Competition Commission Appeal decision for Modification Proposals 0116V

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Competition Commission Appeal decision for
Modification Proposals 0116V 0116A

• Peter Bolitho

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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
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E.ON UKs Grounds of Appeal

• Pre-judgement
• Modification 116V had a substantially negative
  CBA (gt28m)
• The decision understates the negative CBA
• Incorrect analysis of qualitative benefits
• Non-discrimination
• Adverse impact on competition

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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

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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
• GEMAs 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.

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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.

GEMAs position upheld
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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
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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)
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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.

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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
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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
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Cost benefit CC deferentialPara
6.156Unless the regulator has erred in logic
or principle, theCC will be slow to overturn the
regulators quantificationof that cost and
benefit.
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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.
  6.192)
• 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 1986.
• Decision was unaffected by errors of fact made by
  GEMA.

Decision not procedurally flawed but misgivings
highlighted
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Key findings
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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.

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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 1775Do 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?