Competition Commission Appeal decision for Modification Proposals 0116V & 0116A Peter Bolitho

Seite 2Thema Datum Bereich Context  CC was pretty deferential to Ofgem.  Short timescales precluded detailed analysis of many issues.  CC assessment based largely on Decision and FIA.  Industry support and BGT intervention essential to make CC listen.  Raising procedural concerns helped sow the seeds of doubt.  Process favours economic rather than legal arguments  CC asked NGG for their views on key points.  Appeal was upheld based on certain key points.  Many points were unproven or no firm conclusion reached.  Cost of appeal thought to be in excess of £1m. Both 0116V and 0116A decisions quashed CC findings useful reference for Review Group but NOT DEFINATIVE

Seite 3Thema Datum Bereich E.ON UK’s Grounds of Appeal  Pre-judgement  Modification 116V had a substantially negative CBA (>£28m)  The decision understates the negative CBA  Incorrect analysis of qualitative benefits  Non-discrimination  Adverse impact on competition

Seite 4Thema Datum Bereich The main issues considered by CC  The Role of GEMA  User Commitment  Interruptibility & Transmission Access Regulation 1775  Flexibility Capacity  Cost- benefit analysis  Procedural matters  Remedies

Seite 5Thema Datum Bereich The Role of GEMA  Consensus on statutory duties and objectives.  Not helpful to consider these in a hierarchical manner.  GEMA does not have power to propose modifications  GEMA’s directions must comply with Transmission Access Regulation 1175/2005.  GEMA does not have a specific duty to promote promote non- discrimination, although this may be a legitimate policy objective in pursuit of GEMAs other objectives.

Seite 6Thema Datum Bereich User Commitment  Consider 4 years rather than 1 year provides more robust basis for investment decisions.  Did not accept the E.ON argument that reliance on user commitments will have a chilling effect on NTS investment.  Barriers to entry not considered material.  CC omitted to consider the flexibility of current ARCA user commitments, e.g. rescheduling ‘first gas’ date.  GEMA mistakenly believed current arrangements allow for capacity reductions on 1 months notice. GEMA’s position upheld

Seite 7Thema Datum Bereich Interruptibility and Transmission Access Regulation 1775  GEMA argued that they could not approve 116A as this was [illegal] as current charges for interruptible services do not reflect the probaility of interruption.  GEMA criticised for not stating this in their Decision. E.ON given permission to amend its grounds of appeal.  E.ON countered stating that the withdrawal of the ‘up-front’ long- term (greater than 1 year) interruptible service under 116V was illegal. CC concluded that neither 116A or 116V were incompatible with the Regulation

Seite 8Thema Datum Bereich Interruptibility  GEMA argued that current firm users cross-subsidise interruptible users as such users are rarely interrupted.  GEMA said there was a risk of a ‘flight from firm’.  E.ON demonstrated that charges for interruptible users cover variable cost and make a contribution to fixed cost and facilitate the efficient use of spare capacity.  E.ON argued that interruptible users do not drive new investment (capacity cost) and no evidence of a ‘flight from firm’.  CC did not conclude the current arrangements are discriminatory or potentially discriminatory. CC conclude that 116V could deliver competition and efficiency However this is contingent on incentives for the release of interruptibe capacity (note this did not form part of 116V)

Seite 9Thema Datum Bereich Flexibility  BGT/E.ON emphasised the additional costs of complexity  E.ON/BGT argue there is no current shortage of flexibility the new arrangements likely to create artificial scarcity.  GEMA argued for pre-emptive action and potential risk of future scarcity.  CC not convinced about the risk of future scarcity, the need for action now and whether benefits claimed will be realised  GEMA based their Decision on two errors of fact namely - GDNs currently purchase NTS flexibility - TCCs are subject to no restrictions in how they vary their offtake.  E.ON argue that flexibility was not a real product.  CC did not grasp the difference between flexibility capacity and linepack.

Seite 10Thema Datum Bereich Flexibility Continued  GEMA criticised for inadequate competition analyisis e.g. competition between a price regulated part (GDN) and an ‘unregulated’ party (shipper).  CC says GDNs and shippers are relevantly similar wrt to offtake capacity as they place the same demands i.e. the same costs on the system. CC erred in its analysis of the benefits of the flexibility product as these may only arise if it become scarce

Seite 11Thema Datum Bereich Cost Benefit analysis  E.ON said the cost pf 116V closer to £120m rather than £28m, that up-front transporter and Irish cost were wrongly omitted (the later contrary to European Law).  BGT identified the cost of flexibility alone to be £45m by comparison between 116V and 116CVV.  E.ON/BGT stated it was implausible that speculative benefits of the flexibility product could offset the negative cost of £45m.  CC concluded that GEMA erred in its approach to transporter costs but it was not unreasonable to ignore Irish costs.  CC said cost benefit analysis of the flexibility product was flawed given inadequate explanation of nature and extent of benefits.  CC considered confusion in the Decision between ‘principles’ of non-discrimination may have led to double counting of benefit. GEMA made a number of errors in its cost-benefit analysis

Seite 12Thema Datum Bereich Cost benefit – CC deferential Para “Unless the regulator has erred in logic or principle, the CC will be slow to overturn the regulator’s quantification of that cost and benefit.”

Seite 13Thema Datum Bereich Procedural matters  E.ON evidence included reference to conditional licence condition, sunset clause and other ‘irregularities’.  Disclosure of GEMA papers showed decision was finely balanced.  Ofgem admitted it was the progenitor of the of the proposal.  However, the CC did not find GEMA had prejudged.  CC expressed concerns about the effectiveness of the modification procedures where GEMA is the effective pregenitor of a proposal given this may give the appearance of pre-judgement. (para )  It found GEMA had failed to have proper regard to the principle under which regulatory activities should be transparent under section 4AA95A) of the Gas Act  Decision was unaffected by errors of fact made by GEMA. Decision not procedurally flawed but misgivings highlighted

Seite 14Thema Datum Bereich Key findings The Role of GEMA General consensus on objectives and duties GEMA does not have a specific duty to promote non- discrimination User Commitment GEMA’s position upheld Interruptibility & Regulation 1775 CC finding inconclusive hence did not rule against GEMA Neither 116A or 116V incompatible with regulation CC conclude that 116V could deliver competition & efficiency benefits but contingent on incentives and capacity release. Flexibility GEMA erred in its analysis benefits given these may only arise with future scarcity of product. GEMA criticised for inadequate competition analysis as between GDNs and shippers. Cost–benefit GEMA erred in (a) its approach to up-front transporter costs and (b) an inadequate explanation of nature and extent of benefits of flexibility product. Also some criticism of possible double counting. Procedural matters GEMA Decision not found to be procedurally flawed. Concerns expressed about GEMA as progenitor of a proposal being perceived to pre-judge. GEMA found not to have satisfied is better regulation duties with respect to transparency.

Seite 15Thema Datum Bereich Remedies  Quashing order for 116V and 116A Decisions.  GEMA and E.ON agree that there were more than one decision.  CC keen not to close-off option for further reform.  CC seem to believe that other proposals 116BV, 116CVV and 116D are back in the table  Note: notices of non-implementation were issued for each of the modification proposals 116A, 116BV, 116CVV and 116D.  Despite the quashing order the Joint Office on behalf of transporters have yet to revoke the implementation notice for 116V.

Seite 16Thema Datum Bereich Suggested matters for further consideration  User commitments must be flexible and allow reservation more than 6 months in advance.  Access arrangements should take into account the different needs of different offtake points whether these are generators or other large users, shippers, GDNs, storage or interconnectors.  Interruption service design must take into account the cost such users place on the system and be compatible with Regulation 1775 Do such users make use of peak capacity? What contribution (if any) do they make to fixed costs? Do such users drive investment? Should the service be offered up-front? What is its function as an anti-hording device (use-it-or-lose-it capacity)? What about back-up supplies?