I observed part of the hearing yesterday in the judicial review of Ofgem’s decision to reduce triad benefits for distributed generation by changing the charging base for the triad charging element of transmission network use of system charges from net demand (the power drawn by distribution systems from the transmission system to serve a supplier’s customers) to gross demand (the power drawn from distribution systems by the supplier’s demand customers).
A group of distributed generation operators led by Peak Gen is attacking Ofgem’s decision. Ofgem and SSE are defending the decision. Yesterday’s hearing was to examine a request from the claimants for an interim injunction to delay application of Ofgem’s decision by one year.
The reason that the claimants put forward in favour of the interim injunction was that uncertainty about whether Ofgem’s decision would survive would unduly push up prices in the forthcoming capacity market auction (for capacity available in winter 2018/2019), and might lead to a loss of opportunity for distributed generation projects to succeed in that auction.
The request was refused because there was no evidence of harm to the claimants from uncertainty during the capacity market auction: a higher clearing price in the capacity market auction would, if anything, be beneficial to them; and the claimants did not develop the loss of opportunity point beyond a purely theoretical hypothesis. Against this, granting the injunction would have unnecessarily led to the payment of higher triad benefits, even if the court ended up rejecting the challenge to Ofgem’s decision.
Here are five things that I learned yesterday:
1. The main hearing is scheduled for three days at the end of April 2018
Everyone involved expects that there will be an immediate revision of the TNUoS tariff if Ofgem’s decision is quashed following that hearing. Whilst it would be a mid-year price change, it would not be retrospective because it would affect charges that apply to power flows in the winter only.
2. None of the parties wants the wider industry or the public to know what is going on
This is unsurprising in respect of the claimants, and the large generators on the other side of the argument: most generators will have benefitted financially if the quashing of Ofgem’s decision comes as a surprise, since they will extract higher prices from the capacity market and from forward markets for 2018/2019 winter energy if more market participants expect the Ofgem decision cutting triad benefit to stand. But what is Ofgem’s reason for not doing a better job of informing the industry participants who do not attend hearings in central London about events in open court that have a material impact on Ofgem regulation and on energy markets?
3. There might be something wrong with Beis, the buyer in the capacity market (which seems to have had no involvement in the case)
The judge asked the parties whether a court ruling quashing Ofgem’s decision could be followed by some kind of adjustment to the capacity market auction result so as to reduce the windfall that distributed generators with capacity market contracts would get from the higher capacity market clearing price (assuming no injunction). Both Peak Gen and Ofgem were adamant that no such adjustment would happen. I perceived a note of surprise on the part of the judge when he asked for that position to be confirmed, but maybe I imagined that. Surprise would have been legitimate, as “no adjustment” is stupid. A good buyer of generation capacity in the current circumstances would put a clause in the terms of the auction to provide for sharing of the windfall with customers in the event of a successful judicial review.
4. The High Court is a good place to conduct regulatory business
The judge and the barristers were in control of their material at the right level of detail. Discussion (mainly questions from the judge in this case) quickly highlighted the important issues. There were hardly any irrelevant tangents. And this all happens in public. At the same time, there are problems in terms of access to information: very limited website, need to travel to London and to attend the hearings to find out what is going on. The forum of my dreams would combine the High Court process with a Competition Appeal Tribunal-grade website, including hearing transcripts. Could Ofgem pay for transcripts of hearings in open court and publish them, for information only, on its website?
5. The claim might not as powerful as I had speculated in my piece of 20 November 2017
On that last point, it seems that permission to proceed was granted on two grounds. One was do to with an EU law rule against discrimination. I did not pick up what exact undue discrimination Ofgem was accused of; it might be between distributed generation and behind-the-meter embedded generation. The other ground was about Ofgem’s alleged failure to take proper account of other relevant factors, in particular the distribution charging regime, when approving the change to the transmission charging regime to cut triad benefits.
I have my doubts about the prospects of success on the discrimination ground. I can see no outright discrimination in the sense of basing charges on factors that are totally irrelevant. It seems that the arguments will be about cases where a relevant difference in circumstances leads to a difference in charges that is greater than what can be explained by cost analysis.
But detailed examination of anything as complicated as a network charging system will often reveal such things, especially for charges which I have argued as currently very far from cost-reflectivity.
I am guessing that the judgement will acknowledge Ofgem’s point that the change reduces one kind of undue discrimination, and acknowledge the claimants’ point that it creates another kind of undue discrimination. The parties might try to have an argument about whose discrimination is most harmful to customers, but hopefully the judge will cut that off as irrelevant.
In the end the judge will decide that he does not have either the time or the power to redesign the entire charging system, and the claim on grounds of discrimination will fail.
Ofgem’s failure to take account of interactions with distribution charging, in particular the fact that the change has the effect of introducing a charge on use of distribution systems through the transmission charging regime, looks like a much more promising argument to me, as I said two months ago. Since that line of argument is still alive, I still expect Ofgem to lose.
But I am less confident than I was before I had seen the claimants in action.
Franck Latrémolière is an economics consultant, partner of Reckon LLP and editor of the dcmf.co.uk website.