Industrial Distribution Networks. Sarah R. Thomas NARUC ERRA Legal Regulation Working Group Budapest, Hungary, March 19 20, 2012

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1 Industrial Distribution Networks Sarah R. Thomas NARUC ERRA Legal Regulation Working Group Budapest, Hungary, March 19 20, 2012

2 Disclaimer This presentation was prepared by Sarah R. Thomas for NARUC and ERRA and does not represent the views of the California Public Utilities Commission, its Commissioners, the Legal Division, or any other Commission i staff tff 1

3 Topics of Presentation Industrial ldistribution ib ti networks: Legal regime of parts of distribution networks that are usually found in industrial or similar zones in which the ownership of the network and accompanying facilities might be different from the distribution company and be with the user connected to the distribution network and to which other final users within the zone are connected; Rights andobligations related to operatingandmaintaining and such parts of the networks; Are such networks or facilities licensed or regulated in any way?; How are connections to them regulated?; How is switching suppliers regulated?; How is metering regulated? 2

4 What are Industrial Distribution Networks What Rules Traditionally Applied? Small lldistribution ib ti level lnetworks that t serve industrial customers, new housing developments Can serve electric or gas customers Traditionally, the networks were lightly regulated, and not always licensed They had no obligation to allow customers outsidethe the zone to connect, so customers could not readily switch suppliers There was no separate metering requirement, because outside customers had no access to the network 3

5 United Kingdom (UK) Old Rules Ofgem Britain s i Office of Gas and Electricity i Markets Private networks unlicensed electric distribution networks; 2.5MW limit IDNOs (Independent Distribution Network Operators) Attempt to introduce competition at distribution level Compete with monopoly distribution networks Regulated similarly to distribution networks, with some differences related to price 4

6 Concerns Ofgem IDNOs (independent distribution networks) 2010 IDNOs seek to interconnect with main distribution network (DNO) at higher voltage than necessary, simply pyto garner higher prices Main distribution network not obligated to allow independent d interconnect at higher h voltage than necessary Independent may not charge prices that are higher than main electric distribution network 5

7 Private Networks UK Old Rules Privately owned unlicensed networks may operate within existing iti distribution networks. Advantages include exemption from some license charges and reduced energy loss in transmission. Ports and large industrial i users often operate with private wire networks. Private networks incorporating local generation can be used to cut emissions in urban areas. However there is concern that t customers on a private network are vulnerable, since they cannot switch suppliers if prices increase, or complain to a regulator. * *UK Parliamentary Office of Science and Technology, Postnote, 2/07, Number 280, Electricity in the UK, available at / / /f /f 3354.pdf. 6

8 Citiworks AG case (Germany) European Court of Justice In May 2008, the European Court of Justice delivered dl da judgment on a case known as Citiworks [European Court of Justice Case C 439/06], which was concerned with the rights of suppliers to access customers on local distribution systems run as private wires. The judgment noted that a fully open market must allow all consumers to choose their suppliers freely and all suppliers to deliver to their customers freely. To allow for this, suppliers should have the right to access all the different distribution systems that carry electricity to customers. energy/markets/electricity/licence exemp/licence e xemp.aspx Electricity supplier sought to compete with a monopoly supplier at GermanyLeipzig airport. Result: All distribution networks must beopen to third party access so that customers connected to those networks have the option to choose their own electricity and gas suppliers. energy demand/energy markets/3109 draft guid prov of third partyp// / / / / g gy / gy / g p p y access.pdf 7

9 Citiworks case interprets EU Second Directive to Require Access European Court ruled ldthat t the German national law, which failed to impose third party access requirements on a distribution system within an airport, did not properly transpose the EU Second Directive requirements. The EU Third Directive contains almost identical language. It did not matter to the Court that distribution network a small private, unlicensed network serving only certain customers (commercial users of electricity at the airport, such as airlines and retail units). 396D 4DEA BE2D 9700E27FBE2A/0/Citiworks htm 8

10 EU Second and Third Package The Citiworks case interprets t language in the EU Second and Third Package (language is the same in both) Article 32 of the EU Directive concerning (the Electricity Directive ), and Article 32 of the EU Directive concerning common rules for the internal market in natural gas (the Gas Directive ) Require [EU] Member States to ensure the implementation of a system of third party access to gas and electricity it transmission i and distribution ib ti systems based on published tariffs, applicable to all eligible customers and applied objectively and without discrimination between system users. energy demand/energy markets/3109 draft guidprov of third party access.pdf 9

11 UK Now Follows EU Rule As of 2011, UK is introducing i new obligations based on EU Second and Third Package on private distribution networks, including a duty to facilitate third party access to their electricity and gas networks Third party access gives electricity it and gas customers the right ihtto choose from whom they receive a supply of electricity and/or gas and therefore enhances competition. * It is no excuse that t access would require expanding the network: need to increase capacity must be either not technically feasible, significant and adverse economic impact on the distribution exemption holder (private network) or any other person. *UK Department of Energy and Climate Change, Guidance: Provision of Third Party Access to Licence Exempt Electricity and Gas Networks, 14 October 2011, available at energy demand/energy markets/3109 draft guid prov of third party access.pdf 10

12 UK Proposed Rules Owner of private distribution ib ti network must Allow interconnection unless the distribution exemption holder is preventedfrom doing so by circumstances outside its control The connection might involve danger to the public It is not reasonable for the distribution exemption holder to do so Have published tariffs Allow for separate metering of customers on private distribution networks so they can take service from competitive ii providers or some other ability (e.g., through a settlements process) to calculate their usage separately 11

13 Exemptions (UK) Private network may apply to regulator (Ofgem) to be closed distribution system if The distribution system is not used for the purpose of supplying li electricity/gas it to household h customers (or fewer than 50 employees of the exemption holder supplied from embedded generation); The distribution ib ti system is used for distributing ib ti electricity/gas within a geographically self contained industrial, commercial or shared services site and is not integrated into the national transmission or distribution network; The distribution system is wholly or mainly used by integrated system users or to supply the distribution exemption holder (or a person related to the distribution exemption holder). 12

14 Exemption is not Complete Even if you obtain an exemption from Ofgem, private network still has obligation to provide third party access Unclear how this will work, and regulations are still in draft Other exemptions may also apply infeasible to allow interconnection, as discussed above. 13

15 Summary While it used to be the case that private industrial i distribution networks were only for the use of the customers they were set up to serve, the Citiworks case changed things. UK has thus changed its rules to require in most cases equal access to those networks, unless such access is infeasible. Because Citiworks involves interpretation of EU Directive in Second Package (whose rules carry over into Third Package), EU rule also now requires equal access to private distribution networks in many cases 14

16 What Does This Mean For ERRA Countries? The rules of equal access are just now being bi written/issued in the UK (draft issued October 2011) It is beyond my assignment/expertise to determine how and when the equal access rules apply to each ERRA country. It would seem that if your country is subject to the EU Second and Third Package, these rules may apply to you. However, UK closed distribution system exemption may apply to most ERRA country distribution systems and interconnection/tariffing/metering rules may not apply I believe we need further work on this topic to determine whether ERRA countries must comply, and how 15

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