The draft Electricity and Gas (Internal Markets) Regulations 2011 ("the Regulations") published last week are designed to implement the EU "Third Package" of energy legislation in Great Britain.  Under the auspices of a requirement upon regulatory authorities to implement any binding decision made by the Agency for Cooperation of Energy Regulators (ACER) or the European Commission contained in the Third Package (Article 37(1)(d) of the Electricity Directive (Article 41(1)(d) of the Gas Directive), the Regulations introduce a significant change to the current licence modification process under the Electricity Act 1989 and the Gas Act 1986.  This is a far-reaching measure that affects all license obligations, not only those introduced by the Third Package.

Background to the purpose of the Regulations

The EU Third Package is designed as a further key step in building an EU internal market in energy and takes legislative action in that respect in a number of areas, notably, unbundling, regulatory oversight and cooperation, network cooperation, transparency and record keeping and finally, access to storage and LNG facilities.  The Third Package consists of five separate legislative instruments and covers both electricity and downstream gas.

Licence modification

DECC's view is that the current regime prevents Ofgem from implementing binding decisions emanating from the EU to the standard required by the Third Package (i.e. in an efficient and expeditious manner).  Instead of the current licence modification process, which requires all modifications to be approved by at least 81% of affected licensees (a "consent and refer" process), DECC proposes that Ofgem is enabled, following suitable consultation, to make licence modifications without consent but subject to an appeals mechanism (a "decide and approve" process).  This process will cover all decisions, not only those covered by the Third Package.

The licensees affected by the modification will have the right to appeal to the Competition Commission (CC).  Under the proposed mechanism, the CC would reach its appeal decision through a re-hearing of the arguments.  The CC will generally be empowered to confirm, quash or remit the decision back to Ofgem.  In price control decisions, the CC will retain the power to substitute a determination with a fresh determination of its own.  An appeal application can also request that the CC suspends the introduction of licence modifications whilst the appeal process is ongoing, and the CC can suspend when they feel there may be a significant cost implication for licence holders.

What does this mean for industry?

The change to the modification process seems unlikely to appeal to industry, which may perceive that Ofgem would be given an enhanced ability to push through unwelcome licence modifications.  Of course, there are safeguards in place: Ofgem will have to consult on licence modifications and follow the principles of better regulation.  In addition, the general principles found under administrative law, such as Wednesbury unreasonableness, will be applicable.  Furthermore decisions can be challenged both under the new proposed appeal mechanism and, where there are grounds for judicial review, in court.

Nevertheless, this proposal represents a significant shift in process, which is worth noting. Under the proposal, the onus will be on industry to take positive action in relation to an unattractive proposal.  This could potentially be both time-consuming and costly and is a significant shift away from the current regime under which Ofgem would have to make out the case for modification in front of the CC.