Price Cap, Price Control and Income Distribution: The New Energy Bill

The 2009-2010 Energy Bill contains some of the things we knew it would, such as a tax on suppliers to pay for CCS demonstration projects.

It also contains price control powers that are fundamentally anti-market, permit a high degree of government control and go far beyond what we might expect from any government, let alone one needing large-scale investment by energy companies:

• suppliers will be obliged to fund the government’s various fuel poverty schemes in ways, amounts and times government dictates; 
• government will be able to amend supply prices ; 
• and certain generator profits can be prevented.

The powers sought really are quite as extraordinary as this itemisation indicates they may be.

Fuel Poverty Schemes

Suppliers voluntarily participate in the current fuel poverty scheme and provide £150m to those who spend 10%+ of their income on energy.

New schemes will oblige suppliers to participate. These schemes will be flexible about the amount of any benefit (there isn’t a cap on scheme values), its form and how it is provided. The government is looking forward awarding pretty substantial price rebates to consumers.

A particular option foreseen is a scheme in which the fuel poor pay a lower price than others, so others are forced to subsidise them.

This amounts to the right to tax the energy consumer by whatever amount seems to government to be desirable. Further, the tax trigger is fuel poverty, whose level is raised or lowered by government actions.

Price Setting

The second provision involves a dif-ferent form of price setting, activated where prices to consumers are at different levels. Where a supplier charges non-discriminatory different prices to end-users - because some customers buy electricity, some gas and some both gas and electricity and the prices for each are different - the government may set aside the prices and impose its own.

This amounts to the power for government to impose its own view of the right price.

Preventing Excessive Profits

The third form of price control is aimed at preventing generators earning ‘excessive benefits’. When will this happen? When generators choose which plant to run to achieve profits from either bids or offers or make bids to benefit from being a sole provider in an export constraint situation.

In such a circumstance, new licence conditions will be introduced to prohibit this form of bid.

What is an excessive benefit here? We haven’t been told; it has been left for government to determine.

One obvious question to ask at this juncture is whether there is any prospect that this Bill, which has just had its second reading, will become law. There are fifteen pieces of legislation to be dealt with before the latest date Parliament can dissolve (22 May). Of these, three are carried over from the last session and must be dealt with; six others have more obvious electoral importance and there are at most 71 days to achieve this.

Although it cannot be probable the Bill will become law, it is possible.

There are signs the Tories will retain legislation providing them with fiscal tools (they indicate that law they would not introduce they will use because it’s there).

The contradictory nature of the Bill and its investment unintelligence should not lead us to be complacent and assume it could not become law. It could; and it could be hard to get rid of.

(© Sally Barrett-Williams)

Locking the stable door

The likely next government has, it appears, said it will cut Ofgem down to size and repatriate its strategic powers. A announcement of the details is expected some time before Copenhagen (7-18 December).
The new role appears to be an odd combination of ‘pure’ market regulator and consumer protection body. What makes the latter especially odd is that various consumer bodies have only recently been collapsed into one and taking the energy function out of that big brand new consumer body and plugging it back into Ofgem has no obvious rationale. (The Tories do know these bodies have merged, don’t they?)
So far as the ‘pure economic regulator’ bit of the new role is concerned, it seems clear where one might want the slimming regime to focus. Right now Ofgem has on its non-core agenda: Analysing the markets’ capacity to cope with the credit crisis and its reliance on imported gas; Changing the industry rule-making processes to unseat what it calls “vested interests”; Running a new, expensive, unwanted and widely derided offshore transmission regime; Pushing for smart meters; Contributing to “the European energy scene”; and Advising “government how to meet its 2020 target and, along the way, how to mitigate fuel poverty.
Since all this work essentially involves policy or its addendum, it should all be expected to go back to government if Ofgem were restricted to what was, once upon a time, its day job. Is there any chance that will happen?
A fly in the ointment of any retrenchment is the law. Late last August new European Directives came into effect, forcing Member States to arm their energy regulators with a range of powers.
These powers include, predictably, opaquely and vaguely, whatever may be needed to “promote a competitive, secure and environmentally sustainable internal market in electricity’”. If one took that phrase to court to argue that the regulator did or didn’t have the relevant powers, it’s hard to know what the outcome might be. To that extent it is broadly meaningless and is to be understood as just a handwave.
Much more meaningfully, however, the regulators are to have powers to monitor investment in generation capacity and they are to have powers to promote system adequacy. These are substantive powers that go way beyond ‘pure economic regulation’, no matter how broadly one construes the phrase - and several of the items on the regulator’s non-core agenda listed earlier clearly aim at these outcomes. So even though these were once ‘extra-curricular’ activities, they are extra-curricular no more.
Now is not the time to be complaining that with this massively political agenda the regulator is stretching the boundaries of its powers by straying into policy matters. It’s too late; the horse of pure economic loss bolted some time ago and the Tories will have a hard time getting it back in its stable.
That doesn’t mean everything on Ofgem’s agenda must stay. The new government should repeal, immediately, the bizarre, anti-competitive offshore transmission regime that began life this year. And Ofgem should be prohibited from having any kind of role in the market. It should also be pushed back from the more clearly political of its activities.
But trimming the regulator back still leaves it with wider powers than anyone expected. That is something, with whatever bad grace, we have to accept – while blaming our politicians that they have left us with regulation by a body that is substantially free of government direction but is subject to direction by the European Commission. It is a regulatory regime of a kind no-one could possibly have wanted. Although the Tories cannot do what they say they will do, what they can do – what they must do – is devise a regime to ensure that issues of this kind are brought before its own constituents to enable them a say in the matter before they become enshrined in law.


(© Sally Barrett-Williams)

Inappropriate Behaviour

WE ALL KNOW what the legislation says the regulator should be doing but, before saying Ofgem is not doing it, we ought to remind ourselves of its principles to avoid being accused of injustice, or worse. (By the way, when I say 'we' I do not mean only me.)
The regulator's duties are a collection of injunctions and permissions of various kinds scattered throughout the legislation. It must, in whichever of these it does, act in accordance with a pyramid of obligation:

• First it must carry out its duties or exercise its powers so as to achieve X.
• Second it must achieve X in a particular way.
• Third in achieving X it must take account of a number of factors.
• Fourth (sort of hanging on the end) it must also pay attention to guidance.

Thus the main focus for the regulator is doing what it has the power or obligation to do so as to achieve X - even if it has to do it in particular ways while taking account of and paying attention to various matters.
X is, put generally, protecting present and future customers by promoting competition. Given that, it's not surprising that the regulator from time to time seems to come up with yet another hare-brained scheme for introducing a brand new area of competition. Or is it?
Actually it is, and this is the nub of many objections to the regulator's activities: it is only meant to protect customers by promoting competitionwhere it is appropriate to do so.
The regulator cannot appeal to the unalloyed good of competition alone and it cannot claim to have discharged its obligations just because it has brought about yet more competition.
This 'appropriateness test' is a kind of sanity check – and it is one the regulator on occasion spectacularly fails–e.g., its abortive attempt to reform the exit capacity arrangements for gas, or its equally abortive attempts to change the transmission losses regime.
There is a new case of failure to pass the appropriateness test: the 'OFTO' regime, which came into operation this summer and which introduces something the regulator inaptly calls 'competition' into offshore transmission.
If we apply it to the timetable for the Pentland Firth we can see exactly how it works.

• Mid-May: Developers bid for Crown Estate leases for offshore sites.
• End September: Lease options signed. Immediately developers pay National Grid for a connection offer.
• End December: Connection offer made. End January: Developers must have reviewed and negotiated with NG and accepted the offer.
• End February: Apply to Ofgem to join the June tender.
• March-April: The developer pays Ofgem to draft its PIM, populates a data room specified by Ofgem, enters into agreements with Ofgem, pays Ofgem £50,000, provides a guarantee to Ofgem, agrees liability to Ofgem for all other Ofgem costs (including for heat and light).
• June Onward: The developer waits twelve months. It then pays Ofgem yet more and deals with a transmission operator chosen by Ofgem – a choice it has had no role in – before it has firm connection details and price.

Ofgem/DECC have lauded this bizarre arrangement as one to “promote innovation and deliver lower costs”. It is remarkably hard to see the basis for the claim.
They also assert that it will deliver offshore transmission “economically and efficiently”. The basis for this is mysterious.
Worse (if anything could be worse) they appear to have overlooked the funding that will enable offshore schemes to be built. They also appear not to have noticed that the regime affects marine as well as wind. The finance market tells us this is a disaster for any developer lacking a substantial balance sheet and particularly affects marine power.
This is a mockery of better regulation and runs counter to the regulator's primary objectives. What should the regulator be doing? Whatever it is, it is definitely not this.


(© Sally Barrett-Williams)

Black Holes and Illegal Acts

Emissions Trading in Disarray cried the headlines – followed by claims that the European Court’s decision that the Commission unlawfully rejected Poland and Estonia’s National Allocation Plans would undermine the carbon market.
Were they right - or did the instant press overplay its hand?
In 2006 all Member States produced their NAPs to the Commission – which promptly rejected almost every one, imposing its own cap on the number of carbon allowances (EUAs) that could be allocated by each country.
Those who objected the most - Poland, Estonia, Bulgaria, Romania, Hungary, Czech Republic, Lithuania and Latvia – appealed the rejection.
The Court, having heard the first two appeals, has found resoundingly against the Commission. Decisions on the other cases will go the same way.
The main elements of the decisions were:

• Only Member States can draw up a NAP or decide the total quantity of EUAs to be allocated and only they can decide how EUAs are to be distributed.
• The Commission has no power to substitute its own figures and its own cap. In doing so it unlawfully behaves as if it has power to “uniformise” and has a central role in the drafting of NAPs.
• The Commission must give ‘reasoned decisions’ for rejections. In these cases, it rejected the NAPs “on the basis of reasoning which consists only in the evocation of doubts as to the reliability of the data”.

Unsurprisingly, immediately the Court’s decision was published the Commission announced that it would appeal. Any appeal must be on the ground that the Court has erred in law. The chance of a plausible appeal seems slim.
Meantime, the Court decision is in effect. That is to say, the Commission’s rejection of the NAPs no longer stands.
What, then, is the outcome?
Some believe it is now open to Poland and Estonia to resubmit their NAPs with their original EUA figures and that when they do so the market will be “flooded” with EUAs and prices will fall, or even “collapse”.
But if the Commission’s rejection of the NAPs was illegal, they are still theoretically before the Commission for consideration. So no resubmission of NAPs is needed and, contrary to what some have suggested, no redrafting of NAPs is possible.
However, the emissions data have changed. If current emissions data are used, the NAPs will have to be changed (by Poland and Estonia – not by the Commission) and the outcome will be pretty much in line with what the Commission illegally decided.
There is a legal black hole here. If Member States’ NAPs were assessed using data available in 2006, it is arguable that it is not open to the Commission now to assess the NAPs it unlawfully rejected using newer, tougher, data.
And yet, the Directive which determines what the Commission can and cannot do, does not envisage an illegality of the kind found by the Court and it makes no provision for old figures to be used.
Thus the Commission cannot, without injustice, use newer data nor can it, without bending the rules, use old data (inviting legal action by other Member States).
What should it do? It has no options for decisions that are immune from legal challenge except a negotiated ‘fix’ or, if that fails to work, absolutely anything that spins out time and maintains the lower level of EAUs on the market. And that, probably in that order, is what it will do and I predict it will be successful – the Commission is a dab hand at dealing with legal black holes.


(© Sally Barrett-Williams)