In May 2008 the European Court of Justice provided its ruling on the Citiworks case. Since then, the operators of licence exempt distribution networks have been expecting fundamental changes to their regulatory regime: These changes are now firmly on the horizon.

Last month the Department of Energy and Climate Change (DECC) issued a consultation document seeking views on the proposed legal changes. These will oblige all operators of transmission and distribution systems to offer third party access.

The new obligation will apply to those who operate private energy networks (including the operators of industrial, commercial and retail parks and centres). It will allow customers connected to those networks to obtain their energy supplies from persons other than the network operators.

Background

The judgment in Citiworks - or Citiworks AG v Sächsisches Staatsministerium für Wirtschaft und Arbeit als Landesregulierungsbehörde (C-439/06) - confirmed that the Electricity Directive (2003/54/EC) and the Gas Directive (2003/55/EC) required all electricity and gas distribution networks to provide third party access. It also clarified that it was not open to member states to exempt certain categories of system.

In Great Britain, the requirements of the Electricity and Gas Directives have primarily been implemented through licence conditions. As a result, they do not apply to the operators of licence exempt networks.

For example, the Electricity (Class Exemptions from the Requirement for a Licence) Order 2001 (the Exemption Order) allows small distribution systems, and distribution systems to which no domestic consumers are connected, to operate without the need for a licence. By so doing, it also exempts them from the need to comply with the Electricity Directive.

As a consequence of the Citiworks judgment the Exemption Order is incompatible with the Electricity Directive, and therefore unlawful. More details on the implications of Citiworks are available in the firm's earlier analysis of the case.

Consultation

DECC's consultation was published on 19 October 2010. The key points made within the proposals are that:

  • the self-certified regime is to be retained;
  • the requirements for providing third party access will be implemented through legislation; and
  • at the same time legislation will be introduced to impose the requirements on licence exempt undertakings contained in the Third Energy Package.

The deadline for responses to the consultation is 23 November 2010. The Government aims to have the required legislation in place by the implementation date for the Third Energy Package on 3 March 2011.

Self-certification

The preservation of the self-certified class exemption regime is good news for licence exempt operators. It means they will continue to avoid the administrative burden and regulatory costs associated with licensing.

Legal changes

The legislation to be amended is contained within the Electricity Act 1989 and the Gas Act 1986. The changes will:

  • oblige operators of exempt distribution networks, when asked, to provide third party energy suppliers with network access in order to supply energy customers;
  • require any network charges to suppliers to be based on a tariff prepared in accordance with a common methodology, to be determined by the Gas and Electricity Markets Authority (Ofgem); and
  • grant Ofgem the relevant powers to gather information from licence exempt entities and take enforcement action against those in breach of the obligations.

Can the obligations be avoided?

The obligation may be avoided in a few cases if the way the network is used falls outside the definition of a 'distribution system'. This would apply if the network is not used to deliver electricity or gas to "energy customers".

DECC suggests this might be the case where energy use is not measured and billed separately, but supplied as part of a package for which the customer pays a global price (particularly where such arrangements are on a short-term basis). Examples provided by DECC are a hotel room or an area of serviced office accommodation - presumably on the basis that persons renting such accommodation are renting the accommodation as a package (and so the "energy customer" is the hotelier, or office provider, itself).

Unfortunately, as the Citiworks case clarified, where the network does meet the definition of a distribution system, the obligation to provide third party access applies regardless of size; there can be no de minimis rule. Also, access must be provided on a non-discriminatory basis; so the network operator cannot favour one supplier, such as itself or an affiliate, over another.

However:

  • an exempt distribution network operator's third party access obligations will only start if a customer informs the operator in writing that the customer wishes to consider offers from alternative suppliers;
  • network operators may refuse third party access requests, but only if such refusal can be justified on the basis of lack of capacity (which is unlikely if the customer is currently being supplied at that capacity by the network operator); and
  • the obligation to charge suppliers on the basis of approved methodologies is weakened in the case of "Closed Distribution Systems". These are defined systems used to distribute electricity or gas in a geographically confined industrial, commercial or shared services site and where either: (i) the user operations or production processes must be integrated for technical, or safety reasons; or (ii) the system must distribute electricity primarily to the owner or operator of the system, or their related undertakings.

Practical implementation

The consultation recognises that the biggest technical changes may well be to the metering arrangements within licence exempt networks. Currently, the only industry recognised settlement meters relating to these networks will be at the boundary between the local licensed network and the private network. On the face of it, the opening of a private network to third party suppliers would require each individual energy customer to have a settlement meter installed.

The consultation paper sets out three potential alternatives to full settlement metering, as follows:

  • Commercial agreement - settlement metering only at the private network boundary. This requires the network operator to account to its supplier for all electricity metered at this point. There would then be a commercial arrangement between the supplier and network operator for the amount the supplier will pay the operator for the electricity consumed by the supplier's customers;
  • 'Deemed' metering - again this applies settlement metering only at the private network boundary. The difference here is that a central administrator is involved, who deems the amount used by each customer and reports the consumption for the purposes of settlement; and
  • Opt-in / opt-out - opt-in customers default to the existing supplier, while opt-out customers can switch to a supplier of their choice and have a full settlement meter installed. This allows the electricity supplied to opt-in customers to be reported to settlements as the amount recorded by the boundary meter, less that recorded by the other settlement meters.

However, it is unclear whether options two and three are compatible with current industry codes. There is also a question mark over how electrical line losses within the private networks would be treated for such purposes.

In conclusion

DECC's consultation paper promises a flexible, low-cost answer to meet the requirements of the Citiworks ruling without imposing an undue regulatory burden on those affected. This will be reassuring to private distribution network operators, but the practical consequences remain to be seen.

Although the consultation does not expressly deal with the matter, there is still nothing to suggest that network operators cannot agree long-term supply contracts with customers - either through a contract, or the lease of land. Such contracts would need to be justified from the perspective of competition law, but are an option for network operators looking to protect their investment in infrastructure.