Germany to open gas distribution, supply markets to competition

Wintershall found the only way to be able to deliver gas to customers in Germany was to build its own pipeline grid. Here, welding work is in progress on the Midal pipeline. Only big players with large customers can take this approach: Wintershall is owned by BASF, which is also its largest customer. Photo courtesy of Wintershall.

The European Commission (EC) has redrafted a gas directive setting out common rules for deregulation, but Germany and Netherlands in particular are considering their own legislation, too.

Germany, Europe's largest national gas market, intends to be next to bring the benefits of competitive gas supply to customers but faces a number of obstacles.

Unlike other European gas industries, Germany's is already operated by private companies. They are reluctant to accept changes and are well protected by German company law.

German authorities predict that forcing these companies to loosen their tight grips on markets will be tougher than privatizing a state monopoly, as was the case with U.K. and British Gas plc (OGJ, Oct. 14, p. 23).

But recent entry of a new player to the German gas market has brought consumers in some areas a choice of supplier and is seen as a lever to further changes.

There is now growing momentum-created particularly by the country's large industrial customers that do not yet benefit from competitive supply-to open the gas market fully.

Gas liberalization now seems inevitable, since the German government has worked in recent years to break up state industries and monopolies, and gas and electricity are the only sectors where monopolies still exist.

Germany's economy ministry regulates the country's energy industry, and it is attempting to liberalize electricity and gas markets under the same forthcoming energy law, using largely similar rulings.

Current scene

Friedrich Jurgen, deputy head of the ministry's gas policy division, explained that eight companies have long-term take-or-pay agreements to import gas into Germany.

Gas consumption in Germany totaled about 2.75 tcf of gas in 1995. Sources of that gas broke out as Russia 37%, Netherlands 26%, domestic 21%, Norway 14%, and Denmark 2%.

By 2010, German gas consumption is expected to reach 3.25 tcf/year. Then, the breakout is projected as Russia and Norway 32% each, Netherlands 18%, domestic 13%, Denmark and U.K. 3%, and new projects 2%.

There are also 19 privately owned gas distribution companies throughout Germany, said Jurgen, with Ruhrgas AG, Essen, being by far the dominant gas market player and the market being divided on a territorial basis under a web of demarcation agreements.

Kurt Markert, director of Germany's Federal Cartels Office (FCO), explained the complex agreements and laws of the German gas market to a conference in London late in November.

Markert said the first level of gas industry, importation, and wholesale distribution, is dominated by Ruhrgas, which has a market share of more than 60%.

Ruhrgas and the second largest West German wholesaler, BEB Erdgas & Erdol GmbH, a Deutsche Shell AG/Esso AG joint venture, also own 45% of Verbundnetz Gas AG (VNG), Leipzig, the largest East German wholesale distributor.

The second largest East German wholesaler is Erdgasversorgungs GmbH (EVG), also of Leipzig. EVG is jointly owned by Ruhrgas and VNG.

"Natural gas consumed in Germany is mostly imported," said Markert, "mainly from Russia, Norway, and the Netherlands. The declining domestic gas production is mainly marketed by the large gas distribution enterprises such as Ruhrgas."

In recent years, Wintershall AG, Kassel-based upstream subsidiary of German petrochemical giant BASF AG, has carved a niche in the gas supply market under a joint venture with Russian gas producer Gazprom.

Markert said Wintershall entered the wholesale market in 1992 as an independent competitor, with its own transmission system, still partly under construction.

Wintershall formed two joint ventures with Gazprom, Wingas and WIEH, to import and deliver Russian gas to German customers. Wintershall also produces gas in Germany and imports North Sea gas.

"As a result of Wintershall's appearance in the market," said Markert, "gas-to-gas competition between Wingas/WIEH and the established gas suppliers broke out.

"Wintershall is not a party to the existing network of horizontal demarcation agreements but has meanwhile accepted vertical demarcation clauses in its supply contracts with distributors such as VNG and EVG. These clauses prohibit direct sales by Wingas/WIEH in the territories of the purchasers."

Why change?

Jurgen said the energy sector is now Germany's only remaining business sector that features monopolies, now that rail, telecommunications, and postal service liberalization is complete.

The German cabinet decided in October that electricity and gas market liberalization and deregulation would go ahead, and now the economy ministry is drafting a new energy competition law.

"Guidelines from the EC electricity directive will be included in German proposals for electricity deregulation," said Jurgen, "as will be details of the EC gas directive, which has just started to be dealt with by Brussels."

This summer, EC's plans for a single energy market were agreed as far as the electricity sector is concerned, but agreement in the gas sector was found to be impossible under similar proposed regulations to electricity.

However, EC has thought again about how to forge agreement in gas regulation, and now plans to push next year for acceptance of a compromise draft gas directive created this autumn (OGJ, Dec. 9, p. 28).

Jurgen said the German economy ministry intends to conclude its own energy competition law by the end of the parliamentary year in 1999, regardless of the situation in Brussels.

"We are not going to wait for Brussels' gas directive to be fixed first," said Jurgen. "We will undertake a parallel procedure, which will include as much as possible of the EC proposals.

"We will progress our own plans as far as possible, maybe getting them through parliament by the end of 1998, but timing is difficult to predict in the face of a large amount of controversial discussion."

Court cases

The existing German gas industry structure is already under threat, however, with demarcation agreements under which the wholesalers carve up the market being challenged in the courts by the FCO.

Markert gave details of an FCO order of July 1995 that prohibited implementation of a deal between Ruhrgas and Thyssengas GmbH that FCO maintains is keeping gas prices artificially high in one area.

Thyssengas is a joint venture of Bayernwerk 50% and Esso and Shell 25% each. Under a demarcation agreement with Ruhrgas, it imports gas mainly from the Netherlands for distribution in western Northrhine-Westfalia state.

Ruhrgas and Thyssengas have taken the case before the Kammergericht appeals court in Berlin, but Markert views as insupportable their special pleading to continue the deal.

"Wintershall has demonstrated," said Markert, "that gas wholesale distributors in Germany can operate successfully without horizontal territorial protection agreements."

In March 1995, FCO also prohibited vertical demarcation agreements between VNG and Wingas and between EVG and WIEH, under which the Wintershall units cannot sell gas in the territory of the buyers VNG and EVG.

"The conclusion of the two contracts in January 1994," said Markert, "had been preceded by a 2-year period of vigorous gas-to-gas competition between the contracting parties, leading to substantial price reductions.

"When the parties notified the agreements to the FCO in order to obtain an exemption under current energy law, the FCO took the view that the parties had misused the exemption for a primarily anti-competitive purpose rather than to achieve cost reduction.

"An abuse was also seen in the total exclusion of direct Wingas/WIEH supplies by way of third-party access to VNG and EVG transmission facilities."

However, this ruling was overturned by the Kammergericht. Markert said the written court opinions have not been handed down to FCO, but the FCO expects to appeal higher still to the Federal Supreme Court.

Opposition

Jurgen explained that many of the Lnder-Germany's local government areas represented in a second chamber of government-are opposed to pursuit of low energy prices. Instead, they believe energy programs should subsidize development of renewable energy sources.

"We are obliged to gain approval of the Lnder as well as the main parliament for liberalization," said Jurgen. "However, the majority party in the Lnder is the Social Democrats, and they are not likely to approve our proposals.

"Although we are convinced our approach is right, there are some sectors of government and industry that are determined there won't be a new energy law. But we think we will get some of it through, at least."

Among the gas companies, Jurgen expects no opposition to deregulation from large distributors, apart from Ruhrgas, which he said are used to thinking at the European level and are large enough to compete across Europe.

But there are about 700 gas distribution companies at the municipal level, said Jurgen, which are not used to thinking on a European scale: "These form quite a strong pressure group, and they are strong opposition to our initiative."

Also, many small gas consumers such as farmers and householders have the impression that gas industry deregulation will benefit large customers such as industry and electricity generators, but not them.

"Most of Germany's energy business is privately owned," said Jurgen. "There is no German state company like British Gas in the U.K., so we can't declare competition in the same way."

Ruhrgas has campaigned consistently over the past few years against change. Most recently Burckhard Bergmann, Ruhrgas vice chairman, put the company's view to a Paris conference.

"The intensity of the debate," said Bergmann, "on restructuring European gas industry virtually creates the impression that the gas industry needs to be repaired immediately. Yet it is clearly not defective."

Bergmann said Ruhrgas' opinion is that security of supply must not be jeopardized, fair risk-sharing must be preserved between producers and imports, and regulation should be reduced rather than increased.

"Germany's regulatory framework is already very liberal by international standards," said Bergmann. "There is freedom to build pipelines, and this has led to the first functioning system of competition between pipelines.

"The pressure thus exerted towards greater efficiency without any form of regulation is far greater than with regulated transport monopolies. Freedom to build pipelines is therefore a cornerstone of the regulatory framework for the gas industry in Germany. Everyone should be given a chance. The German gas industry is on the right track."

TPA issue

The biggest barrier to German gas market deregulation is the issue of third party access (TPA). German gas distributors have built their own gas pipelines to deliver their gas and are fiercely protective of their rights.

International Energy Agency (IEA), Paris, said Wintershall solved the problem of access to transportation by building its own pipelines and storage facilities.

"This is one way of creating competition," said IEA, "but it requires big players with the financial muscle to build pipelines without much external financing and a large baseload of initial sales."

IEA said German law actually allows TPA, but a company from which TPA is requested can refuse it when TPA could affect the conditions of supply to its own customers.

Jurgen said German law provides strong protection for property rights of companies, so it would be difficult for government to achieve TPA.

Wingas attempted to win the right in court to deliver gas through the Ruhrgas system, in a bitterly fought case that started in 1992.

But Wingas delivered first gas to customers in 1993, through its own grid (OGJ, Sept. 14, 1992, p. 29).

A Wingas official told OGJ the company has secured a 10% share of the German contract gas market and plans to increase its share to 15% before 2010.

The official said the situation in Germany is very different from the U.K.'s. Government's reform proposals are a step in the right direction, he said, but the big problem is that they do not explicitly call for TPA.

"Our position," said the Wingas official, "is that as long as there is no TPA, there will be no real competition. At the moment there is duplication of pipeline grids, which is not wise for ecological or economic reasons.

"We want TPA, and we will willingly offer our grid to competitors and will pay to use theirs. But our competitors are not willing to open their grids to us because there is no legal requirement.

"Without TPA, there will only be competition where Wingas is able physically to offer gas from its own grid. Now we have a two-class society: cities, consumers, and industries in a favorable position next to a Wingas pipeline; and those far away who have to pay extra to cover the others' price cuts."

TPA not needed?

Jurgen said protection for customers may be achievable under proposed new gas regulations, without enforced TPA measures, if customers could show a gas distributor had abused its dominant position in supplying gas.

"But customers fear long-lasting legal procedures," said Jurgen, "which could take maybe 2 years for a court decision. Critics of our system say there should be regulated TPA, but we are not convinced it would be suitable."

Jurgen said a delegation from Enron Corp., a company very experienced in operating in liberalized markets, visited the ministry in early December: "They claimed they were convinced our reforms will not provide a reliable form of access to the grid.

"Our intention is to find effective methods of dealing with abuses of dominant positions and to make these parts of the new laws in 1999. But the problem is to what extent must we describe the criteria."

EC directive

Wilfried Czernie, senior general manager at Ruhrgas, said recently that the current draft directive under consideration by EC is not convincing in many respects and will require huge regulatory effort to achieve TPA.

"The interests of Germany have not yet been taken into account," said Czernie. "Transparency and unbundling give non-European Union (EU) exporters a competitive edge and entail red tape and expenditure for EU companies.

"As things stand at present, opening of markets on a reciprocal basis will not be guaranteed for Germany, because the national amendment of energy law would lead to a complete opening of the market.

"The TPA models envisaged in the gas directive would, due to the lack of reciprocity, be one-sidedly detrimental to the German gas industry. Monitoring of abusive practices has been successful in Germany for many years. This should serve as an approach to implementing TPA in the gas directive."

Outside view

At the Gastech 96 conference in Vienna in early December, debate in one of the sessions turned to competitive gas supply and the prospects for liberalization in Germany.

A speaker from the floor said the establishment of Wingas' niche in a supply market otherwise dominated by Ruhrgas is viewed as evidence of emerging competition in Germany and Europe.

Keynote speaker Clare Spottiswoode, director of Office of Gas Supply (Ofgas), the U.K. government regulator that opened up U.K. gas industry, said Wingas is backed by a very big company with very deep pockets.

"Wingas has no more real interest in third-party access than Ruhrgas has," said Spottiswoode. "The ability to have third-party access is very important in gas industry de- regulation.

"In U.K. we had to call in the Monopolies & Mergers Commission because we couldn't get negotiated third-party access after our discussions with British Gas."

What's ahead

Once the German gas market is deregulated and opened to competition, there is expected to be a fall in gas prices for all sizes of customer, growth in the current trend towards gas-fired heating systems in homes, and a rise in the importance of gas-fired electricity generation.

Jurgen said gas-fired power generation would not immediately take off, because the electricity industry has sufficient capacity to meet needs with mainly coal-fired stations.

But more and more towns are expected to rely on gas for local energy schemes, such as combined heat and power plants.

Large industrial concerns are a major pressure group in favor of reforming Germany's gas industry, and are broadly behind the planned new legislation, said Jurgen.

Industrial users are expected increasingly to burn gas in preference to oil, for environmental reasons and for ease of use. Many are also expected to switch from electricity to gas on environmental and cost grounds.

"They expect cheaper gas," said Jurgen "through increased direct gas-to-gas competition. Where competitive gas supply already exists in Germany, there are lower gas prices.

"For example, along the route of the Wingas pipeline from Hanover to Aachen, it was interesting to watch prices fall as soon as the pipeline was installed.

"The opportunity for distributors to build their own grids will be an important part of development of the German gas market. The Wintershall gas grid gives very strong support in the search for new gas consumers."

In Germany, gas currently accounts for 20% of primary energy consumption, said Jurgen, and this is expected to increase to 25% within the next 10 years. In some areas, gas will account for 30% of primary energy usage.

Ruhrgas expects the main growth area for German gas industry will be the residential and commercial sectors, while industrial consumption will only rise slightly.

"The number of homes with gas heating will rise," said Bergmann, "from 13 million homes at present to about 19 million in 2010. In industry, final energy consumption will fall further, despite the assumption of favorable economic growth."

Bergmann sees overcapacity in the electricity generation market and said gas-fired generation schemes will become attractive only when this surplus disappears. This may be hastened by liberalization of the electricity market.

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