The European Commission has just published two opinions on unbundling in response to applications from Transmission Capital and National Grid for certification as Transmission System Operators.
These opinions give real insight into how the Commission interprets the requirements of the Third Package in relation to unbundling and Ofgem’s role as national regulator responsible for approving applications for certification under the EU regime. They also impact the timing of the appointment of Offshore Transmission Owners under the UK OFTO regime and suggest that these first certifications of OFTOs have not gone entirely smoothly.
With the enduring process for OFTO appointments due to kick off in late 2012 for the first time this is a serious concern. The projects going through the enduring regime will not be able to energise and transfer assets to the OFTO until formally licensed and certified as a TSO for EU purposes. Whilst some teething problems in these first applications are probably inevitable – this does fuel concerns that the uncertainty around how quickly Ofgem will be able to move an OFTO preferred bidder through to full licensing and certification will remain a real risk for projects and their funders.
You may also be interested to know that my colleague, Gordon Downie, who heads the Firm’s Regulation and Markets Team, has established a group on LinkedIn designed to facilitate informed discussion on implementation of the Third Package’s unbundling requirements. If you would like to find out more about the group, please see EU 3rd Energy Package - Unbundling Group on LinkedIn.
Under the Third Package requirements, Ofgem is the regulatory body responsible for issuing decisions on the certification of applicants as transmission system operators. The Commission is required to provide Ofgem with an opinion on their draft decision stating whether or not the Commission believes that the draft decision is in line with the requirements of the Third Package. Ofgem are then required to have the utmost regard to that opinion in making their final decision on certification.
The first application relates to requests by National Grid for its electricity transmission company, National Grid Electricity Transmission, its gas transporter company, National Grid Gas and its interconnector company, National Grid Interconnectors to be certified as TSOs under the Third Package. Ofgem has indicated to the Commission that it believes further work needs to be carried out to verify the independence of each of those entities from any interests in supply or generation businesses. In particular:
- The Commission suggests that the UK legislation transposing unbundling into UK law which provides that any generation or supply interests outwith the EEA are not relevant is not correct – the Commission have stated this view before – that interests outwith the EEA could very much still be relevant. However in this case they indicate that as there is no interface at all between the US and UK electricity systems they are satisfied that the National Grid USA generation interests can be ignored.
- Secondly the Commission makes it clear that the Board of National Grid plc interests in power generation or supply activities are highly relevant – they express concern that one non-exec director’s interests in a waste and recycling business in the UK should not simply be discounted by Ofgem on the basis that the individual interests of the director fall below the license threshold for a generation business – the Commission urges Ofgem to look at the aggregate impact of these interests on that director’s ability to be truly independent when advising and deciding on the management decisions of the proposed TSOs.
- In addition, the Commission notes that two other National Grid plc directors hold directorships of businesses active in power production in markets as diverse as Indonesia and Canada – here the Commission acknowledges that the likelihood of any influence being relevant is low but urges Ofgem to form its own view having looked into and understood the nature of the relevant interests.
Offshore Transmission Owners – Transmission Capital
The second application relates to requests by a number of Transmission Capital companies to become TSOs in relation to their appointments as OFTOs for transitional projects such as Robin Rigg, Gunfleet Sands and Barrow. The Commission calls into question the level of analysis carried out by Ofgem on the ultimate owners of the Transmission Capital entities and indicates that full checks are required of the production and supply interests of all of those individuals involved and not simply of those directly involved in the applicant companies.