?

Mr Osborne:
We need to build a lot more storage, and we need to accept the role of long-term contracts in the way in which new storage is financed and new import infrastructure is created. Great Britain is diversifying the range of places from which it can import through building liquefied natural gas. There will be some freeing up on the Continent. There are now liquid gas hubs in Belgium, the Netherlands and Germany. North Germany is getting there, and Austria is optimistic about developing liquidity. Therefore, there are reference prices, and they are beginning to be used more. There will be some loosening up on the Continent, and the UK market will become more continental. There will be some convergence, but it will take a long time.

The Chairperson:
That is not particularly encouraging for us. It is clear from what you have said that there are no short-term interventions on price that we can look at regionally. At policy level, we must consider actions regarding alternative sources for the medium and longer term. In the short term, the issues that we will have to examine in terms of intervening on fuel poverty seem to be more on the price support side.

Mr Osborne:
The issues are on the price support side, either through public money or from other consumers. If that is how you wish to look at it, we will work with you on that.

The Chairperson:
How far can you, as a regulator, get into those sorts of issues? Where are the red lines for the regulator on those?

Mr Osborne:
We do have statutory duties to general consumers and to vulnerable customers, such as the old, the poor and the sick. We have a statutory basis on which we can move forward if we are given a clear political steer about the kind of measures that the Assembly would like. We need to ensure that distortions in the market are minimised and that whatever is put in place is competition-neutral and is not going to stymie the development of the competitive sector. We also need to ensure that companies are not being asked to do things that they cannot do, because they do not know very much about their customers, and that any scheme that is put in place is practicable. If we are asked to arrange a cross-subsidy between the better-off and less-well-off customers, the amount that the top-end customers are paying must be reasonable. Some measure of cross-subsidy might be OK, but there are limits.

The Chairperson:
We might be entering into areas that are beyond the strict purview of this Committee and its Department.

Mr Osborne:
That is exactly the point. There seems to be a gap between DETI and DSD.

The Chairperson:
The Minister for Social Development has issued a statement, and some of those issues will be raised today at the Executive. It might be appropriate for us to share the information that you have provided with the Committee for Social Development. I am also conscious that this might be a relevant added consideration for the Committee for the Office of the First Minister and deputy First Minister’s inquiry into child poverty.

Thank you for your presentation.