In March this year, Ofgem published its final two consultation documents relating to the regulation of offshore transmission. Both offshore developers and potential bidders for offshore transmission owner (OFTO) licences have now absorbed those documents and submitted their responses. This article focuses on the tender process for appointment of OFTOs and the key issues as we see them.
There are two distinct categories of offshore project. Firstly, the transitional projects are those that have already been built around the UK or that are at or close to financial close. For these, the OFTO opportunity is to take over and run the assets or take over the contracts/design work as at financial close and build and run the assets. There are likely to be eight such projects in the first round of transitional project tenders (due to commence in June 2009) and possibly a similar number in a second round of transitional projects likely to kick off at some point in 2010.
Secondly, there are the enduring projects - those that may be R1, R2 or R3 or Scottish Territorial Waters sites, which in each case have not been "ready" to fall into the transitional competitions.
- Entry into the tender process
For both transitional and enduring projects, Ofgem requires to be satisfied as to the amount of data available to go into the data room and its accuracy/completeness. We have discussed with Ofgem what level and type of information they require but they have not provided guidance. This means that there is a lack of certainty which impacts on a developer's timetable. The developer cannot predict when they will satisfy this pre-condition. For example, will Ofgem permit a project into the tender process before consent applications for the transmission assets have been submitted? How far forward is the developer expected to be with the identification of land rights needed and their acquisition? Many of the developers commenting on the consultation have asked for greater clarity here.
- Sale and Purchase Agreement negotiation
At the heart of the tender process, there is a key difficulty. The developer who will be the "customer" of the OFTO services has limited involvement in selection. Ofgem is clearly concerned that Ofgem retains the ultimate selection decision. This leads Ofgem to offer only "moderated" access between the developer and the bidder to "discuss" the terms of the specific SPA (the template offered is just that and, for each project, the SPA needs to be individually negotiated to reflect the underlying assets and contracts). There may be some confusion here - we are not convinced that direct bidder/developer negotiation needs to cut across Ofgem's role as the ultimate decision maker.
There can be no substitute for direct contact to ensure that the bidder is clearly and well informed about the assets and contracts bid for and to ensure that any misunderstandings are ironed out. Without this, there must be a risk that bidders will add cost into their bids to deal with unknown or unaddressed risks that could otherwise be fairly apportioned via the negotiation of the SPA.
- Timetable risk
We are concerned that the overall timeline of one year for the appointment of an OFTO is optimistic particularly for enduring projects. In particular, where the OFTO bidder needs to secure third party finance, it is not clear how and when they should engage with funders, how those funders will gain access to data room information and how financial close can therefore be achieved in the space of one month from selection as a preferred bidder.
In addition, Ofgem notes the delay risk to OFTO bidders raising finance and then not drawing down for lengthy periods after appointment. In general, we do not believe the funding aspect of the OFTO bid has been properly catered for. Also, the developers will be moving to financial close themselves over a similar period and there is no recognition of the bigger picture e.g. what is the inter-relationship between OFTO financial close and bidder financial close?
- Preparing the "ground"
The developer is required to progress consents and property rights for the OFTO and the paper comments further on this and suggests sea-bed surveys could also fall into the category of work the developer does and then recovers costs from the OFTO on appointment. We have spoken to Ofgem about other types of cost (e.g. reserving supply chain capacity) but this point (which we know concerns many developers) is not dealt with in the paper. Where the timetable to achieve 2020 requires early ordering of capacity, developers need to know if they can recover any cost associated with that from the OFTO. There is also no clarity as to how and when the "efficiently incurred costs" test will be applied and by whom.
Although these issues remain in relation to the bid process, there is considerably more information and certainty now around how Ofgem proposes to run the process than there was six months ago. Ofgem is now in full implementation mode regarding the first transitional round and has appointed RBC, Ernst + Young and Willis as its advisory team.