By Max Clarke

The Competition Commission (CC), an independent public body, which carries out investigations into mergers, markets and the regulated industries, has provisionally decided to keep in place Undertakings given by Centrica plc and Centrica Storage Ltd (together ‘Centrica’) following Centrica plc’s acquisition in 2002 of the Rough gas storage facility (Rough). Rough is a gas field in the North Sea used to store gas in the summer and deliver it in winter when needed to help meet higher demand. Rough provides the majority of Great Britain’s gas storage for the winter.

The Undertakings were put in place to prevent Centrica from using its ownership of Rough to discriminate between customers of Rough (particularly between itself and its competitors in the retail gas market) in giving access to Rough capacity and to disadvantage other market participants in a number of other ways through its operation of Rough. The CC believed that this would have had the effect of weakening competition, with the likely consequence of higher end-user gas prices than would otherwise have been the case.

In April 2010, Centrica applied to the Office of Fair Trading (OFT) to have the Undertakings reviewed, on the basis that changes in market conditions, particularly the availability of new sources of gas supply that could perform a similar function to Rough, meant that the Undertakings were no longer necessary. Centrica also stated that the introduction of the European Union legislation on the operation of the internal gas market (the EU Third Energy Package) would introduce elements that were incompatible with the operation of the Undertakings and introduce new general safeguards that removed the need for the Undertakings.

In its provisional decision published today at www.competition-commission.org.uk the CC has provisionally decided that the Undertakings should not be released or varied because of changes in market conditions. The CC found that, although there had been significant changes in the pattern of gas supplies to Great Britain, Rough still had market power in the supply of flexible gas (that is, gas supplies able to vary the amount supplied in winter to meet higher demand) and Centrica continued to have a strong position in the retail supply of gas in Great Britain. The CC provisionally concluded that the Undertakings were still required. The CC also provisionally concluded that the EU Third Energy Package did not remove the need for the Undertakings.

However, the CC proposes to consult on a number of possible variations to the Undertakings, which are detailed in a Notice of Possible Variations to the Undertakings which the CC has also published today.

Deputy Chairman of the CC and member of the Centrica Review group, Roger Witcomb, said:

Although its share has fallen, Centrica remains by far the largest domestic gas supplier in the UK. Equally, whilst there has been a significant increase in the available capacity for importing gas to Great Britain we found that we needed to take into account other factors that may determine the amount and cost of the gas delivered from abroad. Our provisional view is that the market changes were not sufficient to warrant the release of the Undertakings. While market conditions have changed, Centrica’s ownership of Rough would still give it significant market power, which it could in particular use to discriminate in giving access to capacity at Rough, to the disadvantage of its competitors in retail gas supply.