France, Italy point to liberalized gas market limits, assess efforts made

By Doris Leblond
OGJ Correspondent

PARIS, Feb 9 -- The president of France's Commission de Régulation de l'Energie (CRE), Jean Syrota, in presenting the efforts that CRE has made so far to prepare France for the opening of its gas market to 453,000 more consumers July 1, warned that "the attractiveness and extent of the market has its limits."

Despite rules established to help new customers choose their supplier "in a simple and rapid manner in order to exercise competition and obtain the best service at the best price," Syrota reiterated the obstacles to a truly open market: Important is the small volumes, barely 5-10%, of natural gas left for free transactions in a European market that depends on long-term, take-or-pay contracts with just a few outside suppliers.

In France, this constraint is compounded by the lack of competition in the South where the infrastructure for gas imports is limited. Even in northern France, where most of the country's gas enters, there is no compatibility between natural gas from Holland and the gas from Norway and Russia.

In addition, there is no gas-powered electricity in France, making it difficult for a nonhistorical supplier to reach critical size. Historically, operators in France, as in other areas of Europe, are accustomed to dealing in terms of buyer consortiums and territorial monopolies.

CRE is dealing with these problems in a number of ways: It is encouraging investment in new LNG terminals and persuading Gaz de France to reduce the tariffs for small LNG imports. It will open gas storage capacity to new entrants by July and set up hubs, an effort illustrated by the joint declaration last July by regulators from Spain, France, and Portugal. CRE also is reducing the number of balancing points in the country and rationalizing the networks in the South, taking advantage of the recent agreement of Gaz de France and Total SA on their gas lines (OGJ Online, Dec. 5, 2003). It also is improving transparency on the available gas capacities, setting up points of exchange in France as a prelude to the emergence of North and South hubs, and introducing new and more-immediate measures, such as gas release initiatives, on the lines of what is being done in other European countries—the UK, Italy, Spain, Germany, and Austria.

However, Syrota pointed to a recent factor that could further dry up the independent natural gas offer on Europe's market. With Britain's spot prices higher than long-term gas contract prices, the flow of the Interconnector pipeline between Zeebrugge, Belgium, and Bacton, UK, increasingly is being reversed from the Continent to the UK. In addition, the US is absorbing most of the LNG cargoes, two trends that could reduce competition in Europe through depleting the availability of spot gas. Syrota said the "fundamentals are unfavorable over the next 3 years, as both British and American productions decline." New infrastructures scheduled to be on stream from 2007 would reverse the trend, but might also build up a gas bubble in Britain, Spain, and Italy," he warned.

Italy fully opened up its natural gas market Jan.1, 2003. In France this will only happen in 2007, although in a first step of its initiative, France opened markets to 1,200 industrial users in 2002.

Angelo Ferrari, general manager of Italy's Electricity and Gas Regulatory Commission (Autorità per l'energia elettrica e il gas) said he is pleased that a "clear framework aiming to encourage new investments" has been worked out and that retail gas distribution, which once involved 700 operators, is now less fragmented. He noted also that transmission and storage tariffs have dropped, while transmission and storage capacities have increased, and that the share of short-term contracts now exceeds 5%. Since 2000, transport and trade have been unbundled.

Ferrari pointed out at a recent conference in Paris that the limitations to a truly liberalized gas market in Italy are practically the same as in France: The long-term take-or-pay contracts are leaving little room for short-term trading, the import infrastructures are saturated and controlled by the dominant player ENI SPA, with priority access given to long-term contracts. Gas storage access is also reserved in priority to residential sector supplies. But of the 32% of the market won over by competition, about two thirds is occupied by the country's two main electric power companies, proving that in the opening up of the gas market, gas-fueled electric power has an important edge.

Comparing the gradual opening of France's gas market with Italy's already full opening, Ferrari was doubtful whether it would be possible to set up a hub between southern France and Italy any time in the near future. Such a hub, he said, might figure as a long-term project, however, spurring competition around that area.