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Role of the Public Electricity Supplier and the Supplier of Last Resort in the Deregulated Electricity Market

DOCUMENT TYPE:

Decision Paper

REFERENCE:

CER/11/060

DATE PUBLISHED:

13th May 2011

QUERIES TO: [email protected]

The Commission for Energy Regulation, The Exchange, Belgard Square North, Tallaght, Dublin 24. www.cer.ie

http://www.cer.ie/

Role of the PES and SoLR in the Deregulated Electricity Market – CER/11/060 13th May 2011

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CER – Information Page

Abstract: The CER has reviewed the duties and obligations of the PES and the SoLR and consulted with stakeholders on how they will apply in the deregulated market. This decision paper details the outcome of that process and the approach to the regulation of these roles that will be adopted in the deregulated market.

Target Audience: This paper is for the attention of electricity suppliers, members of the public and all interested parties.

Related Documents:

CER/11/039: Role of the PES and SoLR in the Deregulated Electricity Market

CER 10/058: Review of the Regulatory Framework for the Retail Electricity Market: Roadmap to Deregulation, Decision Paper.

CER 07/171: Supplier of Last Resort in Electricity under the Single Electricity Market, Decision paper

CER/06/006: Supplier of Last Resort in Electricity Decision Paper & Response to Comments.

For further information on this Decision Paper, please contact Seán mac an Bhaird ([email protected]) at the CER.

•%09CER%2010/058:%20Review%20of%20the%20Regulatory%20Framework%20for%20the%20Retail%20Electricity%20Market:%20Roadmap%20to%20Deregulation,%20Decision%20Paper.

http://www.cer.ie/en/electricity-retail-market-decision-documents.aspx?article=df783f6c-1e9f-436e-a2e0-d89edf4daa9b

http://www.cer.ie/en/electricity-retail-market-decision-documents.aspx?article=4da43bdc-8b40-4fb0-8608-56b73e64ea59

http://www.cer.ie/en/electricity-retail-market-decision-documents.aspx?article=16c84e5c-3be0-4f77-9347-44248aab9a13


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Executive Summary With the full deregulation of the retail market Electric Ireland (formerly ESB Customer Supply and ESB Independent Energy) tariffs are no longer regulated by the CER. In 2010, the CER awarded Electric Ireland a new licence under which it could serve its unregulated business customers and with the deregulation of the domestic market, residential customers are also supplied as part of Electric Ireland‟s deregulated customer base. Notwithstanding market deregulation, Electric Ireland continues to be licensed as the Public Electricity Supplier (PES) which places very specific duties and obligations on it beyond that of a generic supply licence. In parallel, Electric Ireland is also currently designated as the Supplier of Last Resort (SoLR), and as such has specific duties and obligations in the event of a supplier withdrawal or market failure. The aim of this review was to explore how the PES and SoLR obligations will continue to be met in parallel with Electric Ireland‟s operation as an unregulated supplier in the competitive market. As noted in the consultation paper a change to primary legislation is required to remove the stipulation in S.I. No. 60 of 2005 that only ESB, “the Board” will be designated as the PES. Until such time as these changes are provided for, the role of the PES, and SoLR will remain with Electric Ireland. In the first instance, the CER considered a number of options for how the requirement for universal service could be provided for in a fully deregulated market. Taking account of the need to establish a fairer method of ensuring universal service provision for customers in a competitive market than the designation of a single supplier, the CER looked to other jurisdictions where regulators have imposed a duty to supply on all suppliers in the market. This approach was broadly supported by respondents to the consultation. In considering what customers should be eligible to avail of this provision, the CER does not agree with suppliers that a duty to supply should be restricted to the domestic market only. There are a large number of SMEs within the Irish economy, particularly at what would be considered the lower end of the SME range that have relatively light consumption demands and therefore they are subject to similar pricing structures as domestics i.e. they do not attract MIC charges. In practice many small business customers are similar to domestic customers and small business customers often exhibit the same behaviours as domestic customers with regard to their engagement with the market in terms of shopping around and switching supplier. As such the CER has made the following decision with respect to the provision of universal service in the deregulated market: The CER has decided that all supply licences will include a duty to supply

for domestic and small business (DG5) customers.


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The CER will monitor how suppliers discharge their obligations with respect to the provision of universal service and tariffs offered.

Having concluded that the key obligation to ensure universal service i.e. the duty to supply should be incorporated as a condition of all supplier licences in the competitive market, the issue of offering the roles of the PES and the SoLR as a package falls away. As such the CER considered respondents‟ comments to the remaining issues of how to designate and administer the role of the SoLR. The CER notes that there was broad agreement that this should be implemented through a competitive process amongst suppliers and there were varying views on the optimum solution. The CER has made the following decision with respect to the designation and administration of the SoLR in the deregulated market: The CER has decided that the role of the SoLR should be offered to

market in a competitive process.

The CER has decided that the SoLR should be designated at the time of the event - subject to a competitive process. The CER will consult further on the detailed process for supplier eligibility and selection.

The CER has decided that costs of the SoLR event should be socialised

as per Option 1 of the consultation. The CER will consult further on the detail of the cost recovery mechanism.

The CER has decided that all supply licences will contain an obligation to

serve as the SoLR, where directed by the CER. The CER will consult further on the circumstances under which such a direction will be issued.

The CER will publish a review of supply licences in June that will propose amendments to all supply licences to formally incorporate the duty to supply and SoLR obligations. The CER will issue a further consultation on the details of the SoLR selection process and cost recovery mechanism.


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Table of Contents

Executive Summary ........................................................................................................ 3 1.0 Introduction ............................................................................................................... 6

1.1 The Commission for Energy Regulation ................................................................. 6 1.2 Purpose of this paper ............................................................................................. 6 1.3 Comments Received .............................................................................................. 6 1.4 Structure of this paper ............................................................................................ 7

2.0 Review of Responses to Consultation ....................................................................... 8 2.1 Introduction ............................................................................................................ 8 2.2 Regulation of the PES ............................................................................................ 8

2.2.1 Respondents Comments ................................................................................. 8 2.2.2 CER‟s Response to Comments ..................................................................... 10 2.2.3 CER‟s Decision ............................................................................................. 11

2.3 Offering the Roles to the Market .......................................................................... 11 2.3.1 Respondent‟s Comments .............................................................................. 11 2.3.2 CER‟s Response to Comments ..................................................................... 13 2.3.3 CER‟s Decision ............................................................................................. 14

2.4 Designation of the PES and SoLR ....................................................................... 14 2.4.1 Respondent‟s Comments .............................................................................. 14 2.4.2 CER‟s Response to Comments ..................................................................... 15 2.4.3 CER‟s Decision ............................................................................................. 15 2.4.4 Respondent‟s Comments .............................................................................. 15 2.4.5 CER‟s Response to Comments ..................................................................... 16 2.4.6 CER‟s Decision ............................................................................................. 17

2.5 Pricing Options for the Designation of PES and SoLR ......................................... 17 2.5.1 Respondent‟s Comments .............................................................................. 17 2.5.2 CER‟s Response to Comments ..................................................................... 18 2.5.3 CER‟s Decision ............................................................................................. 18

2.6 Pricing Options for the Designation of PES and SoLR ......................................... 18 2.6.1 Respondent‟s Comments .............................................................................. 19 2.6.2 CER‟s Response to Comments ..................................................................... 20 2.6.3 CER‟s Decision ............................................................................................. 21 2.6.3 Respondent‟s Comments .............................................................................. 21 2.6.4 CER‟s Response to Comments ..................................................................... 22 2.6.5 CER‟s Decision ............................................................................................. 22

2.7 Other Comments ................................................................................................. 22 2.7.1 CER‟s Response to Comments ..................................................................... 23

3.0 Conclusions and Next Steps .................................................................................... 25 3.1 Conclusions ......................................................................................................... 25 3.2 Next Steps ........................................................................................................... 25

Annex A List of Additional Conditions ............................................................................ 26 Annex B – List of Decisions Outlined in this Paper ........................................................ 27


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1.0 Introduction

1.1 The Commission for Energy Regulation

The Commission for Energy Regulation („the CER‟) is the independent body responsible for overseeing the regulation of Ireland's electricity and gas sectors. The CER was initially established and granted regulatory powers over the electricity market under the Electricity Regulation Act 1999. The enactment of the Gas (Interim) (Regulation) Act 2002 expanded the CER‟s jurisdiction to include regulation of the natural gas market, while the Energy (Miscellaneous Provisions) Act 2006 granted the CER powers to regulate electrical contractors with respect to safety, to regulate natural gas undertakings involved in the transmission, distribution, storage, supply and shipping of gas and to regulate natural gas installers with respect to safety. The Electricity Regulation Amendment (SEM) Act 2007 outlined the CER‟s functions in relation to the Single Electricity Market (SEM) for the island of Ireland. This market is regulated by the CER and the Northern Ireland Utility Regulator (UR). The CER is working to ensure that consumers benefit from regulation and the introduction of competition in the energy sector.

1.2 Purpose of this paper

On March 1st 2011, the CER published a consultation paper on the roles of the Public Electricity Supplier (PES) and the Supplier of Last Resort (SoLR) in the deregulated electricity market. The consultation sought respondents‟ views on how the duties and obligations of these roles would be met in parallel with Electric Ireland‟s operation as an unregulated supplier from April 4th 2011. The CER has carried out a public consultation on this topic and has considered fully the comments and submissions received. The purpose of this paper is to detail the CER‟s decisions with regard to the roles of the PES and SoLR in the deregulated electricity market. In doing such, the paper also summarises and considers the responses received during the consultation process. The aim of the decision is to ensure that the roles are discharged in keeping with developments in competition and the transition to full deregulation.

1.3 Comments Received

The CER received 5 submissions to the Consultation Paper (CER/11/039). Submissions were received from the following organisations or individuals:

Airtricity

Bord Gáis Energy

Electric Ireland

Endesa Ireland

Energia


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On 13th May 2011, the CER published each of the responses received.

1.4 Structure of this paper

Sections 2.0 Review of Responses to consultation and CER decisions.

Section 3.0 Conclusions & Next Steps.

Annex A List of Additional Licence Conditions

Annex B List of Decision outlined in this paper.


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2.0 Review of Responses to Consultation

2.1 Introduction

As the PES, Electric Ireland has very specific duties and obligations for regulated services beyond those of a generic supply licence. In parallel, Electric Ireland is also currently designated as the Supplier of Last Resort (SoLR), and as such has specific duties and obligations in the event of a supplier withdrawal or market failure. The consultation paper has reviewed the duties and obligations of the PES and SoLR and considered how they will endure in a fully deregulated competitive market. The aim of the review is to ensure that the roles are discharged in keeping with developments in competition and full deregulation. The proposals put forth in the consultation are discussed in turn in the following sections. Respondents‟ views are outlined and considered along with the CER‟s decisions.

2.2 Regulation of the PES

Q1. Respondents are invited to comment on the proposal that all supply licences should have a duty to supply. Should this apply to all customers or domestic only? Outline reasons for agreement or disagreement. Are there alternative options which should be considered?

2.2.1 Respondents Comments

Bord Gáis Energy stated that “in a competitive market all suppliers should have a duty to offer supply so that no one supplier wins customers by default and that a customer is never left without an offer of supply.” Furthermore they noted that all suppliers have a duty to offer supply in GB. Endesa stated that if the PES duty is to be imposed on all suppliers it should be limited to those suppliers serving the domestic market. Electric Ireland is of the “view is that the concept of a PES is not compatible with a fully deregulated market. Electric Ireland acknowledged that some specific PES obligations will need to be retained in the interests of customer protection and in its submission proposed that such obligations should be incorporated as conditions in the generic electricity supply licence and thus remove the requirement to have an enduring designated PES role in a deregulated market. Electric Ireland proposed that all suppliers should be obliged to observe the requirements that specifically relate to the Universal Service Obligation (SI 60 2005 Regulation 18) and the duty of Non-discrimination (SI 60 2005 Regulation 20). However, this should also apply to domestic customers only.


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In its response, Electric Ireland outlined the 5 specific PES Regulations in the primary legislation (SI 60 of 2005) that have been transposed into the Interim PES Licence conditions. It noted that with the full deregulation of the electricity market from 4th April 2011 ESB Electric Ireland will serve its customers by way of a licence granted under Section 14(1)(b) of the Electricity Regulations Act 1999 (as amended) rather than by way of the Interim PES Licence granted under Section 14(1)(h). Electric Ireland stated that the regulations associated with a regulated tariff regime namely Regulations 17, 19 and 26 are no longer required from the 4th April, but that Regulations 18 and 20 should be incorporated into the generic supply licence applicable to all suppliers. Electric Ireland proposed that the same obligations should apply to all suppliers with no one supplier carrying a burden in the market, and that Regulations 18 and 20 are reasonable obligations to be asked of any business entity with a desire to be a service provider to significant numbers of domestic customers. Electric Ireland also noted that placing the obligation equally on all licence holders removes any necessity to have regulatory governed recovery processes and therefore facilitates a simple and cost effective market solution. Electric Ireland also suggested that a common obligation would facilitate the CER in conducting a market monitoring role in an equitable manner and particularly so in respect of validating whatever range of tariffs any supplier may offer from time to time. Energia considered that the inclusion of a duty to supply in all supply licences would be an unnecessary and inappropriate step in the deregulated electricity market. In Energia‟s opinion, the inclusion of such a term would likely;

act as a barrier to entry to new firms by limiting their commercial behaviour, likewise this would adversely affect new entrants;

increase costs for existing suppliers; and

represent a backward step in the development of competition in the market, particularly in the continued presence of a dominant supplier.

Energia also noted that the Great Britain (GB) experience of including a duty to supply in the licence supports their argument of the need for a Universal Service Obligation (USO) to be fulfilled by the existing PES or PES-like arrangement. In GB a duty to supply was effectively placed on each of the “Big 6” suppliers as they are dominant in their respective areas, not because there was a general acceptance of a wider need for a general duty to supply clause for all suppliers. Other measures were also introduced (e.g. non-discrimination) to address out of area competition issues. Energia also stated that “the Irish market has one dominant supplier (Electric Ireland) and there are no out of area competition issues. Despite the price deregulation of the market, Electric Ireland‟s market share indicates that they are dominant, and possess a significant degree of


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dominance, by reference to generally accepted thresholds of dominance in competition policy and competition case law.”

2.2.2 CER’s Response to Comments

The CER notes that the majority of respondents were in favour of the inclusion of a duty to supply in all supply licences. This is on the basis that this is a fairer method of ensuring universal service provision for customers in a competitive market. The CER agrees that an enduring obligation of a duty to supply on the incumbent supplier is inconsistent with a competitive market. In both the GB and NI markets all suppliers have a duty to supply obligation in their licences. The imposition of an obligation of duty to supply on all suppliers is not unduly onerous in the view of the CER and is compatible with a fully deregulated market. The CER reiterates its view that the retail electricity market is competitive as set out in the recent decision on deregulation of the domestic market1. This was based on the CER‟s Roadmap2 criteria which required a minimum of two independent suppliers with 10% or more (GWh) market share in each relevant market. At the time of the publication of the decision to deregulate the market Electric Ireland‟s market share had reduced to 57%, while Bord Gais Energy and Airtricity, the two independent suppliers operating in the domestic electricity market had 25% and 16% respectively. All suppliers agreed that if a duty to supply was applied to all suppliers that this should be restricted to the domestic market only. However, the CER notes that in practice many small business customers are often similar to domestic customers. There are a large number of SMEs within the Irish economy, particularly at what would be considered the lower end of the SME range that have relatively light consumption demands and therefore they are subject to similar pricing structures as domestics i.e. they do not attract MIC charges. A typical small business customer would be a small commercial business such as a small office, shop or hairdresser. Small business customers often exhibit the same behaviours as domestic customers with regard to their engagement with the market in terms of shopping around and switching supplier3. Small businesses are also unlikely to be able to exercise countervailing buyer power in response to a price change. Article 3 (3) of the 3rd Package states that; “Member States shall ensure that all household customers, and, where Member States deem it appropriate, small enterprises(namely enterprises with fewer than

50 occupied persons and an annual turnover or balance sheet not exceeding EUR 10 million),enjoy universal service”

1 CER/11/041(a) Review of the Regulatory Framework for the Retail Electricity Market Domestic Market

Deregulation 2 CER/10/058, 21

st April 2010, Review of the Regulatory Framework for the Retail Electricity Market,

Roadmap to Deregulation. 3 CER/11/061, 4

th April 2011, Findings from 2011 research on attitudes and experience in the domestic

electricity market in Ireland, prepared by the Research Perspective Ltd on behalf of the CER.


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In light of the similarities between domestic and small business customers the CER considers that a duty to supply should meet the needs of both domestic and small business customers. In response to Electric Ireland‟s comments on the change in licence conditions as of 4th April 2011. Further to the publication of the Roadmap and, in preparation for deregulation of the business markets, ESB applied for a 3rd licence under Section 14 (1)(b) of the Electricity Regulation Act, 1999. In September 2010, the CER awarded the licence under which ESB Customer Supply and ESB Independent Energy could serve the unregulated business customers. Since deregulation of the domestic electricity market on 4th April, Electric Ireland has served both their business and domestic customers under that licence. However, it should be noted that notwithstanding a CER decision, which designates a party other than Electric Ireland as the PES and/or SoLR, a change to primary legislation will be required to remove the stipulation in S.I. No. 60 of 2005 that only “the Board” will be designated as the PES. Therefore, until such time as these changes are provided for, the role of the PES will remain, unchanged, with the supply incumbent Electric Ireland. As such in the event that a customer is served by Electric Ireland in its capacity as the PES, the current regulations apply.

2.2.3 CER’s Decision

Decision 1. The CER has decided that all supply licences will include a duty to supply for domestic and small business (DG5) customers.

2.3 Offering the Roles to the Market

Q2. Respondents are invited to comment on the roles of the PES and the SoLR in a competitive market. Do you agree that the role of PES and SoLR should be offered to the market in a competitive process or should the incumbent continue to discharge these functions? Outline reasons for agreement or disagreement.

2.3.1 Respondent’s Comments

Regarding the role of PES in a competitive market, Bord Gáis Energy stated in its response that “in a competitive market all suppliers should have a duty to offer supply so that no one supplier wins customers by default and that a customer is never left without an offer of supply.” Bord Gáis Energy agreed that the SoLR function should be put out to tender to the market. As part of this tender, the SoLR should outline its tariff structures, cost recovery proposals and the terms and conditions which will form the basis for the CER‟s decision to appoint the


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SoLR. In the event that no party partakes in the auction then it should rest with the incumbent to provide the role under tariffs and terms and conditions agreed with by the CER. Any such agreement should ensure that the SoLR will recover all costs associated with the role through the tariffs charged to the customers in question. Endesa Ireland considered that there should be a competitive process for suppliers wishing to be designated as PES. Furthermore Endesa stated that if the PES duty to supply is to be imposed on all suppliers it should be limited to those suppliers serving the domestic market only. If the duty is imposed, bad debts and administration costs such as IT systems, must be recoverable from all customers e.g. through TUoS charges, or pre-payment meters must be installed. Endesa also considered that a competitive process should be instituted separately for the role of SoLR. If no supplier expresses interest in becoming the SoLR then the function should be shared by all suppliers. Endesa proposed that if the CER deems the market to be fully competitive it is not appropriate to place additional requirements on one supplier and not all. Furthermore, if a SoLR obligation is to be imposed on all suppliers, then bad debts must be recoverable from all customers or pre-payment meters must be installed. Endesa agreed that while the CER is considering the PES and SoLR obligations, and pending any changes in legislation, these functions should be continue to be carried out by Electric Ireland under its existing licence. Endesa Ireland did not consider that ESB should be able to leverage this obligation as a means to promote its new brand through cross subsidisation Airtricity responded that “both the roles of the PES and the SoLR should be offered

to the market in a competitive manner.” Airtricity also stated that given the view that there is a requirement for both a PES and a SoLR they also agree with the proposal that, if no other suppliers wish to undertake these roles, they should default to the supply incumbents. Airtricity proposed that given state ownership, vertically integrated nature, privileged access to capital and their overall size, the supply incumbents would be the best placed to carry out these duties.

Electric Ireland reiterated its response to Q1, that there is no longer a requirement to have an enduring designated PES role in a deregulated market. Certain obligations that currently only apply to the PES licence, specifically Universal Service and non discrimination, can be incorporated as conditions in the generic electricity supply licence for all suppliers. Electric Ireland also noted that the requirement for changes in primary legislation to amend Section 14(2D) of the 1999 Act which stipulates that the PES licence may be granted only to "the Board", and requested that this should be changed in consultation with the Department of Communications, Energy and Natural Resources as soon as possible. Noting the need for the SoLR, Electric Ireland stated that this role should not necessarily remain with the incumbent. Electric Ireland pointed to the licences in GB and NI, which have specific conditions included in all supply licences


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regarding obligations under a SoLR Direction (Conditions 8 and 9 in GB and 22 and 23 in NI). Electric Ireland recommended that the SoLR role should be offered to the market in a competitive process and should not necessarily remain the responsibility of Electric Ireland, but that the generic ROI supply licence should be modified to incorporate conditions relating to a SoLR event. Electric Ireland referred to the process in GB, there have been a number of SoLR events since the market was open to competition and the process, updated regularly in Ofgem‟s SoLR guidance documentation (most recently in December 2008), has been effective. Electric Ireland noted that in NI, where competition is still at a very early stage of development, the Utility Regulator in its 2009 decision paper stated that it would create a shortlist of suppliers rather than automatically obligate the incumbent to act as the SoLR. Electric Ireland suggested that in the interests of further harmonisation this should also apply in the ROI. Energia supported the continuation of provisions for both universal service (duty to supply), and SoLR arrangements in the price deregulated market. Energia proposed that in the context of the Irish market, the PES is an appropriate mechanism for USO provision. In a general context, Energia supported offering both the PES and SoLR roles to the market in a competitive process. In the context of the Irish market, the SoLR role has been offered to the market in the past and despite the lack of general interest, Energia proposed that this approach should be maintained. Should market participants continue to exhibit a lack of interest in this, it is considered appropriate for this function to default to the incumbent. As already started, Energia would welcome the competitive offering of PES to the market. However, in the context of the Irish market, Energia proposed that there are a number of the functions of the PES that are appropriately and necessarily applied to the incumbent as the dominant supplier in the market. Principal among these is the non-discrimination clause. The experience in GB supports the approach of placing the USO duty on the incumbent with further measures employed to mitigate market power. Energia notes that one issue that will require further clarity from CER in relation to this is the extent to which ESB/Electric Ireland customers are covered by the PES licence and the ability of the incumbent to rearrange its customer base.


In light of the decision outlined in Decision 1, the CER will focus on the responses with respect to the competitive offering of the SoLR to the market. All of the respondents were generally in favour of offering the role of SOLR to the market in a competitive process. The CER agrees that the nature of the SoLR obligation lends itself to a competitive process that all eligible suppliers could partake in. The CER considers that as a sudden exit, or withdrawal, of a supplier from the market will generate costs for consumers, a competitive process can potentially deliver the most cost effective transition to a new supplier.


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The CER notes that three respondents considered that the obligation should default to the incumbent supplier in the event that there were no takers to the competitive process. As noted above, until such time as the legislation has been changed Electric Ireland is the default SoLR. However, in a competitive market, this is may not be an appropriate enduring solution and may represent a disproportionate regulatory burden. The issue of the default SoLR position is discussed further in section 2.6.4.


Decision 2. The CER has decided that the role of the SoLR should be offered to market in a competitive process.

2.4 Designation of the PES and SoLR

Q3. Should the roles of the PES and the SoLR be offered to the market separately, or as a single package? If separately, do you agree that the function of the PES should be designated to a single supplier for a defined period of 2-3 years? Outline reasons for agreement or disagreement. Are there alternative options that should be considered?


Bord Gáis Energy stated that “in a competitive market all suppliers should have a duty to offer supply so that no one supplier wins customers by default and that a customer is never left without an offer of supply.” Bord Gáis Energy also stated that the SoLR should be put out to tender and following this should be appointed for a period of approximately 3 years to avoid inefficiencies in annual retendering. Airtricity responded that “in order to maximise the opportunity for all suppliers to participate in this process, we believe that the PES and SoLR roles should be offered to the market separately rather than as a combined package. It is essential that any successful bidder has the appropriate systems and processes in place to be able to fulfil their role as the PES or the SoLR. We therefore would support the proposal that these roles would be awarded for a period of 2 – 3 years. To do otherwise would make it very difficult for suppliers other than those currently fulfilling these roles to make any required investments/changes to their systems/process.” Furthermore Airtricity considers “it is unnecessary for the SoLR process to envisage only a single supplier performing this role at any one time. This approach will potentially exclude suppliers with the capability to undertake part of the role.” Electricity Ireland is of the view that specific obligations should be incorporated as conditions in the generic electricity supply licence and thus remove the


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requirement to have an enduring designated PES role in a deregulated market. The respondent also proposed that the role of the SoLR should be offered to the market. Energia stated in its response that if both the roles of PES and SoLR are to be offered competitively to the market, then it would be appropriate to offer these two roles separately but in a co-ordinated manner to allow for possible economies of scale and scope to be captured by the procurement process. Energia supported the designation of a single supplier for a period of two to three years. The period of designation chosen should be of a fixed term and appropriate such that efficiencies in procurement for the CER and recovery of allowable cost incurred by the designated supplier, can be facilitated.


In response to Question 1, the CER decided that it was not appropriate to have a single PES supplier and that all supply licences will contain a duty to supply. Therefore the issue of how to offer the roles of the PES and SoLR to the market does not arise. The designation of the SoLR is discussed in the following section.


There is no decision in relation to question 3.

Q4. Where the roles of the PES and the SoLR were offered to the market separately, respondents are invited to comment on whether the SoLR should be designated to a single supplier for a defined period of 2-3 years or designated at the time of the event? Outline reasons for your preferred option. Are there alternative options that should be considered?


Airtricity considers “it is unnecessary for the SoLR process to envisage only a single supplier performing this role at any one time. This approach will potentially exclude suppliers with the capability to undertake part of the role.” Airtricity proposed that eligible suppliers could be approved in advance by the CER, and that potential suppliers could indicate the customers for which they are willing to provide a SoLR service, the CER will then be in a position to allocate each of the customer groups to the chosen supplier. Electric Ireland noted that the CER is proposing two options for appointing the SoLR i.e. designation to a single supplier for a defined period of 2-3 years or designation to a single supplier at the time of the event. Electric Ireland considered that the SOLR should be selected on the basis of two key criteria;

(i) ability to meet its duties and obligations


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(ii) the proposed costs to undertake the role It proposed that the former relates to the scale of the supplier i.e. the number of customers it currently has and its ability to absorb significant additional customers at short notice with minimal disruption, while the latter is not possible to determine, ahead of time, when the size of the SoLR event is unknown. The respondent noted that some SoLR costs are predictable (e.g. customer communications) and others less so (e.g. energy purchases) while many are directly related to the scale of SoLR event. Referring to the GB market, Electric Ireland noted that SoLR events have occurred, although the exiting supplier was relatively small in operational size in comparison with the „Big 6‟. Reiterating comments in its response to Q2, Electric Ireland referred to Ofgem‟s guidance documentation on SoLR events. Ofgem assesses whether the potential SoLR has the ability to supply the additional customers without undermining its ability to supply its current customers, and its willingness to accept the role before giving a direction. Electric Ireland considered this to be a very pragmatic and adaptable approach to the issue. Electric Ireland also noted that the UR in NI in its decision paper on SoLR in 2009 stated that it would create a shortlist of suppliers that have shown willingness and ability to be SoLR, and then appoint a supplier from the list – though no supplier has been appointed to date. Electric Ireland recommended that CER should create a shortlist of suppliers based on the first criterion that would be able to perform the SoLR role, and then appoint a SoLR at the time of an event also taking into consideration the second criterion. Energia stated above that it would support the designation of a single supplier for a period of two to three years. The period of designation chosen should be of a fixed term and appropriate such that efficiencies in procurement for the CER and recovery of allowable cost incurred by the designated supplier, are to be facilitated.


The CER notes Airtricity‟s comments with respect to having multiple suppliers undertaking the role. While this approach is not unsound in principle, the practicalities of a breaking up the exiting supplier‟s customer base, and multiple supplier customer transfers may prove unmanageable at the time of a SoLR event. The CER considers that there is merit in the approach taken in GB where Ofgem assesses whether the potential SoLR has the ability to supply the additional customers without undermining its ability to supply its current customers, and its willingness to accept the role before giving a direction. The CER notes however that this approach is underpinned by a standard condition in all supplier licences in GB which means that any gas or electricity supplier can be directed by Ofgem to take over responsibility for the failed suppliers customers.


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Decision 3. The CER has decided that the SoLR should be designated at the time of the event - subject to a competitive process. The CER will consult further on the detailed process for supplier eligibility and selection.

2.5 Pricing Options for the Designation of PES and SoLR

Q5. Respondents are invited to comment on the proposal to align the PES tariffs to that of the supplier's standard tariff. Outline reasons for agreement or disagreement. Are there alternative options which should be considered?


Airtricity responded that “as stated in the consultation paper the 3rd Package is clear that Member States must ensure that customers can avail of universal service. It is our view that this service is best provided by having a supplier fulfil the role of the PES. The successful bidder for the role of the PES would then be required to provide supply to customers who do not actively choose a new supplier or cannot find an alternate supplier that is willing to provide supply to them at a reasonable rate. It is our view that the alignment of the PES tariffs to that of the supplier‟s standard tariff, for a particular payment/billing method, is appropriate. This proposal would seem to be fairest from both a supplier and customer perspective.” Electric Ireland stated in its response that if the PES obligation rested with a single supplier on behalf of the market then it would require the application of an equitable cost recovery mechanism (potentially via the TUoS charging mechanism similar to the SoLR Pricing Option 1 outlined in this consultation paper). Electric Ireland proposed that this could lead to the CER becoming unnecessarily drawn into an onerous process for USO/PES tariff validation. Electric Ireland stated that it is clearly apparent that the CER could have difficulties doing this without some form of tariff publication and this would not be in the best interests of encouraging competition as it would be seen by the rest of the market as a regulatory price benchmark. Electric Ireland proposed that placing the obligation equally on all licence holders removed any necessity to have regulatory recovery processes and facilitated a simple and cost effective market solution. Energia supported the proposal that PES tariffs should be aligned with existing tariff offerings from the designated supplier. However there is a significant


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potential difficulty around the wording of the proposal and the definition of a supplier‟s “standard tariff”. Energia proposed that evolution of the market and competition in the Irish retail electricity market will see the development of new and innovative products and tariffs by suppliers. In this context, reference to a standard tariff may no longer be appropriate. Furthermore, Energia suggested that the inclusion of a reference to a standard tariff may introduce the possibility of the designated PES supplier “gaming” the applicable tariff and its tariff offerings such that the definition is satisfied but not necessarily to the benefit of the customer. Energia added to this concern, noting that the requirement does not address the potential costs and benefits to a supplier when undertaking the role as PES. Energia noted that an argument could be made that for certain customers under PES, there are relatively higher costs for the designated supplier in serving these customers than for the typical customer, which could be due to increased levels of communication from newly connected customers looking to understand the terms and conditions associated with their connection and the basis of their contract with the designated supplier, as well as follow up queries. On the flip side of this, the designated supplier does not incur an acquisition cost in respect of such customers. Energia considered this to be a significant cost saving and one that may not be reflected in a standard tariff offering.


In response to Question 1, the CER decided that it was not appropriate to have a single PES supplier and that all supply licences will contain a duty to supply. Therefore the issue of how to set PES tariffs does not arise. However the CER notes that Article 3 (3) of the 3rd Package states that;

“Member States shall ensure that all household customers.... enjoy universal service, that is the right to be supplied with electricity of a specified quality within their territory at reasonable, easily and clearly comparable, transparent and non-

discriminatory prices

As such, the CER will monitor how suppliers discharge their obligations with respect to the provision of universal service and tariffs offered.


There is no decision in relation to question 5.

2.6 Pricing Options for the Designation of PES and SoLR

Q6. Respondents are invited to comment on the pricing options for the SoLR. Which is your preferred option? If Option 1, do you agree that TUoS is an appropriate mechanism for marginal cost recovery? Outline reasons for agreement or disagreement. Are there alternative options which should be considered?


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Endesa stated that if the CER sets a PES tariff (for one or all suppliers) lower than a supplier‟s standard tariff, suppliers must be entitled to recover the spread between the set tariff and their standard tariff via TUoS charges. If pre-payment meters can be installed in industrial and commercial premises the PES duty of supply should be extended to those customers. Endesa Ireland noted that the Endesa smart meters can be programmed to be pre-payment meters which can be installed on industrial and commercial premises. Endesa Ireland is in favour of SoLR Pricing Option 2, whereby the SoLR would add an additional margin to its standard supply tariffs for the SoLR customer category only to reflect the extra costs associated with the role, including administration costs. According to Endesa Ireland, this is justified as SoLR customers are free to move supplier. Airtricity responded that these suppliers should be approved by the CER, in advance of performing the role, with systems and processes in place and tested to enable their activation at the short notice a SoLR event is likely to provide. Airtricity stated that potential suppliers should indicate the categories of customers for which they are willing to provide a SoLR service, the CER would then be in a position to allocate each of these customer groups to the chosen supplier. Airtricity commented that a high priority in the SoLR process is that customer impact should be minimised, and while they may no longer have access to their original supplier's tariff the whole SoLR process should cause as little disruption as possible to customers. Depending on the original supplier's tariff– potentially set at a level that contributed to the SoLR event, there can be no guarantee that a customer will not face an increase in its tariff level, but if suppliers are offering their most economic standard tariff this would ensure that any increase would, within reason, reflect current market prices. Airtricity commented that there was a suggestion in the consultation paper that customers should face an incentive to switch supplier in the event of a SoLR event being declared, which it does not believe is warranted. Airtricity noted that there will be an obvious incentive on the SoLR supplier to encourage the new customers to stay with them. Therefore Airtricity is of the opinion that the SoLR supplier should apply its most economic standard tariff to those customers transferred due to the SoLR event, and that any additional costs associated with the SoLR process should be recovered from all customers via the TUoS charging mechanism. Electric Ireland noted that the two proposed pricing options would be based on a competitive tender process with supplier selection based on its ex ante bid price with no ex post cost adjustment. Electric Ireland proposed that a tendering process such as this would make the designation of a single supplier for a 2-3 year period unworkable, as suggested under Q4 above. Underlying energy costs could significantly change over such a lengthy period, as has been experienced in recent years, and Electric Ireland suggested that no supplier could justify the risk of holding the obligation to supply customers on a fixed ex ante cost basis. It proposed that the role of the SoLR is a significant logistical challenge to a


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supplier who will incur increased administrative costs and have to implement last minute additional energy purchasing arrangements to serve the newly acquired customers. It would not be possible to accurately forecast either the customer demand or the additional energy costs, and it is highly likely that such short term energy purchases will be unrelated to the energy costs that are reflected in standard tariffs and gathered over a much longer time horizon. Electric Ireland proposed that some ex post adjustment mechanism should be allowed for, as applies in GB and NI, and the use of an ex post reimbursement process to recover such additional costs from all customers in the market through the TUoS charging mechanism is a reasonable approach. Electric Ireland noted similar approaches in the GB market - energy suppliers can make a claim for otherwise unrecoverable costs and is paid via a levy on gas transporters/DUoS charges. However, Electric Ireland proposed that it would be unfair to charge a premium to customers formerly served by a defaulting supplier even though this is applied in GB. Electric Ireland noted that in NI all costs accrued as a result of their appointment to the role of SoLR can be submitted with full supporting evidence within six months of the SoLR direction taking effect. Energia stated that the options proposed are done so at a high level thus limiting comments largely to the principles underlying both options and on this basis Option 1 is regarded as preferable. Considering instances where the SoLR would be called upon, these instances are not the result of any actions taken by customers and as such it would inappropriate that customers would ultimately bear the cost of provision of this function. Energia considered arguments relating to the “user pays” principle to be misguided in this context and incentives for customers to switch should be provided outside of the cost to customers of a SoLR event. Energia proposed that the information initiatives to be undertaken by CER are considered to be a more appropriate approach to informing and incentivising customers to switch supplier. A prerequisite to discussing the need of the designated SoLR supplier to recover additional costs is an acceptance that there are such associated costs, or that these costs are costs to be borne by the company in excess of those it would have incurred to acquire the customer base acquired through its duty as SoLR. Energia stated that further analysis was required but that in the event that additional costs (in excess of the benefits or costs not incurred) are incurred, it would appear appropriate that these costs should be socialised. Energia also proposed that competition for these customers between suppliers can then be allowed to develop on an equal basis, while acknowledging the affected consumers need for continuous electricity supply, the removal of which was outside their control.


The CER notes that the majority of respondents favoured Option 1 which proposed that the supplier with the most economic standard tariff (at the time of designation) would be selected as the SoLR – subject to all costs being fixed ex ante as part of the bid. Option 1 the supplier would provide, ex ante, a margin value to reflect any additional costs that are expected to be faced by the supplier


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and that this would be recovered through the TUoS charging mechanism. This proposal effectively socialises the costs of the SoLR event across industry so that the additional costs of the role being recovered from all customers and not just the customers of the SoLR. The alternative option proposed that the SoLR would apply an additional margin to its day to day supply tariffs to reflect the likely extra costs associated with the role. This would see the additional costs of the role being recouped directly from the customers of the SoLR and not from the general customer base. This option provides for a price that is more reflective of the cost to serve customers that have been affected by a SoLR event. However, the CER agrees that it would be unfair to charge a premium to customers formerly served by a defaulting supplier for something over which they had no control. Therefore the CER is of the view that the costs of the SoLR event should be socialised. The CER will consult further on the detail of the cost recovery mechanism.


Decision 4. The CER has decided that costs of the SoLR event should be socialised as per Option 1. The CER will consult further on the detail of the cost recovery mechanism.

Q7. Respondents are invited to comment on the proposal that, where no other suppliers were forthcoming to undertake the roles of the PES and / or the SoLR, they would default to the supply incumbent. Do you agree with this proposal? Outline reasons for agreement or disagreement. Are there alternative options which should be considered?


Endesa is of the view that “ESB should remain as the licensed entity providing PES services under its current PES licence until the legislation is changed. ESB should carry out this duty under the trading name of ESB CS, such that any rebranding costs do not fall on PES customers. In addition, the current rules for PES require separation of business activities, which is facilitated if these activities are carried out under a separate licence.” Airtricity also responded that “given this view of the requirement for both a PES and a SoLR we also agree with the proposal that, if no other suppliers wish to undertake these roles, they should default to the supply incumbents. Given their state ownership, vertically integrated nature, the privileged access to capital afforded to them and their overall size, the supply incumbent would be the best placed to carry out these duties.”


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Electric Ireland considered that the paper does not adequately address the possibility that no competitive tender is offered by a supplier, other than to pose this additional question in respect of the incumbent providing the SoLR as a default function. In a situation where no supplier is forthcoming to undertake the role of SoLR, Electric Ireland proposed that CER has adequate powers to appoint one. The respondent proposed that it would be to the benefit of the market and customers to have a number of suppliers with capabilities to fulfil the role of SoLR. Electric Ireland proposed that at the time of a SoLR event the CER should carry out an assessment, similar to Ofgem‟s practice in GB, and appoint the most appropriate SoLR for the given set of circumstances. Energia supported the retention of PES (or PES like USO obligation on the dominant incumbent supplier) and not withstanding recourse to competitive tender of this duty, the obligation on the incumbent should remain in place until such time as it is no longer considered dominant by reference to accepted thresholds in competition policy and competition case law. Energia also proposed that it was appropriate and reasonable approach for the SoLR role should default to the incumbent, in the event of another unsuccessful competitive offering, is considered to be an


Three of the 5 respondents were in agreement that where no other suppliers were forthcoming to undertake the roles of the PES and / or the SoLR, they should default to the supply incumbent. Electric Ireland‟s proposal that the CER should appoint a SOLR where no competitive tender is offered by a supplier has already been addressed in decision 2.4.6 above.


Decision 5. The CER has decided that all supply licences will contain an obligation to serve as the SoLR, where directed by the CER, The CER will consult further on the circumstances under which such a direction will be issued.

2.7 Other Comments

Electric Ireland stated that the CER should use its enhanced market monitoring powers and information provision mechanisms to ensure that all suppliers are fairly meeting their obligations to customers, particularly in respect of ensuring an adequate range of tariff options and choices. If the focus is on continuing to use the incumbent for specific duties (PES, SoLR, etc) then there is a danger of the CER being required to apply some mechanism of tariff approval or validation, and this would have a distortive effect on market developments. Endesa Ireland noted that the consultation paper states that CER has issued a new supply licence to Electric Ireland and requested clarification on whether this


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is a new licence issued to ESB or if the licence is issued to Electric Ireland and whether this is a standard generic licence? Endesa Ireland also noted that the time given for responses to the consultation is less than the minimum of 28 days set out by the CER in its decision paper on the Review of the Consultation Process (CER/08/089). Airtricity also “highlighted their disappointment at the short time frame allowed for responses to this and other recent consultations. It is vitally important that respondents are given reasonable timelines within which to provide properly considered feedback to consultations.” Energia commented that notwithstanding the number of recent consultations issued by CER in relation to the deregulated electricity market, the timing of these consultations could possibly call into question the adherence by CER to its primary objective of protecting customers, by, where possible, promoting effective competition. In this instance, as evidenced by the somewhat after the fact nature of these consultations, the CER‟s haste to price deregulate the retail electricity market in the absence of a clearly defined and agreed policy of how to deal with the residual issues of such an action introduces price competition into the market while uncertainty remains over the potential impacts of this on customers.


The CER will continue to monitor the electricity retail markets after deregulation. This is to ensure that the electricity retail markets in Ireland are working well and delivering for consumers. The CER will be reviewing and consulting on its current market monitoring framework in May 2011. The review will be based on European good practice guidelines, the requirements of the 3rd Package and the customer protection measures outlined in Decision Paper CER11/057. In response to the request for further information on the licence awarded to ESB to enable it to serve customers in the deregulated market, in parallel with its obligations as the PES. As stated in the consultation, this generic supply licence was issued to ESB under Section 14 (1) (b) of the Electricity Regulation Act, 1999. While this licence does not contain conditions with respect to relevant price regulation, it was issued subject to compliance with additional conditions on ring fencing and a prohibition on sharing information which maintains existing requirements between different units of the business – for information the additional conditions are set out in Annex A of this paper. As part of its programme of licence compliance, the CER will audit compliance with these conditions. Both the generic and the PES licence for Electric Ireland were granted to “the Board” of ESB. Electric Ireland is the new brand name for ESB Customer Supply and ESB Independent Energy. The rebranding process commenced with the launch of the


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Electric Ireland brand in December 2010, and while a period of dual branding is currently underway, it will fully replace the ESB supply names by end December 2011. Regarding the length of time allowed for the consultation, the CER notes that the consultation period was shorter than standard and acknowledges the effort of industry participants to comment meaningfully on all the issues presented. With regard to the timing of the consultations in relation to market deregulation, the CER would point out that the Roadmap set out the process for market deregulation and the regular competition reviews identified the market milestones in that process. In accordance with that process, the final decision on deregulation of the domestic market was only made at beginning of March 2011. The CER has, and continues to engage with industry on all parallel workstreams.


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3.0 Conclusions and Next Steps

3.1 Conclusions

The CER has consulted on the duties and obligations of the PES and the SoLR and how they will apply in the deregulated market. The decisions contained in this paper details the outcome of that process and the approach to these roles that will be adopted in the deregulated market. As such the CER has made the following decisions with respect to the provision of universal service in the deregulated market: The CER has decided that all supply licences will include a duty to supply

for domestic and small business (DG5) customers. The CER will monitor how suppliers discharge their obligations with

respect to the provision of universal service and tariffs offered. The CER has made the following decision with respect to the designation and administration of the SoLR in the deregulated market: The CER has decided that the role of the SoLR should be offered to

market in a competitive process.

The CER has decided that the SoLR should be designated at the time of the event - subject to a competitive process. The CER will consult further on the detailed process for supplier eligibility and selection.

The CER has decided that costs of the SoLR event should be socialised

as per Option 1 of the consultation. The CER will consult further on the detail of the cost recovery mechanism.

The CER has decided that all supply licences will contain an obligation to

serve as the SoLR, where directed by the CER. The CER will consult further on the circumstances under which such a direction will be issued.

3.2 Next Steps

The CER will publish a review of supply licences in June 2011 that will propose amendments to all supply licences to formally incorporate the duty to supply and SoLR obligations. The CER will issue a further consultation on the details of the SoLR selection process and cost recovery mechanism.


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Annex A List of Additional Conditions

a) The issuance of this new generic supply licence to the ESB, under Section 14 (1)(b), will also be subject to ring fencing conditions with respect to any affiliate or related undertaking of the Licensee, or an affiliate of any relayed undertaking of the Licensee, or any other Business of the Licensee.

b) All ring fencing arrangements continue to apply to licensed entities of the

Board, except for those applying between the PES, ESBIE, ESB (as holder of the new licence). ESBIE can communicate with ESB, both as the PES and holder of the new licence, and vice versa. However, communication is not permitted with other affiliates, related undertakings or other business units except in accordance with the Protocol of the Disclosure of Commercially Sensitive Information (CER06/153) as already approved by CER.

c) Assets cannot be shared except in accordance with existing Business

Separation arrangements already approved by the CER.

d) Continuation of separate accounts.

e) All costs that are shared (and management charges, charges for assets hared, CfD allocation etc) are regulated to prevent cross subsidies.

f) The new deregulated team cannot access any information relating to

customers that are not currently served by ESBIE and / or PES. Information on customers that are not currently served by ESBIE and /or PES as of this date must be quarantined. However, the Commission will reflect further on the proposal to allow limited access to this information.

g) Minimum ESBIE customer size threshold (225MWh) remains in place until

deregulation of the domestic market. Condition (f) was further qualified in a letter to ESB;

Access to billing data of business customers [shall be limited to those] that have left ESB in the 12 months from 1st October 2009. This [access] shall only come into effect on the date of business market deregulation, Friday 1st October 2010.

When the domestic market is deregulated, ESB shall only be permitted access to billing information of ESB‟s [domestic] customers current at that date i.e. existing customers at the date of domestic market deregulation. This provision is without prejudice to all relevant data protection legislation which applies.


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Annex B – List of Decisions Outlined in this Paper

Decision 1. The CER has decided that all supply licences will include a duty to supply for domestic and small business (DG5) customers. Decision 2. The CER has decided that the role of the SoLR should be offered to market in a competitive process. Decision 3. The CER has decided that the SoLR should be designated at the time of the event - subject to a competitive process. The CER will consult further on the detailed process for supplier eligibility and selection. Decision 4. The CER has decided that costs of the SoLR event should be socialised as per Option 1. The CER will consult further on the detail of the cost recovery mechanism. Decision 5. The CER has decided that all supply licences will contain an obligation to serve as the SoLR, where directed by the CER, The CER will consult further on the circumstances under which such a direction will be issued.

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