GDF and the French government fight over gas prices

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18 July 2012, Gas

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On July 10, 2012 the Council of State ordered the government to revise the price freeze on natural gas prices implemented in October 2011. France's biggest natural gas distributor, GDF Suez, along with ANODE, an association of small independent energy providers, complained about the freeze, which they claimed was against the law. The Council of State agreed, thus setting the scene for future price rises to reflect higher wholesale market costs. GDF Suez may also challenge the government's decision to impose a 2% increase ceiling with effect from August 1, 2012. GDF argues that this limit should be set at 4%.

The Council of State's decision means that prices will be revised retroactively, so that households will need to pay the difference (an estimated E40 per household for the quarter). The government, keen to limit the damage, has said that it will arrange for the increase to be spread in small amounts over an extended timeframe.

Retail and business gas prices have been controlled by the French energy regulator according to a specific formula since 2009. They are revised each quarter according to, among other things, the purchase price of gas on wholesale markets. On January 1, 2012, the government modified the way the formula is calculated for retail customers by increasing the weight of the spot price in the formula to 26%; however, prices still increased by 4.4% in January.

Gas supply in France is dominated by long-term contracts with Norway, Russia, Algeria, and the Netherlands, partly indexed to oil prices. Given the difference between high prices in oil-indexed contracts and low prices on spot markets, GDF Suez has been able to renegotiate long-term contracts to reflect a larger weight from spot prices (25% up from 10%).

In the UK, wholesale purchasing costs also dominate the final price paid by consumers. However, unlike France, gas prices there are determined by suppliers themselves, which may choose to disclose their costs and margins to their customers. In 2011, British Gas had 56% of its costs made up of wholesale purchase costs, 21% from transportation costs, 18% from operating costs and taxes, and 5% from profit. In England and Wales, annual average domestic gas bills have increased some 30% over the 2007-11 period; less than in France.

Domestic gas prices in the UK increased on average by 6.6% over 2010-11 according to the Department of Energy and Climate Change. These price increases, as in France, have been influenced by higher oil prices, but are tempered thanks to a more competitive retail market, in which consumers are able readily to compare the prices offered by gas suppliers.

The comparison between the two markets illustrates the dangers of direct price intervention and setting unreasonable expectations among end consumers in a market so heavily influenced by oil price and geopolitical dynamics.

Source: Datamonitor

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