STROOM, issue 4
This fourth part in a series on the Dutch STROOM Bill focuses on the changes in the tariff regulation of the new Dutch Electricity and Gas Act (the “STROOM Bill”) that was submitted to the Dutch House of Representatives on 4 May 2015.
The tariff regulation aims to motivate system operators to operate efficiently, realize a reasonable yield of return and to fulfil the objectives of the energy legislation. The existing tariff structure reimburses system operators only for their efficient costs, including a reasonable yield of return and is considered to contain a number of flaws. The STROOM Bill amends several aspects of the current tariff regulation to achieve a more transparent and efficient system. In this article we will address the tariff regulation process and the tariff structures, as adjusted by the STROOM Bill.
Flaws of the current system
The current tariff regulations have evolved over the years. The multiple changes and adjustments have led to unexplainable discrepancies between the Gas Act and the Electricity Act 1998 on one hand and between national and European legislation on the other. The tariff regulations are currently fragmented over the various acts, implementing regulations and codes, leading to a lack of transparency and unnecessarily complex tariff regulation procedures, which have resulted in clerical, administrative and regulatory burdens. Additionally, there is a general consensus on the need to: simplify the basic principles for the tariff allocations to different categories of connected parties; remove impediments for renewable and de-central energy production; and create a level playing field for producers. The STROOM Bill also seeks to provide the prerequisites for the tariff regulation of the offshore grid.
Tariff regulation process
Currently tariff regulation is carried out in three steps: (i) the adoption of a “method decision” in which for a period of 3 to 5 years, the method to realize an efficient cost level for system operators is determined; (ii) the adoption of the “X-factor decisions”, in which an annual tariff reduction is determined that aims to result in an efficient cost level; and (iii) the adoption of a yearly “tariff decision” which determines system operators’ tariffs for the following year. The tariff decision is determined by the regulator, the Netherlands Authority for Consumers and Markets (ACM), on the basis of a proposal from the system operator. In this proposal, tariffs are based on the total income from the previous year plus inflation compensation and corrected with the X-factor.
In order to align the Gas Act and the Electricity Act 1998 and achieve a more efficient, transparent and simpler tariff regulation, the STROOM Bill contains the following amendments in relation to the tariff regulation process:
- The X-factor decisions will be replaced by “revenue decisions” that provide more flexibility in calculating costs and savings, simplification because there is no need for subsequent correction and more room to not apply efficiency reductions in relation to costs that cannot be influenced or controlled by the system operators.
- A prolonged regulation period of 4 to 6 years, instead of 3 to 5 years, avoiding objection and appeal proceedings in relation to preceding regulation periods to continue during a new regulation period and providing an extended period of secured revenues for the system operators.
- For each type of system operator there shall be only one method decision, unlike under the current legislation, which requires separate decisions for certain tasks of system operators.
In addition to the tariff regulation process, the STROOM Bill attempts to improve the tariff structure for different system operators by:
- Aligning the terminology of the tariff structures for gas and electricity, where possible, providing more legal certainty.
- Providing the possibility of customized tariffs for the performance of specific tasks in addition to the tariffs determined by the regulator in relation to connection, metering and transportation related tasks. For these tasks there will not be ex ante price determination but only ex post tariff supervision by the regulator.
Entry and exit-points
The transportation tariff will not apply to feeding electricity and (green) gas into the grid. This was already the case for electricity and now results in an identical tariff system for the distribution of both gas and electricity. However, this remains different for gas transmission, where transportation and connection costs may be charged per entry and exit point.
The current cost allocation principles will remain unchanged, with the following principles being codified in the law: the cumulative multi-stage system (cascade systematiek), the principle of cost units (tariefdragers) and the capacity tariff for small scale connections (capaciteitstarief voor aangeslotene met een kleine aansluiting).
In the current system, the transmission operator can only charge for investment costs for projects that have already been put into use, creating an obligation to obtain pre-financing. The new system provides for the possibility to charge capital costs for certain investments that are under construction and reduce interest expenses on debt capital.
It remains to be seen whether the legislator has succeeded in its attempt to combine and streamline the Gas and Electricity Acts to achieve more transparency and modernize the system of tariff regulation. According to the Dutch council of state, combining the Gas and Electricity Act will be complex due to key differences in the sectors, which may result in less accessible regulation. We will find out whether the STROOM Bill provides simpler and better tariff regulation once it enters into force and the first tariff decisions under the new tariff regulation procedure have been made.
The above is intended to provide an overview of important aspects of the tariff regulation of the STROOM Bill and not a complete enumeration of all the changes.