The Sunday Telegraph: Why are gas prices so high?

(Filed: 16/05/2004)

Centrica is urging the Government to probe soaring wholesale prices, write Andrew Murray-Watson and Sylvia Pfeifer 

British consumers might be forgiven for thinking that utility companies are out to suck them dry. Water prices are to soar to pay for the replacement of a crumbling pipe network, electricity prices are already rising by twice the rate of inflation in some areas, and now domestic gas prices are set to go through the roof. Every time a tap is turned, an egg is boiled or a light is switched on, a meter starts to spin like a top.

British Gas, owned by Centrica, and other gas suppliers, have already felt the wrath of irate consumers for price rises at the start of this year. But we could face a massive increase in our annual gas bills - from an average of £337 to as high as £450 - if prices on the futures market for gas do not dip soon.

The steep oil price and the ongoing upheaval in Iraq are having a bearing on wholesale gas prices. Other industry analysts also point to the growing fear that Britain faces a potential shortage of supply as North Sea stocks decline, with some pointing the finger of blame squarely at the Government's unremitting focus in recent years on promoting renewable energy.

"The gas machine works and can work but we lost two critical years because the Government was totally focused on renewables," says one, who believes that more effort should have been devoted to improving access for gas from overseas fields to the British market.

Meanwhile, fears of a shortage of supply over the coming two winters has helped drive futures prices for the delivery of gas this winter to 40p/therm, up substantially from their more historical range in the mid-20s. "We've got two winters where we have to keep our fingers crossed," says Philip Lambert of Lambert Energy Advisory.

Nevertheless, power executives believe that even against such an adverse background of potential tight supplies, the spike in wholesale gas prices is surprising and warrants investigation by government and regulators. In the past six months, average prices have risen by 30 per cent and they are up as much as 60 per cent in the past two years.

Concern within the industry has reached such levels that Sir Roy Gardner, the chief executive of Centrica - which supplies gas under the market-leading trade name, British Gas - has raised the alarm at the Department of Trade and Industry.

The inability to discern the reasons for the gas hike already prompted Ofgem to launch a "probe" into the matter last October. The regulator is due to report within the next few weeks and if it cannot explain away the price increase, a full-blown investigation carried out in conjunction with the DTI will be launched.

One yet unproven possibility is that large gas producers are buying up their own gas on the wholesale market to keep prices artificially high. The practice, known as "gaming", allows producers to make more from long-term contracts with utility customers by using the market price for gas as a benchmark for negotiating deals.

Jake Ulrich, the managing director of Centrica Energy, says: "Ofgem and the DTI have to look at whether the price of gas futures is being pushed up."

The main cause for concern for utility companies is the lack of transparency when it comes to gas production. In the electricity market, companies are obliged to alert the market whenever a dip in production is expected - for example when a power plant is offline for maintenance. But for gas, there are no such obligations. This means that a drop in supply can trigger price rises without it being clear to market participants precisely what has happened.

Ulrich says: "There is an issue of transparency that is causing concern. There is not much information available concerning what production levels companies are forecasting and what will be available."

The DTI has this year introduced a voluntary disclosure code for gas producers. But the main gas purchasers in the UK do not believe that the measures have gone far enough.

Ulrich adds: "At the end of the day, price rises may be completely justified. But we have no way of knowing at the current time. We have to make sure the market is working efficiently."

Major gas producers, including majors BP and Royal/Dutch Shell, all declined to comment specifically on whether there was any deliberate manipulation going on but UKOOA, the trade body for offshore operators, denies there is anything untoward.

"There have been a number of investigations into the high prices before and they have never found any evidence of market manipulation," says a spokeswoman for UKOOA. "It is very difficult for gas producers to manipulate the gas market, not least because 75 per cent of the gas produced is sold via long-term contracts."

A further complication is that the Ofgem probe into gas prices is handicapped by the simple fact that the regulator's powers stop at the beach. Offshore, the burden of overseeing gas production falls to the DTI.

A senior executive at one utility company says: "Nobody can put their finger on why wholesale gas prices have gone through the roof. Gas supply seems more than adequate and should be getting better in this warmer weather. But prices keep going up and we are at a loss to explain it. It is something that needs looking into fast."

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