German gas prices for residential customers under attack
Almost every single German distribution company has increased prices for residential customers since August this year, most by more than 10%. German gas prices for residential customers in October 2005 ranged between around 4.80 ct/kWh and 6.70 ct/kWh (all prices including gas tax of 0.55 ct/kWh and 16% German VAT). Protests continue against the level of gas prices and the price increases that started last year – following the first round of significant price increases.
The German customer organisation Bund der Energieverbraucher estimates that up to 500,000 customers are supporting the protest and refuse to pay at least the price increases. The German association of the gas industry BGW thinks that this number is totally exaggerated and says, that according to its own calculations only 20,000 customers refuse payment. In fact customers have not only refused to pay their bills but have also started court action against their local distribution companies.
The key complaint is a lack of price transparency. Distribution companies justify price increases by citing higher oil prices or – if customers are lucky by providing the slightly more in-depth explanation that procurement costs have increased due to oil linked procurement contracts. But they do not tell their customers the share of the procurement cost in the overall cost for the supply of residential customers with gas nor do they tell their customers the extent of the increase of procurement costs. One could argue that this information is economically sensible, but this holds true only in a world of competition. And competition for residential gas customers is non-existent in Germany. Gas companies argue that there is competition between gas and heating oil at least for new customers. And – goes their argument – because prices are the same for both new customers (which either switch from oil to gas or build new houses) and for the existing customers, this means that all gas users profit from this competition.
Gas dominates the market for heating
It is true that gas dominates the market for heating in newly built houses: 77% of the owners of newly built single family houses have chosen gas for heating in 2004 (according to Germany’s statistical office). Only 13% have chosen heating oil. This demonstrates that gas is perhaps too successful and competition between the two fuels happens only to a limited extent. But the key argument remains that gas prices are not controlled directly by gas to gas competition and therefore gas companies must be able to demonstrate that price increases and the price level in general are justified by the cost situation. The German civil law makes it possible to impose this kind of price justification if prices are fixed in a purely one-sided way, for example in a monopoly situation. Gas customers have now started legal action arguing this provision in the German civil law is applicable to gas prices for residential customers. Currently several court cases are underway. The most prominent case in Germany is the complaint of 52 customers of E.ON Hanse at the Landgericht Hamburg against E.ON Hanse. The Hamburg court will not reach a decision before December but the court judge has already signalled that it will force E.ON Hanse to justify its prices in an open and transparent way.
The opinion that the German civil law makes it possible to enforce transparency and perhaps effect a reduction in prices was supported mid-October by a German High Court decision. The German eco power provider Lichtblick – using provisions laid down in German civil law – wanted to force MVV Energie to make the cost calculation of network tariffs transparent. The German High Court found in Lichtblick’s favour, saying that requiring transparency was justified. Although this decision was related to network tariffs, lawyers expect that it will influence the court decisions on gas prices.
As well as this court action, the German anti-trust authorities have launched an investigation into gas prices. The anti-trust authorities and the German Bundeskartellamt have agreed to co-ordinate their activities – bringing further pressure to bear on gas suppliers.
Procurement prices of distribution companies have been increasing steadily since April 2004. Due to the still prevailing long time lag to the development of heating oil prices, the price spikes of summer 2005 won’t affect the procurement prices before January 2006. Then the commodity price in standard procurement contracts of distribution companies will increase by more than 20% to a level of 2.80 ct/kWh (excluding gas tax).
Yet the companies are totally unable to explain in a transparent way for any time of the year the relationship between price developments on the procurement side and the changes of residential prices, because timing and the amount of the increases differ. This creates the suspicion among consumers that the companies are simply generating an unjustifiable profit. Georg Wilhelm Adamowitsch, the secretary of state of the ministry of economics, for example, just recently observed that according to ministry data, prices for residential customers follow procurement prices on the upward trend but not if procurement prices are on a downward trend.
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