UK to amend ownership unbundling rules in electricity and gas

More flexible approach to operating the third energy package in the UK is in force from 15 January 2015.

On 22 December 2014, Regulations1 were laid before the UK Parliament which provide Ofgem with a discretionary power in appropriate cases to certify a gas or electricity transmission system operator (TSO) even where one (or more) of the five ownership unbundling tests is not passed. To exercise this discretion, Ofgem must be satisfied that the TSO does not have a relationship with the relevant producer or supplier which would lead the TSO to discriminate in favour of it, and that it is appropriate for the test(s) to be treated as if they were passed. In relation to electricity, however, Ofgem will not be able to exercise this discretion where the TSO (or the person controlling, or with a majority shareholding in the TSO) controls or has a majority shareholding in an electricity generator falling within the definition of a relevant producer or supplier where the generating station is (directly) physically connected to the TSO’s transmission system or electricity interconnector. The Regulations take effect on 15 January 2015.

These changes followed the announcement on 17 July 2014 by Edward Davey, the Secretary of State for Energy and Climate Change, of his plans to amend the UK’s implementation of the EU’s unbundling rules to address concerns that investment was being unduly constrained. The Minister specifically identified the rigid unbundling rules as potentially unnecessary barriers to investment in infrastructure.

The unbundling rules are set out in Directives2 in the EU’s Third Energy Package. They prohibit a person who controls either a gas or an electricity TSO from exercising rights, such as appointing a director or voting shares, in an energy producer or supplier, or vice versa. There are also restrictions on voting shares and appointing directors, even when an investment in a TSO does not confer control. The rules implemented a requirement for each TSO to be certified by its national regulator as compliant with the unbundling rules. As part of the process of certification, the national regulator is required to consult the European Commission and take the utmost account of the Commission’s opinion.3

The text of the Directives contains no exceptions to these prohibitions. The prohibitions were implemented in Great Britain4 in similar absolute terms.

Since 2011, the Commission’s approach to unbundling has become clearer as it has issued its opinions to national regulators.  In response to growing frustration from infrastructure investors who argued that the unbundling regime unduly restricted their ability to invest in badly needed infrastructure across the EU, it developed a more pragmatic and purposive approach. It summed up this approach in a Commission working paper5 which addressed the application of the unbundling rules to financial investors when it said:

The objective which the unbundling rules of the Electricity and Gas Directives pursue is the removal of any conflict of interest between generators/producers, suppliers and transmission system operators. It would not be in line with this objective if certification of a TSO were to be refused in cases where it can be clearly demonstrated that there is no incentive for a shareholder in a TSO to influence the TSO’s decision making in order to favour his generation, production and/or supply interest to the detriment of other network users. [Commission’s emphasis]

The Regulations continue to meet the requirements of the EU legislation, but reflect the more purposive approach developed by the Commission. In particular they continue to prevent discrimination by TSOs where that might arise as a consequence of common control, but relax the rules which restrict control where there is “no real likelihood of discrimination”. The obligation under the Directives to consult with the Commission remains.

The new discretionary powers enable Ofgem to assess whether a conflict of interest or risk of discrimination will arise in certification cases, and where it considers that this is not the case, to act flexibly to avoid the unnecessarily chilling effect of the rigid application of the unbundling rules on infrastructure investment in the UK. In exercising its powers of monitoring and review of certification, Ofgem has gained an additional power to stop the clock by issuing an information request. This should ensure that it has access to all necessary information to enable it properly to discharge its monitoring and review functions within the statutory (four month) time frame.

1 2014 No. 3333  The Electricity and Gas (Ownership Unbundling) Regulations 2014

2  See Article 9 of Directive 2009/72/EC (in relation to electricity) and of Directive 2009/73/EC (in relation to gas)

3  See Article 3(2) of Regulation 714/2009/EC (in relation to electricity) and of Regulation 715/2009/EC (in relation to gas)

4  The Electricity and Gas (Internal Markets) Regulations 2011 (SI 2011 No 2704) implemented these provisions by amending the Gas Act 1986 and the Electricity Act 1989

5  Commission Staff Working Document on Ownership Unbundling of 8.5.2013

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