UK: Government Response On The Implementation Of The EU Third Internal Energy Package

Last week the Department for Energy and Climate Change published the Government's combined response to three consultations on the EU's "Third Package" of energy reforms. The first consultation, issued in July 2010, sought views on its proposals to implement the new requirements of the EU legislation. The second consultation, issued in October 2010, sought views on a new process for Ofgem to make changes to licences and a new appeals process, whilst the third consultation, also issued in October 2010, sought views on proposals for requiring private licence exempt distribution networks to provide third party access to allow customers to switch suppliers. The Government has used the response document to set out its final proposals prior to implementing the legislative and structural changes necessary to implement the Third Package in the UK. This will be of interest to all stakeholders involved in transmission, supply or production activities in the UK's gas and electricity markets.

The Third Package

The Third Package, also known as IME3, consists of two Directives (covering the gas and electricity markets separately), and three Regulations. It consists mainly of measures aimed at separating transmission network operations from supply and production activities, improving investments in key electricity and gas infrastructure and cross-border co-operation, reinforcing the independence of national regulators, and improving consumer rights, in order to achieve greater security of supply and more competitive prices and services.

The response

The response is broken down into five main areas, under which the Government sets out its final proposals:

Consumer protection

The Government proposed to insert a new Licence Condition requiring a new supplier of gas or electricity to give new customers a 14 day calendar period after the contract has been entered into to consider whether they wish to proceed; if the customer does change their mind then the supplier must switch the customer within three weeks. Although the Government recognises that the proposed timescales are tight and may not be met in all cases, it has decided that the inclusion of the three week switching requirement in the customer's contract will become a licence requirement, as well as a licence requirement for suppliers to take reasonable steps to improve their systems and processes to increase switching times. Ofgem will be providing the industry with guidance on steps needed to improve systems and processes.

The role of the National Regulatory Authority (NRA)

Ofgem will be designated as the NRA for Great Britain, and NIAUR as the NRA for Northern Ireland. The Government intends to impose a new duty on Ofgem to ensure that Ofgem's staff and Board members cannot carry out any activity nor have any financial or other interests that might compromise their independence, as well as imposing new formal monitoring duties, together with necessary information gathering powers, on Ofgem, to ensure that Ofgem carries out all the duties listed in Article 37 of the Electricity Directive and Article 41 of the Gas Directive.

Licence Modification Appeals

Although many respondents felt that the current licence modification process is compliant with the Third Package, the Government states that further changes will need to be made to ensure compliance with requirements such as the autonomy and independence of the NRA, and its ability to implement binding decisions of the European Commission. As such the Government intends to replace the current licence modification process with an ex-post right of appeal. The Government maintains that the Competition Commission is best placed to act as the appeal body.

Transmission and Distribution Networks

Full ownership unbundling, the ISO model and the Article 9(9) derogation will be made available in both the electricity and gas sectors, and the ITO model will be made available for gas interconnectors. Certification will be made a requirement of transmission and interconnector licences. The Government has agreed to certain limited exceptions from the general prohibition on persons having interests in both transmission and generation or supply, e.g. a de-minimis provision for small-scale generation and supply, and arrangements that allow testing and limited operation of transmission assets pending transfer to a TSO, such as an OFTO.

Gas Infrastructure

The Government intends to amend the Gas Act 1986 in order to implement the requirements of the Gas Directive. The new key requirements include rules requiring legal and functional separation of gas storage operators from parent and affiliate undertakings involved in production and storage, Ofgem's power to publish criteria regarding exemptions from negotiated third party access, and the requirement for gas storage operators to consult system users when developing commercial conditions for the provision of ancillary services. There will also be changes to the process required for applications for third party access exemptions for new or expanded infrastructure, as well as new confidentiality requirements.

Third party access provisions for gas storage fields will be brought together in the Gas Act 1986 (effectively moving certain provisions from the Petroleum Act 1998), and the regulation of gas storage and LNG facilities will be expanded to cover the whole of the UK continental shelf in order to treat onshore and offshore facilities in the same way.

Requirements on exempt undertakings

The Government's initial proposal, set out in its October 2010 consultation, was to extend the right of third party access to private licence exempt distribution networks. This proposal has now been solidified and the Government intends to make the requirement to provide third party access to such networks "relevant requirements" under the Electricity Act 1989 and the Gas Act 1986, enforceable by Ofgem. This will be accompanied by guidance that will enable exempt undertakings to assess the steps they may need to take to ensure compliance, and guidance on the use of system charging methodology.

The Government has also confirmed that the obligations in the Directives to offer consumer protection measures will also apply to unlicensed energy suppliers.

For further information on the third package, please see our previous law-now here.

To view the Government response and associated consultation documents, please click here.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 19/01/2011.

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