ESB Networks Connection Charges. Response and Decision Paper

Transcription

1 ESB Networks Connection Charges Response and Decision Paper CER/06/ June 2006

2 Introduction On Friday 5 May the Commission published for comment a paper proposed by ESB Networks setting out the charging rules for connection to the electricity distribution system. The paper was a refinement of the version approved by the Commission in 2004, and updated the connection charges to reflect various developments since then. In response to the paper the Commission received comments from one party, the Irish Home Builders Association (IHBA). This paper responds to those comments and sets out the Commission s final decision. Background In the Distribution Revenue Determination (CER/05/138), consulted upon and published 2005, the Commission determined that customers should contribute 50% of the attributable connection cost from 2006 onwards. Customers had actually been contributing 37% for Domestic Scheme connections and 41% for Commercial & Industrial and Domestic Non-Scheme connections. The principle of moving to a 50% connection charging policy over a phased period had earlier been established in the Commission s Distribution Revenue Review. The Commission has also determined that 50% of the cost of undergrounding cables to facilitate new developments should be recovered from Domestic Scheme connection charges (i.e., from developers). Both of these decisions result in more costs being charged up-front to connecting parties rather than being recovered through ongoing DUoS charges. ESB Networks had submitted a paper to the Commission listing proposed Charges for Connection to the Distribution System, taking into account the factors outlined above. The paper proposed to revise charges last approved in May Overall the proposed charges amounted to a 27% increase on 2004 charges for Commercial & Industrial connections, a 67% increase for Domestic Scheme connections, and a 27% increase for Domestic Non-Scheme connections. Approximately 5 percentage points of the increases was due to inflation as the charges have not been updated since For Domestic Scheme connections 26 percentage points of the increase was due to the recovery of undergrounding costs, and 35 percentage points of the increase was due to the move to recovering 50% of connection costs up-front (previously 37% for this type of connection). For Commercial & Industrial and Domestic Non- Scheme connections 22 percentage points of the increase was due to the move to recovering 50% of connection costs up-front (previously 41% for these connections). Decision Having considered the comments made in response to the proposed connection charges (published 5 May 2006), the Commission hereby approves the Connection Charges as originally published, for application from 1 August Response to Comments The full submission of the IHBA is published alongside this paper. Below the key themes in the submission are summarised and responses given.

3 The IHBA expressed disappointment at the amount of time given for the consultation on the ESB Networks proposed document. The Commission recognises that the consultation period for the connection charges was relatively short. However, the main factors affecting the price increase (that is, increasing the charges to 50% of the cost from 2006, and charging 50% of the costs of undergrounding to developers) had been consulted upon and decided in 2005 as part of the Distribution Revenue Determination (see CER/05/138). The paper published in May translated aspects of the 2005 decision into revised connection charges. Thus, as the major decisions had already been made, the Commission was comfortable with the relatively short consultation period. The IHBA implied in its comments that the increase in connection charges would reward ESB Networks that increasing charges would be a way to increase [ESB Networks ] profits. The increase proposed is out of line with industry inflation, and would require some justification given the low and decreasing levels of customer service provided by ESB Networks and the ineffective Customer Charter. While the proposed connection charges are increasing, in no way is ESB Networks profiting from the increase. In carrying out its activities ESB Networks incurs costs (these are fully scrutinised by the Commission s experts during revenue reviews to ensure only efficient levels of costs are passed through to customers). As with any business these costs are offset by revenue streams. In the case of ESB Networks this revenue takes the form of either Distribution Use of System Charges (or DUoS, the ongoing charge to customers paid through their electricity tariffs) or direct charges (such as connection charges). The increased charges that were proposed are the result of a decision to take costs out of the pool that is used to calculate DUoS charges and charge those costs directly to customers. So while the connection charges are increasing, the DUoS charges are decreasing due to the Commission s decision. ESB Networks is revenue neutral between the old and the new charges. The Commission recognises that there are some issues with the level of service provided by ESB Networks and has plans to undertake a review of the performance standards for ESB Networks. Part of that review would involve an examination of the effectiveness of the Customer Charter. The IHBA said it believed that the target of connection charges reflecting 50% of costs would be reached over a number of years on a phased basis up to 2010, rather than by 2006.

4 In the revenue determination for the stated goal was to steadily increase the percentage of connection costs recovered by connection charges to reach 50% by In its September 2005 Distribution Revenue Determination for (CER/05/138) the Commission accelerated that timeline to ensure the 50% target would be reached in By bringing forward the date at which the 50% target is reached consumers will see a benefit sooner in terms of the DUoS tariff being lower than it otherwise would be. The decision to reach the 50% target in 2006 was made in order to minimise the ongoing DUoS charges faced by customers. The IHBA questioned the transparency of the costs, saying the breakdown of the source of the increases did not give any real explanation of how the figures were calculated. Also, they couldn t understand the basis of the trenching charges. During the revenue review for the costs of ESB Networks were reviewed in detail by the Commission s experts, with only efficient levels of costs being passed through to customers. In this regard the Revenue Determination (CER/05/138) set the revenue the DSO is allowed to collect per new connection to decrease over time. Specifically, for domestic connections a 1% general productivity improvement per connection is required each year from , and a 7% productivity improvement per connection is required on the labour element of the costs in 2008 when an IT investment (Mobile Workforce Management) comes online. The Revenue Determination allowed certain aggregated levels of revenue for connections to ESB Networks. The connection charges are then scaled to ensure this total amount of revenue will be collected based upon the expected mix of jobs. The document CER/06/084 is not intended to offer a breakdown of how the charges were arrived at, but to show the outcome of this process. The trenching charges (which are ultimately optional for connecting parties because they can undertake the trenching themselves) are set using a different process to that outlined above. ESB Networks issues a tender for a contractor to carry out any trenching on its behalf. The trenching charges pass through the costs incurred under the resulting arrangement with a contractor. Thus, the costs have been market-tested. The IHBA said that where ESB Networks is sizing infrastructure built for a connection for future needs, developers are bearing the cost of the extra infrastructure. Also, it was claimed that the specification of work required of developers has increased over the past number of years. For example, where in the past ESB Networks required plinths for substations, now buildings or rooms are required.

5 When customers are quoted under standard connection charges they are charged based on their required capacity only. Any additional capacity installed for future development needs is not charged to the connecting customer. There may be situations where a developer pays for a connection and where this is subsequently used by another customer. In these situations ESB Networks operates a refund policy in respect of shared networks with a refund to the original developer. (For details of the refund policy see ESB Networks connection charges document). The terms and conditions surrounding a connection are, as well as price, subject to the approval of the Commission. Please see the Distribution System Security and Planning Standards, which have been approved by the Commission, for requirements such as the one mentioned in the submission (i.e., plinths vs rooms/buildings for substations). The document was approved in September 2003, so practice should not have changed since that time. No charges should be made or requirements imposed that are not in line with those approved by the Commission. If there are cases where this is in dispute the Commission will investigate those particular situations if they have been through the ESB Networks complaint process without resolution. The IHBA questioned why scheme housing should bear the cost of undergrounding network. Generally, the Commission believes that those who cause a cost should make (at least) a contribution towards its recovery. Thus, as undergrounding lines is triggered by developments, a portion of that cost is levied upon developers (scheme housing) through connection charges. There is, however, an advantage to the electricity system from undergrounding cables, so it makes sense that the customer contributes to the cost through its DUoS charges. Also, if lines were not to be put underground they would be diverted, so it is the incremental cost of undergrounding (over and above the cost of diversion) that is relevant. In taking these factors into account the Commission decided in its Revenue Determination (CER/05/138) that 50% was an appropriate amount of the cost to charge through scheme-housing connection charges (with the other 50% being charged through DUoS charges). The IHBA said that as the regulated entity is the only source of information, this has caused an issue for the Commission in publishing the proposed charges. The most typical symptom of this issue is said by the IHBA to be when the regulator comes to decisions that side very closely with the objectives of the regulated entity. The IHBA recommends that there must be an independent examination of the proposed connection charges.

6 The Commission denies in the strongest terms that the document issued proposing new connection charges shows bias in favour of ESB Networks. The Commission s statutory duties require it to protect the interests of customers, while taking into account the affect on regulated bodies. The Commission believes that the comment made is based upon a false understanding that the increase in connection charges would result in higher profits for ESB Networks. As explained above, the increase in charges represents an increase in up-front revenue but a decrease in DUoS charges over time, to which ESB Networks is revenue-neutral. As explained above the costs that underlie the proposed new connection charges have already been examined very closely in the Revenue Determination Indeed, in that decision the Commission decreased the revenue allowed to ESB Networks over the five-year period by over 1b when compared to the amount requested by ESB Networks. The IHBA reports unjustified increases over past number of years for similar type schemes. No charges should be made that are not in line with those approved by the Commission. The Commission will investigate particular situations that have been through the ESB Networks complaint process without resolution.