Distribution Licence Review: Public Workshop

1. Distribution Licence Review: Public Workshop 29 November 2007

2. Agenda 10:30 - Introduction 11:00 - Creating a better distribution licence – Roger Barnard, EDF Energy 12:30 - Lunch 13:00 - Implementation of proposals 13:30 - General discussion 15:30 - Conclusions

3. Background to the DLR • Standard licence conditions (SLCs) have not been reviewed in some cases since 1989 • Ofgem’s commitment toward Better Regulation • Follows the example set by the Supply Licence Review • Forthcoming price control (DPCR5) Consequently… • DLR initiated and workgroup established March 2007

4. Objectives and principles applied Objectives: • To improve the clarity and ease of use of the licence • To not make substantive changes to obligations or underlying policy • In particular the DLR has concentrated on: • Rewording certain conditions and defined terms; • The removal of redundant conditions; and • Updating the style of the licence • Bearing in mind the principles of Better Regulation • Proportionate, accountable, consistent, targeted and transparent

5. Creating a Better Distribution Licence Roger Barnard EDF Energy 29 November 2007

6. Back to Basics In the Beginning Was the Word said St John and Parliament now says: a financial cost or an administrative burden may result for regulated companies from legislation (such as a licensing scheme) that is so hard to understand that its meaning can only be found after a disproportionate amount of effort [the combined effect of subsections (3), (5) and (6) of section 1 of the Legislative and Regulatory Reform Act 2006]

7. User Needs First • Licences are the bedrock of regulatory control over network operators and their main instrument of public accountability • Distributors as end users have a strong interest in creating an accessible, better organised, and more clearly drafted distribution licence • The actual users are not normally lawyers and are often not even regulatory specialists • The golden rule is that we never know who is likely to be the ultimate licence user • It is in no one’s interest for the meaning or the objectives of the licence to be disputed • So organisation and drafting must be as simple as possible consistent with legal robustness

8. Desirable Changes Required • The standard of the licence is fairly high relative to other utility licences (e.g. for gas, posts, and water) • But there is variable quality overall and clearly a need for: • some reorganisation into separate themed chapters • restructuring and consolidation, e.g. by bringing together similar requirements for different activities • removal of certain provisions as a result of consolidation or because of redundancy / obsolescence • some simplification and some redrafting to provide greater clarity and certainty • general updating of the overall style and format of the licence to make it more fit for purpose

9. Drafting Approach (1) : Aim to Help As mother used to say, start as you mean to go on: old SLC 1 : Application Regulations means the Electricity (Applications for Licences and Extensions and Restrictions of Licences) Regulations 2004 or any amendment or replacement thereof for the time being in force pursuant to section 6A of the Act. new SLC 1 : Application Regulations means regulations made under section 6A of the Act that set out the form and manner in which applications for an Electricity Distribution Licence or any extension or restriction of such a licence are to be made. Compare old SLC 47 (Indebtedness) with new SLC 33 (Restriction of Indebtedness and transfers of funds)

10. Drafting Approach (2) : KISS • Use direct and colloquial English if you can (e.g. must instead of shall and read instead of construe) • Avoid legalisms, including Latin words and expressions • Draft in the active rather than the passive voice and use the present rather than the future tense • Organise themes / issues under relevant part-headings • Replace archaic expressions (e.g. alleviate and rectify) with more modern ones (reduce and put right) • State obligations positively rather than negatively • Avoid sub-paragraphed lists if possible (or take them into schedules if very lengthy) • Ensure stylistic consistency across all of the drafting

11. Structure of the Licence • Reduction from three sections (A / B / C), plus a separate IDNO section (BA), to two sections only (A / B) • Section A : standard conditions for all licensed distributors • Section B : additional standard conditions for those licensed distributors who are Distribution Services Providers • Alignment and merger of IDNO conditions (old Section BA) with the new Section A conditions • Reorganisation into eleven themed chapters (seven under Section A and four under Section B) • Use of part-headings to help to identify particular themes or requirements within each condition • Reduction of the 77 existing SLCs to 50 new ones

12. The Proposed 11 Chapters • 1. Interpretation and application • 2. General obligations and arrangements • 3. Public service requirements • 4. Arrangements for the provision of services • 5. Industry codes and agreements • 6. Integrity and development of the network • 7. Financial and ring-fencing arrangements • 8. Application and interpretation of Section B • 9. Requirements within the Distribution Services Area • 10. Independence of the Distribution Business • 11. Provision of regulatory information

13. Definitions and Interpretation • Some important new definitions worth noting, including: • Connection [global] // Electronic Communication [technical] • Representative [authorised] // Writing [electronic] • All the defined terms are now identifiable from their use of initial upper case letters • Rules of interpretation (both general and specific) are now contained in their own condition (SLC 2) • Permanent updating of codes / agreements / statements • Clarification of Ofgem’s powers to give or make directions, consents, derogations, approvals, and determinations • Licence must be interpreted strictly -- like a statute

14. Merger of the BA Conditions • Differences between IDNO / DNO conditions are insufficient to justify the complexity of retaining a separate BA suite • Variants following merger are now to be found within: • new SLC 1 (Definitions for the standard conditions) [see the definition of Distribution Business] • new SLC 29 (Restriction of activity and financial ring-fencing of the Distribution Business) [see paragraph 12] • new SLC 30 (Availability of resources) [see paragraph 9] • new SLC 32 (Licensee’s credit rating) [see paragraph 1(b)] • new SLC 33 (Restriction of Indebtedness and transfers of funds) (see paragraph 14] • It is not clear that these variants need to be maintained

15. Public Service Requirements • Current lengthy provisions have been reduced and recast following reconsideration of Ofgem policy • All are now contained within their own single Chapter 3 (including the SSS Enquiry Service requirement) • The code of practice obligations are now requirements to produce and publicise clear and intelligible statements of the licensee’s policies and practices • No longer any requirement to obtain Ofgem’s approval • Continuation of current focus on obligations to the Priority Service Customers in relation to supply interruptions • But also now some policy innovations (e.g. for information provision / communication with customers)

16. No Abuse of Special Position • New SLC 4 : strategically placed in an upfront position to reflect over-arching scope • Consolidates (almost) all of the current prohibitions on: • the restriction, distortion, or prevention of competition in licensed industry activities • the restriction, distortion, or prevention of competition in the provision of metering services and data services • the restriction, distortion, or prevention of competition in any of the markets for those services, and • the giving or receiving of intra-group cross-subsidies • Substantially reflects the current position, but with both a broadening of scope and a relaxation of impact

17. Special Modification Power • Illustrative draft in Annex 1 at the back of the book: a policy innovation requiring some debate • DNOs are dominant in market share and will always be able to veto any collective modification of shared conditions • But IDNOs in total can also block any such modification as they already hold more than 20% of all licences • Standard Condition X would allow modifications relating to DNOs only, or IDNOs only, to be subject to objection only by members of the particular affected category • It therefore sets out an option for levelling the playing field between DNOs and IDNOs in the voting process • But Ofgem could not be compelled to use the power

18. Other Interesting Points • SLC 7 (Determinations by the Authority) : consolidates Ofgem’s various powers to resolve disputes about terms for providing connection, use of system, and other services • SLCs 9 and 42 (Prohibition of discrimination) : these are separate consolidations for each of Sections A and B • SLC 21 (Distribution Code) : paragraph 14 provides a solid legal basis for creating new governance arrangements • SLC 26 (Disposal of Relevant Assets) : brings the important restructuring consents onto the face of the licence • SLC 50 (Modification of Rigs) : assembles various existing Rig modification procedures in one place • See page 19 of the consultation document for a sensible way of ensuring that defined terms in the special licence conditions will retain their meaning

19. End of Review • THANK YOU • FOR BEING • SUCH A GOOD • AUDIENCE

20. Implementation of proposals (1) • Licence modifications must made in accordance with sections 11 and 11A of the Electricity Act 1989 • Consequential changes will be required in the immediate and medium term, for example, in relation to definitions and references • Special conditions • Related codes and agreements (eg DCUSA) • Propose minimum change to Special Condition A1 with a view to more substantial changes (probably) as part of DPCR5 • How many licence modifications?

21. Implementation of proposals (2) Timetable: • Consultation deadline 18 January 2008 • Review consultation responses January/February 2008 • Publish statutory 28 day consultation February 2008 • Go-live 1 April 2008