REGULATORY FRAMEWORK FOR TRANSMISSION LICENSEES UNDER BETTA

OFGEM/DTI CONSULTATION – DECEMBER 2002

A RESPONSE BY SCOTTISH POWER plc

SUMMARY

ScottishPower welcomes the opportunity to comment on this paper. Our views on the issues for consultation are set out below. However, this paper is part of an overall consultation on GB trading arrangements, and our views are therefore dependent on progress in other related areas. We continue to support BETTA as part of a package that includes satisfactory proposals for transmission charging and losses in a GB market, treatment of the restructuring contracts set up in Scotland as part of the privatisation arrangements, and division of responsibilities between the SO and the Transmission Owners (TOs).

This response comprises this summary, followed by a discussion of the key points and thereafter three annexes providing further detailed discussion of volume 2 of the consultation document, volumes 3 and 4, and about governance.

The key points in our response are:

  • BETTA arrangements must be sustainable and enhance overall achievement of transmission licence objectives.
  • The split of the transmission licence is a major change to the regulatory framework for transmission. The magnitude, complexity and significance of this task must not be underestimated if the resulting arrangements are even to maintain, let alone enhance, the overall achievement of the current transmission licence objectives, over the GB transmission businesses as a whole, on an enduring basis.
  • A single transmission licence for all transmission businesses with system operation conditions switched on and off is inappropriate. The SO plays a central role and must be separately licensed from all TOs. A clear split of the SO and the TO licence is required.
  • All TOs must operate on a level playing field and have the same contractual, commercial and technical relationship with the SO, and the same transparency as to SO actions.
  • The pursuit of a single set of trading and transmission arrangements for the whole of GB would be seriously compromised by the different treatment of 132kV in Scotland, leading to similar generators with similar connection arrangements operating in completely different commercial and technical environments.
  • The Licence structure along with the SO/TO code and the contractual interfaces must provide adequate comfort that a robust TO business can continue without loss of control to the SO. These must be backed by robust licence provisions including, for example, auditing requirements.
  • There is a distinct bias towards the SO functions in the consultation process. The proposals to date are focused on the mechanisms needed to allow the SO to carry out its functions and there is a distinct lack of detail in respect of the TO functions. The arrangements required to allow the TOs to carry out their functions in the design, construction and maintenance of the network and connections have not been fully explored.
  • The model proposed whereby the SO acts as a hub is oversimplified. It ignores the important relationships that exist between the TOs and Users with connections to a TOs transmission system. For example (a) the fundamental role of the transmission licensee in respect of the design, (b) the construction of user connections, (c) the ongoing operational relationship between the TOs and the Users, and (d) the requirements for appropriate legal underpinning of these relationships have not been addressed.
  • The case has not been made for a GB CUSC with bilateral connection agreements between the SO and users. ScottishPower believes that connection applications should continue to be submitted to the relevant TO.
  • The framework for the STC is broadly acceptable subject to seeing detailed drafts and the resolution of certain key issues.
  • Without seeing the further detail on the proposed licences and other key documents such as the proposed GB CUSC and Grid Code, it is difficult to assess the suitability of the broad framework. Furthermore until the fundamental issues around separation and independence of the SO’s activities from TO activities are properly addressed, other core and interface documents (such as the STC) will be difficult to progress. As such, the conclusions of this regulatory framework consultation will be pivotal to progress in other areas of BETTA development.
  • ScottishPower would prefer that the overall governance arrangements for BETTA did not follow the current England and Wales model. We are concerned that the continued fragmentation of governance of the various industry codes will be inefficient and will force Ofgem into a counter productive micro-management role.

The opportunity presented by the ETT Bill to revisit the licensing framework established by the 1989 Electricity Act is too valuable to be squandered through seeking the minimal, and unsatisfactory, changes proposed in this consultation document. Boldness is required in setting out the framework to apply for the foreseeable future.

DISCUSSION OF KEY POINTS

  1. A Sustainable BETTA

1.1It is essential that the final BETTA design provides a workable, efficient and enduring regulatory framework, which leads in the long term to increased efficiency and competition, and enhances the overall achievement of each of the transmission licence objectives, over the whole of GB.

1.2The design of the regulatory framework for the SO must have regard to long-term criteria, and should be designed to secure robust long-term regulation of the new structure. We are concerned that the single licence model which is neither fully integrated, nor fully separated will lead to structural tensions that will in time expose its weakness and necessitate further costly reform on an ongoing basis. We suggest that the structure be robustly designed so as to provide certainty for participants in the long term.

2.The split of the Transmission Licence

2.1It is vital to recognise that BETTA is not simply about extending the NETA trading arrangements to Scotland, nor about the yet more complex matter of developing harmonised GB transmission arrangements. Rather, the BETTA proposals also comprise a much more fundamental aspect, namely splitting the current transmission function into two distinct roles – that of system operator (SO) and transmission owner (TO). This split requires major changes to the regulatory framework for transmission. The magnitude, complexity and significance of this task must not be underestimated if the resulting arrangements are even to maintain, let alone enhance, the overall achievement of the current transmission licence objectives, over the GB transmission businesses as a whole, on an enduring basis.

2.2 The regulatory splitting of the transmission function into these separate roles would be a major task even if attempted over a single network and within a single transmission company. The robust separation of transmission functions requires a high level of clarity as to the SO-TO split, to facilitate the creation of formalised interfaces between the SO and TO functions, and the redrafting of industry codes and contracts to reflect the allocation of activities, roles, responsibilities, rights and obligations to the SO and/or TO function under the new regulatory framework. It would also impact on the governance arrangements for the industry codes.

2.3The task of splitting transmission becomes yet more complex when attempting at the same time to convert an arrangement with three separate transmission companies over three respective networks, into one with a single SO over the combined network while retaining TO activities in the respective individual networks. Here it becomes particularly important that there is not only clarity as to the TO-SO split, but also consistency in its application to the respective TOs, in order to ensure that existing efficiencies are maintained and to provide a level playing field for the TOs, and the users, of the respective networks. Further, it is of particular concern to users that the SO-TO separation should not create gaps in liabilities between the SO and the TOs, to the ultimate disadvantage of users trying to progress disputes.

2.4 Hence the BETTA design cannot be considered only in terms of identifying minimal changes to extend the existing England & Wales arrangements to the GB network, since the BETTA proposals also involve fundamental changes to these very arrangements. Further, the SO-TO split under BETTA will apply not only between the Scottish TOs and the SO, but also between the SO and the TO in England & Wales. As such, it is inevitable that these changes should impact on the structure and organisation of NGC, whether or not it is assigned the role of SO.

2.5Further, the SO will have a unique role in the GB market, being central to its establishment and ongoing governance, and to the transmission arrangements. In order to discharge these responsibilities efficiently and equitably, it is essential that the SO is fully independent, not only from generators and suppliers, but also from all transmission licensees.

2.6It is disappointing, therefore, that when seeking to establish the regulatory framework for transmission under BETTA, the consultation takes a narrow view by considering this task in terms of reducing the scope of transmission activities for TOs not affiliated with the SO, whilst considering the SO and affiliated TO as one entity under a single transmission licence. This is seen as a minimal change for E&W (and is also a minimal change for NGC), and is therefore assumed to be a time-efficient solution.

2.7 However, this approach does not recognise the above fundamental differences between the current England & Wales arrangements and the proposed BETTA arrangements. By effectively rendering NGC immune to these changes by allowing it to continue as an integrated transmission company, the proposed approach blurs the distinction between the SO and the TO within England & Wales. Given the central role of the SO in the GB arrangements this is unsatisfactory, and it disadvantages not only Scottish TOs but also their respective users. Further, by reducing the clarity of the SO-TO split the proposed approach actually complicates the BETTA design task, and will potentially lead to a framework which jeopardises the overall achievement of the transmission licence objectives and proves to be unsustainable.

2.8 A better approach would be to seek to develop, as an integral part of the BETTA design task, a model for a transmission regulatory framework appropriate to a functionally split transmission arrangement, with a single SO and three TOs, and each TO treated equitably through having the same contractual relationship, and commercial and technical interfaces, with the SO, and the same level of transparency as to SO actions.

2.9 This equality of treatment is essential if the arrangements are to be effective and sustainable, and it can only be achieved if the SO and the affiliated TO are separate entities, covered by separate licences, and with a formalised interface between them which is consistent with that between the SO and any other TO. It is not sufficient to introduce non-discrimination obligations on the SO in relation to affiliated and non-affiliated TOs, rather the regulatory framework itself must deliver this equality of treatment.

  1. A Single Transmission Licence or Two Separate Licences

3.1There are clear and cogent reasons as to why there should be separate SO and TO licences. One of the policy aims of electricity regulation over the recent years has been to provide whenever possible greater transparency in the electricity market, particularly where monopoly or dominant positions are involved. ScottishPower has welcomed this general approach, and is disappointed by the view that the monopoly role of the SO is of such little significance as to merit a separate licence, far less separate governance. This displays an underestimation of the central monopoly role to be taken by the SO in the market.

3.2While the proposed incumbent of the SO role is NGC there are, apparently, short term attractions in providing for a combined SO/TO Licence. These are fully set out in the consultation paper. However we are unclear as to what objective measures have been employed in reaching this conclusion.

3.3 There is further detailed discussion of the regulatory criteria which we consider are appropriate in Annexe 1 to this response.

  1. Level Playing Field

4.1The regulatory framework must provide a level playing field for TOs, and for the users of their respective networks. The issue of discrimination must be properly addressed if the overall transmission licence objectives are to be achieved.

4.2 We do not believe that the arrangements proposed in the consultation document deal adequately with the potential for the SO to discriminate between TOs. A detailed discussion of the potential for discrimination is set out in Annexe 1 to this response. Licence obligations in relation to non-discrimination and transparency should indeed be applied to the SO where there is more than one TO. Under the proposed arrangements NGC’s TO function would not be a separate entity from the SO function, and as such it would be very difficult to enforce any such obligations and ensure that all TOs have the same level of transparency as to the SO actions. We find this unsatisfactory.

4.3 In our view, the only way to avoid discrimination between TOs is through the introduction of an equitable regulatory framework which ensures that all TOs, including the TO function of NGC, have the same relationship with the SO, through having the same contractual, commercial and technical interface, and the same transparency as to SO actions. This cannot be achieved if the SO and one of the TOs are incorporated within the same legal entity.

4.4 If the arrangements do not provide an equitable treatment for TOs then there is potential for indirect discrimination towards the users of the respective networks, and for these users not to receive the same level of transmission service. There is also potential for reduced efficiency as a result of the SO acting as intermediary between the users and TOs.

4.5There is potential for the SO to favour and promote investments in its affiliated TO network, particularly if the SO is responsible for transmission charging methodologies. Without robust SO-TO separation there is potential to create gaps in liabilities between the SO and the TOs, to the ultimate disadvantage of users trying to progress disputes. Without adequate financial ring fencing regulatory incentive arrangements may be distorted.

  1. Definition of Transmission Assets

5.1 A primary objective of BETTA is to establish a level playing field for the GB Transmission Network. Section 11.2.8 of the Regulatory Impact Assessment, which accompanied the draft ETT Bill, states that “all sources of generation throughout GB will have fair and transparent access to the transmission system”.

5.2 A fundamental difference currently exists between the existing transmission networks in England & Wales and those in Scotland. In E&W, 132kV networks form part of the distribution network, owned and operated by the Distribution Network Operators (such as Manweb). In Scotland, the 132kV network is currently designated as transmission and is consequently owned and operated by the Scottish Transmission licensees.

5.3The pursuit of a single set of trading and transmission arrangements for the whole of GB would be seriously compromised by the different treatment of 132kV in Scotland, leading to similar generators with similar connection arrangements operating in completely different commercial and technical environments. Such different treatment could place 132kV system users in Scotland at a significant disadvantage to their competitors in E&W. For example, a new generation facility in Scotland connecting at 132kV would require to pay transmission charges when providing power in its local market (distribution) area, whereas a similar facility in E&W would not. This might be referred to as the “Solway Firth” question, since the proposed offshore windfarm in the firth could theoretically connect either to the 132kV network in Cumbria, which is owned, operated and priced by a distribution network operator, or to the 132kV network in Dumfries and Galloway which is owned by SPTransmission but will be priced and operated by the GBSO. Such anomalies should be avoided in a unified GB market.

5.4A large number of renewable energy facilities will be required to support the Government’s renewable energy policy. It is likely that some of these facilities will connect to the electricity network at 132kV. Were the 132kV anomaly allowed to persist, new renewable generation in Scotland would be subject to adverse arrangements when compared to an equivalent facility in E&W. Such a scenario is clearly contrary to the principles underlying both BETTA and the Government’s Renewable Energy Policy.

5.5It would therefore make sense to consider re-designating the Scottish 132kV networks from transmission assets to distribution assets. The definition of “high voltage lines” contained within Section 64 of the Electricity Act 1989 would require to be changed to permit a transfer of 132kV assets. Transitional arrangements could be agreed with Ofgem in parallel with the BETTA programme.

  1. Viability of the TO role

6.1Much emphasis has been placed on the obligations to be put upon the TOs to allow the SO to successfully carry out its licence obligations. While this is recognised as important it must surely be of equal importance to place reinforcing conditions into the SO licence to ensure that the SO provides the TOs with all the necessary services, data and information that would allow the TOs to successfully carry out their licence obligations. The arrangements required to allow the TOs to carry out their functions in the design, construction and maintenance of the network and connections have not been fully explored. The ongoing business viability of the TO function has not yet been taken fully into account.

  1. Over-emphasis on the SO Role

7.1 There is a distinct bias towards the SO functions in the consultation process. Emphasis has been placed on the creation of the SO function, whilst there is little discussion on the other new role that will be created namely the Transmission Owner. The existing transmission licence covers all of the functions that are currently carried out by the relevant Transmission licensees. BETTA will by design split this functionality in two creating a SO function and a TO function. It is implicit that the TO will carry out those extant functions which are not otherwise specifically assigned to the SO. Such an approach is flawed and the opportunity to address British transmission arrangements in a holistic manner that ensures a robust, long term framework is being eschewed in favour of an arrangement which expediently fits current circumstances.

  1. SO acting as a hub

8.1 The model proposed whereby the SO acts as a hub is oversimplified. It ignores the important relationships that exist between the TOs and Users with connections to a TOs transmission system. For example (a) the fundamental role of the transmission licensee in respect of the design, (b) the construction of user connections, (c) the ongoing operational relationship between the TOs and the Users, and (d) the requirements for appropriate legal underpinning of these relationships have not been addressed.