Response to DETI's consultation on the implementation of the unbundling provisions of the 2009 Gas Directive (2009/73/EC)
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
Response to DETI’s consultation
on the implementation of the
unbundling provisions of the 2009
Gas Directive (2009/73/EC)
1 February 2010Contents
5.1 Implementation of the models in Northern Ireland .................................................... 5
5.2 Objectives of transmission unbundling ..................................................................... 8
5.3 Assessment of the options ....................................................................................... 8
5.4 Conclusion ............................................................................................................. 11
iThe Bord Gáis Éireann (BGE) Group welcomes the opportunity to provide views on the
appropriate form of unbundling for the Northern Ireland (NI) market. We remain
committed to continued investment in the energy sector in NI. We believe our existing
activities have brought and will continue to bring significant benefits to customers in the
market. As in our approach to other activities, in relation to unbundling our views have
been guided by a desire to deliver the maximum benefits to customers in NI at the
lowest cost.
This submission does not comment on the ownership unbundling option, as views on
ownership are a matter for our primary shareholder, the Minister for Communications,
Energy and Natural Resources. We have therefore restricted ourselves to an
assessment of the ISO and ITO models against a range of criteria which support the
overall objective described above.
Our analysis suggests two key conclusions.
1. The ITO model is the most appropriate to implement in NI (and in RoI). The ITO
model is the most cost effective of the options. It allows far greater incentivisation of
the system operator than the ISO model and thus will deliver, we believe, a
substantially more efficient network. The NIAUR (and the CER in RoI) agree that
the cost effectiveness and incentivisation arguments favour the ITO. Equally, while
they have stated a preference for the ISO model on grounds of perception of
independence, they have also noted that they cannot cite instances of discriminatory
behaviour in the recent past which would imply the need for further unbundling.
There is therefore no evidence that the more costly ISO model will deliver any
significant additional NI customer benefits over the ITO model to compensate for the
extra set up and ongoing costs of operations. The Directive has built many elements
into the ITO model to underpin operator independence.
On this basis, we believe that the ITO model is most consistent with delivering to NI
customers the maximum benefit at lowest cost.
2. The approach adopted in the RoI is of relevance to the decision in NI because
consistency of approach will result in lower costs for NI customers. Specifically, the
mixed outcome – with an ISO in one jurisdiction and an ITO in the other – is one
which we strongly believe should be avoided in the interests of NI customers
because:
It is substantially more expensive than either of the other options. At a minimum
it would necessitate the creation of one or more additional entities, and,
depending on interpretation of the Directive, could require substantial duplication
of equipment, personnel and functions. It would therefore prevent the full
exploitation of cost synergies for NI customers which derive from BGE being
structured optimally to deliver services on an all island basis;
It adds considerably to the complexity of arrangements on the island for shippers
and customers, and is likely to reduce the efficiency of the network; and
It is likely to increase the complexity associated with the development of market
integration initiatives such as Common Arrangements for Gas (CAG).
1The Bord Gáis Éireann (BGE) Group is pleased to have the opportunity to respond to
the Department for Enterprise, Trade and Investment (DETI) consultation on the
implementation of the unbundling provisions of the 2009 Gas Directive. This response
is on behalf of all of our businesses with interests in Northern Ireland (NI), including
BGE (UK)/BGE (Northern Ireland), firmus energy, BGE Networks, BGE Energy and
Gaslink. This response does not purport to represent the views of our primary
shareholder, the Minister for Communications, Energy and Natural Resources.
At the outset, we wish to emphasise that as a Group we remain committed to continued
investment in the NI market, and to providing value for NI consumers. Over the years,
we believe we have helped to deliver benefits to NI customers through significant
infrastructure investment in gas transmission and distribution, through our activities in
competitive markets, and through our involvement in other regulatory processes. Our
activities:
are bringing gas to new areas of NI, and connecting new industrial and domestic
customers to the gas grid;
have diversified the sources of gas to the NI market;
have enhanced security of supply for all NI customers; and
are providing NI customers with a greater choice of supplier in power and gas
markets.
Through Gaslink (an independent subsidiary established in accordance with the 2003
Gas Directive), we are also engaged actively with the NIAUR and the industry on the
arrangements for CAG and those for broader regional and European integration (e.g.
through the codes being developed by the European Network of Transmission System
Operators for Gas).
We are actively seeking to invest further in the energy sector in NI and in particular are
close to finalising arrangements with NIAUR under which the new Kernan to Derryhale
Transmission pipeline will be built. BGE Energy has formed a consortium with
Storenergy (subsidiary of GdF Suez) and the consortium is actively investigating the
potential for gas storage in NI.
We have always sought to operate in a way which promotes choice and competition
while at the same time minimising costs to customers. Where appropriate, therefore,
we have used our infrastructure and capabilities in the Republic of Ireland (RoI) to
deliver services to NI customers more efficiently than would be the case had standalone
operations been required. For example, we provide operational services to Mutual
Energy from our control room in RoI.
In considering the appropriate approach to unbundling, we have continued to apply this
principle – namely to deliver maximum benefits for NI customers at lowest cost. As
supporters of market integration, we also support unbundling models which will best
facilitate co-ordination of operational activities across markets. This is important both in
relation to the island of Ireland, the key linkage to the GB market and also in relation to
EU regional developments.
2Overall the structure of this response follows the questions posed in the consultation,
although we consider them in a slightly different order and have grouped two together.
We therefore set out our view on:
the consultation document description of the existing arrangements in NI (question
(i) from the consultation document);
the description of the available options for transmission unbundling (question (ii));
whether the arrangements for operation of the Belfast Transmission Pipeline (BTP)
have any implications for the unbundling arrangements (question (iv)); and
our preferred transmission unbundling model and the extent to which compliance
requirements in the RoI are relevant to those in NI (questions (iii) and (v)).
We do not wish to raise any other material issues which DETI should take into account
in determining the appropriate unbundling model (question (vi) in the consultation
document).
In line with the consultation document, throughout this response we focus on the
unbundling arrangements for gas transmission activities only, paying specific attention
to the resulting impacts in the NI market.
We broadly agree with the description of the ownership arrangements in NI presented in
the consultation document.
Three companies within the BGE Group conduct licensed gas activities in NI:
BGE (UK) Ltd undertakes gas conveyance and is the owner and operator of the
South North and North West transmission pipelines;
firmus energy distribution is developing the gas distribution networks in 10 towns;
and
firmus energy supply is a licensed gas supply company in these 10 towns and in the
Greater Belfast area.
In the diagram below, we present our view of the arrangements in NI. For
completeness we have included both gas and electricity interests as they are both
relevant to the unbundling provisions of the 2009 Gas Directive.
3Figure 1: Current BGE structure in NI
BGE
Electricity Supply
Licence
BGE (UK) Ltd firmus energy Owenreagh Wind
(distribution) Ltd Farm Ltd BGE/ Storengy
Electricity JV
Gas Conveyance Gas Conveyance
Licence Licence Generation
Licence
firmus energy
(supply) Ltd
Gas Supply
Licence (10 towns)
Legal Entity Gas Supply
Licence (Belfast)
Electricity Supply NIAUR Licence
Licence
Unincorporated
Consortium
There are a number of points to note about the arrangements presented in the diagram
above:
All of our NI network activities are already ringfenced within the Group, in
compliance with the 2003 Directive through a compliance framework directed by
NIAUR;
BGE is undertaking investigative work in relation to the potential for a gas storage
facility in NI. BGE has formed an unincorporated consortium with Storengy (a
company of GdF Suez) to undertake detailed investigative work on the project. It
should be noted these activities are not yet sufficiently advanced to come within the
remit of the 2009 Directive; and
Following the acquisition of SWS Natural Resources in December 2009, three
companies in the BGE Group hold electricity licences in NI. Owenreagh Wind Farm
Ltd (a subsidiary of SWS) holds an electricity generation licence and BGE Energy
and firmus energy supply both hold electricity supply licences.
In addition to the structures shown above, BGE (via Bord Gáis Networks) provides
services to Mutual Energy’s network. In particular, Bord Gais Networks provides
monitoring services to Mutual Energy – an approach which is cost effective for NI
customers.
We believe that the consultation document covers all the options for transmission
unbundling. Essentially:
as ownership unbundled entities, BGTL and Mutual Energy already comply with the
requirements of the Directive, and neither the ITO or ISO models are relevant; and
4as part of a Vertically Integrated Undertaking (VIU), all three of the options set out in
the Directive are in principle available for BGE (UK).
In line with the overall objective we set out above, we are supportive of arrangements
which leverage existing infrastructure, scale and capabilities to provide benefits to NI
customers at low cost, provided these arrangements are consistent with the
requirements of the Directive.
We do not believe the contracted out operating arrangements have any implications for
transmission unbundling requirements.
In this section, we set out our preferred unbundling model and our supporting rationale
together with our views on the extent to which compliance requirements in the RoI are
relevant to those in NI. We set out:
the way in which the ISO and ITO models could be implemented in NI;
our objectives and criteria for assessing transmission unbundling models; and
our assessment of the ISO and ITO models against these criteria;
Conclusion.
This submission does not comment on ownership unbundling options, as views on
ownership are a matter for our primary shareholder, the Minister for Communications,
Energy and Natural Resources. We have therefore restricted ourselves to an
assessment of the ISO and ITO models against a range of criteria which support the
overall objective described above.
5.1 Implementation of the models in Northern Ireland
We provide an overview of our interpretation of the ISO and ITO models as they could
be implemented in NI below. We note that the detail of the implementation of each
model is something that would have to be considered following feedback from DETI.
Therefore, these models should be taken as our current view of how the arrangements
may look – but they are subject to update and development following in particular
discussions with DETI.
5Figure 2: ISO Model – possible BGE structure in Northern Ireland
ISO Board BGE Board
TSO NI BGE
TSO Licence
AO Board
BGE Energy
BG Networks
Gas Supply
TAO Licence Elec Supply NI
Gas Distn
ElecGen
BGE(UK) Board
BGÉ (UK)
NIAUR Licence
The key features of the ISO model illustrated above are that:
BGE UK, as owner of the NI pipelines, would become a subsidiary of BG Networks,
under a new BG Networks Asset Owner company which would manage all of BGE
gas transmission assets in NI, RoI, GB and the Isle of Man;
A new ISO NI body would be designated upon proposal by the Asset Owner, as
provided for under the Directive. Subject to certification by NIAUR, this body would
then be licensed as the ISO in NI;
BGE’s NI assets would thus be operated by the ISO;
The NIAUR would exercise regulatory control through NI licences held by BG
Networks and the ISO; and
We would envisage that firmus energy would remain a subsidiary of BGE Energy,
and would continue to avail of services from BG Networks and from BGE corporate
centre where relevant, subject to NIAUR approval.
NIAUR will need to consider changes to its current licence structure, to account for the
fact that it will need to issue separate licences to the ISO, as Transmission System
Operator (TSO) NI, and to BG Networks as Transmission Asset Owner NI. Moreover,
NIAUR will have to consider how the interface between the TAO and the TSO might be
regulated – for example, experience from the electricity sector suggests that there may
be considerable complexity in agreeing an infrastructure agreement between the asset
owners and system operators.
6Figure 3: ITO model – BGE structures in Northern Ireland
BGE Board
BGE
ITO
supervisory BGE Energy
body
Gas Supply
Elec Supply NI
ITO Board Gas Distn
ElecGen
BGE ITO
Gas Conveyance Licence
BGE(UK) Board
BGÉ (UK)
NIAUR Licence
The key features of the ITO model are that:
BGE UK, asset owner of the NI pipelines, would become a subsidiary of the newly
formed ITO. The BGE ITO would manage all of BGE gas transmission assets in NI,
RoI, GB and Isle of Man in a fully ring fenced EU Third Directive compliant entity
incorporating;
o Separate premises and branding;
o An ITO Supervisory Body would be created: The Supervisory Body’s remit is
to make decisions only on matters that may significantly impact the return on
assets, including the approval of the annual and longer-term financial plans;
the level of indebtedness of the ITO and the amount of dividends distributed
to shareholders. This body would have no role in the day-to-day management
of the ITO. It appoints the ITO Board. The Supervisory Body would have
50%+1 members from the VIU (BGE);
o The ITO would have its own Board which would be the primary corporate
governance body for the ITO, responsible for developing, operating and
maintaining the network. The Regulator in NI would have the power to object
to appointments/terminations of all directors and executive management of
the ITO (as would the CER in RoI) on the basis set out in the Directive;
o The majority of the ITO board members, managers, and their direct reports
would have no connection with the VIU (BGE) for 3 years prior to
appointment. The remaining minority would have no connection with the VIU
for at least 6 months prior to appointment;
o A Compliance Officer would be appointed – the appointment would be subject
to Regulatory approval in NI (and in RoI), in accordance with the Directive.
The Compliance Officer, with a reporting line to the Regulatory Authorities
(RAs), would monitor the compliance programme for the ITO; and
7We would envisage that firmus energy would remain a subsidiary of BGE Energy,
with the ITO providing some services to firmus. Our interpretation of the Directive is
that the provision of services to firmus would be acceptable provided the services
were offered on the same terms to other parties, and provided the arrangements
were approved by the Regulator.
Under the ITO model, we believe the potential changes to the NIAUR’s licensing regime
may be less extensive, because there would be no need to split the existing gas
conveyance licence into an asset owner and asset operator licence (though conditions
of the existing conveyance licence might still require modification).
5.2 Objectives of transmission unbundling
As we noted at the outset, we believe the key objective in relation to the choice of
unbundling model is to secure maximum benefit for NI customers at the lowest cost.
We have considered criteria for unbundling models from the perspective of this overall
objective.
The Regulators, both in NI and in RoI, have previously set out a number of criteria
which we have drawn on.
The most important of these we believe relates to cost and complexity. An efficient set
of unbundling arrangements would:
ensure cost effectiveness, in other words not resulting in significant unnecessary
additional costs which would be borne by NI customers;
ensure the transmission system is operated and developed in an optimal manner, or
put another way, making sure that decisions are taken in relation to the transmission
system which are efficient for the NI system and market as a whole; and
facilitate the integration of markets in a simple and effective manner.
We believe the unbundling models should also be assessed against criteria relating to
customer friendliness. In particular, the chosen model should inspire confidence among
gas shippers and customers that the system will be operated on a non-discriminatory
basis and ensure low costs of operation for shippers and customers (e.g. minimum
number of interactions, simple channels of communication etc.)
Finally, we believe the unbundling model should promote transparency. A transparent
set of arrangements would ensure that the actions and decisions of transmission
operators are both visible and understandable.
We take it as given that any implementation will be carried out in a manner consistent
with EU legislation and that NIAUR’s certification role will ensure that this is the case.
5.3 Assessment of the options
In assessing the options for unbundling, we have considered three possible outcomes:
an ITO outcome: an ITO model is implemented in NI and in the RoI;
an ISO outcome: an ISO model is implemented in NI and in the RoI; and
a mixed outcome: an ITO model is implemented in one jurisdiction, and an ISO
model is implemented in the other jurisdiction
8In relation to cost effectiveness, we have undertaken a detailed review of the likely
impact on total network costs of the ISO and ITO models, which has been shared with
the RAs in NI and RoI, and with DETI. The conclusion from that work is that the ITO
model is the most cost effective. Specifically, we found that the ISO model is
associated with both higher set up costs and higher ongoing operating costs. NIAUR
has recognised that the ISO option is likely to be more expensive than ITO (as has the
CER in RoI).
A mixed outcome (either an ISO in NI and an ITO in RoI or vice versa) would give rise
to even greater costs than were the ISO model to be implemented in both jurisdictions.
As an example if an ISO were adopted in NI and an ITO put in place in RoI, this would
require at least the following for compliance:
the creation of one or more separate legal entities;
separate premises and branding for that entity or entities; and
a reasonable level of management capacity to manage contracts, and carry out
network planning and investment functions.
The extent of cost increase depends critically on the interpretation of this last point. It is
not clear that the Directive would permit, say, an ISO in NI to subcontract transmission
operations to an ITO in RoI. In such a scenario, if the ISO was required to employ
resources directly, this would imply an order of magnitude increase in costs (as a result
of the need to develop and operate separate control rooms, IT infrastructure etc.)
These increased costs would fall in the first instance on NI gas consumers, as they
would bear the full incremental costs associated with the setting up of the ISO.
Similarly, if an ITO was to be put in place in NI and an ISO was put in place in RoI, there
would also be significant incremental costs borne by NI customers as the ITO itself
would need to establish all capabilities required to operate the network.
In relation to the operation of the network in an optimal manner, there are also
advantages of the ITO model over the ISO.
During the debate on the Third Energy Package, and in energy sector restructuring
programmes internationally, it has been widely recognised that ISOs are extremely
difficult to incentivise financially. This is because they have little or no asset return
which can be reduced in the event of poor performance.
Given the scope of activities which an ISO would undertake, the potentially material
operating costs of the organisation and the capital investment programme it would
oversee, we believe this is a significant regulatory and policy issue. Moreover, the RAs,
NIAUR and CER, have recognised that it can be very difficult or even impossible to give
any meaningful incentives to an ISO, as opposed to an ITO. They therefore recognise it
is difficult to ensure that an ISO will behave in a more commercial or efficient manner or
to take on some reasonable degree of risk over a network that it does not own.
In relation to market integration, we believe that co-ordination of system operation can
be achieved with the common implementation of either an ISO or ITO model in both RoI
and NI, while at the same time providing sufficient comfort that each jurisdiction retains
sufficient control over the management and development of their networks.
9However, were a different model to be implemented in each jurisdiction as a result of
independent government decisions, we believe co-ordinated arrangements would be
more complex to implement – not least because there would be a greater number of
organisations with different governance structures to co-ordinate. This would increase
the overall cost of regulation, and potentially also the costs of operating in the integrated
markets.
We therefore do not believe this would be in the interests of NI customers.
In relation to the extent to which ISO or ITO arrangements inspire confidence among
industry participants and customers, the RAs have stated a preference for the ISO
model. However, they have also recognised that they cannot cite instances of
discriminatory behaviour by BGE in the recent past to prove that an ITO model would
inevitably give rise to such discrimination. They have made clear that on this basis,
they could rely on BGE to carry on all its activities and take action if they discovered
evidence of discrimination.
It is also worth noting in this context that the development of the RoI gas market has
taken place within the context of a ringfenced or legally separated transmission operator
(Gaslink) set up to be in compliance with the 2nd Directive. These unbundling
arrangements have enabled a very active market:
multiple shippers – 17 at present, with multiple shippers active in every sector of the
market;
material volumes being shipped by independent players – accounting for 62% of
total gas sold in RoI, and more than 70% in some segments; and
growing volumes of customers changing their suppliers – the past 12 months have
been the busiest to date.
The Third Energy Package ISO and ITO models both go significantly further, in terms of
unbundling requirements, than the current arrangements in RoI. The EU legislative
process has built many elements into the ITO model to underpin operator
independence. Therefore we believe either could support the development of a
competitive market.
We note that, to the extent that a mixed model would create greater complexity in
relation to market integration, it would potentially increase costs for shippers active in
the market, as they may have more parties with which to interface.
Finally, in relation to transparency, our review of the ISO and ITO models suggests
that both are equally capable of providing transparency to all market participants.
However, to the extent that a mixed model would create complexity in relation to roles
and responsibilities of operators, it may reduce transparency. The responsibility and
rationale for particular decisions or actions may be difficult for market participants to
understand.
105.4 Conclusion
Our assessment points to two conclusions, which answer the questions raised in the
consultation document.
1. The ITO model is the most appropriate to implement in NI (and in RoI). The ITO
model is the most cost effective of the options. It allows far greater incentivisation of
the system operator than the ISO model and thus will deliver, we believe, a
substantially more efficient network. The NIAUR (and the CER in RoI) agree that
the cost effectiveness and incentivisation arguments favour the ITO. Equally, while
they have stated a preference for the ISO model on grounds of perception of
independence, they have also noted that they cannot cite instances of discriminatory
behaviour in the recent past which would imply the need for further unbundling.
There is therefore no evidence that the more costly ISO model will deliver any
significant additional NI customer benefits over the ITO model to compensate for the
extra set up and ongoing costs of operations. The Directive has built many elements
into the ITO model to underpin operator independence.
On this basis, we believe that the ITO model is most consistent with delivering to NI
customers the maximum benefit at lowest cost.
2. The approach adopted in the RoI is of relevance for the decision in NI because
consistency of approach will result in lower costs for NI customers. Specifically, the
mixed outcome – with an ISO in one jurisdiction and an ITO in the other – is one
which we strongly believe should be avoided in the interests of NI customers
because:
It is substantially more expensive than either of the other options. At a minimum
it would necessitate the creation of one or more additional entities, and,
depending on interpretation of the Directive, could require substantial duplication
of equipment, personnel and functions. It would therefore prevent the full
exploitation of cost synergies for NI customers which derive from BGE being
structured optimally to deliver services on an all island basis;
It adds considerably to the complexity of arrangements on the island for shippers
and customers, and is likely to reduce the efficiency of the network; and
It is likely to increase the complexity associated with the development of market
integration initiatives such as CAG.
11You can also read
